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FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes:    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.          

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes:    X        No:       

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant as of June 30, 2003, was approximately $286.3 million, based on the closing price of the registrant’s common stock as reported by the New York Stock Exchange at that date. For purposes of this computation, affiliates of the registrant include the registrant’s executive officers and directors as of June 30, 2003. As of February 29, 2004, 34,030,044 shares of the registrant’s common stock were outstanding.

Portions of the definitive Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated into Part III of this Form 10-K.

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TABLE OF ADDITIONAL REGISTRANTS

           The address for service of each of the additional registrants is c/o Bally Total Fitness Holding Corporation, 8700 West Bryn Mawr Avenue, 2^nd Floor, Chicago, Illinois  60631, telephone 773-380-3000. The primary industrial classification number for each of the additional registrants is 7991.

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PART I

           Except as otherwise stated, the information contained in this Form 10-K is as of December 31, 2003, the end of the registrant’s last fiscal year. This Form 10-K contains forward-looking statements which involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the registrant to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. See “Forward-Looking Statements” in Item 7 of this Form 10-K.

ITEMS 1 AND 2.   BUSINESS AND PROPERTIES

General

           Bally Total Fitness Holding Corporation, a Delaware corporation, is the largest commercial operator of fitness centers in North America in terms of revenues, number of members, and number and square footage of its facilities. As of February 29, 2004, we operated 418 fitness centers and had approximately four million members. Our fitness centers are concentrated in major metropolitan areas in 29 states and Canada, with 350 fitness centers located in the top 25 metropolitan areas in the United States and Toronto, Canada. We operate fitness centers in over 50 major metropolitan areas representing 63% of the United States population and over 16% of the Canadian population. Our members made an estimated 150 million visits to our fitness centers in 2003.

           We offer value to our members by providing access to state-of-the-art fitness facilities with affordable membership programs. Bally fitness centers feature a variety of cardiovascular and strength equipment and offer extensive personal training, weight management and group fitness training programs. In addition, many of our fitness centers include pools, racquet courts, spinning rooms or other athletic facilities. Our current fitness center prototype achieves efficiency by focusing on those fitness services our members use most frequently. We have clustered our fitness centers in major metropolitan areas in order to reach the greatest population and achieve marketing and operating efficiencies. Over 87% of our fitness centers are located in markets in which we have five or more facilities, with our largest concentrations in the New York, Los Angeles, Chicago, Baltimore/Washington D.C., Boston, Dallas, Houston, Detroit, San Francisco, Toronto, Portland, Seattle, Philadelphia, Atlanta and Miami areas.

           The majority of our fitness centers use the service mark “Bally Total Fitness®", including 10 upscale centers that are known as “Bally Sports Clubs^SM ”. The nationwide use of the service mark enhances brand identity and increases advertising efficiencies. Pursuant to our strategy of targeted market segmentation, we have opened or acquired new facilities during the past few years that operate under upscale brands, including 27 fitness centers as “Crunch Fitness ^SM ”, 10 fitness centers as “The Sports Clubs of Canada™”, seven as “Pinnacle Fitness®” and four as “Gorilla Sports ^SM ”.

           We market our clubs to consumers through the use of a variety of membership options and payment plans. Our membership options range from single-club memberships to premium memberships, which provide additional amenities and access to all of our fitness centers nationwide. Similarly, we offer a broad range of payment alternatives. Typically, our Bally Total Fitness branded club members pay an initial membership fee which can either be financed or paid-in-full at the time of joining. Members who choose to finance their initial membership fee generally do so for up to 36 months, subject to state, provincial and local regulations and minimum down payment requirements. In addition to the initial membership fee, members are generally required to pay monthly membership dues in order to use our fitness facilities. Recently we have added a new “pay-as-you-go” membership type allowing members to join without a long-term commitment. We believe the various memberships and payment plans offered, in addition to our strong brand identity and the convenience of multiple locations, constitute distinct competitive advantages. Membership plans in our upscale clubs generally include a higher level of club amenities than the Bally Total Fitness clubs, and are also differentiated by single, multi-club, and all-club membership programs. New members of our upscale clubs generally pay a lower initial membership fee than new members of our Bally Total Fitness clubs, but pay higher monthly dues throughout the term of the membership.

