UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2006

o		Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

BALLY TOTAL FITNESS HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code: (773) 380-3000

SEE TABLE OF ADDITIONAL REGISTRANTS

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange Act (check one):

Large Accelerated Filer: o      Accelerated Filer: þ      Non-Accelerated Filer: o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 31, 2006, there were 41,315,263 shares of the registrant’s common stock outstanding.

 

 

TABLE OF ADDITIONAL REGISTRANTS

		Jurisdiction of		I.R.S. Employer
Exact Name of Additional Registrants		Incorporation		Identification Number
59th Street Gym LLC		New York		36-4474644
708 Gym LLC		New York		36-4474644
Ace, LLC		New York		36-4474644
Bally Fitness Franchising, Inc.		Illinois		36-4029332
Bally Franchise RSC, Inc.		Illinois		36-4028744
Bally Franchising Holdings, Inc.		Illinois		36-4024133
Bally Sports Clubs, Inc.		New York		36-3407784
Bally Total Fitness Corporation		Delaware		36-2762953
Bally Total Fitness International, Inc.		Michigan		36-1692238
Bally Total Fitness of California, Inc.		California		36-2763344
Bally Total Fitness of Colorado, Inc.		Colorado		84-0856432
Bally Total Fitness of Connecticut Coast, Inc.		Connecticut		36-3209546
Bally Total Fitness of Connecticut Valley, Inc.		Connecticut		36-3209543
Bally Total Fitness of Greater New York, Inc.		New York		95-3445399
Bally Total Fitness of the Mid-Atlantic, Inc.		Delaware		52-0820531
Bally Total Fitness of the Midwest, Inc.		Ohio		34-1114683
Bally Total Fitness of Minnesota, Inc.		Ohio		84-1035840
Bally Total Fitness of Missouri, Inc.		Missouri		36-2779045
Bally Total Fitness of Upstate New York, Inc.		New York		36-3209544
Bally Total Fitness of Philadelphia, Inc.		Pennsylvania		36-3209542
Bally Total Fitness of Rhode Island, Inc.		Rhode Island		36-3209549
Bally Total Fitness of the Southeast, Inc.		South Carolina		52-1230906
Bally Total Fitness of Toledo, Inc.		Ohio		38-1803897
Bally’s Fitness and Racquet Clubs, Inc.		Florida		36-3496461
BFIT Rehab of West Palm Beach, Inc.		Florida		36-4154170
BTF/CFI, Inc.		Delaware		36-4474644
Crunch LA LLC		New York		36-4474644
Crunch World LLC		New York		36-4474644
Flambe LLC		New York		36-4474644
Greater Philly No. 1 Holding Company		Pennsylvania		36-3209566
Greater Philly No. 2 Holding Company		Pennsylvania		36-3209557
Health & Tennis Corporation of New York		Delaware		36-3628768
Holiday Health Clubs of the East Coast, Inc.		Delaware		52-1271028
Holiday/Southeast Holding Corp.		Delaware		52-1289694
Jack La Lanne Holding Corp.		New York		95-3445400
Mission Impossible, LLC		California		36-4474644
New Fitness Holding Co., Inc.		New York		36-3209555
Nycon Holding Co., Inc.		New York		36-3209533
Rhode Island Holding Company		Rhode Island		36-3261314
Soho Ho LLC		New York		36-4474644
Tidelands Holiday Health Clubs, Inc.		Virginia		52-1229398
U.S. Health, Inc.		Delaware		52-1137373
West Village Gym at the Archives LLC		New York		36-4474644

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

BALLY TOTAL FITNESS HOLDING CORPORATION
Quarterly Report on Form 10-Q For Period Ended June 30, 2006
TABLE OF CONTENTS

		Page
		Number
FORWARD-LOOKING STATEMENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005			1
Consolidated Statements of Operations (Unaudited) for the Three Months Ended June 30, 2006 and 2005			2
Consolidated Statements of Operations (Unaudited) for the Six Months Ended June 30, 2006 and 2005			3
Consolidated Statement of Stockholders’ Deficit and Comprehensive Income (Unaudited) for the Six Months Ended June 30, 2006			4
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2006 and 2005			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures about Market Risk			40
Item 4. Controls and Procedures			42
PART II. OTHER INFORMATION			43
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3. Defaults Upon Senior Securities			47
Item 4. Submission of Matters to a Vote of Security Holders			47
Item 5. Other Information			47
Item 6. Exhibits			48
SIGNATURE PAGE			50
Certification of the Chief Executive Officer
Certification of the Chief Financial Officer
Certification of the CEO and Chief Financial Officer

FORWARD-LOOKING STATEMENTS

     Forward-looking statements in this Quarterly Report on Form 10-Q including, without limitation, statements relating to the Company’s plans, strategies, objectives, expectations, intentions, and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, among others, the following:

	•		ability to maintain existing or obtain new sources of equity and debt financing, on acceptable terms or at all, to satisfy the Company’s cash needs and obligations;
	•		availability, terms, and development of capital;
	•		availability of adequate sources of liquidity and the Company’s ability to meet its obligations beyond the first quarter of 2007;
	•		ability to satisfy long-term obligations as they become due;
	•		ability to remain in compliance with, or obtain waivers under, the Company’s loan agreements and indentures;
	•		success of operating initiatives, advertising and promotional efforts;
	•		ability to attract, retain and motivate highly skilled employees;
	•		the outcome of the Company’s exploration of strategic alternatives, which is now focused on restructuring and refinancing alternatives;
	•		business abilities and judgment of personnel;
	•		general economic and business conditions;
	•		competition;
	•		acceptance of new product and service offerings;
	•		changes in business strategy or plans;
	•		the effect of material weaknesses in internal controls over financial reporting on the Company’s ability to prepare financial statements and file reports with the SEC;
	•		the outcome of the SEC and Department of Justice investigations;
	•		existence of adverse publicity or litigation (including various stockholder litigations and insurance rescission actions) and the outcome thereof and the costs and expenses associated therewith;
	•		changes in, or the failure to comply with, government regulations; and
	•		other factors described in this Quarterly Report on Form 10-Q, including the risk factors identified in Item 1A, and prior filings of the Company with the SEC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BALLY TOTAL FITNESS HOLDING CORPORATION

Condensed Consolidated Balance Sheets
(In thousands)

		June 30				December 31
		2006				2005
		(Unaudited)
ASSETS
Current assets:
Cash		$	15,156			$	17,454
Deferred income taxes			236				151
Prepaid expenses			18,331				20,846
Other current assets			13,241				17,394
Current assets held for sale			—				342
Total current assets			46,964				56,187
Property and equipment, less accumulated depreciation and amortization of $766,260 and $749,860			303,084				314,670
Goodwill, net			19,734				19,734
Trademarks, net of accumulated amortization of $1,607 and $1,510			6,871				6,912
Intangible assets, net of accumulated amortization of $14,036 and $13,463			2,547				2,879
Deferred financing costs, net of accumulated amortization of $27,737 and $18,190			41,170				29,501
Other assets			10,532				10,317
Non-current assets held for sale			—				39,894
		$	430,902			$	480,094
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	49,246			$	57,832
Income taxes payable			1,951				1,697
Accrued liabilities			100,921				96,442
Current maturities of long-term debt			180,354				13,018
Deferred revenues			279,155				299,441
Current liabilities associated with assets held for sale			—				7,764
Total current liabilities			611,627				476,194
Long-term debt, less current maturities			542,786				756,304
Deferred rent liability			89,871				87,290
Deferred income taxes			1,693				1,435
Other liabilities			29,573				28,112
Deferred revenues			565,645				566,469
Non-current liabilities associated with assets held for sale			—				27,976
Stockholders’ deficit			(1,410,293	)			(1,463,686	)
		$	430,902			$	480,094

