<PAGE>   1
                UNITED STATES SECURITITES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-K/A

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended DECEMBER 31, 1996. (Fee Required) 

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act for the transition period from _______to_______.

COMMISSION FILE NUMBER: 1-13290

                          THE SPORTS CLUB COMPANY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

     11100 Santa Monica Blvd., Suite 300
         Los Angeles, California                                   90025
(Address of registrant's principal executive                     (Zip Code)
              offices)
                                                                        
(Registrant's telephone number, including area code)           (310) 479-5200


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

              None                                               None

Securities registered pursuant to Section 12(g) of the Act:

                                (Title of Class)
                           common stock $.01 par value

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 [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 14, 1997 was $25,570,170.

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 11,358,000 on
March 14, 1997.

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/A or any amendment to 
this Form 10-K/A. [X]



<PAGE>   2

                                     PART I

ITEM 1. BUSINESS

GENERAL

     The Sports Club Company, Inc. (the "Company") which is recognized as a
leading developer and operator of sports and fitness clubs, operates sports and
fitness clubs ("Clubs") under the names the "Sports Club," and the "Spectrum
Club". The Company was incorporated in 1994 and acquired the Spectrum Clubs and
Sports Connections from a group of affiliated entities (the "Predecessors")
controlled by the Company's Chairman of the Board and largest shareholder, D.
Michael Talla. The Sports Club/LA and The Sports Club/Irvine were acquired in
October 1994. The Company has entered into an agreement to acquire an additional
interest in this Club. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources." The
Reebok Sports Club/NY, in which the Company currently owns a 50.1% interest, was
opened in April 1995. The Company owns interests in eight Clubs, three of which
are Sports Clubs, and five of which are Spectrum Clubs. Seven of the Clubs are
located in Southern California with the remaining club, the Reebok Sports
Club/NY, located in New York City. As of February 28, 1997, there were 45,684
members of the Sports Clubs and the Spectrum Clubs. The Company has two clubs
under development in Valencia, California and Houston, Texas.

     The two types of Clubs operated by the Company are differentiated primarily
by the level of amenities and services provided, diversity of facilities
available and fees charged for services. The Sports Clubs have been developed as
"urban country clubs" offering a full range of services and amenities, and are
marketed primarily to affluent, health conscious individuals. The Spectrum Clubs
are designed as smaller-scale Sports Clubs. The marketing focus of the Spectrum
Clubs is directed primarily to professionals and the range of services and
fitness options offered at these Clubs is more limited than at the Sports Clubs.

     The following table sets forth, as of February 28, 1997, the name, address,
square footage, opening or acquisition date, and percentage ownership of each of
the Clubs:


<TABLE>
<CAPTION>
                                         APPROXIMATE      YEAR OPENED ("O")      PERCENT OWNED
        NAME AND ADDRESS                 SQUARE FEET      OR ACQUIRED ("A")      BY COMPANY
        ----------------                 -----------      -----------------      ----------
<S>                                       <C>                  <C>                 <C> 

THE SPORTS CLUBS

   The Sports Club/Irvine..............   130,000              1994 A              100%
      1980 Main Street
      Irvine, CA 92714

   The Sports Club/LA..................   100,000              1994 A              100%(1)
      1835 Sepulveda Blvd.
      Los Angeles, CA 90025

   Reebok Sports Club/NY...............   140,000              1995 O              50.1%(2)
      160 Columbus Ave.
      New York, NY 10023

SPECTRUM CLUBS

   Spectrum Club/Manhattan Beach.......    65,300              1987 O              46.1%
      2250 Park Place
      El Segundo, CA 90245

   Spectrum Club/Howard Hughes Center..    36,000              1994 A              100%
      6833 Park Terrace
      Los Angeles, CA 90045

   Spectrum Club/Santa Monica..........    30,000              1991 A              100%
      1815 Centinela Avenue
      Santa Monica CA 90404

</TABLE>


                                       1
<PAGE>   3

<TABLE>
<CAPTION>
                                         APPROXIMATE      YEAR OPENED ("O")      PERCENT OWNED
        NAME AND ADDRESS                 SQUARE FEET      OR ACQUIRED ("A")      BY COMPANY
        ----------------                 -----------      -----------------      ----------
<S>                                       <C>                  <C>                 <C> 

   Spectrum Club/Agoura Hills..........    30,000             1994   A              100%
      5115 N. Clareton Drive
      Agoura Hills, CA 91301

   Spectrum Club/Water Garden..........    18,600             1993   O              100%
      2425 W. Olympic Blvd.
      Santa Monica, CA 90404

   Spectrum Club/Valencia..............    57,000             1997  (3)             100%
      24525 Town Center Drive
      Valencia, CA  91355

</TABLE>


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

(1)     D. Michael Talla, the Company's Chairman and 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. See "Item 13-Certain Relationships and
        Transactions."

(2)     The Company's 50.1% partnership interest is subject to the payment of
        certain priority distributions and return of capital contributions to
        other partners. The Company has entered into an agreement to acquire
        certain of these interests. See "Management's Discussion and Analysis of
        Financial Condition and Results of Operation -- Liquidity and Capital
        Resources."

(3)     The Spectrum Club/Valencia is scheduled to open in the summer of 1997.

STRATEGY

     The Company's strategy is to expand its business to meet the public's
demand for facilities offering a wide variety of sports, fitness and social
activities. The Company's objectives include the development, and in select
cases, the acquisition of multi-amenity facilities complementary to the existing
Sports Clubs and Spectrum Clubs and to develop and implement new programs at
existing Clubs to maintain and expand membership. While certain large-scale
operators have entered the field, the Company believes that the sports and
fitness club industry remains highly fragmented, with a predominance of smaller
owner/operators at the lower end of the market. Consequently, the Company
believes that significant opportunities exist for the Company to operate
multi-amenity sports and fitness clubs at the higher end of the market under
both the Sports Club and Spectrum Club names and concepts.

     Initially, the Company intends to expand further the Sports Club operations
and concept through development in selected metropolitan areas where a
sufficient potential membership base exists to support a large facility. To
expand further the Spectrum Club operations and concept, the Company expects to
develop and acquire suitable facilities located in or adjacent to metropolitan
areas either near a Sports Club or in areas where the potential membership base
will not support a Sports Club facility. The Company intends to develop and
acquire Sports Clubs and Spectrum Clubs at locations both within and outside of
California. The primary difference between these two types of Clubs is that the
Sports Clubs are significantly larger and, consequently, are feasible only in
those metropolitan centers where there exists a sufficient number of potential
members to support them.

     The Company is currently developing a Sports Club in Houston, Texas and is
currently negotiating for Sports Club sites in Washington D.C. and San
Francisco, California. The Company has also signed a letter agreement with
WPI.KOLL Asia Pacific Advisors which provides the Company a right of first
refusal to operate Sports Clubs in MegaMalls being developed in Japan by a
consortium of major Japanese corporations.



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<PAGE>   4

 The Sports Clubs

     The Sports Clubs are large, multi-purpose facilities, offering members and
their guests state of the art fitness equipment, modern programs, wellness
protocols (exercise regimens designed for specific groups of members), extensive
food and beverage selections, personal care and beauty options, social programs,
child care and valet parking. The Sports Club/LA (approximately 100,000 square
feet), was opened in 1987 and The Sports Club/Irvine (approximately 130,000
square feet) was opened in 1990. These Clubs were originally developed and
operated by the Company's management, but between January 1992 and October 1994
were managed and controlled by a third party through a partnership in which the
Predecessors had a non-controlling interest. The Reebok Sports Club/NY was
developed in partnership with a subsidiary of Reebok International, Ltd.
("Reebok") and Millennium Partners ("Millennium") within a 140,000 square foot
facility. Reebok and Millennium retain a direct interest in the partnership that
owns the Reebok Sports Club/NY, which the Company developed, managed from
inception and in which it owns a controlling 50.1% partnership interest. The
Company has entered into an agreement to acquire an additional interest in this
Club. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources."

     The Sports Club/LA. The Sports Club/LA opened in March 1987, in a 100,000
square-foot facility located in West Los Angeles, near the affluent communities
of Santa Monica, Brentwood, Beverly Hills, Westwood and Century City. The Sports
Club/LA offers fully equipped gyms, including a 9,500 square foot coed gym, a
complete gym with equipment designed for women, a spinning room and an
approximately 5,800 square foot cardio-vascular deck. These gyms feature
state-of-the-art equipment including free weights, Nautilus, Flex, Gravitron,
Cybex, Keiser, Trackmaster, Icarian, Lifecycle, Heartmate, Versaclimber,
Stairmaster, Spinning and Nordic Track equipment. Personal trainers are
available to develop and maintain members' exercise routines. The Sports Club/LA
has two 2,500 square-foot aerobics/exercise rooms featuring classes throughout
the day and evening, seven days a week, including aerobics, dance, Step Reebok,
yoga and karate.

     Competitive sports may be played on two racquetball courts, two squash
courts, five outdoor paddle tennis courts and a full court basketball court
(which can be converted into a volleyball court). Additionally, there is a
25-meter indoor pool and a net-enclosed golf swing area on the roof deck. Sports
instructors provide lessons in racquet sports, golf and swimming.

     Men's and women's locker rooms feature wood lockers and include complete
spa areas with steam rooms, saunas, jacuzzis and professional massage. The
Sports Club/LA also includes a sundeck, restaurant, sports bar, private
dining/conference room, a sports media center and a press conference area. A
full-time Activities Director is responsible for social and media events for
members, including organizing trips, lectures and charity events. The Sports
Club/LA also has a pro shop, hair salon, spa and childcare services.

     A wholly owned subsidiary of the Company, HealthFitness Organization of
America, Inc. ("HFA") operates a facility staffed by physicians, exercise
physiologists, physical therapists and nutritionists who provide services to
members of The Sports Club/LA and others. The medical doctors are employed by
SCC Medical Group, Inc. which pays a management fee to HFA. The Company believes
that HFA provides valuable services which are complementary to the other
services provided by The Sports Club/LA.

     The Sports Club/Irvine. The Sports Club/Irvine opened in February 1990, in
a 130,000 square foot facility located on a 1.46-acre site near Newport Beach in
Orange County, California. The Club offers 26,700 square feet of fully equipped
gyms consisting of a 14,000 square foot coed gym and a complete gym with
equipment designed for women; a 5,000 square foot cardiovascular deck;
basketball and volleyball courts; a rooftop running track; three racquetball
courts; four squash courts; and two outdoor paddle tennis courts. The
volleyball/basketball gymnasium is 9,600 square feet and can accommodate either
two full court basketball games, or a basketball and volleyball game
simultaneously. There is also an outdoor roof-top basketball court, and two sand
volleyball courts on adjacent property leased on a month-to-month basis. Like
The Sports Club/LA, The Sports Club/Irvine makes available to its members and
guests state of the art weight and exercise equipment and a variety of aerobic
and exercise classes held throughout the day, in addition to a 25-yard
indoor-outdoor pool, sundeck, social area and a roof deck featuring a
net-enclosed golf swing area.



                                       3
<PAGE>   5

     Men's and women's locker rooms include complete spa areas with steam rooms,
saunas and jacuzzis. Food and beverage facilities include private dining rooms
and conference facilities, a gourmet grill restaurant and sports bar, a sidewalk
cafe and a poolside juice bar. Massages, facials and spa treatments are
available at Oasis Body Salon, which is owned and operated by the Company. In
addition, the Club affords members the opportunity to work with personal
trainers and sports instructors, and to avail themselves of numerous exercise
and dance classes, a beauty salon and childcare services. A full-time Activities
Director plans social and cultural functions, while a full-time Sports
Coordinator organizes sports tournaments, leagues and classes. As is the case
with The Sports Club/LA, HFA operates a facility within The Sports Club/Irvine.

     Reebok Sports Club/NY. The Reebok Sports Club/NY opened in April 1995, in a
140,000 square-foot facility, offering, among other recreational and fitness
options, 13,000 square feet of weight training gyms, a 5,000 square foot
cardiovascular center, two exercise class rooms, two basketball courts, a
rooftop roller-blading and running track, a 45-foot rock climbing wall, a
25-yard Junior Olympic-size swimming pool, complete spa facilities, a circuit
training center, volleyball, boxing, fencing, martial arts, gymnastics and
badminton. In addition, the Reebok Sports Club/NY offers members a bistro-style
open grill restaurant, a sidewalk cafe, a sun deck with juice bar, childcare, a
body salon, children's sports programming, meeting and banquet rooms, shoe
shine, dry cleaning and tailoring services. The Company is the manager of the
Reebok Sports Club/NY pursuant to a management agreement (the "Management
Agreement") with the Reebok-Sports Club/NY partnership (the "Partnership"). The
Company has a controlling 50.1% partnership interest in the Partnership.

     The Company's agreements relating to the Reebok-Sports Club/NY prohibit the
Company from engaging in pre-sale activities or opening a sports and fitness
club in New York City or within a 10-mile radius of the Reebok Sports Club/NY
Club which exceeds 30,000 square feet in size prior to June 1999. The agreements
also prohibit the Company from selling from the Reebok Sports Club/NY any
footwear, apparel, fitness equipment or other sporting goods manufactured by a
competitor of Reebok, or associating with any health club facility affiliated
with a competitor of Reebok through June 2002.

 The Spectrum Clubs

     The Company currently operates Spectrum Clubs in Manhattan Beach, Agoura
Hills, at two locations in Santa Monica and in West Los Angeles at the Howard
Hughes Center. The Company is currently constructing a 57,000 square foot
Spectrum Club in Valencia, California, which is expected to open in the summer
of 1997. While more limited in size and in terms of the social and recreational
options offered, the Spectrum Clubs are generally housed in relatively large
facilities containing modern equipment and offering members personalized
training and instruction; there are, however, differences among the Spectrum
Clubs in terms of their overall size, the age and aesthetic design of facilities
and the types of exercise and work-out equipment available to members.

     The Spectrum Clubs, which are anywhere from 18,000 to 65,000 square feet,
generally include full coed weight training rooms, computerized cardiovascular
centers, aerobics and exercise classrooms (with classes held throughout the day
and evening, seven days a week), locker rooms, private training, complete spa
facilities, juice bars and towel service. Certain of the Spectrum Clubs also
offer indoor swimming pools, childcare, pro shops, a basketball court,
racquetball courts, physical therapy facilities, volleyball, martial arts, dance
and children's and seniors' programs. All of the Spectrum Clubs other than the
Spectrum Club/Manhattan Beach are wholly-owned and operated by the Company. The
Company is the sole general partner and records, as its equity interest, 46.1%
of the net income generated by the operation of the Spectrum Club/Manhattan
Beach.

 The Sports Connections

     The Sports Connections, which are located in Santa Monica, West Hollywood,
South Bay, Long Beach and Costa Mesa, were managed by Bally's S.C. Management,
Inc., an indirect subsidiary of Bally's Health and Tennis Corporation
("Bally's") until November 1, 1996. On this date, the Santa Monica, West
Hollywood, Long Beach and Costa Mesa locations were sold. The South Bay club was
operated by Bally's for an additional 30 days at which time the club was closed
and the management agreement between the Company and Bally's was terminated.



                                       4
<PAGE>   6

 HealthFitness Organization of America, Inc.

     On November 30, 1995, the Company acquired 100% of the common stock of
HealthFitness Organization of America, Inc. ("HFA"). HFA operates facilities
within The Sports Club/LA, The Sports Club/Irvine and The Spectrum Club/Agoura
Hills and is staffed by physicians, exercise physiologists, physical therapists
and nutritionists who provide services to members and others. The physicians are
employed by SCC Medical Group, Inc. which pays a management fee to HFA. The
Company believes that HFA provides valuable services which are complimentary to
the other services provided by the Clubs, and is considering expanding the HFA
concept to other clubs.

SALES AND MARKETING

 General

     The Company's marketing strategy is to continue to develop facilities that
are consistent with an "urban country club" image and to develop and implement
specific sports, fitness and social programs that are designed to attract a
wider membership base without undermining that image. The Sports Clubs and the
Spectrum Clubs both are marketed as multi-amenity facilities catering to
affluent consumers, reflecting the Company's belief that prospective members are
willing to pay higher fees for well-designed and equipped facilities offering
personalized instruction and multiple fitness and workout options.

     Word-of-mouth referrals and endorsements by existing members are the Clubs'
most important source of new members. In addition, both the Sports Clubs and the
Spectrum Clubs utilize targeted marketing programs which include advertisements,
promotions, public relations and community events. The principal marketing media
for the Clubs are print advertisements, with some use of direct mail. The print
advertisements are supplemented by special events and special membership
programs. The Sports Clubs and the Spectrum Clubs host corporate parties and
charity benefits and often donate free or discounted memberships to charitable
organizations. Because the Sports Club and the Spectrum Club names are widely
recognized in Southern California, the Company has been able to rely, to a large
extent, on their reputation and members' referrals. The Company believes that it
will be able to continue to utilize these marketing strategies in the promotion
of new Sports Clubs and Spectrum Clubs.

     The largest segment of the membership base for the Clubs consists of
health-conscious individuals. The Company has targeted five other groups that it
intends to pursue in order to expand that base: children and families, seniors,
corporate members, medical referrals and people who do not exercise on a regular
basis.

     The Company believes the children/family market has considerable potential,
as younger members grow older, marry and have children, and as they seek
recreational activities in which the entire family can participate. Similarly,
the Company anticipates that as the current core membership group ages, it will
modify exercise and workout options to meet this group's changing fitness needs
and to attract additional members from this group. The corporate market is
another source of new members, due to the proximity of the Clubs to business
centers and the potential use by members of the Clubs to conduct business and to
develop and maintain business contacts. The Company believes that it can also
attract new members from the medical referral market through its HFA subsidiary
by offering specific rehabilitation and exercise protocols to complement other
forms of physical therapy recommended by a physician or medical group. Finally,
the Company believes that the image of the Clubs as multiple-amenity facilities,
which offer members numerous social and less-rigorous exercise options, will
help the Company attract prospective members who do not currently exercise
regularly.

     Each of these groups require specialized exercise/fitness programs, and the
Company has developed specific programs to attract members of these groups. For
example, with respect to the family market, the Company has implemented "KidFit"
and "TeenFit" programs which are targeted to children between the ages of 5 and
17, and involve both one-on-one private training and a six-week fitness training
series. The Clubs' weight-training facilities are made available to children 13
and older at off-peak hours, and specially-designed movement classes utilizing a
variety of fitness equipment are offered to younger children. The Clubs maintain
a summer sports camp, provide individualized sports instruction and offer
multiple fitness activities such as gymnastics, martial arts and dance that are
age appropriate.



                                       5
<PAGE>   7

     The Company maintains training and exercise protocol manuals for the senior
market (which the Company generally defines as members who are over 60 years
old) which 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.
The Company believes this market will expand as the "baby boomers" mature and
the programs it has developed will adequately service this market segment.

