UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File No. 001-32230

Life Time Fitness, Inc.

(Exact name of Registrant as specified in its charter)

Minnesota (State or other jurisdiction of incorporation or organization)		41-1689746 (I.R.S. Employer Identification No.)
6442 City West Parkway
Eden Prairie, Minnesota (Address of principal executive offices)		55344 (Zip Code)

Registrant’s telephone number, including area code: 952-947-0000

Securities registered pursuant to Section 12(b) of the Act

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $.02 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.

Large accelerated filer þ       Accelerated filer o       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

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,440,861,172, based on the closing sale price for the registrant’s common stock on that date.

     The number of shares outstanding of the Registrant’s common stock as of February 15, 2007 was 36,838,027 common shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Proxy Statement for the annual meeting of shareholders to be held April 26, 2007 are incorporated by reference in Part III.

 

 

FORWARD-LOOKING STATEMENTS

The information presented in this Annual Report on Form 10-K under the headings “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are subject to risks and uncertainties, including those discussed under “Risk Factors” on pages 13 – 18 of this Annual Report on Form 10-K that could cause actual results to differ materially from those projected. Because actual results may differ, we caution you not to place undue reliance on these forward-looking statements. We are not obligated to update these forward-looking statements or publicly release the results of any revisions to them to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.

TABLE OF CONTENTS

		Page
PART I.
Item 1. Business			3
Item 1A. Risk Factors			13
Item 1B. Unresolved Staff Comments			18
Item 2. Properties			18
Item 3. Legal Proceedings			20
Item 4. Submission of Matters to a Vote of Security Holders			20
PART II.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			20
Item 6. Selected Financial Data			22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			36
Item 8. Financial Statements and Supplementary Data			37
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			65
Item 9A. Controls and Procedures			65
Item 9B. Other Information			66
PART III.
Item 10. Directors, Executive Officers and Corporate Governance			66
Item 11. Executive Compensation			67
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			67
Item 13. Certain Relationships and Related Transactions, and Director Independence			67
Item 14. Principal Accountant Fees and Services			67
PART IV.
Item 15. Exhibits and Financial Statement Schedules			68
SIGNATURES
Form of Restricted Stock Agreement
Executive Nonqualified Excess Plan
Subsidiaries of the Registrant
Consent of Deloitte & Touche LLP
Powers of Attorney
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Section 1350 Certification

PART I

Item 1. Business.

Company Overview

We operate distinctive and large sports and athletic, professional fitness, family recreation and resort/spa centers under the LIFE TIME FITNESS^® brand. We design and develop our own centers, and we focus on providing our members and customers with products and services at a compelling value in the areas of exercise, education and nutrition.

As of February 28, 2007, we operated 60 centers primarily in residential locations across 13 states. In addition to traditional health club offerings, most of our centers include an expansive selection of premium amenities and services, such as indoor swimming pools with water slides, basketball and racquet courts, interactive and entertaining child centers, full-service spas and dining services and, in many cases, climbing walls and outdoor swimming pools with waterslides. We believe our centers provide a unique experience for our members, resulting in a high number of memberships per center.

Over the past 15 years, as we have opened new centers, we have refined the size and design of our centers. Of our 60 centers, we consider 51 to be of our large format design, and of these 51 centers, we consider 30 to be of our current model design. Although the size and design of our centers may vary, our business strategy and operating processes remain consistent across all of our centers. Our current model centers generally target 8,500 to 11,500 memberships by offering, on average, 110,000 square feet of health, fitness and family recreation programs and services. Of the centers that we have opened since 2000, 30 conform to our current model center, and each of these centers has delivered growth in membership levels, revenue and profitability across a range of geographic markets.

Throughout our history, we have consistently grown our company by opening new centers, increasing membership, optimizing membership dues and focusing on the sale of additional programs and services in our centers. For the fiscal years from 2004 to 2006, we experienced annual revenue growth of 21%, 25% and 31%, respectively, with revenue of $511.9 million in 2006; annual EBITDA growth of 20%, 25% and 24%, respectively, with EBITDA of $149.0 million in 2006; and annual net income growth of 40%, 43% and 23%, respectively, with net income of $50.6 million in 2006, which includes the effect of the adoption of Statement of Financial Accounting Standards No. 123, Share-Based Payment (“SFAS 123(R)”).

Our principal executive offices are located at 6442 City West Parkway, Eden Prairie, Minnesota 55344, and our telephone number is (952) 947-0000. Our Web site is located at www.lifetimefitness.com. The information contained on our Web site is not a part of this annual report.

Our Competitive Strengths

We offer comprehensive and convenient programs and services.

Our large format centers offer high quality programs and services in a resort-like setting and are generally situated on a parcel of land of at least 10 acres. Unlike traditional health clubs, these centers typically offer large indoor and outdoor family recreation pools, climbing walls and basketball and racquet/squash courts, in addition to approximately 400 pieces of cardiovascular, free weight and resistance training equipment and an extensive offering of health and fitness classes. Our staff of member-focused employees, each trained through our specifically designed program of classes, is committed to providing an environment that is comfortable, clean, friendly and inviting. Our large format centers generally include luxurious reception areas and locker rooms, child center facilities with spacious play areas, spas offering massage and beauty services and cafes with healthy product offerings throughout the day.

We offer a value proposition that encourages membership loyalty.

The amenities and services we offer exceed most other health and fitness center alternatives available to our members. We offer different types of membership plans for individuals, couples and families. Our typical monthly membership dues range from $50 to $60 per month for an individual membership and from $90 to $130 per month for a couple or family membership. Our memberships now include the primary member’s children under the age of 12 at a nominal per child monthly cost. We provide the majority of our members with a variety of complimentary services, including lockers, towels, group fitness classes and our magazine, Experience Life. Our membership plans are month-to-month, cancelable at any time by giving advance notice and include initial 30-day money back guarantees. We believe our value proposition and member focused approach creates loyalty among our members.

We offer a product that is convenient for our members.

Our centers are generally situated in high-traffic residential areas and are easily accessed and centrally located among the residential, business and shopping districts of the surrounding community. We design and operate our centers to accommodate a large and active membership base by generally providing access to the centers 24 hours a day, seven days a week. In addition, we provide sufficient lockers and equipment to allow our members to exercise with little or no waiting time, even at peak hours and when center membership levels are at targeted capacity. Our child center services are available to the majority of our members for up to two hours per day and most of our centers offer the convenience of spa and dining services under the same roof.

We have an established and profitable economic model.

Our economic model is based on and depends on attracting a large membership base within the first three years after a new center is opened, as well as retaining those members and maintaining tight expense control. For each of the fiscal years from 2004 to 2006, this economic model has resulted in annual revenue growth of 21%, 25% and 31%, respectively, with revenue of $511.9 million in 2006; annual EBITDA growth of 20%, 25% and 24%, respectively, with EBITDA of $149.0 million in 2006; and annual net income growth of 40%, 43% and 23%, respectively, with net income of $50.6 million in 2006. We expect the typical membership base at our large format centers to grow from approximately 35% of targeted membership capacity at the end of the first month of operations to 90% of targeted membership capacity by the end of the third year of operations, which is consistent with our historical performance. Average targeted membership capacity is approximately 7,900 for all of our large format centers and 8,500 to 11,500 for our current model centers. Average revenue at our 23 large format mature centers (those large format centers that reached their 37^th month of operation by the end of 2006) approximated $12.5 million for the year ended December 31, 2006. At these centers during the same period, average EBITDA exceeded 37% of revenue and average net income exceeded 15% of revenue. Over the past three years, average revenue has grown, driven by the addition of larger centers and our in-center revenue expansion. EBITDA margins have declined slightly primarily due to the growth of in-center revenue which comes at lower margins and the introduction of share-based compensation expense. Net income as a percentage of sales has increased slightly. Our typical investment for the 30 current model centers constructed from 2000 to 2006 has ranged from approximately $18 to $34 million, which includes the purchase of land, the building and approximately $3 million of exercise equipment, furniture and fixtures. The cost of the seven current model centers opened in 2006 averaged $29.5 million.

We believe we have a disciplined and sophisticated site selection and development process.

We believe we have developed a disciplined and sophisticated process to evaluate metropolitan markets in which to build new centers, as well as specific sites for future centers within those markets. This multi-step process is based upon applying our proven successful experience and analysis to predetermined physical, demographic, psychographic and competitive criteria generated from profiles of our centers. We continue to modify these criteria based upon the performance of our centers. A formal business plan is developed for each proposed new center and the plan must pass multiple stages of management and board approval. By utilizing a wholly owned construction subsidiary, FCA Construction Company, LLC, that is dedicated solely to building and remodeling our centers, we maintain maximum flexibility over the design process of our centers and control over the cost and timing of the construction process. As a result of this disciplined process, our large format centers produced, on average, EBITDA in excess of 21% of revenue and net income in excess of 2% of revenue during their first year of operation.

Our Growth Strategy

Our growth strategy is driven by three primary elements:

Open new centers.

Since the beginning of 2002, we have expanded our base of centers from 23 to 60. In 2006, we opened 15 centers, of which we designed and constructed seven current model centers, we remodeled existing space for one smaller center and we assumed the operations of seven large format centers. We expect to open eight centers in 2007, all of which are current model centers currently under construction. We plan to open nine current model centers in 2008. The new centers we plan to open in 2007 and 2008 will be built in both new and existing markets.

Increase membership and optimize membership dues.

Of our 60 centers, 28 had not yet reached maturity as of December 31, 2006, which we define as the 37^th month of operations. These 28 centers averaged 65% of targeted membership capacity as of December 31, 2006. We expect the continuing increase in memberships at these centers to contribute significantly to our future growth as these centers move toward our goal of 90% of targeted membership capacity by the end of their third year of operations. We also plan to continue to drive membership growth at mature centers that are not yet at targeted capacity.

In addition to increasing membership, we focus on optimizing our membership dues by offering four different types of centers with distinctive pricing levels and increasing membership dues through selling value-added membership upgrades such as our Sports, Advantage and Athletic membership types as well as couple and family memberships. In order to achieve those goals, we focus on demographics, center usage and membership trends and employ marketing programs to effectively communicate our value proposition to existing and prospective members.

Increase in-center products and services revenue.

From 2002 to 2006, revenue from the sale of in-center products and services grew from $39.6 million to $138.3 million (36.7% compound annual growth rate) and we increased in-center revenue per membership from $207 to $351. We believe the revenue from sales of our in-center products and services will continue to grow at a faster rate than membership dues or enrollment fees. Our centers offer a variety of in-center products and services, including individual and group sessions with certified professional personal trainers and registered dieticians, relaxing LifeSpa services, engaging member activities programs, wellness programs including Pilates and yoga, and healthy food at our quick-service LifeCafe restaurant. We expect to continue to drive in-center revenue by increasing sales of our current in-center products and services and introducing new products and services to our members.

Our Industry

We participate in the large and growing U.S. health and wellness industry, which we define to include health and fitness centers, fitness equipment, athletics, physical therapy, wellness education, nutritional products, athletic apparel, spa services and other wellness-related activities. According to International Health, Racquet & Sportclub Association, or IHRSA, the estimated market size of the U.S. health club industry, which is a relatively small part of the health and wellness industry, was approximately $15.9 billion in revenues for 2005 and 41.3 million memberships with approximately 29,000 clubs as of January 2006. Based on IHRSA membership data, the percentage of the total U.S. population with health club memberships increased from 13.5% in 2001 to 15.5% in 2005. Over this same period, total U.S. health club industry revenues increased from $12.2 billion to $15.9 billion.

Our Philosophy — A “Healthy Way of Life” Company

We offer our members a healthy way of life in the areas of exercise, education, and nutrition by providing high quality products and services both in and outside of our centers. We promote continuous education as an easy and inspiring part of every member’s experience by offering free seminars on health and nutrition to educate members on the benefits of a regular fitness program and a well-rounded lifestyle. Moreover, our centers offer interactive learning opportunities, such as personal training, group fitness sessions and member activities classes and programs. We believe that by helping our members experience the rewards of challenging and investing in themselves, they will associate our company with healthy living.