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

		Three months ended
		June 30
		2006				2005
						(As restated)
Net revenues:
Membership services		$	239,549			$	243,369
Retail products			11,460				12,640
Miscellaneous			3,622				3,608
			254,631				259,617
Operating costs and expenses:
Membership services			170,203				170,713
Retail products			10,667				13,424
Advertising			16,180				14,641
General and administrative			21,230				21,583
Gain on sale of land and building			(872	)			—
Depreciation and amortization			13,233				15,023
			230,641				235,384
Operating income			23,990				24,233
Interest expense, net			(26,148	)			(21,164	)
Foreign exchange gain (loss)			1,760				(163	)
Other, net			166				64
			(24,222	)			(21,263	)
Income (loss) from continuing operations before income taxes			(232	)			2,970
Income tax provision			(501	)			(239	)
Income (loss) from continuing operations			(733	)			2,731
Loss from discontinued operations, net of income taxes			—				(1,124	)
Net income (loss)		$	(733	)		$	1,607
Basic income (loss) per common share:
Income (loss) from continuing operations		$	(0.02	)		$	0.08
Loss from discontinued operations			—				(0.03	)
Net income (loss)		$	(0.02	)			0.05
Diluted income (loss) per common share:
Income (loss) from continuing operations		$	(0.02	)		$	0.08
Loss from discontinued operations			—				(0.03	)
Net income (loss)		$	(0.02	)		$	0.05

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

		Six months ended
		June 30
		2006				2005
						(As restated)
Net revenues:
Membership services		$	479,204			$	479,504
Retail products			23,397				25,987
Miscellaneous			7,196				7,879
			509,797				513,370
Operating costs and expenses:
Membership services			342,488				338,674
Retail products			21,678				26,232
Advertising			35,075				31,752
General and administrative			42,619				39,453
Gain on sales of land and buildings			(1,773	)			—
Depreciation and amortization			27,447				29,962
			467,534				466,073
Operating income			42,263				47,297
Interest expense, net			(49,181	)			(39,241	)
Foreign exchange gain			1,770				44
Other, net			284				139
			(47,127	)			(39,058	)
Income (loss) from continuing operations before income taxes			(4,864	)			8,239
Income tax provision			(702	)			(479	)
Income (loss) from continuing operations			(5,566	)			7,760
Discontinued operations:
Loss from discontinued operations, net of income taxes			(872	)			(1,538	)
Gain on disposal			38,375				—
Gain (loss) from discontinued operations			37,503				(1,538	)
Net income		$	31,937			$	6,222
Basic income (loss) per common share:
Income (loss) from continuing operations		$	(0.14	)		$	0.23
Income (loss) from discontinued operations			0.96				(0.04	)
Net income		$	0.82			$	0.19
Diluted income (loss) per common share:
Income (loss) from continuing operations		$	(0.14	)		$	0.22
Income (loss) from discontinued operations			0.96				(0.04	)
Net income		$	0.82			$	0.18

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statement of Stockholders’ Deficit and Comprehensive Income
(In thousands, except share data)
(Unaudited)

																										Accumulated
		Common stock																				Common				other				Total
		Shares				Par				Contributed				Accumulated				Unearned				stock in				comprehensive				stockholders’
		outstanding				value				capital				deficit				compensation				treasury				loss				deficit
Balance at December 31, 2005			38,503,551			$	392			$	669,089			$	(2,113,854	)		$	(5,534	)		$	(11,635	)		$	(2,144	)		$	(1,463,686	)
Net income															31,937																31,937
Cumulative translation adjustment																											(3,805	)			(3,805	)
Total comprehensive income																															28,132
Stock-based compensation											1,798																				1,798
Sale of common stock			800,000				8				5,592																				5,600
Shares issued to noteholders			1,956,195				19				17,469																				17,488
Shares issued to agent			11,936								98																				98
Reclassification of unearned compensation balance to contributed capital											(5,534	)							5,534												—
Forfeiture of restricted stock			(7,500	)																											—
Issuance of common stock under stock option plans			51,081				1				276																				277
Balance at June 30, 2006			41,315,263			$	420			$	688,788			$	(2,081,917	)		$	—			$	(11,635	)		$	(5,949	)		$	(1,410,293	)

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		Six months ended
		June 30
		2006				2005
						(As restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	31,937			$	6,222
Adjustments to reconcile to cash provided by operating activities—
Depreciation and amortization, including amortization included in interest expense			37,070				35,289
Changes in operating assets and liabilities			(19,123	)			(10,404	)
Deferred income taxes, net			179				210
Gain on disposal of discontinued operations			(38,375	)			—
Loss (gain) on sale of assets			(1,385	)			67
Foreign currency translation gain			(1,770	)			(46	)
Stock-based compensation			1,798				4,337
Cash provided by operating activities			10,331				35,675
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and construction of property and equipment			(18,889	)			(14,474	)
Proceeds from sale of discontinued operations			45,052				—
Proceeds from sale of discontinued operations in escrow			438				—
Proceeds from sale of property			3,307				1,455
Cash provided by (used in) investing activities			29,908				(13,019	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under credit agreement			(36,811	)			(875	)
Net repayments of other long-term debt			(8,205	)			(9,612	)
Debt issuance and refinancing costs			(3,751	)			(2,274	)
Proceeds from sale of common stock			5,600				—
Proceeds from issuance of common stock under stock option plans			277				162
Cash used in financing activities			(42,890	)			(12,599	)
Increase (decrease) in cash			(2,651	)			10,057
Effect of exchange rate changes on cash balance			353				225
Cash, beginning of period			17,454				19,177
Cash, end of period		$	15,156			$	29,459

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows -- (continued)
(In thousands)
(Unaudited)

		Six months ended
		June 30
		2006				2005
						(As restated)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities:
Decrease in other current and other assets		$	5,606			$	1,758
Decrease in accounts payable			(8,599	)			(8,061	)
Increase in income taxes payable			254				237
Increase (decrease) in accrued liabilities			1,235				(3,124	)
Increase in other liabilities			3,355				10,161
Decrease in deferred revenues			(20,974	)			(11,375	)
Change in operating assets and liabilities		$	(19,123	)		$	(10,404	)
Cash payments for interest and income taxes were as follows —
Interest paid		$	39,883			$	35,737
Interest capitalized			(367	)			(140	)
Income taxes paid, net			276				70
Investing and financing activities exclude the following non-cash transactions —
Acquisitions of property and equipment through capital leases/borrowings		$	—			$	302
Reclassification of unearned compensation balance to contributed capital			5,534				—
Payments of consents with common stock			17,488				—
Stock issued to agent			98				—

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Note 1 Basis of Presentation

     The accompanying condensed consolidated financial statements include the accounts of Bally Total Fitness Holding Corporation (the “Company”) and the subsidiaries that it controls. The Company, through its subsidiaries, is a commercial operator of 383 fitness centers at June 30, 2006 concentrated in 29 states and Canada. Additionally, as of June 30, 2006, 35 clubs were operated pursuant to franchise and joint venture agreements in the United States, Asia, Mexico, and the Caribbean. The Company operates in one industry segment, and all significant revenues arise from the commercial operation of fitness centers, primarily in major metropolitan markets in the United States and Canada. Unless otherwise specified in the text, references to the Company include the Company and its subsidiaries. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on June 27, 2006.

     All adjustments have been recorded which are, in the opinion of management, necessary for a fair presentation of the condensed consolidated balance sheet of the Company at June 30, 2006, its consolidated statements of operations for the three and six months ended June 30, 2006 and 2005, its consolidated statement of stockholders’ deficit and comprehensive income for the six months ended June 30, 2006, and its consolidated statements of cash flows for the six months ended June 30, 2006 and 2005. As of June 30, 2006, the Company reclassified $2,518, which represents a cumulative translation adjustment from its property and equipment account. In addition, the Company has reclassified the gain ($901) on the sale of an underperforming Canadian club previously recorded in the first quarter of 2006 as a reduction of membership services expense to gain on sale of land and building on its Consolidated Statement of Operations for the six months ended June 30, 2006. Additionally, in the second quarter of 2006, the Company determined that approximately $900 of the $4,600 write-down of equipment at various clubs recorded in the fourth quarter of 2005 related to equipment previously retired. An adjustment was made to the Company’s consolidated statement of operations for the three months ended June 30, 2006. No adjustment was made to the Company’s consolidated statement of operations for 2005 as such amount was not deemed material.

