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                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                        --------------------------------
                                    FORM 10-K

|X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

         SECURITIES EXCHANGE ACT OF 1934



                   For the fiscal year ended December 31, 2002



                                       OR



  |_|    TRANSITION REPORT PURSUANT TO SECTON 13 OR 15(d) OF THE

         SECURITIES EXCHANGE ACT



             For the transition period from ___________to __________


                         Commission File Number: 1-13290

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                          The Sports Club Company, Inc.
             (Exact name of registrant as specified in its charter)


           Delaware                                  95-4479735
(State or other jurisdiction               (I.R.S. Employer Identification No.)
of incorporation or organization)

         11100 Santa Monica Blvd., Suite 300
               Los Angeles, California                           90025
(Address of registrant's principal executive offices)          (Zip Code)

  Registrant's telephone number, including area code:
                     (310) 479-5200

Securities registered pursuant                   Name of each exhcange on which
to Section 12(b) of the Act:                                registered
     Title of each class

  Common Stock $.01 par value                           American Stock Exchange

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

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

     Indicate  by check  mark  whether  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 |X| No |_|

     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. [_]

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant  on June 28,  2002,  the last  business day of the  registrants  most
recently  completed  second fiscal quarter was $9,960,000.  The aggregate market
value of the voting stock held by  non-affiliates of the registrant on March 24,
2003 was $9,290,000.  The number of shares of the Common Stock,  par value $ .01
per  share,  outstanding  (the  only  class of  Common  Stock of the  registrant
outstanding)  was  18,205,690 on March 24, 2003.  Indicate by check mark whether
the  registrant is an  accelerated  filer (as defined in Rule 12b-2 of the Act).
Yes |_| No |X|



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<PAGE>

                                     PART I

ITEM 1.   BUSINESS

General

     We were  organized in 1994 to  consolidate  the ownership of several sports
and  fitness  clubs.  We  currently  own and operate six Clubs under "The Sports
Club/LA"  name in Los Angeles,  Washington  D.C.,  Boston,  San Francisco and at
Rockefeller  Center and the Upper  East Side in New York  City.  We also own and
operate The Sports Club/Irvine and operate and own a majority interest in Reebok
Sports Club/NY.  Our Clubs offer a wide range of fitness and recreation  options
and amenities,  and are marketed to affluent,  health conscious  individuals who
desire  a  service-oriented,   state-of-the-art   club.  Our  Clubs  are  widely
recognized as being among the finest sports and fitness clubs in the country.

     Our Clubs (hereinafter  referred to as "Clubs" or "The Sports Club/LA") are
conveniently located and are spacious,  modern facilities that typically include
spas,  restaurants,  fitness centers,  swimming pools and basketball courts. The
Sports Club/LA sites are designed as "urban country clubs," ranging in size from
90,000 to 140,000 square feet.  Initiation  fees and monthly  membership dues at
The Sports  Club/LA  are  higher  than  those  charged by most other  sports and
fitness clubs.  Income from ancillary  services and products,  including private
training,  food and beverage and spa  services,  also  constitute a  significant
portion of our revenues.  Our subsidiary,  The SportsMed Company  ("SportsMed"),
operates physical therapy facilities in some Clubs and at other locations.

     Our strategy is to expand The Sports  Club/LA  brand in major  metropolitan
markets and to increase  revenues and  profitability  at existing  Clubs through
regular increases in monthly membership dues, increases in membership levels and
expanded ancillary services and products.  We will continue to investigate other
sites for new The Sports Club/LA developments.

     According to the  International  Health,  Racquet & Sportsclub  Association
("IHRSA"), the industry's leading trade organization,  it is estimated that 33.8
million  Americans  were members of more than 17,000 sports and fitness clubs in
2001.  Revenues  generated by the United States sports and fitness club industry
increased  at a compound  annual rate of 8.2% from $6.5 billion in 1993 to $12.2
billion in 2001. The industry has benefited from the general public's increasing
awareness of the importance of physical exercise.  Among other groups, we target
members  age  35  and  older  who,  according  to  IHRSA,  represent  59% of all
memberships and are the fastest growing segment of the industry.

Recent Events

     On December 10, 2002 our Board of Directors  formed a special  Committee of
the  Board  comprised  of  the  independent   directors  to  explore   strategic
alternatives,  including a possible "going private" transaction in which certain
of our  principal  shareholders  may  participate.  We have  also  engaged a Los
Angeles  based  investment  banking  firm to  assist us in  raising  up to $50.0
million  in  private  equity  to  establish  separate  joint  ventures  for  the
development  of smaller  luxury  sports and fitness  complexes  under The Sports
Club/LA brand.

The Sports Club/LA

     The  Sports   Club/LA  is  typically  a  90,000  to  140,000   square  foot
multi-purpose facility, that generally includes the following features:

o    large,  fully  equipped  gyms  with  state-of-the-art   fitness  equipment,
     including weight training, cardio- vascular equipment,  flexibility centers
     and functional performance areas,

o    basketball,  volleyball,  racquetball,  squash,  tennis and  paddle  tennis
     courts,

                                      -2-
<PAGE>

o    group exercise studios  featuring  classes  throughout the day and evening,
     seven days a week,  including aerobics,  yoga, dance, muscle  conditioning,
     boxing, martial arts, pilates and bodymind,

o    group cycling studios,

o    rock climbing walls,

o    boxing studios,

o    swimming pools, sundecks, golf practice nets and running tracks,

o    destination city spa offering massage, facials and full body treatments,

o    men's and women's locker rooms featuring wood lockers,

o    steam rooms, saunas and jacuzzis,

o    restaurants,   sports  bars,  private  dining/conference  rooms  and  media
     centers,

o    valet parking, pro shops, hair salons and childcare services,

o    sports medicine and physical therapy facilities,

o    personal trainers to develop and supervise members' exercise routines,

o    registered dietitians for nutritional consultations,

o    FitLab assessment centers,

o    PTS Private Trainer System nutritional programs and products,

o    interactive  children's' classes, as well as supervised age-specific junior
     recreation  rooms and junior programs such as gymnastics,  martial arts and
     dance,

o    instruction in racquet sports,  golf,  swimming,  boxing,  martial arts and
     rock climbing,

o    full-time activities directors  responsible for social and media events for
     members, including organizing trips, lectures and charity events,

o    sports instructors who present sports tournaments, leagues and classes, and

o    wellness  protocols such as exercise  regimens designed for specific groups
     of members.

     We  currently  have eight Sports Clubs in  operation.  The original  Sports
Club/LA  opened  in 1987 in west Los  Angeles,  California,  near  the  affluent
communities of Santa Monica,  Brentwood,  Beverly Hills,  Bel Air,  Westwood and
Century City. The Sports Club/Irvine opened in 1990 near Newport Beach in Orange
County,  California.  Reebok Sports Club/NY opened in 1995 on Manhattan's  upper
west  side,  and was  developed  in  partnership  with a  subsidiary  of  Reebok
International,   Ltd.   ("Reebok")  and  Lincoln  Metrocenter   Partners,   L.P.
(collectively  with its affiliates  "Millennium").  We manage the operations and
own a 60% interest in the partnership that owns this Club. Reebok and Millennium
have each retained an interest in the partnership.

     We opened The Sports Club/LA at two locations in New York City in 2000. The
Sports  Club/LA - New York at  Rockefeller  Center was opened in February  2000.
This Club was designed to service the  executive  business  community in midtown
Manhattan.  The Sports Club/LA - New York in New York City's Upper East Side was
opened in September 2000. This site is the location of the former Vertical


                                      -3-
<PAGE>


Club,  which was closed in February 1999 for major  renovation and conversion to
The Sports Club/LA and serves the affluent  residential  Upper East Side area of
New York City.

     We also  recently  opened The Sports  Club/LA at three sites  developed  by
Millennium.  The Sports Club/LA - Washington  D.C.  opened in October 2000. This
100,000  square  foot Club is located at 22nd and M Streets  between  Washington
D.C.'s business  district and Georgetown.  The Sports Club/LA - Boston opened in
September  2001. This Club overlooks the historic Boston Common and is located a
short  distance  from the city's  financial  district.  Both of these  Clubs are
co-located  with a five star Ritz Carlton  Hotel.  Our newest  Club,  The Sports
Club/LA - San Francisco,  has been open since October 2001. This Club is located
in the Four Seasons Hotel and Residences in the emerging South of Market Area in
San Francisco.

The SportsMed Company, Inc.

     Our SportsMed  subsidiary  operates physical therapy  facilities within The
Sports  Club/LA in Los Angeles,  The Sports  Club/Irvine,  the  Spectrum  Club -
Valencia and the Spectrum  Club - Thousand  Oaks.  SportsMed  also operates in a
stand-alone  facility  in  Calabasas,  California.  The  clinics  are staffed by
exercise  physiologists,  physical  therapists  and  registered  dietitians  who
provide  services to members  and others.  We believe  that  SportsMed  provides
valuable services, which are complementary to the other services provided by the
Clubs, and are considering placing physical therapy facilities in other Clubs in
the future.

Development of New Clubs

     Recent  New  Club  Developments.   In  2000  and  2001,  we  completed  the
development of five new The Sports Club/LA sites. Two of these Clubs are located
in New York City and, when combined with our Reebok Sports Club/NY site,  form a
trio of Clubs  located in  residential  areas on the East and West sides and the
central  midtown  business  district.  Three of the new The Sports Club/LA sites
were developed with  Millennium,  with whom we developed  Reebok Sports Club/NY.
Millennium is a developer of premier multi-use projects and is funded by Quantum
Realty  Fund,  a member  of the  Quantum  Group of Funds,  which  are  off-shore
investment funds managed by Soros Fund  Management,  a management firm headed by
George Soros; and Millennium Entertainment Partners L.P., a consortium of German
insurance companies. These Clubs are located in projects developed by Millennium
in prime,  metropolitan  locations  that,  like Reebok Sports  Club/NY,  include
commercial,  retail,  entertainment and residential space. In addition,  each of
these  developments  include  either a Ritz  Carlton or Four  Seasons  five star
hotel.  These Clubs are  approximately  100,000  square feet and offer  services
typically found at other The Sports Club/LA sites. We believe that such projects
offer ideal  locations for The Sports Club/LA and would consider  developing The
Sports Club/LA with Millennium or other  developers in other major  metropolitan
areas.

     Performance of Newly Developed and Acquired Clubs. Based on our experience,
a newly developed Club tends to achieve significant  increases in revenues until
a mature membership level is reached.  In the past,  recently opened Clubs which
have not yet achieved mature  membership levels have operated at a negative cash
flow or only a slight positive cash flow during the first two years of operation
as a result of fixed expenses that,  together with variable operating  expenses,
approximate or exceed  membership fees and other revenues.  This trend continued
at The Sports Club/LA sites we opened in 2000 and 2001. Three of these Clubs are
now operating at a positive  cash flow level while two Clubs are still  building
the  membership  base  necessary  to achieve  this  level.  We believe  that our
revenues  from these  Clubs will  significantly  increase as  membership  levels
mature.


                                      -4-
<PAGE>


Future New Club Developments

     The  completion  of The  Sports  Club/LA  at five new  sites  has  required
significant financial resources. In addition, our current financing arrangements
and level of  operating  cash  flow make it  difficult  to secure  the  required
financing to develop additional new sites.  Therefore,  our primary focus is now
on improving the operating  performance  of our five new Clubs.  We are pursuing
The Sports Club/LA developments at new sites that are financially  structured in
a way that will not  require us to make a  significant  capital  investment.  We
would  consider  entering  into  joint  ventures,   partnership   agreements  or
management agreements for the purpose of developing new Clubs.

     We have two new sites that we are  currently  developing.  We have signed a
lease to develop The Sports Club/LA - Beverly  Hills.  This Club will be located
in the heart of the business and retail  district in Beverly Hills,  California.
It will service that market place as well as the surrounding  neighborhoods  and
allow us to further  penetrate  areas east of Beverly  Hills.  We are  currently
demolishing the existing  interior building space and constructing our pre-sales
office and expect to start  pre-sale  activities in April 2003. Our objective is
to locate a joint  venture  partner to provide the  financing  to  complete  the
construction  of this  Club.  If we are unable to do so, we would need to either
delay the construction or secure additional equity capital or debt financing.

     We are also  negotiating  with  Millennium  regarding The Sports  Club/LA -
Miami.  Millennium  will be the owner of this Club. They will be responsible for
providing all funds necessary to construct,  equip and operate the Club. We will
manage the Club operations for which we expect to receive a management fee based
upon both the gross revenues and net cash flow of the Club. We will also license
The Sports  Club/LA name to Millennium.  This structure  allows us to expand our
brand  and  receive  an  immediate  earnings  stream,  with  the  potential  for
additional profits, without making any capital investment.

Sales and Marketing

     Strategy.  The  Sports  Club/LA  is  marketed  as an "urban  country  club"
offering personalized  attention and multiple amenities and services. We believe
that the image of The Sports  Club/LA  as the  leader in the sports and  fitness
industry justifies charging a premium. Our members include professionals, sports
and  entertainment   personalities  and  business  people.  The  Sports  Club/LA
emphasize  personalized  service and  instruction  and the creation of an "urban
country club" atmosphere in which members can relax and socialize. Our marketing
efforts at The Sports Club/LA emphasize  retaining  existing members,  replacing
members  who leave with new  members  and  increasing  ancillary  revenues  from
services such as private  training and spa services.  Our focus at the newer The
Sports Club/LA locations is on attracting additional members.

     Referrals,  Endorsements  and  Advertising.   Word-of-mouth  referrals  and
endorsements by existing  members are The Sports Club/LA's most important source
of new members.  In addition,  The Sports Club/LA  utilizes  targeted  marketing
programs  which  include  advertisements,   promotions,   public  relations  and
community  events.  The principal  marketing media for the Clubs are direct mail
and  print  advertisements.  Special  events  and  special  membership  programs
supplement the print advertisements.  The Sports Club/LA hosts corporate parties
and  charity  benefits  and often  donates  free or  discounted  memberships  to
charitable  organizations.  We also conduct periodic  membership  drives whereby
referring members are entitled to receive special gifts and other incentives. We
believe that we will be able to continue to utilize these marketing strategies.

     Targeted Members. The largest segment of the membership base for The Sports
Club/LA consists of health-conscious individuals. We target four other groups in
order to expand membership:  corporate members, medical referrals, families, and
seniors. Each of these groups requires specialized exercise/fitness programs and
we have developed specific programs to attract members of these groups.

     Corporate Programs. We believe the corporate market is a significant source
of new members,  due to the proximity of The Sports Club/LA to business  centers
and the use of the  Clubs  to  conduct  business  and to  develop  and  maintain
business  contacts.  We employ  several  Corporate  Membership  Directors  whose

                                      -5-
<PAGE>


principal  responsibilities are to solicit corporate memberships from businesses
operating  in the vicinity of the Clubs.  The Sports  Club/LA  offers  corporate
group-discounted  initiation  fees  depending  upon the  number  of new  members
involved.  Our SportsMed  subsidiary has developed  several  corporate  wellness
programs  to  fit  the  needs  of  this  particular   market.  We  believe  that
corporations  are  favorably  disposed to The Sports  Club/LA and The  SportsMed
programs because of the positive impact regular exercise and overall fitness can
have on employee absenteeism, morale and productivity.

     Medical  Referrals.  We target  members  from the medical  referral  market
through  our  SportsMed  subsidiary  by  offering  specific  rehabilitation  and
exercise protocols to complement other forms of physical therapy  recommended by
a physician or medical group. We also offer a "next-step"  program for SportsMed
patients who complete  their  physical  therapy  programs and are looking for an
option to  complete  their  rehabilitation  by  becoming  members  at The Sports
Club/LA.

     Family  Programs.  We  believe  that the  family  market  has  considerable
potential,  as younger  members  grow older,  marry and have  children  and seek
recreational  activities in which the entire family can participate.  To attract
the family market, we have implemented  "Fun-N-Fit" programs that offer programs
to children  between the ages of 6 months and 15 years and involve  youth sports
camps and  clinics,  fitness  programs,  art classes and birthday  parties.  The
Sports  Club/LA's  weight-training,  basketball and swimming pool facilities are
made   available  to  children  and  their   parents   during  Family  Day,  and
specially-designed movement classes utilizing a variety of fitness equipment are
offered to younger children.  The Sports Club/LA provides  individualized sports
instruction and offers multiple fitness  activities such as gymnastics,  martial
arts and dance that are age appropriate.

     Senior  Programs.  We anticipate that as the current core membership  group
ages, we will meet the changing fitness needs of seniors and attract  additional
members from the senior  population.  We maintain training and exercise protocol
manuals for the senior market (that we generally  define as members who are over
60 years old) that  include a  description  of  exercise  and  fitness  programs
specifically designed for seniors. These manuals also contain discussions of the
biological,  psychological  and  medical  aspects of aging and the  benefits  of
regular  exercise.  We believe  this market  will  expand as the "baby  boomers"
mature.

Employee Training

     We believe that a key component of our operating strategy is a well-trained
and knowledgeable staff. We have comprehensive  training programs to enhance the
effectiveness of our personnel. All newly hired employees are required to attend
an orientation  seminar,  that is led by members of our  management  staff and a
personnel  instructor.  Topics  include our history and  philosophy,  The Sports
Club/LA policies and procedures,  member service, interaction skills and product
knowledge. These orientation seminars are held weekly.

     To aid in the development and continuing education of our management staff,
we offer a  workshop  entitled  "Introduction  to  Management"  for newly  hired
management  personnel and other employees  demonstrating  management skills. The
workshop is intended to educate  managers in the areas of instilling our Company
philosophy,  policies and procedures,  safety,  workers' compensation,  managing
people,  communication,  group problem solving, training, coaching,  motivation,
feedback,  recognition,  counseling,  evaluations,  as well as time  and  stress
management.  Topics are added periodically to reflect new management  techniques
or operating issues.  These seminars,  generally  consisting of three eight-hour
sessions,   are  held  six  times  a  year  or  as  needed  for  new  employees.
Additionally,  our  management  personnel  are  required to  participate  in our
Manager on Duty Program and other  management and sales seminars to maintain and
develop their skills.

     We provide additional seminars  specifically designed for targeted employee
groups.  Seminars  providing  specialized  instruction  for  program  directors,
private trainers,  group exercise instructors and sales/marketing  personnel are
offered at various  times during the year,  for which  attendance on the part of
newly-hired  personnel  is  mandatory.  We  place  particular  emphasis  on  our
sales/marketing  training  seminars,  that are given  once every two months by a
personnel instructor.  In these seminars,  all new

                                      -6-
<PAGE>


membership directors complete 20 hours of participation and all other membership
directors are expected to complete four hours of participation every two months.
Our  fitness  instructors  are  trained to assist in the sales  function  and to
implement  fitness testing and  individually-tailored  exercise  programs.  Most
instructors are  college-educated  and all trainers are required to be certified
by the National Academy of Sports Medicine.  Our group exercise instructors hold
nationally recognized certifications and must have at least one year of teaching
experience  before they are permitted to teach at The Sports  Club/LA.  They are
also required to participate in ongoing training and periodic re-evaluation.

     Lastly, all line staff can voluntarily  participate in quarterly  workshops
that are offered through our human resources department. Workshop topics include
conflict  resolution,  communication  and member service;  however,  topics vary
depending on the Club's current training needs.

Membership Programs

     Membership at The Sports  Club/LA  requires an initiation  fee plus monthly
membership  dues.  Initiation fees are required to be paid upfront or during the
member's  first  year.  Members  are  currently  required to pay their dues on a
monthly  basis  by  electronic   funds   transfer,   by  which  each  member  is
automatically  debited each month for dues either through a checking  account or
credit card. At established  Clubs,  the average life of a membership is four to
five years.

     The Sports Club/LA offers three types of memberships: executive, health and
racquet sports. The Sports Club/LA's initiation fees and monthly membership dues
vary  depending on the location of the Club. The Sports Clubs'  initiation  fees
range from $400 to $2,900 and monthly  membership  dues range from $102 to $300.
Corporate,  bicoastal and spousal  memberships are also available.  We offer the
following membership options:

     Executive  Membership.  Executive  membership offers the greatest number of
amenities  and services,  including  unlimited  use of all  facilities,  racquet
sports privileges,  personal locker assignments within an executive locker room,
laundry service,  free valet parking and charge  privileges for dining and other
Club  services.  Executive  membership  entitles  a member to use all The Sports
Club/LA locations.

     Health  Membership.  Health  membership  is the basic  membership  offering
unlimited  use of the facility  excluding  those  privileges  associated  with a
racquet membership; courts are available to holders of health memberships for an
additional fee. We also offer a bi-coastal  membership that entitles a member to
use all The Sports Club/LA  locations  throughout the country and both an Access
West and Access East  membership  that allows a member the ability to use all of
our Clubs located on either the west coast or east coast.

     Racquet Sports Membership. Racquet sports memberships are currently offered
at The Sports Club/Irvine,  The Sports Club/LA - Boston and The Sports Club/LA -
Washington  D.C. In addition to use of the Club's  facilities,  this  membership
includes unlimited use of racquetball,  squash, paddle tennis and tennis courts,
depending upon the individual Club's facilities.

Competition

     Although the sports and fitness industry is still fragmented,  the industry
has  experienced  significant  consolidation  in recent years and certain of our
competitors are  significantly  larger and have greater  financial and operating
resources than we do. In addition, a number of individual and regional operators
compete with us in our existing markets.  Many of these sports and fitness clubs
attract the same types of members we target.  We also compete with  recreational
facilities established by governments and businesses, the YMCA and YWCA, country
clubs and  weight-reducing  salons, as well as products and services that can be
used in the  home.  As the  general  public  becomes  increasingly  aware of the
benefits  of regular  exercise,  we expect  that  additional  sports and fitness
businesses  will emerge.  We believe that there will  continue to exist a market
for The Sports  Club/LA and that our operating  experience,  our highly  visible
image, the professionalism of our staff and our  state-of-the-art  equipment and
exercise facilities afford us an advantage over our competitors. However, we may
be unable to maintain our  membership  fees or

                                      -7-
<PAGE>


membership  levels  in areas  where  another  sports  and  fitness  club  offers
competitive facilities and services at a lower cost.


Trademarks and Trade names


     We have  registered  our "flying lady" logo as a stand-alone  design and in
combination with "The Sports Club/LA" and "The Sports  Club/Irvine"  names under
federal trademark laws. Internationally, we have registered "The Sports Club/LA"
name and logo in Japan,  Australia and throughout Europe under a joint "European
Community" trademark.


     We have  also  obtained  federal  protection  for our food and  nutritional
products that are marketed  under the trade names of Private  Trainer System and
PTS.

     Additionally,  we have  received  trademark  approval  for  several  of our
fitness programs,  including  BodyArt,  REV and others. We have not been able to
obtain full protection under Federal trademark laws for our SportsMed subsidiary
name,  Splash,  the name of our spas,  and For Kids  Only,  our  child  care and
children's fitness program;  however,  each of these have been granted "allowed"
status.

Government Regulation

     Our  operations  and business  practices  are subject to  regulation at the
federal,  state and,  in some  cases,  local  levels.  State and local  consumer
protection laws and regulations  govern our  advertising,  sales and other trade
practices.

     Statutes and regulations  affecting the fitness  industry have been enacted
or  proposed in  California  and New York.  Many other  states into which we may
expand have or likely will adopt similar legislation.  Typically, these statutes
and regulations  prescribe certain forms and provisions of membership contracts,
limit the amount of prepaid revenues we can collect, afford members the right to
cancel the contract  within a specified  time period after  signing,  require an
escrow of funds  received  from  pre-opening  sales or the  posting of a bond or
proof of financial  responsibility  and may impose  numerous  limitations on the
terms of membership  contracts.  In addition,  we are subject to numerous  other
types of federal and state regulations governing the sale of memberships.  These
laws and regulations are subject to varying interpretations by a number of state
and federal  enforcement  agencies  and  courts.  We  maintain  internal  review
procedures  in order to comply  with these  requirements  and  believe  that our
activities are in substantial compliance with all applicable statutes, rules and
decisions.

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

Employees

     At March 1, 2003,  we had 2,223  employees,  most of whom are employed on a
part-time basis in Club operating activities such as aerobics,  private training
and food and beverage  services.  At March 1, 2003,  we employed  868  full-time
employees,  798 of whom were involved in The Sports Club/LA  operations  such as
sales,  management,  private  training or support staff,  and 70 of whom were in
general  and  administrative  functions.  We are not a party  to any  collective
bargaining agreement with our employees. Although we experience high turnover of
non-management  personnel, we have never experienced any labor shortages nor had
any difficulty in obtaining adequate  replacements for departing  employees.  We
consider our relations with our employees to be good.

                                      -8-
<PAGE>


Available Information

     Quarterly  and annual  reports  on Form 10-Q and Form 10-K can be  accessed
through the SEC website at http://www.sec.gov/edgar/searchedgar/webusers.htm.

ITEM 2.  PROPERTIES

     We own the real estate at The Sports  Club/Irvine  and The Sports Club/LA -
Los  Angeles  (subject to a minority  interest  held by our  Co-Chief  Executive
Officer D. Michael Talla). All other premises on which the Clubs are located are
leased.

         The following table provides certain information concerning our Clubs:


<TABLE>
<CAPTION>

                                                Approximate    Open Date   Own or Lease
                    Club                        Square Feet      (1)      Expiration Date      Renewal Option
                    ----                       --------------   ------     -------------     ------------------

<S>                                              <C>            <C>           <C>                 <C>
The Sports Club/LA - Los Angeles (2).......       100,000       1994 A         Own                 N/A
The Sports Club/Irvine.....................       130,000       1994 A         Own                 N/A
Reebok Sports Club/NY(3)...................       140,000       1995 O       4/17/15      Three 14-year options
The Sports Club/LA - Rockefeller Center....        90,000       2000 O       1/31/13        Two 5-year options
The Sports Club/LA - Upper East Side.......       140,000       2000 O       12/31/20       Two 5-year options
The Sports Club/LA - Washington D.C.(4)           100,000       2000 O       10/31/20     Three 14-year options
The Sports Club/LA - Boston(4).............       100,000       2001 O       8/31/21      Three 14-year options
The Sports Club/LA - San Francisco(5)......        90,000       2001 O       9/30/21      Three 14-year options
The Sports Club/LA - Beverly Hills.........        40,000       2003 E       4/30/18        One 10-year option
-------------
</TABLE>

(1)  Date of acquisition ("A"), opening ("O") or anticipated open date ("E").