Our Sports and Athletic, Professional Fitness, Family Recreation and Resort/Spa Centers

Size and Location

Our centers have evolved over the past several years. Out of our 60 centers, 51 are of our large format design and 30 of these 60 centers conform to our current model center. Our current model center averages 110,000 square feet and serves as an all-in-one sports and athletic club, professional fitness facility, family recreation center and spa and resort. Our distinctive format is designed to provide an efficient and inviting use of space that accommodates our targeted capacity of 8,500 to 11,500 memberships and provides a premium assortment of amenities and services. Our 21 centers that have the large format design, but do not conform to our current model center, average approximately 100,000 square feet and have an average targeted capacity of 7,900 memberships. Generally, targeted capacity for a center is 750 to 1,000 memberships for every 10,000 square feet at a center. This targeted capacity is designed to maximize the customer experience based upon our historical understanding of membership usage. Our centers are centrally located in areas that offer convenient access from the residential, business and shopping districts of the surrounding community, and also generally provide free and ample parking.

Center Environment

Our centers combine modern architecture and décor with state-of-the-art amenities to create an innovative and functional health and recreation destination for the entire family. The majority of our current model centers and most of our large format centers are scalable, freestanding buildings designed with open architecture and naturally illuminated atriums that create a spacious, inviting atmosphere. From the limestone floors, natural wood lockers and granite countertops to safe and bright child centers, each room is carefully designed to create an appealing and luxurious environment that attracts and retains members and encourages them to visit the center. Moreover, we have specific staff members who are responsible for maintaining the cleanliness and neatness of the locker room areas, which contain approximately 800 lockers, throughout the day and particularly during the center’s peak usage periods. We continually update and refurbish our centers to maintain a high quality fitness experience. Our commitment to quality and detail provides a similar look and feel at each of our large format centers.

Equipment and Programs

The table below displays the wide assortment of amenities and services typically found at our centers, which are included in the cost of most of our memberships:

Large Format Centers, including Current Model Centers

Facilities		Amenities and Services		Activities and Events
Basketball/Volleyball Courts		24-Hour Availability		Aquatics
Cardiovascular Training		Fitness Assessments		Athletic Leagues
Child Centers		Child Center		Birthday Parties
Free Weights		Educational Seminars		Eastern/Martial Arts
Group Fitness Studios		Subscription to Experience Life		Kid’s Club
Lap Pool		Towel Service		Pilates
Racquetball/ Squash Courts		Use of Lockers		Running Club
Resistance Training		LifeCafe		Scuba Lessons
Rock Climbing Cavern		LifeSpa		Studio Cycling
Saunas		Massage Therapy		Sports-specific Training Camps
Two-story Waterslides		Nutritional Products		Summer Camps
Whirlpools		Personal Training		Swimming Lessons
Zero-depth Entry Swimming Pools		Pool-side Bistro		Yoga
LifeStudio		T.E.A.M. Programs		Educational Camps
		O2 Cardio Training
		Metabolic Testing
		Nutrition Coaching

Other Centers

Facilities		Amenities and Services		Activities and Events
Cardiovascular Training		Fitness Assessments		Pilates
Child Centers		Child Center		Running Club
Free Weights		Educational Seminars		Studio Cycling
Group Fitness Studios		Subscription to Experience Life		Yoga
Lap Pool		Towel Service
Resistance Training		Use of Lockers
Saunas		Massage Therapy
		Nutritional Products
		Personal Training
		Nutrition Coaching
		T.E.A.M. Programs
		O2 Cardio Training
		Metabolic Testing

Fitness Equipment and Facilities. To help a member develop and maintain a healthy way of life, train for athletic events, or lose weight, our centers have up to 400 pieces of cardiovascular, free weight and resistance training equipment. Exercise equipment is arranged in spacious workout areas to allow for easy movement from machine to machine, thus providing a convenient and efficient workout. Equipment in these areas is arranged in long parallel rows that are clearly labeled by muscle group, allowing members to easily customize their exercise programs and reduce downtime during their workouts. Due to the large amount of equipment in each center, members rarely have to wait to use a machine. We have in-house technicians that service and maintain our equipment, which generally enables us to repair or replace any piece of equipment within 24 hours. In addition, we have a comprehensive system of large-screen televisions in the fitness area, and members can tune their personal headsets to a radio frequency to hear the audio for each television program and obtain helpful health and fitness information.

Our current model centers have full-sized indoor and outdoor recreation pools with zero depth entrances and water slides, lap pools, saunas, steam baths and whirlpools. These centers also have at least two regulation-size basketball courts that can be used for various sports activities, as well as other dedicated facilities for group fitness, rock climbing, racquetball and squash. In addition, eight of our current model and large format centers and one of our presale centers, have tennis courts. Programs at these tennis facilities include professional instruction and leagues.

Personalized Services for Individuals and Small Groups. We offer programs featuring our professional personal trainers or registered dieticians that involve regular one-on-one sessions designed to help members achieve their healthy way of life goals. Our personal trainers are required to be certified by one of the nationally accredited certification bodies before they can work with clients. On average, we employ 25 personal trainers at a current model center. Our personal trainers are skilled in assessing and formulating safe and effective individual and group exercise programs. One of those programs, our Metabolic Testing program, includes two different tests that provide members valuable metabolic data at rest and during exercise to help optimize their fitness and nutrition programs. In addition to one-on-one sessions, we offer other personalized small group activities, including our T.E.A.M. (Training – Education – Accountability - Motivation) Weight Loss program. Our T.E.A.M. Weight Loss program focuses on exercise, education and nutrition and provides the resources as well as support needed for long-term weight loss success. The success of T.E.A.M. Weight Loss has led to the creation of new group classes, such as T.E.A.M. Fitness, which was added in late 2006. Our O₂ cardio training program focuses on training in the right heart rate zones, for the right duration of time and at the right frequency to burn fat more efficiently while improving overall health and wellness. Our registered dieticians, which we refer to as nutrition coaches, promote healthy eating habits by planning food and nutrition programs based on their knowledge of metabolism and the biochemistry of nutrients and food components. We employ, on average, one registered dietician in a current model center.

Fitness Programs and Classes. Our centers offer fitness programs, including group fitness classes and health and wellness training seminars on subjects ranging from stress management to personal nutrition. Each current model center has at least two group fitness studios and makes use of the indoor and outdoor pool areas for classes. In addition, in 2005, we began offering a LifeStudio mind/body area for yoga and Pilates as well as a studio dedicated to studio cycling in our current model centers. On average, we offer 85 group fitness classes per week at each current model center, including studio cycling, Pilates, step workout, circuit training and yoga classes. These classes generally are free of charge to our members. The volume and variety of activities at each center allow each member of the family to enjoy the center, whether participating in personalized activities or with other family members in group activities.

Other Center Services. Our large format centers feature a LifeCafe, which offers fresh and healthy sandwiches, snacks and shakes to our members. Our LifeCafe offers members the choice of dining indoors, ordering their meals and snacks to go or, in each of our current model centers and certain of our other large format centers, dining outdoors at the poolside bistro. Our LifeCafes also carry our own line of nutritional products, third-party nutritional products, sports accessories and personal hygiene products.

Our current model centers and almost all of our other large format centers also feature a LifeSpa, which is a full-service spa located inside the centers. Our LifeSpas offer hair, body, skin care and massage therapy services, customized to each client’s individual needs. The LifeSpas are located in separate, self-contained areas that provide a relaxing environment.

Almost all of our centers offer on-site child centers for children ages three months to 11 years for up to two hours while members use our centers. The children’s area includes games, educational toys, computers, maze structures and junior basketball courts. We hire experienced personnel that are dedicated to working in the child centers to ensure that children have an enjoyable and safe experience.

All of our large format centers offer a variety of programs for children, including swimming lessons, activity programs, martial arts classes, sports programs and craft programs, all of which are open to both members and non-members. We also offer several children’s camps during the summers and holidays. For adults, we offer various sports leagues and martial arts classes.

Membership

Our month-to-month membership plans typically include 24-hour access, free locker and towel service, a full range of educational programs and other premium amenities. Moreover, we offer an initial 30-day money back guarantee on upfront membership enrollment fees and the first month’s membership dues, which is a longer period than required by state law and longer than offered by most other health clubs. We believe our customer service, broad appeal to multiple family members and attractive value proposition are key to our membership growth. We continually monitor member satisfaction through phone and online surveys, secret shoppers and roundtable forums that enable us to collect feedback from our members and incorporate that feedback into our offerings.

As part of our value proposition, our new members may take advantage of equipment orientations and participate in a fitness assessment, which consists of fitness testing, exercise history, percent body fat measurement and goal setting. Fitness clinics on different types of workouts and other courses in nutrition and stress management are also offered free of charge.

We have a flexible membership structure, which includes different types of membership plans, the most common of which are the Fitness and Sports plans. Our Fitness membership plan is our standard plan and offers a member access to the majority of our centers. Our Sports membership plan offers all the benefits of our Fitness membership, plus access to all but our nine Advantage and Athletic centers, while also offering discounts on our other in-center services and third-party facilities, such as participating golf courses, ski resorts and tennis clubs throughout the nation. In addition, the Sports membership plan entitles a member to free use of the center’s racquetball and squash courts and climbing walls. In 2006, we introduced the Advantage membership which offers all the benefits of the Sports membership, plus access to all Fitness, Sports and Advantage centers as well as tennis access in Fitness, Sports and Advantage centers where available. Our Athletic membership includes all of the amenities of the Advantage membership plus access to all Fitness, Sports, Advantage and Athletic centers as well as unlimited and free tennis access in all centers with tennis facilities and unlimited yoga. In certain centers we also offer an Express membership plan from time to time, which has lower membership dues than our Fitness membership plan, but restricts access to a single center and does not include a subscription to Experience Life magazine or access to the child center.

We have always offered a convenient month-to-month membership, with no long-term contracts, a low, one-time enrollment fee and an initial 30-day money back guarantee. Depending upon the market area and the membership plan, new members typically pay a one-time enrollment fee of $99 to $259 for individual members, plus $60 to $100 for each additional family member over the age of 12. Members typically pay monthly membership dues ranging from $50 to $60 for individuals and $90 to $130 for couples or families for Fitness or Sports memberships. In addition, new members pay a $5 per child monthly fee to include junior members on a membership. Our current model centers average approximately 2.4 people per membership.

Usage

Our centers are generally open 24 hours a day, seven days a week and our current model centers average approximately 68,000 visits per month. We typically experience the highest level of member activity at a center during the 5:00 a.m. to 11:00 a.m. and 4:00 p.m. to 8:00 p.m. time periods on weekdays and during the 8:00 a.m. to 5:00 p.m. time period on weekends. Our centers are staffed accordingly to provide each member with a positive experience during peak and non-peak hours.

New Center Site Selection and Construction

Site Selection. Our management devotes significant time and resources to analyzing each prospective site on the basis of predetermined physical, demographic, psychographic and competitive criteria in order to achieve maximum return on our investment. Our ideal site for a current model center is a tract of land with at least 10 acres and a relatively flat topography affording good access and proper zoning. We typically target market areas that have at least 150,000 people within a trade area that meet certain demographic criteria regarding income, education, age and household size. Two of the centers we plan to open in 2008 will adapt our current model center to more densely developed trade areas that meet our demographic criteria. We focus mainly on markets that will allow us to operate multiple centers that create certain efficiencies in marketing and branding activities; however, we select each site based on whether that site can support an individual center on a stand-alone basis.

After we identify a potential site, we develop a business plan for the center on the site that requires approvals from all areas of operations and the finance committee of our board of directors. We believe that our structured process provides discipline and reduces the likelihood that we would develop a site that the market cannot support. As a result of this disciplined process, our large format centers produced, on average, EBITDA in excess of 21% of revenue and net income in excess of 2% of revenue during their first year of operation. We did, however, recognize an asset impairment charge in 2002 related to our only executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we operate in the same building. The center differs significantly from our standard model.

Design and Construction. We have an experienced in-house design and construction team that is solely dedicated to overseeing the design and construction of each center through opening and all subsequent remodels. Our architects have developed a prototypical set of design and construction plans and specifications that can be easily adapted to each new site to build our current model centers. They also assist in obtaining bids and permits in connection with constructing each new center. We have dedicated internal personnel who work on expediting the permit process and scheduling the project. Our bid phase specialists obtain referrals for local subcontractors and monitor project costs, and they also coordinate compliance with safety requirements and prepare site documentation. Our project management group oversees the construction of each new center and works with our architects to review bids and monitor quality. Our construction procurement group bids each component of our projects to ensure cost-effective pricing and, by using the same materials at each center to maintain a consistent look and feel, we are generally able to purchase materials in sufficient quantities to receive favorable pricing. Each center has an on-site construction manager responsible for coordinating the entire project. By utilizing our own dedicated design and construction group, we are able to maximize our flexibility in the design process and retain control over the cost and timing of the construction process.