     The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. 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. Prior period amounts related to discontinued operations reported on the Consolidated Statements of Operations and Condensed Consolidated Balance Sheets have been reclassified in accordance with Statement of Financial Accounting Standards No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ” (“SFAS No. 144”).

Seasonal factors

     The Company’s operations are subject to seasonal factors and, therefore, the results of operations for the six months ended June 30, 2006 and 2005 are not necessarily indicative of the results of operations for the full year.

Market risk

     The Company is exposed to market risk from changes in the interest rates on certain of its outstanding debt. The outstanding revolving credit and term loan balance under its Amended and Restated Credit Agreement dated October 14, 2004 (the “Credit Agreement”) bears interest at variable rates based upon prevailing short-term interest rates in the United States and Europe.

     The Company has entered into interest rate swap agreements whereby the fixed interest commitment on $200,000 of outstanding principal on the Company’s 9 7/8% Senior Subordinated Notes due 2007 (the “Senior Subordinated Notes”) was swapped for a variable rate commitment based on the LIBOR rate plus 6.01%.

     The Company determined by using quoted market prices that the fair value of the Senior Subordinated Notes was $267,158, $290,008 and $288,507, at August 31, 2006, June 30, 2006 and December 31, 2005, respectively. The carrying value at June 30, 2006 was $295,174. Since considerable judgment is required in interpreting market information, the fair value of the Senior Subordinated Notes is not necessarily indicative of the amount which could be realized in a current market exchange.

Note 2 Restatement of 2005 Quarterly Information

     In the fourth quarter of 2005, the Company identified errors in its previously reported 2005 quarterly results with respect to revenue items relating to certain membership offers, amortization of deferred financing costs, depreciation expense and certain insurance liability expense. See Note 20 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The consolidated statements of operations and consolidated statement of cash flows for the 2005 periods included herein reflect the restated items.

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Note 3 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 25 years, excluding optional renewal periods. Certain leases contain contingent rental provisions generally related to cost-of-living criteria or revenues of the respective fitness centers.

     Litigation:

Putative Securities Class Actions

     Between May and July 2004, ten putative securities class actions, now consolidated and designated In re Bally Total Fitness Securities Litigation were filed in the United States District Court for the Northern District of Illinois against the Company and certain of its former and current officers and directors. Each of these substantially similar lawsuits alleged that the defendants violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as the associated Rule 10b-5, in connection with the Company’s proposed restatement.

     On March 15, 2005, the Court appointed a lead plaintiff and on May 23, 2005 the Court appointed lead plaintiff’s counsel. By stipulation of the parties, the consolidated lawsuit was stayed pending restatement of the Company’s financial statements in November 2005. On December 30, 2005, plaintiffs filed an amended consolidated complaint, asserting claims on behalf of a putative class of persons who purchased Bally stock between August 3, 1999 and April 28, 2004. The Court granted defendants’ motions to dismiss the amended consolidated complaint and dismissed the complaint in its entirety on July 12, 2006 without prejudice to plaintiffs filing an amended complaint on or before August 14, 2006. An amended complaint was filed on August 14, 2006, which defendants intend to move to dismiss on or prior to September 28, 2006. It is not yet possible to determine the ultimate outcome of these actions.

Stockholder Derivative Lawsuits in Illinois State Court

     On June 8, 2004, two stockholder derivative lawsuits were filed in the Circuit Court of Cook County, Illinois, by two Bally stockholders, David Schacter and James Berra, purportedly on behalf of the Company against Paul Toback, James McAnally, John Rogers, Jr., Lee Hillman, John Dwyer, J. Kenneth Looloian, Stephen Swid, George Aronoff, Martin Franklin and Liza Walsh, who are current or former officers and/or directors. These lawsuits allege claims for breaches of fiduciary duty against those individuals in connection with the Company’s restatement regarding the timing of recognition of prepaid dues. The two actions were consolidated on January 12, 2005. By stipulation of the parties, the consolidated lawsuit was stayed pending restatement of the Company’s financial statements in November 2005. An amended consolidated complaint was filed on February 27, 2006. The Company filed a motion to dismiss on May 20, 2006, directed solely to the issue of whether plaintiffs have adequately alleged demand futility as required by applicable Delaware law in order to establish standing to sue derivatively. That motion is currently pending. It is not yet possible to determine the ultimate outcome of these actions.

Stockholder Derivative Lawsuit in Illinois Federal Court

     On April 5, 2005, a stockholder derivative lawsuit was filed in the United States District Court for the Northern District of Illinois, purportedly on behalf of the Company against certain current and former officers and directors of the Company by another of the Company’s stockholders, Albert Said. This lawsuit asserts claims for breaches of fiduciary duty in failing to supervise properly its financial and corporate affairs and accounting practices. Plaintiff also requests restitution and disgorgement of bonuses and trading proceeds under Delaware law and the Sarbanes-Oxley Act of 2002. By stipulation of the parties, the lawsuit was stayed pending restatement of the Company’s financial statements in November 2005. An amended consolidated complaint was filed on February 27, 2006. Bally filed a motion to dismiss on May 30, 2006, directed solely to the issues of whether the court has subject matter jurisdiction and whether plaintiffs have adequately alleged demand futility as required by applicable Delaware law in order to establish standing to sue derivatively. That motion is currently pending. It is not yet possible to determine the ultimate outcome of this action.

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Individual Securities Action in Illinois

     On March 15, 2006, a lawsuit captioned Levine v. Bally Total Fitness Holding Corporation, et al., Case No. 06 C 1437 was filed in the United States District Court for the Northern District of Illinois against the Company, certain of its former and current officers and directors, and its former outside audit firm, Ernst & Young, LLP. Plaintiffs complaint alleges violations of Sections 10(b), 18 and 20(a) of the Exchange Act, SEC Rule 10b-5, and the Illinois Consumer Fraud and Deceptive Practices Act, as well common law fraud in connection with the Company’s restatement. The Court found this action related to the consolidated securities class action discussed above, and transferred it to the judge before whom the class action cases were pending. After defendants filed motions to dismiss the complaint and after the Court granted motions to dismiss the class action cases, plaintiff moved for leave to amend its complaint. On July 19, 2006, the Court denied plaintiff’s motion and ordered completion of briefings on defendant’s motions to dismiss on statute of limitations issues, which remain pending. It is not yet possible to determine the ultimate outcome of this action.

Lawsuit in Oregon

     On September 17, 2004, a lawsuit captioned Jack Garrison and Deane Garrison v. Bally Total Fitness Holding Corporation, Lee S. Hillman and John W. Dwyer, CV 04 1331, was filed in the United States District Court for the District of Oregon. The plaintiffs alleged that the defendants violated certain provisions of the Oregon Securities Act, breached the contract of sale, and committed common-law fraud in connection with the acquisition of the plaintiffs’ business in exchange for shares of Bally stock.

     On April 7, 2005, all defendants joined in a motion to dismiss two of the four counts of plaintiffs’ complaint, including plaintiffs’ claims of breach of contract and fraud. On November 28, 2005, the District Court granted the motion to dismiss plaintiffs’ claims for breach of contract and fraud against all parties. Motions for summary judgment were filed on April 21, 2006. On July 27, 2006, the presiding Magistrate Judge issued proposed Findings and Conclusions recommending that summary judgment be entered in favor of all defendants on all remaining claims. The parties have agreed to allow plaintiffs until September 18, 2006 to file objections to these proposed Findings and Conclusions and request review by a United States District Judge while pursuing settlement discussions. It is not yet possible to determine the ultimate outcome of this action.

Lawsuit in Massachusetts

     On March 11, 2005, plaintiffs filed a complaint in the matter of Fit Tech Inc., et al. v. Bally Total Fitness Holding Corporation, et al. Case No. 05-CV-10471 MEL, pending in the United States District Court for the District of Massachusetts. This action is related to an earlier action brought in 2003, Case No. 03-CV-10295 MEL, by the same plaintiffs in the same court alleging breach of contract and violation of certain earn-out provisions of an agreement whereby the Company acquired certain fitness centers from plaintiffs in return for cash and shares of Bally stock. The 2005 amended complaint asserted new claims against the Company for violation of state securities laws on the basis of allegations that misrepresentations in Bally’s financial statements resulted in Bally’s stock price to be artificially inflated at the time of the Fit-Tech transaction. Plaintiffs also asserted additional claims for breach of contract and common law claims. Certain employment disputes between the parties to this litigation are also subject to arbitration in Chicago.

