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                                  UNITED STATES
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                       SECURITIES AND EXCHANGE COMMISSION

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

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

         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2003

                                       OR

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

         SECURITIES EXCHANGE ACT

             For the transition period from ___________to __________

                         Commission File Number: 1-13290

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


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

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

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

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

        Common Stock $.01 par value                 American Stock Exchange

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

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

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


     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant  on June 15,  2004 was  $7,184,586.  The number of shares of the
Common Stock,  par value $ .01 per share,  outstanding (the only class of Common
Stock of the registrant  outstanding) was 18,783,744 on June 15, 2004.  Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes |_| No |X|


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                                     PART I

ITEM 1. BUSINESS

General

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

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

     According to the  International  Health,  Racquet & Sportsclub  Association
("IHRSA"), the industry's leading trade organization,  it is estimated that 36.3
million  Americans  were members of more than 20,000 sports and fitness clubs in
2002.  Revenues  generated by the United States sports and fitness club industry
increased  at a compound  annual rate of 8.1% from $6.5 billion in 1993 to $13.1
billion in 2002. The industry has benefited from the general public's increasing
awareness of the importance of physical exercise.  Among other groups, we target
members  age  35  and  older  who,  according  to  IHRSA,  represent  54% of all
memberships and are the fastest growing segment of the industry.

Recent Events

     On March 12, 2004, we completed a $6.5 million private placement of a newly
created series of Convertible Preferred Stock. We received $6.1 million in cash,
net of costs,  and issued  65,000  shares of $.01 par value Series D Convertible
Preferred  Stock at a price  of $100  per  share.  Proceeds  from the sale  were
primarily used to make our March 15, 2004 interest payment on our Senior Secured
Notes.

     In November 2003, we opened The Sports Club/LA - Miami.  This 40,000 square
foot Club is  located  in the new Four  Seasons  Resort  and  Towers  project in
downtown  Miami. We manage this Club for which we receive a management fee based
upon both the gross  revenue and net cash flow of the Club.  We also license The
Sports Club/LA name to the owner. This management  structure allows us to expand
our brand and receive an  immediate  earnings  stream,  with the  potential  for
additional profits, without making any capital investment.

     In October 2003, we opened The Sports Club/LA - Beverly Hills.  This 40,000
square  foot  Club is  located  in the heart of the  Beverly  Hills  retail  and
commercial  district  and is  located  approximately  three  miles  east  of our
flagship  property The Sports Club/LA - Los Angeles.  This Club may serve as the
prototype for smaller size Clubs to be built in locations  near existing  Sports
Club/LA sites.

     On June 12, 2003,  we replaced our Bank Credit  Agreement  with a new $20.0
million  secured  loan  from  Orange  County's  Credit  Union.  The new  loan is
evidenced by a promissory  note that bears  interest at a fixed interest rate of
7.25% per annum;  requires monthly  principal and interest payments of $144,561;
is secured by the common stock and all the assets of Irvine Sports Club Inc. our
wholly owned subsidiary that

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owns The Sports Club/LA - Orange  County;  and is guaranteed by two of our major
shareholders. The note may be prepaid at any time without penalty and requires a
final principal payment of $18.3 million on July 1, 2008.

The Sports Club/LA

     The Sports  Club/LA  ranges in size from 40,000 to 140,000  square feet and
typically includes the following features:

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

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

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

     o    group cycling studios,

     o    rock climbing walls,

     o    boxing studios,

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

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

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

     o    steam rooms, saunas and jacuzzis,

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

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

     o    sports medicine and physical therapy facilities,

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

     o    registered dietitians for nutritional consultations,

     o    FitLab assessment centers,

     o    PTS Private Trainer System nutritional programs and products,

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

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

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

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

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

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     We  currently  have ten Sports  Clubs in  operation.  The  original  Sports
Club/LA  opened  in 1987 in West Los  Angeles,  California,  near  the  affluent
communities of Santa Monica,  Brentwood,  Beverly Hills,  Bel Air,  Westwood and
Century City. We opened The Sports  Club/LA-Beverly  Hills in October 2003. This
40,000  square  foot Club is located in the heart of Beverly  Hill's  retail and
commercial  district.  The  Sports  Club/LA  - Orange  County  opened in 1990 in
Irvine, California near Newport Beach.

     We operate three Clubs in New York City.  Reebok Sports  Club/NY  opened in
1995 on Manhattan's  upper west side,  and was developed in  partnership  with a
subsidiary of Reebok  International,  Ltd.  ("Reebok")  and Lincoln  Metrocenter
Partners,  L.P. (collectively with its affiliates  "Millennium").  We manage the
operations and own a 60% interest in the partnership that owns this Club. Reebok
and Millennium have each retained an interest in the partnership.  We opened The
Sports  Club/LA at two locations in New York City in 2000.  The Sports Club/LA -
New York at  Rockefeller  Center  was  opened in  February  2000.  This Club was
designed to service the executive business  community in midtown Manhattan.  The
Sports  Club/LA - New York in New York  City's  Upper  East  Side was  opened in
September 2000. This site is the location of the former Vertical Club, which was
closed in  February  1999 for major  renovation  and  conversion  to The  Sports
Club/LA  and serves the  affluent  residential  Upper East Side area of New York
City.

     We also  operate  The  Sports  Club/LA  at four other  sites  developed  by
Millennium.  The Sports Club/LA - Washington  D.C.  opened in October 2000. This
100,000  square  foot Club is located at 22nd and M Streets  between  Washington
D.C.'s business  district and Georgetown.  The Sports Club/LA - Boston opened in
September  2001. This Club overlooks the historic Boston Common and is located a
short  distance  from the city's  financial  district.  Both of these  Clubs are
co-located  with a Ritz Carlton  Hotel.  The Sports  Club/LA - San Francisco has
been open since October 2001. This Club is located in the Four Seasons Hotel and
Residences  in the emerging  South of Market Area in San  Francisco.  The Sports
Club/LA - Miami  opened in November  2004.  We operate  this Club  pursuant to a
management  agreement with Millennium,  which has retained 100% ownership in the
Club's  operations.  We receive a management fee consisting of a flat percentage
of cash revenues plus a share of the Club's operating income.

The SportsMed Company, Inc.

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

Development of New Clubs

     Recent New Club Developments. In October 2003, we opened The Sports Club/LA
- Beverly  Hills.  This  40,000  square foot Club is located in the heart of the
Beverly  Hills  retail  and  commercial  district.  This  Club may  serve as the
prototype for smaller size Clubs to be built in locations  near existing  Sports
Club/LA sites.

     In 2000 and 2001,  we  completed  the  development  of five new The  Sports
Club/LA  sites.  Two of these  Clubs are  located  in New York  City  and,  when
combined  with our Reebok Sports  Club/NY site,  form a trio of Clubs located in
residential  areas on the East and West sides and the central  midtown  business
district.  Three  of the  new The  Sports  Club/LA  sites  were  developed  with
Millennium,  with whom we  developed  Reebok  Sports  Club/NY.  Millennium  is a
developer of premier multi-use  projects and is funded by Quantum Realty Fund, a
member of the  Quantum  Group of Funds,  which are  off-shore  investment  funds
managed by Soros Fund  Management,  a  management  firm headed by George  Soros;
Goldman Sachs' Whitehall Street Real Estate Limited Partnerships; and Millennium
Entertainment  Partners L.P., a consortium of German insurance companies.  These
Clubs are located in projects developed by Millennium

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<PAGE>

in prime,  metropolitan  locations  that,  like Reebok Sports  Club/NY,  include
commercial,  retail,  entertainment and residential space. In addition,  each of
these  developments  includes either a Ritz Carlton or Four Seasons hotel. These
Clubs are approximately  100,000 square feet and offer services  typically found
at other  Sports  Club/LA  sites.  We believe  that such  projects  offer  ideal
locations  for The  Sports  Club/LA  and would  consider  developing  The Sports
Club/LA with Millennium or other developers in other major metropolitan areas.

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

Future New Club Developments

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

     We currently operate The Sports Club/LA - Miami. Millennium is the owner of
this Club.  They are responsible for providing all funds necessary to construct,
equip and operate the Club. We manage the Club's operations for which we receive
a  management  fee based upon both the gross  revenues  and net cash flow of the
Club.  We also license The Sports  Club/LA name to  Millennium.  This  structure
allows us to expand our brand and receive an immediate earnings stream, with the
potential for  additional  profits,  without making any capital  investment.  We
would  consider  entering into similarly  structured  agreements to manage other
Clubs for Millennium or other developers.

Sales and Marketing

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

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


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

     Corporate Programs. We believe the corporate market is a significant source
of new members,  due to the proximity of The Sports Club/LA to business centers.
Our  members  use the Clubs to  conduct  business  and to develop  and  maintain
business  contacts.  We employ  several  Corporate  Membership  Directors  whose
principal  responsibilities are to solicit corporate memberships from businesses
operating  in the vicinity of the Clubs.  The Sports  Club/LA  offers  corporate
group-discounted  initiation  fees  depending  upon the  number  of new  members
involved.  Our SportsMed  subsidiary has developed  several  corporate  wellness
programs  to  fit  the  needs  of  this  particular   market.  We  believe  that
corporations  are  favorably  disposed to The Sports  Club/LA and The  SportsMed
programs because of the positive impact regular exercise and overall fitness can
have on employee absenteeism, morale and productivity.

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

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

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

Employee Training

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

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

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personnel are required to  participate  in our Manager on Duty Program and other
management and sales seminars to maintain and develop their skills.

     We provide additional seminars  specifically designed for targeted employee
groups.  Seminars  providing  specialized  instruction  for  program  directors,
private trainers,  group exercise instructors and sales/marketing  personnel are
offered at various  times during the year,  for which  attendance on the part of
newly-hired  personnel  is  mandatory.  We  place  particular  emphasis  on  our
sales/marketing  training  seminars  that are given  once  every two months by a
personnel instructor.  In these seminars,  all new membership directors complete
20 hours of  participation  and all other  membership  directors are expected to
complete four hours of participation  every two months. Our fitness  instructors
are trained to assist in the sales function and to implement fitness testing and
individually-tailored  exercise programs.  Most instructors are college-educated
and all trainers are required to be certified by the National  Academy of Sports
Medicine.   Our  group   exercise   instructors   hold   nationally   recognized
certifications  and must have at least one year of  teaching  experience  before
they are  permitted to teach at The Sports  Club/LA.  They are also  required to
participate in ongoing training and periodic re-evaluation.

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

Membership Programs

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

     The Sports Club/LA offers three types of memberships: executive, health and
racquet sports. The Sports Club/LA's initiation fees and monthly membership dues
vary  depending on the location of the Club.  The Sports  Clubs' market rate for
initiation fees range from $400 to $2,900 and monthly membership dues range from
$110 to $300.  Corporate,  bicoastal and spousal memberships are also available.
We offer the following membership options:

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

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

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

Competition

     Although the sports and fitness industry is still fragmented,  the industry
has  experienced  significant  consolidation  in recent years and certain of our
competitors are  significantly  larger and have greater  financial and operating
resources than we do. In addition, a number of individual and regional

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operators  compete  with us in our  existing  markets.  Many of these sports and
fitness clubs attract the same types of members we target.  We also compete with
recreational facilities established by governments and businesses,  the YMCA and
YWCA, country clubs and weight-reducing salons, as well as products and services
that can be used in the home. As the general public becomes  increasingly  aware
of the  benefits  of regular  exercise,  we expect  that  additional  sports and
fitness  businesses will emerge.  We believe that there will continue to exist a
market for The Sports  Club/LA  and that our  operating  experience,  our highly
visible  image,  the  professionalism  of our  staff  and  our  state-of-the-art
equipment and exercise  facilities  afford us an advantage over our competitors.
However,  we may be unable to maintain our membership fees or membership  levels
in areas where another sports and fitness club offers competitive facilities and
services at a lower cost.

Trademarks and Trade Names

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

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

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

Government Regulation

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

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

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



                                       8
<PAGE>

Employees

     At May 31,  2004,  we had 2,399  employees,  most of whom are employed on a
part-time basis in Club operating activities such as aerobics,  private training
and food and beverage  services.  At May 31, 2004, we employed  1,091  full-time
employees,  981 of whom were involved in The Sports Club/LA  operations  such as
sales,  management,  private training, food and beverage or support staff, 42 of
whom  work for our  SportsMed  subsidiary  and 68 of whom  were in  general  and
administrative  functions.  We are  not a  party  to any  collective  bargaining
agreement  with  our  employees.   Although  we  experience   high  turnover  of
non-management  personnel, we have never experienced any labor shortages nor had
any difficulty in obtaining adequate  replacements for departing  employees.  We
consider our relations with our employees to be good.

Available Information

     Quarterly  and annual  reports  on Form 10-Q and Form 10-K can be  accessed
through  the SEC  website at  http://www.sec.gov/edgar/searchedgar/webusers.htm.
The  website   for  the  "Public   Company   Accounting   Oversight   Board"  is
http://www.pcaobus.org/.
                                       9
<PAGE>

ITEM 2.  PROPERTIES

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

     The following table provides certain information concerning our Clubs:

<TABLE>
<CAPTION>

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

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

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


(1)  Date of acquisition ("A") or opening ("O").

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

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

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

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

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

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

ITEM 3.  LEGAL PROCEEDINGS

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

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

     Not applicable



                                       10
<PAGE>



                                     PART II

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

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

<TABLE>
<CAPTION>

                                                                            Price Range of Common Stock
                                                                            ---------------------------
                                 Calendar Quarter                             High                 Low
                                 ----------------                             ----                 ---

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

Year Ended December 31, 2003:
     First Quarter..............................................               2.50                 2.15
     Second Quarter.............................................               2.87                 2.40
     Third Quarter..............................................               3.00                 2.50
     Fourth Quarter.............................................               2.70                 1.65

Year Ending December 31, 2004:
     First Quarter..............................................               2.35                 1.80
     Second Quarter (through June 15th).........................               1.98                 1.45
</TABLE>

     As of June 15, 2004, we had 63 stockholders of record and approximately 600
beneficial  owners.  The  closing  price of our Common  Stock as reported by the
American Stock Exchange ("AMEX") on June 15, 2004, was $1.61.

     On April 15, 2004, AMEX notified us that we had not met certain of the AMEX
continued  listing standards as set forth in Section 1003(d) of the AMEX Company
Guide. We were afforded an opportunity to respond and on April 30th, submitted a
plan to comply with the AMEX listing standards.  The plan was amended on May 19,
2004.  On May 25, 2004,  AMEX  approved our amended  plan.  We have an extension
until June 21, 2004,  to complete the filing of our Form 10-K for the year ended
December  31, 2003 and Form 10-Q for the  quarter  ended March 31, 2004 with the
Securities and Exchange  Commission.  We are subject to periodic AMEX review and
our failure to regain compliance with the continued listing standards by the end
of the extension period could result in our Common Stock being delisted from the
AMEX.

Dividend Policy

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



                                       11
<PAGE>



ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following  table presents our summary  financial and operating data for
the fiscal years ended  December 31, 1999 through 2003 and has been derived from
our consolidated  financial statements.  Such consolidated  financial statements
and summary financial and operating data have been restated as described in Note
2 to the consolidated financial statements.  The summary financial and operating
data should be read in  conjunction  with,  and is  qualified in its entirety by
reference to,  "Management's  Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated  financial  statements and the notes
thereto appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>

                                                                     Fiscal Year Ended December 31,
                                                              ------------------------------------------
                                                           1999       2000       2001       2002       2003
                                                           ----       ----       ----       ----       ----
                                                                                         (Restated)
                                                             (Dollars in thousands, except per share data)

<S>                                                    <C>        <C>        <C>        <C>         <C>
Statement of Operations Data:
  Revenues:
   Membership revenues..............................   $  86,787  $  75,217  $ 100,165  $ 120,853   $ 130,988
   Reimbursed costs.................................          --         --         --         --       2,383
                                                       ---------  ---------  ---------  ---------   ---------
     Total revenues.................................      86,787     75,217    100,165    120,853     133,371
  Operating expenses:
   Direct...........................................      60,065     58,575     87,560    100,973     107,925
   Reimbursed costs.................................          --         --         --         --       2,383
   General and administrative.......................       6,810      7,326      8,468      7,414       7,840
   Selling..........................................       2,608      2,915      3,880      4,907       4,902
   Depreciation and amortization....................       6,147      7,428     11,883     11,909      12,052
   Pre-opening expenses.............................       3,090      9,589      5,884        130       2,258
   Impairment charge................................          --         --      5,044         --          --
                                                       ---------  ---------  ---------  ---------   ---------
         Total operating expenses...................      78,720     85,833    122,719    125,333     137,360
                                                       ---------  ---------  ---------  ---------   ---------
         Income (loss) from operations..............       8,067    (10,616)   (22,554)    (4,480)     (3,989)
  Other income (expense):
    Interest........................................      (5,991)    (6,478)   (13,001)   (13,420)    (13,750)
    Minority interests..............................        (150)      (150)      (150)      (150)       (150)
    Equity interest in net income of unconsolidated
      subsidiary....................................         931         --         --         --          --
    Non-recurring items.............................         768     (3,242)       397        127          --
                                                       ---------  ---------  ---------  ---------   ---------
         Total other income (expense)...............      (4,442)    (9,870)   (12,754)   (13,443)    (13,900)
                                                       ---------  ---------  ---------  ---------   ---------
         Income (loss) before income taxes and
           cumulative effect of change in accounting
           principle................................       3,625    (20,486)   (35,308)   (17,923)    (17,889)
  Provision (benefit) for income taxes..............       2,021     (7,982)     5,370       (310)        495
                                                       ---------  ---------  ---------  ---------   ---------
         Income (loss) before cumulative effect of
           change in accounting principle...........       1,604    (12,504)   (40,678)   (17,613)    (18,374)
  Cumulative effect of change in accounting principle,
    net of income tax benefit of $600 in 1999 and $0
    in 2002.........................................         899          --         --      5,134          --
                                                       ---------   --------- ----------  ---------  ----------
         Net income (loss)..........................         705     (12,504)   (40,678)   (22,747)    (18,374)
  Dividends on Preferred Stock......................          --          --         --        888       1,400
                                                       ---------   --------- ---------- ----------  ----------
         Net income (loss) attributable to common
           shareholders.............................    $    705   $ (12,504) $ (40,678) $ (23,635)  $ (19,774)
                                                       =========  ========== ========== ==========  ==========

  Net income (loss) per share:
    Basic and diluted...............................    $   0.04    $  (0.70) $   (2.27) $   (1.31)  $   (1.08)
                                                       =========   ========= ========== ==========  ==========
  Weighted average number of common shares outstanding:
    Basic...........................................      18,114      17,773     17,939     18,080      18,316
                                                       =========   =========  =========  =========   =========
    Diluted.........................................      18,290      17,773     17,939     18,080      18,316
                                                       =========   =========  =========  =========   =========
</TABLE>
















<TABLE>
<CAPTION>
                                                                           At December 31,
                                                       -------------------------------------------------------
                                                          1999         2000       2001       2002        2003
                                                          ----         ----       ----       ----        ----
                                                                                         (Restated)
                                                                         (Dollars in thousands)

<S>                                                     <C>         <C>        <C>        <C>        <C>
Balance Sheet Data:
  Cash and cash equivalents..........................   $ 36,107    $  11,059  $   1,482  $   3,185  $    1,932
  Restricted cash....................................     41,389        6,996         --        227       4,432
  Property and equipment, net........................    118,959      169,907    170,799    156,630     155,173
  Total assets.......................................    225,088      223,773    197,114    181,252     183,959
  Deferred membership revenue (Short and Long-Term)..     13,025       16,214     19,026     18,231      19,161
  Long-term debt including current installments......    103,887      110,331    115,491    104,040     121,830
  Redeemable Preferred Stock.........................         --           --         --      5,140       5,590
  Stockholders' equity...............................     94,806       82,793     42,469     24,145       5,454

</TABLE>



                                       12
<PAGE>



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

     The following  discussion of our  historical  results of operations and our
liquidity  and  capital  resources  should  be  read  in  conjunction  with  the
consolidated  financial statements and related notes appearing elsewhere herein.
The preparation of these financial  statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,  revenues and
expenses  and  related  disclosures.  On an  on-going  basis,  we  evaluate  our
estimates  and  judgments  that are  based on  historical  experience  and other
assumptions  that we  believe to be  reasonable  under the  circumstances.  This
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements.

Overview

     We are the  operator  of ten  sports  and  fitness  Clubs  located in major
metropolitan markets across the United States, including one Club operated under
a management agreement. Our Clubs are spacious, modern facilities that typically
include  spas,  restaurants,  fitness  centers,  swimming  pools and  basketball
courts.  Our Clubs, which are usually named The Sports Club/LA are recognized as
among the finest sports and fitness facilities in the United States. In 1999, we
decided to focus our efforts on the national  development  of The Sports Club/LA
brand.  At that time,  we sold all of our smaller  sized  Clubs.  We also issued
$100.0  million of Senior  Secured  Notes due in March 2006.  The proceeds  from
these  transactions  were utilized to develop five  additional  new Clubs in New
York City,  Washington D.C., Boston and San Francisco.  We have since opened The
Sports Club/LA in Beverly Hills and in Miami.

     Most of our Clubs range in size from 90,000 to 140,000  square feet. Due to
the size of these facilities and the additional amenities included in our Clubs,
we spend significant amounts to construct a new facility. We compare the results
of our Clubs  based  upon how long the Clubs  have been open at the most  recent
measurement  period.  We categorize  Clubs as either mature or recently  opened.
Mature  Clubs are those  Clubs at which we believe  the  membership  levels have
reached a stable  level and based  upon the amount of new  membership  sales and
attrition,  or the size of the Club, we do not believe a significant  additional
growth in the membership  level will occur.  Clubs are considered to be recently
opened while the membership level is increasing.  Three of the Clubs that we own
are  considered  to be mature while the other six are  considered to be recently
opened.  Five of these Clubs were opened  between 2000 and 2001 while The Sports
Club/LA - Beverly Hills was opened in October 2003.  Newly  developed Clubs tend
to achieve significant  increases in revenues until a mature membership level is
reached.  Recently  opened  Clubs that have not yet achieved  mature  membership
levels  have  operated  at a loss or only a slight  profit  as a result of fixed
expenses that, together with variable operating expenses,  approximate or exceed
membership  fees and other  revenues.  Since 2000, we have invested  significant
amounts  of cash in the  construction  and  operation  of these new  Clubs.  Our
operating  performances  and our liquidity have been negatively  impacted due to
the start up nature of these Clubs and the initial construction cost.

     We measure  performance  using key operating  statistics such as initiation
fees,  monthly dues and ancillary  revenues per member.  We closely focus on new
membership  sales and the level of  membership  attrition at each Club.  We also
closely evaluate our expenses with an emphasis on controlling  payroll costs. We
use Club operating income,  before  depreciation  expenses and rent expense as a
means to evaluate the overall performance of an individual Club.