           We elected to change our accounting methods effective January 1, 2003 related to the recognition of revenue from membership contracts, initial membership origination costs, and asset retirement obligations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Significant Accounting Policies, and Notes to Consolidated Financial Statements for more details. In this Report on Form 10-K, unless otherwise noted, numerical disclosures contained in Items 1 and 2 have been conformed to

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the change in accounting method and are presented on a pro forma basis in prior years as if the change in accounting method had been previously adopted for all periods presented.

           We make certain filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, available free of charge through our website, www.ballyfitness.com, as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. Our press releases are also available on our website.

Business Strategy

           Our continuing business focus is to grow our membership base and maximize our yield-per-member. We define yield-per-member as the dollar amount generated per member through initiation fees, monthly dues, products and services revenues and finance charges earned. Our average yield-per-member was $256 during 2003 and $242 in 2002. We expect to continue to grow our membership base as well as maximize our yield-per-member using the following strategies:

           Optimize Our Product and Service Offerings. We are increasingly using our clubs for the delivery of value-added products and services such as personal training, private-label nutritional products, group exercise classes, fitness related merchandise, member magazines and our Weight Management Program. Integrating these ancillary products and services into our core fitness center operations positions Bally as the primary source for all of our members’ wellness and fitness needs. In addition, our private-label nutritional products are sold in approximately 2,500 select retail, grocery and drug store outlets and our licensed portable exercise equipment is sold in over 2,200 retail outlets. We are committed to the continuing development and integration of new and innovative products and services. Our extensive groupings of club operations and brand mix allow us to “test-market” new products and services without exposing our entire operation to the outcome of the introduction.

           Realize the Benefit of Recent Investments. We have invested over $400 million in greenfield expansion, acquisitions, and expansion of existing facilities since 1997. In order to strengthen operating results and cash flows, we scaled back our club expansion plans in 2002 and 2003 and will continue to do so for the next several years. We intend to focus our attention on improving operating margins and cash flows in our existing fitness centers to capitalize on our recent investments and to realize the benefits of reduced capital expenditures. Our immature fitness centers generally require over a full year of operations before generating incremental operating income. By slowing club expansion, we intend to realize the cash flow benefits from reduced capital expenditures as well as from the natural maturation of our 135 clubs less than 5 years old. We expect our immature clubs, as they mature, to contribute higher levels of operating income.

           Expand and Optimize Our Marketing. We will continue to leverage the position of the Bally brand, which we believe is the most recognized brand name of fitness centers in North America. During 2003 we fundamentally reshaped our entire marketing approach and organization, hiring a Chief Marketing Officer and Executive Creative Director to guide our marketing turnaround. During the year, our new team modernized our creative approach and expanded our marketing message to speak to multiple customer segments in the 18-54 year old demographic, rather than relying only on our traditional 18-34 year old target. We created advertising specifically targeting women, men, seniors and Hispanic consumers and added new specialty advertising agencies to assist in reaching these target consumers. We continue to explore Internet-based approaches to marketing to new members and are expanding our web-site as a customer relationship management tool. During 2003, we continued the roll out of more customer friendly approaches to pricing our memberships by giving consumers more flexibility in payment terms, such as the continued expansion of non-obligatory pay-as-you-go membership options.

           Improve Operating Efficiencies. After a period of rapid expansion by adding new clubs in addition to the acquisition of most of our upscale brands, we have consolidated our operations to realize economies of scale. In particular, we launched several initiatives to improve operating efficiencies and reduce operating costs, including energy management programs and staff reductions during 2003. We have also eliminated local area offices and modified some of our incentive and compensation programs to better reward profitability.

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Fitness Centers

           Most of our fitness centers are located near regional, urban and suburban shopping areas and business districts of major cities. Fitness centers vary in size, available facilities and types of services provided. All of our fitness centers contain a wide variety of state-of-the-art progressive resistance, cardiovascular and conditioning exercise equipment, as well as free weights. A member’s use of a fitness center may include group exercise programs or personal training instruction stressing cardiovascular conditioning, strength development or improved appearance. New members are offered orientations on the recommended use of exercise equipment by our personnel.