(2)  D. Michael  Talla,  our Chairman and Co-CEO,  has the right to 49.9% of the
     first $300,000 of annual operating  income from the partnership  which owns
     The Sports Club/LA - Los Angeles.

(3)  We have entered into a lease agreement with Millennium with respect to this
     property.  We are  entitled  to  certain  priority  distributions  from the
     partnership   that  owns  this  Club.   After   payment  of  such  priority
     distributions, we are entitled to 60% of all additional profits.

(4)  We have entered into a lease  agreement with  Millennium for this Club. The
     lease  provides  that  Millennium  is to  receive  25%  of  cash  flows  as
     additional rent after we earn certain priority distributions.

(5)  We have entered into a lease  agreement with  Millennium for this Club. The
     lease  provides  that  Millennium  is to  receive  60%  of  cash  flows  as
     additional rent after we earn certain priority distributions.


     We remain obligated under lease agreements for seven of our former Spectrum
Club locations. We have subleased each of these properties to the buyer of these
Clubs under sublease  agreements  that provide for all operating  costs of these
facilities be assumed by the new owners.

     All of the Clubs maintain  comprehensive  casualty,  liability and business
interruption  insurance.  In March 2003,  we secured  insurance  against acts of
terrorism.  Clubs  located  in  California  maintain  a  blanket  $35.0  million
earthquake  insurance  policy.  We believe  that our  insurance  coverage  is in
accordance with or above industry standards.  There are, however,  certain types
of losses that may be either  uninsurable  or not  economically  insurable,  and
insurance   proceeds  may  not   adequately   compensate  us  for  all  economic
consequences  of any loss.  Should a loss occur, we could lose both our invested
capital and our  anticipated  profits  from the affected  Clubs.  Any such event
could have a material adverse effect on our operations.


                                      -9-
<PAGE>



ITEM 3.  LEGAL PROCEEDINGS

     We are involved in various claims and lawsuits  incidental to our business,
including claims arising from accidents.  However, in the opinion of management,
we are adequately  insured against such claims and lawsuits  involving  personal
injuries,  and any ultimate  liability  arising out of any such proceedings will
not have a material  adverse  effect on our  financial  condition,  cash flow or
results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

         Not applicable



                                      -10-
<PAGE>



                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS

     Our Common Stock is traded on the American  Stock  Exchange  ("AMEX") under
the symbol "SCY". The following table sets forth the quarterly high and low sale
prices for the Common Stock for the periods indicated, as reported by the AMEX.

                                                     Price Range of Common Stock
                                 Calendar Quarter      High              Low

Year Ended December 31, 2001:
     First Quarter ............................... $    3.19         $    2.55
     Second Quarter...............................      3.30              2.86
     Third Quarter................................      4.00              3.12
     Fourth Quarter...............................      3.35              2.35

Year Ended December 31, 2002:
     First Quarter ...............................      2.90              2.45
     Second Quarter...............................      2.60              2.10
     Third Quarter................................      2.45              1.00
     Fourth Quarter...............................      3.45              1.72

Year Ended December 31, 2003:
     First Quarter (through March 14th)...........      2.35              2.15


     As of March 14, 2003 we had 63 stockholders of record and approximately 600
beneficial owners. The closing price of our Common Stock as reported by the AMEX
on March 14, 2003, was $2.35.


Dividend Policy

     We have never  declared or paid any dividends on our Common Stock and we do
not anticipate doing so in the foreseeable  future.  It is our present policy to
retain earnings for use in our operations and the expansion of our business.  In
addition,  our ability to pay cash dividends is limited by our current financing
agreements and may be similarly limited by future financing agreements.



                                      -11-
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following  table presents our summary  financial and operating data for
the fiscal years ended  December 31, 1998 through 2002 and has been derived from
our  consolidated  financial  statements,  that have been  audited  by KPMG LLP,
independent  certified public  accountants.  The summary financial and operating
data should be read in  conjunction  with,  and is  qualified in its entirety by
reference to,  "Management's  Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated  financial  statements and the notes
thereto appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>

                                                                     Fiscal Year Ended December 31,
                                                         --------------------------------------------------
                                                            1998      1999       2000       2001       2002
                                                         --------- ---------  ---------  ---------  -------
                                                              (Dollars in thousands, except per share data)
Statement of Operations Data:
<S>                                                       <C>        <C>        <C>        <C>        <C>
 Revenues..........................................      $ 81,923   $ 87,325   $ 76,869   $102,044   $122,488
  Operating expenses:
    Direct..........................................        56,746     60,528     59,116     88,219    101,957
    General and administrative......................         6,018      6,626      7,298      8,938      7,285
    Selling.........................................         2,538      2,608      2,915      3,880      4,907
    Depreciation and amortization...................         5,282      6,147      7,408     11,809     11,835
    Pre-opening expenses............................            --      3,090      9,589      5,884        130
    Impairment charge...............................            --         --         --      5,250         --
                                                         ---------  ---------  ---------  ---------  ---------
         Total operating expenses...................        70,584     78,999     86,326    123,980    126,114
                                                          --------   --------   --------   --------   --------
         Income (loss) from operations..............        11,339      8,326     (9,457)   (21,936)    (3,626)
  Other income (expense):
    Interest........................................        (1,629)    (5,991)    (6,478)   (13,001)   (13,420)
    Minority interests..............................          (150)      (150)      (150)      (150)      (150)
    Equity interest in net income of unconsolidated
      subsidiary....................................           880        931         --         --         --
    Non-recurring items.............................          (314)       553     (3,242)       397         97
                                                          --------   --------   ---------  --------   --------
         Total other income (expense)...............        (1,213)    (4,657)    (9,870)   (12,754)   (13,473)
                                                          --------   --------   --------   ---------  ---------
         Income (loss) before income taxes,
            extraordinary charge and
            cumulative effect of change in accounting
            principle...............................        10,126      3,669    (19,327)   (34,690)   (17,099)
  Provision (benefit) for income taxes..............         3,971      1,460     (6,940)     3,370       (309)
                                                         ---------  ---------  ---------- ---------  ----------
         Income (loss) before extraordinary charge and
            cumulative effect of change in accounting
            principle...............................         6,155      2,209    (12,387)   (38,060)   (16,790)
  Extraordinary charge from early extinguishment of
   debt, net of income tax benefit of $1,331........         2,173         --         --         --         --
  Cumulative effect of change in accounting principle,
   net of income tax benefit of $600................            --        899         --         --         --
                                                         ---------  ---------  ---------  ---------  ---------
         Net income (loss)..........................         3,982      1,310    (12,387)   (38,060)   (16,790)

  Dividends on Preferred Stock......................            --         --         --         --        888
                                                         ---------  ---------  ---------  ---------  ---------
     Net income (loss) attributable to common
      shareholders..................................      $  3,982  $   1,310  $ (12,387) $ (38,060) $ (17,678)
                                                         =========  =========  ========== ========== ==========

  Net income (loss) per share:
    Basic and Diluted...............................      $   0.21   $   0.07   $  (0.70) $   (2.12) $   (0.98)
                                                          ========   ========   ========= ========== ==========
  Weighted average number of common shares outstanding:
    Basic...........................................        18,603     18,114     17,773     17,939     18,080
                                                          ========   ========   ========   ========   ========
    Diluted.........................................        18,829     18,290     17,773     17,939     18,080
                                                          ========   ========   ========   ========   ========
</TABLE>

<TABLE>
<CAPTION>

                                                                           At December 31,
                                                        ---------------------------------------------------
                                                          1998        1999       2000       2001       2002
                                                        --------   ---------  ---------  ---------  -------
                                                        (Restated) (Restated) (Restated) (Restated)
                                                                         (Dollars in thousands)
Balance Sheet Data:
<S>                                                     <C>        <C>        <C>        <C>        <C>
  Cash and cash equivalents..........................   $  2,233   $  36,107  $  11,059  $   1,482  $    3,185
  Current assets.....................................      7,043      41,952     20,819      8,281       9,453
  Restricted cash....................................         --      41,389      6,996         --          --
  Property and equipment, net........................    135,269     118,959    169,927    170,893     156,798
  Total assets.......................................    163,757     223,553    222,000    197,208     186,554
  Deferred membership revenue........................     12,210      11,969     14,276     15,927      14,615
  Current liabilities................................     28,456      26,090     29,993     41,757      31,763
  Long-term debt including current installments......     37,441     103,887    110,331    115,491     104,040
  Stockholders' equity...............................    102,282      95,430     83,534     45,827      33,460
-----------------
</TABLE>

     The amounts for  stockholders'  equity,  current  liabilities  and deferred
membership  revenue,  have been  restated to reflect an  adjustment  to deferred
membership  revenues.  This  restatement  had  no  impact  on the  statement  of
operation data for the periods  presented.  See Note 2 of notes to  consolidated
financial statements.


                                      -12-
<PAGE>



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION    AND
RESULTS OF OPERATIONS

Overview

     The  following  discussion  and  analysis of our  financial  condition  and
results of operations is based upon our  consolidated  financial  statements and
notes thereto appearing elsewhere herein, which have been prepared in accordance
with accounting  principles  generally accepted in the United States of America.
The preparation of these financial  statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,  revenues and
expenses and related  disclosure of  contingent  assets and  liabilities.  On an
on-going basis, we evaluate our estimates, including those related to principles
of   consolidation,   revenue   recognition,   inventories,   depreciation   and
amortization,  start up costs,  impairment of long-lived  assets and  long-lived
assets to be  disposed  of,  fair value of  financial  instruments  and  segment
reporting.  We base our estimates on historical  experience and on various other
assumptions  that we  believe  to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates  under  different  assumptions or
conditions.

     The Sports  Club/LA - Rockefeller  Center,  The Sports Club/LA - Upper East
Side, The Sports Club/LA - Washington  D.C., The Sports Club/LA - Boston and The
Sports Club/LA - San Francisco opened in February 2000,  September 2000, October
2000, September 2001 and October 2001, respectively. In July 2001, we closed our
SportsMed  Agoura Hills  location and by December 31, 2001,  we had finished the
transfer of our retail  business to outside third party vendors.  On January 31,
2002, we sold The Sports Club/Las Vegas. As a result of these Club openings, the
high level of pre-opening  expenses  incurred at these new Clubs, the closing of
our SportsMed Agoura Hills location, our transfer of the retail business and the
sale of The Sports  Club/Las  Vegas,  results for the years ended  December  31,
2002,  2001 and 2000 are not indicative of expected  results in future  periods.
Neither  seasonal factors nor the relatively  moderate  inflation rate has had a
significant effect on our operating results.
Results of Operations

Fiscal 2002 compared to Fiscal 2001

     Our revenues for the year ended  December  31, 2002,  were $122.5  million,
compared  to $102.0  million in 2001,  an  increase  of $20.5  million or 20.0%.
Revenue  increased by $21.5 million,  due to the opening of The Sports Club/LA -
Boston in September of 2001 and The Sports Club/LA - San Francisco in October of
2001 and revenue  increased by $6.1 million as a result of membership  growth at
the three Sports Club/LA Clubs opened in 2000. Revenue decreased by $5.4 million
as a result of the sale of The Sports Club/Las Vegas on January 31, 2002, and by
$2.2 million due to the transfer of our retail operations to outside third party
vendors.  Revenue  increased  by  $549,000  at our  other  Sports  Clubs and our
SportsMed  subsidiary  primarily  due to an  increase  in private  training  and
monthly dues  revenues at the Sports  Clubs,  partially  offset by a decrease in
SportsMed  revenues  primarily due to the closing of The SportsMed  Agoura Hills
location.

     Our direct  expenses  increased by $13.7 million to $101.9  million for the
year ended  December 31, 2002,  versus $88.2  million in 2001.  Direct  expenses
increased by $21.2 million, due to the opening of The Sports Club/LA - Boston in
September of 2001 and The Sports  Club/LA - San Francisco in October of 2001 and
by $1.8  million as a result of an  increase  in  expenses  associated  with the
membership  growth at the three  Sports  Club/LA  Clubs  opened in 2000.  Direct
expenses  decreased by $5.4 million due to the sale of The Sports Club/Las Vegas
on  January  31,  2002,  by  $2.5  million  due to the  transfer  of our  retail
operations  to outside  third  party  vendors  and by $1.4  million at our other
Sports Clubs and our SportsMed  subsidiary primarily as a result of cost cutting
measures we implemented  at these Clubs and the closing of The SportsMed  Agoura
Hills  location.  Direct  expenses  as a percent of  revenue  for the year ended
December 31, 2002,  decreased to 83.2% from 86.5% in 2001. As membership  levels
and therefore  revenues  increase at The Sports Club/LA Clubs opened in 2000 and
2001, the direct expense  percentage

                                      -13-
<PAGE>


should continue to decrease. There is no assurance, however, that said expansion
or economies of scale will be achieved.

     Our  general and  administrative  expenses  were $7.3  million for the year
ended December 31, 2002, versus $8.9 million in 2001, a decrease of $1.6 million
or 18.5%. Our general and administrative  expenses decreased by $1.0 million due
to lower legal fees  resulting from the settlement or dismissal of certain legal
matters in which we were involved. General and administrative expenses decreased
by $1.1 million as a result of expense  cutting  measures  that have reduced our
payroll and  payroll  related  expenses.  General  and  administrative  expenses
increased  by $519,000  primarily as a result of higher  corporate  office rent,
increased  insurance  premiums and a reduction in corporate costs capitalized on
certain development and information systems projects. General and administrative
expenses  decreased  as a  percentage  of  revenue  to 5.9% for the  year  ended
December 31, 2002, from 8.8% in 2001. We believe that general and administrative
expenses  should  continue to decrease as a percentage of future  revenues as we
expand and achieve economies of scale. There is no assurance, however, that said
expansion or economies of scale will be achieved.

     Our selling  expenses  were $4.9  million for the year ended  December  31,
2002,  versus $3.9 million in 2001,  an increase of $1.0  million or 26.5%.  The
increase  in  selling  expenses  was the  result  of  expanded  advertising  and
promotion  efforts at the five Sports Club/LA Clubs opened in 2000 and 2001 with
the  majority of this  increase  attributable  to our two most  recently  opened
Clubs.  We also  placed  special  emphasis  on  membership  growth at The Sports
Club/LA - Rockefeller  Center.  Selling expenses for the year ended December 31,
2002 at these five most  recently  opened  Clubs  increased  by $1.2  million as
compared to 2001. Selling expenses decreased by $432,000 as a result of the sale
of The Sports Club/Las Vegas on January 31, 2002 and selling  expenses  declined
by $63,000  at our other  Sports  Club/LA  Clubs and our  SportsMed  subsidiary.
Selling  expenses as a  percentage  of revenue for the year ended  December  31,
2002, were 4.0% versus 3.8% in 2001.

     Our depreciation and amortization expenses stayed flat at $11.8 million for
the years  ended  December  31,  2002 and 2001.  Depreciation  and  amortization
expenses  increased by $610,000 as a result of the opening of The Sports Club/LA
- Boston in September  2001 and The Sports Club/LA - San Francisco in October of
2001 and by $709,000 at our corporate  headquarters,  primarily due to the start
of  amortization  of our  recently  installed  membership  accounting  software.
Depreciation and amortization  expenses decreased by $344,000 as a result of the
sale of The Sports  Club/Las  Vegas on January  31,  2002 and by $455,000 at our
other Sports Club/LA Clubs primarily due to assets  becoming fully  depreciated.
Depreciation  and  amortization  expense  also  decreased by $494,000 due to the
adoption of Statement  of  Financial  Accounting  Standards  No. 142,  effective
January 1, 2002, that requires  goodwill and other indefinite lived  intangibles
no longer be amortized.

     Pre-opening  expenses were  $130,000 for the year ended  December 31, 2002,
versus $5.9 million in 2001.  Pre-opening  expenses for the year ended  December
31, 2002,  consisted of legal fees  incurred  related to a possible club site on
Long Island in New York.  We have since  terminated  our  interest in this site.
Pre-opening  expenses by Club for the year ended  December 31,  2001,  were $2.6
million at The Sports Club/LA - Boston, $2.9 million at The Sports Club/LA - San
Francisco and $405,000 at the possible club site on Long Island in New York.

     We incurred  impairment charges during the year ended December 31, 2001, of
$5.3 million.  These impairment  charges consisted of a $3.3 million  impairment
charge  related to the write down of fixed assets at The Sports  Club/Las  Vegas
and a $2.0 million  impairment  charge  related to the write down of goodwill at
our SportsMed subsidiary.

     We  incurred  net  interest  expense  of $13.4  million  for the year ended
December 31, 2002,  versus $13.0 million in 2001,  an increase of $419,000.  Net
interest expense increased by $496,000 due to our discontinuance of capitalizing
interest costs on Sports Clubs under  development  after the last Sports Club/LA
Club was opened in October 2001. Net interest expense increased by $323,000, due
to a reduction in interest income earned on invested cash balances.  There was a
$162,000  decrease  in net


                                      -14-
<PAGE>


interest  expense due to reductions of equipment  financing loans and a $238,000
decrease  resulting from interest  incurred in 2001 related to a sales tax audit
at one of our Clubs.

     We recorded a  non-recurring  gain of  $97,000,  related to the sale of the
undeveloped land in Houston,  Texas during the year ended December 31, 2002. The
Houston,  Texas site was sold on August 30,  2002.  We recorded a  non-recurring
gain of $397,000 during the year ended December 31, 2001. The non-recurring gain
in 2001 was the result of the reversal of accrued  interest  expense  related to
the  settlement  of  litigation.  As part of the  settlement  we were no  longer
required to pay the accrued interest due on the note in question.

     The tax benefit recorded for the year ended December 31, 2002, is comprised
of a  $900,000  federal  income tax  refund we  received  as a result of tax law
changes  that  allowed  us to  carry-back  our  2001  loss to prior  tax  years,
partially  offset by New York State and City  income  taxes  incurred  at Reebok
Sports  Club/NY.  We did not record any deferred tax benefit related to our loss
incurred for the year ended  December  31,  2002.  After the tax benefit and the
Preferred  Stock  dividends  of  $888,000,   our  loss  attributable  to  common
shareholders  for the year ended  December 31, 2002,  was $17.7 million or $0.98
per basic and diluted share.  We did not record any deferred tax benefit related
to our loss incurred in 2001.  The income tax provision of $3.4 million for 2001
is related to the  establishment of a valuation  allowance  against our deferred
tax assets  that were  recorded  prior to January 1, 2001 and an accrual for any
current  state  income  taxes due.  After the 2001 income tax  provision of $3.4
million,  our net loss attributable to common  shareholders was $38.1 million or
$2.12 per basic and diluted  share.  We did not record any  deferred  tax assets
related to the losses incurred in 2002 and 2001 based on our analysis of current
and projected  operating  results and our  determination  that it is more likely
than not that future taxable income will be insufficient to utilize any deferred
tax assets.

Fiscal 2001 compared to fiscal 2000

     Our revenues for the year ended  December  31, 2001,  were $102.0  million,
compared  to $76.9  million  in 2000,  an  increase  of $25.1  million or 32.8%.
Revenue  increased  by $5.6  million  as a result of the  opening  of The Sports
Club/LA - Boston in  September  2001 and The Sports  Club/LA - San  Francisco in
October  2001.  Revenue  increased  by $20.2  million as a result of  membership
growth and a full twelve months of operating  activities at the three new Sports
Clubs opened in 2000. Revenue decreased by $663,000 at our existing Sports Clubs
and SportsMed subsidiary.  The revenue decrease at our existing Sports Clubs and
SportsMed was the result of a $1.0 million decrease in our retail product sales.
During  2001 we decided to exit the retail  business  and have now sublet  these
spaces to outside  operators.  We also  experienced  a decrease  in our food and
beverage  revenues due to curtailing  the restaurant  operating  hours at Reebok
Sports Club/NY. These decreases were offset by higher membership dues because of
rate  increases.  Existing  Club  revenues  also  decreased  by $381,000  due to
decreased  rent revenue  resulting from the sale of real estate in December 2000
and by $282,000 due to decreases in other miscellaneous revenues.

     Our direct operating  expenses  increased by $29.1 million to $88.2 million
in the year ended  December  31, 2001,  versus $59.1  million for the year ended
December 31, 2000. Direct operating expenses  increased by $6.5 million,  due to
the  opening  of The  Sports  Club/LA  - Boston  and The  Sports  Club/LA  - San
Francisco,  by $21.6 million as a result of membership  growth and a full twelve
months of operating  activities at the three new Sports  Club/LA Clubs opened in
2000 and by $1.0  million  at our  existing  Sports  Clubs  and  SportsMed.  The
increase in direct  expenses at our existing  Sports Clubs and SportsMed was due
to increased  payroll and payroll  related  expenses of $1.0 million,  increased
utility  expenses of  $254,000  and a decrease  in other  operating  expenses of
$263,000.  Direct operating  expenses as a percent of revenue for the year ended
December 31, 2001  increased to 86.4% from 76.9% for the year ended December 31,
2000.  The increase in the direct  operating  expense  percentage was due to the
impact of significant fixed costs at our five new Clubs opened in 2000 and 2001.

     Our  general and  administrative  expenses  were $8.9  million for the year
ended  December 31, 2001,  compared to $7.3 million for the year ended  December
31, 2000, an increase of $1.6 million or 22.5%.  Our general and  administrative
costs increased by $1.0 million due to increased  legal fees incurred  regarding
various   legal   matters  we  were   involved  in  during  2001.   General  and
administrative  costs

                                      -15-
<PAGE>


increased by $1.4 million due to a decrease in support service reimbursements we
received in 2000 for  managing the Spectrum  Clubs and lower  capitalization  of
salaries and wages on Clubs under development.  General and administrative costs
decreased by $556,000 due to a decrease in corporate office salaries and payroll
related  costs and by $254,000  due to a decrease in travel  costs.  General and
administrative  costs  increased by $238,000 due to an increase in our corporate
office rent and decreased by $183,000 primarily due to decreases in our supplies
and outside  service  costs.  General and  administrative  costs  decreased as a
percentage of revenue to 8.8% in 2001 from 9.5% in 2000.

     Our selling  costs were $3.9  million in the year ended  December 31, 2001,
compared to $2.9 million in the year ended  December  31,  2000,  an increase of
$1.0 million or 33.1%. The increase in selling costs was the result of increased
advertising and promotion efforts at the five new Clubs opened in 2000 and 2001.
Selling costs as a percentage of revenue stayed flat at 3.8% in 2000 and 2001.

     Our depreciation and amortization  expenses were $11.8 million for the year
ended  December  31, 2001,  versus $7.4 million for the year ended  December 31,
2000.  Depreciation  and  amortization  increased by $3.5 million,  at the three
Sports Clubs opened in 2000,  primarily due to a full twelve months of operating
activity at these new Clubs in 2001.  Depreciation and amortization increased by
$276,000  as a result of the  opening  of The  Sports  Club/LA - Boston  and The
Sports  Club/LA - San Francisco in 2001.  Depreciation  increased by $209,000 at
our existing Sports Clubs and SportsMed as a result of capital additions made at
these  facilities  in  2000  and  2001  and by  $458,000  due to  the  start  of
depreciation related to our recently installed membership accounting software.

     Pre-opening  expenses  were $5.9  million for the year ended  December  31,
2001,  versus $9.6 million for the year ended  December  31,  2000.  Pre-opening
expenses by Club during the year ended  December  31, 2001 were $2.9  million at
The Sports Club/LA - San Francisco,  $2.6 million at The Sports Club/LA - Boston
and  $400,000  related  to a  potential  Club  site on Long  Island in New York.
Pre-opening  expenses by Club during the year ended  December 31, 2000 were $3.6
million at The Sports  Club/LA - Upper  East  Side,  $3.2  million at The Sports
Club/LA -  Washington  D.C.,  $1.8 million at The Sports  Club/LA -  Rockefeller
Center,  $725,000 at The Sports Club/LA - Boston, $155,000 at The Sports Club/LA
-  San   Francisco  and  $125,000  at  other   possible   Sports  Clubs  in  the
pre-development stage.

     We  incurred  impairment  charges in 2001 of $5.3  million.  These  charges
consisted of a $3.3 million impairment charge related to the write down of fixed
assets at The Sports Club/Las Vegas and a $2.0 million impairment charge related
to the write down of goodwill at our SportsMed subsidiary.

     We  incurred  net  interest  expense  of $13.0  million  in the year  ended
December 31, 2001,  versus $6.5 million in the year ended  December 31, 2000, an
increase of $6.5 million.  Net interest expense increased by $3.3 million due to
a reduction in interest  capitalized on Sports Clubs under development,  by $2.3
million due to a reduction  in interest  earned on invested  cash  balances,  by
$362,000 due to increased interest expense on new equipment  financing loans, by
$254,000 due to interest  expense  incurred on prior years' sales tax audits and
by $279,000 due to increased  interest  expense  related to advances on our bank
credit facility.

     We had  non-recurring  income of  $397,000 in the year ended  December  31,
2001, versus  non-recurring  charges of $3.2 million for the year ended December
31,  2000.  The  non-recurring  income in 2001 is the result of the  reversal of
accrued interest expense related to the settlement of litigation. As part of the
settlement we are no longer required to pay the accrued interest due on the note
payable in  question.  The  non-recurring  charges in 2000  consisted  of a $1.5
million  charge for  attorney's  fees and  settlement  costs  related to a class
action lawsuit  against The Sports Club/LA - Los Angeles,  a $1.0 million charge
to reflect the loss on the sale of real estate in  Fountain  Valley,  California
and a $749,000 charge to adjust the carrying value of our real estate located in
Houston, Texas.