     We have two primary  sources of  revenues.  First,  our  largest  source of
revenue is from membership dues and initiation  fees. We recognize  revenue from
dues in the month it is earned.  Initiation  fees are deferred and recognized as
revenue on a straight-line  basis over a period of three years, which represents
the average  life of a  membership  based upon  historical  data.  Secondly,  we
generate  ancillary revenue from our membership within each Club. The largest of
these revenues comes from individual private training. We also generate revenues
from our spas, restaurants, childcare, sports programs and guest fees. Our total
ancillary  revenues  represent  36.5% of total Club  revenue and we believe that
percentage  is among the highest in the  industry.  We believe  that  membership
levels  are the  primary  indicator  of a Clubs  ability  to  generate  revenue.
Therefore, we are consistently generating programs to

                                       13
<PAGE>

market the Clubs to  potential  new  members as well as  striving  to reduce our
membership attrition rates. We believe our current attrition rate of 27% is well
below the normal in the industry.

     Our direct  expenses  include  costs to operate  our Clubs.  These  consist
primarily of payroll and employee  benefits,  rent and other  occupancy  related
costs,  supplies,  repairs,  costs of products sold and various other  operating
costs. A significant amount of these costs are fixed in nature.

     General  and   administrative   expenses   include  costs  related  to  our
centralized  support  functions  such  as  accounting,  information  technology,
development and our executive management. Costs associated with being a publicly
owned Company are also included in this category.  Selling  expenses include our
advertising,  marketing  department and  promotional  costs  associated with the
generation of new memberships.

Critical Accounting Policies and Estimates

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

     Revenue Recognition. We receive initiation fees and monthly membership dues
from our  members.  Substantially  all of our members  join on a  month-to-month
basis and can therefore cancel their membership at any time. Initiation fees and
related  direct  expenses,   primarily  sales  commissions,   are  deferred  and
recognized,  on a  straight  line  basis,  over a period of three  years,  which
represents the average life of a membership  based upon  historical  data.  Dues
that are  received  in advance  are  recognized  on a  pro-rated  basis over the
periods in which  services  are to be provided.  In  addition,  payments of last
months' dues are deferred. Revenues for services including private training, spa
treatments  and physical  therapy  sessions are recorded  when such services are
performed.  Amounts  received  in advance are  recorded  as  deferred  revenues.
Revenues from our SportsMed  subsidiary are recognized  based upon the estimated
amount to be collected.

     Effective July 1, 2003, we adopted EITF 00-21,  Revenue  Arrangements  with
Multiple Deliverables. As a result of the adoption of EITF 00-21, the fair value
of any free products or services bundled with new memberships is now recorded as
revenue when the product is delivered or the service is performed.  Prior to the
adoption of EITF 00-21,  we considered  all payments as  initiation  fees and no
revenue  was  recorded  for the  free  products  or  services  bundled  with new
memberships.  The impact upon  implementation  of EITF 00-21 was to increase our
2003 revenues by $862,000.

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

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

                                       14
<PAGE>

determined  by  estimating  the fair value of the assets and recording a loss if
the carrying  value is greater than the fair value.  There was no  impairment of
long-lived assets at December 31, 2003.

     Valuation of  goodwill.  Prior to January 1, 2002,  we amortized  goodwill,
which  represents the excess of the purchase price over the net assets  acquired
in business acquisitions, over 40 years. We recorded goodwill in connection with
our acquisitions of The Sports Club/LA in Los Angeles and Orange County,  Reebok
Sports Club/NY and SportsMed. In January 2002, we adopted SFAS No. 142, Goodwill
and Other Intangible  Assets,  and as a result have ceased to amortize goodwill.
Instead,  we were required to perform a  transitional  impairment  review of our
goodwill  as of  January  1,  2002.  We  initially  completed  the  transitional
impairment test, in 2002, which did not result in the impairment of goodwill. In
early 2004, we determined that the methodology used to determine if goodwill was
impaired was incorrect and that a reevaluation was required.  We reperformed the
transitional  impairment  test and  determined  that goodwill was impaired as of
January 1, 2002 by $5,134,000.  The 2002 consolidated  financial statements have
been  restated  to reflect  this  adjustment.  We are also  required to evaluate
goodwill on an annual basis. We performed the analysis,  as of December 31, 2002
and 2003, and determined that our remaining goodwill was not impaired.

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

Results of Operations

Fiscal 2003 compared to Fiscal 2002

     Total revenue  increased  $12.5 million or 10.4% to $133.4  million for the
year ended December 31, 2003 from $120.9 million for the year ended December 31,
2002. Of the $12.5 million  increase,  $6.0 million was from membership dues and
initiation fees, $4.1 million was from ancillary revenues,  and $2.4 million was
related to the recovery of operating costs at The Sports Club/LA - Miami, a Club
that we manage.

     Revenue  increased by $8.1 million at the five Sports  Club/LA Clubs opened
in 2000 and 2001,  primarily  as a result of a 9.7%  increase in  membership  at
these five Sports Club/LA Clubs from December 31, 2002 through December 31, 2003
and to annual rate  increases  for monthly  dues and other  ancillary  services.
Revenue  increased by $2.4 million due to cost  reimbursements  we received from
the owners of The Sports  Club/LA - Miami,  a Club we  manage,  which  opened in
November  2003.  Revenue  increased  by $1.3  million  due to the opening of The
Sports Club/LA - Beverly Hills on October 7, 2003 and by $810,000,  at our three
mature Clubs, primarily due to a $327,000 increase in food and beverage revenues
and a $444,000  increase in dues revenues.  Revenue increased by $348,000 at our
SportsMed  subsidiary  primarily due to increased  patient visits and by $88,000
due to  management  fees  received  from The  Sports  Club/LA  - Miami.  Revenue
decreased  by $547,000 as a result of the sale of The Sports  Club/Las  Vegas on
January 31, 2002.

     Our direct expenses  increased by $6.9 million (6.8%) to $107.9 million for
the year ended  December 31, 2003,  versus $101.0 million for the same period in
2002. Direct expenses increased by $4.0 million at our five most recently opened
Sports  Club/LA  Clubs  primarily due to increases in variable  direct  expenses
associated with the 9.7% membership  increase and resulting  revenue growth that
occurred  at these five  Sports  Club/LA  Clubs  between  December  31, 2002 and
December 31, 2003 and to increases in workers'  compensation,  group medical and
property/liability insurance rates. Direct expenses increased by $1.4 million as
a result of the  opening  of The  Sports  Club/LA - Beverly  Hills on October 7,
2003.  Direct  expenses  increased  by $2.0  million at our three  mature  Clubs
primarily  due to  increased  payroll,  utility  and  property  tax costs and to
increases  in  workers'  compensation,   group  medical  and  property/liability
insurance  rates.  Direct expenses  decreased by $505,000 due to the sale of The
Sports  Club/Las  Vegas on January  31,  2002.  Direct  expenses as a percent of
revenue for the year ended December 31, 2003,

                                       15
<PAGE>

decreased to 80.9% from 83.6% for the same period in 2002. As membership  levels
and therefore  revenues increase at the five Sports Club/LA Clubs opened in 2000
and 2001 and at The Sports  Club/LA - Beverly  Hills  opened in October of 2003,
the  direct  expense  percentage  should  continue  to  decrease.  There  is  no
assurance, however, that such membership or revenue growth will occur.

     Reimbursed  costs were $2.4  million for the year ended  December 31, 2003.
These costs relate to The Sports Club/LA - Miami, which is a non-owned Club that
we manage for its owner.  We receive a management  fee for managing the Club and
are reimbursed for all costs we incur pursuant to the management  agreement.  As
required by  generally  accepted  accounting  principles,  reimbursed  costs are
recorded as both revenue and expense in our consolidated  financial  statements.
The  reimbursed  costs of $2.4  million  in the year  ended  December  31,  2003
represents both  pre-opening  expenses and normal  operating  expenses after the
Club opened in November 2003.

     Our  general and  administrative  expenses  were $7.8  million for the year
ended  December  31, 2003,  versus $7.4 million for the same period in 2002,  an
increase  of $426,000 or 5.7%.  The  increase in our general and  administrative
expenses was primarily the result of increased workers'  compensation  insurance
rates,  increased group medical and  property/liability  insurance costs, plus a
small increase in payroll costs.  General and administrative  expenses decreased
as a percentage  of revenue to 5.9% for the year ended  December 31, 2003,  from
6.1% for the same period in 2002.  We believe  that  general and  administrative
expenses  should  continue to decrease as a percentage of future  revenues as we
expand and achieve economies of scale. There is no assurance, however, that said
expansion or economies of scale will be achieved.

     Our  selling  expenses  remained  flat at $4.9  million for the years ended
December  31,  2003 and  December  31,  2002.  We continue  to  concentrate  our
advertising  and  promotion  efforts at the five Sports  Club/LA Clubs opened in
2000 and 2001 and at The Sports Club/LA - Beverly Hills, which opened on October
7, 2003.  Selling expenses  decreased as a percentage of revenue to 3.7% for the
year ended December 31, 2003, from 4.1% for the same period in 2002.

     Our depreciation and amortization  expenses increased by $143,000 (1.2%) to
$12.1 million for the year ended December 31, 2003, versus $11.9 million for the
same  period  in 2002.  Depreciation  and  amortization  expenses  increased  by
$132,000  as a result of the  opening of The Sports  Club/LA - Beverly  Hills on
October 6, 2003 and by $43,000 due to capital additions made at the Clubs during
2002 and 2003.  Depreciation and amortization expenses decreased by $32,000 as a
result of the sale of The Sports Club/Las Vegas on January 31, 2002.

     Pre-opening  expenses  were $2.3  million for the year ended  December  31,
2003, versus $130,000 for the same period in 2002.  Pre-opening expenses for the
year ended  December  31,  2003,  consisted  of  expenses  related to The Sports
Club/LA - Beverly  Hills,  which  opened on  October 7,  2003.  The  pre-opening
expenses for the year ended December 31, 2002,  consisted of expenses related to
a possible  Club site on Long Island in New York.  We have since  decided not to
develop the Long Island site.

     Our net interest expense  increased by $330,000 (2.5%) to $13.7 million for
the year ended  December 31, 2003,  versus $13.4  million for the same period in
2002.  Interest  expense  decreased  by $182,000 due to a reduction of equipment
financing  loans.  Net interest  expense  increased  by $944,000  primarily as a
result of interest  incurred on our new  five-year  mortgage loan secured by The
Sport Club/LA - Orange County.  We used a portion of the proceeds of the loan to
construct The Sports Club/LA - Beverly Hills and therefore, capitalized $432,000
of that interest during the construction period.

     We recorded two non-recurring  gains,  totaling  $127,000,  during the year
ended December 31, 2002. We recorded a non-recurring gain of $30,000, related to
the sale of The Sports  Club/Las  Vegas on January 31, 2002 and a  non-recurring
gain of $97,000,  related to the sale of real estate in Houston, Texas on August
30, 2002.

     In January  2002,  we adopted SFAS No. 142,  Goodwill and Other  Intangible
Assets,  and as a result  have  ceased to amortize  goodwill.  Instead,  we were
required to perform a transitional impairment

                                       16
<PAGE>

review of our goodwill as of January 1, 2002 and to review goodwill annually for
impairment thereafter.  We initially completed the transitional impairment test,
in 2002,  which did not result in the impairment of goodwill.  In early 2004, we
determined that the  methodology  used to determine if goodwill was impaired was
incorrect and that a reevaluation was required.  We reperformed the transitional
impairment  test and determined that goodwill was impaired as of January 1, 2002
by $5,134,000.  The 2002 consolidated financial statements have been restated to
reflect this adjustment.

     The tax  provision  of $485,000  recorded  for the year ended  December 31,
2003, is comprised of New York City and New York State income taxes  incurred on
pre-tax  earnings  at Reebok  Sports  Club/NY.  We did not record any federal or
state deferred tax benefit related to our consolidated pre-tax loss incurred for
the year ended  December  31,  2003.  After the tax  provision  of $485,000  and
dividends  on  preferred  stock  of $1.4  million,  our  consolidated  net  loss
attributable  to common  shareholders  for the year ended December 31, 2003, was
$19.8 million or $1.08 per basic and diluted share.  The tax benefit of $310,000
recorded  for the year ended  December  31,  2002,  was the result of a $900,000
federal  income tax refund we recorded due to tax law changes that allowed us to
carry-back our 2001 loss to prior tax years and New York City and New York State
income taxes of $590,000  incurred on pre-tax earnings at Reebok Sports Club/NY.
We did not  record any  federal or state  deferred  tax  benefit  related to our
consolidated  pre-tax loss incurred for the year ended December 31, 2002.  After
the tax benefit of $310,000 and  dividends on preferred  stock of $888,000,  our
consolidated  net loss  attributable to common  shareholders  for the year ended
December 31, 2002, was $23.6 million or $1.31 per basic and diluted share.

Fiscal 2002 compared to Fiscal 2001

     Total revenue  increased  $20.7 million or 20.7%, to $120.9 million for the
year ended December 31, 2002 from $100.2 million for the year ended December 31,
2001. Of the $20.7 million increase,  $11.1 million was from membership dues and
initiation fees and $9.6 million was from ancillary revenues.

     Revenue  increased  by $21.1  million,  due to the  opening  of The  Sports
Club/LA - Boston in September of 2001 and The Sports  Club/LA - San Francisco in
October of 2001 and revenue  increased by $6.2 million as a result of membership
growth at the three Sports  Club/LA Clubs opened in 2000.  Revenue  decreased by
$5.4 million as a result of the sale of The Sports Club/Las Vegas on January 31,
2002,  and by $2.2  million  due to the  transfer  of our retail  operations  to
outside  third party  vendors.  Revenue  increased  by $1.0 million at our other
Sports  Clubs and our  SportsMed  subsidiary  primarily  due to an  increase  in
private training and monthly dues revenues at the Sports Clubs, partially offset
by a  decrease  in  SportsMed  revenues  primarily  due  to the  closing  of The
SportsMed Agoura Hills location.

     Our direct  expenses  increased by $13.4 million to $101.0  million for the
year ended  December 31, 2002,  versus $87.6  million in 2001.  Direct  expenses
increased by $20.8 million, due to the opening of The Sports Club/LA - Boston in
September of 2001 and The Sports  Club/LA - San Francisco in October of 2001 and
by $1.8  million as a result of an  increase  in  expenses  associated  with the
membership  growth at the three  Sports  Club/LA  Clubs  opened in 2000.  Direct
expenses  decreased by $5.4 million due to the sale of The Sports Club/Las Vegas
on  January  31,  2002,  by  $2.5  million  due to the  transfer  of our  retail
operations  to outside  third  party  vendors  and by $1.3  million at our other
Sports Clubs and our SportsMed  subsidiary primarily as a result of cost cutting
measures we implemented  at these Clubs and the closing of The SportsMed  Agoura
Hills  location.  Direct  expenses  as a percent of  revenue  for the year ended
December 31, 2002, decreased to 83.6% from 87.4% in 2001.

     Our  general and  administrative  expenses  were $7.4  million for the year
ended December 31, 2002, versus $8.5 million in 2001, a decrease of $1.1 million
or 12.4%. Our general and administrative  expenses decreased by $1.0 million due
to lower legal fees  resulting from the settlement or dismissal of certain legal
matters in which we were involved. General and administrative expenses decreased
by  $519,000  as a result of expense  cutting  measures  that have  reduced  our
payroll and  payroll  related  expenses.  General  and  administrative  expenses
increased  by $419,000  primarily as a result of higher  corporate  office rent,
increased  insurance  premiums and a reduction in corporate costs capitalized on
certain development and information systems projects. General and administrative
expenses  decreased  as a  percentage  of  revenue  to 6.1% for the  year  ended
December 31, 2002, from 8.5% in 2001.

                                       17
<PAGE>

     Our selling  expenses  were $4.9  million for the year ended  December  31,
2002,  versus $3.9 million in 2001,  an increase of $1.0  million or 26.5%.  The
increase  in  selling  expenses  was the  result  of  expanded  advertising  and
promotion  efforts at the five Sports Club/LA Clubs opened in 2000 and 2001 with
the  majority of this  increase  attributable  to our two most  recently  opened
Clubs.  We also  placed  special  emphasis  on  membership  growth at The Sports
Club/LA - Rockefeller  Center.  Selling expenses for the year ended December 31,
2002 at these five most  recently  opened  Clubs  increased  by $1.2  million as
compared to 2001. Selling expenses decreased by $432,000 as a result of the sale
of The Sports Club/Las Vegas on January 31, 2002 and selling  expenses  declined
by $63,000  at our other  Sports  Club/LA  Clubs and our  SportsMed  subsidiary.
Selling  expenses as a  percentage  of revenue for the year ended  December  31,
2002, were 4.1% versus 3.9% in 2001.

     Our depreciation and amortization expenses stayed flat at $11.9 million for
the years  ended  December  31,  2002 and 2001.  Depreciation  and  amortization
expenses  increased by $610,000 as a result of the opening of The Sports Club/LA
- Boston in September  2001 and The Sports Club/LA - San Francisco in October of
2001 and by $709,000 at our corporate  headquarters,  primarily due to the start
of  amortization  of our  recently  installed  membership  accounting  software.
Depreciation and amortization  expenses decreased by $344,000 as a result of the
sale of The Sports  Club/Las  Vegas on January  31,  2002 and by $455,000 at our
other Sports Club/LA Clubs primarily due to assets  becoming fully  depreciated.
Depreciation  and  amortization  expense  also  decreased by $494,000 due to the
adoption of Statement  of  Financial  Accounting  Standards  No. 142,  effective
January 1, 2002, that requires  goodwill and other indefinite lived  intangibles
no longer be amortized.

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

     We incurred  impairment charges during the year ended December 31, 2001, of
$5.0 million.  These impairment  charges consisted of a $3.2 million  impairment
charge  related to the write down of fixed assets at The Sports  Club/Las  Vegas
and a $1.8 million  impairment  charge  related to the write down of goodwill at
our SportsMed subsidiary.

     We  incurred  net  interest  expense  of $13.4  million  for the year ended
December 31, 2002,  versus $13.0 million in 2001,  an increase of $419,000.  Net
interest expense increased by $496,000 due to our discontinuance of capitalizing
interest costs on Sports Clubs under  development  after the last Sports Club/LA
was opened in October 2001. Net interest expense increased by $323,000, due to a
reduction  in interest  income  earned on invested  cash  balances.  There was a
$162,000  decrease  in net  interest  expense  due to  reductions  of  equipment
financing loans and a $238,000 decrease resulting from interest incurred in 2001
related to a sales tax audit at one of our Clubs.

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

     In January  2002,  we adopted SFAS No. 142,  Goodwill and Other  Intangible
Assets,  and as a result  have  ceased to amortize  goodwill.  Instead,  we were
required  to perform a  transitional  impairment  review of our  goodwill  as of
January 1, 2002 and to review goodwill  annually for impairment  thereafter.  We
initially  completed the  transitional  impairment  test, in 2002, which did not
result in the  impairment of goodwill.  In early 2004,  we  determined  that the
methodology  used to determine if goodwill was impaired was incorrect and that a
reevaluation was required.  We reperformed the transitional  impairment test and
determined  that goodwill was impaired as of January 1, 2002 by $5,134,000.  The
2002  consolidated  financial  statements  have been  restated  to reflect  this
adjustment.

                                       18
<PAGE>



     The tax benefit recorded for the year ended December 31, 2002, is comprised
of a  $900,000  federal  income tax  refund we  received  as a result of tax law
changes  that  allowed  us to  carry-back  our  2001  loss to prior  tax  years,
partially  offset by New York State and City  income  taxes  incurred  at Reebok
Sports  Club/NY.  We did not record any deferred tax benefit related to our loss
incurred for the year ended  December  31,  2002.  After the tax benefit and the
Preferred  Stock  dividends  of  $888,000,   our  loss  attributable  to  common
shareholders  for the year ended  December 31, 2002,  was $23.6 million or $1.31
per basic and diluted  share.  The income tax provision of $5.4 million for 2001
is related to the  establishment of a valuation  allowance  against our deferred
tax assets  that were  recorded  prior to January 1, 2001 and an accrual for any
current  state  income  taxes due.  We did not record any  deferred  tax benefit
related to our loss  incurred in 2001.  After the 2001 income tax  provision  of
$5.4 million, our net loss attributable to common shareholders was $40.7 million
or $2.27 per basic and diluted share.  We did not record any deferred tax assets
related to the losses incurred in 2002 and 2001 based on our analysis of current
and projected  operating  results and our  determination  that it is more likely
than not that future taxable income will be insufficient to utilize any deferred
tax assets.

Non-GAAP Financial Measures

     We use the term "EBITDA" in this discussion.  EBITDA consists of net income
plus interest  expense,  net,  provision for income taxes and  depreciation  and
amortization.  This term,  as we define it, may not be comparable to a similarly
titled  measure  used by other  companies  and is not a measure  of  performance
presented in  accordance  with GAAP. We use EBITDA and EBITDA margin as measures
of operating  performance.  EBITDA should not be considered as a substitute  for
net income, cash flows provided by operating activities, or other income or cash
flow data  prepared in accordance  with GAAP. We believe  EBITDA is useful to an
investor in evaluation our operating performance and liquidity because:

     o    it is a widely accepted financial  indicator of a company's ability to
          service its debt;

     o    it is widely used to measure a company's operating performance without
          regard to items such as depreciation and amortization,  which can vary
          depending upon accounting methods and the book value of assets, and to
          present a meaningful measure of corporate performance exclusive of our
          capital structure and the method by which assets were acquired; and

     o    it helps  investors  to more  meaningfully  evaluate  and  compare the
          results of our  operations  from period to period by removing from our
          operating  results  the  impact of our  capital  structure,  primarily
          interest expense from our outstanding debt, and asset base,  primarily
          depreciation and amortization of our properties.

          Our management uses EBITDA:

     o    as a  measurement  of operating  performance  because it assists us in
          comparing our  performance on a consistent  basis,  as it removes from
          our  operating  results  the impact of our  capital  structure,  which
          includes  interest  expense from our  outstanding  debt, and our asset
          base, which includes depreciation and amortization of our properties;

     o    in  presentations  to the members of our board of  directors to enable
          our board to have the same consistent  measurement  basis of operating
          performance used by management; and

     o    as the basis for incentive  bonuses paid to selected members of senior
          and Club level management.



                                       19
<PAGE>

     Below is a reconciliation of EBITDA to net income:

                                                               Year Ending
                                                            December 31, 2003
                                                            -----------------
    EBITDA.............................................    $            7,913
        Depreciation and amortization..................               (12,052)
        Interest, net..................................               (13,750)
        Provision for income taxes.....................                  (485)
                                                          -------------------
    Net loss...........................................    $          (18,374)
                                                          ===================

Liquidity and Capital Resources

Liquidity

     Historically,  we have satisfied our liquidity  needs through  various debt
arrangements,  sales of Common or Preferred Stock and cash from operations.  Our
primary  liquidity needs the past several years have been the development of new
Clubs and the interest cost  associated  with our $100.0  million Senior Secured
Notes.

     In order to make our March 15, 2004 interest  payment on the Senior Secured
Notes, we were required to issue $6.5 million of a newly created class of Series
D Convertible  Preferred Stock. We are not certain that amounts we will generate
from operations through September 15, 2004 will be sufficient for us to make the
Senior  Secured Note  interest  payment due on September 15, 2004. If cash flows
from  operations  are  insufficient  to make the  September  15,  2004 or future
interest payments,  we would be required to sell assets, offer additional equity
securities  or  increase  our cash  flow from  operations  to meet our cash flow
needs.  There can be no  assurance  that we will be able to sell  assets,  raise
capital by offering  additional equity securities or increase our cash flow from
operations.