     The Sports Clubs employ several Corporate Membership Directors whose
principal responsibilities are to solicit corporate memberships from businesses
operating in the vicinity of the Sports Clubs. The Sports Clubs provide
corporate group discounted initiation fees depending upon the number of new
members involved. The Company believes corporations are favorably disposed to
joining the Sports Clubs because of the positive impact regular exercise and
overall fitness can have on employee absenteeism, morale and productivity.

     The Company's "Shape Over" program is intended to attract those people who
are out of shape but who are interested in resuming a regular exercise regimen.
Prospective members are given a free, introductory fitness consultation with
Club instructors, which covers nutritional and dietary suggestions, personalized
fitness programs and home exercise plans. In addition, the Club has group
aerobics classes that are specially designed for this target group.

 The Sports Clubs

     The "urban country club" image is essential to the Company's overall
operating and marketing strategies. The three existing Clubs operating under the
Sports Club name are marketed as limited membership, private clubs dedicated to
personalized attention and multiple amenities and services. The Company believes
that the image of these Clubs as leaders in the sports and fitness industry
justifies its charging a premium for the added amenities that come with a
membership in the Sports Clubs. Members include professionals, entertainment
personalities and business people and the Company believes word-of-mouth
advertising from these types of members has enhanced the reputation of the
Sports Clubs.

     The Sports Club/LA experienced rapid market acceptance after its opening in
March 1987 and reached a mature level of membership in 1990. As a result of its
closure for earthquake repairs, the Club's membership level declined to
approximately 7,600 members, but since reopening in September 1994 the
membership level has increased to 8,493 as of February 28, 1997. The Sports
Club/Irvine, on the other hand, has yet to reach its target membership level of
9,000 members, which the Company believes is primarily attributable to
competition from a similar multi-amenities health and fitness club located
nearby. Thus, the Company's marketing focus at The Sports Club/Irvine is to
increase membership levels. As of February 28, 1997, membership was 6,258 at The
Sports Club/Irvine. The Reebok Sports Club/NY, which opened in April 1995, had
7,294 members at February 28, 1997. The Reebok Sports Club/NY membership has
grown steadily and, at current growth rates, should near operating capacity in
1998.

 The Spectrum Clubs

     The Spectrum Clubs are marketed as scaled-down Sports Clubs having modern
equipment, private training, experienced, highly-trained instructors, and
aesthetically-pleasant surroundings. The Spectrum Clubs also emphasize
personalized service and instruction and the creation of a "club" atmosphere in
which members can relax and socialize.

     The cost of the Spectrum Club membership (both in terms of the initiation
fee and monthly dues) is less than membership at the Sports Clubs and, within
the Southern California market, the Company believes the Spectrum Clubs offer as
many services and are as luxurious and aesthetically-pleasing as any other
sports and fitness club with which they compete (other than the Sports Clubs and
a few other large, multi-amenity health and fitness clubs). Because of their
smaller size, the Spectrum Clubs can be developed and operated in locations
where the potential membership base is not sufficiently large to support a club
operating under the Sports Club name.

     The Company's marketing efforts at the older, more seasoned Clubs operating
under the Spectrum Club name emphasize maintaining existing members, while the
focus at the newer Spectrum Clubs is on maintaining existing members and
attracting and maintaining additional members. The Company hopes to achieve its
goals through periodic membership drives whereby referring members are entitled
to receive special gifts and other incentives.



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<PAGE>   8

 Employee Training

     A key component of the Company's marketing strategy is a well-trained and
knowledgeable staff. The Company has developed a comprehensive training program,
which serves as an educational tool to enhance the effectiveness of Company
personnel. All newly-hired employees are required to attend a three-hour
orientation seminar, which is led by members of Company management and a
personnel instructor. Topics include member service and member interaction
skills, Company history and philosophy, and safety issues.
These orientation seminars are held throughout the year.

     To aid in the development and continuing education of management employees,
the Company offers a workshop entitled "Introduction to Club Management," for
newly-hired management personnel and other employees demonstrating management
skills. The workshop consists of five, three-hour seminars led by certain
Company management and a full-time personnel instructor. The workshops are
intended to educate participants in the areas of people and time management;
hiring, developing, training and evaluating employees; sales and marketing
strategies; and safety concerns. Topics are added periodically to reflect new
management techniques or operating issues. These seminars are held six times a
year or as needed for new employees, and the Company's management personnel are
required to attend periodically to maintain their skills.

     The balance of the Company's employee seminars involves specifically-
designed programs for targeted employee groups. Seminars providing specialized
instruction for program directors, private trainers, aerobics teachers and
sales/marketing personnel are offered at various times during the year, for
which attendance on the part of newly-hired personnel within the applicable
employee group is mandatory. The Company places particular emphasis on its
sales/marketing training seminars, which are given once every two months by a
personnel instructor and in which all new membership directors must complete 20
hours of participation and all other membership directors must complete four
hours of participation every two months. Topics covered include sales and
marketing goals and recruitment and qualification of prospective members.

 Membership Programs

     The Sports Clubs offer three types of memberships: Executive, Racquet and
Health. The 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. At
February 28, 1997, executive memberships constitute 10.9% and 15.6% of all
memberships at The Sports Club/LA and The Sports Club/Irvine, respectively. The
Racquet membership includes the unlimited use of racquetball, squash and paddle
tennis courts in addition to the use of Club facilities. At February 28, 1997,
racquet memberships account for approximately 3.6% and 2.7%, respectively, of
the total memberships of The Sports Club/LA and The Sports Club/Irvine. The
Health membership is the basic membership, offering unlimited use of all
facilities excluding racquet court privileges; racquetball courts are available
to holders of Health memberships for an additional fee. There are 12,374 members
at the Sports Club/LA and Sports Club/Irvine who hold this type of membership.
The Reebok Sports Club/NY offers both an Executive and Health membership. At
February 28, 1997, the Reebok Sports Club/NY had 984 Executive memberships and
6,310 Health memberships.

     Racquet and Health memberships are generally available at the Spectrum
Clubs. At some Spectrum Clubs, lockers may be rented by members on a monthly
basis for an additional charge. Each Club operating under the Spectrum Club name
has reciprocity with the others, thereby allowing its members unlimited use of
all other such Clubs in exchange for a $5.00 increase in monthly dues. The same
reciprocity program is in effect at the Sports Clubs, although in certain
instances, The Sports Club/Irvine members are required to pay an additional fee
to utilize the facilities of The Sports Club/LA. As a member of The
International Health Racquet Sports Association of Quality Clubs ("IHRSA"), the
Spectrum Clubs extend guest membership privileges to out-of-town visitors who
are members of IHRSA clubs in their hometown, and the Spectrum Club members may
use IHRSA clubs in cities to which they may travel.

     All memberships require a one-time initiation fee, plus monthly member
dues. Actual rates vary depending on whether the membership is for a Sports Club
or a Spectrum Club and the type of membership selected. Corporate memberships
are also available. Unlike many other sports and fitness clubs, the Company does
not offer financing for its memberships. Members electing to pay their Club dues
on a monthly basis must pay by the checkfree system, under which each member is
automatically debited each month for dues either through a checking account or
credit card. Prepaid memberships for an entire year entitle the member 




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<PAGE>   9

to a discount equal to one free month. The Clubs' current base membership fees
for new memberships are as follows:

<TABLE>
<CAPTION>
                                                          HEALTH       RACQUET      EXECUTIVE
                                                          -------      -------      ---------
<S>               <C>                                     <C>          <C>          <C>      
    THE SPORTS CLUB/LA
    Initiation Fee(1)..............................       $ 1,295      $ 1,600      $   2,500
    Monthly Dues...................................       $   125      $   135      $     165

    THE SPORTS CLUB/IRVINE
    Initiation Fee.................................       $   750      $   825      $   1,475(2)
    Monthly Dues...................................       $    88      $   103      $     137

    REEBOK SPORTS CLUB/NY
    Initiation Fee.................................       $ 1,100          N/A      $   1,900
    Monthly Dues...................................       $   150          N/A      $     250

    THE SPECTRUM CLUBS
    Initiation Fee.................................       $   300      $   300            N/A
    Monthly Dues...................................       $    57(3)   $    65(3)         N/A

</TABLE>

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

(1)     Initiation fees for The Sports Club/LA may be paid over a two to three
        month period.

(2)     Initiation fees for Executive membership in The Sports Club/Irvine may
        be paid over a two month period.

(3)     In addition, Spectrum Club members are charged an annual towel fee of
        $40.

     Consistent with past practices, the Company may, from time to time,
institute special marketing programs which include the offer of discounts on
initiation fees for the Clubs.

OPERATION, ACQUISITION AND DEVELOPMENT OF CLUBS

     The Company's experience has been that membership levels at new Clubs
generally increase for a period of two years or more before reaching a
relatively stable level, following which membership may gradually increase or
decrease, depending upon market conditions and other factors. The Company
considers Clubs which have reached this level to be "mature" Clubs.
Recently-opened Clubs which have not achieved maturity have operated at a loss
or at only a slight profit during the first two to three years of operations as
a result of fixed expenses which, together with variable operating expenses,
approximate or exceed membership fees and other revenues. The Company
anticipates that these types of losses may be incurred as a normal part of the
Company's operations to the extent that it develops additional clubs in the
future.

     The Company has established general criteria for the acquisition of
existing sports and fitness clubs to be operated under the Spectrum Club name.
The Company seeks clubs which exceed 30,000 square feet in size, have in place
an initiation fee and monthly dues structure and are located in an area with
appropriate demographic characteristics. In addition, the current cash flow,
purchase price and anticipated capital expenditures must meet certain
requirements, and the Company must believe that it has the ability to enhance
the profitability of the club following its acquisition. Similarly, the Company
will not undertake to construct a new sports and fitness club unless the Company
has made a determination that, when built, the club will satisfy the foregoing
criteria. The Company will apply similar criteria to the acquisition and
development of clubs to be operated under the Sports Club name, taking into
account that the Sports Club concept requires larger facilities as well as a
location near large metropolitan centers. The Company acquires and develops
clubs based upon its analysis of the number of potential members living in the
area in which the Club is to be located and will proceed with development if it
feels that it will be able to attract a number of members at or near the Club's
maximum capacity.

     In July 1995, the Company announced the development of a 57,000 square foot
Spectrum Club in Valencia, California in a facility to be leased from The
Newhall Land and Farming Company. This Club currently is scheduled to open in
the summer of 1997. The Company is developing a Sports Club in Houston, Texas
and is currently negotiating for Sports Club sites in Washington D.C. and San
Francisco, California. The Company has also signed a letter agreement with
WPI.KOLL Asia Pacific Advisors which 



                                       8
<PAGE>   10

provides the Company a right of first refusal to operate Sports Clubs in
MegaMalls being developed in Japan by a consortium of major Japanese
corporations.

COMPETITION

     The sports and fitness industry, particularly in the basic sports and
fitness club market, is highly competitive. IHRSA estimates that as of December
31, 1996, there were approximately 48,000 sports and fitness clubs in the United
States. In this market, the Spectrum Clubs compete with a limited number of
large corporations which have substantially greater operating and financial
resources than the Company and with numerous regional and local operators of
sports and fitness clubs. In addition, the Company competes with recreational
facilities established by governments and businesses, the YMCA and YWCA, racquet
and tennis clubs, country clubs and weight-reducing salons, and with products
and services that can be used by health-conscious individuals in their homes.
However, the Company believes that there will continue to exist a market for
sports and fitness clubs and that its operating experience, its highly visible
image, the professionalism of its staff and its state-of-the-art equipment and
exercise facilities afford it an advantage over its competitors.

TRADEMARKS AND TRADENAMES

     The Sports Club/LA name combined with the "flying lady" logo and the
Spectrum Club name are registered trademarks of the Company. However, the
"Sports Club" name generally is not protectible under federal or state trademark
law. The Company has also registered the "Young At Heart" name within California
for use in its senior wellness/exercise programs; however the Company has not
sought to protect the "Young At Heart" name at the federal level. The Company
has applied for a trademark of the HFA name and is awaiting final approval of
The Sports Club/LA name and logo in the international markets of France, the
United Kingdom, Germany, Japan and Canada. In addition, the Company is currently
seeking protection of the Sports Clubs "flying lady" logo in Australia.

GOVERNMENT REGULATION

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

     Statutes and regulations affecting the fitness industry have been enacted
or proposed in California, New York and Texas. The Company operates or is
developing clubs in these states. Many other states into which the Company may
expand have or likely will adopt similar legislation. Typically, these statutes
and regulations prescribe certain forms and provisions of membership contracts,
afford members the right to cancel the contract within a specified time period
after signing, require an escrow of funds received from preopening sales or the
posting of a bond or proof of financial responsibility, and may establish
maximum prices for membership contracts and limitations on the term of
contracts. In addition, the Company is subject to numerous other types of
federal and state regulations governing the sale of memberships. These laws and
regulations are subject to varying interpretations by a number of state and
federal enforcement agencies and the courts. In this regard, the California
Civil Code imposes a maximum limit on the amounts that may be charged pursuant
to a contract for health studio services. The Company maintains internal review
procedures in order to comply with these requirements, and believes that its
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, the Company's membership contracts provide that a member
may cancel his or her membership at any time for death, medical reasons or
relocation of a certain distance from the 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 the
Company upon cancellation and the Company may offset such amount against any
refunds owed.



                                       9
<PAGE>   11

EMPLOYEES

     At February 28, 1997, the Company had approximately 1,600 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. The Company employs
409 full-time employees. Approximately 158 employees are sales personnel,
instructors or supervisory personnel involved in Club operations, and 31 are
employed in general and administrative functions. The Company is not a party to
any collective bargaining agreement with its employees. Although the Company
experiences high turnover of non-management personnel, the Company has never
experienced any labor shortages nor had any difficulty in obtaining adequate
replacements for departing employees and considers its relations with its
employees to be good.

     Each of the Company's Clubs has a staff of fitness instructors trained to
assist in the sales function and to implement fitness testing and
individually-tailored exercise programs, as well as one or more managers who are
responsible for sales. Most instructors are college-educated. The Company's
aerobics instructors must have at least one year of teaching experience before
they are permitted to teach at the Clubs, after which they participate in
ongoing training and periodic re-evaluation.


ITEM 2. PROPERTIES


     The Company owns The Sports Club/Irvine, The Sports Club/LA, and the
Spectrum Club/Agoura Hills including all underlying real estate. All other
structures in which the Clubs are located are leased from independent third
parties.

     In March 1996, the Company refinanced The Sports Club/LA property and in
October 1996, increased the note by $500,000 to purchase a parcel of land
adjacent to the Club. The new $23.5 million loan bears interest at a fixed
interest rate of 10.63%. The Company is required to make monthly principal and
interest payments of approximately $262,000. The note matures in March 2003 but,
if certain conditions exist, the Company may extend the term of the note by an
additional five years. All assets of The Sports Club/LA secure this loan. The
building, improvements and personal property of The Sports Club/Irvine secure a
$5,375,000 note bearing interest at a fixed rate of 6%. The note requires
quarterly principal payments of $125,000 with a balloon payment of $4,000,000
due on November 1, 1999. All assets of the Spectrum Club/Agoura Hills secure a
$2,550,000 note which bears interest at a fixed rate of 6% through February 1997
and at 8.5% thereafter. Payments of interest only are required through April
1997, thereafter monthly principal and interest payments of $20,100 are required
through the note's maturity in April 2024.

     The following table provides certain information concerning the Company's
properties:

<TABLE>
<CAPTION>
                                                              TERM      
                                               OWN/LEASE   EXPIRATION   RENEWAL OPTION
                                               ---------   ----------   --------------
<S>                                              <C>         <C>           <C>    
The Sports Club/LA..........................      own          N/A              N/A
The Sports Club/Irvine......................      own          N/A              N/A
Reebok Sports Club/NY.......................     lease       4/19/15       three 14-year
                                                                              options
Spectrum Club/Agoura Hills..................      own          N/A              N/A
Spectrum Club/Water Garden..................     lease       6/30/08       5-year option
Spectrum Club/Santa Monica..................    sublease    11/14/98    two 5-year options
Spectrum Club/Howard Hughes Center..........     lease       9/14/08    two 5-year options
Spectrum Club/Manhattan Beach...............     lease       2/28/02       three 5-year
                                                                              options
Spectrum Club/Valencia......................     lease         (1)      two 5-year options
The Sports Connection/South Bay(2)..........     lease       8/31/04      4.5-year option
The Sports Connection/Encino(3).............     lease      12/31/06       5-year option
</TABLE>

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



                                       10
<PAGE>   12

(1)     The term on the Spectrum Club/Valencia lease will expire 15 years after
        the Club opens.

(2)     Although the Company terminated the management agreement with Bally's
        and the South Bay Sports Connection was permanently closed on November
        30, 1996, a dispute has arisen with the landlord over future obligations
        with respect to the lease.

(3)     The Company no longer owns this Club and has assigned its interest in
        the lease. The landlord, however, has not released the Company from
        liability under this lease.

     Leases for the Clubs are generally long-term "triple net" operating leases
(requiring the Company to pay all real estate taxes, insurance and maintenance
expenses, in addition to rent), having an average remaining term of
approximately 23 years (including options to extend exercisable by the Company).
The earliest expiration date of any of these leases is November 1998 (with
respect to the Spectrum Club/Santa Monica). These leases generally provide that
rent payments shall be adjusted upward periodically during the terms of the
leases, including adjustments based upon changes in the Consumer Price Index in
the surrounding area (but subject to certain maximum increases that will protect
the Company in inflationary periods), and permit extension of the primary term,
subject to certain notice requirements. The Company also leases approximately
15,600 square feet of office space in a commercial building in Los Angeles,
California, for administrative, accounting and general corporate purposes. This
lease requires monthly payments of $28,875 through the end of the lease term in
March 2000.

     Effective January 26, 1992, all existing public accommodations (including
the Clubs) were required to comply with the Americans with Disabilities Act (the
"ADA"). The ADA, together with many state and local statutory provisions,
generally require that buildings be made accessible to persons with
disabilities. The Company has undertaken an assessment of its Clubs to determine
the extent of non-compliance and to devise a plan by which all required
corrective measures can be implemented in the future. Although the cost of
compliance with existing and evolving ADA, state and local statutory provisions
cannot be predicted with any certainty at this time, the Company currently
anticipates spending approximately $500,000 over the next two years in order to
comply with the ADA, most of which will be effected as part of the Company's
routine capital expenditures. Such capital expenditures will be amortized over
the useful life of the improvements. Such expenditures are not expected to have
a material adverse impact on the Company.

     For a period of ten years following its completion in 1989, the property
comprising The Sports Club/Irvine is subject to a covenant to operate it as a
first-class coed athletic and social club facility. For a period of 15 years
thereafter, the property use may not change if the change requires development
approval by the City of Irvine that cannot be obtained separately from the
development rights of the project in which the Club is located. If either of
these covenants is violated, the master developer of that project has the right
to purchase The Sports Club/Irvine for a cash price equal to 95% of its original
purchase price from the master developer plus 95% of the construction costs
incurred in constructing The Sports Club/Irvine.