     We did not to record  any  income  tax  benefit  in 2001.  The  income  tax
provision of $3.4 million in 2001 is related to the establishment of a valuation
allowance against our deferred tax assets that were recorded prior to January 1,
2001 and an accrual  for any  current  state  income  taxes due.  After the 2001
income tax  provision of $3.4  million,  our net loss was $38.1 million or $2.12
per basic and diluted share.



                                      -16-
<PAGE>


Our  effective  federal  and state  income tax rate was 35.9% for the year ended
December 31,  2000,  resulting in a net tax benefit of $6.9 million and in a net
loss of $12.4  million  or $0.70 per  basic and  diluted  share.  In the  fourth
quarter of 2001, we determined,  based on projections  for the next three years,
that it is more likely than not that future taxable income will be  insufficient
to utilize our deferred tax assets. As a result of this determination, we ceased
recording  any  deferred tax benefit  related to our taxable  losses and, in the
fourth  quarter of 2001,  we recorded a valuation  allowance of $18.2 million to
offset our net deferred tax assets.

Liquidity and Capital Resources

Capital Requirements - Existing Operation

     On April 1, 1999,  we issued in a private  placement  $100.0  million of 11
3/8% Senior Secured Notes (the "Senior  Secured  Notes") due in March 2006, with
interest due semi-annually. The Senior Secured Notes were issued pursuant to the
terms of an  indenture  agreement  dated  April 1, 1999 (the  "Indenture").  The
Senior Secured Notes are secured by substantially all of our assets,  other than
certain excluded assets.  The Indenture includes certain covenants that restrict
our ability to: (i) incur additional  indebtedness;  (ii) pay dividends or other
distributions,  or  repurchase  capital  stock  or  other  equity  interests  or
subordinated  indebtedness;  and (iii) make certain  investments.  The Indenture
also limits our ability to: (i) enter into  transactions  with affiliates;  (ii)
create  liens on or sell  certain  assets;  and (iii)  enter  into  mergers  and
consolidations.  The Indenture requires us to make semi-annual interest payments
of $5.7 million on March 15th and September 15th of each year.

     We incur capital  expenditures for normal  replacement of fitness equipment
and updating Clubs. Our Clubs are upscale and capital improvements are regularly
needed  to  retain  the  upscale  nature  and   presentation  of  the  Clubs.  A
deterioration  of the quality of the Clubs can lead to reduction  in  membership
levels and lower revenues. We estimate that expenditures of between 3% and 4% of
revenues,  depending  on the age of the Club,  will be necessary to maintain the
quality of the Clubs to our satisfaction.  We also expect to spend approximately
$700,000 during the next year to upgrade our management  information systems and
enhance our disaster recovery capabilities.

     All our mature  Sports Clubs  (Clubs open at least three  years)  currently
generate  positive  cash flow from  operations.  Newly  developed  Clubs tend to
achieve  significant  increases in revenues until a mature  membership  level is
reached.  In the past,  recently  opened Clubs that have not yet achieved mature
membership levels have operated at a loss or at only a slight profit as a result
of fixed expenses that, together with variable operating  expenses,  approximate
or exceed  membership  fees and other  revenue.  The time  period  necessary  to
achieve  positive cash flows is dependent upon the membership  levels and amount
of fixed costs.  Historically,  it may take two years before a new Club achieves
positive cash flow from operations. Three of our new Clubs now generate positive
cash  flows  while two of the new Clubs  require  cash to fund  their  operating
activities.  Our  consolidated  cash flows from  operations for each of the last
three years were  negative.  We expect  this trend to  continue  until the newly
opened Clubs generate  sufficient  positive cash flows.  Our ability to generate
positive  cash flow from  operating  activities  is  dependent  upon  increasing
membership  levels at these Clubs and we cannot offer any assurance that we will
be successful in these efforts.

     At  December  31,  2002,  we had  $4.0  million  of  outstanding  equipment
financing loans. We make monthly  principal and interest  payments on this debt.
These  monthly  payments are  currently  $203,000 and they will  continue  until
December 2004, when a significant portion of the debt will be repaid.

     The Indenture  requires us to make an offer to retire Senior  Secured Notes
if the net proceeds of any asset sale are not  reinvested  in assets  related to
our business,  unless the remaining net proceeds are less than $10.0 million. To
the extent we sell assets, such as The Sports Club/Las Vegas and our real estate
in  Houston,  the  proceeds  from  those  sales  would be  subject to the excess
proceeds provision of the Indenture.  We were not required to make such an offer
as a result of the sale of The Sports  Club/Las Vegas or the Houston real estate
because the net proceeds were below the $10.0 million level.

                                      -17-
<PAGE>


     Other than our normal operating  activities and capital  expenditures,  our
total cash  requirements for our existing  operations  through December 31, 2003
are estimated to be as follows (amounts in thousands):

 Indenture interest..................................... $           11,375
 Information system upgrades............................                700
 Payments on long-term debt.............................              2,158
                                                         ------------------
                                                         $           14,233
                                                         ==================

Contractual Obligations

     The following  schedule  lists known  contractual  obligations  (amounts in
thousands):

<TABLE>
<CAPTION>
                                                                  Payments Due By Period

                                                         Less Than                                         More than
      Contractual Obligations             Total           1 Year          1-3 Years       3-5 Years         5 years
      -----------------------             -----           ------          ---------       ---------        ---------



<S>                                  <C>           <C>              <C>             <C>              <C>
Senior secured notes (1)........     $    100,000  $           --   $           --  $      100,000   $          --
Equipment financing loans (2)...            4,040           2,158            1,882              --              --
Operating leases (3)............          359,990          22,820           45,171          44,762         247,237
Minority interest (4)...........              600              --               --              --             600
Redeemable Preferred Stock (5)..               --  .........   --               --              --          10,500

                                        ----------    ------------     ------------    ------------     -----------
Total                                $    464,630  $       24,978   $       47,053  $      144,762   $     258,337
                                        ==========    ============     ============    ============     ===========
</TABLE>

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

(1) On April 1, 1999, we issued in a private placement $100.0 million of 11 3/8%
Senior Secured Notes due in March 2006 with interest due semi-annually.

(2) The  equipment  financing  loans are  secured  by  furniture,  fixtures  and
equipment.  The amounts are generally repayable in monthly payments over four or
five years with effective interest rates between 8.5% and 10.5%.

(3) We lease certain facilities  pursuant to various operating lease agreements.
Club facility leases are generally long-term and noncancelable triple-net leases
(requiring us to pay all real estate taxes, insurance and maintenance expenses),
and have an average  remaining term of 44.17 years,  including  renewal  options
which are  included  in the lease  term,  with the  earliest  Sports  Club lease
expiration  date  of  January  31,  2013.  We are  also  obligated  under  lease
agreements for seven of our former  Spectrum Club  locations.  We have subleased
each of these  properties to the buyer of these Clubs under sublease  agreements
which provide that all operating costs of these facilities be assumed by the new
owners.

(4) We own a 50.1%  interest in the  partnership  that owns The Sports Club/LA -
Los Angeles,  and D. Michael Talla, our Co-CEO,  beneficially owns the remaining
49.9%.  Under certain  circumstances,  we have an option to purchase Mr. Talla's
interest  in the  partnership  for  $600,000.  We have not  included  the annual
minority interest payment of $149,700 to Mr. Talla in the above table.

(5) On March 18, 2002,  the Company  issued  10,500 shares of Series B Preferred
Stock. The stock is redeemable by the stockholders on March 18, 2009.

Capital Requirements - New Clubs

     On April  22,  2002,  we signed a lease to  develop  The  Sports  Club/LA -
Beverly Hills. The new Sports Club/LA, which will be approximately 40,000 square
feet,  will be located at 9601  Wilshire  Boulevard  in the heart of the Beverly
Hill's retail and commercial district. Anticipated development costs and working
capital  requirements  are  approximately  $9.0  million.  Due  to  our  limited
financial  resources,   we  are  seeking  development  partners  or  alternative
financing  (subject  to the  restrictions  in the  Indenture)  to  finance  this
project.  We view the Beverly  Hills  market as an  excellent  location  for The
Sports  Club/LA  brand and this Club may serve as a prototype  for smaller sized
Clubs to be built in locations near existing Sports Club/LA sites.

                                      -18-
<PAGE>


Cash and Credit Availability

     Our December 31, 2002 cash balance was $3.2 million.

     On November 8, 2002,  we amended our Loan  Agreement  with  Comerica Bank -
California  effective as of October 31, 2002. The amended  agreement extends the
maturity date of our credit facility until November 1, 2003. The credit facility
bears  interest at a variable rate of LIBOR plus 2 1/4% or the Bank's prime rate
(4 1/4% at December 31, 2002). The loans are secured by all the assets of The
Sports Club/Irvine and are guaranteed by three of our major stockholders.

     The loan  agreement  amendment  added  KASCY,  L.P.,  an affiliate of Kayne
Anderson Capital Advisors, L.P. as a lending participant in the credit facility.
Kayne Anderson Capital  Advisors,  L.P. and certain of its affiliates own all of
our Series B Redeemable  Preferred  Stock.  The credit  facility  increases from
$10.0 million to $15.0 million once KASCY,  L.P.  satisfies  certain  regulatory
requirements.

     At December 31, 2002, no cash advances were  outstanding  under this credit
facility and $5.2 million was utilized in the form of letters of credit, leaving
$4.8 million available for future borrowings. An additional $5.0 million will be
available  for future  borrowing  once KASCY,  L.P.  becomes duly  licensed as a
lender and the credit line increases to $15.0 million.  At December 31, 2002, we
were  not in  compliance  with  one of the  covenants  required  under  our loan
agreement. Comerica Bank - California has waived this default. The Bank's waiver
only covered the quarter ended December 31, 2002 and therefore it is likely that
we may incur a similar default for the various  reporting  quarters during 2003.
If this  occurs,  the Bank  will  have the  option  of  terminating  the  credit
agreement or continuing to waive any new defaults.  If the Bank  terminates  the
credit  agreement  two of our major  shareholders,  who now  guarantee  the bank
credit line, have committed to providing us with sufficient financial support to
continue our operations.

     During 2002 our  operating  activities  generated  $7.5 million and we made
interest payments of $11.9 million resulting in a net use of cash from operating
activities  of $4.4 million.  We believe we will  continue to generate  positive
cash flow from operations, before pre-opening expenses, capital expenditures and
debt  service and that such amount  will  increase as our new Clubs  continue to
mature.

     The Indenture allows us to incur up to $10.0 million of equipment financing
obligations.  At December 31, 2002,  we had $4.0 million of equipment  financing
obligations  outstanding  and would be allowed to  finance  an  additional  $6.0
million with our equipment serving as collateral. Recently we have not been able
to find lenders who would finance our new equipment purchases.

Summary

     During the year ended  December  31,  2002 we  improved  our  liquidity  by
completing $15.5 million in Preferred Stock issuances and completing the sale of
our assets in Las Vegas, Nevada and Houston, Texas. These transactions generated
$24.1 million of cash. We have also  recently  renewed our bank credit  facility
and as of December 31, 2002, have $4.8 million available for borrowing under the
agreement.  We expect to soon increase our bank credit  availability  by another
$5.0 million.

     In our  opinion,  our current  cash  balance at December  31, 2002 plus our
available credit under our Bank credit facility (which we expect to refinance or
extend  beyond the current  maturity date of November 1, 2003) and our projected
cash flows before  capital  expenditures  and debt  service are  estimated to be
adequate to cover our debt service and projected  on-going capital  expenditures
for the twelve months ending December 31, 2003.

     If our projected cash flows before capital expenditures and debt service do
not meet our  estimates or our available  credit under our Bank credit  facility
decreases or becomes unavailable, we may need to sell additional assets or offer
additional  equity  securities to meet our cash flow needs through  December 31,
2003.  There  can be no  assurance  that we  would be able  raise to  additional
capital  by  selling   additional  assets  or  by  offering   additional  equity
securities. However, two of our major shareholders, who now guarantee


                                      -19-
<PAGE>

the bank credit line, have committed to providing us with  sufficient  financial
support to continue our operations. In order to continue to service our interest
obligations  after December 31, 2003 we will need to increase our operating cash
flows above the current levels or secure additional capital.

     Due to our limited financial  resources,  additional funds will be required
to undertake any future acquisitions or the development of additional new Clubs,
including The Sports  Club/LA-Beverly  Hills.  We would  consider  entering into
joint ventures,  partnership agreements or management agreements (subject to the
restrictions  and  limitations  on such  transactions  in the Indenture) for the
purpose of developing new Clubs,  but only if such  arrangements  would generate
additional  cash flow or further  enhance The Sports  Club/LA  brand name in the
market place.  To the extent that adequate  resources are not available we would
delay development of The Sports Club/LA - Beverly Hills.

Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles  generally  accepted in the United  States of America  requires us to
make estimates and  assumptions  that affect the reported  amounts of the assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the financial  statements  and the reported  amounts of revenues and expenses
during the  reporting  period.  We base these  estimates  and  assumptions  upon
historical  experience  and existing known  circumstances.  Actual results could
differ  from  those  estimates.  Specifically,  we must  make  estimates  in the
following areas:

     Revenue Recognition. We receive initiation fees and monthly membership dues
from our  members.  Substantially  all of our members  join on a  month-to-month
basis and can therefore cancel their membership at any time. Initiation fees and
related  direct  expenses,   primarily  sales  commissions,   are  deferred  and
recognized,  on a straight line basis,  over a period of three years.  Dues that
are received in advance are recognized on a pro-rated  basis over the periods in
which services are to be provided. Reserves are recorded against the receivables
of our SportsMed subsidiary at the time the services are provided.

     Allowance  for  doubtful  accounts.   We  provide  a  reserve  against  our
receivables for estimated  losses that may result from our customers'  inability
to pay. We determine the amount of the reserve by analyzing known  uncollectible
accounts,   economic   conditions  and  historical  losses  and  our  customers'
creditworthiness.  The  likelihood  of a material loss from this area is minimal
due to our limited exposure to credit risk.

     Valuation of long-lived  assets.  We periodically  assess the impairment of
our  long-lived  assets  which  require  us to make  assumptions  and  judgments
regarding the carrying  value of these assets.  The assets are  considered to be
impaired if we determine that the carrying  value may not be  recoverable  based
upon our assessment of the following events or changes in circumstances:

(a)  A significant  decrease in the market price of a long-lived  asset or asset
     group,

(b)  A significant  adverse change in the extent or manner in which a long-lived
     asset or asset group is being used or in its physical condition,

(c)  A significant  adverse  change in legal factors or in the business  climate
     that could affect the value of a long-lived asset or asset group, including
     an adverse action or assessment by a regulator,

(d)  An accumulation of costs  significantly in excess of the amount  originally
     expected for the acquisition or construction of a long-lived asset or asset
     group,

(e)  A  current-period  operating or cash flow loss  combined  with a history of
     operating or cash flow losses or a projection or forecast that demonstrates
     continuing  losses  associated with the use of a long-lived  asset or asset
     group, or

                                      -20-
<PAGE>


(f)  A current  expectation  that,  more likely than not, a long-lived  asset or
     asset group will be sold or otherwise disposed of significantly  before the
     end of its previously estimated useful life.

     If the  projected  cash flows to be generated by  long-lived  assets do not
exceed the carrying value of the long-lived assets the long-lived asset would be
considered to be impaired.  The  impairment we would  recognize is the amount by
which the carrying value of the assets exceeds the fair value of the assets.  In
addition,  we base the useful  lives and related  amortization  or  depreciation
expense on our estimate of the period that the assets will generate  revenues or
otherwise be used by us. If a change were to occur in any of the above mentioned
factors  or  estimates,  the  likelihood  of a material  change in our  reported
results would increase.

     Valuation of  goodwill.  Prior to January 1, 2002,  we amortized  goodwill,
which  represents the excess of the purchase price over the net assets  acquired
in business  acquisitions,  over 40 years.  In January 2002, we adopted SFAS No.
142,  "Goodwill  and Other  Intangible  Assets,"  and as a result have ceased to
amortize  goodwill.   Instead,  we  were  required  to  perform  a  transitional
impairment review of our goodwill as of January 1, 2002. We evaluated the impact
of the adoption of SFAS No. 142 and  determined  that no  impairment  charge was
required  upon  adoption of this  standard.  The  impairment  test was performed
through  comparison  of our  fair  value  (determined  primarily  by our  market
capitalization)  with the net carrying value of our assets. We are also required
to  evaluate  goodwill  on an annual  basis.  We  performed  the  analysis as of
December 31, 2002 and determined that no impairment was necessary.

     Litigation reserves. In the ordinary course of business, we are involved in
a variety of legal  matters.  We record  contingent  liabilities  resulting from
claims against us when it is probable that a liability has been incurred and the
amount of the loss is reasonably estimable.  We disclose contingent  liabilities
when there is a reasonable  possibility  that the ultimate  loss will exceed the
recorded  liability.  Estimating  probable losses requires  analysis of multiple
factors,  in some cases including  judgment about the potential actions of third
party  claimants and courts.  Therefore,  actual losses in any future period are
inherently uncertain. Currently, we do not believe that any of our pending legal
proceedings  or claims will have a material  impact on our  financial  position,
cash flows or results of operations.  However,  if actual or estimated  probable
future  losses exceed our recorded  liability  for such claims,  we would record
additional  charges  during  the  period in which the  actual  loss or change in
estimate occurred.

     Valuation of deferred income taxes. Valuation allowances are established to
reduce deferred tax assets to the amount expected to be realized. The likelihood
of material change in our expected realization of these assets depends on future
taxable  income,  our ability to deduct tax loss carry  forwards  against future
taxable income,  the  effectiveness of our tax planning and strategies among the
various tax jurisdictions in which we operate and any significant changes in the
tax laws.

     Off-balance  sheet  transactions.  We have not entered into any off-balance
sheet transactions.

Forward Looking Statements

     From time to time we make  "forward-looking  statements" within the meaning
of Section 27A of the  Securities  Act of 1933 and Section 21E of the Securities
Exchange  Act of 1934.  Forward-looking  statements  include  the  words  "may,"
"will,"  "estimate,"  "continue,"  "believe," "expect" or "anticipate" and other
similar words. The forward-looking  statements  generally appear in the material
set forth under the heading  "Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations"  but may be found in other  locations  as
well.  Forward-looking  statements  may also be found in our other reports filed
with the Securities and Exchange  Commission and in our press releases and other
public disclosures.  These  forward-looking  statements  generally relate to our
plans and  objectives  for future  operations  and are based  upon  managements'
reasonable  estimates of future results or trends.  Although we believe that our
plans  and  objectives   reflected  in  or  suggested  by  such  forward-looking
statements are reasonable,  such plans or objectives may not be achieved. Actual
results  may differ  from  projected  results  due to  unforeseen  developments,
including developments relating to the following:

                                      -21-
<PAGE>


o    the availability and adequacy of our cash flow and financing facilities for
     our requirements, including payment of the Senior Secured Notes,

o    our ability to attract and retain  members,  which depends on  competition,
     market  acceptance  of new  and  existing  sports  and  fitness  clubs  and
     services,  demand  for sports  and  fitness  club  services  generally  and
     competitive pricing trends in the sports and fitness market,

o    our ability to successfully develop new sports and fitness clubs,

o    disputes  or other  problems  arising  with  our  development  partners  or
     landlords,

o    changes in economic,  competitive,  demographic and other conditions in the
     geographic  areas in which we  operate,  including  business  interruptions
     resulting from earthquakes or other causes,

o    competition,

o    changes in personnel or compensation, and

o    changes in statutes and regulations or legal proceedings and rulings.

     We will not update forward-looking statements even though our situation may
change in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our bank credit  facility has a variable  interest rate.  Accordingly,  our
interest  expense could be  materially  affected by future  fluctuations  in the
applicable  interest  rate.  At  December  31,  2002,  we had no  cash  advances
outstanding  under the credit facility and $5.2 million was utilized in the form
of outstanding letters of credit.

     We are also  exposed to risk from a change in interest  rates to the extent
we are required to refinance  existing fixed rate  indebtedness  at rates higher
than those prevailing at the time the existing  indebtedness was incurred. As of
December 31, 2002, we had Senior  Secured Notes  totaling  $100.0 million due in
March 2006 bearing an interest rate of 11.375%. Annual interest of $11.4 million
is payable semi-annually in March and September.  At December 31, 2002, the fair
value of the Senior Secured Notes is  approximately  $90.0 million.  A change in
interest  rates of 1% would impact our interest  expense by  approximately  $1.0
million per year.



                                      -22-
<PAGE>



ITEM  8.  FINANCIAL STATEMENTS

Index to Consolidated Financial Statements
                                                                          PAGE

Independent Auditors' Report.............................................  F-1

Consolidated Balance Sheets as of December 31, 2001 and 2002.............  F-2

Consolidated Statements of Operations for each of the Years in the
Three-Year Period ended December 31, 2002................................  F-3

Consolidated Statements of Stockholders' Equity for each of the
Years in the Three-Year Period ended December 31, 2002...................  F-4

Consolidated Statements of Cash Flows for each of the Years in the
Three-Year Period ended December 31, 2002................................  F-5

Notes to Consolidated Financial Statements...............................  F-6

                    Consolidated Financial Statement Schedule


Valuation and Qualifying Accounts......................................... F-23


     All other  schedules  are omitted  because they are not  applicable  or the
required information is shown in our consolidated  financial statements or notes
thereto.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURES

     Not applicable


                                      -23-
<PAGE>





                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
The Sports Club Company, Inc.:

     We have audited the accompanying  consolidated  financial statements of The
Sports  Club  Company,  Inc.  and  subsidiaries  (the  Company) as listed in the
accompanying index. In connection with our audits of the consolidated  financial
statements,  we have also audited the financial  statement schedule as listed in
the accompanying  index. These consolidated  financial  statements and financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and financial statement schedule based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial position of The Sports
Club Company,  Inc. and  subsidiaries  as of December 31, 2001 and 2002, and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2002,  in  conformity  with  accounting
principles  generally  accepted in the United  States of America.  Also,  in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  consolidated  financial  statements  taken as a  whole,  presents
fairly, in all material respects, the information set forth therein.

     As  discussed  in  Note 2 to the  consolidated  financial  statements,  the
Company has restated its 2001 balance sheet and adjusted its accumulated deficit
as of January 1, 2000 and December 31, 2000 to properly record certain  deferred
membership revenues.

     As discussed in Note 3 to the consolidated financial statements,  effective
January 1, 2002,  the Company  adopted the  provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.

KPMG LLP


Los Angeles, California
February 21, 2003



                                      F-1
<PAGE>


                          THE SPORTS CLUB COMPANY, INC.
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2001 and 2002
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>

                                     ASSETS
                                                                                               2001          2002
                                                                                               ----          ----
Current assets:                                                                             (Restated)
<S>                                                                                         <C>          <C>
    Cash and cash equivalents..........................................................     $     1,482  $     3,185
    Accounts receivable, net of allowance for doubtful accounts of $318 and $534 at
      December 31, 2001 and 2002, respectively.........................................           4,840        3,951
    Inventories........................................................................           1,225        1,169
    Other current assets...............................................................             734        1,148
                                                                                            -----------  -----------
         Total current assets..........................................................           8,281        9,453

Property and equipment, net............................................................         170,893      156,798
Goodwill, less accumulated amortization of
    $2,531 at December 31, 2001 and 2002...............................................          12,794       12,794
Other assets...........................................................................           5,240        7,509
                                                                                            -----------  -----------
                                                                                            $   197,208  $   186,554
                                                                                            ===========  ===========
</TABLE>

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S>                                                                                         <C>          <C>
    Current installments of notes payable and equipment financing loans................     $    11,449  $     2,158
    Accounts payable                                                                              3,028        2,545
    Accrued liabilities                                                                          11,353       12,445
    Deferred membership revenues                                                                 15,927       14,615
                                                                                            -----------  -----------
         Total current liabilities.....................................................          41,757       31,763

Notes payable and equipment financing loans, less current installments.................         104,042      101,882
Deferred lease obligations                                                                        4,982        8,122
Minority interest                                                                                   600          600
                                                                                            -----------  -----------
         Total liabilities                                                                      151,381      142,367

Commitments and contingencies

Redeemable Preferred Stock, $.01 par value, 10,500 shares authorized; 10,500
      shares issued and outstanding at December 31, 2002 (liquidation
      preference of $11,248 at December 31, 2002)......................................             --        10,727

Stockholders' equity:
    Preferred Stock, $.01 par value, 1,000,000 shares and 984,500 shares
        authorized at December 31, 2001 and 2002, respectively;
        no shares issued or outstanding................................................              --           --
    Preferred Stock, $.01 par value, 5,000 shares authorized; 5,000 shares issued and
        outstanding at December 31, 2002 (liquidation preference of $5,140
        at December 31, 2002)                                                                        --        5,000
    Common Stock, $.01 par value, 40,000,000 shares authorized;
        21,060,717 and 21,068,717 shares issued at
        December 31, 2001 and 2002, respectively.......................................             211          211
    Additional paid-in capital                                                                  102,764      101,961
    Accumulated deficit                                                                        (41,738)      (58,528)
    Treasury Stock, at cost, 3,045,360 and 2,964,764 shares at
      December 31, 2001 and 2002, respectively.........................................        (15,410)      (15,184)
                                                                                            -----------  ------------
         Net stockholders' equity                                                                45,827       33,460
                                                                                            -----------  -----------
                                                                                            $   197,208  $   186,554
                                                                                            ===========  ===========

          See accompanying notes to consolidated financial statements.