     Additional  funds will be required to undertake any future  acquisitions or
the development of additional new Clubs.  We would consider  entering into joint
ventures,  partnership  agreements  or  management  agreements  (subject  to the
restrictions  and  limitations  on such  transactions  in the Indenture) for the
purpose of developing new Clubs,  but only if such  arrangements  would generate
additional  cash flow or further  enhance The Sports  Club/LA  brand name in the
market place.

Operating Activities

     Our cash balance on December 31, 2003 was $1.9  million.  During 2003,  our
earnings before interest,  taxes,  depreciation and amortization ("EBITDA") were
$7.9 million.  We believe we will continue to generate  positive EBITDA and that
such amount will increase as our new Clubs continue to mature.

     We  have  various  deposits  that  secure  our  performance  under  several
contracts.  We expect to receive  back  $800,000 of such  deposits in the second
quarter of 2004,  $1.0  million in the third  quarter of 2004 and the  remaining
$1.7 million in the fourth quarter of 2004.



                                       20
<PAGE>

Investing Activities

     Investing  activities  consist of new Club  development and expenditures to
maintain  and update our existing  Clubs.  Capital  expenditures  related to new
Clubs were  $16.1  million in 2001,  $6.7  million in 2002 and $10.6  million in
2003.  Our Clubs are upscale and capital  improvements  are regularly  needed to
retain the upscale nature and  presentation of the Clubs. A deterioration of the
quality  of the Clubs  can lead to  reduction  in  membership  levels  and lower
revenues.  Capital  expenditures  to maintain and update our existing Clubs were
$5.3 million in 2001, $2.6 million in 2002 and $2.2 million in 2003. We estimate
that expenditures of between 2% and 4% of revenues,  depending on the age of the
Club,   will  be  necessary  to  maintain  the  quality  of  the  Clubs  to  our
satisfaction.  We also expect to spend  approximately  $600,000  during the next
year to upgrade our  management  information  systems  and enhance our  disaster
recovery capabilities.

     On April  22,  2002,  we signed a lease to  develop  The  Sports  Club/LA -
Beverly Hills. The new Sports Club/LA,  of approximately  40,000 square feet, is
located at 9601 Wilshire Boulevard in the heart of the Beverly Hill's retail and
commercial  district.  We view the Beverly Hills market as an excellent location
for The Sports  Club/LA brand and this Club may serve as a prototype for smaller
size Clubs to be built in locations  near  existing  Sports  Club/LA  sites.  At
December 31, 2003,  approximately $1.1 million of construction costs are accrued
and remain to be paid on this Club. The Club opened in October 2003.

     We entered into a management  service agreement with Terremark  Brickell II
Ltd.,  an  affiliate  of  Millennium  to  manage  The  Sports  Club/LA  - Miami.
Millennium  provided  all the capital to develop this  facility  and  Millennium
retained a 100%  ownership in the Club. We earn a management  fee based upon the
Club's revenues and can also earn a profit  participation  based upon the Club's
net  operating  income.  We were not  required to invest any of our capital into
this development. The Club opened in November 2003.

     We  currently  have no other  plans for new Club  developments  that  would
require our own capital.

     During 2002,  we generated  $9.3 million of cash  proceeds from the sale of
real estate in Houston, Texas and from the sale of The Sports Club/Las Vegas.

Financing Activities

     On April 1, 1999,  we issued in a private  placement  $100.0  million of 11
3/8% Senior Secured Notes (the "Senior  Secured  Notes") due in March 2006, with
interest due semi-annually. The Senior Secured Notes were issued pursuant to the
terms of an  indenture  agreement  dated  April 1, 1999 (the  "Indenture").  The
Senior Secured Notes are secured by substantially all of our assets,  other than
certain excluded assets.  The Indenture includes certain covenants that restrict
our ability to: (i) incur additional  indebtedness;  (ii) pay dividends or other
distributions,  or  repurchase  capital  stock  or  other  equity  interests  or
subordinated  indebtedness;  and (iii) make certain  investments.  The Indenture
also limits our ability to: (i) enter into  transactions  with affiliates;  (ii)
create  liens on or sell  certain  assets;  and (iii)  enter  into  mergers  and
consolidations.  The Indenture requires us to make an offer to retire the Senior
Secured Notes if the net proceeds of any asset sale are not reinvested in assets
related to our  business,  unless the remaining net proceeds are less than $10.0
million.  To the extent we sell assets,  the proceeds  from those sales would be
subject to the excess proceeds provision of the Indenture.  We are currently not
required to make such an offer as a result of the sale of any of our assets. The
Indenture  requires us to make semi-annual  interest payments of $5.7 million on
March 15th and September 15th of each year.

     On June 12, 2003, we obtained  financing in the form of a secured five-year
promissory  loan in the amount of $20.0 million.  The new loan is evidenced by a
promissory note that bears interest at a fixed interest rate of 7.25%;  requires
monthly  principal and interest  payments of $144,561;  is secured by the common
stock  and all the  assets  of  Irvine  Sports  Club,  Inc.,  our  wholly  owned
subsidiary  that owns The Sports Club/LA - Orange  County;  and is guaranteed by
two of our  major  stockholders.  The note may be  prepaid  at any time  without
penalty and requires a final payment of $18.3 million on July 1, 2008.

                                       21
<PAGE>

     The Indenture allows us to incur up to $10.0 million of equipment financing
obligations.  At December 31, 2003,  we had $2.0 million of equipment  financing
obligations  outstanding  and would be allowed to  finance  an  additional  $8.0
million with our equipment serving as collateral.  We make monthly principal and
interest  payments on this debt. These monthly  payments are currently  $205,000
and they will continue until December  2004,  when a significant  portion of the
debt will be repaid.

     In March 2004, three of our principal  shareholders  purchased $6.5 million
of a newly created class of Series D  Convertible  Preferred  Stock in a private
placement  offering.  The proceeds  were used to pay the March 15, 2004 interest
payment on our Senior Secured Notes and to provide additional working capital.

Contractual Obligations

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

<TABLE>
<CAPTION>

                                                                  Payments Due By Period
                                                                  ----------------------
                                                           Less                                             More
                                                          Than 1                                           Than 5
      Contractual Obligations              Total           Year          1-3 Years       3-5 Years          Years
      -----------------------              -----           ----          ---------       ---------          -----
<S>                  <C>             <C>           <C>              <C>             <C>              <C>
Senior Secured Notes (1)........     $    100,000  $           --   $      100,000  $           --   $          --
Mortgage note (2)...............           19,855             305              677          18,873              --
Equipment financing loans (3)...            1,975           1,794              139              42              --
Operating leases (4)............          356,584          24,404           48,032          48,323         235,825
Minority interest (5)...........              900             150              750              --              --
Redeemable Preferred Stock (6)..           10,500              --               --              --          10,500
                                       ----------     -----------      -----------     -----------      ----------
Total                                $    489,814  $       26,653   $      149,598  $       67,238   $     246,325
                                       ==========     ===========      ===========     ===========      ==========
</TABLE>
-------------

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

     (2) On June 12,  2003,  we  obtained  financing  in the  form of a  secured
five-year  promissory  loan in the amount of $20.0  million.  The new loan bears
interest at a fixed  interest  rate of 7.25%;  requires  monthly  principal  and
interest  payments of $144,561;  and requires a final principal payment of $18.3
million on July 1, 2008.

     (3) The equipment  financing  loans are secured by furniture,  fixtures and
equipment.  The amounts are generally repayable in monthly payments over four or
five years with effective interest rates between 3.5% and 13.3%.

     (4) We  lease  certain  facilities  pursuant  to  various  operating  lease
agreements.  Club  facility  leases are generally  long-term  and  noncancelable
triple-net  leases  (requiring  us to pay all real estate  taxes,  insurance and
maintenance  expenses),  and have an  average  remaining  term of  43.17  years,
including  renewal  options  which  are  included  in the lease  term,  with the
earliest  Sports Club lease  expiration  date of January 31,  2013.  We are also
obligated  under  lease  agreements  for  seven  of  our  former  Spectrum  Club
locations.  We have  subleased  each of these  properties  to the buyer of these
Clubs under sublease  agreements which provide that all operating costs of these
facilities  be assumed by the new owners.  Amounts due for Spectrum  Club leases
are excluded from this table.

     (5) We own a 50.1% interest in the partnership that owns The Sports Club/LA
- Los  Angeles,  and D.  Michael  Talla,  our  Chairman,  beneficially  owns the
remaining 49.9%. We have the option to redeem Mr. Talla's preferred  partnership
interest for  $600,000,  which expires on January 31, 2006. We have included the
annual  preferred  distribution  of $149,700 to Mr. Talla in the above table for
the next two years and the redemption amount is included in 2006 (Year 3).

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



                                       22
<PAGE>



Impact of Inflation

     We do not  believe  inflation  has had a material  impact on our results of
operations  for any of the years in the  three-year  period  ended  December 31,
2003. We cannot provide assurance that future inflation will not have an adverse
impact on our operating results and financial condition.

Seasonality of Business

     Seasonal  trends  have a limited  impact on our  operations.  We  typically
experience  a  slight  increase  in  membership  sales  in  the  first  quarter.
Additionally, we normally experience a slight decrease in our ancillary revenues
during  the  summer  months  at our east  coast  Clubs  due to lower  membership
attendance.

Forward Looking Statements

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

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

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

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

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

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

     o    competition,

     o    changes in personnel or compensation, and

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

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



                                       23
<PAGE>



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to risk from a change in interest rates to the extent we are
required to  refinance  existing  fixed rate  indebtedness  at rates higher than
those  prevailing  at the time the existing  indebtedness  was  incurred.  As of
December 31, 2003, we had Senior  Secured Notes  totaling  $100.0 million due in
March 2006 bearing an interest rate of 11.375%. Annual interest of $11.4 million
is payable semi-annually in March and September.  At December 31, 2003, the fair
value of the Senior Secured Notes is approximately $93.0 million. We also have a
$20.0  million loan with a fixed rate of 7.25% that matures and requires a final
principal  payment of $18.3 million on July 1, 2008. A change in interest  rates
of 1% would impact our interest expense by approximately $1.2 million per year.



                                       24
<PAGE>



ITEM  8.  FINANCIAL STATEMENTS

Index to Consolidated Financial Statements
                                                                       PAGE
                                                                       ----
Report of Independent Registered Public Accounting Firm................ F-1

Consolidated Balance Sheets as of December 31, 2002 and 2003........... F-2

Consolidated Statements of Operations for each of the Years in the
Three-Year Period ended December 31, 2003.............................. F-3

Consolidated Statements of Stockholders' Equity for each of the
Years in the Three-Year Period ended December 31, 2003................. F-4

Consolidated Statements of Cash Flows for each of the Years in the
Three-Year Period ended December 31, 2003.............................. F-5

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

                    Consolidated Financial Statement Schedule

Valuation and Qualifying Accounts......................................F-31

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

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

     None.

ITEM 9A.  CONTROLS AND PROCEDURES

     (a)  Evaluation of disclosure controls and procedures.

     Our Management,  with the  participation of our Chief Executive Officer and
Chief  Financial  Officer,  has evaluated the  effectiveness  of our  disclosure
controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the
Exchange Act) as of the end of the fiscal  period  covered by this Annual Report
on Form 10-K. Based upon such evaluation,  the Chief Executive Officer and Chief
Financial  Officer have concluded that, as of the end of such period,  except as
noted below, the Company's  disclosure  controls and procedures are effective in
recording,  processing,  summarizing  and reporting  information  required to be
disclosed  by us in the reports we file or submit  under the Exchange Act within
the time periods specified in the SEC's rules and forms.

     In performing its audit of our  Consolidated  Financial  Statements for the
year ended December 31, 2003, our independent auditor, KPMG LLP ("KPMG") noted a
matter  involving  our internal  controls  that it considered to be a reportable
condition.  A reportable  condition,  which may or may not be determined to be a
material  weaknesses,  involves matters relating to significant  deficiencies in
the design or operation of internal  controls  that, in KPMG's  judgment,  could
adversely affect our ability to record, process,  summarize and report financial
data  consistent  with the assertions of management on the financial  statement.
The reportable condition,  which was considered to be a material weakness, noted
that the Company does not have adequate  internal  controls over the application
of  new  accounting   principles  or  the  application  of  existing  accounting
principles  to new  transactions.  Specifically,  KPMG stated that during  their
quarterly  review for the quarter  ended March 31, 2003,  they noted the Company
had not properly  accounted for private training revenues.  In addition,  during
their 2003 audit, KPMG noted we were not properly  accounting for our management
arrangement for The Sports Club/LA - Miami, that we had not properly implemented
Statement of Financial Accounting Standard No. 142, relating to goodwill and not
properly  accounted for the accretion of dividends on Series C Preferred  Stock.
KPMG indicated that we enhance our financial and accounting  personnel  staffing
levels to ensure that we

                                       25
<PAGE>

have  appropriate  resources to implement  new  accounting  standards  and apply
existing accounting standards to new transactions.

     (b)  Changes in internal controls.

     There have not been any  changes in our  internal  control  over  financial
reporting (as such term is defined in Rules  13a-15(f) and 15d - 15(f) under the
Exchange  Act)  during the fiscal  quarter  ended  December  31,  2003 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.  As noted, however,  certain weaknesses in our
internal controls have been identified by KPMG.



                                       26
<PAGE>



F-31

                        Report of Independent Registered
                             Public Accounting Firm


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

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial position of The Sports
Club Company,  Inc. and  subsidiaries  as of December 31, 2002 and 2003, and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2003,  in  conformity  with  accounting
principles  generally  accepted in the United  States of America.  Also,  in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  consolidated  financial  statements  taken as a  whole,  presents
fairly, in all material respects, the information set forth therein.

     The accompanying  financial statements have been prepared assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 3 to the
financial  statements,  the Company has  suffered  recurring  net losses,  has a
working capital deficiency and has negative cash flows from operating activities
that raise  substantial  doubt about its ability to continue as a going concern.
Management's  plans in regard to these matters are also described in Note 3. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

     As  discussed  in  Note 2 to the  consolidated  financial  statements,  the
Company restated its 2002 consolidated financial statements.

     As discussed in Note 4 to the consolidated financial statements the Company
adopted Statement of Financial  Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002.





/s/ KPMG LLP


Los Angeles, California
May 24, 2004







                                      F-1
<PAGE>





                          THE SPORTS CLUB COMPANY, INC.
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2002 and 2003
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>

                                     ASSETS
                                                                                               2002          2003
                                                                                               ----          ----
                                                                                            (Restated)
<S>                                                                                         <C>          <C>
Current assets:
    Cash and cash equivalents..........................................................     $   3,185    $   1,932
    Accounts receivable, net of allowance for doubtful accounts of $534 and $517 at
      December 31, 2002 and 2003, respectively.........................................         3,951        3,923
    Inventories........................................................................         1,169          994
    Prepaid expenses...................................................................         1,148        1,789
                                                                                            ---------    ---------
         Total current assets..........................................................         9,453        8,638

Property and equipment, net............................................................       156,630      155,173
Goodwill...............................................................................         7,660        7,660
Restricted cash........................................................................           227        4,432
Other assets...........................................................................         7,282        8,056
                                                                                            ---------    ---------
                                                                                             $181,252    $ 183,959
                                                                                             ========    =========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current installments of notes payable and equipment financing loans................     $   2,158    $   2,099
    Accounts payable...................................................................         2,545        2,464
    Accrued liabilities................................................................        12,657       13,713
    Deferred revenues..................................................................        17,034       18,292
                                                                                            ---------    ---------
         Total current liabilities.....................................................        34,394       36,568

Notes payable and equipment financing loans, less current installments.................       101,882      119,731
Accrued lease obligations..............................................................         8,307        8,976
Deferred revenues......................................................................         1,197          869
Minority interest......................................................................           600          600
                                                                                            ---------    ---------
         Total liabilities.............................................................       146,380      166,744

Commitments and contingencies

Redeemable Preferred Stock, Series B, $.01 par value, 10,500 shares authorized;
      10,500 shares issued and outstanding at December 31, 2002 and December 31,
      2003 (liquidation preference of $11,248 and $12,198 at December 31, 2002
      and 2003, resepctively)..........................................................        10,727       11,761

Stockholders' equity:
    Preferred Stock, $.01 par value, 984,500 shares authorized; no shares issued or
      outstanding......................................................................            --           --
    Preferred Stock, Series C, $.01 par value, 5,000 shares authorized; 5,000
      shares issued and outstanding (liquidation preference of $5,140 and $5,590 at
      December 31, 2002 and 2003, respectively)........................................         5,140        5,590
    Common Stock, $.01 par value, 40,000,000 shares authorized;
        21,068,717 and 21,074,717 shares issued at
        December 31, 2002 and 2003, respectively.......................................           211          211
    Additional paid-in capital.........................................................       101,821      100,348
    Accumulated deficit................................................................       (67,843)     (86,217)
    Treasury Stock, at cost, 2,964,764 and 2,650,003 shares at
      December 31, 2002 and 2003, respectively.........................................       (15,184)     (14,478)
                                                                                            ----------   ----------
         Stockholders' equity..........................................................        24,145        5,454
                                                                                            ---------    ---------
                                                                                            $ 181,252    $ 183,959
                                                                                            =========    =========
</TABLE>

                     See accompanying notes to consolidated
                             financial statements.



                                      F-2
<PAGE>



                          THE SPORTS CLUB COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    Three-Year Period ended December 31, 2003
                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                                  2001           2002           2003
                                                                                  ----           ----           ----
                                                                                              (Restated)
<S>                                                                          <C>            <C>            <C>
Revenues:
    Membership revenues.................................................     $   100,165    $    120,853   $    130,988
    Reimbursed costs....................................................              --              --          2,383
                                                                             -----------    ------------   ------------
         Total revenue..................................................         100,165         120,853        133,371

Operating expenses:
    Direct..............................................................          87,560         100,973        107,925
    Reimbursed costs....................................................              --              --          2,383
    General and administrative..........................................           8,468           7,414          7,840
    Selling.............................................................           3,880           4,907          4,902
    Depreciation and amortization.......................................          11,883          11,909         12,052
    Pre-opening expenses................................................           5,884             130          2,258
    Impairment charges..................................................           5,044              --             --
                                                                             -----------    ------------   ------------
         Total operating expenses.......................................         122,719         125,333        137,360
                                                                             -----------    ------------   ------------
             Loss from operations.......................................         (22,554)         (4,480)        (3,989)

Other income (expense):
    Interest, net.......................................................         (13,001)        (13,420)       (13,750)
    Minority interests..................................................            (150)           (150)          (150)
    Non-recurring items.................................................             397             127             --
                                                                             -----------    ------------   ------------

           Loss before income taxes and cumulative effect of change in
           accounting principle.........................................         (35,308)        (17,923)       (17,889)
Provision (benefit) for income taxes....................................           5,370            (310)           485
                                                                             -----------    -------------  ------------

           Loss before cumulative effect of change in accounting
           principle....................................................         (40,678)        (17,613)       (18,374)

Cumulative effect of change in accounting principle.....................              --           5,134             --
                                                                             -----------    ------------   ------------

           Net loss.....................................................         (40,678)        (22,747)       (18,374)

Dividends on Preferred Stock............................................              --             888          1,400
                                                                             -----------    ------------   ------------

           Net loss attributable to common stockholders.................     $   (40,678)   $    (23,635)  $    (19,774)
                                                                             ============   =============  =============


Loss per share before cumulative effect of change in accounting
    principle - basic and diluted.......................................     $     (2.27)   $      (1.02)  $      (1.08)
Per share effect of cumulative effect of change in accounting
    principle - basic and diluted.......................................              --           (0.29)            --
                                                                             -----------    -------------  ------------
Net loss per share - basic and diluted..................................     $     (2.27)   $      (1.31)  $      (1.08)
                                                                             ============   =============  =============


Weighted average number of common shares outstanding:
    Basic and diluted...................................................          17,939          18,080         18,316
                                                                             ===========    ============   ============
</TABLE>

                     See accompanying notes to consolidated
                             financial statements.



                                      F-3
<PAGE>



                          THE SPORTS CLUB COMPANY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    Three-Year Period ended December 31, 2003
                                 (in thousands)
<TABLE>
<CAPTION>

                                                    Preferred Stock                      Additional
                                                       Series C         Common Stock      Paid-in    Accumulated   Treasury Stock
                                                   Shares   Amount    Shares   Amount     Capital      Deficit    Shares     Amount
                                                   ------   ------    ------   ------     -------      -------    ------     ------
<S>                                               <C>      <C>        <C>     <C>       <C>         <C>            <C>     <C>
Balance, December 31, 2000......................       --  $    --    21,053  $   211   $ 102,743   $  (4,419)     3,156   $(15,742)
  Net loss......................................       --       --        --       --         --      (40,678)        --         --
  Reissuance of Treasury Stock
    for employee stock plans....................       --       --        --       --         --            1        (65)       181
  Reissuance of Treasury Stock
    for loan guarantee fee......................       --       --        --       --         --           --        (46)       151
  Exercise of employee stock options............       --       --         2       --          5           --         --         --
  Issuance of Common Stock to outside directors.       --       --         6       --         16           --         --         --
                                                   ------  -------   -------  -------  ---------    ---------   --------   --------
Balance, December 31, 2001......................       --       --    21,061      211    102,764      (45,096)     3,045    (15,410)
  Net loss, as restated.........................       --       --        --       --         --      (22,747)        --         --
  Issuance of series C Preferred Stock..........        5    5,000        --       --         --           --         --         --
  Issuance of Common Stock to outside directors.       --       --         8       --         15           --         --         --
  Reissuance of Treasury Stock for employee
    stock plans.................................       --       --        --       --         --           --        (80)       226
  Accretion of dividends on Series B Preferred
    Stock.......................................       --       --        --       --       (748)          --         --         --
  Accretion of issuance costs on Series B
    Preferred Stock.............................       --       --        --       --        (70)          --         --         --
  Accretion of dividends on Series C Preferred
    Stock, as restated..........................       --      140        --       --       (140)          --         --         --
                                                  -------  -------   -------  -------   ---------  ----------   --------  ---------
Balance, December 31, 2002, as restated.........        5    5,140    21,069      211     101,821     (67,843)     2,965    (15,184)
  Net loss......................................       --       --        --       --          --     (18,374)        --         --
  Issuance of Common Stock to outside directors        --       --         6       --          12          --         --         --
  Reissuance of Treasury Stock for loan
    guarantee fee...............................       --       --        --       --          --          --       (213)       472
  Reissuance of Treasury Stock for employee
    stock plans.................................       --       --        --       --          --          --       (102)       234
  Accretion of dividends on Series B Preferred
    Stock.......................................       --       --        --       --        (950)         --         --         --
  Accretion of dividends on Series C Preferred
    Stock.......................................       --      450        --       --        (450)         --         --         --
  Accretion of issuance costs on Series B
    Preferred Stock.............................       --       --        --       --         (85)         --         --         --
                                                  -------  -------   -------  -------   ----------  ---------   --------   ---------
Balance, December 31, 2003......................        5  $ 5,590    21,075  $   211   $ 100,348   $ (86,217)     2,650   $(14,478)
                                                  =======  =======   =======  =======   =========   ==========  ========   =========
</TABLE>



                     See accompanying notes to consolidated
                             financial statements.