     The Company believes its properties and equipment, as well as its leased
facilities, are adequate for its needs, have been well-maintained and, other
than mentioned above, do not require any substantial renovation or restoration
work at this time.

ITEM 3. LEGAL PROCEEDINGS

THE SPECTRUM CLUB COMPANY, INC., a California corporation, v. CENTURY
ENTERTAINMENT CENTER, L. P. (Los Angeles Superior Court). In August of 1995,
Century City Spectrum ("CCS"), a subsidiary of the Company, closed the Century
City Spectrum Club. In connection with the bankruptcy of the landlord, CCS's
rights under the lease related to this Club were acquired by Century
Entertainment Center, L.P. ("Century"). On August 10, 1995, CCS filed an action
against Century alleging a breach of the lease by the prior landlord. Century
filed a cross-complaint against CCS for rent due and against the Company as a
guarantor of CCS's obligations under the lease. The Cross-Complaint seeks in
excess of $800,000 through December 1995 plus rent thereafter of approximately
$39,000 per month. The trial court ruled CCS's right of first refusal cannot be
asserted against Century. CCS's primary remaining defense is based upon
Century's obligation to re-lease the subject space. In addition, CCS may appeal
the trial court's ruling following trial. The Company is contesting the action
against it as guarantor on the basis that its obligations were exonerated or do
not inure to the benefit of Century. However, there can be no assurance that the
Company will not be held liable for all amounts found to be due to Century from
CCS. Such liability could have a material, adverse effect upon the Company.



                                       11
<PAGE>   13

AGRICULTURAL INSURANCE COMPANY v. MKDG/RHODES SC PARTNERSHIP AND SPORTS CLUB,
INC. (Los Angeles Superior Court). In connection with the Northridge earthquake
on January 17, 1994, MKDG/Rhodes SC Partnership ("MKDG") carried excess
earthquake coverage for The Sports Club/LA with Agricultural Insurance Company
("Agricultural"). Certain of the Company's predecessors and subsidiaries (the
"SCLA Parties") were named insureds under the policy. The SCLA Parties assigned
to MKDG all of their rights to payments under the Agricultural earthquake policy
in October 1994 and retained no interest in any amounts paid by Agricultural
under that policy. Agricultural made payments totalling approximately $2,974,000
before a dispute arose under the policy. MKDG filed a complaint against
Agricultural on August 2, 1995, and Agricultural filed a cross-complaint against
MKDG and the SCLA Parties, alleging intentional misrepresentation (fraud),
negligent misrepresentation, breach of contract, breach of implied covenant of
good faith and fair dealing, rescission, money had and received, declaratory
judgment and indemnity. Agricultural seeks the return of amounts paid plus
punitive damages and attorneys fees. A hearing is scheduled for May 1, 1997, and
discovery is continuing. The Company believes it is entitled to be indemnified
by MKDG for all damages in this action.

ST INSTITUTE OF CALIFORNIA d/b/a SPORTS TRAINING PHYSICAL THERAPY, L.A. v. THE
SPORTS CLUB COMPANY, INC. (Los Angeles Superior Court) In 1989, ST Institute of
California ("STI") leased space in both The Sports Club/LA and The Sports
Club/Irvine. In 1995, the Company negotiated with HealthFitness Organization of
America, Inc. ("HFA"), now a wholly owned subsidiary of the Company, to take
over the space. Disputes arose regarding termination of STI's use of the space,
which were resolved when STI entered into an asset purchase agreement with HFA
whereby HFA purchased STI's assets. HFA agreed to make performance payments to
STI in the minimum amount of $100,000 per year. A dispute subsequently arose
between HFA and STI, and HFA ceased making payments after having paid
approximately $46,000. STI filed a complaint on December 30, 1996, alleging
damages for breach of contract, conversion, fraud, negligent misrepresentation,
and civil conspiracy. STI claims damages of not less than $2,300,000 on the
first two causes of action, and not less than $1,800,000 on the fifth cause of
action. The defendants have demurred to STI's complaint. STI has stipulated to
file an amended complaint.

HARVEY SCOTT SCHWARTZ v. LA/IRVINE SPORTS CLUB, LTD. AND SPORTS CLUB, INC. OF
CALIFORNIA. (Los Angeles Superior Court). The Company was recently served with a
class action lawsuit brought on behalf of all male members, past and present, of
The Sports Club/LA and The Sports Club/Irvine. The complaint alleges that the
civil rights of the class have been violated because of the existence of
"women's preferred" gym areas at these facilities. The complaint seeks
approximately $1,000 in damages for each class member. The Company and its
counsel are presently investigating the facts of the case, the potential size of
the class, and the likelihood that a class can or will be certified by the
court. At this early stage, the Company has not evaluated the scope of damages
or the amount in controversy. Although the Company has not yet responded to the
complaint, the Company believes the claim is without merit and will vigorously
defend the action. Men are not prevented from using or excluded from the
"women's preferred" gym area and the Company believes that no civil rights
violation has occurred.

OTHER MATTERS. The Company is also involved in various claims and lawsuits
incidental to its business, including claims arising from accidents and disputes
with landlords. 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 a material
adverse effect on the financial condition, cash flow or operations of the
Company.

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

        Not applicable



                                       12
<PAGE>   14

                                     PART II

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

        The Company's common stock is quoted on the American Stock Exchange
under the symbol "SCY". The following table sets forth the quarterly high and
low prices for the Company's common stock as reported by the American Stock
Exchange.

<TABLE>
<CAPTION>
                         CALENDAR QUARTER                       HIGH                 LOW
                         ----------------                       ----                 ---
<S>                                                             <C>                  <C>    
     1995:
First Quarter................................................   $ 8.000              $ 5.250
Second Quarter...............................................   $ 6.250              $ 4.500
Third Quarter ...............................................   $ 5.313              $ 3.875
Fourth Quarter...............................................   $ 5.250              $ 2.625
     1996:
First Quarter................................................   $ 3.375              $ 2.125
Second Quarter...............................................   $ 3.250              $ 2.438
Third Quarter................................................   $ 3.375              $ 2.313
Fourth Quarter ..............................................   $ 3.375              $ 2.375
     1997:
First Quarter (through March 14, 1997).......................   $ 5.000              $ 2.625

</TABLE>

        As of March 14, 1997 there were 42 stockholders of record of the
Company's common stock and the closing price of the common stock on the American
Stock Exchange was $5.00.

        The Company has not paid cash dividends on its common stock and does not
anticipate that it will do so in the foreseeable future. The Company's present
policy is to retain earnings for use in its operations and the expansion of its
business. On January 29, 1997, the Company instituted a stock repurchase program
pursuant to which it will repurchase up to $3,000,000 of the outstanding common
stock. As of March 21, 1997, the Company had repurchased 33,100 shares of common
stock for $132,311.

ITEM 6. SELECTED FINANCIAL DATA

        The selected data presented below under the captions "Statement of
Income Data" and "Balance Sheet Data" as of the end of and for each of the years
in the five-year period ended December 31, 1996, are derived from the
consolidated financial statements of the Company.

<TABLE>
<CAPTION>
                                              SELECTED CONSOLIDATED FINANCIAL INFORMATION
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                        Year Ended December 31,
                                               -------------------------------------------------
                                                1992(4)   1993(4)      1994    1995(1)    1996(1)
                                               --------   --------     -----   -------    ------
                                                                              (Restated)(Restated)
<S>                                           <C>        <C>        <C>      <C>        <C>     
STATEMENT OF INCOME DATA:
Revenues...................................   $ 17,248    $ 13,195   $ 18,846  $ 34,659  $ 36,918
Income (loss) from operations (2)..........     (1,314)      1,946      3,645     4,668     5,387
Income (loss) before income taxes (2)......     (1,692)      1,620      3,044     2,778     2,886
Income tax provision, including pro forma
income tax adjustment (3)..................                    645      1,244     1,139     1,183
Net income after income tax provision,                                                    
including pro forma income tax adjustment                  
(2)........................................                    975      1,800     1,639     1,703
Net income per share after income tax
provision, including pro forma income tax                  
adjustment.................................                   $.14       $.23      $.14      $.15
Weighted average number of common shares
outstanding................................                  6,850      7,836    11,353    11,355

</TABLE>



                                       13
<PAGE>   15

<TABLE>
<CAPTION>
                                                           As of December 31,
                                            ------------------------------------------------
                                             1992 (1)  1993 (1)  1994 (1)  1995 (1)  1996 (1)
                                            (Restated)(Restated)(Restated)(Restated)(Restated)
<S>                                           <C>         <C>     <C>      <C>      <C>    
BALANCE SHEET DATA:
Cash and cash equivalents.................    $ 1,143     $ 209   $ 5,042  $ 1,545  $ 4,146
Current assets............................      4,836     2,478     7,398    7,147    7,341
Property and equipment, net...............      5,837     2,794    59,811   59,956   72,736
Total assets..............................     12,253    11,561    81,676   83,161   95,697
Deferred membership revenue...............      6,169     2,503     5,878    5,614    7,481
Current liabilities.......................      9,947     5,480    11,194   11,355   14,159
Long-term debt including current                                                           
installments..............................      3,545     4,818    33,489   32,913   38,497
Shareholders'/Owners' equity..............        565     2,780    37,824   39,492   41,202
</TABLE>

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

(1)     The selected financial data presented herein have been restated to
        reflect a change in the Company's method of recognizing initiation fees.
        See "Consolidated Financial Statements".

(2)     Income (loss) from operations and net income (loss) for the periods
        through October 20, 1994, reflect the effects on the historical data of
        the payment to D. Michael Talla of annual compensation of $200,000,
        which amounts equal the base compensation provided for by his employment
        contract (assuming the employment agreement was effective at the
        beginning of the respective period). See "Item 11 - Executive
        Compensation -- Employment Agreements".

(3)     Prior to the issuance of 4,500,000 shares of its common stock in a
        public offering (the "Offering"), the Company operated through various
        partnerships. As a result, the earnings of the Company have been taxed
        for federal and California purposes directly to the owners. The income
        tax provision includes the income tax expense incurred by the Company
        subsequent to the Offering on October 20, 1994, and the pro forma income
        tax expense as if the Company's income had been taxable as a corporation
        for periods prior to the Offering.

(4)     Effective March 1, 1993, the Company entered into a joint venture
        management agreement relating to the operation of the Sports
        Connections. As a result of this agreement, the Company's expenses with
        respect to these Clubs were substantially eliminated, though the Company
        continued to receive revenues, through 1995, from memberships sold prior
        to the date of the transaction. Therefore, the results of operations for
        the years ended December 31, 1992 and 1993 are not comparable to future
        periods.


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

OVERVIEW

        The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-K/A. The Company's consolidated statement of income include The Sports
Clubs, The Spectrum Clubs and HealthFitness Organization of America, Inc.
("HFA") which was acquired on November 30, 1995. The Reebok-Sports Club/NY,
which opened in April 1995 was accounted for under the equity method of
accounting, until December 30, 1996, at which time the Company acquired a
majority ownership position, and accordingly, the balance sheet of Reebok-Sports
Club/NY was consolidated with and into the Company. The Spectrum Club/Manhattan
Beach is accounted for under the equity method of accounting.

        The comparability of the Company's operating results, financial
condition and capital requirements is impacted by the number and type of Clubs
which the Company operates. Seasonal factors have not had a significant effect
on the Company's operating results. The Company's current accounting policy for
one-time non-refundable initiation fees was adopted on October 3, 1997 and in
accordance with certain provisions of Accounting Principles Board Opinion No.
20, Accounting Changes, operating results for the years ended December 31, 1995
and 1996 have been restated retroactively to reflect the current policy. See
"Consolidated Financial Statements".



                                       14
<PAGE>   16

RESULTS OF OPERATIONS

Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995

        Revenues for the year ended December 31, 1996 were $36.9 million,
compared to $34.7 million in 1995, an increase of $2.2 million or 6.3%. Revenues
increased by $289,000 as a result of greater management fees earned from the
Reebok Sports Club/NY, which opened in April 1995; by $359,000 as a result of
HFA; and by $2.9 million as a result of higher membership dues and increased
ancillary revenues at existing Sports Clubs and Spectrum Clubs. Offsetting these
increases was a decrease in revenues resulting from the closure of the Century
City Spectrum Club.

        Direct operating expenses increased to $23.0 million in 1996 versus
$21.7 million in 1995, an increase of $1.3 million or 6.0%. HFA, which was
acquired on November 30, 1995, was responsible for an increase in direct costs
of $442,000 while club operating expenses increased $858,000. Direct operating
expenses as a percentage of revenues decreased to 62.3% in 1996 compared to
62.7% in 1995. Direct operating costs without those costs associated with HFA
were 61.7% of revenue in 1996.

        Selling, general and administrative expenses were $6.1 million in 1996
versus $5.3 million in 1995, an increase of $800,000 or 15.1%. HFA was
responsible for an increase in selling, general and administrative costs of
$519,000 in 1996. The remaining increase was due to an increase in costs
associated with corporate overhead. As a percentage of revenues, selling,
general and administrative expenses were 16.4% in 1996 versus 15.8% in 1995.
Selling, general and administrative expenses without those costs associated with
HFA were 14.8% of revenue in 1996. The Company believes these costs should
decrease as a percentage of future revenues as the Company expands and achieves
economies of scale. There is no assurance, however, that such expansion or
economies of scale will be achieved.

        Depreciation and amortization expense was $2.5 million in 1996 versus
$2.8 million in 1995, a decrease of $300,000 or 10.7%. This decrease was
primarily due to the sale of the Sports Connections in 1996. Interest expense
was $2.7 million in 1996 versus $2.6 million in 1995.

        In 1996, equity interest in net income of unconsolidated subsidiaries
was $631,000 compared to $860,000 in 1995. The Company did not record any income
from the Sports Connections in 1996 versus $437,000 in 1995. The 1996 amounts
and $443,000 in 1995 are associated primarily with the Spectrum Club/Manhattan
Beach's operations. Equity in the operations of the Reebok Sports Club/NY was
not significant during these periods.

        In 1996 a loss of $300,000 resulted from the sale of the Sports
Connections.

Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994

        Revenues for the year ended December 31, 1995 were $34.7 million,
compared to $18.8 million in 1994, an increase of $15.9 million or 84.6%. The
increase resulted primarily from revenues of $23.6 million recorded by The
Sports Club/LA and The Sports Club/Irvine, which were acquired on October 20,
1994, in 1995 compared to $4.7 million in 1994, $490,000 in management fees
generated from the Reebok Sports Club/NY, which was opened in April, 1995, and
increased Spectrum Club revenues resulting from membership growth. Offsetting
this increase was a reduction in revenues from other sources. In 1994, The
Spectrum Clubs received $2.1 million from the prior owners of The Sports Club/LA
for use of the Spectrum Clubs following the closure of The Sports Club/LA as a
result of the January 1994 Northridge earthquake. No comparable revenue was
received in 1995.

        Direct operating expenses increased to $21.7 million in 1995 versus
$10.5 million in 1994, an increase of $11.2 million or 106.7% primarily as a
result of direct operating expenses of $13.8 million incurred at The Sports
Club/LA and The Sports Club/Irvine compared to $2.6 million in 1994. The
remaining increase was primarily due to operating the Spectrum Club/Agoura Hills
and Spectrum Club/Howard Hughes Center for an entire 12 months in 1995 versus
shorter periods in 1994, and an increase in the level of monthly operating costs
resulting from membership growth at the Spectrum Clubs. Direct operating
expenses as a percentage of revenues increased to 62.7% in 1995 compared to
55.8% in 1994. The earthquake related revenues received from the prior owners of
The Sports Club/LA, which were generated without a comparable increase in
expenses, resulted in the 1994 operating margins increasing to a level above the
Company's normal operating level.



                                       15
<PAGE>   17

        Selling, general and administrative expenses were $5.3 million in 1995
versus $3.2 million in 1994, an increase of $2.1 million or 65.6%. This increase
in expense was incurred as a result of the acquisition of The Sports Club/LA and
The Sports Club/Irvine and the development of an infrastructure required to
support the Company's management of the Reebok Sports Club/NY and future growth.

        Depreciation and amortization expense was $2.8 million in 1995 versus
$1.5 million in 1994, an increase of $1.3 million or 86.6%. The increase is
primarily due to depreciation and amortization expense for an entire year in
1995 versus shorter periods in 1994 for The Sports Club/LA, The Sports
Club/Irvine, Spectrum Club/Howard Hughes Center and Spectrum Club/Agoura Hills.

        In 1995, equity interest in net income of unconsolidated subsidiaries
was $860,000 compared to $641,000 in 1994 primarily as a result of earnings from
the Sports Connections of $437,000 in 1995 compared to $333,000 in 1994. The
Sports Connections earnings were retained by Bally's for capital expenditures
and to establish a working capital reserve and therefore, the Company did not
receive any cash distributions. The remaining equity interest is associated with
the operations of the Spectrum Club/Manhattan Beach and the Reebok Sports
Club/NY.

        Interest expense increased to $2.6 million in 1995 compared to $1.2
million in 1994 as a result of acquisitions made by the Company in 1994 and
their related financing costs.

LIQUIDITY AND CAPITAL RESOURCES

        During the years ended December 31, 1996 and 1995, the Company generated
$8.1 million and $8.2 million of earnings before interest, depreciation,
amortization and income taxes, respectively. At December 31, 1996, the Company
had a cash and cash equivalent balance of $4.1 million of which $727,000 is in a
special construction account for the development of a Spectrum Club in Valencia,
California, $296,000 belongs to the Reebok-Sports Club/NY Partnership and the
remaining $3.1 million is available for general corporate purposes. The Company
anticipates its cash and cash equivalent balance on hand plus cash generated
from operations will be adequate to fund the Company's current operating
activities, debt service, expansion capital requirements, and recurring capital
expenditures for the next twelve months.

        In March 1996, the Company refinanced The Sports Club/LA property, which
had an outstanding promissory note in the amount of $22.1 million. In October
1996, the Company increased the note by $500,000 in order to purchase a parcel
of land adjacent to the Club. The new $23.5 million loan bears interest at a
fixed interest rate of 10.63%. The Company is required to make monthly principal
and interest payments of $262,000. The note matures in March 2003 but, if
certain conditions exist, the Company may extend the term of the note by an
additional five years. All assets of The Sports Club/LA have been pledged to
secure this loan. This note replaced a note with interest at 10%, secured by the
land, building and equipment of The Sports Club/LA. This old note required a
balloon payment of approximately $22.0 million at December 31, 1996.