Marketing and Sales

Overview of Marketing. Our centralized marketing agency is responsible for generating membership leads for our sales force, supporting our corporate business and promoting our brand. Our marketing agency consists of four fully integrated divisions, which are planning and analysis, creative development and production, public relations and corporate communications and web development. By centralizing our marketing effort, we bring our marketing experience and strategy to each new market we enter in a coordinated manner. We also market to corporations and, in some situations, we offer discounted enrollment fees for persons associated with these corporations. Membership enrollment activity is tracked to gauge the effectiveness of each marketing medium, which can be adjusted as necessary from a center's pre-opening phase through and including maturity.

Overview of Sales. We have a trained and certified, commissioned sales staff in each center that is responsible for converting the leads generated by our centralized marketing agency into new memberships. During the pre-opening and grand opening phases described below, we have up to 12 membership advisors on staff at a center. As the center matures, we reduce the number of membership advisors on staff to between six and eight professionals. Our sales staff also uses our customer relationship management system to understand members’ interests and to manage existing member relationships.

Pre-Opening Phase. We generally begin selling memberships up to nine months prior to a center’s scheduled opening. New members are attracted during this period primarily through a portfolio of broad-reach and targeted consumer and business-to-business media as well as referral promotions. To further attract new members during this period, we offer discounted pre-opening enrollment fees and distribute free copies of our Experience Life magazine to households in the immediate vicinity of the new center.

Grand Opening Phase. We deploy a marketing program during the first month of a center’s operation that builds on our pre-opening efforts. The reach and frequency of the advertising campaign culminate when all households within a strategically designated trade area, based on local access considerations, housing density and travel patterns, receive targeted advertising. Simultaneously, prospective members receive special invitations to grand opening activities and educational seminars designed to assist them in their orientation to the center. Our corporate clients receive special enrollment opportunities, as well as invitations to open house activities.

Membership Growth Phase. After the grand opening phase, marketing activities and costs decrease as drive-by visibility and word-of-mouth marketing become more influential. The goal of each center is to achieve consistent

membership growth until targeted capacity is reached. Once the center has reached its targeted capacity, marketing efforts are directed at keeping membership levels stable and at growing other in-center services to existing members. Marketing plans for each center are formulated on an annual basis and reviewed monthly by marketing and center-level sales personnel. At monthly intervals, a comprehensive situation analysis is performed to ensure sales and retention objectives are meeting the goals of the center’s business plan.

Leveraging the LIFE TIME FITNESS Brand

We are building a national brand by delivering products and services in the areas of exercise, education and nutrition at an attractive price. We are further strengthening the LIFE TIME FITNESS brand by growing our Experience Life magazine, our internationally-recognized triathlon and our line of nutritional products.

Education. We work to educate people by offering educational information and tips on our Web site, www.lifetimefitness.com, and by distributing Experience Life to most of our members. Our Web site offers various educational features, including healthy cooking recipes, health news and exercise tips. The Web site also has interactive functions that allow a user to ask exercise or fitness questions.

Our Experience Life magazine includes an average of 98 full-color pages of health tips and insights, articles featuring quality-of-life topics and advertisements and has a current circulation of approximately 625,000 copies to all of our members, non-member subscribers, households in new market areas and selected major bookstores nationwide. Experience Life averages 36 pages of advertising per issue and is expected to be published 10 times in 2007. In 2006, Experience Life was honored with a top national prize for excellence in use of editorial illustration and a Minnesota Magazine Publications Association gold medal for Overall Excellence.

Athletic Events. Our annual Life Time Fitness Triathlon attracted participants from 40 states and 13 countries in 2006, as well as national sponsors. The Life Time Fitness Triathlon offers a professional division for one of the sport’s largest prize purses. The event draws significant selected local, national and international media coverage. We also launched the Life Time Fitness Triathlon Series, a partnership with the Nautica New York City Triathlon, Accenture Chicago Triathlon, Kaiser Permanente Los Angeles Triathlon and the Life Time Fitness Triathlon. This Series provides professional athletes with the opportunity to compete from race to race for a chance to win their portion of a total prize purse worth more than $1.0 million. In addition to the Life Time Fitness Triathlon, we organize several shorter run/walks during the year, such as the 5K Reindeer Run in most of the cities where we have centers and the Torchlight Run and Turkey Day 5K in Minneapolis, Minnesota, as well as indoor triathlons in some of our centers.

Nutritional Products. We offer a line of nutritional products, including multi-vitamins, energy bars, powder drink mixes, ready-to-drink beverages and supplements. Our products use high quality ingredients and are available in our LifeCafes and through our Web site. Our current nutritional product line focuses on four areas, which are daily health, weight management, energy and athletic performance. Our weight management products work safely and effectively to manage weight. Our formulations are created and tested by a team of external scientific experts and each formulation undergoes extensive testing. We use experienced and professional third parties to manufacture our nutritional products and commission independent testing to ensure that the product labels accurately list the ingredients delivered in the products.

Our Employees

Most of our current model centers are staffed with an average of 250 full-time and part-time employees, of which approximately 11 are in management positions, and all of whom are trained to provide members with a positive experience. Our personal trainers, registered dieticians, massage therapists, physical therapists and cosmetologists are required to maintain a professional license or one of their industry’s top certifications, as the case may be. Each center typically has a general manager, an operations department head and a sales department head to ensure a well-managed center and a motivated work force.

All center employees are required to participate in a training program that is specifically designed to promote a friendly, personable environment at each center and a consistent standard of performance across all of our centers. Employees also receive ongoing mentoring, and continuing education is required before they are permitted to advance to other positions within our company.

As of December 31, 2006, we had approximately 12,350 employees, including approximately 7,950 part-time employees. We are not a party to a collective bargaining agreement with any of our employees. Although we experience turnover of non-management personnel, historically we have not experienced difficulty in obtaining adequate replacement personnel. In general, we believe relations with our employees are good.

Information Systems

In addition to our standard operating and administrative systems, we utilize an integrated and flexible member management system to manage the flow of member information within each of our centers and between centers and our corporate office. We have designed and developed the system to allow us to collect information in a secure and easy-to-use environment. Our system enables us to, among other things, enroll new members with a paperless membership agreement, acquire and print digital pictures of members and capture and maintain specific member information, including frequency of use. The system allows us to streamline the collection of membership dues electronically, thereby offering additional convenience for our members while at the same time reducing our corporate overhead and accounts receivable. We have a customer relationship management system to enhance our marketing campaigns and management oversight regarding daily sales and marketing activities.

Competition

There are a number of health club industry participants that compete directly and indirectly with us that may have significantly greater economies of scale. However, due to the innovative nature of our complete product and service offering, we believe that there are no competitors in this industry offering the same experience and services we offer at a comparable value. We consider the following groups to be the primary competitors in the health and fitness industry:

	•		health club operators, including 24 Hour Fitness Worldwide, Inc., Bally Total Fitness Holding Corporation, Equinox Holdings, Inc., LA Fitness International, LLC and Town Sports International, Inc.;
	•		the YMCA and similar non-profit organizations;
	•		physical fitness and recreational facilities established by local governments, hospitals and businesses;
	•		local salons, cafes and businesses offering similar ancillary services;
	•		exercise studios;
	•		racquet, tennis and other athletic clubs;
	•		amenity and condominium clubs;
	•		country clubs; and
	•		the home-use fitness equipment industry.

Competition in the health club industry varies from market to market and is based on several factors, including the breadth of product and service offerings, the level of enrollment fees and membership dues, the flexibility of membership options and the overall quality of the offering. We believe that our comprehensive product offering and focus on customer service provide us with a distinct competitive advantage.

Government Regulation

All areas of our operations and business practices are subject to regulation at federal, state and local levels. The general rules and regulations of the Federal Trade Commission and other consumer protection agencies apply to our advertising, sales and other trade practices. State statutes and regulations affecting the health club industry have been enacted or proposed that prescribe certain forms for, and regulate the terms and provisions of, membership contracts, including:

•

giving the member the right under various state “cooling-off” statutes to cancel, in most cases, within three to ten days after signing, his or her membership and receive a refund of any enrollment fee paid;

	•		requiring an escrow for funds received from pre-opening sales or the posting of a bond or proof of financial responsibility; and
	•		establishing maximum prices and terms for membership contracts and limitations on the financing term of contracts.

We are subject to federal and state regulations governing the manufacture and sale of supplement and food products in the U.S. The U.S. Food and Drug Administration and the Federal Trade Commission are increasingly scrutinizing claims made for supplement and food products, especially claims related to weight loss. We work with the manufacturers of our food and supplement products to ensure that appropriate regulatory notices have been provided, where necessary.

All laws, rules and regulations are subject to varying interpretations by a large number of state and federal enforcement agencies and the courts. We maintain internal review procedures in order to comply with these requirements and believe our activities are in substantial compliance with all applicable statutes, rules and decisions.

Trademarks and Trade Names

We own several trademarks and service marks registered with the U.S. Patent and Trademark Office, referred to as the USPTO, including “LIFE TIME FITNESS®” and “EXPERIENCE LIFE®.” We have also registered our logo, our design depicting six circles of fitness activities and our LIFE TIME FITNESS Triathlon logo. We have several applications pending with the USPTO for trademark registrations. We also registered the “LIFE TIME FITNESS” mark in certain foreign countries. In addition to our trademarks, we filed a patent application for one of our nutritional products.

We believe our trademarks and trade names have become important components in our marketing and branding strategies. We believe that we have all licenses necessary to conduct our business. In particular, we license the mark “LIFE TIME” in connection with our nutritional products so that we can market and distribute them under the LIFE TIME FITNESS brand.

Available Information

Our Web site is www.lifetimefitness.com. We make available through our Web site all reports and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).

Item 1A. Risk Factors.

If we are unable to identify and acquire suitable sites for new sports and athletic, professional fitness, family recreation and resort/spa centers, our revenue growth rate and profits may be negatively impacted.

To successfully expand our business, we must identify and acquire sites that meet the site selection criteria we have established. In addition to finding sites with the right demographic and other measures we employ in our selection process, we also need to evaluate the penetration of our competitors in the market. We face significant competition for sites that meet our criteria, and as a result we may lose those sites, our competitors could copy our format or we could be forced to pay significantly higher prices for those sites. If we are unable to identify and acquire sites for new centers, our revenue growth rate and profits may be negatively impacted. Additionally, if our analysis of the suitability of a site is incorrect, we may not be able to recover our capital investment in developing and building the new center. For example, in 2002 we recorded an asset impairment charge of $7.0 million related to our executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we separately operate in the same building.

We may be unable to attract and retain members, which could have a negative effect on our business.

The success of our business depends on our ability to attract and retain members, and we cannot assure you that we will be successful in our marketing efforts or that the membership levels at our centers will not materially decline, especially at those centers that have been in operation for an extended period of time. All of our members can cancel

their membership at any time upon providing advance notice. In addition, we experience attrition and must continually attract new members in order to maintain our membership levels. There are numerous factors that could lead to a decline in membership levels or that could prevent us from increasing membership at newer centers where membership is generally not yet at a targeted capacity, including market maturity or saturation, a decline in our ability to deliver quality service at a competitive price, direct and indirect competition in the areas where our centers are located, a decline in the public’s interest in health and fitness, changes in discretionary spending trends and general economic conditions. In addition, we may decide to close a center and attempt to move members of that center to a different center or we may temporarily relocate members if a center is closed for remodeling or due to hurricane, fire, earthquake or other casualty.

Delays in new center openings could have a material adverse affect on our financial performance.

In order to meet our objectives, it is important that we open new centers on schedule. A significant amount of time and expenditure of capital is required to develop and construct new centers. If we are significantly delayed in opening new centers, our competitors may be able to open new clubs in the same market before we open our centers. This change in the competitive landscape could negatively impact our pre-opening sales of memberships and increase our investment costs. In addition, delays in opening new centers could hurt our ability to meet our growth objectives. Our ability to open new centers on schedule depends on a number of factors, many of which are beyond our control. These factors include:

	•		obtaining acceptable financing for construction of new sites;
	•		obtaining entitlements, permits and licenses necessary to complete construction of the new center on schedule;
	•		recruiting, training and retaining qualified management and other personnel;
	•		securing access to labor and materials necessary to develop and construct our centers;
	•		delays due to material shortages, labor issues, weather conditions or other acts of god, discovery of contaminants, accidents, deaths or injunctions; and
	•		general economic conditions.

We may incur rising costs related to construction of new centers and maintaining our existing centers. If we are not able to pass these cost increases through to our members, our returns may be adversely affected.