     Plaintiffs’ claims are brought against the Company and its former Chairman and CEO Paul Toback, as well as former Chairman and CEO Lee Hillman and former CFO John Dwyer. Plaintiffs have voluntarily dismissed all claims under the federal securities laws, leaving breach of contract, common law and state securities claims pending. On April 4, 2006, the Court granted motions to dismiss all claims against defendants Hillman and Dwyer for lack of jurisdiction. Under the current schedule, motions to dismiss on other grounds are to be filed on October 16, 2006. It is not yet possible to determine the ultimate outcome of this action.

Securities and Exchange Commission Investigation

     In April 2004, the Division of Enforcement of the SEC commenced an investigation in connection with the Company’s restatement. The Company continues to fully cooperate in the ongoing SEC investigation. It is not yet possible to determine the ultimate outcome of this investigation.

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Department of Justice Investigation

     In February 2005, the United States Justice Department commenced a criminal investigation in connection with the Company’s restatement. The investigation is being conducted by the United States Attorney for the Northern District of Illinois. The Company is fully cooperating with the investigation. It is not yet possible to determine the ultimate outcome of this investigation.

Insurance Lawsuits

     On November 10, 2005, two of the Company’s excess directors and officers liability insurance providers filed a complaint captioned Travelers Indemnity Company and ACE American Insurance Company v. Bally Total Fitness Holding Corporation; Holiday Universal, Inc, n/k/a Bally Total Fitness of the Mid-Atlantic, Inc; George N. Aronoff; Paul Toback; John W. Dwyer; Lee S. Hillman; Stephen C. Swid; James McAnally; J. Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of the Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff Scheitlin; John H. Wildman; John W. Rogers, Jr.; and Martin E. Franklin, Case No. 05C 6441, in the United States District Court for the Northern District of Illinois. The complaint alleged that financial information included in the Company’s applications for directors and officers liability insurance in the 2002-2004 policy years was materially false and misleading. Plaintiff requested the Court to declare two of the Company’s excess policies for the year 2002-2003 void, voidable and/or subject to rescission, and to declare that the exclusions and/or conditions of a separate excess policy for the year 2003-2004 bar coverage with respect to certain of the Company’s claims. Firemans Fund, another excess carrier, was allowed to join in the case on January 4, 2006. Defendants filed motions to dismiss or stay the proceedings on February 10, 2006, which motions are currently pending.

     On April 6, 2006, an additional excess directors and officers liability insurance provider filed a complaint captioned RLI Insurance Company v. Bally Total Fitness Holding Corporation; Holiday Universal, Inc.; George N. Aronoff; Paul Toback; John H. Dwyer; Lee S. Hillman; Stephen C. Swid; James McAnally; J. Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of the Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff Scheitlin; John H. Wildman; John W. Rogers, Jr.; and Martin E. Franklin, Case No. 06CH06892 in the circuit court of Cook County, Illinois, County Department Chancery Division. The complaint alleged that financial information included in the Company’s applications for directors and officers liability insurance in the 2002-2003 policy year was materially false and misleading. Plaintiff requested the Court to declare the Company’s excess policy for the year 2002-2003 void, voidable and/or subject to rescission. Defendants filed motions to dismiss or stay the proceedings on July 10, 2006, which motions are currently pending.

     On August 22, 2006, the Company’s primary directors and officers insurance provider for the policy years 2001-2002 and 2002-2003 filed a complaint captioned Great American Insurance Company v. Bally Total Fitness Holding Corporation, Case No. 06 C 4554 in the United States District Court for the Northern District of Illinois. The complaint alleged that financial information included in the Company’s applications for directors and officers liability insurance in the 2001-2002 and 2002-2003 policy years was materially false and misleading. Plaintiff requested the Court to declare the Company’s primary policies for those years void ab initio and rescinded, and to award plaintiff all sums that plaintiff has paid pursuant to an Interim Funding and Non-Waiver Agreement between the parties, which consists of the $10,000 limit of the 2002-2003 primary policy and additional amounts paid pursuant to the 2001-2002 primary policy. The Company’s response to the complaint is due on September 12, 2006. The Company anticipates moving to dismiss or stay the proceedings on substantially the same grounds as the motion filed in the RLI Insurance Company case listed above.

     It is not yet possible to determine the ultimate outcome of these actions.

     Other:

     The Company is also 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 should not have a material adverse effect on the financial condition or results of operations of the Company. In addition, from time to time, customer complaints are investigated by various governmental bodies. In the opinion of management, none of these other complaints or investigations currently pending should have a material adverse effect on the Company’s financial condition or results of operations.

     In addition, the Company is, and has been in the past, named as defendant in a number of purported class action lawsuits based on alleged violations of state and local consumer protection laws and regulations governing the sale, financing and collection of membership fees. To date the Company has successfully defended or settled such lawsuits without a material adverse effect on its

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

financial condition or results of operations. However, the Company cannot assure you that it will be able to successfully defend or settle all pending or future purported class action claims, and its failure to do so may have a material adverse effect on the Company’s financial condition or results of operations. See Part II, Item 1A — Risk Factors.

     Under employment agreements with four senior executives, the Company has agreed to use its reasonable best efforts to develop and adopt a supplemental retirement plan for the benefit of these executives and other executives as the Board may determine. As of August 31, 2006, no plan has been adopted.

Note 4 Debt

     On October 14, 2004, the Company entered into the Credit Agreement with a group of financial institutions led by JPMorgan Chase Bank that provided for a five-year $175,000 term loan in addition to the existing $100,000 revolving credit facility that expires in June 2008, subject to the early termination provision discussed below. The Credit Agreement is secured by substantially all the Company’s real and personal property, including member obligations under installment contracts. The Credit Agreement contains restrictive covenants that include certain interest coverage and leverage ratios, and restrictions on use of funds; additional indebtedness; incurring liens; certain types of payments (including, without limitation, capital stock dividends and redemptions, payments on existing indebtedness and intercompany indebtedness); incurring or guaranteeing debt; capital expenditures; investments; mergers, consolidations, sales and acquisitions; transactions with subsidiaries; conduct of business; sale and leaseback transactions; incurrence of judgments; changing fiscal year; and financial reporting, all subject to certain exceptions. At June 30, 2006, pursuant to the Credit Agreement, the Company had $30,000 in borrowings and $14,114 of letters of credit outstanding under its $100,000 revolving credit facility. The amount available under the revolving credit facility is reduced by any outstanding letters of credit, which are limited to $30,000. The amount outstanding on the term loan under the Credit Agreement was $141,438.5 reflecting a payment in the amount of $1,811.5 during the second quarter from the release of funds held in an escrow account related to the sale of Crunch Fitness. At June 30, 2006, the average rate on borrowings under the revolving credit and term loan facility was 9.79%. As of June 30, 2006, the Company was in compliance with the terms of the Credit Agreement.

     The Credit Agreement will terminate on April 15, 2007 in the event that the Senior Subordinated Notes have not been refinanced. Because of this refinancing requirement as it relates to the Credit Agreement, the entire balance ($171,438.5) outstanding under the Credit Agreement is considered due and owing within the next 12 months, and therefore is included in Current maturities of long-term debt on our Condensed Consolidated Balance Sheet at June 30, 2006. The Senior Subordinated Notes are due in October 2007. If the Company is unable to refinance the Senior Subordinated Notes prior to April 15, 2007, absent an agreement by the lenders to extend the maturity of the Credit Agreement or the Company refinancing the Credit Agreement, the Company will not have sufficient liquidity to operate its business and will be unable to satisfy the Credit Agreement obligations when due. If such events were to occur, the holders of the 10-1/2% Senior Notes due 2011 (the “Senior Notes”) and Senior Subordinated Notes could accelerate the obligations under those instruments, and the Company would be unable to satisfy those obligations.