        In connection with the acquisition of The Sports Club/Irvine, MKDG
Partners has agreed to pay the Company for each of the years ending December 31,
1994, 1995 and 1996, the lesser of approximately $1.0 million or the amount by
which The Sports Club/Irvine's earnings before depreciation and amortization and
the Company's administrative overhead relating to the Club, as defined, for such
year is less than approximately $2.9 million. The Company collected $687,000
related to the 1995 shortfall in the third quarter of 1996. MKDG Partners has
agreed to pay $106,000 for previously disputed amounts relating to the 1994 and
1995 shortfall amounts. The Company also anticipates making a claim for
approximately $684,000 in 1997 relating to the 1996 shortfall.

        The Company sold its interest in certain Sports Connection Clubs to
Fitness Holding, Inc. d/b/a 24 Hour Fitness in November 1996. The Company
received cash proceeds of approximately $3.6 million and used $2.5 million of
such proceeds to acquire an additional 10.1% interest in the Reebok-Sports
Club/NY partnership.



                                       16
<PAGE>   18

     The Company currently owns a 50.1% interest in the Reebok-Sports Club/NY
Partnership. At December 31, 1996 the Partnership owed $3.3 million under a loan
secured by equipment and owed $4.0 million to the partners in the form of notes
payable. The Partnership is also in arrears in the payment of priority
Partnership distributions in the amount of $1.8 million. Notes payable in the
amount of $2.5 million and the $1.8 million priority distribution are recorded
as liabilities on the Company's December 31, 1996 consolidated balance sheet.
The Reebok Sports Club/NY achieved a positive cash flow in September 1995 and
has improved its operations since that date. The Club is expected to continue to
improve its operating results in the future as membership levels increase. The
future cash flows of the Partnership will first be used to satisfy the principal
and interest requirements of the equipment loan in the amount of $75,000 per
month. Additional cash flows will be used to pay the past due priority
Partnership distribution and the future priority distributions of $2.1 million
in 1997 and $3.0 million per year thereafter. The remaining future cash flows
will be returned to the partners to satisfy the notes payable, accrued
management fees and certain additional priority distributions. At December 31,
1996 these amounts total $14.0 million, of which the Company is entitled to $8.6
million. After these amounts are paid, the Company will be entitled to 50.1% of
future cash distributions.

        On March 13, 1997 the Company entered into an agreement to sell
2,105,263 shares of its common stock to Millennium Entertainment Partners, L.P.,
("MEP"). MEP currently owns a 9.9% interest in the Partnership. The Company will
receive $5.0 million in cash, MEP's 9.9% Partnership interest, and a $2.5
million note due from the Partnership and MEP's right to certain accrued
management fees due from the Partnership in exchange for the newly issued
shares. Once the transaction is consumated, the Company will be entitled to
substantially all of the $14.0 million currently due to the partners for notes
payable, accrued management fees and certain additional priority distributions.
These amounts will be paid as cash flow of the Partnership is available.

        The Company's long-term capital needs are to provide funds for the
retirement of existing long-term debt and to secure funds for the acquisition of
existing clubs and development of new clubs. The Company intends to continue its
efforts to pursue joint venture arrangements with strategic partners as a means
of financing the acquisition and development of new clubs. The Company has
secured a $5.0 million credit facility with a commercial bank. The credit
facility will be available to provide funds for the acquisition and development
of new clubs and for general corporate purposes.

        In the first quarter of 1996, the Company began development of the
57,000 square foot Spectrum Club in Valencia, California. The Company will own
and manage the Club operations in a building which will be leased from The
Newhall Land and Farming Company. Through December 31, 1996, the Company has
deposited $1.9 million into a special construction escrow account of which $1.2
million has been expended on the project. The Company anticipates that it will
be able to fund its remaining portion of this development, estimated to be
approximately $100,000, from operating cash flows. In August 1996, the Company
announced plans to develop a Sports Club in Houston, Texas. The Company's
portion of this development is estimated to be $3.6 million and will be funded
starting in late 1997. In March 1997, the Company announced its intent to
develop Sports Clubs in Washingtion D.C. and San Francisco, California. These
projects should start near the end of 1997. The Company's portion of these two
developments is preliminarily estimated to be approximately $10.0 million.
Operating cash flow, the $5.0 million proceeds from the sale of common stock to
MEP and the $5.0 million revolving credit facility will be utilized to finance
the Company's portion of these three developments. The Company does not expect
these Clubs to contribute significantly to revenues or net income until 1999.

        Other than as described above and for normal replacement of fitness
equipment and remodeling of Clubs, the Company has no commitments for capital
expenditures. Equipment has generally been available under capital lease
arrangements. In 1995, the Company invested approximately $1.9 million in
capital expenditures of which $1.0 million was financed under capital lease
agreements. In 1996 capital expenditures, other than those related to new club
development, were $1.6 million. In 1996 the Company secured a $500,000 lease
facility to be used to finance capital expenditures. As of December 31, 1996,
the Company had drawn down approximately $158,000 on this facility. The Company
has secured a similar $1.2 million facility to be used to finance the equipment
for the Spectrum Club in Valencia, California. The Company believes it will be
able to secure equipment financing for its Sports Clubs in Houston, Washington
D.C. and San Francisco, currently estimated to be $2.0 million per Club. While
capital expenditures may fluctuate from time to time, generally the Company
expects to spend approximately 4% of revenues on facility and equipment upgrades
and replacements. Expansion of the Company's operations beyond existing Clubs
will also require expenditures above this level.



                                       17
<PAGE>   19

FORWARD LOOKING STATEMENTS

        The foregoing discussion and other published documents contain
forward-looking statements relating to the future operations of the Company,
including The Reebok Sports Club/NY and HFA, the adequacy of the Company's cash
for its anticipated requirements, and other matters. These forward-looking
statements are based on a series of projections and assumptions regarding the
economy, other statements which are not historical facts, the Company's
operations and the sports and fitness industry in general. These projections and
assumptions involve certain risks and uncertainties that could cause actual
results to differ materially from those included in the forward-looking
statement. Furthermore, actual results may differ from projected results as a
result of unforeseen developments relating to demand for the Company's services
and competitive pricing trends in the health and fitness market; increased
expenses; the success of planned advertising, marketing and promotional
campaigns; changes in personnel or compensation; business interruptions
resulting from earthquakes, landlord disputes or other causes; general market
acceptance of new and existing Clubs operated by the Company; changes in
membership growth patterns; the success of new products; and regulatory or legal
proceedings and rulings which might adversely affect the Company. Investors are
also directed to consider other risk and uncertainties discussed in all
documents filed by the Company with the SEC. The Company expressly disclaims any
obligation to update any forward-looking statements as a result of developments
after the date hereof.

RECENT DEVELOPMENTS

     Not applicable

ITEM 8. FINANCIAL STATEMENTS, AS RESTATED

                        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                       ----
<S>                                                                                    <C>
Independent Auditors' Report                                                           F-1

Consolidated Balance Sheets as of December 31, 1995 and 1996                           F-2

Consolidated Statements of Income for the Three-Year Period ended December             F-3
31, 1996

Consolidated Statements of Shareholders' Equity for the Three-Year Period ended        F-4
December 31, 1996

Consolidated Statements of Cash Flows for the Three-Year Period ended                  F-5
December 31, 1996

Notes to Consolidated Financial Statements                                             F-6

</TABLE>

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

     Not applicable



                                       18
<PAGE>   20


                          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. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, based on our audits, 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,
1995 and 1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.

As disclosed in Note 2 to the Consolidated Financial Statements, the Company has
restated its consolidated financial statements as of December 31, 1995 and 1996,
and for the years then ended.


                                            KPMG PEAT MARWICK LLP




Los Angeles, California
March 13, 1997
  except for the last paragraph of note 5 
  which is as of March 20, 1997 and 
  the 3rd and 4th paragraphs of note 2, which 
  are as of October 3, 1997.



                                      F-1
<PAGE>   21

                          THE SPORTS CLUB COMPANY, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1995 AND 1996
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                            ASSETS                                   1995       1996
                                                                                  ----------  ----------
                                                                                  (Restated)  (Restated)
                                                                                  ----------  ----------
<S>                                                                                 <C>       <C>    
Current assets:
    Cash and cash equivalents, includes $727 escrowed
        construction funds in 1996                                                  $ 1,545   $ 4,146
    Accounts receivable, net of allowance for doubtful accounts
        of  $39 and $57 in 1995 and 1996, respectively                                1,323     1,376
    Inventories                                                                         401       395
    Other current assets                                                                370       381
    Due from affiliates                                                               3,508     1,043
                                                                                    -------   -------
         Total current assets                                                         7,147     7,341

Property and equipment, net                                                          59,956    72,736
Equity interest in unconsolidated subsidiaries                                        4,533       642
Costs in excess of net assets acquired, less accumulated amortization of
     $215 and $454  in 1995 and 1996, respectively                                   10,136    13,552
Organizational costs and other assets, net                                            1,389     1,426
                                                                                    -------   -------
                                                                                    $83,161   $95,697
                                                                                    =======   =======


                                             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current installments of notes payable and capitalized
       lease obligations                                                            $ 1,890   $ 2,470
    Accounts payable                                                                  2,021     1,431
    Accrued liabilities                                                               1,830     2,777
    Deferred membership revenues                                                      5,614     7,481
                                                                                    -------   -------
         Total current liabilities                                                   11,355    14,159

Notes payable and capitalized lease obligations,
    less current installments                                                        31,023    36,027
Deferred lease obligations                                                              691     3,309
Minority interest                                                                       600     1,000
                                                                                    -------   -------
         Total liabilities                                                           43,669    54,495

Commitments and contingencies

Shareholders' equity:
    Preferred stock, $.01 par value 1,000,000 shares authorized;
      no shares issued or outstanding                                                  --        --
    Common stock, $.01 par value, 40,000,000 shares authorized; 11,355,000 and
      11,358,000 shares issued and outstanding at December 31, 1995 and
      1996, respectively                                                                114       114
    Additional paid-in capital                                                       36,927    36,935
    Retained earnings                                                                 2,451     4,153
                                                                                    -------   -------
         Total shareholders' equity                                                  39,492    41,202
                                                                                    -------   -------
                                                                                    $83,161   $95,697
                                                                                    =======   =======
</TABLE>

                   See accompanying notes to consolidated financial statements 



                                      F-2
<PAGE>   22

                          THE SPORTS CLUB COMPANY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                    THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                     1994        1995       1996
                                                                   --------   ----------  ---------
                                                                              (Restated)  (Restated)
<S>                                                                <C>         <C>         <C>     
Revenues                                                           $ 18,846    $ 34,659    $ 36,918

Operating expenses:
    Direct                                                           10,525      21,730      22,989
    Selling, general and administrative                               3,166       5,486       6,052
    Depreciation and amortization                                     1,510       2,775       2,490
                                                                   --------    --------    --------
      Total operating expenses                                       15,201      29,991      31,531
                                                                   --------    --------    --------
         Income from operations                                       3,645       4,668       5,387

Other income (expense):
    Interest                                                         (1,213)     (2,600)     (2,682)
    Minority interests                                                  (29)       (150)       (150)
    Equity interest in net income of unconsolidated subsidiaries        641         860         631
    Loss on sale of Sports Connections                                 --          --          (300)
                                                                   --------    --------    --------
      Total other income (expense)                                     (601)     (1,890)     (2,501)
                                                                   --------    --------    --------
       Income before income taxes                                     3,044       2,778       2,886

Provision for income taxes                                              460       1,139       1,183
                                                                   --------    --------    --------
        Net income                                                    2,584       1,639       1,703

Pro forma income tax adjustment (unaudited) - provision
    for income taxes incremental to historical taxes                    784        --          --
                                                                   --------    --------    --------
        Net income after pro forma income
          tax adjustment (1994 unaudited)                          $  1,800    $  1,639    $  1,703
                                                                   ========    ========    ========


Net income per share after pro forma income
   tax adjustment  (1994 unaudited)                                $   0.23    $   0.14    $   0.15
                                                                   ========    ========    ========

</TABLE>



          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>   23

                          THE SPORTS CLUB COMPANY, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                    THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                            Additional
                                                              Partners'    Common Stock      Paid-in   Retained
                                                              Capital     Shares   Value     Capital   Earnings
                                                              -------    -------   -------   -------   -------
<S>                                                           <C>                  <C>       <C>       <C>  
Partners' capital at January 1, 1994 as previously reported   $ 2,897       --     $  --     $  --     $  --
    Adjustment for the cumulative effect on prior
       years for the change in accounting for deferred
       initiation fees                                           (117)      --        --        --        --
                                                              -------    -------   -------   -------   -------
Partners' capital at January 1, 1994 as restated                2,780
    Net income                                                  1,772       --        --        --         812
    Contributions                                                 398       --        --        --        --
    Distributions and redemptions of partnership interests     (2,902)      --        --        --        --
    Exchange of partnership interest for common stock          (2,048)     6,850        69     1,979      --
    Issuance of common stock in connection with
         initial public offering                                 --        4,500        45    34,919      --
                                                              -------    -------   -------   -------   -------
Balance, December 31, 1994 (Restated)                            --       11,350       114    36,898       812
    Net income (Restated)                                        --         --        --        --       1,639
    Issuance of common stock to outside directors                --            5      --          29      --
                                                              -------    -------   -------   -------   -------
Balance, December 31, 1995 (Restated)                            --       11,355       114    36,927     2,451
    Net income (Restated)                                        --         --        --        --       1,702
    Issuance of common stock to outside directors                --            3      --           8      --
                                                              -------    -------   -------   -------   -------
Balance, December 31, 1996 (Restated)                         $  --       11,358   $   114   $36,935   $ 4,153
                                                              =======    =======   =======   =======   =======
</TABLE>




          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   24

                          THE SPORTS CLUB COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             1994        1995       1996
                                                                           --------   ----------  ---------
                                                                                      (Restated)  (Restated)
<S>                                                                        <C>         <C>         <C>     
Cash flows from operating activities:
    Net income                                                             $  2,584    $  1,639    $  1,703
    Adjustments to reconcile net income to net cash
      provided by operating activities:
         Cumulative effect of change in accounting for deferred
          initiation fees                                                      (117)
         Depreciation and amortization                                        1,510       2,775       2,490
         Accrued management fees                                               --          (502)        (97)
         Equity interest in net income of unconsolidated subsidiaries          (681)       (860)       (631)
         Distributions from unconsolidated subsidiaries                         258         320         623
         Stock issued as directors' fees                                       --            29           8
         Loss on sale of Sports Connections                                    --          --           300
         (Increase) decrease in:
              Accounts receivable, net                                         (172)        (23)        149
              Inventories                                                        18          42         105
              Other current assets                                              402        (106)        (12)
         Increase (decrease) in:
              Accounts payable                                                  665       1,011        (816)
              Accrued liabilities                                               894        (908)        225
              Deferred membership revenues                                   (1,515)       (263)       (633)
              Deferred lease obligations                                        379         312         211
                                                                           --------    --------    --------
                   Net cash provided by operating activities                  4,225       3,466       3,625

Cash flows from investing activities:
    Capital expenditures                                                       (381)       (929)     (2,788)
    Business acquisitions, net of cash acquired                             (27,906)     (1,255)     (2,118)
    Proceeds from sale of Sports Connections                                   --          --         3,569
    Sale (purchase) of other non-operating assets                            (1,116)        (33)         95
                                                                           --------    --------    --------
                   Net cash used for investing activities                   (29,403)     (2,217)     (1,242)

Cash flows from financing activities:
    (Increase) decrease in due from affiliates                                 (318)     (2,658)        540
    Proceeds from notes payable and capital lease obligations                   714        --        23,371
    Repayments of notes payable and capital lease obligations                (5,085)     (2,058)    (23,693)
    Net proceeds from sale of common stock                                   35,564        --          --
    Capital contributions by partners                                           398        --          --
    Distributions and redemptions of partnership interests                   (1,262)        (30)       --
                                                                           --------    --------    --------
                   Net cash provided by (used for)  financing activities     30,011      (4,746)        218
                                                                           --------    --------    --------
                   Net increase (decrease) in cash and cash equivalents       4,833      (3,497)      2,601
Cash and cash equivalents at beginning of year                                  209       5,042       1,545
                                                                           --------    --------    --------
Cash and cash equivalents at end of year                                   $  5,042    $  1,545    $  4,146
                                                                           ========    ========    ========

Supplemental disclosure of cash flow information:
    Cash paid during the year for interest                                 $  1,021    $  2,585    $  3,068
                                                                           ========    ========    ========
    Cash paid during the year for income taxes                             $   --      $  1,473    $    590
                                                                           ========    ========    ========

Non-cash activities:
    Redemption of partnership interests by issuance of notes payable       $  1,213    $   --      $   --
    Redemption of partnership interests by decrease in other assets             427        --          --
    Capital expenditures financed                                              --           982         158

</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>   25

                          THE SPORTS CLUB COMPANY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996


1. ORGANIZATION

The Sports Club Company, Inc. (the "Company") was formed on February 15, 1994.
In order to facilitate an initial public offering of common stock in October
1994, the Company issued 6,850,000 shares of common stock to the owners of The
Spectrum Club Company (predecessor company) in exchange for their 100% ownership
interests in The Spectrum Club Company. This transaction ("Exchange
Transaction") has been accounted for under the principles of reorganization
accounting and therefore The Spectrum Club Company's operating results for
periods prior to October 1994 are presented as the predecessor company. The
Spectrum Club Company was engaged in the management and development of health
and fitness facilities located in Southern California. The Spectrum Club Company
developed principally two distinct athletic club products serving different
markets; Spectrum Clubs and Sports Connections. The products were differentiated
by the level of amenities and services, diversity of facilities and fees
charged. The Spectrum Club concept generally serves an upscale market in
comparison to the Sports Connections which served the lower end of the fitness
market.

Commencing March 1, 1993, under a joint venture agreement between Bally's Health
and Tennis Corporation (Bally's) and The Spectrum Club Company, Bally's began
managing the Sports Connections. Since Bally's assumed financial and operating
control for the Sports Connections, the results of operations are not included
in the accompanying consolidated financial statements and the Company had
recorded its investment under the equity method of accounting. In November 1996,
the Company sold its interest in certain Sports Connection clubs to Fitness
Holding, Inc. d/b/a 24 Hour Fitness. The Company received cash proceeds of
approximately $4.6 million. The management agreement with Bally's was terminated
simultaneously with this transaction in consideration of a termination fee of
$1.0 million.

Concurrent with the completion of the initial public offering, the Company
entered into an employment agreement with D. Michael Talla as its Chief
Executive Officer. The Company has recorded certain compensation to Mr. Talla in
the accompanying consolidated financial statements as if his current employment
agreement was in effect during the year ended December 31, 1994.

The pro forma financial information included on the consolidated statements of
operations is provided to illustrate the effects on the consolidated historical
financial information had the Company operated as a taxable corporation and
reflects the issuance of 6,850,000 shares of common stock for purposes of
presenting pro forma net income per share.

In October 1994, the Company completed its initial public offering of 4,500,000
shares of common stock. The net proceeds of such sale were primarily used to
acquire majority control of The Sports Club/LA and The Sports Club/Irvine. These
Clubs have been developed as "urban country clubs" offering a full range of
services and amenities primarily to affluent health conscious individuals.

