• Ancillary club revenue: For the three months ended March 31, 2008, we generated 12.8% of our revenue from personal training and 4.9% of our revenue from other ancillary programs and services consisting of programming for children, group fitness training and other member activities, as well as sales of miscellaneous sports products.

In addition, we receive revenue (approximately 1.1% of our revenue for the three months ended March 31, 2008) from the rental of space in our facilities to operators who offer wellness-related offerings, such as physical therapy. In addition, we sell in-club advertising and sponsorships and generate management fees from certain club facilities that we do not wholly own. We refer to this as Fees and Other revenue.

Revenue (in $'000s) was comprised of the following:

                                                Three Months Ended March 31,
                                               2008                      2007
        Membership dues                $  99,183        78.5 %   $  90,984        78.9 %
        Initiation fees                    3,402         2.7 %       2,883         2.5 %

        Membership revenue               102,585        81.2 %      93,867        81.4 %

        Personal training revenue         16,141        12.8 %      13,921        12.0 %
        Other ancillary club revenue       6,182         4.9 %       6,552         5.7 %

        Ancillary club revenue            22,323        17.7 %      20,473        17.7 %
        Fees and Other revenue             1,412         1.1 %       1,037         0.9 %

        Total revenue                  $ 126,320       100.0 %   $ 115,377       100.0 %

Our revenues, operating income and net income for the three months ended March 31, 2008 were $126.3 million, $14.1 million and $4.8 million, respectively.
Our operating and selling expenses are comprised of both fixed and variable costs. Fixed costs include club and supervisory salary and related expenses, occupancy costs, including certain elements of rent, housekeeping and contracted maintenance expenses, as well as depreciation. Variable costs are primarily related to payroll associated with ancillary club revenue, membership sales compensation, advertising, utilities, certain facility repairs and club supplies.
General and administrative expenses include costs relating to our centralized support functions, such as accounting, insurance, information systems, purchasing and member relations, legal and consulting fees and real estate development expenses.
As clubs mature and increase their membership base, fixed costs are typically spread over an increasing revenue base and operating margins tend to improve.
Our primary capital expenditures relate to the construction or acquisition of new club facilities and upgrading and expanding our existing clubs. The construction and equipment costs vary based on the costs of labor, materials and the planned service offerings and size and configuration of the facility. We perform routine improvements at our clubs and partial replacement of the fitness equipment each year for which we budget approximately 4.0% of projected annual revenue. Expansions of certain facilities are also performed from time to time, when incremental space becomes available on acceptable terms, and utilization and demand for the facility dictate. In this connection, facility remodeling is also considered where appropriate.
Historical Club Growth
The following table sets forth our club growth during each of the quarters in 2007 and the first quarter of 2008.

                                                                               2007                                         2008
                                                  Q1             Q2             Q3             Q4            Total           Q1
Wholly owned clubs operated at beginning
of period                                         147            150            150            152            147            159
New clubs opened                                    3              1              2              8             14              2
Clubs acquired                                      -              -              -              1              1              -
Clubs closed, relocated, merged or sold             -             (1 )            -             (2 )           (3 )           (1 )

Wholly owned clubs at end of period               150            150            152            159            159            160

Total clubs operated at end of period (1)         152            152            154            161            161            162

(1) Includes wholly owned and partly owned clubs. In addition to the above, as of December 31, 2007 and March 31, 2008, we managed five university fitness clubs in which we did not have an equity interest.

Comparable Club Revenue
   We define comparable club revenue as revenue at those clubs that were
operated by us for over 12 months and comparable club revenue growth as revenue
for the 13th month and thereafter as applicable as compared to the same period
at the prior year. Comparable club revenue growth was 4.5% for the three months
ended March 31, 2008 and 2007.
Results of Operations
   The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:

                                                                          Three Months
                                                                         Ended March 31
                                                                     2008             2007
Revenue                                                              100.0 %          100.0 %

Operating expenses:
Payroll and related                                                   38.3             38.8
Club operating                                                        33.9             34.1
General and administrative                                             6.6              6.7
Depreciation and amortization                                         10.0              9.6

                                                                      88.8             89.2

Operating income                                                      11.2             10.8
Loss on extinguishment of debt                                           -             10.9
Interest expense                                                       5.2              6.1
Interest income                                                       (0.1 )           (0.2 )
Equity in the earnings of investees and rental income                 (0.4 )           (0.4 )