           Our current prototype fitness center generally focuses on those fitness services our members most frequently use, such as well-equipped cardiovascular, strength and free weight training areas along with a wide variety of group fitness classes. Services that receive a far-lower degree of member use, such as swimming pools, running tracks, racquet courts or other athletic facilities have been de-emphasized. Our prototype fitness center, which tends to range from 25,000 to 30,000 square feet, has recently averaged approximately 26,000 square feet and costs approximately $2 million to construct, exclusive of purchased real estate and exercise equipment and net of landlord contributions. The prototype is designed to cost less to construct and maintain than our older facilities and has the capacity to accommodate significantly more members than older fitness centers of the same size because it focuses on the most widely used amenities. We generally invest approximately $400,000 ($300,000 through lease programs) for exercise equipment in a prototype fitness center. Beginning in 2003, we developed a new version of our prototype that was meant to be more inviting with an updated color scheme, higher end looking material and a greater use of technology. This new model will be continually updated and used in all new and remodeled clubs.

           Pursuant to franchise agreements, six clubs operate in the United States as Bally Total Fitness brand clubs—five in Upstate New York and one in Massachusetts. Internationally, four clubs operate as Bally Total Fitness brand clubs pursuant to franchise agreements—one in The Bahamas, two in South Korea and one in Mexico. Pursuant to a joint venture agreement in which the Company holds a 35% interest with China Sports Industry Co., Ltd., nine fitness centers are operated in China—one under the joint venture and eight operated as franchisees of the joint venture.

Products and Services

           Our fitness center operations provide a unique platform for the delivery of value-added products and services to our fitness-conscious members. By integrating personal training, private-label nutritional products, and our Weight Management Program into our core fitness center operations, we have positioned the Bally Total Fitness brand as the total source for all of our members’ wellness and fitness needs.

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Membership Plans

           We offer prospective members a choice of membership plans. These membership plans are distinguished primarily by their priority of access to in-club services and access to other fitness centers we operate, either locally or system wide and by the level of fitness-related products and services included in the membership program. From time to time, we also offer special membership plans, which limit a member’s access to a single fitness center and to certain days and non-peak hours. Similarly, we offer a broad range of payment alternatives. Most memberships sold require a substantial initiation fee and relatively low monthly dues. We also offer “pay-as-you-go” memberships, which require higher monthly payments for the duration of the membership but offer the consumer a choice in terms of length of commitment.

           The one-time initial membership fees for joining our Bally Total Fitness brand fitness centers, excluding limited special offers and corporate programs, generally range from approximately $700 to $1,600 and can be financed for up to 36 months, subject to down payment requirements and state, provincial and local regulations. Generally, the initial membership fee is based on:

• The membership plan selected;
• The diversity of facilities and services available at the fitness center of enrollment;
• Market conditions; and
• Seasonal promotional strategies.

           In addition to one-time initial membership fees, Bally Total Fitness brand club members generally pay monthly dues to maintain membership privileges. Monthly dues are generally charged at a fixed rate during the finance period and may increase thereafter, subject to stated terms.

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           Our upscale branded clubs – The Sports Clubs of Canada, Gorilla Fitness, Pinnacle Fitness and Crunch Fitness – offer memberships with lower initial membership fees generally ranging from $50 to $225, but carrying monthly dues ranging from $49 to $94 per month during an initial obligatory term, generally between 12 and 24 months, and subject to increase thereafter. Our upscale Bally Sports Clubs branded clubs offer memberships similar to Bally Total Fitness brand clubs in terms of 36 month financing of the initial membership fee, but ranging from $1,400 to $2,100, in addition to monthly dues during the initial financing period, and dues ranging from $29 to $54 thereafter, subject to increase.

           Members who finance their initial membership fees or choose monthly pay-as-you-go payment programs may either choose monthly statement billing, or the more popular electronic payment option where the fixed monthly payment is automatically deducted from a checking, savings or credit card account each month. Electronic payment options are selected by more than 70% of all new members.

Sales and Marketing

           We devote substantial resources to the marketing and promotion of our fitness centers and their services under each of the brands we operate. We believe strong marketing support is critical to attracting new members at both existing and new fitness centers. The majority of our fitness centers use the branded service mark “Bally Total Fitness,” including 10 upscale fitness centers that are known as “Bally Sports Clubs.” The nationwide use of the service mark enhances brand identity and increases advertising efficiencies. Pursuant to our strategy of targeted market segmentation, we have opened or acquired new facilities during the past few years that operate under more trendy or upscale brands, including 27 fitness centers as “Crunch Fitness”, 10 as “The Sports Clubs of Canada”, seven as “Pinnacle Fitness” and four as “Gorilla Sports”.