The Reebok Sports Club/NY, which the Company manages and in which it initially
owned a 40% partnership interest, is in New York City and opened in April 1995.
The Company's investment had been accounted for under the equity method of
accounting. On December 30, 1996, the Company acquired an additional 10.1%
ownership interest and, the Company will begin including the financial condition
and operating results of the Reebok Sports Club/NY in its consolidated financial
statements as of that date. The balance sheet of Reebok-Sports Club/NY has been
consolidated with and into the Company's financial statements at December 31,
1996.



                                      F-6
<PAGE>   26

On November 30, 1995, the Company acquired 100% of the common stock of
HealthFitness Organization of America, Inc. ("HFA"). HFA provides integrated
wellness and musculoskeletal healthcare programs at The Sports Club/LA, The
Sports Club/Irvine and Spectrum Club/Agoura Hills.

2. 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. Certain
reclassifications have been made to the prior years' financial statements to
conform to the presentation used in 1996.

Revenue Recognition

The Company receives a one-time non-refundable initiation fee and monthly 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 between two and one half and 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.

The Company's current accounting policy for one-time non-refundable initiation
fees was adopted on October 3, 1997 and in accordance with certain provisions of
Accounting Principles Board Opinion No. 20, Accounting Changes, operating
results for the years ended December 31, 1995 and 1996 have been restated
retroactively to reflect the current policy. Such change was made to: (i) better
match revenues with related costs over an estimated period of membership; (ii)
conform with the current practices of others in the industry; and (iii) comply
with recently communicated guidance from the Securities and Exchange Commission.
The impact on operating results for the year ended December 31, 1994 was
immaterial. The impact on the December 31, 1995 and 1996 financial statement is
as follows:

<TABLE>
<CAPTION>
                                        As Reported                 As Restated
                                 ------------------------    -------------------------
                                    1995           1996          1995          1996
                                 ---------       --------    ----------      ---------
                                  (amounts in thousands,       (amounts in thousands,
                                 except per share amounts)   except per share amounts)
<S>                               <C>            <C>           <C>           <C>    

Revenues                          $36,092        $37,422       $34,659       $36,918
Net income                          2,004          1,704         1,639         1,703
Earnings per share                   0.18           0.15          0.14          0.15

Total assets                      $83,106        $95,584       $83,161       $95,697
                                  =======        =======       =======       =======

Total liabilities                 $43,132        $53,898       $43,669       $54,495
Total equity                       39,974         41,686        39,492         4,202
                                  --------       -------        ------         -----
Total liabilities and equity      $83,106        $95,584       $83,161       $95,697
                                  =======        =======       =======       =======

</TABLE>



                                      F-7
<PAGE>   27

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents At December 31, 1996, cash and cash equivalents include
$727,000 of escrowed construction funds. Inventories

Inventories are stated at the lower of cost or market using the average cost
method.

Depreciation and Amortization

Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease term or the estimated
useful life of the improvements. Loan costs are amortized over the terms of the
related loans and organizational costs are amortized over five years.

Predevelopment Costs

Predevelopment costs consist of architectural and feasibility expenditures
incurred for certain prospective health and fitness projects. Projects are
reviewed periodically by management for viability. Should a project be deemed
not viable for construction, such related costs are charged to operations at the
time of determination. The Company has predevelopment costs for a Sports Club in
Houston, Texas in the amount of $53,000 at December 31, 1996.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long lived assets and certain
identifiable intangibles be reviewed 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 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. Adoption of this Statement had no impact on the Company's financial
position, results of operation or liquidity.

Intangible Assets

The costs in excess of net assets of acquired businesses resulting from the
acquisitions referred to in Note 3 are being amortized on a straight-line basis
over a period of 40 years. The Company periodically evaluates the carrying value
of intangible assets and, considers the ability to generate positive cash flow
through undiscounted future operating cash flows of the acquired operation as
the key factor in determining whether the assets have been impaired. The Company
has not experienced an impairment of value of any of its intangible assets as of
December 31, 1996 or September 30, 1997.

Equity Interest in Unconsolidated Subsidiaries

At December 31, 1995, equity interest in unconsolidated subsidiaries consisted
of the 40% general partnership interest in the Reebok-Sports Club/NY, a 46.1%
interest in a Spectrum Club located in Manhattan Beach, California, and the
Company's interest in the Sports Connections included in the joint venture
agreement with Bally's. The Company sold its interest in the Sports Connections
during 1996. On December 30, 1996, the Company acquired controlling interest in
the Reebok-Sports Club/NY and therefore this Club's balance sheet is included in
the Company's consolidated balance sheet as of 



                                      F-8
<PAGE>   28

December 31, 1996 and the results of the Reebok-Sports Club/NY will be included
in the Company's consolidated statement of operations from the date of
acquisition.

The Company allocates profits and losses on a basis defined in the various
partnership agreements. Operating losses in the Reebok-Sports Club/NY in 1995
were allocated 99% to the limited partners and 1% to the Company. Operating
profits in 1996 were allocated 99% to the limited partners and 1% to the
Company.

Summary financial information of unconsolidated subsidiaries is as follows:
(The December 31, 1996 and September 30, 1997 balance sheet information
operating information for the nine months ended September 30, 1997 only
includes the accounts of the Spectrum Club/Manhattan Beach since the Sports
Connections were sold and the Reebok-Sports Club/NY is now included in the
consolidated balance sheet.)

<TABLE>
<CAPTION>

                                                       Years ended December 31,
                                                       -----------------------
                                                         1995           1996  
                                                       -------         ------     
                                                        (Amounts in thousands)
                                      
<S>                                                   <C>            <C>   
Revenues............................................   $26,370        $28,572      
Net income (loss)...................................      (819)         1,764


                                                            December 31,
                                                            ------------
                                                         1995           1996
                                                       -------         ------
                                                        (Amounts in thousands)

Current assets......................................   $ 1,214         $  522
Non-current liabilities.............................    18,658          2,653
                                                       -------         ------
Total assets........................................   $19,872         $3,175
                                                       =======         ======

Current assets......................................   $ 4,153         $1,444
Non-current liabilities.............................     7,490            727
                                                       -------         ------
Total liabilities...................................    11,643          2,171
Partners' capital...................................     8,229          1,004
                                                       -------         ------
Total liabilities and partners' capital.............   $19,872         $3,175
                                                       =======         ======                        
</TABLE>

Income Taxes

Prior to the October 1994 Exchange Transaction, the Company consisted of a
series of partnerships; accordingly no provisions for federal or state income
taxes were recorded, and the liability for such taxes was passed through to the
respective partners.

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
bases. 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.

Earnings per Share

Net income per share is computed by dividing net income by the weighted average
number of common and dilutive common share equivalents (consisting of stock
options) outstanding during the period. Common stock equivalents are not
included when their effect would be antidilutive. The number of shares used for
this computation was 7,836,000, 11,353,000 and 11,355,000 for the years ended
December 31, 1994, 1995, and 1996, respectively.



                                      F-9
<PAGE>   29

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles 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 of financial instruments approximate fair value as of
December 31, 1996. The carrying amounts related to cash and cash equivalents,
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.

3. ACQUISITIONS

On October 20, 1994, the Company acquired a controlling interest in The Sports
Club/LA and The Sports Club/Irvine (the "Sports Club Acquisition") in exchange
for $27.7 million in cash and a promissory note in the amount of $5.5 million.
The Company also assumed a $23.2 million note in connection with this
acquisition. This acquisition was accounted for as a purchase. Accordingly, the
operations of The Sports Club/LA and The Sports Club/Irvine are included in the
accompanying statement of operations from the date of acquisition. The purchase
price was primarily allocated to property and equipment, and the balance of
approximately $7.0 million was recorded as costs in excess of net assets
acquired.

On November 30, 1995, the Company acquired 100% of the stock of HealthFitness
Organization of America, Inc. ("HFA"). The acquisition was accounted for as a
purchase. Accordingly, the operations of HFA are included in the accompanying
statement of operations from the date of acquisition.

On December 30, 1996, the Company acquired an additional 10.1% interest in The
Reebok-Sports Club/NY partnership for $2,525,000 which brings the Company's
total ownership to 50.1%. This acquisition was accounted for as a purchase and
accordingly, the operations of the Club will be included in the consolidated
statement of operations from the date of acquisition. The Company's consolidated
balance sheet as of December 31, 1996 includes the acquired assets and
liabilities of the Reebok-Sports Club/NY. Goodwill of approximately $3.8 million
resulted due to this transaction. (See also note 11).

The following pro forma financial data present the Company's unaudited pro forma
statement of operations for the years ended December 31, 1995 and 1996, giving
effect to the Reebok-Sports Club/NY acquisition as if the transaction had
occurred on January 1, 1995. The operations of HFA, on a pro forma basis, are
not material to the consolidated statement of operations, accordingly, its
impact has been excluded from the following pro forma presentation. The
unaudited pro forma condensed statements of operations do not purport to
represent what the Company's actual results of operations would have been had
such transactions in fact occurred on such date. The unaudited pro forma
condensed statements of operations also do not purport to project the results of
operations of the Company for any future period.



                                      F-10
<PAGE>   30


<TABLE>
<CAPTION>
                                                                      (Unaudited)
                                                                 Year ended December 31,
                                                                 -----------------------
                                                                 1995              1996
                                                                 ----              ----
                                                           (in thousands, except per share data)
<S>                                                             <C>                 <C>     
         Revenues ...........................................   $44,103             $52,041 
         Operating expenses .................................    42,569              47,580 
                                                                -------             ------- 
         Income from operations .............................     1,534               4,461 
         Other expenses .....................................       891               2,966 
                                                                -------             ------- 
         Income before provision for income taxes ...........       643               1,495 
                                                                -------             ------- 
         Provision for income taxes .........................       264                 612 
                                                                -------             ------- 
         Net income .........................................   $   379             $   883 
                                                                =======             ======= 
                                                                                            
         Net income per share ...............................   $   .03             $   .08 
                                                                =======             ======= 
                                                                                            
         Weighted average number of common shares outstanding    11,353              11,355 
                                                                =======             ======= 
</TABLE>


4. PROPERTY AND EQUIPMENT

Property and equipment is carried at cost, less accumulated depreciation, and
summarized as follows at December 31:

<TABLE>
<CAPTION>
                                                    1995       1996      Estimated useful lives
                                                    ----       ----      ----------------------
                                                 (Amounts in thousands)
<S>                                               <C>        <C>     
        Land....................................  $ 9,744    $ 10,234
        Building and improvements...............   47,967      58,076     31.5 to 40 years
        Furniture, fixtures and                     
        equipment...............................    4,995       9,126     5 to 7 years
                                                  -------    --------
                                                   62,706      77,436
        Less accumulated
        depreciation and amortization...........    2,750       4,700
                                                  -------    --------
        Net property and equipment..............  $59,956    $ 72,736
                                                  =======    ========
</TABLE>

Equipment under capital leases was $1,911,000 and $2,056,000 and related
accumulated amortization was $649,000 and $1,008,000 at December 31, 1995 and
1996, respectively.

5. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS

Notes payable and capitalized lease obligations are summarized as follows at
December 31:

<TABLE>
<CAPTION>
                                                 1995              1996
                                                 ----              ----
                                                 (Amounts in thousands)
<S>                                           <C>               <C>     
The Sports Club/LA note(a).................   $ 22,104          $ 23,070
The Sports Club/Irvine note(b).............      5,500             5,375
                                                 
Spectrum Club/Agoura Hills note(c).........      2,550             2,550
                                                 
Secured bank notes(d)......................        629               245
                                                 
Equipment financing and capitalized              
lease obligations(e)........................     1,494             4,303
                                                 
Other notes payable(f).....................        636             2,954
                                               -------           -------
                                                32,913            38,497
                                                 
Less current installments...................     1,890             2,470
                                               -------           -------
                                              $ 31,023          $ 36,027
                                              ========          ========
</TABLE>

(a) The Sports Club/LA note was assumed from the seller as part of the Sports
Club Acquisition. The note was secured by land, building improvements and the
building of The Sports Club/LA, with interest at the 



                                      F-11
<PAGE>   31

rate of 10% and required monthly payments aggregating $264,000 with a balloon
payment of approximately $22 million on December 31, 1996. On March 9, 1996, the
Company refinanced that note with another lender. In October, 1996, the Company
increased the note by $500,000 in order to purchase a parcel of land adjacent to
the Club. The new loan bears interest at the rate of 10.63% and requires monthly
payments of approximately $262,000 with a balloon payment of approximately $17.5
million on April 1, 2003. If certain conditions exist, the Company may extend
the term of the loan by five years. The note is secured by all the assets of The
Sports Club/LA and requires the Club to maintain a debt service coverage ratio,
as defined, of 1.4 to 1.0.

(b) The Sports Club/Irvine note was issued to the seller as partial
consideration for the Sports Club Aquisition. The note is secured by land,
equipment, building improvements and the building of The Sports Club/Irvine,
bears interest at 6%, and requires quarterly principal payments of $125,000,
which commenced in November 1996, and a balloon payment of $4.0 million on
November 1, 1999.

(c) The Spectrum Club/Agoura Hills note was issued by a savings and loan
association to complete the Company's acquisition of the Spectrum Club/Agoura
Hills. The note is secured by land, equipment, building improvements and the
building of the Spectrum Club/Agoura Hills. The note bears interest at the rate
of 6% through February 1997 and 8.5% thereafter. Payments of interest only are
required through April 1997, thereafter monthly principal and interest payments
of $20,107 are required through the note's maturity in April 2024.

(d) The secured bank notes are secured by an assignment of the Company's common
stock owned by the Company's Chairman and CEO. These notes bear interest between
0.5% above the bank's prime interest rate (10.25% and 9.75% at December 31, 1995
and 1996 respectively) and the bank's prime interest rate. The notes require
varying monthly payments with the final payment due June 1997.

(e) The equipment financing and capitalized lease obligations are secured by the
furniture, fixtures and equipment. The amounts are generally repayable in
monthly payments over five years with effective interest rates between 8% to
14%.

(f) Other notes payable in 1996 include a $2.5 million note from the
Reebok-Sports Club/NY ("Partnership") to Millennium Entertainment Partners L.P.,
a limited partner in the Partnership. The note bears interest at the rate of 10%
and is repayable as net cash flow of the Partnership is available, with a final
maturity in December 1999.

Future minimum annual principal payments at December 31, 1996, are as follows
(in thousands):

<TABLE>
<S>       <C>                                             <C>       
          1997........................................... $    2,470
          1998...........................................      2,311
          1999...........................................      8,862
          2000...........................................      2,166
          2001...........................................      1,549
          Thereafter.....................................     21,139
                                                          ----------
                                                          $   38,497
</TABLE>

On March 20, 1997, the Company entered into a $5.0 million loan agreement. The
agreement provides a $3.0 million revolving line of credit for working capital
and new club development and a $2.0 million non-revolving line for funding
mergers and acquisitions. The revolving line of credit will bear interest at the
Bank's prime rate plus .5% over a two year term. The non-revolving line will
convert to a term-loan payable over three years with interest at prime plus
1.0%. The loans are unsecured, however, the Company is prohibited from pledging
any of its assets except for normal furniture, fixture and equipment financing.
The agreement also requires the Company to maintain certain Tangible Net Worth,
Debt Coverage Ratios and Senior Liabilities to Tangible Net Worth Ratio
requirements.



                                      F-12
<PAGE>   32

6. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases certain facilities pursuant to various operating lease
agreements. The 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 23 years,
including renewal options, with the earliest expiration date of November 1998.
Future minimum noncancelable operating lease payments as of December 31, 1996
including the lease for the Spectrum Club in Valencia, expected to commence in
1998, are as follows (in thousands):


<TABLE>
<CAPTION>
          Year ending December 31:
<S>            <C>                                        <C>       
               1997...................................... $    6,126
               1998......................................      8,019
               1999......................................      7,912
               2000......................................      7,672
               2001......................................      7,608
               Thereafter................................     92,338
                                                          ----------
                    Total minimum lease payments......... $  129,675
                                                          ==========
</TABLE>

Rent expense for facilities and equipment aggregated $1,465,000, $1,805,000 and
$1,960,000 for the years ended December 31, 1994, 1995 and 1996, respectively.

Litigation

In August of 1995, Century City Spectrum ("CCS"), a subsidiary of the Company,
closed the Century City Spectrum Club. In connection with the bankruptcy of the
landlord, CCS's rights under the lease related to this Club were acquired by
Century Entertainment Center, L.P. ("Century"). On August 10, 1995, CCS filed an
action against Century alleging a breach of the lease by the prior landlord.
Century filed a cross-complaint against CCS for rent due and against the Company
as a guarantor of CCS's obligations under the lease. The Cross-Complaint seeks
in excess of $800,000 through December 1995, plus rent thereafter of
approximately $39,000 per month. The trial court ruled CCS's right of first
refusal cannot be asserted against Century. CCS's primary remaining defense is
based upon Century's obligation to re-lease the subject space.

In addition, CCS may appeal the trial court's ruling following trial. The
Company is contesting the action against it as guarantor on the basis that its
obligations were exonerated or do not inure to the benefit of Century. However,
there can be no assurance that the Company will not be held liable for all
amounts found to be due to Century from CCS. Such liability could have a
material adverse effect upon the Company.

The Company is also involved in various claims and lawsuits incidental to its
business, including claims arising from accidents and disputes with landlords.
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 a material adverse effect on
the financial condition, cash flow or operations of the Company.

Employment Agreements

The Company currently has employment agreements with three key executive
officers which expire in 1998 and 2000. The agreements provide the executives
with a base compensation and, in the event of certain conditions, a severance
payment not to exceed three times each executive's annual compensation.



                                      F-13
<PAGE>   33

7. INCOME TAXES

The provision for income taxes, including the pro forma income tax adjustment
for income taxes incremental to historical taxes in 1994, consists of the
following:

<TABLE>
<CAPTION>
                                                Year ended December 31,
                                         ---------------------------------------
                                           1994          1995              1996
                                           ----          ----              ----
                                                (Amounts in thousands)
<S>                                      <C>            <C>              <C>    
   Federal.....................          $   951        $   881          $   915
   State.......................              293            258              268
                                         -------        -------          -------
                                         $ 1,244        $ 1,139          $ 1,183
                                         =======        =======          =======
</TABLE>

The Company's statements of operations reflect $460,000 as a provision for
income taxes in the year ended December 31, 1994. This amount represents the
federal and state tax liability incurred after October 20, 1994, the date of the
issuance of 6,850,000 shares to the partners of The Spectrum Club Company. Prior
to that date, the Company's earnings resulted from a series of partnerships,
accordingly, no provision for federal or state income taxes was made as the
liability for such taxes passed through to the respective partners. The pro
forma unaudited income tax expense presented represents the estimated income
taxes which would have been reported had the Company been subject to federal and
state income taxes as a taxable corporation.