Income (loss) before provision (benefit) for corporate
income taxes                                                           6.5             (5.6 )
Provision (benefit) for corporate income taxes                         2.7             (2.3 )

Net income (loss)                                                      3.8 %           (3.3 )%

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
Revenues
Revenues increased $10.9 million, or 9.5%, to $126.3 million for the three months ended March 31, 2008 from $115.4 million for the three months ended March 31, 2007. This increase in revenue was driven primarily by growth in membership revenue and ancillary club revenue. For the three months ended March 31, 2008, revenues increased $3.1 million, or 2.8%, at our clubs opened or acquired prior to March 31, 2006. For the three months ended March 31, 2008, revenue increased $8.9 million at the 23 clubs opened or acquired subsequent to March 31, 2006. These increases in revenue were offset by a $886,000 revenue decrease related to the six clubs that were closed and/or relocated subsequent to April 1, 2006.
Comparable club revenue increased 4.5% for the three months ended March 31, 2008. Of this 4.5% increase, 1.7% was due to an increase in membership, 1.5% was due to an increase in price and 1.3% was due to an increase in Ancillary club revenue and Fees and Other revenue.

Operating Expenses
Operating expenses increased $9.3 million, or 9.0%, to $112.2 million for the three months ended March 31, 2008, from $103.0 million for the three months ended March 31, 2007. The increase was due to the following factors:
Payroll and related. Payroll and related expenses increased $3.7 million, or 8.2%, to $48.4 million for the three months ended March 31, 2008, from $44.8 million for the three months ended March 31, 2007. This increase was attributable to a 7.9% increase in the total months of club operation from 442 to 477. In addition, payroll costs directly related to our personal training, group fitness training, and programming for children increased $1.5 million or 16.3%, due to an increase in demand for these programs.
Club operating. Club operating expenses increased $3.5 million, or 8.9 %, to $42.9 million for the three months ended March 31, 2008, from $39.4 million for the three months ended March 31, 2007. This increase was attributable to a 7.9% increase in the total months of club operation from 442 to 477.
General and administrative. General and administrative expenses increased $548,000, or 7.1%, to $8.3 million for the three months ended March 31, 2008, from $7.8 million for the same period in the prior year.
Depreciation and amortization. Depreciation and amortization increased $1.6 million, or 14.0%, to $12.6 million for the three months ended March 31, 2008 from $11.1 million for the three months ended March 31, 2007, principally due to new and expanded clubs. Depreciation and amortization includes income of $400,000 related to the disposal of fixed assets, partly offset by a loss on disposal of $200,000 from club closures. Loss on Extinguishment of Debt
For the three months ended March 31, 2007 loss on extinguishment of debt was $12.5 million. The proceeds from the New Senior Credit Facility obtained on February 27, 2007 were used to repay $170.0 million, representing the remaining outstanding principal of the 9 5/8% Senior Notes ("Old Senior Notes"). We incurred $8.8 million of tender premium and $215,000 of call premium together with $335,000 of fees and expenses related to the tender of the Old Senior Notes. Net deferred financing costs related to the Old Senior Notes and the related Senior Credit Facility totaling approximately $3.2 million were expensed in the first quarter of 2007. There were no such costs in the three months ended March 31, 2008.
Interest Expense
Interest expense decreased $502,000 to $6.5 million for the three months ended March 31, 2008 from $7.0 million for the three months ended March 31, 2007. This decrease is a result of the February 27, 2007 refinancing of the Old Senior Notes with our Term Loan Facility, which is at the variable rate of the Eurodollar rate plus 1.75%. The Old Senior Notes were outstanding through February 27, 2007 and from February 28, 2007 through March 31, 2007, the variable rate on the Term Loan Facility was approximately 7.13%, while the average rate for the three months ended March 31, 2008 decreased to approximately 6.57%.
Interest Income
Interest income decreased $119,000 to $140,000 for the three months ended March 31, 2008 from $259,000 for the three months ended March 31, 2007 due to a decrease in interest rates, as well as a decrease in the monthly average cash balance for the three months ended March 31, 2008 when compared to the three months ended March 31, 2007.