                                      F-4
<PAGE>



                          THE SPORTS CLUB COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    Three-year Period ended December 31, 2003
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                 2001         2002         2003
                                                                                 ----         ----         ----
                                                                                           (Restated)
<S>                                                                          <C>           <C>          <C>
Cash flows from operating activities:
    Net loss.............................................................    $(40,678)     $(22,747)    $ (18,374)
    Adjustments to reconcile net loss to cash used in operating
      activities:
         Loss (gain) on disposition of real estate.......................         282          (127)           --
         Impairment charges..............................................       5,044            --            --
         Depreciation and amortization...................................      11,883        11,909        12,052
         Related party costs settled with common stock...................         349           241           718
         Cumulative effect of change in accounting principle.............          --         5,134            --
         Deferred taxes..................................................       4,524            --            --
         (Increase) decrease in:
             Accounts receivable, net....................................      (1,215)          725            28
             Inventories.................................................       1,629           (50)          175
             Other current assets........................................       2,547          (439)         (642)
             Other assets, net...........................................       1,164        (2,283)          (15)
         Increase (decrease) in:
             Accounts payable............................................       1,102          (233)          (81)
             Accrued liabilities.........................................       1,834           679         1,056
             Deferred revenues...........................................       2,812          (439)          930
             Accrued lease obligations...................................       2,758         3,242           669
                                                                             --------      --------     ---------
                Net cash used in operating activities....................      (5,965)       (4,388)       (3,484)

Cash flows from investing activities:
    Capital expenditures.................................................     (16,122)       (6,653)      (10,595)
    Distributions from unconsolidated subsidiary.........................          32            --            --
    (Increase) decrease in restricted cash...............................       6,996            --        (4,205)
    Proceeds from sale of The Sports Club/Las Vegas - net of costs.......          --         6,154            --
    Proceeds from sale of Houston real estate - net of costs.............          --         3,133            --
                                                                             --------      --------     ---------
             Net cash provided by (used in) investing activities.........      (9,094)        2,634       (14,800)

Cash flows from financing activities:
    Proceeds from issuance of Preferred Stock - net of costs.............          --        14,908            --
    Exercise of employee stock options...................................           5            --            --
    Proceeds from notes payable and equipment financing loans............      24,588        21,725        30,741
    Repayments of notes payable and equipment financing loans............     (19,111)      (33,176)      (13,710)
                                                                             ---------     ---------    ----------
             Net cash provided by financing activities...................       5,482         3,457        17,031
                                                                             --------      --------     ---------
             Net increase (decrease) in cash and cash equivalents.......       (9,577)        1,703        (1,253)
Cash and cash equivalents at beginning of year...........................      11,059         1,482         3,185
                                                                             --------      --------     ---------
Cash and cash equivalents at end of year.................................    $  1,482      $  3,185     $   1,932
                                                                             ========      ========     =========

Supplemental disclosure of cash flow information:
    Cash paid during the year for interest...............................    $ 12,118      $ 11,902     $  12,500
                                                                             ========      ========     =========
    Cash paid during the year for income taxes...........................    $    533      $    242     $     386
                                                                             ========      ========     =========
</TABLE>

                     See accompanying notes to consolidated
                             financial statements.




                                      F-5
<PAGE>




                          THE SPORTS CLUB COMPANY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2001, 2002 and 2003

1. Organization

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

2. Restatement

     In July 2001, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting Standard ("SFAS") No. 142, Goodwill and Other
Intangible Assets.  SFAS No. 142 requires that goodwill and certain  intangibles
no longer be  amortized,  but instead be reviewed for  impairment on at least an
annual basis.  The Company  adopted SFAS No. 142 effective  January 1, 2002. The
Company initially completed the transitional impairment test, in 2002, which did
not result in the impairment of goodwill.  During the first quarter of 2004, the
Company  determined  that the  methodology  used to  determine  if goodwill  was
impaired was incorrect  and that a  reevaluation  was required.  The Company has
reperformed  the  transitional  impairment test and determined that goodwill was
impaired as of January 1, 2002, by $5,134,000.  The 2002 consolidated  financial
statements have been restated to reflect this adjustment.

     The Company has restated the December 31, 2002 balance  sheet to reclassify
$1,197,000 of deferred  revenues to a long-term  liability and to accrete/record
$140,000 of Series C Preferred  Stock dividends from paid in capital to Series C
Preferred Stock.

     A restated  consolidated  balance  sheet at December  31,  2002, a restated
consolidated  statement of operations and a restated  consolidated  statement of
cash  flows  for  the  year  ended  December  31,  2002,  reflecting  the  above
adjustments,  is presented below. The amounts are in thousands, except per share
amounts:



                                      F-6
<PAGE>


<TABLE>
<CAPTION>

                                                                         At December 31, 2002
                                                                -------------------------------------
                                                                    As       Restatement        As
                                                                 Reported    Adjustments     Restated
                                                                 --------    -----------     --------
                            ASSETS
<S>                                                             <C>          <C>            <C>
Current assets:
    Cash and cash equivalents...............................    $   3,185    $      --      $   3,185
    Accounts receivable, net of allowance for doubtful
      accounts..............................................        3,951           --          3,951
    Inventories.............................................        1,169           --          1,169
    Other current assets....................................        1,148           --          1,148
                                                                ---------    ---------      ---------
      Total current assets..................................        9,453           --          9,453

Property and equipment, net.................................      156,630           --        156,630
Goodwill....................................................       12,794       (5,134)         7,660
Restricted cash.............................................          227           --            227
Other assets................................................        7,282           --          7,282
                                                                ---------    ---------      ---------
                                                                $ 186,386    $  (5,134)     $ 181,252
                                                                =========    ==========     =========
</TABLE>

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


<S>                                                             <C>         <C>             <C>
Current liabilities:
    Current lnstallments of notes payable and equipment
      financing loans.......................................    $   2,158   $      --       $   2,158
    Accounts payable........................................        2,545          --           2,545
    Accrued liabilities.....................................       12,657          --          12,657
    Deferred revenues.......................................       18,231      (1,197)         17,034
                                                                ---------   ----------      ---------
      Total current liabilities.............................       35,591      (1,197)         34,394

Notes payable and equipment financing loans, less
   current installments.....................................      101,882          --         101,882
Accrued lease obligations...................................        8,307          --           8,307
Deferred revenues...........................................           --       1,197           1,197
Minority interest...........................................          600          --             600
                                                                ---------   ---------       ---------
    Total liabilities.......................................      146,380          --         146,380

Commitments and contingencies

Redeemable Preferred Stock..................................       10,727          --          10,727

Shareholders' equity:
    Preferred Stock, Series C...............................        5,000         140           5,140
    Common Stock............................................          211          --             211
    Additional paid-in capital..............................      101,961        (140)        101,821
    Accumulated deficit.....................................      (62,709)     (5,134)        (67,843)
    Treasury Stock, at cost.................................      (15,184)         --         (15,184)
                                                                ---------   ---------       ---------
      Stockholders' equity..................................       29,279      (5,134)         24,145
                                                                ---------  ----------       ---------
                                                                $ 186,386   $  (5,134)      $ 181,252
                                                                =========  ==========       =========

</TABLE>



                                      F-7
<PAGE>


<TABLE>
<CAPTION>


                                                                     Year Ended December 31, 2002
                                                                -------------------------------------
                                                                    As       Restatement        As
                                                                 Reported    Adjustments     Restated
                                                                 --------    -----------     --------
<S>                                                             <C>         <C>             <C>
Membership revenues.........................................    $ 120,853   $      --       $ 120,853

Operating expenses:
    Direct..................................................      100,973          --         100,973
    General and administrative..............................        7,414          --           7,414
    Selling.................................................        4,907          --           4,907
    Depreciation and amortization...........................       11,909          --          11,909
    Pre-opening expenses....................................          130          --             130
                                                                ---------   ---------       ---------
      Total operating expenses..............................      125,333          --         125,333
                                                                ---------   ---------       ---------
        Loss from operations................................       (4,480)         --          (4,480)

Other income (expense):
    Interest, net...........................................      (13,420)         --         (13,420)
    Minority interests......................................         (150)         --            (150)
    Non-recurring items.....................................          127          --             127
                                                                ---------   ---------       ---------

      Loss before income taxes and cumulative effect of
        change in accounting principle......................      (17,923)         --         (17,923)
Provision (benefit) for income taxes........................         (310)         --            (310)
                                                                ----------  ---------       ----------

    Loss before cumulative effect of change in
      accounting principle..................................      (17,613)         --         (17,613)

Cumulative effect of change in accounting principle.........           --       5,134           5,134
                                                                ---------   ---------       ---------

    Net loss................................................      (17,613)     (5,134)        (22,747)

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

    Net loss attributable to common stockholders............    $ (18,501)  $  (5,134)      $ (23,635)
                                                                ==========  ==========      ==========

Net loss per share:
    Basic and diluted.......................................    $   (1.02)  $   (0.29)      $   (1.31)
                                                                ==========  =========       ==========

Weighted average number of common shares outstanding:
    Basic and diluted.......................................       18,080          --          18,080
                                                                =========  ==========      ==========
</TABLE>



                                      F-8
<PAGE>


<TABLE>
<CAPTION>

                                                                     Year Ended December 31, 2002
                                                                -------------------------------------
                                                                    As       Restatement        As
                                                                 Reported    Adjustments     Restated
                                                                 --------    -----------     --------
<S>                                                             <C>         <C>             <C>
Cash flows from operating activities:
    Net loss................................................    $ (17,613)  $  (5,134)      $ (22,747)
    Adjustments to reconcile net loss to cash used in
      operating activities:
       Gain on disposition of real estate...................         (127)         --            (127)
       Impairment charges...................................           --          --              --
       Depreciation and amortization........................       11,909          --          11,909
       Related party costs settled with common stock........          241          --             241
       Cumulative effect of change in accounting principle..           --       5,134           5,134
       (Increase) decrease in:
          Accounts receivable, net..........................          725          --             725
          Inventories.......................................          (50)         --             (50)
          Other current assets..............................         (439)         --            (439)
          Other assets, net.................................       (2,283)         --          (2,283)
       Increase (decrease) in:
          Accounts payable..................................         (233)         --            (233)
          Accrued liabilities...............................          679          --             679
          Deferred revenues.................................         (439)         --            (439)
          Accrued lease obligations.........................        3,242          --           3,242
                                                                ---------   ---------       ---------
             Net cash used in operating activities..........       (4,388)         --          (4,388)

Cash flows from investing activities:
    Capital expenditures....................................       (6,653)         --          (6,653)
    Proceeds from sale of The Sports Club/Las Vegas-net of
      costs.................................................        6,154          --           6,154
    Proceeds from sale of Houston real estate-net of costs..        3,133          --           3,133
                                                                ---------   ---------       ---------
             Net cash provided by investing activities              2,634          --           2,634

Cash flows from financing activities:
    Proceeds from issuance of Preferred Stock-net of costs         14,908          --          14,908
    Proceeds from notes payable and equipment financing loans      21,725          --          21,725
    Repayments of notes payable and equipment financing loans     (33,176)         --         (33,176)
                                                                ----------  ---------       ----------
             Net  cash provided by financing activities.....        3,457          --           3,457
                                                                ---------   ---------       ---------
             Net increase in cash and cash equivalents......        1,703          --           1,703
Cash and cash equivalents at beginning of year..............        1,482          --           1,482
                                                                ---------   ---------       ---------
Cash and cash equivalents at end of year....................    $   3,185   $      --       $   3,185
                                                                =========   =========       =========

Supplemental disclosure of cash flow information:
    Cash paid during the year for interest..................    $  11,902          --       $   11,902
    Cash paid during the year for income taxes..............    $     242          --       $      242


</TABLE>


                                      F-9
<PAGE>



3. Liquidity/Going Concern

     The Company has  experienced  recurring net losses of $40.7 million,  $22.7
million and $18.4  million  during the years ended  December 31, 2001,  2002 and
2003,  respectively.  The  Company has also  experienced  net cash flows used in
operating  activities of $6.0 million,  $4.4 million and $3.5 million during the
years ended December 31, 2001, 2002 and 2003,  respectively.  Additionally,  the
Company  may suffer a  significant  loss and net cash  flows  used in  operating
activities  during the year ending  December  31,  2004.  The Company has had to
raise funds  through  the  offering  of equity  securities  in order to make the
interest  payments due on its Senior  Secured  Notes.  The above  historical and
estimated  future  results of  operations  and cash flows  raise doubt about the
Company's ability to continue as a going concern.

     The Company's  continued  existence is primarily dependent upon its ability
to increase  membership levels at its six most recently opened Clubs. Five Clubs
were opened during 2000 and 2001 and The Sports Club/LA-Beverly Hills was opened
in  October  2003.  Recently  opened  Clubs  that have not yet  achieved  mature
membership levels have operated at a loss or only a slight profit as a result of
fixed expenses that, together with variable operating  expenses,  approximate or
exceed  current  membership  fees  and  other  ancillary  revenues.   Increasing
membership  levels  at  these  six  most  recently  opened  Clubs  is the key to
producing  operating profits and positive cash flows from operating  activities.
The Company is constantly  generating  programs to market the Clubs to potential
new members as well as striving to reduce its membership  attrition  rates.  The
Company has also  pursued  aggressive  cost cutting  programs  that have reduced
general  and  administrative  expenses  (including  employment  costs) from $8.5
million  during the year ended December 31, 2001 to $7.8 million during the year
ended  December 31,  2003.  Direct and selling  expenses  have also dropped as a
percentage of revenues during the last three years.

     If the Company is unable to increase  membership  levels or reduce costs to
the point where cash flows from operating  activities are sufficient to make the
September 15, 2004 or future interest payments, the Company would be required to
sell assets or issue  additional  equity  securities.  There can be no assurance
that the  Company  will be able to sell  assets  or raise  capital  by  offering
additional  equity  securities.  The  consolidated  financial  statements do not
include any adjustments that might result from the outcome of this uncertainty.

4. 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. The Company has
a 50.1% interest in the partnership  that owns The Sports Club/LA - Los Angeles,
and the Company's  Chairman  beneficially  owns the remaining 49.9%. The Company
includes  The  Sports  Club/LA  - Los  Angeles  in  its  consolidated  financial
statements.  The partnership  agreement  provides that, on an annual basis,  the
partners  will  share in the  first  $300,000  of the  Club's  net cash flow and
profits in proportion to their percentage  interests.  The next $35.0 million of
annual net cash flow will be distributed to the Company.  All  distributions  of
net cash flow thereafter,  if any, will be made to the partners in proportion to
their percentage  interests.  The Company has the option to redeem the preferred
partnership  interest in the  partnership  held by the Company's  Chairman.  The
option  expires as of January 31, 2006.  The preferred  partnership  interest is
carried at its  redemption  amount,  which is $600,000 at December  31, 2003 and
2002  and  has  been  classified  as  minority   interest  on  the  accompanying
consolidated balance sheets.

Revenue Recognition

     The Company receives  initiation fees and monthly  membership dues from its
members.  Substantially  all of the Company's  members join on a  month-to-month
basis and can therefore cancel their membership at any time. Initiation fees and
related  direct  expenses,   primarily  sales  commissions,   are  deferred  and
recognized,  on a straight-line  basis,  over an estimated  membership period of
three  years.

                                      F-10
<PAGE>

Dues that are received in advance are  recognized  on a pro-rata  basis over the
periods in which  services  are to be provided.  In  addition,  payments of last
month dues are deferred.  Revenues for services including private training,  spa
treatments  and physical  therapy  sessions are recorded  when such services are
performed. Amounts received in advance of performing these services are recorded
as deferred  revenues.  Revenues from the  Company's  SportsMed  subsidiary  are
recognized  as services  are  performed  based upon the  estimated  amount to be
collected by the Company.  Management  fees,  including  reimbursed  costs,  are
recognized as the management services are provided.

     Effective July 1, 2003,  the Company  adopted  Emerging  Issues Task Forces
("EITF") 00-21, Revenue Arrangements with Multiple Deliverables.  As a result of
the  adoption  of EITF  00-21,  the fair value of any free  products or services
bundled  with new  memberships  is now  recorded as revenue  when the product is
delivered or the service is performed.  Prior to the adoption of EITF 00-21, the
Company considered all payments as initiation fees and no revenue was recognized
specifically for the free products or services bundled with new memberships. The
impact upon  implementation  of EITF 00-21 was to increase  the  Company's  2003
revenues by $862,000.

     Membership  fees  and  other  ancillary  revenues  are  often  prepaid  and
amortized to revenue as the  membership  fees and other  ancillary  revenues are
earned.  The following is a rollforward of deferred revenues for the years ended
December 31, 2001, 2002 and 2003:

<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                                                   ------------------------
                                                          2001                 2002               2003
                                                          ----                 ----               ----
                                                                        (in thousands)
<S>                                                <C>                  <C>                 <C>
Deferred revenues - beginning of year.........     $      16,214        $      19,026       $     18,231
Plus cash received from members...............            13,404               12,555             14,848
Less revenue recognized as earnings...........           (10,592)             (13,350)           (13,918)
                                                   --------------       --------------      -------------
Deferred revenues - end of year...............     $      19,026        $      18,231       $     19,161
                                                   =============        =============       ============
</TABLE>

Reimbursed Costs

     The Company accounts for reimbursed costs in accordance with Emerging Issue
Task Force ("EITF") 99-19,  Reporting Revenue Gross as a Principal versus Net as
an Agent.  EITF 99-19  requires  that  revenue be reported  gross with  separate
display of cost of sales to arrive at gross  profit or on a net basis,  when the
Company  acts  as a  primary  obligor  in the  transaction,  has  discretion  in
selecting  the service  provider  and has credit  risk as the  Company  receives
reimbursements after the goods or services have been purchased. Reimbursed costs
relate to The Sports Club/LA - Miami, which is a non-owned Club that the Company
manages for its owner.  The Company  receives a management  fee for managing the
Club and is  reimbursed  for all costs that are advanced on the owner's  behalf.
Reimbursed  costs are recorded as both  revenue and expense in the  consolidated
financial  statements.  Reimbursed costs represent both pre-opening expenses and
normal operating expenses of the Club during 2003.

Allowance for Doubtful Accounts.

     The Company provides a reserve against its receivables for estimated losses
that may result from its members'  inability to pay. The Company  determines the
amount of the  reserve  by  analyzing  known  uncollectible  accounts,  economic
conditions  and  historical  losses  and  its  members'  creditworthiness.   The
likelihood  of a material  loss from this area is minimal  due to the  Company's
limited exposure to credit risk.

Cash Equivalents and Restricted Cash

     The  Company   considers  all  highly  liquid   investments  with  original
maturities of three months or less to be cash equivalents.  At December 31, 2002
and  2003,  cash  and cash  equivalents  were  $3.2  million  and $1.9  million,
respectively.

     The  Company   considers  cash,  cash   equivalents  and  other  short-term
investments  that  are  required  to be  held as  deposits  to  satisfy  certain
governmental regulatory or Club operating lease security deposits as


                                      F-11
<PAGE>

restricted  cash.  At December  31, 2002 and 2003,  the Company had $227,000 and
$4.4 million, respectively, of restricted cash.

Inventories

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

Advertising Costs

     Amounts  incurred for advertising  costs with third parties are expensed as
incurred.  Advertising expense totaled  approximately $1.2 million, $1.5 million
and $1.4  million  for the  years  ended  December  31,  2001,  2002  and  2003,
respectively.

Loan Costs

     Loan costs and the debt discount on the Senior Notes are amortized over the
terms of the related loans using the straight line method which approximates the
effective interest method.

Start-up Costs

     All costs  related to the  development  of new sports  and  fitness  clubs,
except for real  estate  related  costs are  expensed as  incurred.  Real estate
related  costs,  which include  construction  costs and rent  payments  prior to
opening, are capitalized.

Long-Lived Assets

     Property and equipment are recorded at cost.

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

     The Financial  Accounting  Standards  Board  ("FASB")  issued  Statement of
Financial  Accounting  Standards ("SFAS") No. 144, Accounting for the Impairment
or Disposal of Long-Lived  Assets,  which  addresses  financial  accounting  and
reporting  for the  impairment  or disposal of  long-lived  assets.  The Company
adopted SFAS No. 144 on January 1, 2002.  The Company  evaluates its  long-lived
assets on a  club-by-club  basis with the exception of its three New York Clubs,
which are evaluated on a combined basis due to the  inter-related  nature of the
operations of the New York Clubs.

     The  Company  reviews  its  long-lived  assets  and  certain   identifiable
intangible  assets  for  impairment  on an annual  basis or  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be  recoverable.  Recoverability  of assets to be held and used is measured by a
comparison  of the  carrying  amount  of an asset  to  future  net  undiscounted
operating cash flows  expected to be generated by the asset.  If such assets are
considered  to be impaired,  the  impairment to be recognized is measured by the
amount by which the carrying  amount of the assets exceeds 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.

Goodwill

     In July 2001, the FASB issued SFAS No. 141, Business Combinations,  and No.
142,  Goodwill  and Other  Intangible  Assets.  SFAS No. 141  requires  that the
purchase method be used for all business  combinations  initiated after June 30,
2001. SFAS No. 142 requires that goodwill and certain intangibles no

                                      F-12
<PAGE>

longer be  amortized,  but instead be  reviewed  for  impairment  on at least an
annual  basis.  Through  December  31, 2001,  goodwill was being  amortized on a
straight-line  basis over forty years. In December 2001, the Company recorded an
impairment loss of $1.8 million related to goodwill at its SportsMed subsidiary.
The amortization of goodwill and certain intangibles ceased upon the adoption of
SFAS No. 142,  which is effective for fiscal years  starting  after December 15,
2001.  The Company  adopted SFAS No. 141 and SFAS No. 142  effective  January 1,
2002.  The  Company  has  goodwill  recorded  which will no longer be  amortized
subsequent to the adoption of SFAS No. 142. The Company initially  completed the
transitional impairment test, in 2002, which did not result in the impairment of
goodwill.  In early 2004, the Company  determined that the  methodology  used to
determine if goodwill was impaired was  incorrect  and that a  reevaluation  was
required.  The Company has  reperformed  the  transitional  impairment  test and
determined  that goodwill was impaired as of January 1, 2002 by $5,134,000.  The
2002  consolidated  financial  statements  have been  restated  to reflect  this
adjustment.  In addition, the Company was not required to reclassify any portion
of goodwill as a result of the adoption of SFAS No. 142.

     The  adoption  of SFAS No. 142 had the  following  effect on the  Company's
reported net income (loss)  attributable to common  shareholders  and net income
(loss)  per share for the  years  ended  December  31,  2001,  2002 and 2003 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>

                                                                    Years Ended
                                                                    December 31,
                                                                    ------------
                                                         2001           2002          2003
                                                         ----           ----          ----
                                                                     (Restated)
<S>                                                  <C>            <C>           <C>
Reported loss attributable to
    common stockholders..........................    $  (40,678)    $  (23,635)   $  (19,774)
Add back: Goodwill amortization, net of tax......           494             --            --
                                                     ----------     ----------    ----------
Adjusted loss attributable to
    common stockholders..........................    $  (40,184)    $  (23,635)   $  (19,774)
                                                     ===========    ===========   ===========

Reported basic and diluted
    loss per share...............................    $    (2.27)    $    (1.31)   $    (1.08)
                                                     ===========    ===========   ===========

Adjusted basic and diluted
    loss per share...............................    $    (2.24)    $    (1.31)   $    (1.08)
                                                     ===========    ===========   ===========
</TABLE>

Income Taxes

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

     In the fourth  quarter of 2001,  the Company  determined,  based on year to
date operating  results and  projections  for the next three years,  that it was
more likely than not that future taxable income will be  insufficient to utilize
its deferred tax assets. As a result of this  determination,  the Company ceased
recording  any  further  deferred  tax  benefit  related to its  taxable  losses
incurred in 2001,  2002 and 2003, and in the fourth quarter of 2001, the Company
recorded a valuation  allowance  of  $19,627,000  to offset its net deferred tax
asset recorded through that date (See Note 12 - Income Taxes).  The Company will
continue  to  evaluate  its  projected  future  taxable   operating  income  and
reconsider its current determination when appropriate.