     The Company requires operating cash flows to fund its capital spending and working capital requirements. The Company maintains a substantial amount of debt, the terms of which require significant interest payments each year. Cash flows and liquidity may be negatively impacted by various items, including declines in membership revenues, changes in terms or other requirements by vendors, regulatory fines, penalties, settlements or adverse results in litigation, future consent payments to lenders or bondholders if required and unexpected capital requirements. The Company’s liquidity (cash and unutilized revolving credit facility) has declined by $12,700 from $68,900 to $56,200 during the first seven months of 2006. During August, utilization under the Credit Agreement revolving credit facility increased by $6,500 to $62,614 on August 31, 2006. Decreased cash collections of membership revenue, coupled with costs incurred in connection with ongoing investigations and litigation related to the restatement of the Company’s financial statements, an increase in Director’s fees and audit costs, cash fees paid related to consent solicitations of the Company’s lenders and noteholders in April 2006, fees paid to the lenders for the Fourth Amendment (described below), capital expenditures and the July interest payment, more than offset the $10,000 of Crunch Fitness sale proceeds that were not required to prepay the term loan pursuant to the Credit Agreement and $5,600 of proceeds from the sale of stock. Making the interest payments due on the Senior Subordinated Notes and Senior Notes in October 2006 and January 2007, respectively, will further reduce liquidity. In addition, the Company is subject to certain financial covenants in the Credit Agreement, including interest coverage and leverage tests. If the Company is unable to satisfy those covenants, absent a waiver by the lenders, the Company will be unable to access the revolving credit facility and therefore will be unable to meet its obligations under the Senior Notes and Senior Subordinated Notes and operate its business. In addition, as a result of not satisfying a financial covenant, an event of default could occur under the Credit Agreement and cross-defaults could occur under the indentures governing the Senior Notes and the Senior Subordinated Notes. If such events were to occur, the lenders and holders could accelerate the obligations under these instruments and the Company would be unable to satisfy those obligations. While the Company currently believes that it will be in compliance with the financial covenants in the Credit Agreement at the end of the third and fourth quarters of 2006, and has begun to take cost savings actions in that regard, there can be no assurance as to financial covenant compliance. In the event the Company fails to maintain adequate liquidity, as a result of increased expenses or decreased revenues or as a result of a default under its Credit Agreement (whether directly as a result of a cross-default to other indebtedness) and is unable to draw on its revolving credit facility, the Company would be unable to continue operating its business.

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

     In addition, the Company is subject to certain financial reporting covenants under the indentures governing the Senior Notes and the Senior Subordinated Notes. Although the Company anticipates filing its Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 on a timely basis, on June 23, 2006, the Company entered into the Fourth Amendment with the lenders under its Credit Agreement that extended the 10 day period to 28 days after which a cross-default will occur upon receipt of any financial reporting covenant default notice for the third quarter of 2006 under the indentures governing the Senior Subordinated Notes or the Senior Notes. The Company paid the lenders under the Credit Agreement fees in the amount of $493 in connection with the Fourth Amendment. In addition, the Company is in the process of implementing an accelerated closing process for the third quarter. However, if the Company is unable to file its financial reports on a timely basis and cannot obtain additional consents from its bondholders and lenders and such a cross-default or indenture event of default occurs, we would not be able to draw on our revolving credit facility and the lenders under the Credit Agreement and the holders of the Senior Notes and Senior Subordinated Notes could accelerate the obligations under these instruments and the Company would be unable to satisfy those obligations and continue operating its business.

     On April 10, 2006, the Company completed consent solicitations to amend the indentures governing the Senior Subordinated Notes and the Senior Notes to waive any default through September 11, 2006 arising under the financial reporting covenants from a failure to timely file financial statements with the SEC for the year ended December 31, 2005 and the quarter ended March 31, 2006 through July 10, 2006, and for the quarter ended June 30, 2006. In connection with the consent solicitations, on March 30, 2006, the Company entered into the Third Amendment and Waiver with the lenders under the Credit Agreement that, among other things, extended the time for delivering the audited financial statements for the year ended December 31, 2005 and the unaudited financial statements for the quarter ended March 31, 2006 until July 10, 2006, extended the time for delivering the unaudited financial statements for the quarter ending June 30, 2006 until September 11, 2006, permitted payment of the consent fees to the holders of the Senior Notes and the Senior Subordinated Notes and excludes fees and expenses incurred in connection with the consent solicitation from the computation of financial covenants.

     In connection with these consents, the Company issued 1,956,195 shares of unregistered common stock (valued at $17,446 as of the completion date of the solicitation) and paid $769 in consent fees to the holders of the Senior Notes and the Senior Subordinated Notes, paid the lenders under the Credit Agreement $2,474, and recorded $20,689 in deferred financing charges. Additionally, on April 11, 2006, the Company entered into stock purchase agreements (the “Stock Purchase Agreements”) to sell 400,000 shares of unregistered common stock to each of Wattles Capital Management, LLC and investment funds affiliated with Ramius Capital Group, L.L.C. Proceeds of $5,600 from the sales of Common Stock were used to fund: (i) the cash portion of the consent fees paid to holders of the Senior Notes and Senior Subordinated Notes and related expenses; (ii) fees and expenses relating to the Credit Agreement amendment and waiver; and (iii) additional working capital.

     The Company’s unrestricted Canadian subsidiary was not in compliance with its credit agreement at June 30, 2006. As a result, the entire outstanding amount of $878 has been classified as current.

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Note 5 Deferred Revenue

     Deferred revenue represents cash received from members, but not yet earned. The summary set forth below of the activity and balances in deferred revenue at June 30, 2006 and 2005 and for the periods then ended includes as cash additions all cash received for membership services. Revenue recognized includes all revenue earned during the periods from membership services. Financed members are those members who have financed their initial membership fee to be paid monthly. Advance payments from financed members are included within this table as advance payments of periodic dues and membership fees.

		Six months ended June 30, 2006
		Balance at												Balance at
		December 31,				Cash				Revenue				June 30,
		2005				Additions				Recognized				2006
Deferral of receipts from financed members:
Initial contract term payments		$	517,624			$	115,100			$	(137,132	)		$	495,592
Down payments			100,009				26,032				(27,353	)			98,688
Deferral of receipts representing advance payments:
Paid-in-full membership fees collected upon origination			109,819				18,125				(18,587	)			109,357
Advance payments of periodic dues and membership fees			120,696				60,060				(59,199	)			121,557
Receipts collected and earned without deferral during period							173,822				(173,822	)			—
Deferral of receipts for personal training services			17,762				64,955				(63,111	)			19,606
		$	865,910			$	458,094			$	(479,204	)		$	844,800

		Six months ended June 30, 2005
		Balance at												Balance at
		December 31,				Cash				Revenue				June 30,
		2004				Additions				Recognized				2005
Deferral of receipts from financed members:
Initial contract term payments		$	534,446			$	142,041			$	(150,279	)		$	526,208
Down payments			105,614				28,761				(27,886	)			106,489
Deferral of receipts representing advance payments:
Paid-in-full membership fees collected upon origination			115,735				14,331				(17,691	)			112,375
Advance payments of periodic dues and membership fees			132,164				66,528				(71,375	)			127,317
Receipts collected and earned without deferral during period							151,368				(151,368	)			—
Deferral of receipts for personal training services			17,697				62,634				(60,905	)			19,426
		$	905,656			$	465,663			$	(479,504	)		$	891,815

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Note 6 Income (loss) per Common Share

     Income (loss) per share is computed in accordance with SFAS No. 128 “Earnings per Share.” Basic income (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted income per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options and warrants using the “treasury stock” method.