</TABLE>
                                       F-2
<PAGE>


                          THE SPORTS CLUB COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    Three-Year Period ended December 31, 2002
                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                 2000           2001           2002
                                                                                 ----           ----           ----
<S>                                                                          <C>            <C>            <C>
Revenues................................................................     $   76,869     $  102,044     $    122,488

Operating expenses:
    Direct..............................................................         59,116         88,219          101,957
    General and administrative..........................................          7,298          8,938            7,285
    Selling.............................................................          2,915          3,880            4,907
    Depreciation and amortization.......................................          7,408         11,809           11,835
    Pre-opening expenses................................................          9,589          5,884              130
    Impairment charges..................................................             --          5,250               --
                                                                             ----------     ----------     ------------
         Total operating expenses.......................................         86,326        123,980          126,114
                                                                             ----------     ----------     ------------
           Income (loss) from operations................................         (9,457)       (21,936)          (3,626)

Other income (expense):
    Interest, net.......................................................         (6,478)       (13,001)         (13,420)
    Minority interests..................................................           (150)          (150)            (150)
    Non-recurring items.................................................         (3,242)           397               97
                                                                             -----------    ----------     ------------

           Income (loss) before income taxes............................        (19,327)      (34,690)          (17,099)
Provision (benefit) for income taxes....................................         (6,940)         3,370             (309)
                                                                             -----------    ----------     -------------

           Net income (loss)............................................        (12,387)      (38,060)          (16,790)

Dividends on Preferred Stock............................................             --             --              888
                                                                             ----------     ----------     ------------

           Net income (loss) attributable to common shareholders........     $  (12,387)    $  (38,060)    $    (17,678)
                                                                             ===========    ===========    =============

Net income (loss) per share:
    Basic and diluted...................................................     $    (0.70)    $    (2.12)    $      (0.98)
                                                                             ===========    ===========    =============

Weighted average number of common shares outstanding:
    Basic and diluted...................................................         17,773         17,939           18,080
                                                                             ==========     ==========     ============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                          THE SPORTS CLUB COMPANY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    Three-Year Period ended December 31, 2002
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                                      Retained
                                                                                         Additional   Earnings
                                                  Preferred Stock       Common Stock      Paid-in     (Accum.)     Treasury Stock
                                                  Shares    Amount    Shares    Amount    Capital    (Deficit)    Shares    Amount
                                                  --------- ------    ----------------   ---------   ----------   ----------------
<S>                                              <C>       <C>       <C>       <C>       <C>         <C>           <C>     <C>
Balance, January 1, 2000, as previously reported.     --        --    20,907   $   209   $ 102,403   $  10,966      3,195  $(15,891)
     Adjustment (Note 2).........................     --        --        --        --          --      (2,257)        --        --
                                                  ------   -------   -------   -------   ---------   ----------  --------  --------
Balance, January 1, 2000, as restated                 --        --    20,907       209     102,403       8,709      3,195   (15,891)
     Net loss....................................     --        --        --        --          --     (12,387)        --        --
     Reissuance of Treasury Stock
       for employee stock plans..................     --        --        --        --          --          --       (39)       149
     Exercise of employee stock options..........     --        --        25        --          61          --         --        --
     Issuance of Common Stock to outside directors    --        --         6        --          20          --         --        --
     Issuance of Common Stock for 1997
       business acquisition......................     --        --       115         2         259          --         --        --
                                                  ------   -------   -------   -------   ---------   ---------   --------  --------
Balance, December 31, 2000, as restated..........     --        --    21,053       211     102,743      (3,678)     3,156   (15,742)
     Net loss....................................     --        --        --        --          --     (38,060)        --        --
     Reissuance of Treasury Stock
       for employee stock plans..................     --        --        --        --          --          --       (65)       181
     Reissuance of Treasury Stock
       for loan guarantee fee....................     --        --        --        --          --          --       (46)       151
     Exercise of employee stock options..........     --        --         2        --           5          --         --        --
     Issuance of Common Stock to outside directors    --        --         6        --          16          --         --        --
                                                  ------   -------   -------   -------   ---------   ---------   --------  --------
Balance, December 31, 2001, as restated..........     --        --    21,061       211     102,764     (41,738)     3,045   (15,410)
     Net loss....................................     --        --        --        --          --     (16,790)        --        --
     Issuance of series C Preferred Stock........      5     5,000        --        --          --           --        --        --
     Issuance of Common Stock to outside directors    --        --         8        --          15           --        --        --
     Reissuance of Treasury Stock for employee
      stock plans................................     --        --        --        --          --           --       (80)      226
     Accretion of dividends on series B Preferred
      Stock......................................     --        --        --        --        (748)          --        --        --
     Accretion of issuance costs on series B
      Preferred Stock...........................      --        --        --        --         (70)          --        --        --
                                                  ------   -------   -------   -------   ----------  ----------  --------  --------
Balance, December 31, 2002.......................      5   $ 5,000    21,069   $   211   $ 101,961   $ (58,528)     2,965  $(15,184)
                                                  ======   =======   =======   =======   =========   ==========  ========  =========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                          THE SPORTS CLUB COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    Three-year Period ended December 31, 2002
                                 (in thousands)
<TABLE>
                                                                                 2000         2001        2002
                                                                                 ----         ----        ----
Cash flows from operating activities:
<S>                                                                          <C>           <C>         <C>
    Net income (loss)....................................................    $(12,387)     $(38,060)   $ (16,790)
    Adjustments to reconcile net income (loss) to cash provided from
    (used in) operations:
         (Gain) loss on disposition of real estate.......................       1,766           282         (97)
         Impairment charges..............................................          --         5,250           --
         Depreciation and amortization...................................       7,408        11,809       11,835
         Deferred taxes..................................................      (2,526)        2,526           --
         (Increase) decrease in:
             Accounts receivable, net....................................      (1,476)       (1,215)         725
             Inventories.................................................      (1,499)        1,629          (50)
             Other current assets........................................      (1,088)        2,547         (439)
             Other assets, net...........................................      (1,854)        1,164       (2,283)
         Increase (decrease) in:
             Accounts payable............................................        (126)        1,102         (233)
             Accrued liabilities.........................................         946         2,652          790
             Deferred membership revenues................................       2,307         1,651         (986)
             Deferred lease obligations..................................       1,015         2,698        3,140
                                                                             --------      --------    ---------
             Net cash (used in) operations...............................      (7,514)       (5,965)      (4,388)

Cash flows provided from (used in) investing activities:
    Capital expenditures.................................................     (62,173)      (16,122)      (6,653)
    Distributions from unconsolidated subsidiary.........................          --            32           --
    Decrease in due from affiliates......................................         148            --           --
    Decrease in restricted cash..........................................      34,393         6,996           --
    Proceeds from sale of Spectrum Clubs.................................       3,593            --           --
    Proceeds from sale of The Sports Club/Las Vegas - net of costs.......          --            --        6,154
    Proceeds from sale of Houston real estate - net of costs.............          --            --        3,133
                                                                             --------      --------    ---------
             Net cash provided from (used in) investing activities.......     (24,039)       (9,094)       2,634

Cash flows provided from (used in) financing activities:
    Proceeds from issuance of Preferred Stock - net of costs.............          --            --       14,908
    Exercise of employee stock options...................................          61             5           --
    Proceeds from notes payable and equipment financing loans............       7,681        24,588       21,725
    Repayments of notes payable and equipment financing loans............      (1,237)      (19,111)     (33,176)
                                                                             ---------     ---------   ----------
             Net cash provided from financing activities.................       6,505         5,482        3,457
                                                                             --------      --------    ---------
             Net increase (decrease) in cash and cash equivalents.......      (25,048)       (9,577)       1,703
Cash and cash equivalents at beginning of year...........................      36,107        11,059        1,482
                                                                             --------      --------    ---------
Cash and cash equivalents at end of year.................................    $ 11,059      $  1,482    $   3,185
                                                                             ========      ========    =========

Supplemental disclosure of cash flow information:
    Cash paid during the year for interest...............................    $ 11,605      $ 12,118    $  11,902
                                                                             ========      ========    =========
    Cash paid during the year for income taxes...........................    $    977      $    533    $     242
                                                                             ========      ========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>


                          THE SPORTS CLUB COMPANY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 2001 and 2002


1. Organization

     The Sports Club Company,  Inc. (the "Company")  operates sports and fitness
Clubs  ("Clubs"),  primarily  under the "The Sports  Club/LA"  name.  The Sports
Club/LA sites are developed as "urban  country  clubs"  offering a full range of
services including numerous fitness and recreation  options,  diverse facilities
and other  amenities.  The  Sports  Club/LA  is  marketed  to  affluent,  health
conscious individuals who desire a premier Club.

2. Restatement

     The Company has determined that certain revenues relating to the payment of
last month dues under certain membership agreements at three of our Clubs should
have been deferred at the time the memberships were initiated.  Accordingly, the
Company has restated its deferred  membership  revenues and retained earnings by
$2,257,000,   effective  January  1,  2000,  to  reflect  this  adjustment.  The
restatement  had no impact on the  results of  operations  or cash flows for the
periods  presented  and had the  following  impact on the  consolidated  balance
sheet.  In addition,  we have  adjusted our deferred tax asset and net operating
loss carryforward as described in Note 12:

                                                      December 31, 2001
                                                      -----------------
                                                       (in thousands)
                                                As reported       As Restated
                                                -----------       -----------
  Deferred membership revenues...........    $         13,670   $        15,927
                                             ================   ===============

  Current liabilities....................    $         39,500   $        41,757
                                             ================   ===============

  Total Liabilities......................    $        149,124   $       151,381
                                             ================   ===============

  Accumulative deficit...................    $       (39,481)   $      (41,738)
                                             ================   ===============

  Net Stockholders Equity................    $         48,084   $        45,827
                                             ================   ===============

3. Summary of Significant Accounting Policies

Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
the Company and its majority owned  subsidiaries.  All significant  intercompany
transactions and balances have been eliminated in consolidation.

Revenue Recognition

     The Company receives  initiation fees and monthly  membership dues from its
members.  Substantially  all of the Company's  members join on a  month-to-month
basis and can therefore cancel their membership at any time. Initiation fees and
related  direct  expenses,   primarily  sales  commissions,   are  deferred  and
recognized,  on a straight-line  basis,  over an estimated  membership period of
three  years.  Dues that are  received in advance are  recognized  on a pro-rata
basis over the  periods  in which  services  are to be  provided.  In  addition,
payments of last month dues are  deferred.  Reserves  are  recorded  against the
receivables of the Company's  SportsMed  subsidiary at the time the services are
provided.

                                      F-6
<PAGE>

Cash Equivalents and Restricted Cash

     The  Company   considers  all  highly  liquid   investments  with  original
maturities of three months or less to be cash equivalents.  At December 31, 2001
and  2002,  cash  and cash  equivalents  were  $1.5  million  and $3.2  million,
respectively.

     The  Company   considers  cash,  cash   equivalents  and  other  short-term
investments  that  are  required  to be  held as  deposits  to  satisfy  certain
regulatory  requirements  related to the  operation  of the  Company's  Clubs as
restricted  cash.  At December 31, 2002,  the Company had $227,000 of restricted
cash  which  was  included  in  "Other  Assets"  (long-term)  on  the  Company's
consolidated balance sheet.

Inventories

     Inventories  are  stated at the lower of cost or market  using the  average
cost method. Inventories consist of retail merchandise sold at spas, nutritional
products, food and beverage products, uniforms and supplies.

Advertising Costs

     Amounts  incurred for advertising  costs with third parties are expensed as
incurred.  Advertising expense totaled approximately  $822,000, $1.2 million and
$1.5 million for the years ended December 31, 2000, 2001 and 2002, respectively.

Loan Costs

     Loan costs and the debt discount on the Senior Notes are amortized over the
terms of the related loans.

Start-up Costs

     The Company  adopted  Statement of Position  98-5,  Accounting for Start-Up
Costs ("SOP 98-5")  effective  January 1, 1999. SOP 98-5 provides that all costs
related to the  development  of new sports and  fitness  clubs,  except for real
estate related costs, be expensed as incurred.

Long-Lived Assets

     Property and equipment are recorded at cost.

     Depreciation is computed primarily using the straight-line  method over the
estimated  useful  lives of the  assets,  ranging  from five to seven  years for
equipment and forty years for buildings.  Leasehold  improvements  are amortized
using the  straight-line  method over the  shorter of the lease term  (including
option periods in which the Company will incur a penalty for non-renewal) or the
estimated useful life of the improvements.

     The Financial Accounting Standards Board ("FASB") recently issued Statement
of  Financial   Accounting  Standards  ("SFAS")  No.  144,  Accounting  for  the
Impairment  or  Disposal  of  Long-Lived  Assets,   which  addresses   financial
accounting  and reporting for the  impairment or disposal of long-lived  assets.
While SFAS No.  144  supersedes  FASB  Statement  No.  121,  Accounting  for the
Impairment  of  Long-Lived  Assets to Be  Disposed  Of, it  retains  many of the
fundamental  provisions of that statement.  The standard is effective for fiscal
years  beginning  after  December  15,  2001.  The  adoption of SFAS No. 144, on
January  1,  2002,  did not have a material  impact on the  Company's  financial
position or results of operations.
                                      F-7
<PAGE>

     The Company  evaluates its long-lived  assets on a club-by-club  basis with
the  exception  of the three New York Clubs,  which are  evaluated on a combined
basis due to the nature of the operations of the New York Clubs.

     The  Company  reviews  its  long-lived  assets  and  certain   identifiable
intangible  assets for impairment  whenever  events or changes in  circumstances
indicate  that  the  carrying  amount  of  an  asset  may  not  be  recoverable.
Recoverability  of assets to be held and used is measured by a comparison of the
carrying  amount of an asset to future  net  undiscounted  operating  cash flows
expected  to be  generated  by the asset.  If such assets are  considered  to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.  Assets to be
disposed of are reported at the lower of the carrying  amount or fair value less
costs to sell.

     In December  2001,  the Company  recorded an impairment  loss of $2,007,000
related to its SportsMed subsidiary.

Goodwill

     During July 2001, the FASB issued SFAS No. 141, Business Combinations,  and
No. 142,  Goodwill and Other Intangible  Assets.  SFAS No. 141 requires that the
purchase method be used for all business  combinations  initiated after June 30,
2001.  SFAS No. 142 requires that goodwill and certain  intangibles no longer be
amortized against earnings,  but instead be reviewed for impairment on an annual
basis. The amortization of goodwill and certain intangibles ceases upon adoption
of SFAS No. 142, which is effective for fiscal years starting after December 15,
2001.  The Company  adopted SFAS No. 141 and SFAS No. 142  effective  January 1,
2002.  The  Company  has  goodwill  recorded  which will no longer be  amortized
subsequent  to  the  adoption  of  SFAS  No.  142.  The  Company  completed  the
transitional  impact test,  which did not result in the  impairment  of recorded
goodwill. In addition, the Company was not required to reclassify any portion of
goodwill as a result of the adoption of SFAS No. 142.

     Through  December  31,  2001,  costs in  excess of net  assets of  acquired
businesses were being amortized on a straight-line  basis over forty years. SFAS
No.  142  requires  that,  effective  January  1,  2002,  goodwill  no longer be
amortized  to  earnings,  but instead be reviewed  for  impairment  on an annual
basis.

     The  adoption  of SFAS No. 142 had the  following  effect on the  Company's
reported net income (loss)  attributable to common  shareholders  and net income
(loss)  per share for the  years  ended  December  31,  2000,  2001 and 2002 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                                    Years Ended
                                                                    December 31,
                                                                   ------------
                                                         2000           2001          2002
                                                         ----           ----          ----
<S>                                                  <C>            <C>           <C>
    Reported net income (loss) attributable to
      common shareholders........................    $  (12,387)    $  (38,060)   $  (17,678)
 Add back: Goodwill amortization, net of tax.....           288            494            --
                                                     ----------     ----------    ----------
    Adjusted net income (loss) attributable to
      common shareholders........................    $  (12,099)    $  (37,566)   $  (17,678)
                                                     ===========    ===========   ===========

            Reported basic and diluted
       income (loss) per share...................    $    (0.70)    $    (2.12)   $    (0.98)
                                                     ===========    ===========   ===========

            Adjusted basic and diluted
      income (loss) per share....................    $    (0.68)    $    (2.09)   $    (0.98)
                                                     ===========    ===========   ===========

</TABLE>
                                      F-8
<PAGE>


Income Taxes

     The Company uses the asset and liability  method of  accounting  for income
taxes.  Under this method,  deferred  income taxes are recognized for the future
tax  consequences  attributable to differences  between the financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
basis and net operating loss and tax credit  carryforwards.  Deferred tax assets
and  liabilities  are measured using enacted tax rates expected to be applied to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  The effect on deferred  taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.

     In the fourth  quarter of 2001,  the Company  determined,  based on year to
date operating results and projections for the next three years, that it is more
likely than not that future taxable income will be  insufficient  to utilize its
deferred  tax assets.  As a result of this  determination,  the  Company  ceased
recording  any deferred tax benefit  related to its taxable  losses  incurred in
2001 and 2002,  and in the  fourth  quarter  of 2001,  the  Company  recorded  a
valuation allowance of $18,239,000 to offset its net deferred tax asset recorded
through that date (See Note 12 - Income  Taxes).  The Company  will  continue to
evaluate its  projected  future  taxable  operating  income and  reconsider  its
current determination when appropriate.

Earnings per Share

     The Company presents Basic and Diluted  earnings per share.  Basic earnings
reflects the actual weighted average shares of Common Stock  outstanding  during
the period.  Diluted  earnings  per share  includes  the effects of all dilutive
options, warrants and other securities and utilizes the treasury stock method.

     The securities whose  conversion  would result in an incremental  number of
shares  that would be  included  in  determining  the  weighted  average  shares
outstanding for diluted  earnings per share if their effect was not antidilutive
are as follows:

o    December 31, 2002 - the common stock  equivalent  effect of 1,785,333 stock
     options,  10,500  shares of  Series B  mandatorily  redeemable  convertible
     Preferred Stock and, 5,000 shares of Series C convertible Preferred Stock.

o    December 31, 2001 - the common stock  equivalent  effect of 1,850,275 stock
     options.

o    December 31, 2000 - the common stock  equivalent  effect of 1,533,832 stock
     options.

Stock Based Compensation

     The Company has elected to account for stock  options  granted to employees
and  directors  under the  provisions of APB Opinion No. 25, using the intrinsic
value method.  Entities electing to continue using the accounting  prescribed by
APB Opinion No. 25 must make pro forma  disclosures of net income and income per
share,  as if the fair value based method of accounting  defined in SFAS No. 123
had been applied.  In accordance with APB Opinion No. 25, no  compensation  cost
has been  recognized as the fair value of the  Company's  stock was equal to the
exercise price of the options at the date of grant.  Had  compensation  cost for
the Company's plan been  determined  consistent with SFAS No. 123, the Company's
net income  (loss)  attributable  to common  shareholders  and income (loss) per
share would have been reduced to the pro-forma amounts indicated below:

                                      F-9
<PAGE>
<TABLE>
<CAPTION>
                                                                           Year ended December 31
                                                                           ----------------------
                                                                     2000            2001           2002
                                                                     ----            ----           ----
                                                                   (in thousands, except per share data)
<S>                                                           <C>             <C>              <C>
Net income (loss) attributable to common shareholders:
         As reported.................................         $  (12,387)     $  (38,060)      $  (17,678)
         Pro forma...................................         $  (13,435)     $  (39,600)      $  (18,917)

   Basic and Diluted income (loss) per share:
         As reported.................................         $    (0.70)     $    (2.12)      $    (0.98)
         Pro forma...................................         $    (0.76)     $    (2.21)      $    (1.05)

</TABLE>

     The fair value of all option grants for the Company's plan are estimated on
the  date of  grant  using  the  Black-Scholes  option-pricing  model  with  the
following  weighted-average  assumptions  used for all option grants in 2000 and
2001  respectively:  dividend yield of 0% and 0%; expected  volatility of 111.6%
and 118.9%;  risk-free  interest rates of 6.25% and 4.48% and expected  economic
lives of 6.0 years and 6.0 years. There were no options granted in 2002.

Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make certain estimates and assumptions. These affect the reporting
of  assets  and  liabilities,  the  disclosure  of  any  contingent  assets  and
liabilities  and the  reported  amounts  of  revenues  and  expenses  during the
reporting periods. Actual results could differ from these estimates.

Fair Value of Financial Instruments

     The carrying amounts related to cash equivalents,  short-term  investments,
accounts receivable,  other current assets and accounts payable approximate fair
value due to the relatively short maturity of such  instruments.  The fair value
of  long-term  debt is estimated  by  discounting  the future cash flows of each
instrument  at  rates  currently  available  to the  Company  for  similar  debt
instruments of comparable maturities by the Company's bankers. The fair value of
long-term debt was estimated to be $90 million.

Redeemable Preferred Stock

     Mandatorily  redeemable convertible Preferred Stock is stated at redemption
value, less the unamortized discount. The discount is accreted into the carrying
value of the mandatorily redeemable convertible Preferred Stock through the date
at which the  Preferred  Stock is  redeemable at the option of the holder with a
charge to accumulated  deficit using the  effective-interest  method. Due to the
inherent  uncertainties  regarding the ability and ultimate timing of either the
redemption  or  conversion of these  preferred  shares and the accretion  method
used, it is not practicable for management to determine their fair value.

Segment Reporting

     Management has determined that the Company has one reporting segment.

Impact of Recent Accounting Pronouncements

     In April 2002, the FASB issued SFAS No. 145,  Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). SFAS 145 rescinds SFAS 4, which required all gains and losses from
extinguishment  of debt to be  aggregated  and, if  material,  classified  as an
extraordinary item, net of related income tax effect. Upon adoption of SFAS 145,
the
                                      F-10
<PAGE>

Company will be required to apply the criteria in APB Opinion No. 30,  Reporting
the Results of  Operations - Reporting the Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions,  in determining the  classification  of gains and losses resulting
from the  extinguishment  of debt.  Additionally,  SFAS  145  amends  SFAS 13 to
require that certain lease  modifications  that have economic effects similar to
sale-leaseback   transactions   be   accounted   for  in  the  same   manner  as
sale-leaseback  transactions.  SFAS  145  will be  effective  for  fiscal  years
beginning  after May 15, 2002 with early adoption of the  provisions  related to
the rescission of SFAS 4 encouraged.  Upon adoption,  companies must  reclassify
prior  period  items  that do not meet  the  extraordinary  item  classification
criteria in APB Opinion No. 30. The adoption of SFAS 145 for  long-lived  assets
held  for use did not  have a  material  impact  on our  consolidated  financial
statements because the impairment assessment under SFAS 144 is largely unchanged
from SFAS 121.

     On  December  31,  2002,  the FASB  issued  SFAS No.  148,  Accounting  for
Stock-Based  Compensation - Transition and Disclosure ("SFAS 148"), which amends
SFAS No. 123,  Accounting for Stock-Based  Compensation  ("SFAS 123").  SFAS 148
amends the disclosure requirements in SFAS 123 for stock-based  compensation for
annual periods ending after December 15, 2002 and for interim periods  beginning
after  December 15, 2002. The  disclosure  requirements  apply to all companies,
including those that continue to recognize  stock-based  compensation  under APB
Opinion  No.  25,  Accounting  for Stock  Issued  to  Employees.  Effective  for
financial  statements for fiscal years ending after December 15, 2002,  SFAS 148
also provides three alternative  transition methods for companies that choose to
adopt the fair value measurement  provisions of SFAS 123. The Company has chosen
not to adopt the fair value measurement provisions of SFAS 123.

     In  November  2002,  the FASB  issued  Interpretation  No. 45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others ("FIN 45"),  which addresses the disclosure
to be made by a guarantor in its interim and annual  financial  statements about
its obligations under guarantees.  The disclosure requirements are effective for
interim and annual financial statements ending after December 15, 2002.

     FIN 45 also requires the  recognition  of a liability by a guarantor at the
inception of certain  guarantees.  FIN 45 requires the  guarantor to recognize a
liability  for  the  non-contingent  component  of a  guarantee,  which  is  the
obligation  to stand  ready to perform in the event  that  specified  triggering
events or conditions  occur.  The initial  measurement  of this liability is the
fair value of the guarantee at inception.  The  recognition  of the liability is
required even if it is not probable  that  payments  will be required  under the
guarantee or if the guarantee was issued with a premium  payment or as part of a
transaction  with multiple  elements.  The initial  recognition  and measurement
provisions are effective for all guarantees within the scope of FIN 45 issued or
modified after December 31, 2002.

     The  Company has adopted  the  disclosure  requirements  of FIN 45 and will
apply the recognition and measurement provisions for all guarantees entered into
or modified  after  December 31, 2002.  The Company does not have any guarantees
that require disclosure under FIN 45.

     In February 2003, the FASB issued  Interpretation No. 46,  Consolidation of
Variable  Interest  Entities ("FIN 46"),  which addresses the  consolidation  by
business  enterprises of variable interest  entities,  which have one or both of
the  following  characteristics:  (1)  the  equity  investment  at  risk  is not
sufficient  to permit the entity to finance its  activities  without  additional
financial  support from other parties,  or (2) the equity  investors lack one or
more of the  following  essential  characteristics  of a  controlling  financial
interest:  (a) the  direct  or  indirect  ability  to make  decisions  about the
entity's  activities  through  voting or similar  rights,  (b) the obligation to
absorb  the  expected  losses of the entity if they  occur,  or (c) the right to
receive the expected  residual  returns of the entity if they occur. FIN 46 will
have a  significant  effect on existing  practice  because it requires  existing
variable  interest  entities  to  be  consolidated  if  those  entities  do  not
effectively disburse risks among parties involved. In addition,  FIN 46 contains
detailed  disclosure  requirements.  FIN  46  applies  immediately  to  variable
interest  entities  created  after  January 31, 2003,  and to variable  interest
entities in which an enterprise  obtains an interest after that date. It applies
in the first fiscal year or interim  period  beginning  after June 15, 2003,  to
variable interest entities in which an enterprise holds a variable interest that
it  acquired  before  February  1,  2003.  This  Interpretation  may be

                                      F-11
<PAGE>

applied  prospectively  with a  cumulative-effect  adjustment  as of the date on
which it is first applied or by restating previously issued financial statements
for one or more years with a cumulative-effect adjustment as of the beginning of
the first year restated.