Earnings per Share

     The Company presents basic and diluted  earnings per share.  Basic earnings
reflects the actual weighted average shares of Common Stock  outstanding  during
the period. Diluted earnings per share

                                      F-13
<PAGE>

includes the effects of all dilutive options,  warrants and other securities and
utilizes the treasury stock method or if converted method as appropriate.

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

     o    December 31, 2003 - 1,754,609 stock options, 10,500 shares of Series B
          mandatorily redeemable convertible Preferred Stock and 5,000 shares of
          Series C convertible Preferred Stock.

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

     o    December 31, 2001 - 1,850,275 stock options.

Stock Based Compensation

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

                                                                    Year ended December 31,
                                                                    -----------------------
                                                            2001             2002             2003
                                                            ----             ----             ----
                                                                           (Restated)
                                                                (in thousands, except per share data)
<S>                                                    <C>               <C>              <C>
   Net loss attributable to common
        stockholders, as reported..................  $    (40,678)     $    (23,635)     $   (19,774)

   Stock-based employee compensation expense
       included in reported net loss...............            --                --               --

   Stock-based employee compensation expense
       determined under fair value based method for
       all awards..................................        (1,540)           (1,239)            (583)
                                                     ------------      ------------     ------------

   Adjusted net loss attributable to common
       stockholders................................   $   (42,218)     $    (24,874)     $   (20,357)
                                                     ============      ============     ============

   Net loss per share as reported basic and
       diluted.....................................   $     (2.27)     $      (1.31)     $     (1.08)
                                                     ============      ============     ============

   Adjusted net loss per share basic and diluted...   $     (2.35)     $      (1.38)     $     (1.11)
                                                     ============      ============     ============
</TABLE>


     The fair value of all option grants for the  Company's  plans are estimated
on the date of grant  using  the  Black-Scholes  option-pricing  model  with the
following  weighted-average  assumptions  used for all  option  grants  in 2001:
dividend yield of 0%; expected  volatility of 119%;  risk-free  interest rate of
4.48% and expected economic life of 6.0 years.  There were no options granted in
2002 and 2003.

                                      F-14
<PAGE>

Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make certain estimates and assumptions. These affect the reporting
of  assets  and  liabilities,  the  disclosure  of  any  contingent  assets  and
liabilities  and the  reported  amounts  of  revenues  and  expenses  during the
reporting periods. Those estimates include the estimated undiscounted cash flows
used to determine any potential  impairment of long-lived assets and a change in
such  undiscounted  cash flows may change the  Company's  conclusion as to their
impairment. Actual results could differ from these estimates.

Fair Value of Financial Instruments

     The carrying amounts related to cash equivalents,  short-term  investments,
accounts receivable,  other current assets and accounts payable approximate fair
value due to the relatively short maturity of such  instruments.  The fair value
of  long-term  debt is estimated  by  discounting  the future cash flows of each
instrument  at  rates  currently  available  to the  Company  for  similar  debt
instruments of comparable maturities or by obtaining the then current fair value
from the  publicly  traded  bond  market.  The fair value of  long-term  debt at
December 31, 2003 was estimated to be $112.7 million.

Redeemable Preferred Stock

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

Segment Reporting

     Management has determined that the Company has one reporting segment.

Impact of Recent Accounting Pronouncements

     In June 2002,  the FASB  issued  Statement  No. 146,  Accounting  for Costs
Associated  with  Exit or  Disposal  Activities.  Statement  No.  146  nullified
Emerging  Issues Task Force  ("EITF")  issue  94-3,  Liability  Recognition  for
Certain  Employee  Termination  Benefits  and  Other  Costs to Exit an  Activity
(including Certain Costs Incurred in a Restructuring).  Under EITF issue 94-3, a
liability for an exit cost was recognized at the date of an entity's  commitment
to an exit plan.  Under  Statement No. 146, the  liabilities  associated with an
exit or disposal activity will be measured at fair value and recognized when the
liability  is incurred  and meets the  definition  of a liability  in the FASB's
conceptual  framework.  This  Statement is effective  prospectively  for exit or
disposal activities initiated after December 31, 2002. The adoption of Statement
No.  146 did  not  have  any  impact  on the  Company's  consolidated  financial
statements.

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

                                      F-15
<PAGE>

     In  November  2002,  the FASB  issued  Interpretation  No. 45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others ("FIN 45"),  which addresses the disclosure
to be made by a guarantor in its interim and annual  financial  statements about
its obligations under guarantees.  The disclosure requirements are effective for
interim and annual  financial  statements  ending after  December 15, 2002.  The
Company does not have any guarantees that require disclosure under FIN 45.

     In November 2002,  the EITF issued EITF 00-21,  Revenue  Arrangements  with
Multiple  Deliverables  ("EITF 00-21").  EITF 00-21 addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating  activities.   Specifically,  EITF  00-21  addresses  how  to
determine whether an arrangement  involving multiple  deliverables contains more
than one unit of accounting. In applying EITF 00-21, separate contracts with the
same entity or related  parties  that are entered  into at or near the same time
are  presumed to have been  negotiated  as a package and should,  therefore,  be
evaluated as a single  arrangement in considering  whether there are one or more
units of  accounting.  That  presumption  may be overcome if there is sufficient
evidence to the contrary.  EITF 00-21 also addresses how consideration should be
measured and allocated to the separate  units of accounting in the  arrangement.
The guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Alternatively, companies may elect
to report the change in accounting as a cumulative-effect adjustment.  Effective
July 1, 2003, the Company adopted EITF 00-21, Revenue Arrangements with Multiple
Deliverables on a prospective  basis. As a result of the adoption of EITF 00-21,
the fair value of any free products or services  bundled with new memberships is
now  separated  and  recognized  as revenue when the product is delivered or the
service  is  performed.  Prior  to the  adoption  of  EITF  00-21,  the  Company
considered  all  payments  as  initiation  fees and no  revenue  was  recognized
separately for the free products or services bundled with new  memberships.  The
impact upon  implementation  of EITF 00-21 was to increase  the  Company's  2003
revenues by $862,000.

     In January 2003, the FASB issued  Interpretation  No. 46,  Consolidation of
Variable  Interest  Entities ("FIN 46"),  which addressed the  consolidation  by
business  enterprises of variable interest  entities,  which have one or both of
the  following  characteristics:  (i)  the  equity  investment  at  risk  is not
sufficient  to permit the entity to finance its  activities  without  additional
financial  support from other parties,  or (ii) the equity investors lack one or
more of the  following  essential  characteristics  of a  controlling  financial
interest:  (a) the  direct  or  indirect  ability  to make  decisions  about the
entity's  activities  through  voting or similar  rights,  (b) the obligation to
absorb  the  expected  losses of the entity if they  occur,  or (c) the right to
receive  the  expected  residual  returns  of the entity if they  occur.  FIN 46
applies  immediately  to variable  interest  entities  created after January 31,
2003,  and to  variable  interest  entities  in which an  enterprise  obtains an
interest  after that date. It applies in the first fiscal year or interim period
beginning  after  December 15, 2003, to variable  interest  entities in which an
enterprise  holds a variable  interest that it acquired before February 1, 2003.
In December 2003, the  interpretation was revised by the FASB when it issued FIN
46R,  which  clarified its scope and also extended the  requirement to apply its
provisions to investments created prior to January 31, 2003 until the end of the
Company's first quarter in 2004. The implementation  extension does not apply to
special purpose entities.  The Company does not expect FIN 46 or FIN 46R to have
an impact on the consolidated financial statements.

     On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative  Instruments and Hedging  Activities ("SFAS 149"). SFAS 149 amends
and  clarifies   accounting  for  derivative   instruments,   including  certain
derivative  instruments embedded in other contracts,  and for hedging activities
under SFAS No. 133. This  Statement is effective  for contracts  entered into or
modified after June 30, 2003, and hedging  relationships  designated  after June
30, 2003. The Company has no derivative  instruments  and is not involved in any
hedging  activities  and  therefore  the  adoption  of SFAS 149 did not have any
impact on the Company's consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments  with  Characteristics  of both Liabilities and Equity ("SFAS 150"),
which  addresses  how an issuer  classifies  and  measures in its  statement  of
financial  position certain financial  instruments with  characteristics of both
liabilities  and  equity.  It  requires  that an  issuer  classify  a  financial
instrument as a liability if it embodies an

                                      F-16
<PAGE>

obligation for the issuer such as a mandatorily redeemable financial instrument.
SFAS 150 is effective for financial  instruments  entered into or modified after
May 31, 2003,  and otherwise  shall be effective  for the first  interim  period
beginning  after June 15,  2003.  The  application  of SFAS 150 did not have any
effect on the Company's  consolidated financial statements and it did not change
the  presentation of any liability or equity items in its  consolidated  balance
sheets.

5. Dispositions

Disposition of Real Estate

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

Disposition of Club

     In January 2002, the Company sold The Sports Club/Las Vegas to another club
operator.  An  impairment  loss of  $3,243,000  was recorded in December 2001 to
reduce the  carrying  value of The Sports  Club/LasVegas  to its fair value less
costs to sell.  A gain of  $30,000,  related to the sale of The Sports  Club/Las
Vegas was recorded in January 2002. The gain was based upon the actual  proceeds
received from the sale of this Club.



                                      F-17
<PAGE>



6. Property and Equipment

     Property and equipment is carried at cost,  less  accumulated  depreciation
and amortization, which is summarized as follows:

<TABLE>
<CAPTION>
                                                                                 At December 31,
                                                                                 ---------------
                                                                              2002              2003
                                                                              ----              ----
                                                                                  (in thousands)
<S>                                                                     <C>               <C>
        Land.......................................................     $    10,621       $    10,621
        Building and leasehold improvements........................         146,814           153,690
        Furniture, fixtures and equipment..........................          40,314            44,018
                                                                        -----------       -----------
                                                                            197,749           208,329
        Less accumulated depreciation and amortization.............          41,119            53,156
                                                                        -----------       -----------
        Net property and equipment.................................     $   156,630       $   155,173
                                                                        ===========       ===========
</TABLE>

     Equipment,  which secures  equipment  financing  loans,  was $8,151,000 and
$8,251,000 at December 31, 2002 and 2003, respectively.

7. Notes Payable and Equipment Financing Loans

     Notes payable and equipment financing loans are summarized as follows:
<TABLE>
<CAPTION>

                                                                                  At December 31,
                                                                                  ---------------
                                                                              2002               2003
                                                                              ----               ----
                                                                                   (in thousands)
<S>                                                                     <C>                <C>
        Senior secured notes (a)...................................     $   100,000        $    100,000
        Equipment financing loans (b)..............................           4,040               1,975
        Mortgage note (c)..........................................              --              19,855
                                                                        -----------        ------------
                                                                            104,040             121,830
        Less current installments..................................           2,158               2,099
                                                                        -----------        ------------
                                                                        $   101,882        $    119,731
                                                                        ===========        ============
</TABLE>

(a) On April 1, 1999, the Company issued in a private  placement  $100.0 million
of 11 3/8% Senior  Secured  Notes due in March 2006 (the  "Senior  Notes")  with
interest due  semi-annually.  In May 1999,  the Senior Notes were  exchanged for
registered  Series B Senior  Secured  Notes (the "Senior  Secured  Notes").  The
Senior Secured Notes are secured by substantially  all of the Company's  assets,
other than  certain  excluded  assets.  In  connection  with the issuance of the
Senior Secured Notes, the Company entered into an indenture dated as of April 1,
1999 (the "Indenture") that includes certain covenants, which as of December 31,
2003,  restrict the Company's ability,  subject to certain  exceptions,  to: (i)
incur additional  indebtedness;  (ii) pay dividends or other  distributions,  or
repurchase capital stock or other equity interests or subordinated indebtedness;
and (iii) make certain  investments.  The  Indenture  also limits the  Company's
ability to: (i) enter into transactions with affiliates, (ii) create liens on or
sell certain assets, and (iii) enter into mergers and consolidations. The Senior
Notes are subject to  redemption  at the option of the  Company,  in whole or in
part, at the redemption  prices  (expressed as percentages of principal  amount)
set forth below, plus accrued and unpaid interest thereon:

              Period                                   Percentage
              ------                                   ----------
              Prior to March 15, 2004..............    105.688%
              Prior to March 15, 2005..............    102.844%
              Thereafter...........................    100.000%




                                      F-18
<PAGE>



     If  the  Company  undergoes  a  "change  in  control",  as  defined  in the
Indenture,  it must give holders of the Senior Secured Notes the  opportunity to
sell their  Senior  Secured  Notes to the Company at 101% of their face  amount,
plus  interest.  At December 31, 2003,  the Company was in  compliance  with the
terms of the  Indenture,  except as noted  below.  At  December  31,  2003,  the
estimated fair value of the Senior Secured Notes was $93.0 million.

     On May 25,  2004,  the  Company  received a letter  from the Trustee of the
Indenture  Agreement  notifying the Company that an "event of default" under the
Indenture  would arise if the Company failed to file its financial  reports with
the Securities and Exchange Commission ("SEC") within thirty (30) days after the
Company's receipt of such notice.  The Company has filed its report with the SEC
within the thirty (30) day period  thereby  curing and  nullifying the Trustee's
notice.

(b) The  equipment  financing  loans are  secured  by  furniture,  fixtures  and
equipment.  The amounts are generally repayable in monthly payments over four or
five years with effective interest rates between 3.5% and 13.3%.

(c) Prior to June 12, 2003, the Company had a $10.0 million credit facility from
a commercial bank. On June 12, 2003, the Company obtained alternative  financing
in the form of a secured  five-year  mortgage  in the  amount of $20.0  million.
Amounts  outstanding  under the previous bank credit facility were repaid with a
portion  of the  proceeds  of the new  loan.  The new  loan  is  evidenced  by a
promissory note that bears interest at a fixed interest rate of 7.25%;  requires
monthly  principal and interest  payments of $144,561;  is secured by the common
stock and all the assets of Irvine Sports Club, Inc., the Company's wholly owned
subsidiary  that owns The Sports Club/LA - Orange  County;  and is guaranteed by
two of the Company's major shareholders.  The note requires The Sports Club/LA -
Orange County to maintain a minimum operating income, as defined, or the Company
will be required to establish a payment reserve account of up to $607,000. As of
December 31, 2003, the Company has maintained the minimum operating income.  The
note may be prepaid at any time without  penalty and requires a final  principal
payment of $18.3 million on July 1, 2008.

     Future  minimum  annual  principal  payments at December 31,  2003,  are as
follows (in thousands):

         2004.............................................    $     2,099
         2005.............................................            444
         2006.............................................        100,372
         2007.............................................            400
         2008.............................................         18,515
                                                              -----------
                                                              $   121,830
                                                              -----------
                                                              -----------

8. Commitments and Contingencies

Lease Commitments

     The Company leases certain  facilities  pursuant to various operating lease
agreements.  Club  facility  leases are generally  long-term  and  noncancelable
triple-net leases (requiring the Company to pay all real estate taxes, insurance
and maintenance expenses).  The Company is also obligated under lease agreements
for seven of its former Spectrum Club locations.  The Company has subleased each
of these properties to the buyer of these Clubs under sublease  agreements which
provide  that all  operating  costs of these  facilities  be  assumed by the new
owners. Future minimum noncancelable operating lease payments as of December 31,
2003 are as follows (in thousands):



                                      F-19
<PAGE>





                                                                        Net
                                                          Sublease     Rental
                                             Commitments  Rentals   Commitments
                                             -----------  -------   -----------
Year ending December 31:
     2004................................. $    30,116  $    5,712 $    24,404
     2005.................................      29,892       5,917      23,975
     2006.................................      29,974       5,917      24,057
     2007.................................      30,004       5,990      24,014
     2008.................................      29,726       5,417      24,309
     Thereafter...........................     266,139      30,314     235,825
                                           -----------  ---------- -----------
          Total minimum lease payments.... $   415,851  $   59,267 $   356,584
                                           ===========  ========== ===========


     Rent expense for facilities, including minimum lease payments recorded on a
straight-line basis over the lease term, aggregated $18,685,000, $23,301,000 and
$23,743,000 for the years ended December 31, 2001, 2002 and 2003, respectively.

Litigation

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

Employment Agreements

     At December 31, 2003,  the Company did not have any  employment  agreements
with any employees.

9. Series B Redeemable Preferred Stock

     On March 18, 2002, the Company  completed a $10.5 million private placement
of a newly  created  series of its  Convertible  Preferred  Stock.  The  Company
received $9.9 million in cash, after issuance costs, and issued 10,500 shares of
Series B Preferred Stock,  $.01 par value ("Series B Preferred"),  at a price of
$1,000 per share. The Company has the option to redeem any outstanding shares of
Series B Preferred at any time and the holders may require the redemption of any
outstanding  shares of Series B Preferred  on or after March 18, 2009 at a price
of $1,000 per share plus accrued but unpaid  dividends.  Dividends accrue at the
annual rate of $90.00 per share. Such dividends are cumulative but do not accrue
interest  and at the  Company's  option,  may be paid  in cash or in  additional
shares of Series B Preferred.  The Series B Preferred  may, at the option of the
holder,  be  converted  into  shares of Common  Stock at the rate of $2.8871 per
share,  as adjusted for the  issuance of Series D Preferred  Stock in March 2004
(resulting  in the issuance of  3,636,867  shares of Common Stock if 100% of the
Series B Preferred is converted at that  price).  The  conversion  price will be
adjusted  downward in the event the Company issues  additional  shares of Common
Stock at a price below $2.8871 per share, subject to certain exceptions; and any
such downward  adjustment is subject to the prior approval of the American Stock
Exchange. In the event the Series B Preferred is redeemed before March 18, 2005,
the holders will receive  warrants to purchase shares of Common Stock at a price
of  $3.00  per  share,  exercisable  before  March  18,  2007.  In the  event of
liquidation,  the Series B Preferred holders are entitled to receive,  prior and
in preference to any  distribution  to common  shareholders  and pari passu with
holders  of the Series C  Preferred  Stock,  an amount  equal to $1,000 for each
share of Series B Preferred then outstanding.

     The initial  carrying  value of the Series B Preferred  was recorded at its
"fair  value"  (sale  price  less costs to issue) on the date of  issuance.  The
carrying value

                                      F-20
<PAGE>

of the Series B Preferred  will be  periodically  adjusted so that the  carrying
value equals the redemption  value on the redemption date. The carrying value of
the Series B Preferred  will also be  periodically  adjusted for any accrued and
unpaid  dividends.  The  Series B  Preferred  carrying  value  consisted  of the
following (in thousands):

Initial fair value, sale price of $10,500
      less costs to issue of $592..........................   $       9,908
 Redemption value accretion................................              71
 Accrued and unpaid dividends accretion....................             748
                                                              -------------
     Total carrying value at December 31, 2002.............          10,727
Redemption value accretion.................................              84
Accrued and unpaid dividends accretion.....................             950
                                                              -------------
     Total carrying value at December 31, 2003.............   $      11,761
                                                              =============




                                      F-21
<PAGE>



10.  Series C Preferred Stock

     On  September  6,  2002,  the  Company  completed  a $5.0  million  private
placement of a newly created series of Convertible  Preferred Stock. The Company
received  $5.0 million in cash and issued  5,000 shares of Series C  Convertible
Preferred Stock, $.01 par value ("Series C Convertible  Preferred"),  at a price
of $1,000 per share. Dividends are earned at an annual rate of $90.00 per share.
Dividends  are  payable  when and as declared  by the Board of  Directors.  Such
dividends  are  cumulative,  but do not  accrue  interest  and at the  Company's
option,  may be paid in  cash or  additional  shares  of  Series  C  Convertible
Preferred.  Dividends  are  paid  pari  passu  with  dividends  on the  Series B
Preferred  Stock. In addition,  upon conversion any earned and unpaid  dividends
would  become  payable.  Accordingly,  the  Company has  recorded  such Series C
divdidends. The Series C Convertible Preferred may, at the option of the holder,
be converted  into shares of Common  Stock at the rate of $2.8871 per share,  as
adjusted for the issuance of Series D Preferred  Stock in March 2004  (resulting
in the  issuance  of  1,731,842  shares of Common  Stock if 100% of the Series C
Convertible  Preferred is converted at that price). Upon conversion,  any earned
and unpaid dividends would become payable in cash or additional shares of Series
C Convertible  Preferred,  at the Company's option. The conversion price will be
adjusted  downward in the event the Company issues  additional  shares of Common
Stock at a price below $2.8871 per share, subject to certain exceptions; and any
such downward  adjustment is subject to the prior approval of the American Stock
Exchange.  At the option of the Company the Series C Convertible Preferred Stock
may be  redeemed  in whole or in part by paying  in cash the sum of  $1,000  per
share  plus  any  earned  and  unpaid  dividends.  In the  event  the  Series  C
Convertible  Preferred is redeemed  before  September 6, 2005,  the holders will
receive  warrants  to  purchase  shares of Common  Stock at a price of $3.00 per
share,  exercisable  before September 6, 2007. In the event of liquidation,  the
Series C  Convertible  Preferred  holders are entitled to receive,  prior and in
preference  to any  distribution  to common  shareholders,  and pari  passu with
holders of the Series B  Preferred,  an amount equal to $1,000 for each share of
Series  C  Convertible  Preferred  then  outstanding,  plus  earned  and  unpaid
dividends.