		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Weighted average number of common shares outstanding			40,190,279				33,886,380				38,944,691				33,417,715
Effect of outstanding stock options and warrants			1,320,118				534,193				1,327,717				983,878
Diluted weighted average number of shares outstanding			41,510,397				34,420,573				40,272,408				34,401,593
Options and warrants excluded from the computation of diluted weighted average number of common shares because the exercise prices were greater than the average market prices of the common stock			1,618,840				5,417,152				1,618,840				5,417,152
Range of exercise prices per share:
High		$	36.00			$	36.00			$	36.00			$	36.00
Low		$	2.91			$	2.91			$	2.91			$	2.91

Note 7 Income Taxes

     At June 30, 2006, the Company had approximately $682,000 of federal net operating loss carryforwards and approximately $5,896 of Alternative Minimum Tax (“AMT”) credit carryforwards. The AMT credits can be carried forward indefinitely, while the tax loss carryforwards expire beginning in 2011 and fully expire in 2026. In addition, the Company has substantial state tax loss carryforwards that began to expire in 2006 and fully expire in 2026. On September 28, 2005, the Company underwent an ownership change for purposes of IRC Section 382. Due to the ownership change that occurred, the utilization of the Company’s federal tax loss carryforwards is subject to an annual limitation under Section 382, which will significantly limit their use. The amount of the limitation may, under certain circumstances, be increased by built-in gains held by the Company at the time of the change that are recognized in the five-year period after the ownership change.

     Based on 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. In accordance with SFAS No. 109, “Accounting for Income Taxes,” the Company will continue to review and evaluate the valuation allowance.

Note 8 Share-based payments

     In December 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment ” (“SFAS No.123R”). SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-based Compensation,” (“SFAS No. 123”) and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and its related implementation guidance. SFAS No. 123R primarily focuses on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires entities to recognize compensation expense from all share-based payment transactions in the financial statements. SFAS No. 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for all share-based payment transactions with employees.

     The Company adopted SFAS No. 123R on January 1, 2006 using the modified prospective method. Accordingly, prior period amounts have not been restated. Under this method, the Company must record compensation expense for all awards granted after the adoption date and for the unvested portion of previously granted awards that remain outstanding at the adoption date, under the fair value method. The Company has elected to recognize compensation expense on a straight-line basis over the vesting period of the

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

award. Total stock-based compensation expense for the three months ended June 30, 2006 was $846, which is comprised of $490 related to stock options, $318 related to restricted shares and $38 related to estimated income tax obligations which are liability classified. Total stock-based compensation expense for the six months ended June 30, 2006 was $1,936, which is comprised of $1,051 related to stock options, $748 related to restricted shares and $137 related to estimated income tax obligations which are liability classified.

     Prior to the adoption of SFAS No. 123R, the Company accounted for its stock-based awards using the intrinsic value method in accordance with APB 25, and recognized no compensation costs for its stock plans other than for its restricted stock awards. Specifically, the adoption of SFAS No. 123R resulted in the recording of compensation expense for employee stock options. The following table shows the effect of adopting SFAS No. 123R on selected items (“As Reported”) and what those items would have been under previous guidance under APB 25:

		Three months ended								Six months ended
		June 30, 2006								June 30, 2006
						Under APB								Under APB
		As Reported				No. 25				As Reported				No. 25
Loss from continuing operations before income taxes		$	(232	)		$	258			$	(4,864	)		$	(3,813	)
Loss from continuing operations			(733	)			(243	)			(5,566	)			(4,515	)
Net income (loss)			(733	)			(243	)			31,937				32,988
Cash flow from operating activities			(246	)			(246	)			10,331				10,331
Cash flow from financing activities			5,108				5,108				(42,890	)			(42,890	)
Basic and diluted income (loss) per common share
Loss from continuing operations		$	(0.02	)		$	(0.01	)		$	(0.14	)		$	(0.11	)
Income from discontinued operations			—				—				0.96				0.96
Net income (loss)		$	(0.02	)		$	(0.01	)		$	0.82			$	0.85

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for the three and six months ended June 30, 2005:

		Three months ended				Six months ended
		June 30, 2005				June 30, 2005
Net income, as reported		$	1,607			$	6,222
Plus: stock-based compensation expense included in net income			4,207				4,337
Less: stock-based compensation expense determined under fair value based method			(4,699	)			(5,377	)
Pro forma net income		$	1,115			$	5,182
Basic income per common share:
As reported		$	0.05			$	0.19
Pro forma			0.03				0.16
Diluted income per common share:
As reported		$	0.05			$	0.18
Pro forma			0.03				0.15

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Stock-Based Compensation 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 provided for the grant of non-qualified stock options to non-employee directors of the Company. Options under the Directors’ Plan were 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. The Directors’ Plan expired as of January 3, 2006. As such, stock options may no longer be granted under the Directors’ Plan.

     Also in January 1996, the Board of Directors of the Company adopted the 1996 Long-Term Incentive Plan (the “Incentive Plan”). The Incentive Plan provided 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. Pursuant to the Incentive Plan, non-qualified stock options were generally granted with an exercise price equal to the fair market value of the Common Stock at the date of grant. Incentive stock options could not be granted at less than the fair market value of the Common Stock at the date of grant. Option grants become exercisable generally in three equal annual installments commencing one year from the date of grant. Option grants in 2005, 2004 and 2003 have 10-year terms. The Incentive Plan expired as of January 3, 2006. As such, awards may no longer be granted under the Incentive Plan.

     On March 8, 2005, the Company adopted the Inducement Award Equity Incentive Plan (the “Inducement Plan”) as a means of providing equity compensation in order to induce individuals to become employed by the Company. The Inducement Plan provides for the issuance of up to 600,000 shares of the Company’s Common Stock in the form of stock options and restricted shares, subject to various restrictions. Pursuant to the Inducement 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. Inducement stock options must be granted at not less than the fair market value of the Common Stock at the date of grant. Options are granted at the discretion of the Compensation Committee of the Board of Directors (the “Compensation Committee”). Option grants become exercisable generally in three equal annual installments commencing one year from the date of grant and have 10-year terms. As of June 30, 2006, 65,500 shares remain available for issuance under the Inducement Plan.

     Certain employment arrangements contain provisions that provide for the payment to the participant of amounts which represent estimated income tax obligations related to the vesting of awards. The amounts related to the estimated income tax obligations are liability classified awards.

Stock Options

     A summary of stock based compensation activity within the Company’s stock-based compensation plans for the six months ended June 30, 2006 is as follows:

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual				Aggregate
						Exercise				Term				Intrinsic
		Number of Shares				Price				(Years)				Value
Outstanding at December 31, 2005			4,138,514			$	13.26
Granted			19,500				8.02
Exercised			(51,081	)			5.41
Forfeited			(62,834	)			6.43
Canceled			(160,758	)			21.43
Outstanding at June 30, 2006			3,883,341			$	13.11				6.2			$	2,630
Exercisable at June 30, 2006			2,851,341			$	15.86				5.2			$	1,186

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

     Other information pertaining to option activity during the three and six months ended June 30, 2006 and 2005 was as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
Weighted average grant-date fair value of stock options granted		$	4.30			$	1.56			$	4.42			$	1.72
Total intrinsic value of stock options exercised		$	149			$	—			$	276			$	—

     The Company received $277 of cash from stock options exercised during the six months ended June 30, 2006. At June 30, 2006, there was approximately $2,100 of total unrecognized compensation cost related to non-vested stock options. This cost will be recognized over a weighted average period of 3 years.

     The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
Expected option life in years			6				6				6				6
Risk-free interest rate			4.98	%			3.86	%			4.87	%			4.15	%
Dividend yield			—				—				—				—
Expected volatility			52	%			51	%			52	%			52	%

     For the first and second quarters of 2006, the expected life of each award granted was calculated using historical experience. Expected volatility was based on historical volatility levels of the Company’s common stock. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury strip rates with a remaining term equal to the expected term. Expected dividend yield is based on historical dividend payments.

Restricted Stock

     The Company also grants restricted stock awards to certain employees. Restricted stock awards are valued at the closing market value of the Company’s common stock on the day prior to the grant, and the total value of the award is recognized as expense ratably over the vesting period of the employees receiving the grants. The Company did not grant restricted stock awards during the first six months of 2006.