Income tax expense (pro forma in 1994) differs from the statutory tax rate as
applied to income before income taxes as follows:

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                      -----------------------
                                                      1994      1995       1996
                                                      ----      ----       ----
                                                         (Amounts in thousands)
<S>                                                  <C>       <C>         <C>    
   Expected federal income tax expense............   $ 1,035   $   945     $   981
   State income taxes, net of federal benefit.....       209       194         202
                                                     -------   -------     -------
                                                     $ 1,244   $ 1,139     $ 1,183
                                                     =======   =======     =======
</TABLE>

Upon the completion of the Exchange Transaction, the Company recorded deferred
tax assets aggregating $100,000 relating to temporary differences in the
recognition of certain accrued expenses and depreciation and amortization costs.
The Company's deferred tax assets and liabilities at December 31, 1995 were
approximately $500,000 and $130,000, respectively, compared with approximately
$416,000 and $25,000 at December 31, 1996. The Company's valuation allowance for
deferred taxes was approximately $370,000 and $391,000 at December 31, 1995 and
1996, respectively. The Company's most significant temporary differences relate
to differences in the bases, depreciable lives and depreciation methods of
property and equipment and cost in excess of net assets acquired for tax and
financial reporting purposes.

8. STOCK PLANS

In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123 defines a fair value based method of accounting for an
employee stock option or similar instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it allows an entity to continue to measure compensation cost for these
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net earnings and earnings per share, as if
the fair value based method of accounting defined in SFAS 123 had been applied.
The Company implemented the statement during the year ended December 31, 1996.

At December 31, 1996, the Company had an employee stock option plan which is
described below. The Company applied APB Opinion No. 25 in accounting for its
plan. Accordingly, no compensation cost has been recognized. Had compensation
cost for the Company's plan been determined consistent with SFAS 



                                      F-14
<PAGE>   34

123, the Company's net earnings and earnings per share would have been reduced
to the proforma amounts indicated below (in thousands of dollars, except per
share amounts):

<TABLE>
<CAPTION>
                                                              1995      1996
                                                              ----      ----
<S>                                                        <C>       <C>    
            Net Earnings:
                 As reported.........................      $ 1,639   $ 1,703
                 Pro forma...........................        1,474     1,533
            Earnings per
            share:
                 As reported.........................        $ .14     $ .15
                 Pro forma...........................          .13       .14
</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
weighted-average assumptions used for all fixed option grants in 1995 and 1996,
respectively: dividend yield of 0%, and 0%; expected volatility of 40.0%, and
51.3%; risk-free interest rates of 6.5%, and 7.0%; and expected lives of 7.5
years, and 7.0 years.

In May 1994 the Company instituted the 1994 Stock Incentive Plan (the "Plan")
which reserved 1,000,000 shares of common stock. The Plan authorizes the
issuance of various stock incentives to directors, officers, employees and
consultants including options, 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 at least equal to the fair market 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 market value of the Company's common stock at
the date of grant. Options granted under the Plan may, at the election of the
Compensation Committee, become exercisable in installments. All options will
expire on the tenth anniversary of the grant date.

A summary of the status of Company stock options in all its stock-based plans as
of December 31, 1996 and 1995 and changes during the year then ended is
presented below:

<TABLE>
<CAPTION>
                                                     1995                   1996
                                               --------------------  -------------------
                                                          Weighted-            Weighted-
                                                          Average               Average
                                                          Exercise             Exercise
                                               Shares      Price     Shares      Price
                                               ------      -----     ------      -----
<S>                                            <C>          <C>      <C>           <C> 
Outstanding at beginning of year...........                          297,000      $5.06
Granted....................................    522,000      $6.76    220,500       2.66
Canceled...................................    225,000       9.00     25,000       3.18
                                               -------                ------
Outstanding at end of year.................    297,000       5.06    492,500       3.17
                                               =======               =======

Options exercisable at year-end............     93,753       5.00    185,505       3.28
                                                ======               =======

Weighted-average fair value of
options granted during the year............                  2.37                  1.75

</TABLE>



                                      F-15
<PAGE>   35

The following table summarizes information about stock options outstanding at
December 31, 1996

<TABLE>
<CAPTION>
                                                Weighted
                                                Average
                                               Remaining
            Exercise           Number         Contractual            Options
             Prices         Outstanding       Live (Years)         Exercisable
             ------         -----------       ------------         -----------
<S>          <C>                <C>               <C>                <C>    
             $2.5625            72,500            9.40                  -
              2.6875            70,000            9.17                  -
              2.7500            58,000            9.83                  -
              3.0000           225,000            8.58               162,508
              5.2500            67,000            8.25                22,997
                               -------                               -------
                               492,500            9.05               185,505
                               =======                               =======
</TABLE>


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 market 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, 1996, no SAR's have 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
market 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, 1996, no purchase rights have been granted.

In July 1994, the Company instituted its 1994 Stock Compensation Plan 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 5,000 and
3,000 shares were issued to outside directors in 1995 and 1996, respectively.

9. RELATED PARTY TRANSACTIONS

Due from affiliates are summarized as follows at December 31:

<TABLE>
<CAPTION>
                                                                 1995          1996
                                                                 ----          ----
                                                                   (In thousands)
<S>                                                               <C>           <C> 
Note receivable from the Company's CEO, including interest
at 5.3%, due on April 3, 1997.  Secured by a pledge of
384,000 shares of the Company's common stock................      $631          $624

Note receivable from the Reebok-Sports Club/NY, interest at
 10%, payable quarterly, principal repayable as net cash
flow of the partnership is available (1)....................     1,500          ---

Accrued management fees from the Reebok-Sports Club/NY
interest at 10%, payable as net cash flow of the            
partnership is available (1)................................       502          ---

Advances to affiliates made in the normal course of
business, payable on demand...............................         875           419
                                                                   ---          ----
                                                                $3,508        $1,043
                                                                ======        ======
</TABLE>

(1) Effective December 30, 1996, the Company acquired a controlling interest in
the Reebok-Sports Club/NY. The note receivable and accrued management fees are
eliminated in the presentation of the Company's consolidated financial condition
at December 31, 1996.



                                      F-16
<PAGE>   36

The Company manages the operation of the Spectrum Club/Manhattan Beach, of which
it owns a 46.1% interest. The Company receives a fee of $27,447 per month plus
4.5% of the Club's gross revenues for managing this Club.

The Company also manages the operations of the Reebok Sports Club/NY and
receives a fee of approximately 5.5% of the gross monthly collections, as
defined.

10. CONCENTRATION OF CREDIT RISK

The Company markets its products principally to customers in Southern California
and New York City. 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 management's
estimates.

11. SUBSEQUENT EVENTS

On March 13, 1997, the Company entered into an agreement to sell 2,105,263
shares of its common stock to Millennium Entertainment Partners, L.P., ("MEP").
MEP curently owns a 9.9% Partnersip interest in the Reebok-Sports Club/NY
Partnership. The Company will receive $5.0 million in cash, MEP's 9.9%
Partnership interest, a $2.5 million note due from the Partnership and MEP's
rights to certain accrued management fees due from the Partnership in exchange
for the newly issued shares. The Company also announced it signed a letter of
intent to jointly develop Sports Clubs in Washington D.C. and San Francisco,
California on properties currently under development by an affiliate of MEP.
Consumation of the agreements is expected in April 1997, but is subject to
certain conditions including the negotiation of leases for the Washinton D.C.
and San Francisco, California Sports Clubs.



                                      F-17


<PAGE>   37

                                    PART III

 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


DIRECTORS AND EXECUTIVE OFFICERS

     The names of the directors and executive officers of the Company, as well
as their respective ages as of February 28, 1997, and positions with the
Company, are as follows:

<TABLE>
<CAPTION>
               NAME              AGE    POSITION
               ----              ---    --------
<S>                              <C>    <C>        
         D. Michael Talla        50     Chairman of the Board and Chief Executive Officer
         Rex A. Licklider        53     Vice Chairman of the Board
         John M. Gibbons         48     President, Chief Operating Officer and Director
         Nanette Pattee Francini 48     Executive Vice President, Secretary and Director
         Mark S. Spino           42     Vice President - Director of Development
         Philip J. Swain         39     Vice President - Director of Operations
         Timothy M. O'Brien      45     Chief Financial Officer and Assistant Secretary
         Andrew L. Turner        50     Director
         Dennison Veru           36     Director
</TABLE>

     D. MICHAEL TALLA co-founded the Company in 1977, has served as the Chief
Executive Officer since that time and has served as Chairman of the Board of
Directors since February 1994. Mr. Talla has been in the sports and fitness
industry for more than 20 years and has developed or participated in the
development of more than 20 clubs in the United States, including all Clubs
owned by the Company. Mr. Talla holds a Bachelor of Arts Degree in Business
Administration from the University of Arizona.

     REX A. LICKLIDER has served as a director of the Company since February 
1994 and was named Vice Chairman of the Board in May 1994. Prior to his
involvement with the Company, Mr. Licklider served as Chairman, President and
Chief Executive Officer of Com Systems, Inc., an AMEX-listed long-distance
telecommunications company which he founded in 1975. Mr. Licklider is a director
of Deckers Outdoor Corporation, GoldenTel, Inc., and Associated Travel Services,
Inc. He also serves on the Board of Directors of the Children's Bureau of
Southern California and Los Angeles Youth Programs, Inc. Mr. Licklider holds a
Bachelor of Arts Degree in Business Administration from the University of
Arizona and a Masters in Business Administration from the University of
California at Los Angeles.

     JOHN M. GIBBONS was engaged by the Company to serve as Chief Financial
Officer in May 1994 and became Executive Vice President in February 1995 and
President and Chief Operating Officer on July 1, 1995. Mr. Gibbons was elected
to the Board of Directors effective August 14, 1995. From September 1993 until
May 1994, Mr. Gibbons was a financial and business consultant whose clients
included the Company. From February 1990 until September 1993, Mr. Gibbons was
employed as a Vice President by Com Systems, Inc., an AMEX-listed long-distance
telecommunications company located in Westlake Village, California, serving as
General Manager and Senior Vice President from December 1992 to September 1993,
and as Chief Financial Officer from August 1991 through December 1992. From
January 1988 through February 1990, Mr. Gibbons was employed as Chief Financial
Officer of TMC Communications, a long-distance telecommunications company
located in Santa Barbara, California, which was acquired by Com Systems, Inc. in
February 1990. Mr. Gibbons has a Bachelors of Business Administration from Notre
Dame and a Masters of Business Administration from the University of Southern
California, and is a Certified Public Accountant.

     NANETTE PATTEE FRANCINI, Executive Vice President, co-founded the Company
in 1977, has been principally responsible for overseeing all marketing for the
Company since 1978 and has served as a director of the Company since February
1994. Ms. Pattee Francini has been in the sports and fitness industry for more
than 20 years and has developed or participated in the development of more than
20 sports and fitness clubs, including all Clubs owned by the Company. Ms.
Pattee Francini holds a Bachelor of Arts Degree from the University of Arizona.



                                       19
<PAGE>   38

     MARK S. SPINO has served as Director of Development of the Company from
1980 to the present and as a Vice President since 1984. Mr. Spino has been in
the sports and fitness industry for more than 15 years and has developed or
participated in the development of more than 15 sports and fitness clubs in the
United States, including many of the Clubs owned by the Company. From July 1979
to June 1980, Mr. Spino was Assistant Manager, and later Manager, of the
Mid-Valley Athletic Club in Reseda, California. Mr. Spino holds Bachelor of Arts
and Master of Arts Degrees in Physical Education from the University of Southern
California.

     PHILIP J. SWAIN has been employed by the Company since 1982 and has served
as Vice President-Director of Operations since 1988. Mr. Swain has been in the
sports and fitness industry for more than 20 years and has developed or
participated in the development of more than 15 clubs in the United States,
including many of the Clubs owned by the Company. Mr. Swain served as Regional
General Manager from 1986 until 1988. From December 1979 to November 1982, Mr.
Swain was the Director of Marketing and Membership at the Mid-Valley Athletic
Club in Reseda, California. From February 1975 to December 1979, Mr. Swain was
employed by Health & Tennis Corporation of America, managing different
facilities in Detroit and Los Angeles.

     TIMOTHY M. O'BRIEN has been employed by the Company since February 1995 as
Chief Financial Officer. From July 1993 until February 1995, Mr. O'Brien was
employed as Vice President/Controller of WCT Communications, Inc., a publicly
traded long-distance telecommunications company located in Santa Barbara,
California. From May 1989 until July 1993, Mr. O'Brien was Controller for Com
Systems, Inc., an AMEX-listed long-distance telecommunications company located
in Westlake Village, California. Mr. O'Brien has a Bachelors of Business
Administration degree from the University of Wisconsin-Madison and is a
Certified Public Accountant.

     ANDREW L. TURNER has been a director of the Company since September 1994
and has been Chairman of the Board of Directors, President and Chief Executive
Officer of Sun Healthcare Group, Inc. since its formation in 1989. Sun
Healthcare Group, Inc., of which Mr. Turner was a founder, is a long-term health
care services provider. Mr. Turner was also founder and previously served as
Chief Operating Officer of Horizon Healthcare Corporation, a health care
services provider, from 1986 to 1989. Prior to 1986, Mr. Turner served as a
Senior Vice President of Operations of The Hillhaven Corporation.

     DENNISON VERU has been President of Awad & Associates, a money management
division of Raymond James Financial since November 1992. From February 1990 to
November 1992 he served as Executive Vice President, Investments of Smith
Barney, Inc. specializing in small and medium capitalization stocks. Prior to
that, Mr. Veru was Vice President of Broad Street Investment Management and an
Assistant Vice President at Drexel Burnham Lambert. Mr. Veru serves as a diretor
for Lois USA, Inc. a publicly held company. Mr. Veru is a graduate of Fanklin
and Marshall college.

     The directors of the Company are divided into three classes having terms
expiring at the annual meetings of the Company's stockholders in 1997 (Messrs.
Talla and Licklider), 1998 (Messrs. Turner and Gibbons) and 1999 (Ms. Pattee
Francini and Mr. Veru), or such later 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 for three-year terms and
until their successors are elected. After the planned sale of 2,105,263 shares
of common stock to Millennium Entertainment Partners, L.P., ("MEP"), a
representative of MEP will be appointed to the Board of Directors.

     Officers serve at the pleasure of the Board of Directors subject to any
rights under employment agreements.

     The Board of Directors has created an Audit Committee and a Compensation
Committee of the Board. The Audit Committee, composed of Messrs. Turner and
Veru, is charged with reviewing the Company's annual audit and meeting with the
Company's independent auditors and reviewing the Company's internal controls and
financial management practices. The Compensation Committee, also composed of
Messrs, Turner and Veru, recommends to the Board of Directors compensation for
the Company's key employees and administers the 1994 Stock Incentive Plan.



                                       20
<PAGE>   39

CERTAIN TRANSACTIONS

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors and persons who own more than ten percent
of a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Company with copies of such reports. Based on the Company's
review of the copies of those reports and written representations which it has
received, the Company believes that all such filings required to be made from
January 1, 1996 through the date hereof have been made.

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth the compensation paid by the Company to the
Chief Executive Officer and to the five other most highly compensated executive
officers for the years ended December 31, 1994, 1995 and 1996, for services
rendered. Current salaries of the Company's executives are described below under
"Employment Agreements."

                 1994, 1995 AND 1996 SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                 LONG-TERM
                                                               COMPENSATION
   NAME AND                            ANNUAL COMPENSATION        AWARDS       ALL OTHER
PRINCIPAL POSITION           YEAR          SALARY(1) BONUS       OPTIONS      COMPENSATION
------------------           ----      -------------------     -------------  ------------
                                                                 (SHARES)
                                                               -------------
<S>                          <C>      <C>      <C>      <C>         <C>           <C>
D. Michael Talla             1996      $218,000(2)      --          --            --
Chairman of the Board        1995       205,250(2)      --          --            --
and Chief Executive          1994        31,154(2)      --          --            --
Officer

Nanette Pattee Francini      1996       124,175         --       15,000           --
Executive Vice President,    1995       122,200         --          --            --
Secretary and Director       1994       104,400         --          --            --

John M. Gibbons              1996       232,800(3)    $25,000   225,000(4)        --
President, Chief Operating   1995       218,933(3)      --      450,000(4)        --
Officer and Director         1994        26,586         --           --        $133,396
                                                                                  (5)

Mark S. Spino                1996       116,795         --       15,000           --
Vice President and           1995       111,855         --          --            --
Director of Development      1994        81,535         --          --            --

Philip J. Swain              1996       131,375         --       25,000           --
Vice President and           1995       127,000         --          --            --
Director of Operations       1994       105,450        20,000       --            --

Timothy M. O'Brien           1996       122,175         5,000    20,000           --
Chief Financial Officer      1995       100,087         --       25,000           --
and Assistant Secretary      1994         --            --          --            --

</TABLE>

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

(1)  Includes automobile allowance.

(2)  Until October 21, 1994, Mr. Talla received income from the Predecessors in
     his capacity as a partner, and did not receive a salary. Mr. Talla also
     receives, on an annual basis, 49.9% of the first $300,000 of The Sports
     Club/LA's net cash flow. This amount is not included in Mr. Talla's
     compensation.

(3)  Includes an allowance for living expenses paid to Mr. Gibbons under the
     terms of his employment agreement.



                                       21
<PAGE>   40

(4)  Options to purchase 225,000 shares at the exercise price of $9.00 per share
     issued on February 27, 1995, were canceled in connection with the issuance
     on July 5, 1995 of options to purchase 225,000 shares at the exercise price
     of $5.00 per share. Effective April 24, 1996, The Compensation Committee of
     the Board of Directors lowered the exercise price to $3.00 per share.
     Pursuant to the rules of the Securities and Exchange Commission, the
     cancellation and regrant of the option, and the repricing of the option,
     are each deemed to constitute a separate award.

(5)  Prior to joining the Company, Mr. Gibbons was retained as an outside
     consultant and received consulting fees for such services.

OPTION GRANTS, EXERCISES AND YEAR-END VALUES

     The following table provides information concerning stock options granted
by the Company to the Named Executive Officers during the year ended December
31, 1996.