Our centers require significant upfront investment. If our investment is higher than we had planned, we may need to outperform our operational plan to achieve our targeted return. Over the longer term, we believe that we can offset cost increases by increasing our membership dues and other fees and improving profitability through cost efficiencies; however, higher costs in certain regions where we are opening new centers during any period of time may be difficult to offset through the initiatives identified in the previous sentence in the short-term.

The opening of new centers in existing locations may negatively impact our same-center revenue increases and our operating margins.

We currently operate centers in 13 states. During 2007, we plan to open eight centers, four of which are in existing markets. With respect to existing markets, it has been our experience that opening new centers may attract some memberships away from other centers already operated by us in those markets and diminish their revenues. In addition, as a result of new center openings in existing markets, and because older centers will represent an increasing proportion of our center base over time, our same-center revenue increases may be lower in future periods than in the past.

Another result of opening new centers is that our center operating margins may be lower than they have been historically while the centers build membership base. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly-opened centers to affect our center operating margins at these new centers. We also expect certain operating costs, particularly those related to occupancy, to be higher than in the past

in some newly-entered geographic regions. As a result of the impact of these rising costs, our total center contribution and operating margins may be lower in future periods than they have been in the past.

Our continued growth could place strains on our management, employees, information systems and internal controls which may adversely impact our business and the value of your investment.

Over the past several years, we have experienced significant growth in our business activities and operations, including an increase in the number of our centers. Our past expansion has placed, and any future expansion will place, significant demands on our administrative, operational, financial and other resources. Any failure to manage growth effectively could seriously harm our business. To be successful, we will need to continue to implement management information systems and improve our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales and operations functions. These processes are time-consuming and expensive, will increase management responsibilities and will divert management attention.

The anticipated benefits of operating additional leased centers may not be realized.

In July 2006, we entered into two lease agreements to operate seven health and fitness centers that were previously leased and operated by another health and fitness company. We entered into new leases for these centers with the expectation that we would be able to convert the members at these centers to memberships with us, retain the employees at these centers as our employees and utilize operating efficiencies since six of the centers are located in one of our existing markets. Achieving the anticipated benefits of these centers is subject to a number of uncertainties, including whether we integrate these centers in an efficient and effective manner and continue to retain the members and employees, and obtain planned operating effectiveness. Failure to achieve these anticipated benefits could result in decreases in the amount of expected revenues and profits and diversion of management’s time and energy, which could materially impact our business, financial condition and operating results. We also expect to invest at least $25 million in capital improvements over the next year and a half among the leased centers. Any change in our expected schedule or costs for completing these improvements could impact our ability to retain the members at these centers and our operating results.

Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.

As of December 31, 2006, we had total consolidated indebtedness of $389.6 million, consisting principally of obligations under term notes that are secured by certain of our properties, borrowings under our revolving credit facility that are secured by certain personal property, mortgage notes that are secured by certain of our centers and obligations under capital leases.

Our level of indebtedness could have important consequences to us, including the following:

	•		our ability to obtain additional financing, if necessary, for capital expenditures, working capital, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;
	•		we will need a substantial portion of our cash flow to pay the principal of, and interest on, our indebtedness, including indebtedness that we may incur in the future;
	•		payments on our indebtedness will reduce the funds that would otherwise be available for our operations and future business opportunities;
	•		a substantial decrease in our cash flows from operations or a substantial increase in our investment in new centers could make it difficult for us to meet our debt service requirements and force us to modify our operations;
	•		we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage;
	•		our debt level may make us more vulnerable and less flexible than our competitors to a downturn in our business or the economy in general; and
	•		some of our debt has a variable rate of interest, which increases our vulnerability to interest rate fluctuations.

In addition to the amount of indebtedness outstanding as of December 31, 2006, we had access to an additional $36.2 million under our credit facilities. On January 24, 2007 we secured $105.0 million in additional mortgage financing, the proceeds of which partially repaid our revolving credit facility. We also have the ability to incur new debt, subject to limitations under our existing credit facilities and in our debt financing agreements. Furthermore, we have 13 centers financed by Teachers Insurance and Annuity Association of America (TIAA) that are subject to cross-default and cross-collateral provisions, which would allow the lender to foreclose on each of these 13 centers if there is an event of default related to one or more of these centers. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, could intensify.

Because of the capital-intensive nature of our business, we may have to incur additional indebtedness or issue new equity securities and, if we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our operating results could be adversely affected.

Our business requires significant levels of capital to finance the development of additional sites for new centers and the construction of our centers. If cash from available sources is insufficient, or if cash is used for unanticipated needs, we may require additional capital sooner than anticipated. In the event that we are required or choose to raise additional funds, we may be unable to do so on favorable terms or at all. Furthermore, the cost of debt financing could significantly increase, making it cost-prohibitive to borrow, which could force us to issue new equity securities. If we issue new equity securities, existing shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to take advantage of future opportunities or respond to competitive pressures. Any inability to raise additional capital when required could have an adverse effect on our business plans and operating results.

If our founder and chief executive officer leaves our company for any reason, it could have a material adverse effect on us.

Our growth and development to date have been largely dependent upon the services of Bahram Akradi, our Chairman of the Board of Directors, President, Chief Executive Officer and founder. If Mr. Akradi ceases to be Chairman of the Board of Directors and Chief Executive Officer for any reason other than due to his death or incapacity or as a result of his removal pursuant to our articles of incorporation or bylaws, we will be in default under the loan documents for our 13 centers financed with TIAA. As a result, Mr. Akradi may be able to exert disproportionate control over our company because of the significant consequence of his departure. We do not have any employment or non-competition agreement with Mr. Akradi.

The health club industry is highly competitive and our competitors may have greater name recognition than we have.

We compete with other health and fitness centers, physical fitness and recreational facilities established by local non-profit organizations, governments, hospitals, and businesses, local salons, cafes and businesses offering similar ancillary services, and to a lesser extent, amenity and condominium clubs and similar non-profit organizations, exercise studios, racquet, tennis and other athletic clubs, country clubs and the home fitness equipment industry. Competitors, which may have greater name recognition than we have, may compete with us to attract members in our markets. Non-profit and government organizations in our markets may be able to obtain land and construct centers at a lower cost than us and may be able to collect membership fees without paying taxes, thereby allowing them to lower their prices. This competition may limit our ability to increase membership fees, retain members, attract new members and retain qualified personnel.

Competitors could copy our business model and erode our market share, brand recognition and profitability.

We employ a business model that could allow competitors to duplicate our successes. We cannot assure you that our competitors will not attempt to copy our business model and that this will not erode our market share and brand recognition and impair our growth rate and profitability. In response to any such competitors, we may be required to decrease our membership fees, which may reduce our operating margins and profitability.

We have significant operations concentrated in certain geographic areas, and any disruption in the operations of our centers in any of these areas could harm our operating results.

We currently operate multiple centers in several metropolitan areas, including 22 in the Minneapolis/ St. Paul market, eight in the Chicago market, six in both the Detroit and Dallas markets, with continued planned expansion in current and new markets. As a result, any prolonged disruption in the operations of our centers in any of these markets, whether due to technical difficulties, power failures or destruction or damage to the centers as a result of a natural disaster, fire or any other reason, could harm our operating results. In addition, our concentration in these markets increases our exposure to adverse developments related to competition, as well as economic and demographic changes in these areas.

If we cannot retain our key personnel and hire additional highly qualified personnel, we may not be able to successfully manage our operations and pursue our strategic objectives.

We are highly dependent on the services of our senior management team and other key employees at both our corporate headquarters and our centers, and on our ability to recruit, retain and motivate key personnel. Competition for such personnel is intense, and the inability to attract and retain the additional qualified employees required to expand our activities, or the loss of current key employees, could materially and adversely affect us.

We could be subject to claims related to health or safety risks at our centers.

Use of our centers poses potential health or safety risks to members or guests through exertion and use of our equipment, swimming pools, rock climbing walls, waterslides and other facilities and services. We cannot assure you that claims will not be asserted against us for injury or death suffered by someone using our facilities or services. In addition, the child center services we offer at our centers expose us to claims related to child care. Lastly, because we construct our own centers, we also face liability in connection with the construction of these centers.

We are subject to extensive government regulation, and changes in these regulations could have a negative effect on our financial condition and results of operations.

Various federal and state laws and regulations govern our operations, including:

	•		general rules and regulations of the Federal Trade Commission, state and local consumer protection agencies and state statutes that prescribe certain forms and provisions of membership contracts and that govern the advertising, sale and collection of our memberships;
	•		state and local health regulations;
	•		federal regulation of health and nutritional products; and,
	•		regulation of rehabilitation service providers.

Any changes in such laws could have a material adverse effect on our financial condition and results of operations.

We could be subject to claims related to our nutritional products.

The nutritional products industry is currently the source of proposed federal laws and regulations, as well as numerous lawsuits. We advertise and offer for sale proprietary nutritional products within our centers and through our Web site. We cannot assure you that there will be no claims against us regarding the ingredients in, manufacture of or results of using our nutritional products. Furthermore, we cannot assure you that any rights we have under indemnification provisions or insurance policies will be sufficient to cover any losses that might result from such claims.

If it becomes necessary to protect or defend our intellectual property rights or if we infringe on the intellectual property rights of others, we may become involved in costly litigation or be required to pay royalties or fees.

We may have disputes with third parties to enforce our intellectual property rights, protect our trademarks, determine the validity and scope of the proprietary rights of others or defend ourselves from claims of infringement, invalidity or unenforceability. Such disputes may require us to engage in litigation. We may incur substantial costs and a diversion of resources as a result of such disputes and litigation, even if we win. In the event that we do not win, we may have to enter into royalty or licensing agreements, we may be prevented from using the marks within certain markets in connection with goods and services that are material to our business or we may be unable to prevent a third party from using our marks. We cannot assure you that we would be able to reach an agreement on reasonable terms, if at all. In particular, although we own an incontestable federal trademark registration for use of the LIFE TIME FITNESS® mark in the field of health and fitness centers, we are aware of entities in certain locations around the country that use LIFE TIME FITNESS or a similar mark in connection with goods and services related to health and fitness. The rights of these entities in such marks may predate our rights. Accordingly, if we open any centers in the areas in which these parties operate, we may be required to pay royalties or may be prevented from using the mark in such areas.

Our business could be affected by acts of war or terrorism.

Current world tensions could escalate, potentially leading to war or acts of terrorism. This could have unpredictable consequences on the world economy and on our business.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate headquarters, located in Eden Prairie, Minnesota, is approximately 87,000 square feet, 74,850 square feet is currently under lease until October 2007 and approximately 12,150 square feet is currently under lease until October 2008. We are currently constructing a 105,000 square foot office facility on land we own in Chanhassen, Minnesota.

As of February 28, 2007, we operated 60 centers, of which we leased 18 sites, were parties to long-term ground leases for four sites and owned 38 sites. We expect to open eight centers on sites we own in various markets in 2007, all of which are currently under construction. Excluding renewal options, the terms of leased centers, including ground leases, expire at various dates from 2007 through 2041. The majority of our leases have renewal options and a few give us the right to purchase the property. The table below contains information about our current center locations:

				Center		Square Feet
Location		Owned/Leased		Format		(1)				Date Opened
1. Eagan, MN		Owned		Large			64,415			September 1994
2. Woodbury, MN (2)		Leased		Large			73,050			September 1995
3. Roseville, MN		Leased		Other			14,000			September 1995
4. Highland Park, MN (3)		Owned		Other			25,827			November 1995
5. Coon Rapids, MN (4)		Leased		Other			90,262			May 1996
6. Bloomington, MN		Owned		Other			47,307			November 1996
7. Plymouth, MN		Leased (Ground)		Large			109,558			June 1997
8. St. Paul, MN		Leased		Other			85,630			December 1997
9. Troy, MI		Owned		Large			93,579			January 1999
10. Apple Valley, MN		Leased		Other			10,375			June 1999
11. Columbus, OH		Leased (Ground)		Large			98,047			July 1999
12. Indianapolis, IN		Owned		Large			90,956			August 1999
13. Novi, MI		Owned		Large			90,956			October 1999
14. Centreville, VA		Owned		Large			90,956			January 2000