Provision for Corporate Income Taxes
We recorded an income tax provision of $3.3 million for the three months ended March 31, 2008 compared to a benefit of $2.6 million for the three months ended March 31, 2007, calculated using the Company's effective tax rate. Liquidity and Capital Resources
Historically, we have satisfied our liquidity needs through cash generated from operations and various borrowing arrangements. Principal liquidity needs have included the acquisition and development of new clubs, debt service requirements and other capital expenditures necessary to upgrade, expand and renovate existing clubs.
Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2008 was $37.8 million compared to $18.9 million for the three months ended March 31, 2007, for a $18.9 million increase. Contributing to the cash flow increase was the increase in earnings before interest, taxes, depreciation and amortization and loss on extinguishment of debt of $3.3 million. In addition, the net changes in certain operating assets and liabilities increased $18.2 million primarily due to decreases in pre-payments made to landlords, the timing of other certain vendor payments and decreases in our cash paid for interest and cash paid for taxes of $2.7 million and $2.2 million, respectively.
Excluding the effects of cash and cash equivalent balances, we normally operate with a working capital deficit because we receive dues and program and services fees either (i) for the month services are rendered, or (ii) when paid-in-full, in advance. As a result, we typically do not have significant accounts receivable. We record deferred liabilities for revenue received in advance in connection with dues and services paid-in-full and for initiation fees paid at the time of enrollment. Initiation fees received are deferred and amortized over a 30-month period, which represents the approximate life of a member. At the time a member joins our club we incur enrollment costs which are deferred over 30 months. These costs typically offset the impact initiation fees have on working capital. We do not believe we will have to finance this working capital deficit in the foreseeable future, because as we increase the number of clubs open, we expect we will continue to have deferred revenue balances that reflect services and dues that are paid-in-full in advance at levels similar to, or greater than, those currently maintained. The deferred revenue balances that give rise to this working capital deficit represent cash received in advance of services performed, and do not represent liabilities that must be funded with cash.
Investing Activities. Investing activities consist primarily of construction of new clubs and the purchase of new fitness equipment. In addition, we make capital expenditures to expand and remodel our existing clubs. We finance construction and the purchase of equipment by using cash generated by operations and various borrowing arrangements. Net cash used in investing activities was $22.5 million and $19.3 million for the three months ended March 31, 2008 and 2007, respectively. The increase in capital expenditures is due to the increase in the number of clubs under construction in 2008 compared to 2007. For the year ending December 31, 2008, we estimate we will invest a total of $90.0 million in capital expenditures. This amount includes $19.0 million to continue to upgrade existing clubs, $9.0 million to support and enhance our management information systems and $6.0 million for the construction of a new regional laundry facility in our New York Sports Clubs market. The remainder of our 2008 capital expenditures will be committed to building, acquiring or expanding clubs. These expenditures will be funded by cash flow provided by operations, available cash on hand and, to the extent needed, borrowings from the Revolving Loan Facility.
Financing Activities. Net cash used in financing activities was $9.2 million for the three months ended March 31, 2008 compared to net cash provided by financing activities of $2.9 million for the same period in the prior year for a decrease in financing cash of $12.1 million. This decrease can also be attributed to the refinancing of our debt on February 27, 2007. The net proceeds after issuance costs from the New Senior Credit Facility of $182.4 million were used to repay the remaining principal of $170.0 million of the outstanding principal of the Old Senior Notes. In addition, we paid a premium and fees in connection with the extinguishment of debt of $9.3 million. These transactions accounted for a $3.1 million increase in cash related to financing activities for the three months ended March 31, 2007. In addition, for the three months ended March 31, 2008 we repaid $9.0 million for amounts borrowed on the Revolving Loan Facility in December 2007.

As of March 31, 2008, our total consolidated debt was $309.9 million. This substantial amount of debt could have significant consequences, including:
• Making it more difficult to satisfy our obligations;

• Increasing our vulnerability to general adverse economic conditions;

• Limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of new clubs and other general corporate requirements;

• Requiring cash flow from operations for the payment of interest on our credit facility and reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions of new clubs and general corporate requirements; and

• Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.
On February 27, 2007, TSI Holdings and TSI LLC entered into the New Senior Credit Facility. The New Senior Credit Facility consists of the Term Loan Facility, the Revolving Loan Facility, and an incremental term loan commitment facility in the maximum amount of $100.0 million, under which borrowing is subject to compliance with certain conditions precedent by TSI LLC and agreement upon certain terms and conditions thereof between the participating lenders and TSI LLC. The Revolving Loan Facility replaced the senior secured revolving credit facility of $75.0 million that was to mature on April 16, 2008.
As of March 31, 2008, TSI LLC had $183.2 million outstanding under the Term Loan Facility. Borrowings under the Term Loan Facility will, at TSI LLC's option, bear interest at either the administrative agent's base rate plus 0.75% or its Eurodollar rate plus 1.75%, each as defined in the related credit agreement. The interest rate on these borrowings was 4.69% as of March 31, 2008. The Term Loan Facility matures on the earlier of February 27, 2014, or August 1, 2013, if the 11% Senior Discount Notes are still outstanding. TSI LLC is required to repay 0.25% of principal, or $462,500, per quarter beginning June 30, 2007. Total principal payments of $1.9 million have been made as of March 31, 2008.
The Revolving Loan Facility expires on February 27, 2012 and borrowings under the facility currently, at TSI LLC's option, bear interest at either the administrative agent's base rate plus 1.25% or its Eurodollar rate plus 2.25%, each as defined in the related credit agreement. TSI LLC's applicable base rate and Eurodollar rate margins, and commitment commission percentage, vary with our consolidated secured leverage ratio, as defined in the related credit agreement. TSI LLC is required to pay a commitment fee of 0.50% per annum on the daily unutilized amount. There were no borrowings outstanding under the Revolving Loan Facility at March 31, 2008 and outstanding letters of credit issued totaled $11.5 million. The unutilized portion of the Revolving Loan Facility as of March 31, 2008 was $63.5 million.
As of March 31, 2008, we were in compliance with our debt covenants in the related credit agreement and given our operating plans and expected performance for 2008, we expect we will continue to be in compliance during the remainder of 2008. These covenants may limit TSI LLC's ability to incur additional debt. As of March 31, 2008, permitted borrowing capacity of $75.0 million was not restricted by the covenants.
The terms of the indenture governing our Senior Discount Notes and the New Senior Credit Facility significantly restrict the payment of dividends by us. Our subsidiaries are permitted under the terms of the New Senior Credit Facility (including under the indenture governing our Senior Discount Notes) to incur additional indebtedness that may severely restrict or prohibit the payment of dividends by such subsidiaries to us. Our substantial leverage may impair our financial condition and we may incur significant additional debt.
As of March 31, 2008, we had $126.7 million of the 11% Senior Discount Notes outstanding.
As of March 31, 2008, we had $12.1 million of cash and cash equivalents. We believe that we have, or will be able to obtain or generate sufficient funds to finance our current operating and growth plans through March 31, 2009. Any material acceleration or expansion of our plans through newly constructed clubs or acquisitions (to the

extent such acquisitions include cash payments) may require us to pursue additional sources of financing prior to March 31, 2009. There can be no assurance that such financing will be available or that it will be available on acceptable terms.
Notes payable were incurred upon the acquisition of various clubs and are subject to possible post acquisition reductions arising out of operations of the acquired clubs. These notes bear interest at rates between 6% and 7% and are generally non-collateralized. The notes are due on various dates through 2009.
The aggregate long-term debt, and operating lease obligations as of March 31, 2008 were as follows:

                                                                Payments Due by Period (in $'000s)
                                                            Less than                                               After
Contractual Obligations                    Total             1 Year           1-3 Years         3-5 Years          5 Years
Long-Term Debt(1)                       $   397,799        $     1,902        $   32,890        $   34,159        $ 328,848
Operating Lease Obligations(2)              929,631             76,548           163,334           152,952          536,797

Total Contractual Cash Obligations      $ 1,327,430        $    78,450        $  196,224        $  187,111        $ 865,645

Notes:

(1) The long-term debt contractual cash obligations include principal and interest payment requirements.

(2) Operating lease obligations include base rent only. Certain leases provide for additional rent based on real estate taxes, common area maintenance and defined amounts based on the operating results of the lessee.

The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: income taxes (including uncertain tax positions), insurance accruals and other accruals. The Company is unable to estimate the timing of payments for these items.
As of March 31, 2008, we were operating at a working capital deficit of $65.6 million, of which $47.2 million is related to deferred revenue and does not need to be financed for the foreseeable future. In addition, we have lease commitments of $76.5 million for the next 12 months and expect to invest $90.0 million in capital expenditures in 2008. We believe that we have, or will be able to, obtain or generate sufficient funds to finance our current operating and growth plans through the end of 2008. These expenditures will be funded by . . .