     The carrying  value of the Series C Convertible  Preferred is  periodically
adjusted  for any  accrued  and  unpaid  dividends.  The  Series  C  Convertible
Preferred  dividends are accrued because they must be paid concurrently with any
redemption  of the  Series B  Preferred.  At  December  31,  2003,  the Series C
Convertible Preferred carrying value consisted of the following (in thousands):

          Initial fair value............................. $          5,000
          Accrued and unpaid dividend accretion..........              590
                                                              ------------
          Total carrying value at December 31, 2003...... $          5,590
                                                              ============

11. Loss per Share

     Basic and diluted loss per share  computations for the years 2001, 2002 and
2003 are as follows:
<TABLE>
<CAPTION>

                                                                         Years ended December 31,
                                                                         ------------------------
                                                                   2001            2002            2003
                                                                   ----            ----            ----
                                                                                (Restated)
                                                                  (in thousands, except per share data)

<S>                                                           <C>             <C>              <C>
   Net loss attributabel to common shareholders used for
   basic and diluted loss per share......................     $   (40,678)    $   (23,635)     $   (19,774)
                                                              ===========     ===========      ===========

   Weighted average shares outstanding:
     Basic and diluted....................................         17,939          18,080           18,316
                                                              ===========     ===========      ===========

   Loss per share:
     Basic and diluted....................................    $     (2.27)    $     (1.31)     $     (1.08)
                                                              ===========     ===========      ===========

</TABLE>




                                      F-22
<PAGE>



12. Income Taxes

     The provision for income taxes consists of the following:
<TABLE>
<CAPTION>

                                                                         Years ended December 31,
                                                                         ------------------------
                                                                   2001            2002             2003
                                                                   ----            ----             ----
                                                                              (in thousands)
<S>                                                           <C>             <C>              <C>
    Current:
          Federal.........................................    $        89    $       (930)  $           --
          State...........................................            757             620              485
                                                              -----------     -----------      -----------
                                                                      846            (310)             485
    Deferred:
          Federal.........................................          3,486              --               --
          State...........................................          1,038              --               --
                                                              -----------     -----------      -----------
                                                                    4,524              --               --
                                                              -----------     -----------      -----------
    Income tax provision (benefit)........................    $     5,370     $      (310)     $       485
                                                              ===========     ============     ===========
</TABLE>


     Income tax expense (benefit) as computed differs from the statutory rate as
applied to pre-tax net income (loss) as follows:
<TABLE>
<CAPTION>

                                                                          Years ended December 31,
                                                                          ------------------------
                                                                   2001            2002             2003
                                                                   ----            ----             ----
                                                                               (in thousands)

<S>                                                           <C>             <C>              <C>
    Computed "expected" tax expense (benefit).............    $   (12,005)    $    (7,839)     $   (6,070)
    Increase (decrease) in tax resulting from:
        State taxes - net of federal benefit..............         (2,091)         (1,102)         (1,009)
        Meals and entertainment...........................             63              75              79
        Change in valuation allowance.....................         19,627           9,048           6,592
        Other.............................................           (224)           (492)            893
                                                              ------------    ------------     ----------
    Income tax provision (benefit)........................    $     5,370     $      (310)     $      485
                                                              ===========     ============     ==========
</TABLE>

     The effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities are presented as follows:
<TABLE>
<CAPTION>


                                                                               At December 31,
                                                                               ---------------
                                                                          2002                     2003
                                                                          ----                     ----
                                                                                (in thousands)
<S>                                                            <C>                     <C>
Deferred tax assets:
     Deferred revenues....................................     $         1,368         $          1,232
     Operating loss carry forwards........................              24,198                   31,723
     Accrued vacation.....................................                 257                      294
     Bad debt.............................................                 193                      186
     Depreciation and amortization........................                 507                      263
     State taxes..........................................                 315                      165
     Other................................................               1,837                    1,404
                                                               ---------------         ----------------
       Gross deferred tax assets..........................              28,675                   35,267
Valuation allowance.......................................             (28,675)                 (35,267)
                                                               ----------------        -----------------
Net deferred tax asset....................................     $            --         $             --
                                                               ===============         ================
</TABLE>


     The Company  has  determined,  based on  historical  operating  results and
projections for the next three years that it is more likely than not that future
taxable  income will be  insufficient  to utilize its deferred tax assets.  As a
result of this  determination,  the Company  ceased  recording  any deferred tax
benefit  related to its taxable  losses and  recorded  valuation  allowances  of
$19,627,000,  $9,048,000 and $6,592,000 in 2001, 2002 and 2003,  respectively to
offset the Company's net deferred tax assets.

                                      F-23
<PAGE>


     As of December  31, 2003,  the Company had federal and state net  operating
loss  carryforwards  of  $70,094,000  and  $84,147,000  respectively,  beginning
expiration in 2020 and 2005, respectively.

13. Non-Recurring Items

     The Company  recorded the following as  non-recurring  items for 2001, 2002
and 2003:

<TABLE>
<CAPTION>

                                                                             Years Ended December 31,
                                                                             ------------------------
                                                                        2001              2002          2003
                                                                        ----              ----          ----
                                                                                  (in thousands)
<S>                                                                 <C>            <C>            <C>
Gain on sale of Houston real estate (See Note 5)................    $     --       $        97    $       --
Gain on sale of The Sports Club/Las Vegas (See Note 5)..........          --                30            --
Interest expense reversal on litigation settlement (a)..........         397                --            --
                                                                    --------       -----------    ----------
                                                                    $    397       $       127    $       --
                                                                    ========       ===========    ==========
</TABLE>

     (a) The Company  recorded a non-recurring  gain of $397,000 during the year
ended  December 31, 2001. The  non-recurring  gain in 2001 was the result of the
reversal of accrued interest expense related to the settlement of litigation. As
part of the  settlement  the Company  was no longer  required to pay the accrued
interest due on the note in question.

14. Stock Plans

Stock Incentive Plans

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

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



                                      F-24
<PAGE>



     A summary of the status of the Company's  stock option plans as of December
31, 2001,  2002 and 2003 and changes  during the years then ended are  presented
below:

<TABLE>
<CAPTION>

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

Outstanding at January 1, 2002.......................................     1,850,275              5.37
Granted..............................................................            --                --
Canceled.............................................................       (64,942)             5.20
Exercised............................................................            --                --
                                                                         ----------
Outstanding at December 31, 2002.....................................     1,785,333              5.38
                                                                         ==========
Options exercisable at December 31, 2002.............................     1,296,448              5.61
                                                                         ==========

Outstanding at January 1, 2003.......................................     1,785,333              5.38
Granted..............................................................            --                --
Canceled.............................................................       (30,724)             8.13
Exercised............................................................            --                --
                                                                         ----------

Outstanding at December 31, 2003.....................................     1,754,609              5.33
                                                                         ==========
Options exercisable at December 31, 2003.............................     1,621,965              5.52
                                                                         ==========
</TABLE>

     The following table summarizes  information about stock options outstanding
at December 31, 2003:

                                                  Weighted
                                                   Average
                                                  Remaining
              Exercise           Number          Contractual          Options
               Prices         Outstanding       Life (Years)        Exercisable
               ------         -----------       ------------        -----------
              $2.5625            24,333             2.41                24,334
               2.6875            70,000             2.11                70,000
               2.7500            26,000             2.84                26,000
               3.0100           282,932             7.39               188,621
               3.3110           115,000             2.39                76,667
               3.9375           210,000             5.10               210,000
               4.2500           219,344             6.85               219,343
               4.3750            60,000             3.22                60,000
               5.2500            42,000             1.24                42,000
               5.3750            32,000             3.50                32,000
               8.0000           211,000             4.29               211,000
               8.0000           450,000             6.11               450,000
               8.3750            12,000             3.85                12,000
                          -------------                          -------------
                              1,754,609                              1,621,965
                          =============                          =============




                                      F-25
<PAGE>



     Stock  appreciation  rights  ("SAR's") may be granted in  combination  with
options or on a stand-alone  basis. SAR's permit the holder to receive shares of
stock,  cash or a  combination  of shares and cash based upon by the  difference
between the option  price and the fair value of the Common  Stock on the date of
exercise.  Upon  exercise of a SAR granted in  combination  with an option,  the
related option is canceled. At December 31, 2003, no SAR's had been granted.

     Rights to  purchase  shares of Common  Stock to be offered  for direct sale
under the Plan  must be at a  purchase  price  equal to not less than 85% of the
fair value of the shares on the day preceding the date of grant. Purchase rights
are  generally  exercisable  for a period of thirty days  following  the date of
grant. At December 31, 2003, no purchase rights had been granted.

1994 Stock Compensation Plan

     In July 1994, the Company instituted its 1994 Stock Compensation Plan (that
was  amended by the  Company's  shareholders  in July  1999) for the  purpose of
compensating  outside  directors by issuing them shares of the Company's  Common
Stock as part of their  directors'  fees. A total of 50,000 shares were reserved
for issuance pursuant to this plan and a total of 50,000 shares have been issued
to outside  directors under the plan.  During the years ended December 31, 2001,
2002 and 2003, the Company issued 6,000,  8,000 and 6,000 shares of Common Stock
as director  compensation for aggregate  consideration  of $16,000,  $15,000 and
$12,000, respectively.

15. Related Party Transactions

     Millennium Partners LLC (collectively with its affiliate "Millennium") is a
significant  shareholder of the Company and has jointly developed Clubs with the
Company.  A representative of Millennium is on the Company's Board of Directors.
Millennium is a partner in the Reebok Sports Club/NY  partnership as well as the
landlord of the  building  in which the Reebok  Sports  Club/NY is located.  The
Reebok Sports  Club/NY pays rent to Millennium in the amount of $2.0 million per
year  and  the  partnership  agreement  provides  for a  first  priority  annual
distribution  of $3.0 million to Millennium.  The Company is entitled to certain
additional priority distributions and 60% of the remaining cash flow. Millennium
is entitled to 20% of such remaining cash flows.

     The Company  pays rent to  Millennium  for The Sports  Club/LA - Washington
D.C.,  The Sports Club/LA - Boston and The Sports Club/LA - San Francisco and in
2001,  2002 and 2003 a total of $4.8  million,  $9.5  million and $9.5  million,
respectively,  was paid to  Millennium  for rent on these three Clubs.  All such
payments are reflected as rent expense in the Company's consolidated  statements
of operations. In addition, after the Company receives a management fee equal to
6% of all revenues,  an amount equal to its capital investment in the Boston and
Washington  D.C. Clubs and a 11% annual return on the capital  investment and an
amount equal to its operating  investment in the Club and a 10% annual return on
the operating investment,  Millennium is entitled to receive a percentage of all
additional cash flows from each Club as additional rent. Millennium's percentage
of the excess cash flow, as defined,  is 25% for the Washington and Boston Clubs
and 60% for the San Francisco Club.  Millennium has not received any payments to
date under these provisions.

     On November 24, 2003, the Company opened The Sports Club/LA - Miami as part
of the exclusive new Four Seasons Hotel and Tower in Miami, Florida. The Company
operates this 40,000 square foot Club  pursuant to a management  agreement  with
Millennium,  the developer of the project.  The Company  receives a fee of 6% of
gross  revenues and a  participation  in the Club's net cash flow.  For the year
ended December 31, 2003, management fees of $131,000 were earned by the Company.
The Company was also reimbursed  $2,383,000 for costs it incurred related to the
operation of The Sports Club/LA - Miami.

     The Company has a 50.1%  interest in the  partnership  that owns The Sports
Club/LA  - Los  Angeles,  and  the  Company's  Chairman  beneficially  owns  the
remaining  49.9%.  The Company  includes The Sports Club/LA - Los Angeles in its
consolidated  financial statements.  The partnership agreement provides that, on
an annual basis, the partners will share in the first $300,000 of the Club's net
cash flow in

                                      F-26
<PAGE>

proportion to their percentage  interests.  The next $35.0 million of annual net
cash flow will be distributed to the Company. All distributions of net cash flow
thereafter,  if any,  will  be  made to the  partners  in  proportion  to  their
percentage  interests.  The  Company  has the  option  to redeem  the  preferred
partnership  interest in the  partnership  held by the Company's  Chairman.  The
option  expires as of January 31, 2006.  The preferred  partnership  interest is
carried at its  redemption  amount,  which is $600,000 at December  31, 2003 and
2002  and  has  been  classified  as  minority   interest  on  the  accompanying
consolidated balance sheets.

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

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

     On March 18, 2002, the Company sold an aggregate of 10,500 shares of Series
B  Convertible  Preferred  Stock to Kayne  Anderson  Capital  Advisors  and four
affiliates thereof for aggregate offering proceeds of $10.5 million.  The shares
of Series B Preferred may, at the option of the holder, be converted into shares
of the Company's Common Stock at the current rate of $2.8871 per share;  entitle
each holder to one vote for each share of Common  Stock into which such Series B
Preferred  could then be converted;  and provide for the payment of dividends at
an annual  rate of $90.00 per share.  Dividends  are  cumulative,  do not accrue
interest and, at the Company's  discretion,  may be paid in additional shares of
Series B  Preferred.  As part of the sale of the  Series  B  Preferred  to Kayne
Anderson,  the Company  agreed that for so long as Kayne  Anderson  beneficially
owns at  least  12% of the  Company's  equity  securities  (on an  "as-converted
basis")  Kayne  Anderson  will have the  right to  designate  one  member to the
Company's Board of Directors.  Mr. Charles A. Norris is currently serving on the
Board as the nominee of Kayne Anderson.

     On  September  6, 2002,  the Company  sold an  aggregate of 5,000 shares of
Series  C  Convertible   Preferred   Stock  to  three  of  the  Company's  major
shareholders,  D.  Michael  Talla,  Rex  Licklider  and MDP Ventures II, LLC, an
affiliate of Millennium,  for aggregate  offering proceeds of $5.0 million.  The
shares of Series C Preferred may, at the option of the holder, be converted into
shares of the  Company's  Common Stock at the current rate of $2.8871 per share;
entitle  each holder to one vote for each share of Common  Stock into which such
Series C  Preferred  could then be  converted;  and  provide  for the payment of
dividends at an annual rate of $90.00 per share.  Dividends are  cumulative,  do
not accrue interest and, at the Company's discretion,  may be paid in additional
shares of Series C Preferred.

     In  consideration  of  executing  a guaranty  in favor of  Comerica-Bank  -
California  (the "Bank") in connection  with the Bank's renewal of the Company's
credit  facility (the "Credit  Facility"),  Messrs.  Talla and Licklider and MDP
Ventures II, LLC, an affiliate of Millennium,  entered into  agreements with the
Company as of July 3, 2001, pursuant to which the Company was obligated to pay a
1% annual commitment fee to each of the guarantors. In addition to the committee
fee, the Company was obligated to pay to each  guarantor a usage fee equal to 2%
per annum of such  guarantor's  pro rata portion of any amounts  advanced to the
Company by the Bank. At the Company's  discretion all earned commitment fees and
usage fees under the agreements  were paid in restricted  shares of Common Stock
with each guarantor  receiving in the aggregate 86,392 shares. In June 2003, the
Company  replaced the Credit  Facility and, as of February 15, 2004, all payment
obligations due the guarantors have been met.

     Upon  termination  of the Credit  Facility,  on June 12, 2003,  the Company
entered into a new promissory note with another financial  institution.  The new
note is for $20.0 million (the "Loan") and is  guaranteed  by Messrs.  Talla and
Licklider. Messrs. Talla and Licklider entered into agreements with the

                                      F-27
<PAGE>

Company as of December 1, 2003,  pursuant to which the Company is  obligated  to
pay a quarterly  fee to each  guarantor  equal to 3% per annum of their pro rata
portion  of the  average  outstanding  principal  balance  of the  Loan.  At the
Company's  discretion,  such  fees  may be  paid  in  Common  Stock,  cash  or a
combination  thereof.  The third  quarter  2003 fee was paid in stock  with each
guarantor  receiving  28,509  shares.  The Company  has also  elected to pay the
fourth  quarter 2003 fee in stock and has  determined  that each  guarantor will
receive 40,731 shares.

16. Concentration of Credit Risk

     The Company  markets its  products  principally  to  customers  in Southern
California, New York City, Washington D.C., Boston and San Francisco. Management
performs regular evaluations  concerning the ability of its customers to satisfy
their obligations and records a provision for doubtful accounts based upon these
evaluations.   The  Company's  credit  losses  for  the  periods  presented  are
insignificant  and  have  not  exceeded  managements'  estimates  (see  Note 4 -
allowance for doubtful accounts).

17. Subsequent Events

     On March 12, 2004, the Company  completed a $6.5 million private  placement
of a newly created series of Convertible  Preferred  Stock. The Company received
$6.1 million in cash,  net of costs,  and issued 65,000 shares of $.01 par value
Series D Convertible  Preferred Stock ("Series D Convertible  Preferred"),  at a
price of $100 per share. The Series D Convertible  Preferred Stock was purchased
by three of the Company's  major  shareholders  consisting of Rex Licklider (the
Company's  Chief  Executive  Officer),  Millennium  and Kayne  Anderson  Capital
Advisors. Dividends are earned at an annual rate of $9.00 per share and shall be
paid prior and in preference to any dividends  earned on the Series B Preferred,
Series C Preferred,  Common Stock or any other class of equity  security that is
junior to the Series D Convertible Preferred.  Dividends are payable when and as
declared by the Board of Directors.  Such dividends are  cumulative,  but do not
accrue interest and at the Company's  option,  may be paid in cash or additional
shares of Series D Convertible  Preferred.  The Series D  Convertible  Preferred
may, at the option of the holder,  be  converted  into shares of Common Stock at
the rate of $2.00 per share  (resulting  in the issuance of 3,250,000  shares of
Common Stock if 100% of the Series D Convertible  Preferred is converted).  Each
share of Series D Convertible  Preferred shall  automatically  be converted into
shares of Common  Stock upon the  consummation  of a qualified  secondary  stock
offering of at least $50.0  million or if the closing  price of the Common Stock
for a period of thirty  consecutive  trading days exceeds  $4.00 per share until
March 15, 2005, or $6.00 per share  thereafter,  and at least 150,000  shares of
Common Stock have been traded  during such  applicable  thirty day period.  Upon
conversion, any earned and unpaid dividends would become payable. The conversion
price   will  be   adjusted   equitably   in  the  event  of  any   combination,
recapitalization, merger, reclassification or similar transaction or issuance of
Common Stock (or any  instrument  convertible  into or  exercisable  into Common
Stock)  at a price  per  share  less  than the  Series D  Convertible  Preferred
conversion  price then in effect.  Commencing  on the sixth  anniversary  of the
issuance  of the Series D  Convertible  Preferred  the Company at its option may
redeem the Series D Convertible  Preferred in whole or in part by paying in cash
the sum of $100 per share plus any earned and unpaid dividends.  In the event of
liquidation, the Series D Convertible Preferred holders are entitled to receive,
prior and in preference to any  distribution to common  shareholders and holders
of the Series B Preferred and Series C Convertible Preferred, an amount equal to
$100 for each share of Series D Convertible Preferred then outstanding, plus any
earned and unpaid dividends.  The holders of the Series D Convertible  Preferred
are afforded  protective  rights that among other things  restrict the Company's
ability to incur debt or lease  obligations,  make  investments or acquisitions,
sell a Club leased from  Millennium,  issue any new class of equity  securities,
repurchase  or redeem any equity  securities,  hire or fire the Chief  Executive
Officer,  enter  into any new line of  business  or change the  primary  line of
business and issue options under the Company's  stock option plans. In addition,
Millennium  is entitled to designate two directors (at least one of whom must be
independent)  and the other two  holders  are each  entitled  to  designate  one
director, to serve on the Company's Board of Directors.


                                      F-28
<PAGE>



18. Quarterly Summary of Information (Unaudited)

     Revenues and operating  expenses for the first,  second, and third quarters
of 2003 have been  restated  to record  the  impact of  reimbursed  costs  which
previously  had not been  shown on the  consolidated  statement  of  operations.
Reimbursed costs relate to The Sports Club/LA - Miami, which is a non-owned Club
that the Company  manages for its owner.  The Company  receives a management fee
for  managing  the Club and is  reimbursed  for costs that are  advanced  on the
owner's behalf. Reimbursed costs are recorded as both revenue and expense in the
consolidated  financial  statements.  The  effect  of  reimbursed  costs  on the
Company's  loss  from  operations,   net  loss,  loss   attributable  to  common
stockholders  and net  loss  per  share  (basic  and  diluted)  is  zero,  since
reimbursed  costs are reported both as revenue and as operating  expenses in the
consolidated  financial statements in equal amounts.  Reimbursed costs represent
both pre-opening expenses and normal operating expenses of the Club.  Reimbursed
costs by quarter for the first,  second,  third and fourth quarters of 2003 were
$258,000, $448,000, $327,000 and $1,350,000, respectively.
<TABLE>
<CAPTION>

                                                                               2003
                                                  ---------------------------------------------------------------
                                                    March 31       June 30      September 30     December 31
                                                    --------       -------      ------------     -----------
                                                             (in thousands, except per share amounts)
<S>                                               <C>           <C>             <C>              <C>
Revenue:
   As reported...............................     $    32,403   $     32,181    $     31,727     $     36,027
                                                  ===========   ============    ============     ============
   As restated...............................     $    32,661   $     32,629    $     32,054     $     36,027
                                                  ===========   ============    ============     ============

Operating expenses:
   As reported...............................     $    32,788   $     33,193    $     33,399     $     36,947
                                                  ===========   ============    ============     ============
   As restated...............................     $    33,046   $     33,641    $     33,726     $     36,947
                                                  ===========   ============    ============     ============

Net loss attributable to common stockholders:
   As reported...............................     $   (4,243)   $    (4,822)    $    (5,618)     $    (5,091)
                                                  ===========   ============    ============     ============
   As restated...............................     $   (4,243)   $    (4,822)    $    (5,618)     $    (5,091)
                                                  ===========   ============    ============     ============

Net loss per share basic and diluted:
   As reported...............................     $    (0.23)   $     (0.26)    $     (0.31)     $     (0.28)
                                                  ===========   ============    ============     ============
   As restated...............................     $    (0.23)   $     (0.26)    $     (0.31)     $     (0.28)
                                                  ===========   ============    ============     ============
</TABLE>

     The following  unaudited  condensed  quarterly  financial data for the four
quarters ended December 31, 2002 have been restated as described in Note 2:
<TABLE>
<CAPTION>

                                                                               2002
                                                  ---------------------------------------------------------------
                                                    March 31       June 30       September 30      December 31
                                                    --------       -------       ------------      -----------
                                                             (in thousands, except per share amounts)
<S>                                               <C>           <C>             <C>              <C>
Revenues:
     As reported.............................     $     29,968    $    29,946   $      30,195    $      30,744
                                                  ============  =============   =============    =============
     As restated ............................     $     29,968    $    29,946   $      30,195    $      30,744
                                                  ============  =============   =============    =============

Net loss attributable to common stockholders:
     As reported.............................     $    (4,312)  $     (5,239)   $     (3,882)    $     (5,068)
                                                  ============  =============   =============    =============
     As restated.............................     $    (9,446)  $     (5,239)   $     (3,882)    $     (5,068)
                                                  ============  =============   =============    =============



                                      F-29
<PAGE>





Net loss per share basic and diluted:
      As reported............................     $     (0.24)  $      (0.29)   $      (0.21)    $      (0.29)
                                                  ============  =============   =============    =============
      As restated............................     $     (0.52)  $      (0.29)   $      (0.21)    $      (0.29)
                                                  ============  =============   =============    =============
</TABLE>

19. Employee Benefit Plan

     The Company maintains a 401(k) defined  contribution plan and is subject to
the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").
The Plan  provides  for the Company to make a  discretionary  employer  matching
contribution  currently  equal  to 33% of the  first  8% of  each  participating
employees'  wages.  The employer  matching  contribution  can be made in cash or
Company stock,  at the Company's  discretion.  Employer  matching  contributions
totaling  $225,667,  $233,995  and  $256,066  were made for the Plan years ended
December 31, 2001, 2002 and 2003, respectively.  The employer contribution vests
pro-rata over four years.  In order to participate  in the Plan,  employees must
have been  employed by the Company for at least one year and must have worked at
least 1,000 hours during that one year  period.  In order to receive an employer
matching  contribution  the  participant  must be  employed  by the  Company  at
December 31st and must have worked a minimum of 1,000 hours for each  applicable
Plan year.