				Center		Square Feet
Location		Owned/Leased		Format		(1)				Date Opened
15. Shelby Township, MI		Owned		Large			101,680			March 2000
16. Minneapolis, MN (center and restaurant)		Leased		Other			72,547			July 2000
17. Schaumburg, IL		Owned		Large/Current			108,890			October 2000
18. Warrenville, IL		Owned		Large/Current			114,993			January 2001
19. Bloomingdale, IL (5)		Owned		Large/Current			108,890			February 2001
20. Algonquin, IL		Owned		Large/Current			108,890			April 2001
21. Orland Park, IL		Owned		Large/Current			108,890			August 2001
22. Fairfax City, VA		Leased		Large			67,467			October 2001
23. Champlin, MN		Leased (Ground)		Large			61,948			October 2001
24. Burr Ridge, IL		Owned		Large/Current			105,562			February 2002
25. Savage, MN		Leased (Ground)		Large			80,853			June 2002
26. Old Orchard (Skokie), IL		Owned		Large/Current			108,890			August 2002
27. Canton Township, MI (2)		Leased		Large/Current			105,010			September 2002
28. Rochester Hills, MI (2)		Leased		Large/Current			108,890			November 2002
29. Tempe, AZ		Owned		Large/Current			108,890			April 2003
30. Gilbert, AZ		Owned		Large/Current			108,890			October 2003
31. New Hope, MN		Leased		Other			44,156			October 2003
32. Plano, TX		Owned		Large/Current			108,890			November 2003
33. Willowbrook, TX		Owned		Large/Current			108,890			June 2004
34. Garland, TX		Owned		Large/Current			108,890			July 2004
35. Sugar Land, TX		Owned		Large/Current			108,890			October 2004
36. Flower Mound, TX		Owned		Large/Current			108,890			October 2004
37. North Dallas, TX		Leased		Large			68,982			November 2004
38. Colleyville, TX		Owned		Large/Current			108,890			November 2004
39. Commerce Township, MI		Owned		Large/Current			108,890			March 2005
40. Cinco Ranch, TX		Owned		Large/Current			108,890			June 2005
41. Chanhassen, MN		Owned		Large/Current			110,563			July 2005
42. Austin, TX		Owned		Large/Current			110,563			September 2005
43. Romeoville, IL		Owned		Large/Current			110,563			September 2005
44. San Antonio, TX		Owned		Large/Current			110,563			December 2005
45. Maple Grove, MN		Owned		Large			72,500			December 2005
46. Minnetonka, MN		Owned		Other			41,000			January 2006
47. Columbia, MD		Owned		Large/Current			110,563			February 2006
48. Allen-McKinney, TX		Owned		Large/Current			125,475			May 2006
49. Moore Lake (Fridley), MN		Leased		Large			162,048			July 2006
50. Arena (Minneapolis), MN		Leased		Large			170,925			July 2006
51. Crosstown (Eden Prairie), MN		Leased		Large			145,896			July 2006
52. St. Louis Park, MN		Leased		Large			189,496			July 2006
53. Eden Prairie, MN		Leased		Large			89,011			July 2006
54. 98th Street (Bloomington), MN		Leased		Large			95,314			July 2006
55. Boca Raton, FL		Leased		Large			73,688			July 2006
56. South Valley (South Jordan), UT		Owned		Large/Current			108,925			August 2006
57. Overland Park, KS		Owned		Large/Current			110,080			October 2006
58. Palm Valley (Goodyear), AZ		Owned		Large/Current			109,775			October 2006
59. Alpharetta, GA		Owned		Large/Current			109,720			December 2006
60. Scottsdale, AZ		Owned		Large/Current			109,775			December 2006

Item 3. Legal Proceedings.

We may be subject to litigation from time to time incidental to the normal course of our business. Due to their nature, such legal proceedings involve inherent uncertainties, including but not limited to, court rulings, negotiations between affected parties and governmental intervention. We have established reserves for matters that are probable and estimable in amounts we believe are adequate to cover reasonable adverse judgments not covered by insurance. Based upon the information available to us and discussions with legal counsel, it is our opinion that the outcome of the various legal actions and claims that are incidental to the our business will not have a material adverse impact on our consolidated financial position, results of operations or cash flows; however, such matters are subject to many uncertainties, and the outcome of individual matters are not predictable with assurance.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchaser of Equity Securities.

Market Information

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol LTM. The following table sets forth, for the periods indicated, the high and low sales prices as reported by the NYSE.

		High				Low
Fiscal Year Ended December 31, 2005:
First Quarter (January 1, 2005 – March 31, 2005)		$	27.16			$	23.82
Second Quarter (April 1, 2005 – June 30, 2005)		$	33.99			$	24.73
Third Quarter (July 1, 2005 – September 30, 2005)		$	37.00			$	31.38
Fourth Quarter (October 1, 2005 – December 31, 2005)		$	40.70			$	30.93
Fiscal Year Ended December 31, 2006:
First Quarter (January 1, 2006 – March 31, 2006)		$	46.85			$	37.84
Second Quarter (April 1, 2006 – June 30, 2006)		$	48.86			$	41.03
Third Quarter (July 1, 2006 – September 30, 2006)		$	47.73			$	41.75
Fourth Quarter (October 1, 2006 – December 31, 2006)		$	52.58			$	46.33

Holders

As of February 15, 2007, the number of holders of our common stock was approximately 10,050, consisting of 250 record holders and approximately 9,800 shareholders whose stock is held by a bank, broker or other nominee.

Performance Graph

The following graph compares the quarterly change in the cumulative total shareholder return on our common stock from June 30, 2004, which is the day our common stock began to trade publicly, through December 31, 2006 with the cumulative total return on the NYSE Composite Index and Russell 2000 Index. The comparison assumes $100 was invested on June 30, 2004 in Life Time Fitness common stock and in each of the foregoing indices and assumes that dividends were reinvested when and as paid. We have not declared dividends on our common stock. You should not consider shareholder return over the indicated period to be indicative of future shareholder returns.

Comparison of Total Return

		June 30,				December 31,				June 30,				December 31,				June 30,				December 31,
		2004				2004				2005				2005				2006				2006
Life Time Fitness (1)		$	100.00			$	123.24			$	156.24			$	181.38			$	220.33			$	231.00
NYSE Composite Index			100.00				109.80				109.31				117.43				123.72				138.41
Russell 2000 Index			100.00				110.15				108.41				113.81				122.51				133.16

Dividends

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all future earnings for the operation and expansion of our business and do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our revolving credit facility and certain of our debt financing agreements prohibit us from paying dividends without the consent of the lenders. The payment of any dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions, outstanding indebtedness and other factors deemed relevant by our board.

Issuer Purchases of Equity Securities in Fourth Quarter 2006

		Total								Total Number of				Maximum Number
		Number of				Average				Shares Purchased as				of Shares that May
		Shares				Price Paid				Part of Publicly				Yet be Purchased
Period		Purchased				per Share				Announced Plan (1)				Under the Plan (1)
October 1 – 31, 2006			—				—				—				500,000
November 1 – 30, 2006			—				—				—				500,000
December 1 – 31, 2006			8,500			$	49.52				8,500				491,500
Total			8,500			$	49.52				8,500				491,500

Equity Compensation Plan Information

Incorporated by reference hereunder is the information under “Equity Compensation Plan Information” in our Proxy Statement.

Certifications by CEO and CFO

The certifications by our chief executive officer and chief financial officer required under Section 302 of the Sarbanes-Oxley Act of 2002, have been filed as exhibits to this Annual Report on Form 10-K. Our CEO’s annual certification pursuant to NYSE Corporate Governance Standards Section 303A.12(a) that our CEO was not aware of any violation by the company of the NYSE’s Corporate Governance listing standards was submitted to the NYSE on September 26, 2006.

Item 6. Selected Financial Data.

You should read the selected consolidated financial data below in conjunction with our consolidated financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The consolidated statement of operations data for the years ended December 31, 2006, 2005 and 2004 and the consolidated balance sheet data as of December 31, 2006 and 2005 are prepared from our audited consolidated financial statements that are included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2003 and 2002 and the consolidated balance sheet data as of December 31, 2004, 2003 and 2002 are derived from our audited consolidated financial statements that have been previously filed with the SEC. Historical results are not necessarily indicative of the results of operations to be expected for future periods. See Note 2 to our consolidated financial statements for a description of the method used to compute basic and diluted net earnings (loss) per share.

		For the Year Ended December 31,
		2006				2005				2004				2003				2002
		(In thousands, except per share, center and membership data)
Statement of Operations Data:
Revenue
Center revenue
Membership dues		$	339,623			$	262,989			$	208,893			$	171,596			$	132,124
Enrollment fees			22,438				20,341				19,608				19,198				17,204
In-center revenue (1)			138,332				97,710				71,583				55,633				39,630
Total center revenue			500,393				381,040				300,084				246,427				188,958
Other revenue			11,504				9,076				11,949				10,515				6,208
Total revenue			511,897				390,116				312,033				256,942				195,166
Operating expenses
Center operations			292,273				216,314				164,764				131,825				102,343
Advertising and marketing			20,770				14,446				12,196				11,045				11,722
General and administrative			37,781				27,375				21,596				18,554				14,981
Other operating			12,998				12,693				18,256				16,273				10,358
Depreciation and amortization			47,560				38,346				29,655				25,264				20,801
Impairment charge (2)			—				—				—				—				6,952
Total operating expenses			411,382				309,174				246,467				202,961				167,157
Income from operations			100,515				80,942				65,566				53,981				28,009
Interest expense, net			(17,356	)			(14,076	)			(17,573	)			(19,132	)			(14,950	)
Equity in earnings of affiliate (3)			919				1,105				1,034				762				333
Income before income taxes			84,078				67,971				49,027				35,611				13,392
Provision for income taxes			33,513				26,758				20,119				15,006				5,971
Net income			50,565				41,213				28,908				20,605				7,421
Accretion on redeemable preferred stock			—				—				3,570				6,987				7,085
Net income applicable to common shareholders		$	50,565			$	41,213			$	25,338			$	13,618			$	336
Basic earnings per share		$	1.40			$	1.19			$	1.02			$	0.85			$	0.02
Weighted average number of common shares outstanding — basic			36,118				34,592				24,727				16,072				15,054
Diluted earnings per share		$	1.37			$	1.13			$	0.87			$	0.72			$	0.02
Weighted average number of common shares outstanding — diluted (4)			36,779				36,339				33,125				28,612				16,430
Balance Sheet Data (end of period):
Cash and cash equivalents		$	6,880			$	4,680			$	10,211			$	18,446			$	8,860
Working capital			(100,509	)			(66,123	)			(71,952	)			(15,340	)			(29,819	)
Total assets			987,676				723,460				572,087				453,346				419,024
Total debt			389,555				273,282				209,244				233,232				231,320
Total redeemable preferred stock			—				—				—				106,165				99,179
Total shareholders’ equity			392,513				307,844				250,634				32,792				18,547
Cash Flow Data:
Net cash provided by operating activities		$	125,852			$	107,952			$	80,431			$	52,576			$	43,558
Net cash used in investing activities			(263,183	)			(180,850	)			(146,080	)			(24,476	)			(31,350	)
Net cash provided by (used in) financing activities			139,531				67,367				57,414				(18,514	)			(5,556	)
Other Data:
Comparable center revenue growth (5)			7.3	%			7.7	%			9.7	%			13.2	%			22.3	%
Average revenue per membership (6)		$	1,270			$	1,171			$	1,119			$	1,089			$	989
Average in-center revenue per membership (7)			351				300				267				242				207
EBITDA (8)			148,994				120,393				96,255				80,007				49,143
EBITDA margin (9)			29.1	%			30.9	%			30.8	%			31.1	%			25.2	%
Capital expenditures (10)		$	263,387			$	190,451			$	145,707			$	81,846			$	87,432
Operating Data (11):
Centers open at end of period			60				46				39				33				29
Number of memberships at end of period			443,660				358,384				299,538				249,192				215,387

		December 31,
		2006				2005				2004				2003				2002
						(In thousands)
Weighted average number of common shares outstanding – basic			36,118				34,592				24,727				16,072				15,054
Effect of dilutive stock options			509				1,739				1,943				1,522				1,376
Effect of dilutive restricted stock awards			152				8				2				—				—
Effect of dilutive redeemable preferred shares outstanding			—				—				6,453				11,018				—
Weighted average number of common shares outstanding – diluted			36,779				36,339				33,125				28,612				16,430

		For the Year Ended December 31,
		2006				2005				2004				2003				2002
						(In thousands)
Net income		$	50,565			$	41,213			$	28,908			$	20,605			$	7,421
Interest expense, net			17,356				14,076				17,573				19,132				14,950
Provision for income taxes			33,513				26,758				20,119				15,006				5,971
Depreciation and amortization			47,560				38,346				29,655				25,264				20,801
EBITDA		$	148,994			$	120,393			$	96,255			$	80,007			$	49,143

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Risk Factors” beginning on page 13 of this report.