     A summary of restricted stock activity for the six months ended June 30, 2006 is as follows:

						Weighted
						Average
						Grant Date Fair
		Number of Shares				Value
Outstanding at December 31, 2005			837,000			$	6.92
Vested			(2,500	)			7.01
Forfeited			(7,500	)			7.01
Outstanding at June 30, 2006			827,000			$	6.92

     As of June 30, 2006, the total amount of unrecognized compensation expense related to non-vested restricted stock awards and estimated income tax obligations was approximately $4,936 and $893, respectively. Both amounts are expected to be recognized on a straight-line basis over a weighted-average period of approximately 4 years. The total grant date fair value of shares vested during the six months ended June 30, 2006 and 2005 was $18 and $2,186, respectively.

     The Company issued approximately 11,936 shares of its common stock to its tabulation agent for their services in connection with the Company’s consent solicitation. The shares were valued as of the agreement date and the Company has recorded general and administrative expense of $98 for this transaction.

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Note 9 Guarantees

     In connection with the Company’s January 2006 sale of its “Crunch Fitness” brand along with certain additional health clubs located in San Francisco, California, the Company and/or certain of its subsidiaries remain liable for the obligations (including rent) on certain leases transferred to the purchaser in the amount of $87,819 and may remain liable for the obligations on three additional leases that have not yet transferred to purchaser in an additional amount of $7,948.

     The amount of foregoing liabilities will reduce over time as obligations are paid by the purchaser under these leases. However, certain of the leases possess renewal options which, if exercised by purchaser, will again increase the amount of liability of the Company and/or certain of its subsidiaries under such lease existing as of the date of such exercise by purchaser, but for no more than the obligations for a 5 year period under any such lease.

     The Company’s exposure for these retained liabilities is mitigated by two letters of credit naming the Company as beneficiary, aggregating $3,228 and having a term equal to the longer of three years or the time the purchaser has a Debt to EBITDA Ratio of less than 3 to 1.

     The Company has recorded a liability on its balance sheet for the estimated fair value of these retained liabilities equal to $600 based upon an analysis prepared by an independent third party valuation company.

Note 10 Gain on sale of land and building

The Company recorded a gain of approximately $0.9 million on the sale of land and a building relating to a club in Canada, in March 2006 and a $0.9 million gain on the sale of land and a building relating to a club in Ohio, in June 2006.

Note 11 Insurance Proceeds

     Costs incurred as a result of the Audit Committee investigation, costs of cooperating with the various government agencies investigating accounting-related matters, attorneys’ and other professional fees advanced by the Company to various current and former Company officers, directors and employees, as provided in the Company’s by-laws, subject to the undertaking of the recipients to repay the advanced fees should it ultimately be determined by a court of law that they were not entitled to be indemnified, and related class action litigation are reflected in “General and Administrative” expenses in the Consolidated Statements of Operations. The Company received payments of $1,623 during the quarter ended March 31, 2006 and $404 during the quarter ended June 30, 2006 for reimbursement of costs incurred in prior periods pursuant to the Company’s Director and Officer insurance policies. See Note 3.

Note 12 Discontinued Operations

     On January 20, 2006, pursuant to a sale agreement, the Company completed the sale of twenty-five health clubs operated primarily under the “Crunch Fitness” brand, along with certain additional health clubs operating under the “Gorilla Sports” and “Pinnacle Fitness” brands located in San Francisco, California. The transaction resulted from an offering and competitive bidding process run by the Company’s independent investment banking firm. The Company received $45,000 in gross proceeds and recorded a net gain of $38,375. As a result of this transaction, the Company has presented the operating results of Crunch as a discontinued operation for all periods presented. All previously reported amounts from the statement of operations and balance sheet have been reclassified in accordance with the reporting requirements of SFAS No. 144.

     The financial results of Crunch Fitness, included in discontinued operations, are as follows:

		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Revenue		$	—			$	16,821			$	4,687			$	34,652
Loss from discontinued operations before income taxes			—				(1,105	)			(866	)			(1,500	)
Income tax provision			—				(19	)			(6	)			(38	)
Loss from discontinued operations			—				(1,124	)			(872	)			(1,538	)
Gain on disposal of discontinued operations			—				—				38,375				—
Net income (loss) from discontinued operations		$	—			$	(1,124	)		$	37,503			$	(1,538	)

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Note 13 Subsequent Events

Real Estate Transaction

     On July 28, 2006, a subsidiary of the Company closed the sale of an owned location in Georgia for a sale price of $4,500. The Company estimates the gain on the sale of this club will be approximately $2,350. The club will close for workouts no later than October 31, 2006.

Separation Agreement with Mr. Landeck

     The Company entered into a Separation Agreement with Mr. Carl J. Landeck, the previous Chief Financial Officer, on August 1, 2006. Under the Separation Agreement, the Company agreed to pay Mr. Landeck severance in the amount of approximately $700 on or about October 16, 2006. The Separation Agreement provided that certain equity awards previously granted to Mr. Landeck immediately vested. The 23,000 options that were granted to Mr. Landeck under the Inducement Plan on November 29, 2005 at a strike price of $7.01 will be cancelled. The Separation Agreement extends the exercise period of Mr. Landeck’s vested options until October 10, 2006. At the end of the extended exercise period, any unexercised options will immediately expire. The Company recorded approximately $1,200 for the severance liability for Mr. Landeck in the second quarter of 2006.

Director Compensation

     On August 6, 2006, upon the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors approved modifications to payment amounts for the Company’s Lead Director, Committee Chairmen, and members of the Company’s Strategic Alternatives Committee, and certain meeting fees, as compensation for the extraordinary commitment of time spent during the past year. As approved, (i) the Lead Director is to receive an additional one-time payment of $35, (ii) the Chairman of the Audit Committee is to receive an additional one-time payment of $35, and (iii) the Chairmen of the Compensation Committee and Nominating and Corporate Governance Committee are to receive additional one-time payments of $25 (though that payment will not be made to the current Compensation Committee Chairman, since he is also the Lead Director). The Board also approved payments to each Co-Chairman of the Strategic Alternatives Committee (“SAC”), which had been approved only through June 2006, in the amount of $17.5 for each of the third and fourth quarters of 2006. Stipends for the other members of the SAC were eliminated and the per meeting fee for the SAC was reduced from $1.5 to 1. Finally, the Board approved a one-time increase in the per meeting fee payable to members of the Audit Committee from $1 to $2 only for meetings held from January 1 — June 30, 2006.

Appointment of Mr. Eidell as Chief Financial Officer

     On August 6, 2006, the Board of Directors named Ronald G. Eidell as Senior Vice President and Chief Financial Officer and principal financial officer of the Company. Mr. Eidell is also a partner of Tatum LLC, a financial and accounting services provider. The Company is currently utilizing the services of several partners and associates of Tatum LLC, to manage and assist in certain projects relating to accelerating the accounting close process and remediation of material weaknesses. The Company has paid Tatum LLC an aggregate of $354 through August 31, 2006.

Employment Agreement and Separation Agreement with Mr. Toback

     On August 6, 2006, upon the recommendation of the Compensation Committee, the Board of Directors (with Mr. Toback recusing himself) approved a modification to the Employment Agreement between the Company and Paul A. Toback, then the Company’s Chairman and Chief Executive Officer. The modification increased by $900 the amount payable to Mr. Toback only in the event he were terminated without “Cause”, as defined in the Employment Agreement, on or prior to February 7, 2008.

     On August 11, 2006, the Company announced the separation of Paul A. Toback as Chairman, President and Chief Executive Officer of the Company, effective August 11, 2006. Pursuant to the terms of his separation agreement, among other things, on August 11, 2006 the Company paid Mr. Toback approximately $3,800 and certain equity awards previously granted to him immediately vested. The Company is also obligated to provide Mr. Toback a tax gross-up if any amounts payable under the separation agreement, or otherwise, are subject to excise tax under Section 4999 of the Internal Revenue Code. In addition, Mr. Toback is entitled to tax gross-up payments for income and employment taxes relating to the vesting of his restricted stock. The terms of Mr. Toback’s Separation agreement were substantially equivalent to those set forth in his employment agreement in the circumstances of termination without cause following a change in Control (as defined). The Company intends to record a charge of approximately $5,400 in the third quarter of 2006 in connection with this agreement.