           We operate fitness centers in over 50 major metropolitan areas representing 63% of the United States population and over 16% of the Canadian population with 350 of our fitness centers located in the top 25 metropolitan areas in the United States and Toronto, Canada. Concentrating our fitness centers in major metropolitan areas increases the efficiency of our marketing and advertising programs and enhances brand identity and word-of-mouth marketing.

           We spent $56.9 million in 2003, $55.5 million in 2002 and $54.0 million in 2001, for advertising and promotion. Historically, we have primarily advertised on television and, to a lesser extent, through direct mail, newspapers, telephone directories, radio, outdoor signage and other promotional activities. In late 2003, we fundamentally reshaped our entire marketing approach and organization, modernizing our creative approach and expanding our marketing message to reach multiple customer segments in the 18-54 year old demographic, rather than relying only on our traditional 18-34 year old target. We created advertising specifically targeting women, men, seniors and Hispanic consumers and added new specialty agencies to assist in reaching these target consumers.

           Our sales and marketing programs emphasize the benefits of health, physical fitness and exercise by appealing to the public’s desire to look and feel better. Advertisements are augmented with individual sales presentations made by sales personnel in our fitness centers. We believe the various membership and payment plans, in addition to our strong brand identity and the convenience of multiple locations, constitute distinct competitive advantages.

           Our marketing efforts also include corporate membership sales and in-club marketing programs. Open houses and other activities for members and their guests are used to foster member loyalty and introduce fitness centers to prospective members. Referral incentive programs involve current members in the process of new member enrollments and enhance member loyalty. Direct mail reminders encourage renewal of existing memberships. We also attract membership interest from internet visitors to our home page at www.ballyfitness.com and www.crunch.com and continue to explore ways to use the internet as a customer relationship management tool.

           In 2003, we continued to benefit from new and existing strategic marketing alliances heightening public awareness of our fitness centers and the Bally Total Fitness brand. Our licensed Bally Total Fitness line of portable exercise equipment is carried in more than 2,200 retail stores in the United States and Canada and in more than 10 mail order catalogs with distribution in North America and the United Kingdom. Strategic alliances during 2003 included Visa USA®, MasterCard®, Sports Display, Inc., Pepsi-Cola Company, Muzak®, Tylenol®, Starkist®, Discovery™ Channel, Lean Cuisine®, Sony®, Colgate-Palmolive Company (Simply White™), Unilever (Dove®), and Gatorade®. These alliances provide products for our members to use and/or sample as well as an incremental source of revenue for us.

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Account Servicing

           In 2003, we consolidated member processing and collection activities from our Towson, Maryland regional service center into our newer, state of the art Norwalk, California national service center. All of our member services, collection and new member processing activities are now handled by the Norwalk facility allowing for further efficiencies through centralization of these high volume activities.

           All collections for past-due accounts are initially handled internally by our national service center. We systematically pursue past-due accounts by utilizing a series of computer-generated correspondence and telephone contacts. Our power-dialer system assists in the efficient administration of our in-house collection efforts. Based on period of delinquency, members are contacted by collectors. At 60 days past due, members are generally denied entry to the fitness centers. Delinquent accounts are generally written off after 90 or 194 days without payment, depending on delinquency history. Accounts that are written off are reported to credit reporting bureaus, and selected accounts are then sold to a third-party collection group.

           We prioritize our collection approach based on credit scores and club usage, among other criteria, at various levels of delinquency. By tailoring our membership collection approach to reflect a delinquent member’s likelihood of payment, we believe that we can collect more of our membership receivables at a lower cost. To credit score, we use a national bureau, which charges a nominal fee per account.

Competition

           We are the largest commercial operator of fitness centers in North America in terms of revenues, number of members, and number and square footage of facilities. We are the largest operator, or among the largest operators, of fitness centers in every major market in which we operate fitness centers. Within each market, we compete with other commercial fitness centers, physical fitness and recreational facilities established by local governments, hospitals, and businesses for their employees, the YMCA and similar organizations, and, to a certain extent, with racquet, tennis and other athletic clubs, country clubs, weight-reducing salons and the home-use fitness equipment industry. We also compete, to some extent, with entertainment and retail businesses for the discretionary income of our target markets. However, we believe our brand identity, operating experience, membership options, ability to allocate advertising and administration costs over all of our fitness centers, nationwide operations, purchasing power and account processing and collection infrastructure, provide us with distinct competitive advantages. Future competitive factors may emerge which may lessen our ability to compete as effectively.