Overview

We operate sports and athletic, professional fitness, family recreation and resort/spa centers. As of February 28, 2007, we operated 60 centers primarily in residential locations across 13 states under the LIFE TIME FITNESS brand. We commenced operations in 1992 by opening centers in the Minneapolis and St. Paul, Minnesota area. During this period of initial growth, we refined the format and model of our center while building our membership base, infrastructure and management team. As a result, several of the centers that opened during our early years have designs that differ from our current model center.

We compare the results of our centers based on how long the centers have been open at the most recent measurement period. We include a center for comparable center revenue purposes beginning on the first day of the thirteenth full calendar month of the center’s operation, prior to which time we refer to the center as a new center. As we grow our presence in existing markets by opening new centers, we expect to attract some memberships away from our other existing centers already in those markets, reducing revenue and initially lowering the memberships of those existing centers. In addition, as a result of new center openings in existing markets, and because older centers will represent an increasing proportion of our center base over time, our comparable center revenue may be lower in future periods than in the past. Of the eight new centers we plan to open in 2007, we expect that four will be in existing markets. We do not expect that operating costs of our planned new centers will be significantly higher than centers opened in the past, and we also do not expect that the planned increase in the number of centers will have a

material adverse effect on the overall financial condition or results of operations of existing centers. Another result of opening new centers, as well as the assumption of operations of seven leased facilities in 2006, is that our center operating margins may be lower than they have been historically while the centers build membership base. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly-opened centers, as well as the facility costs for the seven leased centers, to affect our center operating margins at these new centers and on a consolidated basis. Our categories of new centers and existing centers do not include the center owned by Bloomingdale LLC because it is accounted for as an investment in an unconsolidated affiliate and is not consolidated in our financial statements.

We measure performance using such key operating statistics as average revenue per membership, including membership dues and enrollment fees, average in-center revenue per membership and center operating expenses, with an emphasis on payroll and occupancy costs, as a percentage of sales and comparable center revenue growth. We use center revenue and EBITDA margins to evaluate overall performance and profitability on an individual center basis. In addition, we focus on several membership statistics on a center-level and system-wide basis. These metrics include growth of center membership levels and growth of system-wide memberships, percentage center membership to target capacity, center membership usage, center membership mix among individual, couple and family memberships and center attrition rates.

We have three primary sources of revenue. First, our largest source of revenue is membership dues and enrollment fees paid by our members. We recognize revenue from monthly membership dues in the month to which they pertain. We recognize revenue from enrollment fees over the expected average life of the membership, which we estimate to be 36 months. Second, we generate revenue, which we refer to as in-center revenue, at our centers from fees for personal training, dieticians, group fitness training and other member activities, sales of products at our LifeCafe, sales of products and services offered at our LifeSpa and renting space in certain of our centers. And third, we have expanded the LIFE TIME FITNESS brand into other wellness-related offerings that generate revenue, which we refer to as other revenue, including our media, athletic events and nutritional product businesses. Our primary media offering is our magazine, Experience Life. Other revenue also includes our restaurant located in the building where we operate a center designed as an executive facility in downtown Minneapolis, Minnesota and rental income on our Highland Park, Minnesota office building.

Center operations expenses consist primarily of salary, commissions, payroll taxes, benefits, real estate taxes and other occupancy costs, utilities, repairs and maintenance, supplies, administrative support and communications to operate our centers. Advertising and marketing expenses consist of our marketing department costs and media and advertising costs to support center membership growth and our media, athletic event and nutritional product businesses. General and administrative expenses include costs relating to our centralized support functions, such as accounting, information systems, procurement, real estate and development and member relations. Our other operating expenses include the costs associated with our media, athletic events and nutritional product businesses, our restaurant and other corporate expenses, as well as gains or losses on our dispositions of assets. Our total operating expenses may vary from period to period depending on the number of new centers opened during that period and the number of centers engaged in presale activities.

Our primary capital expenditures relate to the construction of new centers and updating and maintaining our existing centers. The land acquisition, construction and equipment costs for a current model center since inception in 2000, has ranged from approximately $18 to $34 million, and can vary considerably based on variability in land cost and the cost of construction labor, as well as whether or not a tennis area is included or whether or not we expand the gymnasium. The average cost for the current model centers opened in 2006 increased to $29.5 million as a result of higher land costs and higher construction costs in states where we are opening centers. We perform maintenance and make improvements on our centers and equipment throughout each year. We conduct a more thorough remodeling project at each center approximately every four to six years.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In recording transactions and balances resulting from business operations, we use estimates based on the best information

available. We use estimates for such items as depreciable lives, volatility factors, expected lives and rate of return in determining fair value of option grants, tax provisions and provisions for uncollectible receivables. We also use estimates for calculating the amortization period for deferred enrollment fee revenue and associated direct costs, which are based on the weighted average expected life of center memberships. We revise the recorded estimates when better information is available, facts change or we can determine actual amounts. These revisions can affect operating results. We have identified below the following accounting policies that we consider to be critical.

Revenue recognition. We receive a one-time enrollment fee at the time a member joins and monthly membership dues for usage from our members. The enrollment fees are non-refundable after 30 days. Enrollment fees and related direct expenses, primarily sales commissions, are deferred and recognized on a straight-line basis over an estimated membership period of 36 months, which is based on historical membership experience. In addition, monthly membership dues paid in advance of a center opening are deferred until the center opens. We only offer members month-to-month memberships and recognize as revenue the monthly membership dues in the month to which they pertain.

We provide services at each of our centers, including personal training, LifeSpa, LifeCafe and other member services. The revenue associated with these services is recognized at the time the service is performed. Personal training revenue received in advance of training sessions and the related commissions are deferred and recognized when services are performed. Other revenue, which includes revenue generated primarily from our media, athletic events and restaurant, is recognized when realized and earned. Media advertising revenue is recognized over the duration of the advertising placement. For athletic events, revenue is generated primarily through sponsorship sales and registration fees. Athletic event revenue is recognized upon the completion of the event. In limited instances in our media and athletic events businesses, we recognize revenue on barter transactions. We recognize barter revenue equal to the lesser of the value of the advertising or promotion given up or the value of the asset received. Restaurant revenue is recognized at the point of sale to the customer.

Pre-opening operations. We generally operate a preview center up to nine months prior to the planned opening of a center during which time memberships are sold as construction of the center is completed. The revenue and direct membership acquisition costs, primarily sales commissions, incurred during the period prior to a center opening are deferred until the center opens and are then recognized on a straight-line basis over a period of 36 months beginning when the center opens; however, the related advertising, office and rent expenses incurred during this period are expensed as incurred.

Impairment of long-lived assets. The carrying value of our long-lived assets is reviewed annually and whenever events or changes in circumstances indicate that such carrying values may not be recoverable. We consider a history of consistent and significant operating losses to be our primary indicator of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows, which is generally at an individual center level. The determination of whether an impairment has occurred is based on an estimate of undiscounted future cash flows directly related to that center, compared to the carrying value of the assets. If an impairment has occurred, the amount of impairment recognized is determined by estimating the fair value of the assets and recording a loss if the carrying value is greater than the fair value.

Results of Operations

The following table sets forth our statement of operations data as a percentage of total revenues for the periods indicated:

		For the Year Ended
		December 31,
		2006				2005				2004
Revenue
Center revenue
Membership dues			66.4	%			67.5	%			66.9	%
Enrollment fees			4.4				5.2				6.4
In-center revenue			27.0				25.0				22.9
Total center revenue			97.8				97.7				96.2
Other revenue			2.2				2.3				3.8
Total revenue			100.0				100.0				100.0
Operating expenses
Center operations (including 0.4%, 0.0% and 0.0% related to share-based compensation expense, respectively)			57.1				55.4				52.8
Advertising and marketing			4.1				3.7				3.9
General and administrative (including 1.1%, 0.1% and 0.0% related to share-based compensation expense, respectively)			7.4				7.0				6.9
Other operating			2.5				3.3				5.9
Depreciation and amortization			9.3				9.9				9.5
Total operating expenses			80.4				79.3				79.0
Income from operations			19.6				20.7				21.0
Other income (expense)
Interest expense, net			(3.4	)			(3.6	)			(5.6	)
Equity in earnings of affiliate			0.2				0.3				0.3
Total other income (expense)			(3.2	)			(3.3	)			(5.3	)
Income before income taxes			16.4				17.4				15.7
Provision for income taxes			6.5				6.8				6.4
Net income			9.9	%			10.6	%			9.3	%

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Total revenue. Total revenue increased $121.8 million, or 31.2%, to $511.9 million for the year ended December 31, 2006 from $390.1 million for the year ended December 31, 2005.

Total center revenue grew $119.4 million, or 31.3%, to $500.4 million from $381.0 million, driven by a 7.3% increase in comparable center revenue, opening of eight new centers and the assumption of operations of seven leased facilities in 2006 and the full-year contribution of seven centers opened in 2005. Of the $119.4 million increase in total center revenue,

	•		64.2% was from membership dues, which increased $76.7 million, due to increased memberships at new and existing centers, the introduction of junior membership programs and increased sales of Sports and other value-added memberships.
	•		34.0% was from in-center revenue, which increased $40.6 million primarily as a result of our members’ increased use of our personal training, member activities, LifeCafe and LifeSpa products and services. As a result of this in-center revenue growth and our focus on broadening our offerings to our members, average in-center revenue per membership increased from $300 to $351 for the year ended December 31, 2006.
	•		1.8% was from enrollment fees, which are deferred until a center opens and recognized on a straight-line basis over 36 months. Enrollment fees increased $2.1 million for the year ended December 31, 2006 to $22.4 million. Our number of memberships increased 23.8% to 443,660 at December 31, 2006 from 358,384 at December 31, 2005.

Other revenue increased $2.4 million, or 26.8%, to $11.5 million from $9.1 million, which was primarily due to increased advertising revenue from our media business and rental revenue from our Highland Park office building.

Center operations expenses. Center operations expenses were $292.3 million, or 58.4% of total center revenue (or 57.1% of total revenue), for the year ended December 31, 2006 compared to $216.3 million, or 56.8% of total center revenue (or 55.4% of total revenue), for the year ended December 31, 2005. This $76.0 million increase primarily consisted of $38.9 million in additional payroll-related costs to support increased memberships at new centers, an increase of $16.5 million in facility-related costs, including incremental lease expense for the seven leased centers, utilities and real estate taxes, an increase in expenses to support in-center products and services and $2.2 million due to incremental share-based compensation expense. As a percent of total center revenue, center operations expense increased primarily due to the lower center operating margins associated with new centers including the leased centers for which we assumed operations in July 2006 and the incremental share-based compensation expense.

Advertising and marketing expenses. Advertising and marketing expenses were $20.8 million, or 4.1% of total revenue, for the year ended December 31, 2006 compared to $14.5 million, or 3.7% of total revenue, for the year ended December 31, 2005. These expenses increased primarily due to advertising for our new centers and those centers engaging in presale activities.

General and administrative expenses. General and administrative expenses were $37.8 million, or 7.4% of total revenue, for the year ended December 31, 2006 compared to $27.4 million, or 7.0% of total revenue, for the year ended December 31, 2005. This $10.4 million increase was primarily due to increased costs to support the growth in membership and the center base in 2006, as well as $5.4 million of incremental share-based compensation expense.

Other operating expenses. Other operating expenses were $13.0 million for the year ended December 31, 2006 compared to $12.7 million for the year ended December 31, 2005.

Depreciation and amortization. Depreciation and amortization was $47.6 million for the year ended December 31, 2006 compared to $38.3 million for the year ended December 31, 2005. This $9.3 million increase was due primarily to depreciation on our centers opened in 2005 and 2006.

Interest expense, net. Interest expense, net of interest income, was $17.4 million for the year ended December 31, 2006 compared to $14.1 million for the year ended December 31, 2005. This $3.3 million increase was primarily the result of increased average debt balances.

Provision for income taxes. The provision for income taxes was $33.5 million for the year ended December 31, 2006 compared to $26.8 million for the year ended December 31, 2005. This $6.7 million increase was due to an increase in income before income taxes of $16.1 million and an increase in the effective tax rate to 39.9% for the year ended December 31, 2006 compared to 39.4% for the year ended December 31, 2005.

Net income. As a result of the factors described above, net income was $50.6 million, or 9.9% of total revenue, for the year ended December 31, 2006 compared to $41.2 million, or 10.6% of total revenue, for the year ended December 31, 2005.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Total revenue. Total revenue increased $78.1 million, or 25.0%, to $390.1 million for the year ended December 31, 2005 from $312.0 million for the year ended December 31, 2004.