                  OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1996

                                INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
                                    PERCENT
                                    OF TOTAL                               POTENTIAL
                                    OPTIONS                           REALIZABLE VALUE AT
                        NUMBER OF   GRANTED                           ASSUMED ANNUAL RATES
                         SHARES        TO                                OF STOCK PRICE
                       UNDERLYING   EMPLOYEES   EXERCISE                APPRECIATION FOR
                         OPTIONS    IN FISCAL   OR BASE   EXPIRATION     OPTION TERM (1)
        NAME           GRANTED (2)    YEAR       PRICE       DATE        5%         10%
        ----           -----------  ---------   -------    --------   -------     -------
<S>                      <C>            <C>     <C>        <C>        <C>         <C>    
Nanette Pattee Francini  15,000         6.8%    $2.6875    2/8/2006   $29,933     $68,730
Mark S. Spino            15,000         6.8      2.6875    2/8/2006    29,933      68,730
Philip J. Swain          25,000        11.3      2.6875    2/8/2006    49,889     114,550
Timothy M. O'Brien       15,000         6.8      2.6875    2/8/2006    29,933      68,730
Timothy M. O'Brien        5,000         2.3      2.7500  10/31/2006     9,665      23,535

</TABLE>

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

(1)  The dollar amounts under these columns are the result of calculations at
     the 5% and 10% annual rates of stock appreciation prescribed by the
     Securities and Exchange Commission and are not intended to forecast
     possible future appreciation, if any, of the Company's stock price. No gain
     to the optionee is possible without an increase in the price of the
     Company's stock which will benefit all stockholders commensurately. without
     an increase in the price of the Company's stock, which will benefit all
     stockholders commensurately.

(2)  All of such options are governed by the Company's 1994 Stock Incentive Plan


     The following table provides information with respect to unexercised stock
options as of December 31, 1996. None of the Named Executive Officers exercised
stock options during the last fiscal year.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES


<TABLE>
<CAPTION>
                                                                     VALUE OF ALL
                            NUMBER OF UNEXERCISED                   UNEXERCISED IN-
                                OPTIONS UNDER                      THE-MONEY OPTIONS
                               THE OPTION PLAN                       AT FY-END (2)
                                EXERCISABLE/                         EXCERCISABLE/
        NAME                  UNEXERCISABLE(1)                       UNEXERCISABLE
        ----                  ----------------                       -------------
<S>                            <C>                                   <C>  
John M. Gibbons                162,508/62,492                            $0/$0
Nanettte Pattee Francini             0/15,000                        $0/$2,812
Mark S. Spino                        0/15,000                        $0/$2,812
Philip J. Swain                      0/25,000                        $0/$4,688
Timothy M. O'Brien               8,333/36,667                        $0/$3,438

</TABLE>



                                       22
<PAGE>   41

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

(1)  All such options are governed by the Company's 1994 Stock Incentive Plan.

(2)  An in-the-money option is an option which has an exercise price for the
     common stock which is lower than the fair market value of the common stock
     on a specified date. The fair market value of the common stock on December
     31, 1996, was $2.875, which was the closing price per share on the American
     Stock Exchange on such date.


EMPLOYMENT AGREEMENTS

     Effective August 10, 1994, the Company entered into Employment Agreements
with D. Michael Talla, as Chief Executive Officer, and Nanette Pattee Francini,
as Executive Vice President, each of which expire on December 31, 2000. Certain
terms of Mr. Talla's employment agreement were amended by the Board of Directors
as of February 27, 1995. The Agreements provide for annual compensation of
$200,000 payable to Mr. Talla, and $120,000 payable to Ms. Pattee Francini,
subject to upward adjustment at the discretion of the Board of Directors. The
Company may terminate either Employment Agreement without penalty for cause or
upon the disability of the affected employee.

     The Employment Agreements with Mr. Talla and Ms. Pattee Francini summarized
above entitle each employee to annual performance bonuses in the discretion of
the Board of Directors, to be paid within 120 days for Mr. Talla and 150 days
for Ms. Pattee Francini following the end of each fiscal year. The Employment
Agreements also include severance provisions which entitle each executive
officer to severance pay if his or her employment is terminated by the Company
without cause; if the employee dies or is disabled; or if the employee
terminates the Agreement as a result of a material breach by the Company of its
obligations thereunder (six months' pay for Ms. Pattee Francini and twelve
months' pay for Mr. Talla). In addition, the Employment Agreements provide Mr.
Talla and Ms. Pattee Francini with additional severance benefits upon the
occurrence of any one of the following events without the approval of a majority
of the Board of Directors: (i) the consolidation or merger of the Company with
any other corporation or other entity; (ii) the sale or other transfer of all or
substantially all of the assets of the Company; (iii) the approval by the
stockholders of the Company of a plan of liquidation or dissolution of the
Company; (iv) any person becomes the beneficial owner directly or indirectly of
25% or more of the Company's outstanding common stock; or (v) a change occurs in
the composition of a majority of the Board of Directors of the Company (unless
approved by two-thirds of the Board of Directors of the Company). If at any time
within two years after the occurrence of any one of the foregoing events Mr.
Talla's or Ms. Pattee Francini's employment is terminated (other than for cause,
incapacity or death), or Mr. Talla or Ms. Pattee Francini elects to terminate
his or her employment for "good reason" (as that term is defined in the
Agreements), he or she is entitled to receive severance compensation equal to
the lesser of: (i) the maximum amount which does not constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986, as
amended; or (ii) an amount equal to three times the aggregate of (A) his or her
base annual salary then in effect, (B) the car allowance, club memberships and
dues, and insurance benefits paid for the employee during the one-year period
immediately prior to termination, and (C) bonuses accrued but unpaid through the
date of termination of employment. Under the Agreements, "good reason" means the
assignment of any duties inconsistent with the employee's position or any other
action which diminishes the employee's position, authority or duties, which
determination shall be made in good faith by the employee. If the employment of
Mr. Talla or Ms. Pattee Francini were terminated within such period as a result
of the occurrence of any of the foregoing events (assuming that neither would be
entitled to any performance bonus), the aggregate approximate amounts payable to
Mr. Talla and Ms. Francini would be $679,035 and $393,834, respectively.

     Effective as of July 1, 1995, the Company entered into an Employment
Agreement with John M. Gibbons, which expires June 30, 1998. The Employment
Agreement provides for annual base compensation of $200,000, subject to annual
review and upward adjustment at the discretion of the Board of Directors. In
addition to his base salary Mr. Gibbons is entitled to participate in any
management bonus program the Board of Directors may implement from time to time.
The Employment Agreement also includes a severance provision which entitles Mr.
Gibbons to receive payments equal to his base compensation until the earlier of
12 months following the date of his termination date or the expiration of the
agreement, if his employment is terminated prior to the expiration date other
than for cause or by Mr. Gibbons himself. Mr. Gibbons will be paid $25,000 each
year through March 1997 for living expenses and $7,800 each year as an auto
allowance payable in equal semi-monthly installments. Pursuant to the terms of
the Employment Agreement, the Compensation Committee of the Board of Directors,
effective July 1, 1995, granted Mr. Gibbons an option to purchase 225,000 shares
of the Company's common stock at an exercise price of $5.00 per share ("Option



                                       23
<PAGE>   42

Shares"). One-third of the Option Shares became immediately vested upon the
grant with the remaining two-thirds vesting in 24 equal monthly installments
commencing October 21, 1995. Upon any merger, acquisition or other
reorganization in which the Company is not the surviving corporation, or upon a
change in control of the Company, the Option Shares will be fully exercisable.
Concurrent with the grant of these options to purchase shares of common stock,
options for the purchase of 225,000 shares of common stock which were granted to
Mr. Gibbons on February 27, 1995 at a price of $9.00 per share were canceled.

     Effective April 24, 1996, the Compensation Committee of the Board of
Directors amended the employment agreement to lower the exercise price of the
Option Shares to $3.00 per share, the fair market price of a share of the
Company's common stock, as evidenced by the closing price on the American Stock
Exchange on April 24, 1996. In exchange, Mr. Gibbons agreed to waive 50% of the
$100,000 bonus that was to be paid to him in 1996 pursuant to the terms of his
employment agreement. In addition, payment of 50% of the remaining bonus was
deferred until the second quarter of 1997.

     The Company does not have written employment agreements with Messrs. Spino,
Swain, and O'Brien who currently receive annual base salaries of $117,500,
$132,000, and $122,800 respectively.

COMPENSATION OF DIRECTORS

     Effective February 1995, non-employee directors of the Company are entitled
to receive an annual fee of $10,000 and a fee of $500 for each meeting attended.
Non-employee directors who are members of the Audit Committee or Compensation
Committee are entitled to receive $500 for each meeting they attend. In
addition, non-employee directors receive 1,000 shares of the Company's common
stock each year pursuant to the Company's 1994 Stock Compensation Plan. Messrs.
Licklider, Turner and Veru currently serve on the Board as non-employee
directors. The Company provides Mr. Licklider with health insurance under its
group insurance plan. All directors receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with meetings of the Board.
Amounts paid to directors were $36,000 during 1995 and $37,026 during 1996.
Under the Stock Compensation Plan an aggregate of 8,000 shares of common stock
were issued to non-employee directors through December 31, 1996.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The executive compensation for the Company is administered by the
Compensation Committee of the Board, whose members are currently Messrs. Turner
and Veru. None of these individuals has ever been an officer or employee of the
Company. Prior to entering into a consulting agreement with the Company in
August 1996, Mr. Licklider also served as a member of the Compensation
Committee.

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND   MANAGEMENT

     The following table sets forth certain information, as of March 1, 1997,
regarding the beneficial ownership of the Company's common stock, by (i) each
person known by the Company to be the beneficial owner of more than five percent
of its common stock; (ii) each director; (iii) each executive officer listed in
the Summary Compensation Table; and (iv) all directors and executive officers as
a group. Unless otherwise indicated, each of the following stockholders has sole
voting and investment power with respect to the shares beneficially owned,
except to the extent that such authority is shared by spouses under applicable
law.



                                       24
<PAGE>   43

<TABLE>
<CAPTION>
                                                           NUMBER OF
                                                            SHARES    PERCENT OF
                       NAME OF                           BENEFICIALLY OUTSTANDING
                 BENEFICIAL OWNER(1)                         OWNED    SHARES (7)
                 -------------------                     ------------ -----------
<S>                                                       <C>          <C>    
    D. Michael Talla(2)(3).............................   4,872,238    42.83 %
    The Licklider Living Trust
       dated May 2, 1986...............................   1,285,562    11.32 %
    Mona Talla(2)(3)...................................   4,872,238    42.83 %
    Nanette Pattee Francini(2)(3)......................   4,872,238    42.83 %
    Mark S. Spino(2)(3)................................   4,872,238    42.83 %
    Phil Swain(2)(3)...................................   4,872,238    42.83 %
    The Jared R. Talla
       Irrevocable Trust dated
       January 4, 1993(2)(3)...........................   4,872,238    42.83 %
    The Brett M. Talla
       Irrevocable Trust dated
       January 4, 1993(2)(3)...........................   4,872,238    42.83 %
    John M. Gibbons(4).................................     228,005     1.97 %
    Dennison Veru......................................      11,000        ***
    Timothy M. O'Brien(5)..............................      21,666        ***
    Andrew Turner......................................      53,000        ***
    All directors and executive officers as a group
       (9 persons)(6)..................................   6,471,471    55.86 %

</TABLE>

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

***  Less than one percent.

(1)  The address of each of the foregoing persons is 11100 Santa Monica
     Boulevard, Suite 300, Los Angeles, California 90025.

(2)  Includes shares with respect to which the named beneficial owner shares
     voting power pursuant to a voting agreement which requires each party to
     vote their 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 common stock held by all persons subject to
     the agreement. Mr. Talla, Mona Talla, The Jared R. Talla Irrevocable Trust
     dated January 4, 1993, The Brett M. Talla Irrevocable Trust dated January
     4, 1993, Ms. Pattee Francini, Mr. Spino and Mr. Swain are record owners of
     3,956,487, 30,953, 70,362, 70,362, 286,107, 237,969, and 201,664 shares of
     the Company's common stock, respectively. Mr. Talla (including members of
     his immediate family and trusts for their benefit) is the record owner of
     4,128,164 shares.

(3)  Includes 18,334 shares of common stock issuable within 60 days upon the
     exercise of options granted to Ms. Pattee Francini, Mr. Spino and Mr. Swain
     under the Company's 1994 Stock Incentive Plan. Ms. Pattee Francini and Mr.
     Spino each hold options exercisable for 5,000 shares and Mr. Swain holds
     options exercisable for 8,334 shares.

(4)  Includes 35,500 shares owned by Mr. Gibbons, 5,000 shares owned by Mr.
     Gibbons' spouse and 187,505 shares of common stock issuable within 60 days
     upon the exercise of options granted under the Company's 1994 Stock
     Incentive Plan.

(5)  Includes 21,666 shares of common stock issuable within 60 days upon the
     exercise of options granted under the Company's 1994 Stock Incentive Plan.

(6)  Includes 227,505 shares of common stock issuable within 60 days upon the
     exercise of options granted under the Company's 1994 Stock Incentive Plan.

(7)  All shares not currently outstanding that are subject to options, warrants,
     rights or conversion privileges exercisable within 60 days are deemed to be
     outstanding for the purpose of computing the "Percent of Outstanding
     Shares" held by the holder thereof, but are not deemed to be outstanding
     for the purpose of computing the "Percent of Outstanding Shares" held by
     any other shareholder, pursuant to Rule 13d-3(d)(1) under the Securities
     Exchange Act of 1934, as amended.




                                       25
<PAGE>   44

ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS


     The Company possesses a 50.1% interest in the partnership which owns The
Sports Club/LA; Mr. Talla owns the remaining 49.9% interest. The partnership
agreement provides that, on an annual basis, the partners will share in the
first $300,000 of The Sports Club/LA'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 (the "Priority Distribution"). All distributions of
net cash flow thereafter, if any, will be made to the partners in proportion to
their percentage interests. In addition, the partnership agreement provides the
Company with an option to purchase Mr. Talla's interest for an amount equal to
the product of four times the amount of distributions received by Mr. Talla in
the year immediately preceding the year in which the option is exercised.

     The property on which the Sports Connection/West Hollywood is located is
leased from a partnership in which Mr. Talla and his affiliates hold a
controlling interest. The lease expires in August 2022, provides for monthly
rental payments of $48,228, provides for increases in rent based upon increases
in the CPI, and requires the lessee to pay all taxes, utilities, insurance and
maintenance. In November 1996, the Company sold its interest in the Sports
Connection/West Hollywood and the purchaser of the Club assumed the lease
payable to Mr. Talla.

     As of December 31, 1996, Mr. Talla is either the guarantor of, or the named
debtor with respect to, approximately $245,000 in debts of the Company. The
Company has agreed with Mr. Talla to make all payments due with respect to all
such debts, and to indemnify him with respect to all costs incurred in
connection therewith. These debts have been reflected in the Company's financial
statements.

     In April 1996, The Company's Board of Directors approved a renewal of the
loan to Mr. Talla in the amount of $600,000, secured by 384,000 shares of the
Company's common stock. The loan is due and payable on April 3, 1997 and bears
interest at 6.8%. Upon the payment of all accrued interest, the Company intends
to renew the loan for another year in exchange for a pledge of shares of the
Company's common stock. The number of shares pledged as security will be
determined by the common stock's fair market value, but in no event will the
value of the shares pledged be less than two times the amount of the loan.

     Effective August 1, 1996, Mr. Licklider entered into a consulting agreement
with the Company pursuant to which Mr. Licklider will receive $10,000 per month
plus reimbursement for reasonable and necessary expenses. The Agreement has a
one year term and expires July 31, 1997. Under the terms of the Agreement, Mr.
Licklider must provide the Company with a minimum of 60 hours of service per
month outside the normal scope of his duties as a director. Effective with the
commencement of the consulting agreement, Mr. Licklider resigned from the audit
and compensation committees of the Board of Directors.

     The Company has entered into agreements with its directors and officers
providing for the indemnification of such directors and officers by the Company
to the maximum extent permitted under Delaware law, in the event such persons
are the subject of lawsuits or otherwise suffer losses as a result of their
activities on behalf of the Company. These agreements include, among other
things, indemnity for judgments and settlements in derivative actions, prompt
payment of legal expenses in advance of indemnification and equitable
contribution by the Company in certain instances in the event a director or
officer is not entitled to full indemnification. In addition, the
indemnification agreements between the Company and Messrs. Talla and Licklider
provide that the Company shall indemnify them against any losses incurred as a
result of guarantees extended for the benefit of the Company or any of the
Clubs. Currently, Mr.
Licklider does not guarantee any indebtedness.

     The Company believes that each of the foregoing transactions has been on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All transactions between the Company and any of its
directors or officers are subject to the approval of the disinterested
directors.



                                       26
<PAGE>   45

                                         PART IV

ITEM 14. 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 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>
     EXHIBIT
     NUMBER      EXHIBIT
     ------      -------
<S>              <C>        
      3.1        Restated Certificate of Incorporation of the Registrant.*

      3.2        Bylaws of the Registrant.*

      3.3        Amendment to Bylaws dated February 1, 1995.**

      4.1        Specimen Common Stock Certificate.*

      9.1        Voting Agreement among D. Michael Talla, Nanette Pattee Francini,
                 Mark S. Spino, Peter Feinstein, Philip J. Swain and FP II.*

      10.1       1994 Stock Incentive Plan.*#

      10.2       Form of Stock Option Agreement.*#

      10.3       Form of Stock Purchase Agreement.*#

      10.4       1994 Stock Compensation Plan.*#

      10.5       Form of Indemnification Agreement between the Registrant and its
                 directors and certain officers.*

      10.6       Indemnification Agreement between the Registrant and D. Michael Talla.*

      10.7       Indemnification Agreement between Registrant and Rex A. Licklider.*

      10.8       Employment Agreement between Registrant and D. Michael Talla.*#

      10.9       Employment Agreement between the Registrant and Nanette Pattee Francini.*#

      10.10      Promissory Notes executed by D. Michael Talla dated November 5,
                 1991 in favor of World Trade Bank, N.A., and related Loan
                 Agreement dated June 24, 1992, as amended.*
</TABLE>



                                       27
<PAGE>   46

<TABLE>
<CAPTION>
     EXHIBIT
     NUMBER      EXHIBIT
     ------      -------
<S>              <C>        
      10.11      Promissory Note executed by Agoura Hills/Spectrum Club dated
                 March 29, 1994 in favor of Hawthorne Savings and Loan
                 Association.*

      10.12      Ground Lease of premises for the Howard Hughes Center/Spectrum
                 Club located at 6833 Park Terrace, Los Angeles, California
                 dated November 15, 1991 as amended August 20, 1992 and August
                 21, 1992 and as assigned February 4, 1994.*

      10.13      Entertainment Center Lease of premises for the Spectrum
                 Club/Century City located at 2040 Avenue of the Stars, Los
                 Angeles, California, dated January 1, 1969 as amended August
                 17, 1970, May 19, 1971, December 23, 1974, February 23, 1979,
                 May 1, 1984 and June 14, 1984.*

      10.14      Lease of premises for the Spectrum Club/Century City located at
                 2040 Avenue of the Stars dated January 7, 1992, as amended May
                 12, 1992, and Consent to Sublease dated February 4, 1992.*

      10.15      Lease of premises for the Spectrum Club/Water Garden located at
                 2425 W. Olympic Boulevard, Santa Monica, California dated July 1,
                 1992.*