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

Appointment of Acting Chief Executive Officer

     On August 11, 2006, the Company announced it had appointed current director Barry R. Elson as acting Chief Executive Officer, effective immediately. On September 1, 2006, the Company’s Compensation Committee approved payment of a monthly stipend to Mr. Elson, retroactive to August 11, 2006, in the amount of $50 per month through the earlier of December 31, 2006 or appointment of a permanent Chief Executive Officer. The Committee will review the matter again at the end of 2006, if a permanent Chief Executive Officer has not been appointed by such date.

Appointment of Interim Chairman of the Board

     On August 11, 2006, the Company announced it had appointed current director Don R. Kornstein as interim Chairman, effective immediately. On September 1, 2006, the Company’s Compensation Committee approved payment of additional director fees to Mr. Kornstein, retroactive to August 11, 2006, in the amount of $50 per month through the earlier of December 31, 2006 or the election of a permanent Chairman of the Board. The Committee will review the matter again at the end of 2006, if a permanent Chairman of the Board has not been elected by such date.

Strategic Alternatives Committee

     On August 23, 2006, the Board of Directors approved the dissolution of the Strategic Alternatives Committee and assumed its duties with respect to evaluation of strategic alternatives.

Resignation of Director

     On August 24, 2006, James F. McAnally, M.D. notified the Company of his resignation from the Company’s Board of Directors, effective immediately. Dr. McAnally’s resignation was not due to any disagreement with the Company.

Note 14 Condensed Consolidating Financial Statements

     Condensed consolidating financial statements present the accounts of Bally Total Fitness Holding Corporation (“Parent”), and its Guarantor and Non-Guarantor subsidiaries, as defined in the indenture governing the Senior Notes issued in July 2003. The Senior Notes are unconditionally guaranteed, on a joint and several basis, by the Guarantor subsidiaries, including substantially all domestic subsidiaries of the Parent. Non-Guarantor subsidiaries include Canadian operations and real estate finance programs.

     As defined in the indenture governing the Senior Notes, guarantor subsidiaries include:

59th Street Gym LLC; 708 Gym LLC; Ace LLC; Bally Fitness Franchising, Inc.; Bally Franchise RSC, Inc.; Bally Franchising Holdings, Inc.; Bally Total Fitness Corporation; Bally Total Fitness International, Inc.; Bally Total Fitness of Missouri, Inc.; Bally Total Fitness of Toledo, Inc.; Bally’s Fitness and Racquet Clubs, Inc.; BFIT Rehab of West Palm Beach, Inc.; Bally Total Fitness of Connecticut Coast, Inc.; Bally Total Fitness of Connecticut Valley, Inc.; Crunch LA LLC; Crunch World LLC; Flambe LLC; Greater Philly No. 1 Holding Company; Greater Philly No. 2 Holding Company; Health & Tennis Corporation of New York; Holiday Health Clubs of the East Coast, Inc.; Bally Total Fitness of Upstate New York, Inc.; Bally Total Fitness of Colorado, Inc.; Bally Total Fitness of the Southeast, Inc.; Holiday/Southeast Holding Corp.; Bally Total Fitness of California, Inc.; Bally Total Fitness of the Mid-Atlantic, Inc.; Bally Total Fitness of Greater New York, Inc.; Jack La Lanne Holding Corp.; Bally Sports Clubs, Inc.; Mission Impossible, LLC; New Fitness Holding Co., Inc.; Nycon Holding Co., Inc.; Bally Total Fitness of Philadelphia, Inc.; Bally Total Fitness of Rhode Island, Inc.; Bally Total Fitness of the Midwest, Inc.; Bally Total Fitness of Minnesota, Inc.; Soho Ho LLC; BFT/CFI, Inc. (f/k/a Crunch Fitness International, Inc.); Tidelands Holiday Health Clubs, Inc.; U.S. Health, Inc.; and West Village Gym at the Archives LLC.

     The following tables present the condensed consolidating balance sheets at June 30, 2006 and December 31, 2005, the condensed consolidating statements of operations for the three and six months ended June 30, 2006 and 2005, and the condensed consolidating statements of cash flows for the six months ended June 30, 2006 and 2005. The Eliminations column reflects the elimination of investments in subsidiaries and intercompany balances and transactions. Certain amounts in the condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three and six months ended June 30, 2005 have been restated. See Note 2.

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

		June 30, 2006
						Guarantor				Non-Guarantor								Consolidated
		Parent				Subsidiaries				Subsidiaries				Eliminations				Total
ASSETS
Current assets:
Cash		$	—			$	12,370			$	2,786			$	—			$	15,156
Other current assets			—				30,512				1,296				—				31,808
Total current assets			—				42,882				4,082				—				46,964
Property and equipment, net			—				287,711				15,373				—				303,084
Goodwill, net			—				19,734				—				—				19,734
Trademarks, net			6,507				—				364				—				6,871
Intangible assets, net			—				2,079				468				—				2,547
Investment in and advances to subsidiaries			(725,863	)			221,315				—				504,548				—
Other assets			41,007				6,946				3,749				—				51,702
		$	(678,349	)		$	580,667			$	24,036			$	504,548			$	430,902
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	—			$	49,072			$	174			$	—			$	49,246
Income taxes payable			—				1,895				56				—				1,951
Accrued liabilities			21,617				69,628				9,676				—				100,921
Current maturities of long-term debt			175,230				2,003				3,121				—				180,354
Deferred revenues			—				273,246				5,909				—				279,155
Total current liabilities			196,847				395,844				18,936				—				611,627
Long-term debt, less current maturities			535,097				2,764				4,925				—				542,786
Net affiliate payable			—				436,004				61,676				(497,680	)			—
Other liabilities			—				115,308				5,829				—				121,137
Deferred revenues			—				554,670				10,975				—				565,645
Stockholders’ deficit			(1,410,293	)			(923,923	)			(78,305	)			1,002,228				(1,410,293	)
		$	(678,349	)		$	580,667			$	24,036			$	504,548			$	430,902

BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements — (continued)
(All dollar amounts in thousands, except share and per share data)
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

		December 31, 2005
						Guarantor				Non-Guarantor								Consolidated
		Parent				Subsidiaries				Subsidiaries				Eliminations				Total
ASSETS
Current assets:
Cash		$	—			$	16,238			$	1,216			$	—			$	17,454
Other current assets			—				36,976				1,415				—				38,391
Current assets held for sale			—				342				—				—				342
Total current assets			—				53,556				2,631				—				56,187
Property and equipment, net			—				294,888				19,782				—				314,670
Goodwill, net			—				19,734				—				—				19,734
Trademarks, net			6,507				—				405				—				6,912
Intangible assets, net			—				2,333				546				—				2,879
Investment in and advances to subsidiaries			(724,893	)			221,315				—				503,578				—
Other assets			29,265				6,580				3,973				—				39,818
Non-current assets held for sale			—				39,894				—				—				39,894
		$	(689,121	)		$	638,300			$	27,337			$	503,578			$	480,094
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	—			$	57,724			$	108			$	—			$	57,832
Income taxes payable			—				1,641				56				—				1,697
Deferred income taxes			—				—				—				—				—
Accrued liabilities			22,407				67,768				6,267				—				96,442
Current maturities of long-term debt			6,594				485				5,939				—				13,018
Deferred revenues			—				293,116				6,325				—				299,441
Current liabilities associated with assets held for sale			—				7,764				—				—				7,764
Total current liabilities			29,001				428,498				18,695				—				476,194
Long-term debt, less current maturities			745,564				5,182				5,558				—				756,304
Net affiliate payable			—				517,799				58,658				(576,457	)			—
Other liabilities			—				108,259				8,578				—				116,837
Deferred revenues			—				554,722				11,747				—				566,469
Non-current liabilities associated with assets held for sale			—				27,976				—				—				27,976
Stockholders’ deficit			(1,463,686	)			(1,004,136	)			(75,899	)			1,080,035				(1,463,686	)
		$	(689,121	)		$	638,300			$	27,337			$	503,578			$	480,094