                                      F-30
<PAGE>



                          THE SPORTS CLUB COMPANY, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                    Three-year period ended December 31, 2003


<TABLE>
<CAPTION>

                                                Balance at
                                               beginning of                                         Balance at end
Description                                       period           Additions        Deletions          of period
------------------------------------------     --------------    --------------    -------------    ----------------
<S>                                            <C>               <C>               <C>               <C>
Year ended December 31, 2001:
     Allowance for doubtful accounts           $   671,000       $   782,000       $ 1,135,000       $   318,000
                                               ===========       ===========       ===========       ===========

Year ended December 31, 2002:
     Allowance for doubtful accounts           $   318,000       $   798,000       $   582,000       $   534,000
                                               ===========       ===========       ===========       ===========

Year ended December 31, 2003:
     Allowance for doubtful accounts           $   534,000       $   684,000       $   701,000       $   517,000
                                               ===========       ===========       ===========       ===========

</TABLE>




                                      F-31
<PAGE>





                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Our executive officers and directors and their ages as of June 15, 2004 are
as follows:

Name                     Age Position
----                    ---- ---------
D. Michael Talla.........57  Chairman of the Board
Rex A. Licklider.........61  Vice Chairman of the Board and
                             Chief Executive Officer
Philip J. Swain..........46  President and Chief Operating Officer
Nanette Pattee Francini..55  Executive Vice President
Timothy M. O'Brien.......52  Chief Financial Officer and Assistant Secretary
Mark S. Spino............49  Senior Vice President of Development
Andrew L. Turner.........57  Director
George J. Vasilakos......66  Director
Charles A. Norris........58  Director
Christopher M. Jeffries..54  Director
Charles J. Ferraro.......60  Director

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

     D. Michael Talla began developing  sports and fitness clubs in 1977 when he
co-founded our predecessor  non-public company. He has served as Chairman of the
Board since the inception of our public  company in 1994,  and served until July
1999 as our Chief  Executive  Officer.  From February 2000 until March 2004, Mr.
Talla held the position of Co-Chief Executive Officer with Mr. Licklider.  Since
1978,  Mr.  Talla  has  owned  Talla  Development  Company  and  West  Hollywood
Development  Company,  both real estate  holding  companies  with  properties in
California  and Nevada.  He has served on the Board of  Trustees  for the Curtis
School  in  Brentwood,  California;  West  L.A.  Little  League;  For Kids  Only
Foundation; American Youth Soccer Association and Los Angeles Youth Programs.

     Rex A. Licklider has served as Vice Chairman of the Board since 1994 and as
Chief  Executive  Officer  since March  2004,  having  served with Mr.  Talla as
Co-Chief Executive Officer from February 2000. Previously,  Mr. Licklider served
as a consultant  to us for  strategic  and  financial  planning.  He founded Com
Systems, Inc., a publicly traded long-distance  telecommunications  company, and
at various times  between 1975 and April 1992 served as its Chairman,  President
and Chief Executive Officer. Since January 1993, Mr. Licklider has been a member
of the Pentium Group, an entity  investing,  and often taking a management role,
in early  stage  and turn  around/growth  businesses.  He is a  director  of The
Learning Network,  Inc., and Deckers Outdoor Corporation.  He also serves on the
Board  of  Directors  of The  Children's  Bureau  of  Southern  California,  The
Achievable Foundation and For Kids Only Foundation.

     Philip J. Swain was  appointed  President  and Chief  Operating  Officer in
April 2003,  having been our Senior Vice President of Operations  since February
2000.  Mr. Swain  served as Vice  President  of  Operations  from 1994 until his
promotion in 2000.

     Nanette Pattee Francini began  developing  sports and fitness clubs in 1977
when she co-founded our predecessor  non-public  company.  She has served as our
Executive   Vice  President  and  has  been   responsible   for  overseeing  all
Branding/Marketing as well as new concept development since the inception of our
public company in 1994. Ms.  Francini served on the Board of Directors from 1994
until April 2004.  She founded and is Chairman of the Board of  Directors of For
Kids Only Foundation.  In 2003, Ms. Francini received the Golden Star Award from
Big Brothers Big Sisters,  and in 2004 she accepted the Visionary Award bestowed
by the City of Beverly Hills.





                                       24
<PAGE>




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

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

     Andrew L.  Turner has been a director  since  1994.  Mr.  Turner  currently
serves as Chairman of the Board for EnduraCare Therapy Management,  the nation's
largest privately held contract physical therapy company. He serves on the Board
of Directors for Watson Pharmaceuticals,  Inc., a New York Stock Exchange traded
pharmaceutical  manufacturing  company.  From 1989 until August 2000, Mr. Turner
served as Chairman and Chief Executive Officer of Sun Healthcare Group,  Inc., a
New York Stock Exchange traded health care services  provider.  In October 1999,
Sun Healthcare  Group, Inc. filed voluntary  petitions with the U.S.  Bankruptcy
Court to reorganize under Chapter 11 of the Federal Bankruptcy Code.

     George J.  Vasilakos  has been a director  since June 2002.  Since  January
1993, Mr. Vasilakos has been a member of the Pentium Group, an entity investing,
and often  taking a  management  role,  in early  stage  and turn  around/growth
businesses.  He was a  principal  and served as the Chief  Executive  Officer of
Golden Tel,  the largest  payphone  provider in Nevada,  which was sold in 1998.
Currently,  Mr.  Vasilakos  serves as Chief  Executive  Officer for The Learning
Network,  Inc.,  an  e-learning  company,  and  DiTronics,  LLC, a  provider  of
Automated  Teller  Machine  services.  He has served as a member of the Board of
Directors  and  Executive   Committee  for  the  long  distance  industry  trade
association, COMPTEL, and on the advisory committees for the masters programs in
telecommunications at Colorado University and Golden Gate University.

     Charles A. Norris was elected to the Board of Directors in August 2002. Mr.
Norris  currently  serves as Chairman of the Board of Directors of Glacier Water
Services,  Inc. Previously,  Mr. Norris was President of McKesson Water Products
Company  and a  Senior  Vice  President  of  McKesson  Corporation.  He is  past
President and served on the Board of Directors  and  Executive  Committee of the
International  Bottled  Water  Association.  Mr.  Norris is also a member of the
Board of Directors of the AEM/DC Sports,  a mid sized auto after market company.
As part of the sale of the Series D Convertible  Preferred  Stock in March 2004,
we agreed that Kayne  Anderson,  one of the three  principal  purchasers  of the
Series D would be entitled to  designate  one  director to serve on our Board of
Directors. Mr. Norris is currently serving as Kayne Anderson's designee pursuant
to this agreement.

     Christopher M. Jeffries  became a member of the Board of Directors in April
2004.  Mr.  Jeffries  has  founded,   owned  and  managed  several   real-estate
development  companies.  He  founded  Millennium  Partners  in 1990 to meet  the
lifestyle demands of affluent urbanites by creating luxury mixed-use  properties
in the New York marketplace.  The Millennium  portfolio now includes projects in
New York,  Boston,  Washington  D.C.,  Miami  and San  Francisco.  Mr.  Jeffries
graduated  from  Columbia  College in 1968 and the  University  of Michigan  Law
School in 1972. As part of the sale of the Series D Convertible  Preferred Stock
in March  2004,  we  agreed  that  Millennium  has the  right to  designate  two
directors (one of whom must be  independent) to serve on our Board of Directors.
Mr.  Jeffries is a principal of  Millennium  and is currently  serving as one of
Millennium's two designees pursuant to this agreement.

     Charles J. Ferraro became a member of the Board of Directors in April 2004.
Mr.  Ferraro has been with the Four  Seasons  Hotels and Resorts  since 1980 and
currently  serves as its Senior Vice  President  of  Operations  with  operating
responsibilities  in  Texas,  California,   Hawaii,  Washington,   Florida,  the
Caribbean, Mexico, Central America and South America. Mr. Ferraro graduated from
Paul Smith's College of Hotel and Restaurant Management.  As part of the sale of
the  Series D  Convertible  Preferred  Stock  in  March  2004,  we  agreed  that
Millennium  has the  right  to  designate  two  directors  (one of whom  must be
independent) to serve on our Board of Directors.  Mr. Ferraro meets the criteria
of  "independent"  as defined by the Securities and Exchange  Commission and the
American  Stock  Exchange and is serving as  Millennium's  independent  designee
pursuant to this agreement.



                                       25
<PAGE>

     The rules of the American Stock Exchange  generally require that a majority
of the directors of a listed company be independent directors,  that nominations
for members of the Board of Directors must be selected or recommended  either by
a  nominating  committee  comprised  solely  of  independent  directors  or by a
majority of independent  directors on the Board,  that the  compensation  of all
officers must be determined or recommended to the Board for determination either
by a compensation  committee comprised of independent directors or by a majority
of the independent  directors on the Board and that the Chief Executive  Officer
may not be present during discussion of his compensation.  However, a company in
which over 50% of the voting power is held by a "group" (a "Controlled Company")
is not required to comply with these general rules.

     Rex A.  Licklider  ("Licklider"),  Millennium  and Kayne  Anderson  Capital
Advisors,  L.P. and its affiliates ("Kayne") own Common Stock and various series
of voting Convertible Preferred Stock, which in the aggregate,  constitute 63.7%
of the voting power of the Company.  In  connection  with their  purchase of the
Series D Convertible  Preferred Stock on March 12, 2004,  Licklider,  Millennium
and Kayne entered into an  Investors'  Rights  Agreement  with us, which affords
each of them  certain  consent  rights  with  respect  to the  operation  of our
business. In addition, the Investors' Rights Agreement affords each of Licklider
and Kayne the right to designate one director and affords  Millennium  the right
to designate two directors, one of whom must be an independent director, in each
case so  long  as  certain  specified  Common  Stock  ownership  thresholds  are
maintained.  As a result of the provisions of the Investors'  Rights  Agreement,
Licklider,  Millennium  and Kayne are a group  that holds over 50% of the voting
power of the  Company  within  the  meaning of the rules of the  American  Stock
Exchange.

     We have  determined  that we are a  Controlled  Company  and as such we are
entitled to take advantage of the exceptions set forth above.  Therefore,  it is
likely  that  nominations  for  members  of  our  Board  as  well  as  officers'
compensation  will be  determined  by the  entire  Board  and not  solely by our
independent directors.

     Both the Securities and Exchange Commission and the American Stock Exchange
require that a public company maintain a permanent  independent audit committee.
The  designation  of a company as a  Controlled  Company  does not  negate  this
responsibility.  The Board has appointed Messrs. Vasilakos, Turner and Norris to
the  Audit  Committee  and has  charged  them  with  the  responsibility  of (i)
reviewing our annual audit and appointing  our  independent  auditors,  and (ii)
reviewing  our internal  controls and financial  management  practices and (iii)
implementing  and maintaining  procedures for the reporting and treatment of any
complaints or concerns  regarding  accounting  matters or otherwise as specified
under the Sarbanes-Oxley Act of 2002.

     The Board has  created two other  permanent  committees:  Compensation  and
Nominating  and  Governance.  The  Compensation  Committee,  composed  of Messrs
Turner,  Vasilakos and Norris (Mr.  Collins also served on this Committee  until
his  resignation  in April 2004),  recommends  compensation  for  key-employees,
oversees the management bonus program and administers our stock incentive plans.
The Nominating and Governance  Committee,  composed of Messrs Norris,  Vasilakos
and Turner,  insures that the Board meets its fiduciary  responsibilities to our
stockholders  and  that  we are in  full  compliance  with  standard  governance
policies and procedures.

     Pending adoption by the stockholders at the next annual meeting,  the Board
of  Directors  on April 8,  2004,  approved  an  amendment  to the our  Restated
Certificate  of  Incorporation  providing for the annual  election of directors.
Previously   the  directors  had  been  divided  into  three  classes  with  the
stockholders  electing  approximately  one-third  of the members of the Board of
Directors at each annual meeting. If approved,  the Amendment would call for the
annual  election of each member of the Board of  Directors,  with each  Director
being elected to serve a one-year term.



                                       26
<PAGE>



     In August of 2002, the Board approved certain cash  compensation to be paid
to non-employee directors. Because of the declared Controlled Company status, in
April 2004 the Board modified the plan so that only  independent  directors were
eligible for cash compensation. This action in effect results in Mr. Jeffries, a
principal of Millennium, not receiving any cash award. Our independent directors
(currently,  Messrs.  Ferraro,  Norris,  Turner and Vasilakos)  will be paid the
following compensation:  (i) an annual directorship retainer of $12,000, (ii) an
annual  committee  chair  retainer  of $4,000,  (iii)  $1,000 for each Board and
committee meeting attended and (iv) an annual option award of 2,000 shares under
our 2001 Incentive  Stock Plan. All directors are entitled to  reimbursement  of
expenses for attending meetings.

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

Section 16(a) Beneficial Ownership Reporting Compliance

     Under Section 16(a) of the  Securities  Exchange Act of 1934 our directors,
executive  officers  and any persons  holding  more than 10% of our Common Stock
(who we refer to as  "Reporting  Persons")  are required to report their initial
ownership and any  subsequent  changes in that  ownership to the  Securities and
Exchange Commission. Such Reporting Persons are also required to furnish us with
copies of all  Section  16(a)  forms  they  file.  Specific  due dates for these
reports have been  established  and we are  required to identify  all  Reporting
Persons who failed to timely file these reports.

     To our  knowledge,  based  solely  on  review  of  copies  of such  reports
furnished to us and written representations that no other reports were required,
during the fiscal  year ended  December  31,  2003,  all the  Reporting  Persons
complied with applicable filing requirements, except:

     D. Michael Talla, a director and executive  officer,  did not timely file a
Form 4 relating to a March 18, 2003 transaction.

     Rex A. Licklider,  a director and executive officer,  did not timely file a
Form 4 relating to an April 8, 2003 transaction.

     Philip  J.  Swain,  an  executive  officer,  did not  timely  file a Form 4
relating to an April 8, 2003 transaction.

     Millennium did not timely file Forms 4 with respect to various transactions
that occurred in 2001 and 2002.

     Each party subsequently filed the required report.



                                       27
<PAGE>



Code of Ethics

     We have  drafted a written  code of ethics  that  applies to our  principal
executive officers,  principal financial officer,  principal  accounting officer
and other persons performing similar functions.  This code of standards fulfills
the requirements  recently imposed by the Securities and Exchange Commission and
covers such topics as conflict of  interest,  confidentiality,  compliance  with
legal  requirements and other business ethics  subjects.  We have also drafted a
Code of Business  Conduct for  members of our Board of  Directors.  This code of
conduct  seeks to guide our Board  members in (i)  recognizing  and dealing with
ethical issues,  (ii) fulfilling their fiduciary and oversight  responsibilities
and (iii) establishing and maintaining mechanisms for reporting by our employees
of  unethical  conduct.  Once  approved,  we intend to post  these  codes on our
website  www.thesportsclubla.com  in  connection  with  our  investor  relations
materials.  We further intend to promptly disclose on our website (i) the nature
of any amendment to these codes and (ii) the nature of any waiver,  including an
implicit waiver, from a provision of our codes that is granted, the name of such
person who is granted the waiver and the date of the waiver.  We presently  rely
on the written policies in our Employee  Handbook,  as well as informal policies
and  procedures,  our  directors'  awareness of their  fiduciary  duties and our
employees'  understanding  of  their  responsibilities  to the  Company  and our
shareholders to fulfill our duties as a public  company.  These policies may not
adequately protect us from all conflict of interest situations; therefore, it is
our  intention  in  addition  to the code of  financial  conduct and the code of
business  conduct to also adopt: (i) corporate  governance  principles that will
establish oversight  responsibilities for the conduct of our business and (ii) a
code of standards that will expand our current Employee  Handbook and define how
all employees and directors will act in areas of professional conduct.

     To  demonstrate  our  commitment  to  operating  fairly and  ethically,  we
currently  require  that  each  employee  acknowledge  receipt  of our  Employee
Handbook,  which sets forth,  among other  things,  our  professional  standards
requiring   proper   business   conduct  and   confidentiality   of  proprietary
information.  We are in the process of finalizing a contract with an independent
outside hotline  provider to implement an anonymous  avenue for the reporting of
employee concerns relating to our financial reporting.

ITEM 11.  EXECUTIVE COMPENSATION

     The table  below  shows,  for the last three  fiscal  years,  the amount of
compensation  earned by the Co-Chief  Executive  Officers and the next four most
highly-compensated  executive  officers (the "Named  Executive  Officers").  The
current   salaries  of  such  executive   officers  are  described  below  under
"Employment Agreements."
<TABLE>
<CAPTION>
                                                                              Long-Term
                                                                            Compensation
                                                                               Shares             All Other
                                           Annual      Compensation          Underlying         Compensation
 Name & Position                Year      Salary($)       Bonus($)         Options Awards          ($)(a)
 ---------------                ----    -------------  --------------    -----------------       -----------
<S>                            <C>        <C>          <C>               <C>                     <C>
D. Michael Talla..........     2003       200,000(b)         --                  --                15,281
  Chairman of the Board        2002       200,000(b)         --                  --                17,814
                               2001       240,000(b)         --               115,000              17,979

Rex A. Licklider..........     2003       200,000            --                  --                11,321
  Chief Executive Officer and  2002       200,000            --                  --                14,184
  Vice Chairman of the Board   2001       240,000            --               115,000              14,613


Philip J. Swain...........     2003       160,000            --                  --                14,885
  President and                2002       160,000          20,000                --                17,385
  Chief Operating Officer      2001       200,000            --                21,733              16,923

Nanette Pattee Francini...     2003       160,000            --                  --                 9,925
  Executive Vice President     2002       160,000          20,000                --                11,906
                               2001       200,000            --                21,733              12,195

Mark S. Spino.............     2003       160,000            --                  --                14,291
  Senior Vice President of     2002       160,000          20,000                --                13,962
  Development                  2001       200,000            --                21,733              17,913

Timothy M. O'Brien........     2003       160,000            --                  --                12,102

                                       28
<PAGE>

  Chief Financial Officer      2002       160,000          20,000                --                15,953
  and Assistant Secretary      2001       200,000            --                21,733              17,913

</TABLE>

----------

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

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

Option Grants, Exercises and Year-End Values

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

Unexercised Stock Options and Fiscal Year-End Option Values

     None of the Named  Executive  Officers  exercised  stock options during the
last fiscal year.  The  following  table  provides  information  with respect to
unexercised stock options outstanding as of December 31, 2003.
<TABLE>
<CAPTION>

                         Number of Shares Underlying      Value of In-the-Money
                        Unexercised Options at Fiscal  Unexercised Options at Fiscal
                                Year-End(a)                   Year-End(b)
                        -----------------------------  -----------------------------
                        Exercisable    Unexercisable  Exercisable    Unexercisable
Name                        (#)             (#)           ($)             ($)
----                    ------------   -------------  ------------   -------------
<S>                       <C>             <C>              <C>              <C>
D. Michael Talla........  326,667         38,333          -0-              -0-
Rex A. Licklider........   76,667         38,333          -0-              -0-
Philip J. Swain.........  212,756          7,244          -0-              -0-
Nanette Pattee Francini.  202,756          7,244          -0-              -0-
Mark S. Spino...........  202,756          7,244          -0-              -0-
Timothy M. O'Brien......  232,756          7,244          -0-              -0-
</TABLE>

----------

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

(b)  The closing  price of our Common  Stock on the American  Stock  Exchange on
     December 31, 2003 was $1.81.  Since all options have been granted at prices
     above $1.81, there are no options considered to be in-the-money.

Employment Agreements

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

    Rex A. Licklider           Chief Executive Officer                  200,000
    Philip J. Swain            President and Chief Operating Officer    180,000
    Nanette Pattee Francini    Executive Vice President                 160,000
    Mark S. Spino              Senior Vice President                    160,000
    Timothy M. O'Brien         Chief Financial Officer                  160,000

     On March 16,  2004,  D. Michael  Talla,  founder and Chairman of the Board,
relinquished  his  position  as  Co-Chief  Executive  Officer.  In light of this
change,  the  Compensation  Committee is reviewing Mr.  Talla's  current  salary
package and is expected to present their recommendations for future compensation
based  solely on services  rendered as Chairman at the next meeting of our Board
of Directors. Until our Board makes this determination,  Mr. Talla will continue
to receive his current annual salary of $200,000.

                                       29
<PAGE>

Compensation of Directors

     Our independent directors receive the following compensation:

     o    Annual retainer fee of $12,000,
     o    Annual retainer fee of $4,000 for each committee chair,
     o    $1,000 for eachBoard and committee meeting attended,
     o    Reimbursement of expenses for attending Board and committee meetings,
     o    Annual  option award of 2,000 shares  under our 2001  Incentive  Stock
          Plan (timing of such grant is at the  discretion of the Board,  and as
          of June 15, 2004 no option awards have been granted).

     Messrs. Turner, Vasilakos,  Norris and Ferraro currently serve on the Board
as independent directors.  Prior to April 2004, compensation for services on the
Board was given to non-employee  directors.  Therefore,  Mr. Licklider  received
amounts due non-employee  directors until his appointment to Co-Chief  Executive
Officer in February 2000; and until his  resignation in June 2002, Mr.  Dennison
T. Veru also received amounts due non-employee directors.  From 2001 through his
resignation  in 2004,  Mr.  Collins,  because  of his  executive  position  with
Millennium, waived all cash compensation. All directors receive reimbursement of
reasonable  out-of-pocket  expenses  incurred in connection with meetings of the
Board.

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

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

                           Year                  Amount
                           ----                  ------
                           2001               $   56,863
                           2002                   68,502
                           2003                  112,675

     Under the Amended and Restated 1994 Stock Compensation Plan an aggregate of
50,000  shares of Common  Stock was  issued to  non-employee  directors  through
December 31, 2003.  There are no more shares  available for issuance  under this
current plan.

Compensation Committee Interlocks and Insider Participation

     The  Compensation  Committee  of the Board  (the  "Committee")  administers
executive  compensation.  Mr.  Turner has been a member of the  Committee  since
September 13, 1994, and became its Chairman on February 27, 1995. Mr.  Vasilakos
was appointed on August 2, 2002 following the  resignation of Dennison Veru. Mr.
Norris was appointed to the Committee on February 25, 2003. Mr. Collins had been
a member of the Committee from 1998 until his resignation in April 2004. None of
these individuals has ever been an officer or employee.



                                       30
<PAGE>


ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table shows the shares of our Common Stock beneficially owned
as of June 15, 2004 by our directors and Named Executive Officers. It also shows
other individuals or entities that beneficially owned more than 5% of our Common
Stock.
<TABLE>
<CAPTION>



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

<S>                                       <C>            <C>               <C>              <C>        <C>            <C>
D. Michael Talla (e)..................    4,629,019      346,365           365,000          8,126      5,348,510      32.78
Nanette Pattee Francini (e)...........      256,107           --           210,000          4,086        470,193      32.78
Mark S. Spino (e).....................      227,969           --           210,000          6,030        443,999      32.78
Philip J. Swain (e)...................      112,164           --           220,000          6,002        338,166      32.78
Voting Trust (e)......................    5,225,259      346,365         1,005,000         24,244      6,660,868      32.78
Timothy O'Brien.......................        3,000           --           240,000          6,242        249,242       1.31
The Licklider Living Trust
  Dated May 2, 1986 ..................    2,055,132    1,192,730           115,000            --       3,362,862      16.74
Andrew L. Turner......................        7,500           --             --               --         176,683      21.53
Charles A. Norris(f)..................        3,500      173,183             --               --         176,683      21.53
George J. Vasilakos...................      327,400           --             --               --         327,400       1.74
Christopher M. Jeffries (g)...........       29,000           --             --               --          29,000      42.28
Charles J. Ferraro....................           --           --             --               --            --          *
All Directors and Executive Officers
  as a Group (11 persons).............    7,650,791    1,712,278         1,360,000         30,486     10,753,555      49.20
Millennium (g)........................    6,243,749    2,942,730             --               --       9,186,479      42.28
Kayne Anderson Capital Advisors, L.P.(f)    797,128    4,136,833             --               --       4,933,961      21.53
</TABLE>

----------

*    Less than 1%

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

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

(c)  Includes shares that can be acquired through stock option exercises through
     August 14, 2004.