      10.16      Athletic Facility Lease of premises for the Spectrum Club/Manhattan
                 Beach located at 2250 Park Place, El Segundo, California dated
                 January 3, 1986, as amended January 3, 1986, October 17, 1986,
                 March 1, 1987, March 31, 1988 and July 29, 1990.*

      10.17      Lease of premises for Reebok Sports Club/NY located at 160 Columbus Avenue,
                 New York, New York 10023 dated June 3, 1992.*

      10.18      Sublease of premises for the Spectrum Club/Santa Monica located
                 at 1815 Centinela Avenue, Santa Monica, California dated
                 October 31, 1991.*

      10.19      Lease of premises for The Sports Connection/Santa
                 Monica located at 2929 31st Street, Santa Monica, California
                 dated May 2, 1978, as amended October 20, 1978, April 13, 1979,
                 September 27, 1982, August 14, 1984, January 15, 1989 and
                 February 19, 1992 and as assigned June 28, 1978 and April 1,
                 1979.*

      10.20      Lease of premises for The Sports Connection Valley Ltd. located at
                 17401 Ventura Blvd., Encino, California dated May 15, 1991, as
                 amended February 14, 1992 and September 17, 1993.*

      10.21      Agreement of Purchase and Sale between MKDG/RHODES SC Partnership
                 and Rex Licklider dated November 19, 1993, as amended November
                 19, 1993, December 10, 1993, December 31, 1993, and February
                 18, 1994.*

      10.22      Master Agreement among Bally's Health & Tennis Corporation, Health
                 and Tennis Corporation of America, Bally's S.C. Management, Inc.
                 (collectively, The "Bally Group"), Talla Holding Company, and
                 other limited partnerships (collectively, the "Talla Group")
                 dated January 22, 1993.*

      10.23      Memorandum Agreement among The Bally Group, the Talla Group,
                 Bally's HHC Partner, Inc., B.T. Howard Hughes Center Partnership, 
                 D. Michael Talla and Holiday Health Clubs of California dated 
                 February 4, 1994.*

      10.24      Secured Note executed by Talla Holding Company, D. Michael Talla,
                 and certain limited partnerships in favor of Bally's Health & Tennis 
                 Corporation dated February 4, 1994.*
</TABLE>



                                       28
<PAGE>   47

<TABLE>
<CAPTION>
     EXHIBIT
     NUMBER      EXHIBIT
     ------      -------
<S>              <C>        
      10.25      Joint Venture Agreement for Sports Connection - ES/MB between El
                 Segundo-TDC, Ltd. and Continental El Segundo Corporation effective
                 as of January 3, 1986.*

      10.26      Restated Agreement of Limited Partnership of El Segundo-TDC, Ltd.,
                 as amended.*

      10.27      Assignment Agreement effective as of October 2, 1989 among D.
                 Michael Talla, ES/MB, Ltd. and El Segundo-TDC, Ltd.*

      10.28      Assignment Agreement effective as of October 2, 1989, among
                 ES/MB, Ltd., the Spectrum Club/MB and El Segundo-TDC, Ltd.*

      10.29      Agreement of Limited Partnership of R-SC/NY, Ltd.*

      10.30      Management Agreement effective as of June 3, 1992, between R-SC/NY,
                 Ltd. and Pontius Realty, Inc.*

      10.31      License Agreement between Reebok Fitness Centers, Inc. and R-SC/NY,
                 Ltd. dated June 3, 1992.*

      10.32      Agreement of Purchase and Sale and Joint Escrow Instructions entered
                 between Hawthorne Savings and Loan Association and Agoura Hills/Spectrum
                 Club, Inc. effective as of April 14, 1994.*

      10.33      Lease of premises for the Sports Connection/Costa Mesa located
                 at 1301 Newport Blvd., Costa Mesa, California, dated January
                 16, 1985, as amended March 14, 1994.*

      10.34      Commercial Lease of premises for the Sports Connection/Beverly
                 Hills located at 8612-24 and 880 Westbourne Drive, Los Angeles,
                 California dated January 1980, amended March 4, 1980, July 27,
                 1981, June 4, 1985 and as amended and assigned September 29,
                 1987.*

      10.35      Building lease of premises for the Sports Connection/South Bay
                 located at 21345 Hawthorne Boulevard, Torrance, California
                 dated December 13, 1978, as amended December 13, 1978, July 23,
                 1979 as modified by letter agreement July 29, 1979 and February
                 18, 1981, as subleased and amended December 1, 1982, and as
                 assigned September 26, 1988.*

      10.36      Lease of premises for the Sports Connection/Long Beach located
                 at 3030 Bellflower Boulevard, Long Beach, California dated
                 February
                 18, 1993.*

      10.37      First Amendment to Joint Venture Agreement for Sports
                 Connection - ES/MB dated January 3, 1986.*

      10.38      Form of Membership Agreements for the Sports Clubs, Spectrum Clubs
                 and Sports Connections.*

      10.39      Third Amendment to Lease of premises for the Howard Hughes
                 Center/Spectrum Club located at 6833 Park Terrace, Los Angeles,
                 California dated April 11, 1994.*

      10.40      Letter Agreement regarding R-SC/NY dated June 3, 1992.*

      10.41      Club Management Contract for the Spectrum Club/Manhattan Beach
                 dated January 3, 1986, as amended January 3, 1986 and September
                 17, 1987 and as assigned June 30, 1992.*
</TABLE>



                                       29
<PAGE>   48

<TABLE>
<CAPTION>
     EXHIBIT
     NUMBER      EXHIBIT
     ------      -------
<S>              <C>        
      10.42      Amendment to Lease for the Sports Connection Valley Ltd. premises
                 dated January 6, 1994.*

      10.43      Amendment to Agreement of Purchase and Sale between MKDG/Rhodes
                 SC Partnership and Rex Licklider dated May 3, 1994.*

      10.44      Agreement of Limited Partnership of NY-SC, Ltd. dated as of April
                 29, 1992, as amended July 1, 1992.*

      10.45      Sixth Amended and Restated Agreement of Limited Partnership of
                 L.A./Irvine Sports Clubs. Ltd., dated June 30, 1992.*

      10.46      Agreement of Limited Partnership of The Sports
                 Connection/Century City, dated January 15, 1992, as amended
                 July 1, 1992.*

      10.47      Assignment of Contract Rights Between Rex Licklider and Sports
                 Club, Inc., dated as of June 21, 1994.*

      10.48      Memorandum of Agreement between Reebok Fitness Centers, Inc. and
                 the Company dated as of June 3, 1992.*

      10.49      Seventh Amendment and Restated Agreement of Limited Partnership of
                 L.A./Irvine Sports Club, Ltd., a Calfornia Limited Partnership.*

      10.50      First Amendment to Seventh Amended and Restated Agreement of
                 Limited Partnership of L.A./Irvine Sports Club, Ltd., a California
                 Limited Partnership.*

      10.51      Form of Option Agreement by and 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.*

      10.52      Master Lease dated September 29, 1987, between Scott Cameron, The
                 Sports Connection, Beverly Hills and West Hollywood Development
                 Company.*

      10.53      Form of Membership Agreement for The Sports Club/LA.*

      10.54      Form of Membership Agreement for the Reebok Sports Club/NY.*

      10.55      Promissory Note dated June 17, 1993, issued by Talla
                 Development Company to Teachers Retirement System of the State
                 of Illinois, in the amount of $164,382.60.*

      10.56      Settlement Agreement dated February 23, 1993 by and among Sepulveda
                 Office Partners, L.P., The Sports Connection-Van Nuys, Jackson
                 Sports Limited, Inc. and D. Michael Talla.*

      10.57      Amended and Restated Agreement of 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.*

      10.58      Letter Agreement dated October 11, 1994, by and between MKDG
                 Rhodes/SC Partnership, a General Partnership, and Rex
                 Licklider, including a $5,500,000 promissory note and deed of
                 trust to be delivered concurrently with the consummation of the
                 Offering.*

      10.59      Guarantee by Marvin Davis in favor of L.A./Irvine Sports Club,
                 Ltd., which became effective with the consummation of the
                 Offering.*

</TABLE>


                                       30
<PAGE>   49

<TABLE>
<CAPTION>
     EXHIBIT
     NUMBER      EXHIBIT
     ------      -------
<S>              <C>        
      10.60      First Amended and Restated Agreement of Limited Partnership of
                 Reebok-Sports Club/NY, Ltd. dated as of October 12, 1994.*

      10.61      Letter Agreement by and between Reebok Fitness Centers, Inc. and
                 the Company dated October 12, 1994.*

      10.62      Amendment to First Amended and Restated Agreement of Limited
                 Partnership of Reebok-Sports Club/NY, Ltd. dated as of October 12,
                 1994.*

      10.63      Letter Agreement by and between Reebok Fitness Centers, Inc. and
                 the Company, which became effective with the consummation of the
                 Offering.*

      10.64      License Agreement by and between Reebok Fitness Centers, Inc. and
                 the Company, which became effective with the consummation of the
                 Offering.*

      10.65      Assignment and First Amendment of Lease between Watergarden
                 Associates, The Sports Connection Watergarden and Agoura
                 Hills/Spectrum Club, Inc. which became effective with the
                 consummation of the Offering.*

      10.66      Assignment Agreement effective as of October 21, 1994 among The
                 Sports Club Company, Inc. and Jackson Sports Limited, Inc.**

      10.67      Sixth Amendment to Athletic Facility Lease of premises for the
                 Spectrum Club/Manhattan Beach located at 2250 Park Place, El
                 Segundo, California, dated November 28, 1994.**

      10.68      Assignment of Limited Partnership Interests in El Segundo-TDC, Ltd.
                 between Dr. Jerome Friedland and The Spectrum Club Company, Inc.
                 dated as of February 17, 1995.**

      10.69      Promissory Note executed by L.A./Irvine Sports Clubs, Ltd. in favor
                 of MKDG/Rhodes SC Partnership, dated October 20, 1994.**

      10.70      Employment Agreement between the Registrant and John M. Gibbons.**#

      10.71      First Amendment to Employment Agreement between Registrant and D.
                 Michael Talla, dated February 27, 1995. ***#

      10.72      Amended and Restated Employment Agreement between Registrant and
                 John M. Gibbons, dated July 14, 1995. ***#

      10.73      Secured Promissory Note and Security Agreement in connection
                 therewith between Registrant as Payee and D. Michael Talla as
                 payor, both dated April 3, 1995.***

      10.74      Office Sublease of premises located at 11100 Santa Monica
                 Boulevard, Suite 300, Los Angeles, California effective as of
                 January 15, 1995.***

      10.75      Athletic Club lease by and between The Spectrum Club Company, Inc.
                 and The Newhall Land and Farming Company dated as of January 22,
                 1996.***

      10.76      Settlement Agreement by and among Lincoln Metrocenter Partners,
                 L.P., Reebok-Sports Club/NY, Ltd., Talla New York, Inc., RFC,
                 Inc., and LMP Health Club Co. dated as of December 28, 1995 and
                 Promissory Notes in connection therewith.***

      10.77      Credit Agreement and related Exhibits by and between The Sports
                 Club Company, Inc. and HealthFitness Organization of America, Inc.
                 dated as of November 28, 1995.***
</TABLE>


                                       31
<PAGE>   50

<TABLE>
<CAPTION>
     EXHIBIT
     NUMBER      EXHIBIT
     ------      -------
<S>              <C>        
      10.78      Notification to HealthFitness Organization of America, Inc.'s
                 shareholders of The Sports Club Company, Inc.'s exercise of its
                 option to acquire shares of HealthFitness Organization of
                 America, Inc. dated as of November 28, 1995.***

      10.79      Second Amendment to Promissory Note dated November 5, 1991 between
                 World Trade Bank, N.A. and D. Michael Talla, dated September 28,
                 1995.***

      10.80      Loan Agreement between AT&T Commercial Finance Corporation and
                 L.A./Irvine Sports Clubs, Ltd. dated March 9, 1996.***

      10.81      First Amendment to Loan Agreement between AT&T Commercial Finance
                 Corporation and L.A./Irvine Sports Clubs, Ltd., dated March 12,
                 1996.***

      10.82      401-K Profit Sharing Plan and related Group Annuity Contract
                 No. GA-P K522 and Group Separate Account Annuity Contract No.
                 GA-P K523, both with Nationwide Life Insurance Company with an
                 effective date of February 1, 1996.

      10.83      First Amendment to Restated Employment Agreement between Registrant
                 and John M. Gibbons dated as of April 24, 1996.#

      10.84      Asset Purchase Agreement among 24 Hour Fitness, Inc., The Sports
                 Connection Holding Company, and Registrant dated as of November 1,
                 1996.

      10.85      Management Agreement by and between Registrant and C.I.T.E. Design
                 Corp. dated as of May 2, 1996.

      10.86      Consulting Agreement by and between Registrant and Rex A. Licklider
                 dated as of August 1, 1996.#

      10.87      Letter Agreement by and between Registrant and WPI.Koll Asia
                 Pacific Advisors dated as of October 9, 1996.

      10.88      Second Amendment to Loan Agreement and related documents between
                 AT&T Commercial Finance Corporation and L.A./Irvine Sports Clubs,
                 Ltd. dated as of October 11, 1996.

      10.89      Termination Agreement by and among Bally Total Fitness Holding
                 Corporation, Bally Total Fitness Corporation, Bally's S.C.
                 Management, Inc., The Sports Connection Holding Company and
                 Registrant dated October 31, 1996.

      10.90      Fourth Amendment to Athletic Club Lease dated December 11,
                 1996, by and between Howard Hughes Properties, Limited
                 Partnership, a Delaware limited partnership and The Spectrum
                 Club Company, Inc.

      10.91      Agreement by and among Reebok-Sports 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.

      10.92      Letter Agreement between Millennium Entertainment Partners, L.P.
                 and the Registrant dated as of March 13, 1997.

      10.93      Loan Agreement entered into by and among the Registrant, The
                 Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club,
                 Inc. of California, Irvine Sports Club, Inc., HealthFitness
                 Organization of America, Inc., L.A./Irvine Sports Club, Ltd.,
                 Talla New York, Inc., SCC Sports Club, Inc. and Sumitomo Bank
                 of California dated as of March 20, 1997.

       21.1      Subsidiaries of the Registrant.
</TABLE>



                                       32
<PAGE>   51

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

#    Compensation agreement or plan.

*    Incorporated by reference to the Registrant's Registration Statement on
     Form S-1, declared effective on October 13, 1994 (SEC file No. 33-79552).

**   Incorporated by reference to the Registrant's Annual Report on Form 10-K,
     filed with the Securities and Exchange Commission on March 31, 1995 (SEC
     file No. 1-13290).

***  Incorporated by reference to the Registrant's Annual Report or Form 10-K/A,
     filed with the Securities and Exchange Commission on March 29, 1996 (SEC
     file No. 1-3290).

(b)  Reports on Form 8-K

No reports on Form 8-K have been filed during the last quarter of the period
covered by this Report.

(c)  Exhibits

<TABLE>
<CAPTION>
                  INDEX TO EXHIBITS                                        SEQUENTIALLY
       EXHIBIT                                                               NUMBERED
       NUMBER     EXHIBITS                                                     PAGE
       -------    -------------------------------------------------------- ------------
<S>               <C>                                                         
       10.82      401-K Profit Sharing Plan and related Group Annuity Contract
                  No. GA-P K522 and Group Separate Account Annuity Contract No.
                  GA-P K523, both with Nationwide Life Insurance Company with an
                  effective date of February 1, 1996.

       10.83      First Amendment to Restated Employment Agreement
                  between Registrant and John M. Gibbons dated as of
                  April 24, 1996.#

       10.84      Asset Purchase Agreement among 24 Hour Fitness, Inc.,
                  The Sports Connection Holding Company, and Registrant
                  dated as of November 1, 1996.

       10.85      Management Agreement by and between Registrant and
                  C.I.T.E. Design Corp. dated as of May 2, 1996.

       10.86      Consulting Agreement by and between Registrant and Rex
                  A. Licklider dated as of August 1, 1996.#

       10.87      Letter Agreement by and between Registrant and WPI.Koll Asia
                  Pacific Advisors dated as of October 9, 1996.

       10.88      Second Amendment to Loan Agreement and related
                  documents between AT&T Commercial Finance Corporation
                  and L.A./Irvine Sports Clubs, Ltd. dated as of October
                  11, 1996.

       10.89      Termination Agreement by and among Bally Total Fitness Holding
                  Corporation, Bally Total Fitness Corporation, Bally's S.C.
                  Management, Inc., The Sports Connection Holding Company and
                  Registrant dated October 31, 1996.

       10.90      Fourth Amendment to Athletic Club Lease dated December 11,
                  1996, by and between Howard Hughes Properties, Limited
                  Partnership, a Delaware limited partnership and The Spectrum
                  Club Company, Inc.
</TABLE>



                                       33
<PAGE>   52

<TABLE>
<S>               <C>                                               
       10.91      Agreement by and among Reebok-Sports 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.

       10.92      Letter Agreement between Millennium Entertainment
                  Partners, L.P. and the Registrant dated as of March
                  13, 1997.

       10.93      Loan Agreement entered into by and among the
                  Registrant, The Spectrum Club Company, Inc., Pontius
                  Realty, Inc., Sports Club, Inc. of California, Irvine
                  Sports Club, Inc., HealthFitness Organization of
                  America, Inc., L.A./Irvine Sports Club, Ltd., Talla
                  New York, Inc., SCC Sports Club, Inc. and Sumitomo
                  Bank of California dated as of March 20, 1997.

       21.1       Subsidiaries of the Registrant.
</TABLE>

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

      #           Compensation agreement or plan



                                       34
<PAGE>   53

                                   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/A to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 14th
day of October 1997.


                                      THE SPORTS CLUB COMPANY, INC.





                                      -----------------------------
                                      D. Michael Talla,
                                      Chief Executive Officer




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

<TABLE>
<CAPTION>

Signature                                    Title                              Date
------------------------------------         ------------------------------     --------------------
<S>                                          <C>                                <C>  


------------------------------------         Chairman of the Board              October 14, 1997 
D. Michael Talla                             and Chief Executive Officer                         
                                             

                                             
------------------------------------         Chief Financial Officer            October 14, 1997
Timothy O'Brien                              (Principal Financial and                           
                                             Accounting  Officer)                               
                                             
                                     
------------------------------------         Vice Chairman of the Board         October 14, 1997
Rex A. Licklider


------------------------------------         President, Chief Operating         October 14, 1997
John M. Gibbons                              Officer and Director


                                     
------------------------------------         Director                           October 14, 1997   
Brian J. Collins                                                                                   
                                                                                                   
                                                                                                   
                                                                                                   
------------------------------------         Director                           October 14, 1997   
Nanette Pattee Francini                                                                            
                                                                                                   
                                                                                                   
                                                                                                   
------------------------------------         Director                           October 14, 1997   
Andrew L. Turner                                                                                   
                                                                                                   
                                                                                                   
                                                                                                   
------------------------------------         Director                           October 14, 1997   
Dennison Veru                                

</TABLE>

                                       35