     In November 2002, the FASB's  Emerging Issues Task Force (EITF) issued EITF
00-21 Revenue Arrangements with Multiple  Deliverables ("EITF 00-21). EITF 00-21
addresses  certain aspects of the accounting by a vendor for arrangements  under
which it will perform multiple revenue-generating activities. Specifically, EITF
00-21  addresses  how to determine  whether an  arrangement  involving  multiple
deliverables contains more than one unit of accounting.  In applying EITF 00-21,
separate contracts with the same entity or related parties that are entered into
at or near the same time are presumed to have been  negotiated  as a package and
should,  therefore,  be evaluated as a single arrangement in considering whether
there are one or more units of accounting.  That  presumption may be overcome if
there is  sufficient  evidence to the  contrary.  EITF 00-21 also  addresses how
arrangement consideration should be measured and allocated to the separate units
of  accounting in the  arrangement.  The guidance in this Issue is effective for
revenue  arrangements  entered into in fiscal periods  beginning  after June 15,
2003. Alternatively, companies may elect to report the change in accounting as a
cumulative-effect adjustment. Early application of this consensus is permitted.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations,  which addresses financial accounting and reporting for obligations
associated with the retirement of tangible  long-lived assets and the associated
asset retirement  costs.  This statement is effective for the Company  beginning
January 1, 2003.  Management does not expect that adoption of this standard will
have a material impact on the Company's financial statements.

     In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal  Activities.  SFAS No. 146
supersedes previous accounting guidance,  principally Emerging Issues Task Force
Issue No. 94-3, Liability  Recognition for Certain Employee Termination Benefits
and Other  Costs to Exit an  Activity  (including  Certain  Costs  Incurred in a
Restructuring).  SFAS No. 146 requires that the  liability for costs  associated
with an exit or  disposal  activity  be  initially  measured  at fair  value and
recognized  when the liability is incurred.  The  provisions of SFAS No. 146 are
required to be applied  prospectively to exit or disposal  activities  initiated
after  December 31, 2002. The adoption of SFAS No. 146 is not expected to have a
material impact on the Company's financial statements.

4. Dispositions

Disposition of Real Estate

     On December  28,  2000,  the Company  completed  the sale of real estate in
Fountain  Valley,  California  for  $3,700,000  in cash. In December  2000,  the
Company recorded a pre-tax loss of approximately  $1,017,000 related to the sale
of the Fountain Valley property (See Note 13).

     In June 1998, the Company acquired undeveloped land in Houston,  Texas with
the intention of developing a Club on the site. In 2000, the Company decided not
to develop  this site and to  dispose of the  property.  An  impairment  loss of
$749,000 was recorded in December 2000 to reduce the carrying value of the asset
to its  estimated  fair value less costs to sell.  The Houston  site was sold on
August 30, 2002 and a non-recurring gain of $97,000 was recorded (See Note 13).

Disposition of Club

     In January 2002, the Company sold The Sports Club/Las Vegas to another club
operator.  An  impairment  loss of  $3,243,000  was recorded in December 2001 to
reduce the  carrying  value of The Sports  Club/LasVegas  to its fair value less
costs to sell.  The fair value and costs to sell The Sports  Club/Las Vegas were
based upon the actual fair value  received and selling  costs  incurred when the
Club was sold.

                                      F-12
<PAGE>

5. Property and Equipment

     Property and equipment is carried at cost,  less  accumulated  depreciation
and amortization, which is summarized as follows:
<TABLE>
<CAPTION>
                                                                                  At December 31,
                                                                                  ---------------
                                                                              2001              2002
                                                                              ----              ----
                                                                                  (in thousands)
<S>                                                                     <C>               <C>
        Land.......................................................     $    16,082       $    10,621
        Building and improvements..................................         145,735           146,814
         Furniture, fixtures and equipment.........................          39,635            40,314
                                                                        -----------       -----------
                                                                            201,452           197,749
        Less accumulated depreciation and amortization.............          30,559            40,951
                                                                        -----------       -----------
        Net property and equipment.................................     $   170,893       $   156,798
                                                                        ===========       ===========
</TABLE>

     Equipment   secured  by  equipment   financing  loans  was  $8,219,000  and
$8,151,000 and related accumulated amortization was $2,196,000 and $4,111,000 at
December 31, 2001 and 2002, respectively.

6. Notes Payable and Capitalized Lease Obligations

     Notes payable and capitalized lease obligations are summarized as follows:
<TABLE>
<CAPTION>

                                                                                  At December 31,
                                                                                  ---------------
                                                                              2001               2002
                                                                              ----               ----
                                                                                   (in thousands)
<S>                                                                     <C>                <C>
        Senior secured notes (a)...................................     $   100,000        $    100,000
        Equipment financing loans (b)..............................           6,023               4,040
        Other note payable (c).....................................             963                  --
        Bank credit facility (See Note 7)..........................           8,505                  --
                                                                        -----------        ------------
                                                                            115,491             104,040
        Less current installments..................................          11,449               2,158
                                                                        -----------        ------------
                                                                        $   104,042        $    101,882
                                                                        ===========        ============
</TABLE>

(a) On April 1, 1999, the Company issued in a private  placement  $100.0 million
of 11 3/8% Senior  Secured  Notes due in March 2006 (the  "Senior  Notes")  with
interest due  semi-annually.  In May 1999,  the Senior Notes were  exchanged for
registered Series B Senior Secured Notes (the "Senior Secured Notes").

     The Senior  Secured Notes are secured by  substantially  all assets,  other
than certain  excluded  assets.  In  connection  with the issuance of the Senior
Secured Notes,  the Company  entered into an indenture dated as of April 1, 1999
(the  "Indenture")  which includes certain covenants that restrict the Company's
ability,  subject to certain exceptions,  to: (i) incur additional indebtedness;
(ii) pay dividends or other distributions,  or repurchase capital stock or other
equity   interests  or   subordinated   indebtedness   and  (iii)  make  certain
investments.  The Indenture also limits the Company's ability to: (i) enter into
transactions  with  affiliates;  (ii) create liens or sell certain  assets,  and
(iii) enter into mergers and  consolidations.  Under the terms of the Indenture,
after March 15, 2003, the Company may, at its option,  redeem all or some of the
Senior  Secured  Notes at a redemption  price that will  decrease over time from
105.688% to 100% of their face amount, plus interest. If the Company undergoes a
"change in control",  as defined in the  Indenture,  it must give holders of the
Senior  Secured Notes the  opportunity to sell their Senior Secured Notes to the
Company at 101% of their face amount,  plus interest.  At December 31, 2002, the
Company was in compliance with the terms of the Indenture. At December 31, 2002,
the estimated fair value of the Senior Secured Notes was $90 million.

(b) The  equipment  financing  loans are  secured  by  furniture,  fixtures  and
equipment.  The amounts are generally repayable in monthly payments over four or
five years with effective interest rates between 8.5% and 10.5%.

                                      F-13
<PAGE>

(c) This note was  issued  in  connection  with the  acquisition  of The  Sports
Club/LA - Upper East Side. Final payment was made during 2002.

     Future  minimum  annual  principal  payments at December 31,  2002,  are as
follows (in thousands):

         2003..............................................    $     2,158
         2004..............................................          1,784
         2005..............................................             98
         2006..............................................        100,000
                                                               -----------
                                                               $   104,040

7. Bank Credit Facility

     In  October   2002,   we  extended  our  credit   facility   with  Comerica
Bank-California.  The $10.0 million credit facility matures on November 1, 2003.
The credit  facility  bears  interest at a variable rate of LIBOR plus 2 1/4% or
the Bank's  prime rate (4 1/4% at December  31,  2002).  The credit  facility is
secured by all the assets of The Sports  Club/Irvine  and is  guaranteed  by our
three major  shareholders.  The credit facility  requires us to maintain certain
Tangible  Net  Worth,  Total  Liabilities  to  Tangible  Net  Worth  and  EBITDA
covenants.  At December 31, 2002,  we were not in  compliance  with one of these
convenants.  The Bank has  waived  this  default as of  December  31,  2002.  At
December 31, 2002, there were no cash advances outstanding, but $5.2 million was
utilized in the form of letters of credit  leaving  $4.8 million  available  for
future borrowings.

     The new credit  facility  has added  KASCY,  L.P.,  an  affiliate  of Kayne
Anderson Capital Advisors, L.P. as a lending participant in the credit facility.
Kayne Anderson Capital  Advisors,  L.P. and certain of its affiliates own all of
the  Company's  Series B  Redeemable  Preferred  Stock  (See Note 9). The credit
facility  increases  from  $10.0  million  to $15.0  million  once  KASCY,  L.P.
satisfies certain regulatory requirements.

8. Commitments and Contingencies

Lease Commitments

     The Company leases certain  facilities  pursuant to various operating lease
agreements.  Club  facility  leases are generally  long-term  and  noncancelable
triple-net leases (requiring the Company to pay all real estate taxes, insurance
and maintenance  expenses),  and have an average  remaining term of 44.17 years,
including  renewal  options  which  are  included  in the lease  term,  with the
earliest  Sports Club lease  expiration date of January 31, 2013. The Company is
also  obligated  under lease  agreements  for seven of its former  Spectrum Club
locations.  The Company has subleased  each of these  properties to the buyer of
these Clubs under sublease  agreements which provide that all operating costs of
these  facilities  be assumed by the new owners.  Future  minimum  noncancelable
operating lease payments as of December 31, 2002 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                                Net
                                                                             Sublease          Rental
                                                           Commitments        Rentals       Commitments
                                                           -----------       --------       -----------
         Year ending December 31:
              <S>                                       <C>                <C>            <C>
              2003...................................   $    29,211        $    6,391     $    22,820
              2004...................................        29,878             7,050          22,828
              2005...................................        29,638             7,295          22,343
              2006...................................        29,717             7,336          22,381
              2007...................................        29,832             7,451          22,381
              Thereafter.............................       300,894            53,657         247,237
                                                        -----------        ----------     -----------
                   Total minimum lease payments......   $   449,170        $   89,180     $   359,990
                                                        ===========        ==========     ===========
</TABLE>
                                      F-14
<PAGE>

     Rent expense for facilities and equipment, including minimum lease payments
recorded on a straight-line basis over the lease term,  aggregated  $10,675,000,
$18,657,000  and  $23,257,000  for the years ended  December 31, 2000,  2001 and
2002, respectively.

Litigation

     The Company is involved in various  claims and lawsuits  incidental  to its
business,  including claims arising from accidents.  However,  in the opinion of
management,  the Company is adequately  insured against such claims and lawsuits
involving personal injuries,  and any ultimate liability arising out of any such
proceedings will not have an material adverse effect on the Company's  financial
condition, cash flow or results of operations.

Employment Agreements

     At December 31, 2002,  the Company did not have any  employment  agreements
with any employees.

9. Redeemable Preferred Stock

     On March 18, 2002, the Company  completed a $10.5 million private placement
of a newly  created  series of its  Convertible  Preferred  Stock.  The  Company
received $9.9 million in cash, after issuance costs, and issued 10,500 shares of
Series B Preferred Stock,  $.01 par value ("Series B Preferred"),  at a price of
$1,000 per share.  The  Company  has the  obligation  to redeem any  outstanding
shares of Series B  Preferred  on March 18,  2009 at a price of $1,000 per share
plus accrued but unpaid dividends. Dividends accrue at the annual rate of $90.00
per share.  Such dividends are cumulative but do not accrue  interest and at the
Company's  option,  may be paid in cash or in  additional  shares  of  Series  B
Preferred. The Series B Preferred may, at the option of the holder, be converted
into  shares of Common  Stock at the rate of $3.00 per share  (resulting  in the
issuance of  3,500,000  shares of Common Stock if 100% of the Series B Preferred
is converted at that price).  The conversion price will be adjusted  downward in
the event the Company issues  additional shares of Common Stock at a price below
$3.00 per share, subject to certain exceptions; and any such downward adjustment
is subject to the prior  approval of the American Stock  Exchange.  In the event
the Series B Preferred  is redeemed  before  March 18,  2005,  the holders  will
receive a warrant  to  purchase  shares of Common  Stock at a price of $3.00 per
share,  exercisable  before March 18,  2007.  In the event of  liquidation,  the
Series B Preferred  holders are entitled to receive,  prior and in preference to
any  distribution  to common  shareholders  and pari passu  with  holders of the
Series C Preferred  Stock,  an amount equal to $1,000 for each share of Series B
Preferred then outstanding.

     The initial  carrying  value of the Series B Preferred  was recorded at its
"fair  value"  (sale  price  less costs to issue) on the date of  issuance.  The
carrying value of the Series B Preferred will be  periodically  adjusted so that
the carrying  value equals the  redemption  value on the  redemption  date.  The
carrying value of the Series B Preferred will also be periodically  adjusted for
any accrued and unpaid  dividends.  At December 31, 2002, the Series B Preferred
carrying value consisted of the following (in thousands):

Initial fair value, sale price of $10,500
      less costs to issue of $592......................  $               9,908
 Redemption value accretion............................                     71
 Accrued and unpaid dividends accretion................                    748
                                                         ---------------------
     Total carrying value                                $              10,727
                                                         =====================

                                      F-15
<PAGE>

10.  Preferred Stock

     On  September  6,  2002,  the  Company  completed  a $5.0  million  private
placement of a newly created series of Convertible  Preferred Stock. The Company
received  $5.0 million in cash and issued  5,000 shares of Series C  Convertible
Preferred Stock, $.01 par value ("Series C Convertible  Preferred"),  at a price
of $1,000 per share. Dividends are earned at an annual rate of $90.00 per share.
Dividends  are  payable  when and as declared  by the Board of  Directors.  Such
dividends  are  cumulative,  but do not  accrue  interest  and at the  Company's
option,  may be paid in  cash or  additional  shares  of  Series  C  Convertible
Preferred.  The Series C Convertible Preferred may, at the option of the holder,
be  converted  into  shares  of  Common  Stock at the rate of  $3.00  per  share
(resulting  in the issuance of  1,666,667  shares of Common Stock if 100% of the
Series C Convertible Preferred is converted at that price). Upon conversion, any
earned and unpaid  dividends would become payable.  The conversion price will be
adjusted  downward in the event the Company issues  additional  shares of Common
Stock at a price below $3.00 per share,  subject to certain exceptions;  and any
such downward  adjustment is subject to the prior approval of the American Stock
Exchange.  At the option of the Company the Series C Convertible Preferred Stock
may be  redeemed  in whole or in part by paying  in cash the sum of  $1,000  per
share  plus  any  earned  and  unpaid  dividends.  In the  event  the  Series  C
Convertible  Preferred is redeemed  before  September 6, 2005,  the holders will
receive a warrant  to  purchase  shares of Common  Stock at a price of $3.00 per
share,  exercisable  before September 6, 2007. In the event of liquidation,  the
Series C  Convertible  Preferred  holders are entitled to receive,  prior and in
preference  to any  distribution  to common  shareholders,  and pari  passu with
holders of the Series B  Preferred,  an amount equal to $1,000 for each share of
Series  C  Convertible  Preferred  then  outstanding,  plus  earned  and  unpaid
dividends.

11. Income (Loss) per Share

     The following is a  reconciliation  of the basic and diluted  income (loss)
per share computations for the years 2000, 2001 and 2002:
<TABLE>
<CAPTION>

                                                                         Year ended December 31,
                                                                         -----------------------
                                                                   2000            2001            2002
                                                                   ----            ----            ----
                                                                  (in thousands, except per share data)

<S>                                                           <C>             <C>              <C>
   Net income (loss) attributable to common shareholders
   used for basic and diluted income (loss) per share....     $  (12,387)     $   (38,060)     $   (17,678)
                                                              ===========     ============     ============

   Shares of Common Stock and
     Common Stock equivalents:
           Weighted average shares used
              in basic computation........................         17,773          17,939           18,080
                                                              ===========     ===========      ===========
           Weighted average shares used in dilutive
             computation..................................         17,773          17,939           18,080
                                                              ===========     ===========      ===========

   Income (loss) per share:
      Basic and Diluted...................................    $    (0.70)     $     (2.12)     $     (0.98)
                                                              ===========     ============     ============
</TABLE>
                                      F-16
<PAGE>

12. Income Taxes

     The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                          -----------------------
                                                                   2000            2001             2002
                                                                   ----            ----             ----
                                                                              (in thousands)
<S>                                                           <C>             <C>              <C>
    Current:
          Federal.........................................    $   (1,701)     $         89     $      (930)
          State...........................................         1,181               755             621
                                                              ----------      ------------     -----------
                                                                    (520)              844            (309)
    Deferred:
          Federal.........................................        (2,119)            1,788              --
          State...........................................        (4,301)              738              --
                                                              -----------     ------------     -----------
                                                                  (6,420)            2,526              --
                                                              -----------     ------------     -----------
    Income tax provision (benefit)........................    $   (6,940)     $      3,370     $      (309)
                                                              ===========     ============     ============
</TABLE>


     Income tax expense (benefit) as computed differs from the statutory rate as
applied to pre-tax net income (loss) as follows:
<TABLE>
<CAPTION>
                                                                           Year ended December 31
                                                                           ----------------------
                                                                   2000            2001             2002
                                                                   ----            ----             ----
                                                                               (in thousands)

<S>                                                           <C>             <C>              <C>
    Computed "expected" tax expense (benefit).............    $  (6,571)      $  (11,795)      $   (5,794)
    Increase (decrease) in tax resulting from:
        State taxes - net of federal benefit..............       (1,202)          (1,998)            (987)
        Meals and entertainment...........................           65               63               75
        Change in valuation allowance.....................           --           18,239            6,888
        Other.............................................          768           (1,139)            (491)
                                                              ---------       -----------      -----------
    Income tax provision (benefit)........................    $  (6,940)      $    3,370       $     (309)
                                                              ==========      ==========       ===========
</TABLE>

     The effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities are presented as follows.
<TABLE>
<CAPTION>
                                                                               At December 31,
                                                                               ---------------
                                                                        2001                     2002
                                                                        ----                     ----
                                                                     (Restated)
Deferred tax assets:                                                            (in thousands)
<S>                                                            <C>                     <C>
     Deferred initiation fees.............................     $         2,153         $          1,368
     Operating loss carry forwards........................              18,522                   22,500
     Accrued vacation.....................................                 223                      257
     Bad debt.............................................                 121                      193
     State taxes..........................................                 624                      315
     Other................................................                 669                    1,837
                                                               ---------------         ----------------
            Gross deferred tax assets.....................              22,312                   26,470
Deferred tax liabilities:
     Depreciation and amortization........................              (4,073)                  (1,343)
     Other................................................                  --                       --
                                                               ---------------         ----------------
            Gross deferred tax liabilities................              (4,073)                  (1,343)
                                                               ----------------        -----------------
Net deferred tax asset....................................              18,239                   25,127
Valuation allowance.......................................             (18,239)                 (25,127)
                                                               ----------------        -----------------
Net deferred tax asset....................................     $            --         $             --
                                                               ===============         ================
</TABLE>
                                      F-17
<PAGE>

     The Company has  determined,  based on year to date  operating  results and
projections for the next three years that it is more likely than not that future
taxable  income will be  insufficient  to utilize its deferred tax assets.  As a
result of this  determination,  the Company  ceased  recording  any deferred tax
benefit  related to its taxable  losses and  recorded  valuation  allowances  of
$18,239,000  (as restated)  and  $6,888,000  in 2001 and 2002,  respectively  to
offset the Company's net deferred tax assets.

     In March 2002,  changes in existing  tax laws  resulted in a tax benefit of
approximately  $930,000.  The tax benefit  arises from the Company's  ability to
carryback net operating  losses incurred during 2001, to the 1995, 1996 and 1997
tax years in which the Company had taxable income.  This benefit was recorded in
the first  quarter  of 2002  consistent  with the  provisions  of  Statement  of
Financial Accounting Standards Board No. 109, Accounting for Income Taxes.

     As of December  31, 2002,  the Company had federal and state net  operating
loss  carryforwards  of  $42,817,000  and  $76,571,000  respectively,  beginning
expiration in 2020 and 2005, respectively.

13. Non-Recurring Items

     The Company recorded the following income (expense) as non-recurring  items
in each of the years in the three-year period ended December 31, 2002:
<TABLE>
<CAPTION>
                                                                             Year ending December 31,
                                                                             ------------------------
                                                                        2000           2001           2002
                                                                        ----           ----           ----
                                                                                  (in thousands)
<S>                                                                 <C>            <C>            <C>
Class action litigation settlement..............................    $ (1,476)      $        --    $       --
Loss on sale of Fountain Valley real estate (See Note 4)........      (1,017)               --            --
Impairment of Houston real estate (See Note 4)..................        (749)               --            --
Gain on sale of Houston real estate (See Note 4)................          --                --            97
Interest reversal on litigation settlement......................          --               397            --
                                                                    --------       -----------    ----------
                                                                    $ (3,242)      $       397    $       97
                                                                    =========      ===========    ==========
</TABLE>

14. Stock Plans

Stock Incentive Plans

     The Company's  shareholders reserved 1,800,000 shares of Common Stock under
the Company's  Amended and Restated 1994 Stock Incentive Plan,  which authorized
the issuance of various stock incentives to directors,  officers,  employees and
consultants including options, stock appreciation rights and purchase rights. On
December 31, 2000,  the 1994 Stock  Incentive  Plan expired and in May 2001, the
Company's  shareholders  adopted the 2001 Stock Incentive Plan (the "Plan"). The
2001 Stock  Incentive Plan reserves 2.5 million shares of Common Stock,  expires
in May 2011 and also authorizes stock appreciation rights and purchase rights.

     Options allow for the purchase of Common Stock at prices  determined by the
Company's Compensation  Committee.  Incentive stock options must be granted at a
price equal to or greater  than the fair value of a share of Common Stock on the
date the option is granted.  Non-statutory  options must have an exercise  price
equal to at least 85% of the fair  value of the  Company's  Common  Stock at the
date of grant.  Options  granted  under the Plans may,  at the  election  of the
Compensation  Committee,  become  exercisable  in  installments.  Except for the
options granted to D. Michael Talla, Co-Chief Executive Officer, which expire on
the  fifth  anniversary  of the  grant  date,  all  options  expire on the tenth
anniversary of the grant date.

                                      F-18
<PAGE>



     A summary of the status of the Company's  stock option plans as of December
31, 2000,  2001 and 2002 and changes  during the years then ended are  presented
below:
<TABLE>
<CAPTION>


                                                                                                Weighted
                                                                                            Average Exercise
                                                                              Shares             Price
                                                                              ------             -----
<S>                    <C>                                                    <C>         <C>
Outstanding at January 1, 2000.......................................         1,169,832   $     5.01
Granted..............................................................           744,499         6.50
Canceled.............................................................          (355,499)        6.67
Exercised............................................................           (25,000)        2.96
                                                                              ---------
Outstanding at December 31, 2000.....................................         1,533,832         5.94
                                                                              =========
Options exercisable at December 31, 2000.............................           559,675         5.36
                                                                              =========
Weighted-average per share fair value of options
granted during year ended December 31, 2000.......................                              4.25

Outstanding at January 1, 2001.......................................         1,533,832         5.94
Granted..............................................................           411,915         3.09
Canceled.............................................................           (93,472)        2.23
Exercised............................................................            (2,000)        2.56
                                                                              ---------
Outstanding at December 31, 2001.....................................         1,850,275         5.37
                                                                              =========
Options exercisable at December 31, 2001.............................           915,284         5.83
                                                                              =========
Weighted-average per share fair value of options
granted during year ended December 31, 2001.......................                              3.09

Outstanding at January 1, 2002.......................................          1,850,275         5.37
Granted..............................................................                 --           --
Canceled.............................................................            (64,942)        5.20
Exercised............................................................                              --
                                                                              ----------
                                                                                      --
Outstanding at December 31, 2002.....................................          1,785,333         5.38
                                                                              ==========

Options exercisable at December 31, 2002.............................          1,296,448         5.61
                                                                              ==========
</TABLE>

     The following table summarizes  information about stock options outstanding
at December 31, 2002:

<TABLE>
<CAPTION>
                                                           Weighted
                                                            Average
                                                           Remaining
              Exercise                Number              Contractual                Options
               Prices              Outstanding           Life (Years)              Exercisable
               ------              -----------           ------------              -----------
              <S>                     <C>                    <C>                      <C>
              $2.5625                 24,333                 3.41                     24,334
               2.6875                 70,000                 3.11                     70,000
               2.7500                 26,000                 3.84                     26,000
               3.0100                283,656                 8.39                     94,552
               3.3110                115,000                 3.39                     38,333
               3.9375                210,000                 6.10                    210,000
               4.2500                219,344                 7.85                    146,229
               4.3750                 60,000                 4.22                    60,000
               5.2500                 42,000                 2.24                     42,000
               5.3750                 32,000                 4.50                    32,000
               8.0000                211,000                 5.29                    211,000
               8.0000                450,000                 7.11                    300,000
               8.2500                 28,000                  .32                     28,000
               8.3750                 14,000                 4.85                     14,000
                               -------------                                   -------------
                                   1,785,333                                       1,296,448
                               =============                                   =============
</TABLE>
                                      F-19
<PAGE>

     Stock  appreciation  rights  ("SAR's") may be granted in  combination  with
options or on a stand-alone  basis. SAR's permit the holder to receive shares of
stock,  cash or a  combination  of shares and cash based upon by the  difference
between the option  price and the fair value of the Common  Stock on the date of
exercise.  Upon  exercise of a SAR granted in  combination  with an option,  the
related option is canceled. At December 31, 2002, no SAR's had been granted.