Total center revenue grew $80.9 million, or 27.0%, to $381.0 million from $300.1 million, driven by a 7.7% increase in comparable center revenue, opening of seven new centers in 2005 and the full-year contribution of six centers opened in 2004. Of the $80.9 million increase in total center revenue,

	•		66.8% was from membership dues, which increased $54.1 million, due to increased memberships at new and existing centers.
	•		32.3% was from in-center revenue, which increased $26.1 million primarily as a result of our members’ increased use of our personal training, LifeCafe and LifeSpa products and services. As a result of this in-

			center revenue growth and our focus on broadening our offerings to our members, average in-center revenue per membership increased from $267 to $300 for the year ended December 31, 2005.
	•		0.9% was from enrollment fees, which are deferred until a center opens and recognized on a straight-line basis over 36 months. Enrollment fees increased $0.7 million for the year ended December 31, 2005 to $20.3 million. Our number of memberships increased 19.6% to 358,384 at December 31, 2005 from 299,538 at December 31, 2004.

Other revenue decreased $2.8 million, or 23.5%, to $9.1 million from $11.9 million, which was primarily due to decreased revenue generated from external sales in our nutritionals division as a result of our phase out of selling our nutritional products at third party retailers.

Center operations expenses. Center operations expenses were $216.3 million, or 56.8% of total center revenue (or 55.4% of total revenue), for the year ended December 31, 2005 compared to $164.8 million, or 54.9% of total center revenue (or 52.8% of total revenue), for the year ended December 31, 2004. This $51.5 million increase primarily consisted of an increase of $22.0 million in payroll-related costs to support increased memberships at new centers, an increase in $10.3 million in facility-related costs, including utilities and real estate taxes, and increased expenses to support in-center products and services. As a percent of total center revenue, center operations expense increased primarily due to the lower operating margins associated with new centers. At December 31, 2005, we had seven centers in the first year of operations compared to six centers in the first year of operations at December 31, 2004, and 13 centers in the first 24 months of operations at December 31, 2005 compared to 10 centers in the first 24 months of operations at December 31, 2004.

Advertising and marketing expenses. Advertising and marketing expenses were $14.5 million, or 3.7% of total revenue, for the year ended December 31, 2005 compared to $12.2 million, or 3.9% of total revenue, for the year ended December 31, 2004. As a percentage of total revenue, these expenses decreased primarily due to lower advertising costs associated with our nutritional business, partially offset by increased advertising at our new centers.

General and administrative expenses. General and administrative expenses were $27.4 million, or 7.0% of total revenue, for the year ended December 31, 2005 compared to $21.6 million, or 6.9% of total revenue, for the year ended December 31, 2004. This $5.8 million increase was primarily due to increased costs to support the growth in membership and the center base in 2005, as well as costs associated with being a public company.

Other operating expenses. Other operating expenses were $12.7 million for the year ended December 31, 2005 compared to $18.3 million for the year ended December 31, 2004. This $5.6 million decrease was primarily due to lower costs associated with our nutritional product and media businesses.

Depreciation and amortization. Depreciation and amortization was $38.3 million for the year ended December 31, 2005 compared to $29.7 million for the year ended December 31, 2004. This $8.6 million increase was due to the opening of seven centers during the year, as well as the full-year effect of depreciation for the six centers opened in 2004.

Interest expense, net. Interest expense, net of interest income, was $14.1 million for the year ended December 31, 2005 compared to $17.6 million for the year ended December 31, 2004. This $3.5 million decrease was primarily the result of reduced average debt balances for our non-construction related debt, lower interest rates on certain of our non-construction related debt and a reduction in interest expense on leased equipment. Proceeds from the initial public offering and increased cash flows from operating activities allowed us to limit our borrowings during 2004 and 2005.

Provision for income taxes. The provision for income taxes was $26.8 million for the year ended December 31, 2005 compared to $20.1 million for the year ended December 31, 2004. This $6.7 million increase was due to an increase in income before income taxes of $19.0 million, partially offset by a decrease in the effective tax rate to 39.4% for the year ended December 31, 2005 compared to 41.0% for the year ended December 31, 2004. The reduction in tax rate was driven by a business entity realignment that reduced state income taxes and resultant cumulative state deferred tax liabilities.

Net income. As a result of the factors described above, net income was $41.2 million, or 10.6% of total revenue, for the year ended December 31, 2005 compared to $28.9 million, or 9.3% of total revenue, for the year ended December 31, 2004.

Interest in an Unconsolidated Affiliated Entity

In 1999, we formed Bloomingdale LLC with two unrelated organizations for the purpose of constructing, owning and operating a sports and athletic, professional fitness, family recreation and resort/spa center in Bloomingdale, Illinois. The terms of the relationship among the members are governed by an operating agreement, referred to as the Operating Agreement, which expires on the earlier of December 2039 or the liquidation of Bloomingdale LLC. In December 1999, Bloomingdale LLC entered into a management agreement with us, pursuant to which we agreed to manage the day-to-day operations of the center, subject to the overall supervision by the Management Committee of Bloomingdale LLC, which is comprised of six members, two from each of the three members of the joint venture. We have no unilateral control of the center, as all decisions essential to the accomplishments of the purpose of the joint venture require the approval of a majority of the members. Bloomingdale LLC is accounted for as an investment in an unconsolidated affiliate and is not consolidated in our financial statements. Additional details related to our interest in Bloomingdale LLC are provided in Note 3 to our consolidated financial statements.

Non-GAAP Financial Measures

We use EBITDA and EBITDA margin as measures of operating performance. EBITDA should not be considered as a substitute for net income, cash flows provided by operating activities, or other income or cash flow data prepared in accordance with GAAP. The funds depicted by EBITDA are not necessarily available for discretionary use if they are reserved for particular capital purposes, to maintain compliance with debt covenants, to service debt or to pay taxes.

We believe EBITDA is useful to an investor in evaluating our operating performance and liquidity because:

	•		it is a widely accepted financial indicator of a company’s ability to service its debt and we are required to comply with certain covenants and borrowing limitations that are based on variations of EBITDA in certain of our financing documents; and
	•		it is widely used to measure a company’s operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired.

Our management uses EBITDA:

	•		as a measurement of operating performance because it assists us in comparing our performance on a consistent basis;
	•		in presentations to the members of our board of directors to enable our board to have the same consistent measurement basis of operating performance used by management; and
	•		as the basis for incentive bonuses paid to selected members of senior and center-level management.

We have provided reconciliations of EBITDA to net income in the section “Quarterly Results (Unaudited),” located immediately following the Report of Independent Registered Public Accounting Firm.

Seasonality of Business

Seasonal trends have a limited effect on our overall business. Generally, we have experienced greater membership growth at the beginning of the year and we have not experienced an increased rate of membership attrition during any particular season of the year. During the summer months, we have experienced a slight increase in operating expenses due to our outdoor aquatics operations.

Liquidity and Capital Resources

Liquidity

Historically, we have satisfied our liquidity needs through various debt arrangements, sales of equity and cash provided by operations. Principal liquidity needs have included the development of new centers, debt service requirements and expenditures necessary to maintain and update our existing centers and their related fitness equipment. We believe that we can satisfy our current and longer-term debt service obligations and capital expenditure requirements with cash flow from operations, by the extension of the terms of or refinancing our existing debt facilities, through sale-leaseback transactions and by continuing to raise long-term debt or equity capital, although there can be no assurance that such actions can or will be completed. Our business model operates with negative working capital because we carry minimal accounts receivable due to our ability to have monthly membership dues paid by electronic draft, we defer enrollment fee revenue and we fund the construction of our new centers under standard arrangements with our vendors that are paid with proceeds from long-term debt.

Operating Activities

As of December 31, 2006, we had total cash and cash equivalents of $6.9 million and $4.7 million of restricted cash that serves as collateral for certain of our debt arrangements. We also had $36.2 million available under the terms of our revolving credit facility as of December 31, 2006.

Net cash provided by operating activities was $125.9 million for 2006 compared to $108.0 million for 2005. The increase of $17.9 million was primarily due to an $8.5 million increase in net income adjusted for non-cash charges.

Net cash provided by operating activities was $108.0 million for 2005 compared to $80.4 million for 2004. The increase of $27.6 million was primarily due to a $15.3 million increase in net income adjusted for non-cash charges.

Investing Activities

Investing activities consist primarily of purchasing real property, constructing new centers and purchasing new fitness equipment. In addition, we invest in capital expenditures to maintain and update our existing centers. We finance the purchase of our property and equipment by cash payments or by financing through notes payable or capital lease obligations. For current model centers, our investment, through 2006, has ranged from approximately $18 to $34 million, which includes the land, the building and approximately $3 million of exercise equipment, furniture and fixtures. We expect the average cost of new centers constructed in 2007 to range from $28 to $30 million.

Our total capital expenditures were as follows:

		For the Year Ended December 31,
		2006				2005				2004
		(In thousands)
Purchases of property and equipment		$	261,767			$	190,355			$	145,562
Non-cash property and equipment purchases financed through capital lease obligations			—				96				145
Non-cash property purchase financed through notes payable obligation			1,620				—				—
Total capital expenditures		$	263,387			$	190,451			$	145,707

The following schedule reflects capital expenditures by type of expenditure:

		For the Year Ended December 31,
		2006				2005				2004
		(In thousands)
Capital expenditures for new center land, building and construction		$	230,270			$	166,244			$	127,846
Capital expenditures for updating existing centers, assumption of leased centers and corporate infrastructure			33,117				24,207				17,861
Total capital expenditures		$	263,387			$	190,451			$	145,707

At December 31, 2006, we had purchased the real property for the eight new centers that we plan to open in 2007, and we had entered into agreements to purchase real property for the development of seven of the nine new centers that we plan to open in 2008.

We expect our capital expenditures to be approximately $330 to $350 million in 2007, of which we expect approximately $45 to $50 million to be one-time in nature for the remodel of the seven centers leased in July 2006 and the completion of a new office building we plan to move into in the fourth quarter of 2007. In addition, we expect to incur approximately $260 to $270 million for new center construction and approximately $25 to $30 million for the updating of existing centers and corporate infrastructure. We plan to fund these capital expenditures with cash from operations, our revolving line of credit and additional mortgage financing.

Financing Activities

On April 15, 2005, we entered into a Credit Agreement, with U.S. Bank National Association, as administrative agent and lead arranger, J.P. Morgan Securities, Inc., as syndication agent, and the banks party thereto from time to time (the “U.S. Bank Facility”). On April 26, 2006, we entered into an Amended and Restated Credit Agreement effective April 28, 2006 to amend and restate the U.S. Bank Facility. The significant changes to the U.S. Bank Facility increased the amount of the facility from $200.0 million to $300.0 million, which replaced the prior $50.0 million accordion feature, and extended the term for the facility by approximately one year to April 28, 2011. As of December 31, 2006, $245.0 million was outstanding on the U.S. Bank Facility, plus $18.8 million related to letters of credit.

Interest on the amounts borrowed under the U.S. Bank Facility continues to be based on (i) a base rate, which is the greater of (a) U.S. Bank’s prime rate and (b) the federal funds rate plus 50 basis points, or (ii) an adjusted Eurodollar rate, plus, in either case (i) or (ii), the applicable margin within a range based on our consolidated leverage ratio. In connection with the amendment and restatement of the U.S. Bank Facility, the applicable margin ranges were decreased to 0 to 25 basis points (from 0 to 50 basis points) for base rate borrowings and to 75 to 175 basis points (from 100 to 200 basis points) for Eurodollar borrowings. Additionally, we are restricted in our borrowings and in general under the Amended and Restated Credit Agreement by certain financial covenants. We are required to maintain a fixed coverage ratio of not less than 1.60 to 1.00, a consolidated leverage ratio of not more than 3.75 to 1.00 and a senior secured operating company leverage ratio of not more than 2.25 to 1.00. The Amended and Restated Credit Agreement also contains covenants that, among other things, restrict our ability to enter into certain business combinations, dispose of assets, make certain acquisitions, pay dividends, incur certain additional debt and create certain liens.

The weighted average interest rate and debt outstanding under the revolving credit facility for the year ended December 31, 2006 was 6.8% and $140.0 million, respectively. The weighted average interest rate and debt outstanding under the revolving credit facility for the year ended December 31, 2005 was 5.7% and $44.5 million, respectively.