           We believe competition has increased to some extent in certain markets, reflecting the public’s enthusiasm for fitness and the decrease in the barriers to entry into the market due to financing available from, among others, landlords, equipment manufacturers and private equity sources. We believe our brand identity is strong, membership plans are affordable and we have the flexibility to be responsive to economic conditions.

           Our pursuit of new business initiatives, particularly the sale of weight loss services, nutritional products and apparel, has us competing against large, established companies with more experience selling products on a retail basis. In some instances, our competitors in these business initiatives have substantially greater financial resources than we have. We may not be able to compete effectively against these established companies.

Properties

           At February 29, 2004, we operated 418 fitness centers in 29 states and Canada. At February 29, 2004, we owned 50 fitness centers and leased either the land, building or both for the remainder of our fitness centers. Aggregate rent expense, including office and administrative space, was $135.9 million in 2003, $129.1 million in 2002 and $113.6 million in 2001. Most of our leases require us to pay real estate taxes, insurance, maintenance and, in the case of shopping center and office building locations, common-area maintenance fees. A limited number of leases also provide for percentage rental based on receipts. Various leases also provide for periodic rent adjustments based on changes in the Consumer Price Index, most with limits provided to protect us from large increases in annual rental payments. One fitness center accounted for approximately 1% of our net revenues during 2003. We believe we can expand the number of members we have with the capacity at our properties.

           The leases for fitness centers we have entered into in the last five years generally provide for an initial term of 15 years. Most leases give us at least one five-year option to renew and often two or more such options.

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           Our executive office is located in leased office space in Chicago, Illinois. We also lease space in Norwalk, California for our national service center, and Towson, Maryland for our information systems and telemarketing facilities.

Trademarks and Trade Names

           The majority of our fitness centers use the service mark “Bally Total Fitness”, including 10 upscale centers that are known as “Bally Sports Clubs.” Other facilities operate under the names Crunch Fitness, The Sports Clubs of Canada, Pinnacle Fitness and Gorilla Sports. The use of these trademarks and service marks enhance brand identity and increases advertising efficiencies.

Seasonality of Business

           Historically, we experience greater membership fee originations in the first quarter and lower membership fee originations in the fourth quarter, while advertising expenditures are typically lower during the fourth quarter. Our products and services business may have the effect of further increasing the seasonality of our business.

Employees

           At February 29, 2004, we had approximately 22,200 employees, including approximately 11,630 part-time employees. The distribution of our employees is summarized as follows:

• Approximately 21,210 employees are involved in fitness center operations, including sales personnel, instructors, personal trainers, supervisory and facility personnel;

• Approximately 800 employees are involved in the operation of our member processing and collection centers, including management information systems;

• Approximately 65 employees are product and service development and operations support personnel; and

• Approximately 125 employees are accounting, marketing, human resources, real estate, legal and administrative support personnel.

           We are not a party to a collective bargaining agreement with any of our employees. Although we experience high turnover of non-management personnel, historically we have not experienced difficulty in obtaining adequate replacement personnel. Periodically, our sales personnel become somewhat more difficult to replace due, in part, to increased competition for skilled retail sales personnel.

Government Regulation

           Our operations and business practices are subject to regulation at federal, state, provincial and local levels. The general rules and regulations of the Federal Trade Commission and of other federal, state, provincial and local consumer protection agencies apply to our advertising, sales and other trade practices.

           State and provincial statutes and regulations affecting the fitness industry have been enacted or proposed in all of the states and provinces in which we conduct business. Typically, these statutes and regulations prescribe certain forms and regulate the terms and provisions of membership contracts, including:

• Giving the member the right to cancel the contract, in most cases, within three business days after signing;

• Requiring an escrow for funds received from pre-opening sales or the posting of a bond or proof of financial responsibility; and, in some cases,

• Establishing maximum prices and terms for membership contracts and limitations on the financing term of contracts.