(d)  Includes  shares  issued  pursuant  to our  401(k)  Profit  Sharing  Plan's
     discretionary match as of June 15, 2004.

(e)  Named  persons  share  voting  power  pursuant to a voting  agreement  that
     requires each party to vote his or her shares in the manner determined by a
     majority of all holders. The agreement is effective until October 20, 2004,
     or until  terminated by persons holding 66 2/3% of the shares of our Common
     Stock subject to the agreement. Each of the parties to the voting agreement
     effectively  controls  the voting of all shares  held by the parties to the
     agreement, and, under SEC rules, are deemed beneficial owners of the shares
     subject to the agreement.

(f)  Kayne Anderson Capital  Advisors,  L.P. and several of their affiliates are
     owners of our Convertible  Preferred Stock.  Kayne Anderson is deemed to be
     the  beneficial  owner  of  the  shares.  Mr.  Norris  is  also  deemed  to
     beneficially  hold  these  shares  because  of his  affiliation  with Kayne
     Anderson.  Mr.  Norris'  ownership has therefore been reflected (1) next to
     his name so that the table  accurately  reflects the share ownership of our
     officers and directors and (2) in the totals for Kayne Anderson so that the
     Kayne Anderson  total  accurately  reflects their joint  ownership as noted
     below. The address of all such entities is 1800 Avenue of the Stars, Second
     Floor, Los Angeles, California 90067.



                                       31
<PAGE>



     The Preferred Stock carries voting rights and is convertible into shares of
     Common  Stock.  The  following  table  reflects the  ownership of the Kayne
     affiliates as to outstanding  Common Stock currently owned and Common Stock
     into which the preferred shares are convertible:


                               Outstanding
                                  Common      Series B     Series D
                                 Directly   Convertible  Convertible
                   Owner           Held      Preferred    Preferred     Total
                   -----           ----      ---------    ---------     -----
     Kayne Anderson Capital
       Advisors, L.P..........   793,628     3,073,990       --       3,867,618
     Ric Kayne................      --         346,365       --         346,365
     Charles Norris...........     3,500       173,183       --         176,683
     Howard Zelikow...........      --          34,636       --          34,636
     David Shladovsky.........      --           8,659       --           8,659
     Arbco Associates, L.P....      --           --        166,668      166,668
     Kayne Anderson Non-
       Traditional
       Investments, L.P.........    --           --        166,666      166,666
     Kayne Anderson Select
       Investments A, L.P.....      --           --        166,666      166,666
                               ---------   -----------  ----------   ----------
          Total...............   797,128     3,636,833     500,000    4,933,961
                               =========   ===========  ==========   ==========


(g)  Millennium  Entertainment  Partners  and  several of their  affiliates  are
     owners of our Common and our  Preferred  Stock.  Millennium is deemed to be
     the beneficial  owner of the shares.  Mr. Jeffries  because of his position
     with  Millennium  is also deemed to be a beneficial  owner of these shares.
     Mr.  Jeffries'  ownership has therefore been reflected (1) next to his name
     so that the table  accurately  reflects the share ownership of our officers
     and directors,  and (2) in the totals for Millennium so that the Millennium
     total accurately reflects their joint ownership as noted below. The address
     of all such  entities  is c/o  Millennium  Partners  Management  LLC,  1995
     Broadway, New York, New York, 10023.

     The Preferred Stock carries voting rights and is convertible into shares of
     Common Stock.  The following table reflects the ownership of the Millennium
     affiliates as to outstanding  Common Stock currently owned and Common Stock
     into which the preferred shares are convertible:
<TABLE>
<CAPTION>

                                    Outstanding
                                      Common          Series C       Series D
                                     Directly       Convertible    Convertible
               Owner                   Held          Preferred      Preferred          Total
               -----                   ----          ---------      ---------          -----

<S>                                  <C>             <C>           <C>              <C>
     Christopher M. Jeffries...         29,000          --             --               29,000
     Millennium Partners LLC...      2,253,863          --             --            2,253,863
     Millennium Development
       Partners L.P............        978,900          --             --              978,900
     MDP Ventures I LLC........         72,100          --             --               72,100
     MDP Ventures II LLC.......      2,284,886        692,730        2,250,000       5,227,616
     Millennium Entertainment
       Partners L.P............        625,000          --             --              625,000
                                 -------------     ----------     ------------   -------------
                                     6,243,749        692,730        2,250,000       9,186,479
                                 =============     ==========     ============   =============

</TABLE>



                                       32
<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

     In June 1997, we issued to Millennium  2,105,263 shares of our Common Stock
in exchange for $10.0  million.  In December  1997,  we sold  625,000  shares of
Common Stock to  Millennium  for $5.0  million.  We also  granted to  Millennium
certain registration and preemptive rights regarding its shares.

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

     On November 24, 2003,  we opened The Sports  Club/LA - Miami as part of the
exclusive  new Four Seasons Hotel and Tower in Miami,  Florida.  We operate this
40,000 square foot Club pursuant to a management agreement with Millennium,  the
developer  of the project.  We will receive a fee of 6% of gross  revenues and a
participation in the Club's net cash flow.

     Mr. Talla. We have a 50.1% interest in the partnership that owns The Sports
Club/LA - Los Angeles and Mr. Talla  beneficially  owns the remaining 49.9%. The
partnership agreement provides that, on an annual basis, the partners will share
in the  first  $300,000  of the  Club's  net cash  flow in  proportion  to their
percentage  interests.  The next  $35.0  million of annual net cash flow will be
distributed to us. All  distributions of net cash flow thereafter,  if any, will
be made to the partners in proportion to their percentage interests. The Company
has the option to redeem the preferred  partnership  interest in the partnership
held by Mr.  Talla.  The option  expires as of January 31, 2006.  The  preferred
partnership  interest is carried at its redemption amount,  which is $600,000 at
December 31, 2003.

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



                                       33
<PAGE>



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

     Kayne Anderson. On March 18, 2002, we sold an aggregate of 10,500 shares of
Series B Convertible Preferred Stock to Kayne Anderson Capital Advisors and four
affiliates thereof for aggregate offering proceeds of $10.5 million.  The shares
of Series B Preferred may, at the option of the holder, be converted into shares
of our Common  Stock at a rate of $2.8871 per share;  entitle each holder to one
vote for each share of Common  Stock into which such  Series B  Preferred  could
then be converted; and provide for the payment of dividends at an annual rate of
$90.00 per share.  Dividends are cumulative,  do not accrue interest and, at our
discretion, may be paid in additional shares of Series B Preferred.

     Messrs. Talla and Licklider and Millennium. In consideration of executing a
guaranty in favor of  Comerica-Bank - California (the "Bank") in connection with
the Bank's renewal of our $15.0 million credit facility (the "Credit Facility"),
Messrs.  Talla  and  Licklider  and  MDP  Ventures  II,  LLC,  an  affiliate  of
Millennium,  entered  into  agreements  with us as of July 3, 2001,  pursuant to
which we were  obligated to pay an 1% percent  annual  commitment fee to each of
the  guarantors.  In addition to the commitment fee, we were obligated to pay to
each  guarantor a usage fee equal to 2% per annum of such  guarantor's  pro rata
portion of any amounts  advanced to us by the Bank. At our discretion all earned
commitment  fees and usage fees  under the  agreements  were paid in  restricted
shares of Common Stock with each  guarantor  receiving in the  aggregate  86,392
shares.  In June 2003,  we replaced the Credit  Facility and, as of February 15,
2004, all payment obligations due the guarantors have been met.

     Upon termination of the Credit Facility,  on June 12, 2003, we entered into
a new promissory note with another  financial  institution.  The new note is for
$20.0  million (the "Loan") and is guaranteed  by Messrs.  Talla and  Licklider.
Messrs.  Talla and Licklider  entered into  agreements with us as of December 1,
2003,  pursuant  to  which  we are  obligated  to pay a  quarterly  fee to  each
guarantor  equal to 3% per  annum  of their  pro  rata  portion  of the  average
outstanding  principal balance of the Loan. At our discretion,  such fees may be
paid in Common Stock, cash or a combination  thereof. The third quarter 2003 fee
was paid in stock with each guarantor  receiving 28,509 shares. On May 20, 2004,
we paid the fourth  quarter 2003 and the first quarter 2004 fees in Common Stock
and each guarantor  received 80,269 shares.  These  obligations have been funded
out of Treasury Shares.

     On  September  6, 2002,  we sold an  aggregate  of 5,000 shares of Series C
Convertible  Preferred  Stock to three of our  major  shareholders,  D.  Michael
Talla,  Rex Licklider and MDP Ventures II, LLC, an affiliate of Millennium,  for
aggregate  offering  proceeds of $5.0 million.  The shares of Series C Preferred
may, at the option of the holder,  be converted  into shares of our Common Stock
at a rate of $2.8871 per share;  entitle  each holder to one vote for each share
of Common Stock into which such Series C Preferred could then be converted;  and
provide  for the  payment of  dividends  at an annual  rate of $90.00 per share.
Dividends are cumulative, do not accrue interest and, at our discretion,  may be
paid in additional shares of Series C Preferred.



                                       34
<PAGE>



     Mr.  Licklider , Millennium and Kayne Anderson.  On March 12, 2004, we sold
an aggregate of 65,000 shares of Series D Convertible  Preferred  Stock to these
three shareholders for aggregate proceeds of $6.5 million.  The shares of Series
D Preferred  may, at the option of the holders,  be converted into shares of our
Common  Stock at a rate of $2.00 per share;  entitle each holder to one vote for
each share of Common  Stock into which  such  Series D  Preferred  could then be
converted;  and provide for the payment of  dividends at an annual rate of $9.00
per  share.  Dividends  are  cumulative,  do not  accrue  interest  and,  at our
discretion,  may be paid in additional shares of Series D Preferred.  Each share
of Series D Preferred  shall  automatically  be converted  into shares of Common
Stock upon the consummation of a qualified  secondary stock offering of at least
$50.0 million or if the closing price of our Common Stock for a period of thirty
consecutive  trading days exceeds $4.00 per share until March 15, 2005, or $6.00
per share  thereafter,  and at least  150,000  shares of Common  Stock have been
traded  during such  applicable  thirty day  period.  As part of the sale of the
Series D Preferred, we agreed that for so long as certain specified Common Stock
ownership is maintained, Mr. Licklider and Kayne Anderson each have the right to
designate one director and  Millennium has the right to designate two directors,
one of whom must be independent.  Pursuant to this agreement,  Mr.  Licklider is
currently  serving as the  designee of Mr.  Licklider;  Mr.  Norris is currently
serving as the designee of Kayne  Anderson and Messrs.  Jeffries and Ferraro (an
independent board member) are currently serving as Millennium's designees.



                                       35
<PAGE>



                                     PART IV


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     We were  billed  for the  following  services  provided  by KPMG  LLC,  our
principal independent accountants, during 2002 and 2003:

                                                           2002             2003
                                                           ----             ----
       Audit fees(1)...........................   $     129,500    $     161,500
       Audit related fees......................           3,000            3,000
       Tax fees................................              --               --
       All other fees..........................              --               --
                                                  -------------    -------------

       Total...................................   $     132,500    $     164,500
                                                  =============    =============


(1)  Audit fees  include fees for (i) the audits of the  Company's  consolidated
     financial statements,  (ii) review of the unaudited condensed  consolidated
     interim  financial  statements  included in quarterly reports and (iii) the
     review of debt agreements and issuance of compliance letters.

     The Audit  Committee's  policy is to pre-approve  all audit and permissible
non-audit services provided by the independent  accountants.  These services may
include  audit  services,   audit-related  services,  tax  services,  and  other
services.  Pre-approval is generally provided for up to one year and is detailed
as to the particular  service or category of services.  The Audit  Committee may
also  pre-approve  particular  services  on  a  case-by-case  basis.  The  Audit
Committee pre-approved 100% of the audit fees for the fiscal year ended December
31, 2003.

     The Audit  Committee  determined  that the provision of services  discussed
above is  compatible  with  maintaining  the  independence  of KPMG LLC from the
Company.

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

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

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

     (3)  The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>

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

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

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

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

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

                                       36
























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

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

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

   3.7          Amendment No. 2 to Bylaws dated July            10-K          1-13290         03/31/03
                21, 1999.

   3.8          Certificate of Designation of Series            8-K           1-13290         03/18/04
                D Convertible Preferred Stock of the
                Registrant

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

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

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

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

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

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

   4.7          Second Amendment to Rights Agreement            10-K          1-13290         03/28/00
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                July 2, 1999.



                                       37
<PAGE>





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

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

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

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

   4.11         Sixth Amendment to Rights Agreement             10-K          1-13290         03/31/03
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                March 5, 2003.

   4.12         Seventh Amendment to Rights Agreement           8-K           1-13290         04/17/03
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                April 14, 2003.

   4.13         Eighth Amendment to Rights Agreement            8-K           1-13290         06/02/03
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                May 30, 2003.

   4.14         Ninth Amendment to Rights Agreement             8-K           1-13290         07/31/03
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                July 30, 2003.

   4.15         Tenth Amendment to Rights Agreement             8-K           1-13290         10/03/03
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                September 30, 2003.



                                       38
<PAGE>





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

   4.16         Eleventh Amendment to Rights                    8-K           1-13290         12/03/03
                Agreement by and between the Registrant
                and American Stock Transfer & Trust entered
                into as of November 25, 2003.

   4.17         Twelfth Amendment to Rights Agreement           8-K           1-13290         03/04/04
                by and between the Registrant and American
                Stock Transfer & Trust entered into as of
                March 3, 2004.

   4.18         Thirteenth Amendment to Rights                  8-K           1-13290         03/18/04
                Agreement by and between the Registrant
                and American Stock Transfer & Trust entered
                into as of March 10, 2004.

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

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

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

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

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

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

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

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

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

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



                                       39
<PAGE>





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

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

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

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

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

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

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

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

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

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



                                       40
<PAGE>





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

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

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

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

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

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

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

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

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

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



                                       41
<PAGE>





 Exhibit                                                              Incorporated by Reference                 Filed
                                                            ----------------------------------------------

  Number                 Exhibit Description                    Form          File No.       Filing Date      Herewith
-----------     ---------------------------------------     -------------    -----------    --------------    ----------

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

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

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

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

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

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

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

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

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

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

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

                                       42
<PAGE>


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

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

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

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

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

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

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

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

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

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

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



                                       43
<PAGE>





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

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

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

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

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

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

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

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

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



                                       44
<PAGE>





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

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

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

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

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

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

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

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

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



                                       45
<PAGE>





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

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

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

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

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

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

  10.70         Fitness Club and Spa Management and                                                               X
                Pre-Opening Service Agreement between
                Terramark Brickell II, Ltd. and the
                Registrant effective as of January 1,
                2003.

  10.71         First Supplement to Fitness Club and                                                              X
                Spa Management and Pre-Opening
                Services Agreement effective as of
                January 1, 2003.

  10.72         Waiver of Covenant Compliance Letter            10-K          1-13290         03/31/03
                from Comerica Bank - California dated
                March 26, 2003.

  10.73         Promissory Note dated June 12, 2003             8-K           1-13290         06/18/03
                in favor of Orange County's Credit
                Union in the amount of $20,000,000.



                                       46
<PAGE>





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

  10.74         Deed of Trust, Assignment of Rents,             8-K           1-13290         06/18/03
                Security Agreement and Fixture Filing
                dated as of June 12, 2003, made by
                Irvine Sports Club, Inc. for the
                benefit of Orange County's Credit
                Union.

  10.75         Reserve and Security Agreement made             8-K           1-13290         06/18/03
                as of June 12, 2003 by Irvine Sports
                Club, Inc. in favor of Orange
                County's Credit Union.

  10.76         Pledge and Security Agreement made as           8-K           1-13290         06/18/03
                of June 12, 2003 by the Registrant
                and Irvine Sports Club, Inc. in favor
                of Orange County's Credit Union.

  10.77         Indemnity and Guaranty Agreement                                                                  X
                entered into as of December 1, 2003
                among the Registrant, Irvine Sports
                Club, Inc., Rex A. Licklider and D.
                Michael Talla.

  10.78         Supplemental Indenture dated as of              8-K           1-13290         04/04/03
                March 28, 2003 between the
                Registrant, the Subsidiary Guarantors
                and U.S. Bank Trust National
                Association.

  10.79         Supplemental Indenture dated as of                                                                X
                February 4, 2004 between the
                Registrant, the Subsidiary Guarantors
                and U.S. Bank National Association.

  10.80         Third Supplemental Indenture made as            8-K           1-13290         03/18/04
                of March 9, 2004 between the
                Registrant, the Subsidiary Guarantors
                and U.S. Bank National Association.

  10.81         Investors' Rights Agreement made as             8-K           1-13290         03/18/04
                of March 10, 2004, by and among the
                Registrant and the holders of the
                Series D Convertible Preferred Stock.

  10.82         Preferred Stock Purchase Agreement              8-K           1-13290         03/18/04
                made as of March 10, 2004 by and among
                the Registrant and the holders of the
                Series D Convertible Preferred Stock.



                                       47
<PAGE>





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

  10.83         Consent Letter dated March 10, 2004             8-K           1-13290         03/18/04
                by holders of the Series B
                Convertible Preferred Stock.

  10.84         Consent Letter dated March 10, 2004             8-K           1-13290         03/18/04
                by holders of the Series C
                Convertible Preferred Stock.

   21.1         Subsidiaries of the Registrant.                                                                   X

   23.1         Consent of Independent Registered                                                                 X
                Public Accounting Firm.

   31.1         Certification of Rex A. Licklider                                                                 X
                Pursuant to Section 302 of the
                Sarbanes - Oxley Act of 2002.

   31.2         Certification of Timothy O'Brien                                                                  X
                Pursuant to Section 302 of the
                Sarbanes - Oxley Act of 2002.

   32.1         Certification of Rex A. Licklider                                                                 X
                Pursuant to 18 U.S.C.  Section 1350,
                as adopted Pursuant to Section 906 of
                the Sarbanes - Oxley Act of 2002.

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

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

#        Compensation agreement or plan.


                                       48
<PAGE>



(b)  Reports on Form 8-K

     The  following  reports on Form 8-K were filed from October 1, 2003 through
December 31, 2003:

     o    On October 3, 2003, we filed a report on Form 8-K  announcing  that on
          September  29, 2003,  the Special  Committee of our Board of Directors
          approved an amendment to our Rights Agreement adopted on September 29,
          1998. The Amendment  provides that until November 30, 2003, the Rights
          Plan  will not be  triggered  as a result  of any  non-binding  "going
          private"   negotiations  or  understandings   between  and  among  the
          principal shareholders, so long as such negotiations or understandings
          relate to a transaction  that has been, or is intended to be, proposed
          to our special committee.

     o    On  October  9, 2003,  we filed a report on Form 8-K  stating  that on
          October 8, 2003, we issued a press release  announcing  the opening of
          The Sports Club/LA - Beverly Hills.  The new Club opened on October 7,
          2003  and is  located  in  Beverly  Hills,  California.  The  Club,  a
          two-story  40,000 square foot luxury sports and fitness complex offers
          a  state-of-the  art  environment  including  a Bar and Lounge and spa
          services.

     o    On October 14,  2003,  we filed a report on Form 8-K  stating  that on
          October 13, 2003,  we issued a press  release  announcing  that we had
          mutually agreed with Palisade  Concentrated Equity  Partnership,  L.P.
          ("Palisade")  to set aside the  previously  announced  offer of "going
          private." We also stated that we expected to receive an amended letter
          of intent setting forth the revised terms and  conditions  under which
          Palisade would propose to make an $18.5 million  equity  investment in
          us,  subject to an  additional  investment  by certain of our existing
          stockholders,  the  proceeds  of which would be retained by us to fund
          operations.

     o    On  November 3, 2003,  we filed a report on Form 8-K  stating  that on
          November  3,  2003,  we issued a press  release  announcing  operating
          results for the third  quarter and nine months  ending  September  30,
          2003.

     o    On December 3, 2003, we filed a report on Form 8-K announcing  that on
          November  25,  2003,  the Special  Committee of our Board of Directors
          approved an amendment to our Rights Agreement adopted on September 29,
          1998. The Amendment  provides that until February 29, 2004, the Rights
          Plan  will not be  triggered  as a result  of any  non-binding  "going
          private"   negotiations  or  understandings   between  and  among  the
          principal shareholders, so long as such negotiations or understandings
          relate to a transactions that has been, or is intended to be, proposed
          to our Special Committee.


                                       49
<PAGE>

(c)  Exhibits

Index to Exhibits of Form 10-K

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

10.70           Fitness Club and Spa Management and Pre-Opening  Service
                Agreement between Terramark  Brickell II, Ltd. and the
                Registrant  effective as of January 1, 2003.

10.71          First  Supplement  to Fitness  Club and Spa  Management  and
               Pre-Opening  Services  Agreement effective as of January 1, 2003.

10.77          Indemnity  and Guaranty  Agreement entered into as of December 1,
               2003 among the  Registrant, Irvine Sports Club, Inc., Rex A.
               Licklider and D. Michael Talla.

10.79          Supplemental  Indenture  dated as of February 4, 2004 between the
               Registrant,  the Subsidiary Guarantors and U.S. Bank National
               Association.

21.1           Subsidiaries of the Registrant.

23.1           Consent of Independent Registered Public Accounting Firm.

31.1           Certification of Rex A. Licklider Pursuant to Section 302 of the
               Sarbanes - Oxley Act of 2002.

31.2           Certification of Timothy O'Brien Pursuant to Section 302 of the
               Sarbanes - Oxley Act of 2002.

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

32.2           Certification  of Timothy O'Brien  Pursuant to 18 U.S.C. Section
               1350, as adopted Pursuant to Section 906 of the Sarbanes - Oxley
               Act of 2002.



                                       50
<PAGE>



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities  Exchange Act
of 1934,  the  Registrant  has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned,  thereunto duly authorized, on the 21st
day of June 2004.


                                                THE SPORTS CLUB COMPANY, INC.



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

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

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

/s/ Rex A. Licklider              Vice Chairman of the Board     June 21, 2004
---------------------------------
Rex A. Licklider                  and Chief Executive Officer


/s/ Timothy O'Brien               Chief Financial Officer        June 21, 2004
---------------------------------
Timothy M. O'Brien                (Principal Financial and
                                   Accounting Officer)


/s/ D. Michael Talla              Chairman of the Board          June 21, 2004
---------------------------------
D. Michael Talla

                                  Director                       June 21, 2004
---------------------------------
Charles Ferraro


/s/ Christopher M. Jeffries       Director                       June 21, 2004
---------------------------------
Christopher M. Jeffries


/s/ Charles Norris                Director                       June 21, 2004
---------------------------------
Charles Norris


/s/ Andrew L. Turner              Director                       June 21, 2004
---------------------------------
Andrew L. Turner


/s/ George Vasilakos              Director                       June 21, 2004
---------------------------------
George Vasilakos




                                       51
<PAGE>