     Rights to  purchase  shares of Common  Stock to be offered  for direct sale
under the Plan  must be at a  purchase  price  equal to not less than 85% of the
fair value of the shares on the day preceding the date of grant. Purchase rights
are  generally  exercisable  for a period of thirty days  following  the date of
grant. At December 31, 2002, no purchase rights had been granted.

1994 Stock Compensation Plan

     In July 1994, the Company instituted its 1994 Stock Compensation Plan (that
was  amended by the  Company's  shareholders  in July  1999) for the  purpose of
compensating  outside  directors by issuing them shares of the Company's  Common
Stock as part of their  directors'  fees. A total of 50,000  shares are reserved
for issuance pursuant to this plan. A total of 44,000 shares have been issued to
outside directors under the plan. During the years ended December 31, 2000, 2001
and 2002,  the Company  issued 6,000,  6,000 and 8,000 shares of Common Stock as
director  compensation  for  aggregates  consideration  of $20,000,  $16,000 and
$15,000, respectively.

15. Related Party Transactions

     Millennium Partners LLC (collectively with its affiliate "Millennium") is a
significant  shareholder of the Company and has jointly developed Clubs with the
Company.  A  representative  of  Millennium  sits  on  the  Company's  Board  of
Directors.  The Reebok  Sports  Club/NY pays rent to Millennium in the amount of
$2.0  million  per  year  and the  partnership  agreement  provides  for a first
priority annual distribution of $3.0 million to Millennium.

     The Company  pays rent to  Millennium  for The Sports  Club/LA - Washington
D.C.,  The Sports Club/LA - Boston and The Sports Club/LA - San Francisco and in
2000,  2001  and 2002 a total  of  $500,000,  $4.8  million  and  $9.5  million,
respectively,  was paid to  Millennium  for rent on these three Clubs.  All such
payments are reflected as rent expense in the Company's  consolidated  statement
of operations. In addition, after the Company receives a management fee equal to
6% of all  revenues,  an amount equal to its  investment in the Club and a 10% -
11%  annual  return on the  investment,  Millennium  is  entitled  to  receive a
percentage  of all  additional  cash  flows from each Club as  additional  rent.
Millennium's  percentage  of the excess cash flow,  as  defined,  is 25% for the
Washington and Boston Clubs and 60% for the San Francisco  Club.  Millennium has
not received any payments to date under these provisions.

     The Company has a 50.1%  interest in the  partnership  that owns The Sports
Club/LA - Los Angeles,  and Mr. Talla beneficially owns the remaining 49.9%. The
Company includes The Sports Club/LA - Los Angeles in its consolidated  financial
statements.  The partnership  agreement  provides that, on an annual basis,  the
partners  will  share in the  first  $300,000  of the  Club's  net cash  flow in
proportion  to their  percentage  interests.  The next $35.0 million of net cash
flow will be  distributed  to the Company.  All  distributions  of net cash flow
thereafter,  if any,  will  be  made to the  partners  in  proportion  to  their
percentage interests. Under certain circumstances,  the Company has an option to
purchase Mr.  Talla's  interest in the  partnership  for an amount equal to four
times the amount of his most recent annual  distribution  from the  partnership.
This amount is reflected as a minority  interest  liability on the  consolidated
balance sheet.

     As of May 4, 2001, the Company  entered into a ten-year  sublease for space
located within The Sports  Club/LA - Upper East Side. The sublease  provides for
two five-year renewal options,  an initial monthly rent of $125,000,  and rental
increases of 10% at the end of each  five-year  period.  The  subtenant for this
lease is Club at 60th Street, Inc., a New York corporation owned by Mr. Talla.

                                      F-20
<PAGE>

     In September 1999, the Company sold the property on which the Spectrum Club
- Thousand  Oaks is located  for a sales  price of $12.0  million.  The  Company
entered into a sale and leaseback  agreement for the property  under a long-term
lease  with an initial  annual  base rent of $1.3  million.  The  Thousand  Oaks
property  consists of the Spectrum Club - Thousand  Oaks, a SportsMed  facility,
unimproved office space, and a parking ramp. The Company is currently subleasing
the  Spectrum  Club  space to  another  club  operator.  Mr.  Licklider  owns an
approximate  4.6% interest in the purchaser of the property,  and trusts for the
benefit of Mr. Talla's minor children own an approximately  5.2% interest in the
purchaser of the property.

     In  consideration  of  executing  a guaranty  in favor of  Comerica  Bank -
California  (the "Bank") in connection  with the Bank's renewal of the Company's
$15.0 million credit  facility (the "Credit  Facility"),  Messrs.  Licklider and
Talla and MDP  Ventures  II, LLC,  an  affiliate  of  Millennium,  entered  into
agreements with the Company as of July 3, 2001, pursuant to which the Company is
obligated  to pay an annual  commitment  fee to each of the  guarantors.  At the
Company's  discretion the 2001 fee was paid in restricted shares of Common Stock
with each guarantor  receiving 15,384 shares.  In addition to the commitment fee
the Company is also  obligated to pay each  guarantor a usage fee equal to 2% of
such  guarantor's pro rata portion of outstanding  letters of credit and amounts
advanced under the Credit Facility. On November 8, 2002, the Company amended the
loan  agreement  with the Bank,  effective as of October 31,  2002.  The amended
agreement  extends the maturity date of the Credit  Facility  until  November 1,
2003. The Credit  Facility  continues to be guaranteed by Messrs.  Licklider and
Talla and MDP  Ventures  II, LLC.  The Company  continues to be obligated to pay
fees to compensate the guarantors.

     On  September  6, 2002,  the Company  sold an  aggregate of 5,000 shares of
Series C  Convertible  Preferred  Stock to three of its major  shareholders,  D.
Michael  Talla,  Rex  Licklider  and MDP  Ventures  II,  LLC,  an  affiliate  of
Millennium, for aggregate offering proceeds of $5,000,000.

16. Concentration of Credit Risk

     The Company  markets its  products  principally  to  customers  in Southern
California, New York City, Washington D.C., Boston and San Francisco. Management
performs regular evaluations  concerning the ability of its customers to satisfy
their obligations and records a provision for doubtful accounts based upon these
evaluations.   The  Company's  credit  losses  for  the  periods  presented  are
insignificant and have not exceeded managements' estimates.

17. Liquidity

     At December 31,  2002,  the Company was not in  compliance  with one of the
covenants  requried  under its loan  agreement.  Comerica Bank - California  has
wiaved this default.  The Bank's waiver only covered the quarter ended  December
31, 2002 and therefore it is likely that the Company may incur a similar default
for the various  reporting  quarters during 2003. If this occurs,  the Bank will
have the option of terminating  the credit  agreement or continuing to waive any
new defaults. If the Bank terminates the credit agreement,  two of the Company's
major  shareholders,  who now guarantee the bank credit line,  have committed to
providing  the  Company  with  sufficient  financial  support  to  continue  its
operations.

                                      F-21
<PAGE>

18. Quarterly Summary of Information (Unaudited)

     Summarized unaudited condensed quarterly financial data is as follows:
<TABLE>
<CAPTION>

                                                                         2002
                                          -------------------------------------------------------------------
                                             March 31         June 30        September 30      December 31
                                             --------         -------        ------------      -----------
                                                       (in thousands, except per share amounts)
<S>                                       <C>              <C>             <C>               <C>
     Revenues.........................    $    29,546      $     30,495    $     30,272      $     32,175
                                          ===========      ============    ============      ============

     Net income (loss) attributable to
       common shareholders............    $    (4,970)     $     (4,876)   $     (4,020)     $     (3,812)
                                          ============     =============   =============     =============

     Net income (loss) per share:
      Basic and Diluted...............    $     (0.28)     $      (0.27)   $      (0.22)     $      (0.21)
                                          ============     =============   =============     =============

                                                                         2001
                                          -------------------------------------------------------------------
                                             March 31         June 30        September 30      December 31
                                             --------         -------        ------------      -----------
                                                       (in thousands, except per share amounts)
     Revenues.........................    $    23,546      $     25,076    $     24,041      $     29,381
                                          ===========      ============    ============      ============

     Net income (loss) attributable to
       common shareholders............    $    (4,642)     $     (3,849)   $     (4,683)     $    (24,886)
                                          ============     =============   =============     =============

     Net income (loss) per share:
      Basic and Diluted...............    $     (0.26)     $      (0.21)   $      (0.26)     $      (1.39)
                                          ============     =============   =============     =============
</TABLE>


     In  the  fourth  quarter  of  2001,  the  Company  recorded  the  following
significant adjustments:

(a) An  impairment  loss of  $3,243,000  related to the  disposal  of The Sports
Club/Las Vegas.

(b) An impairment loss of $2,007,000 to write-down the goodwill of the Company's
SportsMed subsidiary.

(c) A valuation  allowance  on the net deferred  tax assets of  $18,239,000  (as
restated).



                                      F-22
<PAGE>


                          THE SPORTS CLUB COMPANY, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                    Three-year period ended December 31, 2002
                                 (in thousands)

<TABLE>
<CAPTION>

                                                Balance at
                                               beginning of                                         Balance at end
Description                                       period           Additions        Deletions          of period
------------------------------------------     --------------    --------------    -------------    ----------------
<S>                                            <C>               <C>               <C>               <C>
Year ended December 31, 2000:
     Allowance for doubtful accounts           $   342,000       $   985,000       $   656,000       $   671,000
                                               ===========       ===========       ===========       ===========

Year ended December 31, 2001:
     Allowance for doubtful accounts           $   671,000       $   782,000       $ 1,135,000       $   318,000
                                               ===========       ===========       ===========       ===========

Year ended December 31, 2002:
     Allowance for doubtful accounts           $   318,000       $   798,000       $   582,000       $   534,000
                                               ===========       ===========       ===========       ===========
</TABLE>
                                      F-23
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Our executive officers and directors and their ages as of March 1, 2003 are
as follows:

Name                     Age Position
----                     --- --------
D. Michael Talla......... 56 Chairman of the Board and Co-Chief Executive
                             Officer
Rex A. Licklider......... 59 Vice Chairman of the Board and Co-Chief Executive
                             Officer
Nanette Pattee Francini.. 54 Executive Vice President and Director
Timothy M. O'Brien....... 51 Chief Financial Officer and Assistant Secretary
Philip J. Swain.......... 45 Senior Vice President of Operations
Mark S. Spino............ 48 Senior Vice President of Development
Brian J. Collins......... 42 Director
Andrew L. Turner......... 56 Director
George J. Vasilakos...... 65 Director
Charles A. Norris........ 56 Director

     The following  information  summarizes  the business  experience  during at
least the past five years of each of our executive officers and directors.

     D. Michael Talla began developing  sports and fitness clubs in 1977 when he
co-founded our predecessor  non-public company. He has served as Chairman of the
Board since the inception of our public  company in 1994,  and served until July
1999 as our Chief Executive Officer.  Mr. Talla assumed the position of Co-Chief
Executive Officer with Mr. Licklider in February 2000.

     Rex A.  Licklider  has served as Vice  Chairman of the Board since 1994 and
was appointed  Co-Chief  Executive  Officer in February  2000.  Previously,  Mr.
Licklider served as a consultant to us for strategic and financial planning.  He
founded Com Systems,  Inc., a publicly traded  long-distance  telecommunications
company,  and at  various  times  between  1975 and  April  1992  served  as its
Chairman,  President  and Chief  Executive  Officer.  Since  January  1993,  Mr.
Licklider has been a member of the Pentium Group, an entity investing, and often
taking a management role, in early stage and turn around/growth  businesses.  He
is a director of The Learning Network, Inc., and Deckers Outdoor Corporation. He
also  serves on the Board of  Directors  of The  Children's  Bureau of  Southern
California and The Achievable Foundation.

     Nanette Pattee Francini began  developing  sports and fitness clubs in 1977
when she co-founded our predecessor non-public company. She has served as one of
our directors, our Executive Vice President and has been principally responsible
for  overseeing  all  marketing  activities  since the  inception  of our public
company in 1994.  Ms.  Francini  founded and serves on the Board of the For Kids
Only Foundation, a charity serving the needs of children.

     Timothy M. O'Brien has been our Chief Financial Officer since February 1995
and since June 1995 has also served as  Assistant  Secretary.  Mr.  O'Brien is a
Certified Public Accountant.

     Philip J. Swain was  appointed  Senior  Vice  President  of  Operations  in
February 2000, having served as Vice President of Operations since our inception
as a public company in 1994.

     Mark S.  Spino was  appointed  Senior  Vice  President  of  Development  in
February  2000,  having  served  as Vice  President  of  Development  since  our
inception as a public company in 1994.

     Brian J. Collins has been one of our  directors  since 1997.  From December
1996 to May 1999,  Mr.  Collins  served as Vice  President  and Chief  Financial
Officer of Millennium Partners Management



                                      -24-
<PAGE>


LLC, an affiliate of Millennium  Entertainment  Partners  L.P.,  which is a real
estate  developer of mixed-use  urban  entertainment  projects.  In June 1997 he
became a principal of Millennium  Partners  Management  LLC and in June 1999 was
named Chief Operating Officer. From March 1993 to November 1996, Mr. Collins was
Senior Vice President at Carol  Management  Corp., an owner and operator of real
estate and hotel properties.  For so long as Millennium maintains at least a 12%
interest  in our equity  securities,  we and  certain of our  stockholders  have
agreed with  Millennium  to cause a nominee of  Millennium  to be  appointed  or
elected  to our  Board  of  Directors.  Mr.  Collins  is  currently  serving  as
Millennium's nominee pursuant to this agreement.

     Andrew L.  Turner has been a director  since  1994.  Mr.  Turner  currently
serves as  Chairman  of the Board for both  Code  Blue  Staffing  Solutions  and
Enduracare  Rehabilitation Services. He also serves on the Board of Directors of
Watson  Pharmaceuticals,  Inc., a publicly traded  pharmaceutical  manufacturing
company. From 1989 until August 2000, Mr. Turner served as Chairman of the Board
and Chief  Executive  Officer of Sun Healthcare  Group,  Inc., a publicly traded
health care services provider. In October 1999, Sun Healthcare Group, Inc. filed
voluntary  petitions with the U.S.  Bankruptcy Court to reorganize under Chapter
11 of the Federal Bankruptcy Code.

     George J.  Vasilakos  has been a director  since June 2002.  Since  January
1993, Mr. Vasilakos has been a member of the Pentium Group, an entity investing,
and often  taking a  management  role,  in early  stage  and turn  around/growth
businesses.  He is a  principal  and  served as the Chief  Executive  Officer of
Golden Tel, the largest payphone  provider in Nevada.  Currently,  Mr. Vasilakos
serves as Chief Executive Officer for The Learning Network,  Inc., an e-learning
company, and DiTronics, LLC, a provider of Automated Teller Machine services. He
has served as a member of the Board of Directors and Executive Committee for the
long  distance  industry  trade  association,   COMPTEL,  and  on  the  advisory
committees for the masters programs in telecommunications at Colorado University
and Golden Gate University.

     Charles A. Norris was elected to the Board of Directors in August 2002. Mr.
Norris  currently  serves as Chairman of the Board of Directors of Glacier Water
Services,  Inc. and Day Runner,  Inc.  Previously,  Mr.  Norris was President of
McKesson  Water  Products  Company  and a  Senior  Vice  President  of  McKesson
Corporation.  From 1981 to 1990,  Mr.  Norris  operated  Deer Park Spring  Water
Company. He is past President and served on the Board of Directors and Executive
Committee of the International  Bottled Water Association,  and was a trustee of
the  Drinking  Water  Research  Foundation.  As part of the sale of the Series B
Convertible  Preferred  Shares to Kayne Anderson,  we agreed that for so long as
Kayne  Anderson  maintains  a 12%  interest  in  our  equity  securities  (on an
"as-converted  basis") they will have the right to  designate  one member to our
Board of Directors.  Mr. Norris is currently serving as Kayne Anderson's nominee
pursuant to this agreement.

     Effective  August 26, 2002, the Board  approved the following  compensation
for our non-employee directors:  (i) an annual directorship retainer of $12,000,
(ii) an annual committee  chairman  retainer of $4,000,  (iii)  reimbursement of
expenses for attending Board and committee meetings,  (iv) annual award of 2,000
shares of our Common  Stock  pursuant  to our amended  and  Restated  1994 Stock
Compensation  Plan,  and (v) annual  option award of 2,000 shares under our 2001
Incentive Stock Plan.

     Additionally,  in December 2002, the Board created a special  committee and
in  recognition  of the added  responsibilities  and  demands  of the work to be
performed by this committee,  its members will receive  additional  compensation
of: (i) $1,000 for each  meeting of the  special  committee  attended in person,
(ii) $500 for each  telephonic  meeting,  and (iii)  $1,000 per day for each day
committee members devote a material portion of their business day on the affairs
of the committee.

     Our directors are divided into three classes  having terms  expiring at the
annual  stockholders'  meetings  in 2003  (Messrs.  Talla and  Licklider),  2004
(Messrs.  Turner and Collins) and 2005 (Ms.  Francini and Messrs.  Vasilakos and
Norris),  or such other dates as their  successors  are elected.  At each annual
meeting of stockholders, successors to the class of directors whose term expires
at such  meeting  will be  elected  to serve  three-year  terms and until  their
successors are elected.

     Officers serve at the pleasure of the Board of Directors.

                                      -25-
<PAGE>


     The Board has created three permanent committees:  Audit,  Compensation and
Nominating and Governance.  The Audit Committee,  composed of Messrs. Vasilakos,
Turner and Norris,  is charged with  reviewing our annual audit and meeting with
our  independent  auditors and  reviewing  our internal  controls and  financial
management practices.  The Compensation  Committee,  composed of Messrs. Turner,
Collins,  Vasilakos  and Norris (Mr.  Norris being  appointed  to the  committee
effective February 25, 2003),  recommends to the Board of Directors compensation
for key employees and administers our Stock Incentive  Plans. The Nominating and
Governance Committee, comprised of Messrs. Norris, Vasilakos and Turner, insures
that the Board of Directors is  appropriately  constituted to meet its fiduciary
responsibilities  to our  stockholders  and that we are in full  compliance with
standard governance policies and procedures.

Certain Transactions

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
our  officers  and  directors  and  persons  who own more than ten  percent of a
registered  class of our equity  securities  to file  reports of  ownership  and
changes in ownership with the Securities and Exchange  Commission and to furnish
us with  copies of such  reports.  Based on our  review  of the  copies of those
reports and written  representations that we have received, we believe that with
the  exception of a filing by MDP  Ventures  II, LLC made on March 28, 2003,  to
report  various  transactions  occurring  in 2001 and  2002,  all  such  filings
required to be made during calendar 2002 have been made.

Code of Ethics

     We presently rely on the written policies in our Employee Handbook, as well
as informal policies and procedures, our directors' awareness of their fiduciary
duties and our executive  officers'  understanding of their  responsibilities to
the Company  and our  shareholders  to fulfill  our duties as a public  company.
These  policies  may not  adequately  protect us from all  conflict  of interest
situations,  so in 2003, we intend to adopt a formal written code of ethics that
applies to our directors,  principal  executive  officers,  principal  financial
officer,  principal  accounting  officer and other  persons  performing  similar
functions. This code of standards will fulfill the requirements recently imposed
by the Securities and Exchange Commission and will cover such topics as conflict
of  interest,  confidentiality,  compliance  with legal  requirements  and other
business  ethics  subjects.  We intend to post the code of ethics on our website
www.thesportsclubla.com  in connection with our investor relations materials. We
further  intend  to  promptly  disclose  on our  website  (i) the  nature of any
amendment to our code of ethics that  applies to our  directors  and  executives
officers and (ii) the nature of any waiver, including an implicit waiver, from a
provision  of our code of  ethics  that is  granted  to one of  these  specified
officers,  the name of such person who is granted the waiver and the date of the
waiver.

     To demonstrate our commitment to operating fairly and ethically, we require
that each  employee  acknowledge  receipt of our Employee  Handbook,  which sets
forth, among other things, our professional  standards requiring proper business
conduct and confidentiality of proprietary information.



                                      -26-
<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION

     The table  below  shows,  for the last three  fiscal  years,  the amount of
compensation  earned by the Co-Chief  Executive  Officers and the next four most
highly-compensated  executive  officers (the "Named  Executive  Officers").  The
current   salaries  of  such  executive   officers  are  described  below  under
"Employment Agreements."
<TABLE>
<CAPTION>

                                                                              Long-Term
                                                                            Compensation
                                             Annual Compensation               Shares             All Other
                                             -------------------             Underlying         Compensation
 Name & Position                Year      Salary($)       Bonus($)         Options Awards          ($)(a)
 ---------------               ----- ---------------- ---------------    -----------------    ---------------

<S>                            <C>    <C>             <C>                 <C>                 <C>
D. Michael Talla..........     2002   200,000(b)             --                  --           17,814
  Co-Chief Executive Officer   2001   240,000(b)             --                115,000        17,979
  and Chairman of the Board    2000   243,875(b)           70,000              250,000        14,245

Rex A. Licklider..........     2002   200,000                --                  --           14,184
  Co-Chief Executive Officer   2001   240,000                --                115,000        14,613
  and Vice Chairman of the
  Board...................     2000   156,050                --                  --           10,879

Nanette Pattee Francini...     2002   160,000                --                  --           11,906
  Executive Vice President     2001   200,000                --                21,733         12,195
  and Director                 2000   198,325              60,000              78,267          9,617

Mark S. Spino.............     2002   160,000                --                  --           13,962
  Senior Vice President of     2001   200,000                 --                21,733         17,913
  Development                  2000   197,916              60,000              78,267         14,145

Philip J. Swain...........     2002   160,000                --                  --           17,385
  Senior Vice President of     2001   200,000                --                21,733         16,923
  Operations                   2000   198,325              60,000              78,267         12,704

Timothy M. O'Brien........     2002   160,000                --                  --           15,953
  Chief Financial Officer      2001   200,000                --                21,733         17,913
  and Assistant Secretary      2000   197,916              60,000              78,267          4,716
----------
</TABLE>

(a)  Represents value of (i) amounts paid by us on behalf of the Named Executive
     Officer and  dependents  for medical and life insurance and (ii) our Common
     Stock  contributed for the benefit of the Named Executive Officer under the
     401K Profit  Sharing Plan,  based upon the December 31 closing market price
     each year of our Common Stock, on the American Stock Exchange.

(b)  Mr. Talla also receives, on an annual basis, 49.9% of the first $300,000 of
     The  Sports  Club/LA  - Los  Angeles'  net cash  flow.  This  amount is not
     included  in Mr.  Talla's  compensation.  See  "Certain  Relationships  and
     Related Transactions."

Option Grants, Exercises and Year-End Values

     There were no option grants made to any Named Executive  Officer during the
last fiscal year.



                                      -27-
<PAGE>



 Unexercised Stock Options and Fiscal Year-End Option Values

     None of the Named  Executive  Officers  exercised  stock options during the
last fiscal year.  The  following  table  provides  information  with respect to
unexercised stock options outstanding as of December 31, 2002.
<TABLE>
<CAPTION>

                               Number of Shares Underlying         Value of In-the-Money
                              Unexercised Options at Fiscal    Unexercised Options at Fiscal
                                       Year-End(a)                      Year-End(b)
                            -------------------------------  -------------------------------
                               Exercisable    Unexercisable     Exercisable    Unexercisable
Name                               (#)             (#)              ($)             ($)
----                        --------------- ---------------  --------------- ---------------
<S>                                <C>              <C>            <C>              <C>
D. Michael Talla........           235,001          159,999       -0-              -0-
Rex A. Licklider........            38,334           76,666       -0-              -0-
Nanette Pattee Francini.           169,424           40,576       -0-              -0-
Mark S. Spino...........           169,424           40,576       -0-              -0-
Philip J. Swain.........           179,424           40,576       -0-              -0-
Timothy M. O'Brien......           199,424           40,576       -0-              -0-
----------
</TABLE>

(a)  All options were granted pursuant to one of our two Stock Incentive Plans.

(b)  The  in-the-money  options  had  exercise  prices of less than  $2.30,  the
     closing  price  of our  Common  Stock on the  American  Stock  Exchange  on
     December 31, 2002. The  calculations of value assume a fair market value of
     our Common Stock on December 31, 2002 at the price of $2.30 per share.

Employment Agreements

     The Company has no written employment agreements.  Currently, our executive
officers receive the following salaries:

         D. Michael Talla                   Co-Chief Executive Officer $200,000
         Rex A. Licklider                   Co-Chief Executive Officer  200,000
         Nanette Pattee Francini            Executive Vice President    160,000
         Mark S. Spino                      Senior Vice President       160,000
         Philip J. Swain                    Senior Vice President       160,000
         Timothy M. O'Brien                 Chief Financial Officer     160,000

Compensation of Directors

     Effective as of August 26, 2002,  Directors'  fees,  paid only to directors
who are not employees of the Company, are as follows:

o    Annual retainer fee of $12,000,
o    Annual  retainer fee of $4,000 for each committee  chair,
o    $1,000 for each Board and committee meeting attended,
o    Reimbursement of expenses for attending Board and committee meetings, and
o    Automatic  annual award of 2,000 shares of our Common Stock  granted  under
     the Amended and Restated 1994 Stock Compensation Plan each November 15th.
o    Annual  option award of 2,000 shares  under our 2001  Incentive  Stock Plan
     (timing of such grant is at the  discretion  of the Board,  and as of March
     15, 2003 no option awards have been granted).