We have financed 13 of our centers with Teachers Insurance and Annuity Association of America pursuant to the terms of individual notes. The obligations under these notes are due in full in September 2011, and are secured by mortgages on each of the centers specifically financed, and we maintain a letter of credit in the amount of $5.0 million in favor of the lender. The obligations related to 10 of the notes are being amortized over a 20-year period, while the obligations related to the other three notes are being amortized over a 15-year period. The interest rate

payable under these notes has been fixed at 8.25%. The loan documents provide that we will be in default if our Chief Executive Officer, Mr. Akradi, ceases to be Chairman of the Board of Directors and Chief Executive Officer for any reason other than due to his death or incapacity or as a result of his removal pursuant to our articles of incorporation or bylaws. As of December 31, 2006, $122.5 million remained outstanding on the notes.

We have financed two of our centers in Minnesota separately. These obligations bear interest at a fixed rate of 6.0% and are being amortized over a 15-year period. The obligations are due in full in January 2007 and August 2007. As security for the obligations, we have granted mortgages on these two centers. At December 31, 2006, $4.7 million was outstanding with respect to these obligations. We are in the process of refinancing the note that came due in January 2007 with the same lender.

In May 2001, we financed one of our Minnesota centers pursuant to the terms of a sale-leaseback transaction that qualified as a capital lease. Pursuant to the terms of the lease, we agreed to lease the center for a period of 20 years. At December 31, 2006, the present value of the future minimum lease payments due under the lease amounted to $6.7 million.

We have financed our purchase of some of our equipment through capital lease agreements with an agent and lender, on behalf of itself and other lenders. The terms of such leases are typically 60 months and our interest rates range from 7.3% to 11.3%. As security for the obligations owing under the capital lease agreements, we have granted a security interest in the leased equipment to the lender or its assigns. At December 31, 2006, $6.2 million was outstanding under these leases.

On June 12, 2006, through a wholly owned subsidiary, we signed a promissory note in the amount of $1.7 million in favor of a municipality. The note is secured by a mortgage on the real property purchased from the municipality on the same date for the purpose of constructing one of our centers. The note bears no interest and is payable in two equal payments of $0.8 million on the third and sixth anniversary dates of the opening of the center. Those dates are expected to be June 2010 and June 2013. We recorded a $0.5 million reduction in the purchase price to reflect imputed interest between the accounting acquisition date and the final payment of consideration.

On November 10, 2006 we signed a promissory note in the amount of $0.5 million in favor of the seller of certain real property we purchased on the same date for the purpose of constructing one of our centers. The note is unsecured and bears interest at 5.6%. The note is payable in various unequal installments over a three year period following the opening of the center, currently expected to be in December 2007. The note is due and payable in full no later than December 2010. We recorded a $48 reduction in the purchase price to reflect imputed interest between the accounting acquisition date and the final payment of consideration.

On January 24, 2007, LTF CMBS I, LLC, a wholly owned subsidiary, obtained a commercial mortgage-backed loan in the original principal amount of $105.0 million from Goldman Sachs Commercial Mortgage Capital, L.P. pursuant to a loan agreement dated January 24, 2007. The mortgage financing is secured by six properties owned by the subsidiary and operated as Life Time Fitness centers located in Tempe, Arizona, Commerce Township, Michigan, and Garland, Flower Mound, Willowbrook and Sugar Land, Texas. The mortgage financing matures in February 2017.

Interest on the amounts borrowed under the mortgage financing is 6.03% per annum, with a constant monthly debt service payment of $0.6 million. Our subsidiary LTF CMBS I, LLC, as landlord, and LTF Club Operations Company, Inc., another wholly owned subsidiary of ours as tenant, entered into a lease agreement dated January 24, 2007 with respect to the properties. The initial term of the lease ends in February 2022, but the lease term may be extended at the option of LTF Club Operations Company, Inc. for two additional periods of five years each. Our subsidiaries may not transfer any of the properties except as permitted under the loan agreement. We guarantee the obligations of our subsidiary under the lease.

As additional security for LTF CMBS I, LLC’s obligations under the mortgage financing, the subsidiary granted a security interest in all assets owned from time to time by the subsidiary including the properties which had a net book value of $94.2 million on January 24, 2007, the revenues from the properties and all other tangible and intangible property, and certain bank accounts belonging to the subsidiary that the lender has required pursuant to the mortgage financing.

We are in compliance in all material respects with all restrictive and financial covenants under our various credit facilities as of December 31, 2006.

Contractual Obligations

The following is a summary of our contractual obligations as of December 31, 2006 (3):

		Payments due by period
						Less than												More than
		Total				1 year				1-3 years				3-5 years				5 years
		(In thousands)
Long-term debt obligations		$	376,695			$	10,204			$	12,681			$	351,289			$	2,521
Capital lease obligations			12,860				5,024				1,552				429				5,855
Interest (1)			52,348				11,604				20,267				15,991				4,486
Operating lease obligations			321,802				17,768				34,332				34,197				235,505
Purchase obligations (2)			164,541				152,681				11,731				129				—
Other long-term liabilities			264				—				—				—				264
Total contractual obligations		$	928,510			$	197,281			$	80,563			$	402,035			$	248,631

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision of Statement of Financial Accounting Standards No. 123, “Share-Based Payment” (“SFAS 123(R)”). This accounting standard revises SFAS No. 123 and requires entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. SFAS 123(R) was effective for us on January 1, 2006. As of the required effective date, we applied SFAS 123(R) using the modified prospective method, recognizing compensation expense for all awards granted after the date of adoption of SFAS 123(R) and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. For more information on the adoption of SFAS 123(R), see Note 2 to our consolidated financial statements.

In July 2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”). FIN 48 clarifies the application of SFAS No. 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. The criterion allows for recognition in the financial statements of a tax position when it is more likely than not that the position will be sustained upon examination. FIN 48 was effective for us on January 1, 2007. We are still evaluating the impact FIN 48 will have on our consolidated financial position and consolidated results of operations.

Impact of Inflation

We believe that inflation has not had a material impact on our results of operations for any of the years in the three-year period ended December 31, 2006. We cannot assure you that future inflation will not have an adverse impact on our consolidated financial position and consolidated results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We invest our excess cash in highly liquid short-term investments. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and, therefore, impact our consolidated cash flows and consolidated results of operations. As of December 31, 2006, our floating rate indebtedness was approximately $245.0 million. If long-term floating interest rates were to have increased by 100 basis points during the year ended December 31, 2006, our interest costs would have increased by approximately $1.4 million. If short-term interest rates were to have increased by 100 basis points during the year ended December 31, 2006, our interest income from cash equivalents would have increased by less than $0.1 million. These amounts are determined by considering the impact of the hypothetical interest rates on our floating rate indebtedness and cash equivalents balances at December 31, 2006.

Item 8. Financial Statements and Supplementary Data.

LIFE TIME FITNESS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		December 31,
		2006				2005
		(In thousands, except share and per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	6,880			$	4,680
Accounts receivable, net			2,320				4,267
Inventories			8,773				5,669
Prepaid expenses and other current assets			9,201				7,187
Deferred membership origination costs			12,575				10,082
Income tax receivable			97				3,510
Total current assets			39,846				35,395
PROPERTY AND EQUIPMENT, net			902,122				661,371
RESTRICTED CASH			4,738				3,915
DEFERRED MEMBERSHIP ORIGINATION COSTS			10,875				8,410
OTHER ASSETS			30,095				14,369
TOTAL ASSETS		$	987,676			$	723,460
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	15,228			$	14,447
Accounts payable			8,878				9,964
Construction accounts payable			49,285				25,811
Accrued expenses			37,191				27,862
Deferred revenue			29,773				23,434
Total current liabilities			140,355				101,518
LONG-TERM DEBT, net of current portion			374,327				258,835
DEFERRED RENT LIABILITY			25,716				5,492
DEFERRED INCOME TAXES			38,584				35,419
DEFERRED REVENUE			15,917				14,352
OTHER LIABILITIES			264				—
Total liabilities			595,163				415,616
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS’ EQUITY:
Undesignated preferred stock, 10,000,000 shares authorized; none issued or outstanding			—				—
Common stock, $.02 par value, 50,000,000 shares authorized; 36,817,199 and 35,570,567 shares issued and outstanding, respectively			737				712
Additional paid-in capital			259,905				228,132
Deferred compensation			—				(2,306	)
Retained earnings			131,871				81,306
Total shareholders’ equity			392,513				307,844
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	987,676			$	723,460

See notes to consolidated financial statements.

LIFE TIME FITNESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		For the Year Ended
		December 31,
		2006				2005				2004
		(In thousands, except per share data)
REVENUE:
Membership dues		$	339,623			$	262,989			$	208,893
Enrollment fees			22,438				20,341				19,608
In-center revenue			138,332				97,710				71,583
Total center revenue			500,393				381,040				300,084
Other revenue			11,504				9,076				11,949
Total revenue			511,897				390,116				312,033
OPERATING EXPENSES:
Center operations (including $2,179, $0 and $0 related to share-based compensation expense, respectively)			292,273				216,314				164,764
Advertising and marketing			20,770				14,446				12,196
General and administrative (including $5,377, $388 and $0 related to share-based compensation expense, respectively)			37,781				27,375				21,596
Other operating			12,998				12,693				18,256
Depreciation and amortization			47,560				38,346				29,655
Total operating expenses			411,382				309,174				246,467
Income from operations			100,515				80,942				65,566
OTHER INCOME (EXPENSE):
Interest expense, net of interest income of $269, $259 and $312, respectively			(17,356	)			(14,076	)			(17,573	)
Equity in earnings of affiliate			919				1,105				1,034
Total other income (expense)			(16,437	)			(12,971	)			(16,539	)
INCOME BEFORE INCOME TAXES			84,078				67,971				49,027
PROVISION FOR INCOME TAXES			33,513				26,758				20,119
NET INCOME			50,565				41,213				28,908
ACCRETION ON REDEEMABLE PREFERRED STOCK			—				—				3,570
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS		$	50,565			$	41,213			$	25,338
BASIC EARNINGS PER COMMON SHARE		$	1.40			$	1.19			$	1.02
DILUTED EARNINGS PER COMMON SHARE		$	1.37			$	1.13			$	0.87
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC			36,118				34,592				24,727
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED			36,779				36,339				33,125

See notes to consolidated financial statements.

LIFE TIME FITNESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

										Additional
		Common Stock								Paid-In				Deferred				Retained
		Shares				Amount				Capital				Compensation				Earnings				Total
		(In thousands, except share data)
BALANCE — December 31, 2003			16,146,607			$	323			$	17,714			$	—			$	14,755			$	32,792
Common stock issued upon initial public offering			4,774,941				95				80,303				—				—				80,398
Tax benefit from expenses incurred upon initial public offering			—				—				88				—				—				88
Conversion of redeemable preferred stock to common stock upon initial public offering			12,629,233				253				109,482				—				—				109,735
Common stock issued upon exercise of stock options			233,801				5				1,056				—				—				1,061
Grant of restricted stock			7,028				—				142				(142	)			—				—
Compensation related to stock options and restricted stock			—				—				277				76				—				353
Tax benefit upon exercise of stock options			—				—				869				—				—				869
Accretion on redeemable preferred stock			—				—				—				—				(3,570	)			(3,570	)
Net income			—				—				—				—				28,908				28,908
BALANCE — December 31, 2004			33,791,610				676				209,931				(66	)			40,093				250,634
Common stock issued upon exercise of stock options			1,698,714				34				6,149				—				—				6,183
Grant of restricted stock			80,243				2				2,625				(2,627	)			—				—
Compensation related to stock options and restricted stock			—				—				255				387				—				642
Tax benefit upon exercise of stock options			—				—				9,172				—				—				9,172
Net income			—				—				—				—				41,213				41,213
BALANCE — December 31, 2005			35,570,567				712				228,132				(2,306	)			81,306				307,844
Reclassification of deferred compensation to additional paid-in capital			—				—				(2,306	)			2,306				—				—
Common stock issued upon exercise of stock options			1,090,788				22				15,242				—				—				15,264
Grant of restricted stock			156,164				3				(3	)			—				—				—
Forfeiture of restricted stock			(320	)			—				—				—				—				—
Compensation related to stock options and restricted stock			—				—				7,556				—				—				7,556
Capitalized compensation related to stock options and restricted stock			—				—				1,055				—				—				1,055
Tax benefit upon exercise of stock options			—				—				10,229				—				—				10,229
Net income			—				—				—				—				50,565				50,565
BALANCE — December 31, 2006			36,817,199			$	737			$	259,905			$	—			$	131,871			$	392,513