     Messrs. Collins,  Turner, Vasilakos and Norris currently serve on the Board
as  non-employee  directors.  Because  of  his  position  as an  executive  with
Millennium,  Mr.  Collins  waived receipt of his monetary fees in 2001 and 2002.
Mr. Licklider received amounts due non-employee  directors until his appointment
to Co-Chief  Executive  Officer in February 2000;  and until his  resignation in
June  2002,  Mr.  Dennison  T.  Veru  also  received  amounts  due  non-employee
directors.  All directors  receive  reimbursement  of  reasonable  out-of-pocket
expenses incurred in connection with meetings of the Board.

                                      -28-
<PAGE>


     In December 2002, Messrs.  Turner and Vasilakos were appointed to a special
committee,  and in recognition of the added  responsibilities and demands of the
work to be performed by them,  Messrs.  Turner and  Vasilakos are to receive the
following  additional  compensation:  $1,000  for each  meeting  of the  special
committee  attended in person,  $500 for each telephonic  meeting and $1,000 per
day on which they devote a material portion of their business day on the affairs
of the committee.

     Following  are the amounts paid to all directors for each of the last three
years:

                           Year                  Amount
                           ----                  ------
                           2000               $   71,500
                           2001                   56,863
                           2002                   68,502

     Under the Amended and Restated 1994 Stock Compensation Plan an aggregate of
44,000  shares of Common  Stock was  issued to  non-employee  directors  through
December 31, 2002.

Compensation of Committee Interlocks and Insider Participation

     The  Compensation  Committee  of the Board  (the  "Committee")  administers
executive  compensation.  Mr.  Turner has been a member of the  Committee  since
September 13, 1994,  and became its Chairman on February 27, 1995.  Mr.  Collins
was appointed to the Committee on April 10, 1998. Mr. Vasilakos was appointed on
August 2, 2002  following  the  resignation  of Dennison  Veru.  Mr.  Norris was
appointed to the  Committee on February 25, 2003 to serve as a fourth  Committee
member. None of these individuals has ever been an officer or employee.

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table shows the shares of our Common Stock beneficially owned
as of March 24, 2003 by our  directors  and Named  Executive  Officers.  It also
shows other individuals or entities that beneficially  owned more than 5% of our
Common Stock.

<TABLE>
<CAPTION>

                                                           Shares Issuable
                                                           upon Conversion
                                                            of Preferred
                                                              Stock or
                                                              exercise                    Total and Percent of
                                             Shares          of options     Shares Held     Stock Outstanding
          Name and Address                   Owned            within 60        Under       -------------------
       of Beneficial Owner (a)             Directly (b)        days (c)      401-K Plan(d)  Number      Percent
       ----------------------             --------------    -----------     --------------  -------------------

<S>                                         <C>                <C>              <C>     <C>          <C>
D. Michael Talla (e)..................      4,445,733          690,000          5,938   5,141,671    32.766
Nanette Pattee Francini (e)...........        256,107          193,334          2,992     452,433    32.766
Mark S. Spino (e).....................        227,969          193,334          4,389     425,692    32.766
Philip J. Swain (e)...................        124,164          203,334          4,033     331,531    32.766
Voting Trust (e)......................      5,053,973        1,280,002         17,352   6,351,327    32.766
Timothy O'Brien.......................          3,000          223,334          4,273     230,607     1.258
The Licklider Living Trust
  Dated May 2, 1986...................      1,863,346          743,333           --     2,606,679    13.831
Andrew L. Turner......................          6,000            --              --         6,000      *
Charles A. Norris(f)..................          2,000          166,667           --       168,667    19.874
Brian J. Collins (g)..................         57,601            --              --        57,601    36.589
George J, Vasilakos...................        325,900            --              --       325,900     1.800
All Directors and Executive Officers as
 a Group (10 persons)................       7,311,820        2,413,336         21,625   9,746,781    47.505
Millennium (g)........................      6,143,741          666,666           --     6,810,407    36.589
Kayne Anderson Capital Advisors, L.P.(f)      793,628        3,500,000           --     4,293,628    19.874
----------
</TABLE>

 *    Less than 1%


                                      -29-
<PAGE>



(a)  The address of all directors and executive  officers is c/o The Sports Club
     Company,  Inc.,  at 11100  Santa  Monica  Blvd.,  Suite 300,  Los  Angeles,
     California 90025.

(b)  Includes shares for which the named person is considered the owner because:
     1. the named  person has sole  voting and  investment  power,
     2. the named persons' spouse has voting and investment  power, or
     3. the shares are held by other members of the named persons' immediate
        family.

(c)  Includes shares that can be acquired upon conversion of Preferred Stock and
     shares that can be acquired through stock option exercises  through May 23,
     2003.

(d)  Includes  shares  issued  pursuant  to our  401(k)  Profit  Sharing  Plan's
     discretionary match as of March 24, 2003.

(e)  Named  persons  share  voting  power  pursuant to a voting  agreement  that
     requires each party to vote his or her shares in the manner determined by a
     majority of all holders. The agreement is effective until October 20, 2004,
     or until  terminated by persons holding 66 2/3% of the shares of our Common
     Stock subject to the agreement. Each of the parties to the voting agreement
     effectively  controls  the voting of all shares  held by the parties to the
     agreement, and, under SEC rules, are deemed beneficial owners of the shares
     subject to the  agreement.  The total  number of shares of our Common Stock
     held by the parties without giving effect to beneficial ownership resulting
     from the voting agreement is:

                                                       Shares
                                                        Held        Total Shares
Named Person                                          Directly           Held
------------                                         ----------          ----
D. Michael Talla:
     Individually................................      4,274,752
     Spouse......................................         30,953
     Trusts for two minor children...............        140,028
                                                     ------------
        Total................................................         4,445,733
Nanette Pattee Francini......................................           256,107
Mark S. Spino................................................           227,969
Philip J. Swain..............................................           124,164
                                                               ----------------
     All Parties to Voting Agreement.........................         5,053,973

(f)  Effective  March 18,  2002,  we  completed a private  placement  of a newly
     created class of Preferred Stock to Kayne Anderson Capital  Advisors,  L.P.
     and several of their affiliates.  The new class of Series B Preferred Stock
     carries  voting  rights and is  convertible  into  3,500,000  shares of our
     Common Stock.  Kayne Anderson is deemed to be the  beneficial  owner of the
     shares subject to  conversion.  Kayne Anderson  Capital  Advisors,  L.P. is
     located at 1800 Avenue of the Stars, Second Floor, Los Angeles, CA 90067.

The Kayne Anderson  Capital  Advisors,  L.P.  shares issuable upon conversion of
Preferred Stock are held by the following affiliates:

                                                          Shares Held
                                                          -----------
           Kayne Anderson Capital Advisors, L.P......      2,958,334
           Ric Kayne.................................        333,333
           Charles Norris............................        166,667
           Howard Zelikow............................         33,333
           David Shladovsky..........................          8,333
                                                          ----------
                Total                                      3,500,000

      For purposes of the table, Mr. Norris' shares are listed separately so
      that they may be included in the total number of shares held by Directors
      and Executive Officers. Mr. Norris' shares are included in determining the
      percentage of shares held by Kayne Anderson.



                                      -30-
<PAGE>



(g)  The Millennium shares are held by the following affiliates:
                                                                    Shares Held
                                                                    -----------
     Brian J. Collins.........................................           57,601
     Millennium Partners LLC..................................        2,253,863
     Millennium Development Partners L.P......................          978,900
     MDP Ventures I LLC.......................................           72,100
     MDP Ventures II LLC......................................        2,213,878
     Millennium Entertainment Partners L.P....................          625,000
                                                                  -------------
          Total                                                       6,143,741

       For purposes of the table, Mr. Collins' shares are listed separately so
       that they may be included in the total number of shares held by Directors
       and Executive Officers. Mr. Collins' shares are included in determining
       the percentage of shares beneficially held by Millennium.

       The address of all such entities is c/o Millennium Partners Management
LLC, 1995 Broadway, New York, New York, 10023.


                                      -31-
<PAGE>



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     From time to time we have  entered  into  transactions  with our  officers,
directors and stockholders.  We believe that each of the following  transactions
has been on terms no less  favorable  to us than could have been  obtained  from
unaffiliated third parties. All transactions between us and any of our directors
or officers are subject to the approval of the disinterested directors.

     Mr. Talla. We have a 50.1% interest in the partnership that owns The Sports
Club/LA - Los Angeles and Mr. Talla  beneficially  owns the remaining 49.9%. The
partnership agreement provides that, on an annual basis, the partners will share
in the  first  $300,000  of the  Club's  net cash  flow in  proportion  to their
percentage  interests.  The  next  $35.0  million  of  net  cash  flow  will  be
distributed to us. All  distributions of net cash flow thereafter,  if any, will
be made to the  partners in  proportion  to their  percentage  interests.  Under
certain circumstances, we have an option to purchase Mr. Talla's interest in the
partnership  for an amount  equal to four  times the  amount of his most  recent
annual distribution from the partnership.

     As of May 4, 2001,  we entered into a ten-year  sublease for space  located
within the building including The Sports Club/LA - Upper East Side. The sublease
provides for two five-year renewal options, an initial monthly rent of $125,000,
and rental increases of 10% at the end of each five-year  period.  The subtenant
for this lease is Club at 60th Street, Inc., a New York corporation owned by Mr.
Talla.

     Messrs.  Talla and  Licklider.  In September  1999, we sold the property on
which the  Spectrum  Club - Thousand  Oaks is located for a sales price of $12.0
million. We entered into a sale and leaseback agreement for the property under a
long-term  lease with an initial annual base rent of $1.3 million.  The Thousand
Oaks  property  consists  of the  Spectrum  Club - Thousand  Oaks,  a  SportsMed
facility,  unimproved  office  space,  and a  parking  ramp.  We  are  currently
subleasing the Spectrum Club space to another club operator.  Mr. Licklider owns
an  approximate  4.6% interest in the purchaser of the property,  and trusts for
the benefit of Mr. Talla's minor children own an approximately  5.2% interest in
the purchaser of the property.

     Millennium.   Millennium  is  a  partner  in  the   Reebok-Sports   Club/NY
partnership  as well as the  landlord  of the  building in which  Reebok  Sports
Club/NY is located. Reebok-Sports Club/NY partnership pays rent to Millennium in
the amount of $2.0 million per year, and the partnership  agreement provides for
a first  priority  annual  distribution  of $3.0 million to  Millennium.  We are
entitled to certain additional  priority  distributions and 60% of the remaining
cash  flow.  Millennium's  partnership  interest  entitles  them  to 20% of such
remaining cash flow.

     In June 1997, we issued to Millennium  2,105,263 shares of our Common Stock
in exchange for $10.0  million.  In December  1997,  we sold  625,000  shares of
Common Stock to  Millennium  for $5.0  million.  We also  granted to  Millennium
certain  registration and preemptive  rights regarding its shares.  In addition,
for so long as  Millennium  maintains  at  least a 12%  interest  in our  equity
securities, we and certain of our stockholders have agreed to cause a nominee of
Millennium  to be  appointed or elected to the Board of  Directors.  Pursuant to
this agreement Brian J. Collins, an officer of Millennium,  is currently serving
as a member of our Board of Directors.

     We have entered into leases with Millennium  relating to The Sports Club/LA
- San Francisco, The Sports Club/LA - Washington,  D.C. and The Sports Club/LA -
Boston.  On March 27, 2001, the leases were amended with  Millennium's  landlord
contribution  increasing  by $16.5  million  in  exchange  for  additional  rent
payments.  In  addition,  after we receive a  management  fee equal to 6% of all
revenues,  an amount equal to our  investment in the Club and a 10% - 11% annual
return on the investment,  Millennium is entitled to receive a percentage of all
additional cash flows from each Club as additional rent. Millennium's percentage
of the excess cash flow, as defined, previously was 20% for each of these Clubs.
Under the amended lease  agreements,  their percentage  increases to 25% for the
Washington and Boston Clubs and 60% for the San Francisco  Club.  Millennium has
not received any payments to date under these provisions.

                                      -32-
<PAGE>


     We have reached an agreement in principle  with  Millennium  to develop The
Sports  Club/LA  - Miami as part of the  exclusive  new Four  Seasons  Hotel and
Tower.  We are  currently  negotiating  the terms of definitive  management  and
license  agreements,  pursuant  to which we will manage the Club and be provided
with 6% of gross revenues and a participation in the Club's net cash flow. It is
anticipated  that the Club will  encompass  45,000  square  feet and open in the
fourth quarter of 2003.

     Kayne Anderson. On March 18, 2002, we sold an aggregate of 10,500 shares of
Series B Convertible Preferred Stock to Kayne Anderson Capital Advisors and four
affiliates thereof for aggregate offering proceeds of $10,500,000. The shares of
Series B Preferred may, at the option of the holder, be converted into shares of
our Common  Stock at a rate of $3.00 per share;  entitle each holder to one vote
for each share of Common Stock into which such Series B Preferred  could then be
converted;  and provide for the payment of dividends at an annual rate of $90.00
per  share.  Dividends  are  cumulative,  do not  accrue  interest  and,  at our
discretion,  may be paid in additional shares of Series B Preferred.  As part of
the sale of the Series B Preferred to Kayne Anderson, we agreed that for so long
as Kayne Anderson beneficially owns at least 12% of our equity securities (on an
"as-converted  basis") they will have the right to  designate  one member to our
Board of Directors.  Mr. Charles A. Norris is currently  serving on the Board as
the nominee of Kayne Anderson.

     Messrs. Talla and Licklider and Millennium. In consideration of executing a
guaranty in favor of Comerica Bank - California  (the "Bank") in connection with
the Bank's renewal of our $15.0 million credit facility (the "Credit Facility"),
Messrs.  Licklider  and  Talla  and  MDP  Ventures  II,  LLC,  an  affiliate  of
Millennium,  entered  into  agreements  with us as of July 3, 2001,  pursuant to
which  we  are  obligated  to pay  an  annual  commitment  fee  to  each  of the
guarantors.  At our  discretion  the 2001 fee was paid in  restricted  shares of
Common Stock with each guarantor  receiving  15,384  shares.  In addition to the
commitment  fee we are also obligated to pay each guarantor a usage fee equal to
2% of such  guarantor's  pro rata portion of  outstanding  letters of credit and
amounts  advanced  to us under the Credit  Facility.  On  November  8, 2002,  we
amended our loan agreement with the Bank,  effective as of October 31, 2002. The
amended  agreement  extends  the  maturity  date of our  Credit  Facility  until
November 1, 2003.  The Credit  Facility  continues to be  guaranteed  by Messrs.
Licklider and Talla and MDP Ventures II, LLC. We continue to be obligated to pay
fees to compensate the guarantors.

     On  September  6, 2002,  we sold an  aggregate  of 5,000 shares of Series C
Convertible  Preferred  Stock to three of our  major  shareholders,  D.  Michael
Talla,  Rex Licklider and MDP Ventures II, LLC, an affiliate of Millennium,  for
aggregate offering proceeds of $5,000,000. The shares of Series C Preferred may,
at the option of the holder,  be converted  into shares of our Common Stock at a
rate of $3.00 per  share;  entitle  each  holder  to one vote for each  share of
Common  Stock into which such Series C Preferred  could then be  converted;  and
provide  for the  payment of  dividends  at an annual  rate of $90.00 per share.
Dividends are cumulative, do not accrue interest and, at our discretion,  may be
paid in additional shares of Series C Preferred.




                                      -33-
<PAGE>





                                     PART IV

ITEM 14.  CONTROLS AND PROCEDURES

(a)  Evaluation of disclosure controls and procedures.

     Our  management,  including our Co-Chief  Executive  Officers and our Chief
Financial Officer,  have conducted an evaluation of the effectiveness of the our
disclosure  controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934 as of a date (the  "Evaluation  Date") within 90 days prior
to the filing date of this  report.  Based upon that  evaluation,  the  Co-Chief
Executive  Officers  and  Chief  Financial  Officer  concluded  that,  as of the
Evaluation  Date,  our  disclosure  controls and  procedures  were  effective in
ensuring  that all  material  information  required  to be filed in this  annual
report has been made known to them in a timely manner.

(b)  Changes in internal controls.

     There have been no significant  changes made in our internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the Evaluation Date.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      (1)  Financial Statements filed as part of this Report are listed in
              Item 8 of this Report.

         (2)  No other financial schedules have been included because they are
              not applicable, not required or because required information is
              included in the consolidated financial statements or notes
              thereto.

         (3)  The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
                                                                      Incorporated by Reference
 Exhibit                                                    ---------------------------------------------      Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                         <C>              <C>              <C>             <C>
   3.1          Restated Certificate of Incorporation           S-1           33-79552        10/13/94
                of the Registrant.

   3.2          Bylaws of the Registrant.                       S-1           33-79552        10/13/94

   3.3          Amendment to Bylaws dated February 1,          10-K/A         1-13290         10/14/97
                1995.

   3.4          Certificate of Designation of Series            8-K           1-13290         03/26/02
                B Convertible Preferred Stock of the
                Registrant.

   3.5          Corrected Certificate of Designation            8-K           1-13290         09/09/02
                of Series B Convertible Preferred
                Stock of the Registrant.

   3.6          Certificate of Designation of Series            8-K           1-13290         09/09/02
                C Convertible Preferred Stock of the
                Registrant.

   3.7          Amendment No. 2 to Bylaws dated July                                                              X
                21, 1999.
</TABLE>

                                      -34-
<PAGE>


<TABLE>
<CAPTION>

                                                                      Incorporated by Reference
 Exhibit                                                   ----------------------------------------------       Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                          <C>              <C>             <C>             <C>
   4.1          Specimen Common Stock Certificate.              S-1           33-79552        10/13/94

   4.2          Rights Agreement by and between the             8-K           1-13290         10/06/98
                Registrant and American Stock Transfer
                & Trust dated as of October 6, 1998.

   4.3          First Amendment to Rights Agreement             8-K           1-13290         03/15/99
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                February 18, 1999.

   4.4          Indenture by and among Registrant,              8-K           1-13290         04/14/99
                U.S. Bank Trust National Association
                and the Subsidiary Guarantors
                referred to therein, dated as of
                April 1, 1999.

   4.5          Registration Rights Agreement by and            8-K           1-13290         04/14/99
                among the Registrant, Jeffries &
                Company, Inc. and CIBC Oppenheimer
                Corp., dated as of April 1, 1999.

   4.6          Purchase Agreement by and among the             8-K           1-13290         04/14/99
                Registrant, Jeffries & Company, Inc.
                and CIBC Oppenheimer Corp., dated
                March 29, 1999.

   4.7          Second Amendment to Rights Agreement            10-K          1-13290         03/28/00
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                the second day of July 1999.

   4.8          Third Amendment to Rights Agreement             10-K          1-13290         03/30/01
                by and between the Registrant and American
                Stock Transfer & Trust made and entered into
                as of April 27, 2000.

   4.9          Fourth Amendment to Rights Agreement            8-K           1-13290         07/17/01
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                June 27, 2001.

   4.10         Fifth Amendment to Rights Agreement             8-K           1-13290          09/9/02
                by and between the Registrant and
                American Stock Transfer & Trust
                entered into as of September 6, 2002

</TABLE>

                                      -35-
<PAGE>

<TABLE>
<CAPTION>
                                                                      Incorporated by Reference
 Exhibit                                                    ---------------------------------------------       Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                         <C>              <C>            <C>               <C>
   4.11         Sixth Amendment to Rights Agreement                                                               X
                by and between the Registrant and
                American Stock Transfer & Trust
                entered into as of March 5, 2003.

   9.1          Voting Agreement among D. Michael               S-1           33-79552        10/13/94
                Talla, Nanette Pattee Francini, Mark
                S. Spino, Peter Feinstein, Philip J.
                Swain and FP II.

   10.1         1994 Stock Incentive Plan. #                    S-1           33-79552        10/13/94

   10.2         Form of Stock Option Agreement. #               S-1           33-79552        10/13/94

   10.3         Form of Stock Purchase Agreement. #             S-1           33-79552        10/13/94

   10.4         1994 Stock Compensation Plan. #                 S-1           33-79552        10/13/94

   10.5         Form of Indemnification Agreement               S-1           33-79552        10/13/94
                between the Registrant and its
                directors and certain officers.

   10.6         Indemnification Agreement between the           S-1           33-79552        10/13/94
                Registrant and D. Michael Talla.

   10.7         Indemnification Agreement between               S-1           33-79552        10/13/94
                Registrant and Rex A. Licklider.

   10.8         Lease of premises for Reebok Sports             S-1           33-79552        10/13/94
                Club/NY located at 160 Columbus
                Avenue, New York 10023 dated June 3,
                1992.

   10.9         Management Agreement effective as of            S-1           33-79552        10/13/94
                June 3, 1992, between R-SC/NY, Ltd.
                and Pontius Realty, Inc.

  10.10         License Agreement between Reebok                S-1           33-79552        10/13/94
                Fitness Centers, Inc. and R-SC/NY,
                Ltd. dated June 3, 1992.

  10.11         Letter Agreement regarding R-SC/NY              S-1           33-79552        10/13/94
                dated June 3, 1992.

  10.12         Memorandum of Agreement between                 S-1           33-79552        10/13/94
                Reebok Fitness Centers, Inc. and the
                Company dated as of June 3, 1992.

</TABLE>

                                      -36-
<PAGE>




<TABLE>
<CAPTION>
                                                                      Incorporated by Reference
 Exhitit                                                    ---------------------------------------------       Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                          <C>             <C>             <C>              <C>
  10.13         Seventh Amendment and Restated                  S-1           33-79552        10/13/94
                Agreement of Limited Partnership of
                L.A./Irvine Sports Club, Ltd., a
                California Limited Partnership, dated
                as of October 12, 1994.

  10.14         First Amendment to Seventh Amended              S-1           33-79552        10/13/94
                and Restated Agreement of Limited
                Partnership of L.A./Irvine Sports
                Club, Ltd., a California Limited
                Partnership, dated as of October 12,
                1994.

  10.15         Form of Option Agreement by and                 S-1           33-79552        10/13/94
                between D. Michael Talla, an
                individual, TTO Partners, a
                California Limited Partnership, and
                Sports Club, Ltd., a California
                Corporation, relating to L.A./Irvine
                Sports Club, Ltd., a California
                Limited Partnership.

  10.16         Amended and Restated Agreement of               S-1           33-79552        10/13/94
                Limited Partnership of TTO Partners,
                a California Limited Partnership,
                dated June 30, 1992, as amended
                January 1, 1993, January 4, 1993 and
                February 12, 1994 and as assigned
                January 1, 1993.

  10.17         First Amended and Restated Agreement            S-1           33-79552        10/13/94
                of Limited Partnership of
                Reebok-Sports Club/NY, Ltd. Dated as
                of October 12, 1994.

  10.18         Letter Agreement by and between                 S-1           33-79552        10/13/94
                Reebok Fitness Centers, Inc. and the
                Company dated October 12, 1994.

  10.19         Amendment to First Amended and                  S-1           33-79552        10/13/94
                Restated Agreement of Limited
                Partnership of Reebok-Sports Club/NY,
                Ltd. dated as of October 12, 1994.

  10.20         Letter Agreement by and between                 S-1           33-79552        10/13/94
                Reebok Fitness Centers, Inc. and the
                Company, which became effective on
                October 29, 1994.

</TABLE>

                                      -37-
<PAGE>



<TABLE>
<CAPTION>

                                                                      Incorporated by Reference
 Exhibit                                                    ---------------------------------------------       Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                          <C>              <C>             <C>             <C>
  10.21         License Agreement by and between                S-1           33-79552        10/13/94
                Reebok Fitness Centers, Inc. and the
                Company, which became effective on
                October 20, 1994.

  10.22         Agreement by and among Reebok-Sports           10-K/A         1-13290         10/14/97
                Club/NY Ltd., Talla New York, Inc.,
                RFC, Inc., LMP Health Club Co.,
                Millennium Entertainment Partners,
                L.P. and Registrant dated as of
                December 30, 1996.

  10.23         Letter Agreement between Millennium            10-K/A         1-13290         10/14/97
                Entertainment Partners, L.P. and the
                Registrant dated as of March 13, 1997.

  10.24         First Amendment to Option Agreement             10-K          1-13290         02/26/98
                between D. Michael Talla and TTO
                Partners dated May 27, 1997.

  10.25         Amendment of Lease between Lincoln              10-K          1-13290         02/26/98
                Metrocenter Partners, L.P. and
                Reebok-Sports Club/NY Ltd. as of
                January 31, 1998.

  10.26         Lease Agreement between RCPI Trust              10-K          1-13290         03/25/99
                and the Registrant as of February 27,
                1998.

  10.27         Amended and Restated Net Operating              10-K          1-13290         03/25/99
                Lease among Hirschfeld Realty Club
                Corporation and 328 E. 61 Corp., and
                Vertical Fitness and Racquet Club,
                Ltd., dated March 26, 1985.

  10.28         Lease Modification Agreement by and             10-K          1-13290         03/25/99
                among Hirschfeld Realty Corporation
                and 328 E. 61 Corp., and Vertical
                Fitness and Racquet Club, Ltd., dated
                July 1, 1990.

  10.29         Assignment and Assumption of Lease by           10-K          1-13290         03/25/99
                and between Vertical Fitness and
                Racquet Club, Ltd., and Bally
                Entertainment Corporation dated
                January 8, 1996.

</TABLE>

                                      -38-
<PAGE>


<TABLE>
<CAPTION>


                                                                      Incorporated by Reference
 Exhibit                                                    ---------------------------------------------       Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                             <C>           <C>            <C>              <C>
  10.30         Assignment of Lease executed by                 10-K          1-13290         03/25/99
                Hilton Hotels Corporation, as successor
                to tenant, and agreed to and accepted by
                the Registrant, dated April 15, 1998.

  10.31         Second Amendment to Amended and                 10-K          1-13290         03/25/99
                Restated Net Operating Lease by and
                among Hirschfeld Realty Club
                Corporation and 328 E. 61 Corp., and
                the Registrant dated April 15, 1998.

  10.32         Note Payable issued by the Registrant           10-K          1-13290         03/25/99
                to Hilton Hotels Corporation dated
                April 15, 1998.

  10.33         Amended and Restated 1994 Stock                 10-K          1-13290         03/25/99
                Incentive Plan as of June 2, 1998. #

  10.34         Letter Agreement between the                    10-K          1-13290         03/25/99
                Registrant and Millennium Partners
                LLC dated as of October 27, 1998.

  10.35         First Amendment to Lease between RCPI           10-K          1-13290         03/25/99
                Trust and the Registrant dated
                October 30,1998.

  10.36         Second Amendment to Lease between               10-K          1-13290         03/25/99
                RCPI Trust and the Registrant dated
                March 4, 1999.

  10.37         Lease between CB-1 Entertainment                10-K          1-13290         03/25/99
                Partners LP and S.F. Sports Club,
                Inc. dated June 1, 1997.

  10.38         Lease between 2200 M Street LLC and             10-K          1-13290         03/25/99
                Washington D.C. Sports Club, Inc.
                dated March 1999.

  10.39         Fourth Amended and Restated Loan                8-K           1-13290         04/14/99
                Agreement by and among the Registrant,
                certain of its subsidiaries and Comerica
                Bank-California, dated April 1, 1999.

  10.40         Intercreditor Agreement by and among            8-K           1-13290         04/14/99
                the Registrant, certain of its
                subsidiaries, Comerica
                Bank-California and U.S. Bank Trust
                National Association, dated April 1, 1999.
</TABLE>

                                      -39-
<PAGE>


<TABLE>
<CAPTION>
                                                                      Incorporated by Reference
 Exhitit                                                    ---------------------------------------------       Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                             <C>           <C>             <C>             <C>
  10.41         Disbursement Agreement between U.S.             8-K           1-13290         04/14/99
                Bank Trust National Association and
                the Registrant and certain of its
                subsidiaries dated as of April 1,
                1999.

  10.42         Amended and Restated 1994 Stock                 10-K          1-13290         03/28/00
                Compensation Plan. #

  10.43         Lease Agreement as of September 24,             10-K          1-13290         03/28/00
                1999 between The Spectrum Club
                Company, Inc. and West Hollywood
                Property Limited Partnership and 2400
                Willow Lane Associates Limited
                Partnership.

  10.44         Lease Agreement as of November 5,               10-K          1-13290         03/28/00
                1999 by and between New Commonwealth
                Center Limited Partnership and
                Washington D.C. Sports Club, Inc.

  10.45         Separation from Employment Agreement            10-K          1-13290         03/28/00
                made as of February 11, 2000 by and
                between the Registrant and John M.
                Gibbons. #

  10.46         Letter Agreement dated March 11, 1999           10-K          1-13290         03/28/00
                amending the October 27, 1998 Letter
                Agreement between the Registrant and
                Millennium Partners, LLC.

  10.47         Amendment adopted November 4, 1999 to           10-K          1-13290         03/28/00
                the Registrant's 1994 Stock Incentive
                Plan. #

  10.48         Certificate representing Series B               10-K          1-13290         03/28/00
                Senior Secured Notes.

  10.49         First Amendment to Fourth Amended and           10-K          1-13290         03/28/00
                Restated Loan Agreement among the
                Registrant and certain of its
                subsidiaries and Comerica Bank -
                California as of December 3, 1999.

  10.50         Form of The Sports Club Membership              10-K          1-13290         03/28/00
                Agreements.

</TABLE>

                                      -40-
<PAGE>


<TABLE>
<CAPTION>


                                                                      Incorporated by Reference
 Exhibit                                                    ---------------------------------------------       Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                             <C>           <C>             <C>             <C>
  10.51         Second Amendment to Fourth Amended              10-K          1-13290         03/30/01
                and Restated Loan Agreement among the
                Registrant and certain of its subsidiaries
                and Comerica Bank-California as of August 10,
                2000.

  10.52         Reaffirmation of Intercreditor and              10-K          1-13290         03/30/01
                Subordination Agreement dated as of
                August 10, 2000 among the Registrant
                and certain of its subsidiaries and
                U.S. Bank Trust, National Association.

  10.53         First Supplemental Agreement of Lease           10-K          1-13290         03/30/01
                made as of the 27th day of March,
                2001 between CB-1 Entertainment
                Partners, LP and S.F. Sports Club,
                Inc.

  10.54         First Supplemental Agreement of Lease           10-K          1-13290         03/30/01
                made as of the 27th day of March 2001
                between New Commonwealth Center
                Limited Partnership and Washington
                D.C. Sports Club, Inc.

  10.55         First Supplemental Agreement of Lease           10-K          1-13290         03/30/01
                made as of the 27th day of March 2001
                between 2200 M Street LLC and
                Washington D.C. Sports Club, Inc.

  10.56         Third Amendment to Fourth Amended and           8-K           1-13290         07/17/01
                Restated Loan Agreement entered into
                as of June 1, 2001 by and among
                Registrant and various of its
                subsidiaries and Comerica Bank -
                California.

  10.57         Indemnification and Contribution                8-K           1-13290         07/17/01
                Agreement entered into as of July 3,
                2001 by and among the Registrant.,
                Rex A. Licklider, D. Michael Talla
                and MDP Ventures II LLC.

  10.58         The Sports Club Company, Inc. 2001              10-K          1-13290         03/29/02
                Stock Incentive Plan. #

</TABLE>

                                      -41-
<PAGE>


<TABLE>
<CAPTION>


                                                                      Incorporated by Reference
 Exhibit                                                    ----------------------------------------------      Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                             <C>           <C>             <C>             <C>
  10.59         Preferred Stock Purchase Agreement              8-K           1-13290         03/26/02
                made as of March 18, 2002 by and among
                Registrant and the holders of the Series B
                Convertible Preferred Stock.

  10.60         Investor Rights Agreement made as of            8-K           1-13290         03/26/02
                the 18th day of March 2002 by and
                between the Registrant and the
                holders of the Series B Convertible
                Preferred Stock.

  10.61         Asset Purchase Agreement dated as of            10-K          1-13290         03/29/02
                January 25, 2002, by and between SCC
                Nevada, Inc. and LSI-Nevada, LLC.

  10.62         Standard Form Lease between the                 10-K          1-13290         03/29/02
                Registrant and Club at 60th St., Inc.
                for space located at 333 East 60th
                Street, New York, dated May 4, 2001.

  10.63         First Amendment to Lease by and among           10-K          1-13290         03/29/02
                Registrant and Club at 60th St., Inc.
                dated as of March 1, 2002.

  10.64         Waiver of Covenant Compliance Letter            10-K          1-13290         03/29/02
                Agreement between the Registrant and
                Comerica Bank - California dated
                March 14, 2002.

  10.65         Fourth Amendment to Fourth Amended              8-K           1-13290         06/04/02
                and Restated Loan Agreement and First
                Amendment to Amended and Restated
                Revolving Loan between the Registrant
                and certain of its Subsidiaries and
                Comerica Bank - California dated May
                31, 2002.

  10.66         Fifth Amendment to Fourth Amended and           8-K           1-13290         09/04/02
                Restated Loan Agreement between the
                Registrant and certain of its
                Subsidiaries and Comerica Bank -
                California dated August 30, 2002.

</TABLE>

                                      -42-
<PAGE>


<TABLE>
<CAPTION>


                                                                      Incorporated by Reference
 Exhibit                                                    ----------------------------------------------      Filed
  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

<S>                                                             <C>           <C>             <C>               <C>
  10.67         Reaffirmation of Intercreditor and              8-K           1-13290         09/04/02
                Subordination Agreement dated as of
                August 30, 2002 among the Registrant
                and certain of its Subsidiaries and
                U.S. Bank Trust, National Association.

  10.68         Investors' Rights Agreement made as             8-K           1-13290         09/09/02
                of September 6, 2002 by and between
                the Registrant and the holders of the
                Series C Convertible Preferred Stock.

  10.69         Preferred Stock Purchase Agreement              8-K           1-13290         09/09/02
                made as of September 6, 2002 by and
                among the Registrant and the holders
                of the Series C Convertible Preferred Stock.

  10.70         Sixth Amendment to Fourth Amended and           8-K           1-13290         11/12/02
                Restated Loan Agreement by and among
                the Registrant and certain of its
                Subsidiaries, Comerica Bank -
                California and KASCY, L.P. dated
                October 31, 2002.

  10.71         Consent and Reaffirmation of                    8-K           1-13290         11/12/02
                Intercreditor and Subordination
                Agreement dated as of October 31,
                2002 among the Registrant and certain
                of its Subsidiaries, Comerica Bank -
                California and U.S. Bank Trust,
                National Association.

  10.72         Waiver of Covenant Compliance Letter
                from Comerica Bank - California dated
                March 26, 2003.                                                                                   X

   21.1         Subsidiaries of the Registrant.                                                                   X

   23.1         Consent of KPMG LLP.                                                                              X

   99.1         Certification Pursuant to 18 U.S.C.                                                               X
                Section 1350, as adopted Pursuant to
                Section 906 of the Sarbanes - Oxley
                Act of 2002.
------------------
</TABLE>

#        Compensation agreement or plan.



                                      -43-
<PAGE>



(b)      Reports on Form 8-K

     The  following  reports on Form 8-K were filed from October 1, 2002 through
the date of this report:

o    On November 12, 2002, we filed a report on Form 8-K stating that we amended
     our loan  agreement  with Comerica Bank - California to extend the maturity
     date to  November 1, 2003 and to add KASCY,  L.P.,  an  affiliate  of Kayne
     Anderson  Capital  Advisors,  L.P. as a lending  participant  in the credit
     facility.

o    On December 12,  2002,  we filed a report on Form 8-K  announcing  that our
     Board of  Directors  had  approved  the  formation  of a special  committee
     comprised of its independent  directors to explore strategic  alternatives,
     including a possible  "going  private"  transaction in which certain of our
     principal shareholders may participate.

o    On December 13, 2002, we filed a report on Form 8-K/A to also disclose that
     we engaged Hankin & Company,  a Los Angeles based investment  banking firm,
     to assist us in raising up to $50.0 million in private  equity to establish
     separate  joint  ventures for the  development of smaller luxury sports and
     fitness complexes under The Sports Club/LA brand.

o    On December 19, 2002,  we filed a report on Form 8-K to announce we reached
     an agreement  in  principle  with  Millennium  to develop an  approximately
     45,000  square foot sports and fitness Club under our brand name The Sports
     Club/LA as part of  Millennium's  mixed use project in Miami,  Florida.  We
     expect  to  manage  the new  Club  pursuant  to a  management  and  license
     agreement   that  will  provide  us  with  6%  of  gross   revenues  and  a
     participation in net profits.

(c)      Exhibits

Index to Exhibits

Exhibit
Number          Exhibit
-------         -------

3.7             Amendment No. 2 to Bylaws dated July 21, 1999.

4.11            Sixth  Amendment  to Rights  Agreement  by and between the
                Registrant  and American Stock Transfer & Trust entered into
                as of March 5, 2003.

10.72           Waiver of Covenant  Compliance Letter from Comerica Bank -
                California dated March 26, 2003.

21.1            Subsidiaries of the Registrant.

23.1            Consent of KPMG LLP.

99.1            Certification  Pursuant to 18 U.S.C.  Section 1350, as adopted
                Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.



                                      -44-
<PAGE>



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities  Exchange Act
of 1934,  the  Registrant  has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned,  thereunto duly authorized, on the 31th
day of March, 2003.


                                        THE SPORTS CLUB COMPANY, INC.



                                        /s/ D. Michael Talla
                                        -------------------------------------
                                         D. Michael Talla
                                         Co-Chief Executive Officer

                                        /s/ Rex A. Licklider
                                        -------------------------------------
                                        Rex A. Licklider
                                        Co-Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant, in the capacities and on the date indicated.

Signature                        Title                           Date
---------                        -----                           ----

/s/ D. Michael Talla             Chairman of the Board           March 31, 2003
--------------------------------
D. Michael Talla                 and Co-Chief Executive Officer


/s/ Rex A. Licklider             Vice Chairman of the Board      March 31, 2003
--------------------------------
Rex A. Licklider                 and Co-Chief Executive Officer


/s/ Timothy O'Brien              Chief Financial Officer         March 31, 2003
--------------------------------
Timothy M. O'Brien               (Principal Financial
                                 and Accounting Officer)


/s/ Brian J. Collins             Director                        March 31, 2003
--------------------------------
Brian J. Collins


/s/ Nanette Pattee Francini      Director                        March 31, 2003
--------------------------------
Nanette Pattee Francini


/s/ Andrew L. Turner             Director                        March 31, 2003
--------------------------------
Andrew L. Turner


/s/ George Vasilakos             Director                        March 31, 2003
--------------------------------
George Vasilakos


/s/ Charles Norris               Director                        March 31, 2003
--------------------------------
Charles Norris




                                      -45-
<PAGE>



                                 CERTIFICATIONS

I, D. Michael Talla, certify that:

1.   I have reviewed this annual report on Form 10-K of The Sports Club Company,
     Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;
     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and
     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


Dated, March 31, 2003

/s/ D. Michael Talla
--------------------------------------
D. Michael Talla
Co-Chief Executive Officer


                                      -46-
<PAGE>



                                 CERTIFICATIONS

I, Rex A. Licklider, certify that:

1.   I have reviewed this annual report on Form 10-K of The Sports Club Company,
     Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;
     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and
     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.  The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):
     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.  The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


Dated, March 31, 2003

/s/ Rex A. Licklider
--------------------------------------
Rex A. Licklider
Co-Chief Executive Officer




                                      -47-
<PAGE>



                                 CERTIFICATIONS

I, Timothy O'Brien, certify that:

1.  I have reviewed this annual report on Form 10-K of The Sports Club Company,
     Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.  Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;
     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and
     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.  The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):
     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.  The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Dated, March 31, 2003

/s/ Timothy O'Brien
--------------------------------------
Timothy O'Brien
Chief Financial Officer




                                      -48-
<PAGE>



                                                                    EXHIBIT 3.7


                                 AMENDMENT NO. 2
                                       TO
                                     BYLAWS
                                       OF

                          THE SPORTS CLUB COMPANY, INC.
                             A Delaware corporation


                             Effective July 21, 1999



At the Annual Meeting of  Stockholders,  duly and validly held on July 21, 1999,
the  stockholders,  having voted in the majority to approve said amendment,  did
amend Section 2 of Article 111 of the Bylaws of The Sports Club Company, Inc. to
read in its entirety as follows:


              "Section 2. Number and Qualifications. The number of directors
         shall be not less than 5 nor more than nine (the exact number of which
         shall be the number from time to time fixed by resolution of the Board
         of Directors) until changed by a duly adopted amendment to the Articles
         of Incorporation or by a Bylaw amending this Section 2 approved by the
         affirmative vote of a majority of the outstanding shares entitled to
         vote."





                                      -49-
<PAGE>




                                                                    EXHIBIT 4.11


                       SIXTH AMENDMENT TO RIGHTS AGREEMENT
                       -----------------------------------
                           DATED AS OF OCTOBER 6, 1998
                           ---------------------------

     This Sixth  Amendment (the "Sixth  Amendment") to Rights  Agreement is made
and entered into as of March 5, 2003, and amends that certain  agreement entered
into by and between The Sports Club Company,  Inc., a Delaware  corporation (the
"Company"),  and American Stock Transfer & Company,  a New York corporation (the
"Rights Agent"),  dated as of October 6, 1998, as amended by (a) First Amendment
to Rights  Agreement  dated as of February  18,  1999,  (b) Second  Amendment to
Rights  Agreement  dated as of July 2,  1999,  (c)  third  Amendment  to  Rights
Agreement dated as of April 27, 2000, (d) Fourth  Amendment to Rights  Agreement
dated as of June 27, 2001, and (e) Fifth Amendment to Rights  Agreement dated as
of September 6, 2002 (as so amended, the "Rights Agreement").  Capitalized terms
used but not defined  herein shall have the meanings given to them in the Rights
Agreement.

                                 R E C I T A L S
                                 ---------------

     WHEREAS,  on September 29, 1998, the Board of Directors of the Company (the
"Board")  authorized  and declared a dividend of one  preferred  share  purchase
right for each Common Share of the Company  outstanding on October 6, 1998, each
Right representing the right to purchase one five-hundredth of a Preferred Share
upon the terms and subject to the conditions set forth in the Rights  Agreement,
and further  authorized  and  directed the issuance of one Right with respect to
each Common Share that shall become outstanding  between the Record Date and the
earliest of the Distribution Date, the Redemption Date and the Expiration Date;

     WHEREAS, the Company and the Rights Agent entered into the Rights Agreement
as of October 6, 1998,  and  thereafter  amended said Agreement on the dates set
forth in the first paragraph of this Sixth Amendment;

     WHEREAS, on December 10, 2002, the Board approved the creation of a special
committee  thereof (the "Special  Committee") to investigate  various  strategic
alternatives  for the Company,  including the  possibility of a "going  private"
transaction  in which certain of  Millennium  Entertainment  Partners,  L.P., D.
Michael Talla, Rex A. Licklider and Kayne Anderson Capital  Advisors,  and their
respective  Affiliates   (collectively,   the  "Principal  Shareholders")  would
participate (the "Proposed Transaction").

     WHEREAS,  the Committee has  recommended  that the Company amend the Rights
Agreement as set forth herein; and

     WHEREAS,  the Board has determined  that it is in the best interests of the
Company and its stockholders to amend the Rights Agreement as set forth herein.



                                      -50-
<PAGE>




                                A G R E E M E N T
                                -----------------

     NOW, THEREFORE,  in consideration of the recitals, and the mutual covenants
and agreements hereinafter set forth, the parties hereto hereby amend the Rights
Agreement as follows:

     1. The definitions of "Beneficial Owner" and "Beneficially Owned" set forth
in Section 1 of the Rights  Agreement are hereby amended by adding,  immediately
following  the  semi-colon  set  forth in clause  (iv)  thereof,  the  following
provison:

     provided,  however,  that from and after  the  effective  time of the Sixth
Amendment,   until  April  30,  2003,  no  securities  shall  be  deemed  to  be
beneficially  owned  by any  person  solely  pursuant  to  this  clause  (iv) in
connection with any non-binding arrangement or understanding with respect to the
securities of the Company owned by the Principal Shareholders, as defined in the
recitals to the Sixth  Amendment,  that results from discussions or negotiations
regarding the Proposed Transaction, as long as such arrangement or understanding
relates  to a  transaction  that  is  intended  to be  proposed  to the  Special
Committee;

     2. Section 27 of the Rights  Agreement  is amended by adding the  following
sentence to the end of Section 27(a) thereof:

                  For the purpose of this Section 27, the Board of Directors of
                  the Company shall include any duly formed committee thereof
                  that has been delegated the power to supplement or amend this
                  Agreement.

     3. No Other Changes.  Except as expressly set forth in this Amendment,  the
terms of the  Rights  Agreement  shall  continue  in full  force  and  effect in
accordance with its terms.

     4.  Miscellaneous.  This  Amendment  (together  with the Rights  Agreement)
represents  the entire  agreement and  understanding  between the parties hereto
with respect to this  Amendment  and  supersedes  all prior and  contemporaneous
written and oral negotiations,  discussions and agreements; shall be binding on,
and inure to the benefit of, the parties hereto and their respective successors,
assigns and legal representatives;  and may be executed in counterparts, each of
which shall be deemed an original but all of which shall  constitute one and the
same  agreement.  Paragraph  headings  appearing in this  Amendment  are for the
convenience  of the  parties  and shall not be  considered  in  interpreting  or
construing any term or provision hereof.






                                      -51-
<PAGE>




     IN WITNESS WHEREOF,  the parties hereto have executed this Amendment on the
date first written above.



                                          Company:

                                          THE SPORTS CLUB COMPANY, INC.
Attest:

                                          By:      /s/ Rex A. Licklider
                                               ------------------------------
         /s/ Lois Barberio                Name:  Rex A. Licklider
------------------------------------
Name:  Lois Barberio                      Title:    Co-Chief Executive Officer
Title:    Secretary



                                          Trustee:
                                          -------

                                          AMERICAN STOCK TRANSFER & TRUST
                                          COMPANY
Attest:
                                          By:      /s/ Herbert J. Lemmer
                                              -------------------------------
         /s/ Susan Silber                 Name:     Herbert J. Lemmer
------------------------------------
Name:    Susan Silber                     Title:    Vice President
Title:    Assistant Secretary








                                      -52-
<PAGE>




                                                                   EXHIBIT 10.72

                     [Comerica Bank - California Letterhead]




March 26, 2003


Mr. Tim O'Brien
Chief Financial Officer
The Sports Club Company, Inc.
11100 Santa Monica Blvd., Suite 300
Los Angeles, CA 90025

RE: Default Waiver

Dear Tim,

     Pursuant to the terms and conditions in Section 6.14 of the Sixth Amendment
to the Fourth Amended and Restated Loan Agreement,  ("The  Agreement")  Comerica
Bank -  California  ("Bank")  hereby  waives  violation  of the  Ratio  of Total
Unsubordinated   Liabilities  to  Effective  Tangible  Net  Worth,  ("Leverage")
Covenant, as of 12/31/02.

Covenant                      Requirement          Actual           Period
--------                      -----------          ------           ------
Leverage                      4.65:1.00             4.70            12/31/02

     This letter does not constitute a waiver for any other terms and conditions
and only  applies  to the  covenant  and the  period  outlined  above.  The Bank
reserves the right to enforce The Agreement and any other subsequent violations.
Should you have any questions, please feel free to give me a call.

Warm Regards,


/s/ William Phillips
William Phillips
Vice President




                                      -53-
<PAGE>



                                                                    EXHIBIT 21.1


                                        SUBSIDIARIES
<TABLE>
<CAPTION>
Subsidiary                               Form                     Owner               Ownership
----------                               ----                     -----               ---------

<S>                                      <C>          <C>                              <C>
TVE, Inc.                                Corporation  The Sports Club Company, Inc.    100.00%

SCC Development Company                  Corporation  The Sports Club Company, Inc.    100.00%

The Sports Connection Holding Company    Corporation  The Sports Club Company, Inc.    100.00%

SCC California, Inc.                     Corporation  The Sports Club Company, Inc.    100.00%

Sports Club, Inc. of California          Corporation  The Sports Club Company, Inc.    100.00%

Pontius Realty, Inc.                     Corporation  The Sports Club Company, Inc.    100.00%

Irvine Sports Club, Inc.                 Corporation  The Sports Club Company, Inc.    100.00%

The SportsMed Company, Inc.              Corporation  The Sports Club Company, Inc.    100.00%

SCC Sports Club, Inc.                    Corporation  The Sports Club Company, Inc.    100.00%

L.A./Irvine Sports Clubs, Ltd.           Partnership  Sports Club, Inc. of
                                                      California                        50.10%

Talla New York, Inc.                     Corporation  Sports Club, Inc. of
                                                      California                       100.00%

Reebok-Sports Club/NY                    Partnership  Talla New York, Inc.              60.00%

El Segundo-TDC, Ltd.                     Partnership  The Spectrum Club Company, Inc.   17.19%
                                                      Pontius Realty, Inc.               0.75%
                                                      Sports Club, Inc. of
                                                      California                         9.89%
                                                      The Sports Club Company, Inc.      9.89%

SCC Nevada, Inc.                         Corporation  The Sports Club Company, Inc.    100.00%

SF Sports Club, Inc.                     Corporation  The Sports Club Company, Inc.    100.00%

Washington D.C. Sports Club, Inc.        Corporation  The Sports Club Company, Inc.    100.00%

HFA Services, Inc.                       Corporation  The SportsMed Company, Inc.      100.00%

Sepulveda Realty and Development Co. Inc.Corporation  The Sports Club Company, Inc.    100.00%

SCC Realty Company                       Corporation  The Sports Club Company, Inc.    100.00%

NY Sports Club, Inc.                     Corporation  The Sports Club Company, Inc.    100.00%

</TABLE>

                                      -54-
<PAGE>



                                                                    EXHIBIT 23.1


                          Independent Auditors' Consent



The Board of Directors
The Sports Club Company, Inc.

We consent to  incorporation  by reference in the  Registration  Statement  (No.
333-26421) on Form S-8 and the  Registration  Statement (No.  333-38459) on Form
S-3 of The Sports Club  Company,  Inc. of our report  dated  February  21, 2003,
relating to the consolidated balance sheets of The Sports Club Company,  Inc. as
of  December  31,  2002 and 2001,  and the related  consolidated  statements  of
operations,  stockholders'  equity and the related financial statement schedule,
and cash flows for each of the years in the three-year period ended December 31,
2002,  which report  appears in the December 31, 2002 annual report on Form 10-K
of The Sports Club Company,  Inc. Our report refers to a restatement of the 2001
balance sheet and an adjustment to accumulated deficit as of January 1, 2000 and
December  31, 2000 to properly  record  certain  deferred  membership  revenues.
Additionally,  our  report  refers to a change in the method of  accounting  for
goodwill and other intangible assets as a result of the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002.

KPMG LLP



Los Angeles, California
March 31, 2003




                                      -55-
<PAGE>



                                                                    EXHIBIT 99.1


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     Each of the undersigned  herby certifies,  in his capacity as an officer of
The Sports Club Company, Inc. (the "Company"), for purposes of 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to the best of his knowledge:

o    The Annual Report of the Company on Form 10-K for the period ended December
     31,  2002 fully  complies  with the  requirements  of Section  13(a) of the
     Securities Exchange Act of 1934; and

o    The information contained in such report fairly represents, in all material
     respects, the financial condition and results of operations of the Company.

Dated:  March 31, 2003


/s/ D. Michael Talla
---------------------------------------------
D. Michael Talla
Co-Chief Executive Officer


/s/ Rex A. Licklider
---------------------------------------------
Rex A. Licklider
Co-Chief Executive Officer


/s/ Timothy O'Brien
---------------------------------------------
Timothy O'Brien
Chief Financial Officer


                                      -56-
<PAGE>