           In addition, we are subject to numerous other types of federal, state and provincial regulations governing

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the sale, financing and collection of memberships, including, among others, the Truth-in-Lending Act and Regulation Z adopted thereunder, as well as state and provincial laws governing the collection of debts. These laws and regulations are subject to varying interpretations by a large number of state, provincial and federal enforcement agencies and the courts. We maintain internal review procedures in order to comply with these requirements and believe our activities are in substantial compliance with all applicable statutes, rules and regulations.

           Under so-called “cooling-off” statutes in most states and provinces we operate in, new members of fitness centers have the right to cancel their memberships for a period of three to ten days after the date the contract was entered into and are entitled to refunds of any payment made. The amount of time new members have to cancel their membership contract depends on the applicable state and provincial law. Further, our membership contracts provide that a member may cancel his or her membership at any time for qualified medical reasons or if the member relocates a certain distance away from a Bally fitness center. In addition, a membership may be cancelled in the event of a member’s death. The specific procedures for cancellation in these circumstances vary according to differing state and provincial 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 upon cancellation, and we may offset that amount against any refunds owed.

           We are a party to some state and federal consent orders. The consent orders essentially require continued compliance with applicable laws and require us to refrain from activities not in compliance with those laws. From time to time, we make minor adjustments to our operating procedures to remain in compliance with those consent orders.

           Our nutritional products are subject to regulation by one or more federal agencies, including the Food and Drug Administration (the “FDA”) and the FTC. For example, the FDA regulates the formulation, manufacture and labeling of vitamin and other nutritional supplements in the United States while the FTC is principally charged with regulating marketing and advertising claims.

           Since 1995, we have offered a program of transferring membership receivables balances into a credit card program funded and managed by an independent financial institution. During 2003, we terminated the program for reasons of unsatisfactory performance. We have made claims for improper charges exceeding $30 million. The independent financial institution has made counterclaims for $5.3 million and other declaratory relief including as to the sharing of financial responsibility for future losses under the program against us that we have denied and for which no provision has been made as of December 31, 2003. The matter has been submitted to arbitration and is set for hearing in June 2004. The ultimate outcome of this dispute cannot be fully determined.

           The Company is also involved in various claims and lawsuits incidental to its business, including claims arising from accidents at its fitness centers. In the opinion of management, the Company is adequately insured against such claims and lawsuits, and any ultimate liability arising out of such claims and lawsuits will not have a material adverse effect on the financial condition or results of operations of the Company. In addition, from time to time, customer complaints are investigated by governmental bodies. In the opinion of management, none of the complaints or investigations currently pending will have a material adverse effect on our financial condition or results of operations.

           Item 4 is inapplicable.

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EXECUTIVE OFFICERS OF THE REGISTRANT

           Paul A. Toback was named Chairman of the Board of Directors in May 2003 and was elected a Director in March 2003 and President and Chief Executive Officer in December 2002. He was Executive Vice President from February 2002 to December 2002, Chief Operating Officer from June 2001 to December 2002, Senior Vice President, Corporate Development from March 1998 to June 2001 and a Vice President, from November 1997 to March 1998. From 1995 to 1997, Mr. Toback was Chief Operating Officer of Globetrotters Engineering Corp., and from 1993 to 1994, he served as Executive Assistant to the Chief of Staff at the White House. Prior to 1993, Mr. Toback was Director of Administration for the City of Chicago. Mr. Toback is an attorney licensed to practice in Illinois and is 40 years of age.

           John W. Dwyer was elected a Director in August 2001, Executive Vice President in November 1997, a Senior Vice President in 1995, Vice President and Chief Financial Officer in May 1994 and was Treasurer from October 1996 to June 2001. Mr. Dwyer was Corporate Controller of Bally Entertainment Corporation between June 1992 and December 1996 and a Vice President between December 1992 and December 1996. Mr. Dwyer is 51 years of age.

           Julie Adams was elected Senior Vice President, Membership Services in February 2003, was Vice President, Membership Services from September 1997 to February 2003, Vice President, Controller from 1993 to September 1997, Controller from March 1991 to 1993 and Director of Financial Reporting from August 1985 to March 1991. Ms. Adams is 58 years of age.

           William G. Fanelli was elected Senior Vice President, Finance in June 2001, was Senior Vice President, Operations from November 1997 to June 2001 and was Vice President, Strategic Operations from November 1996 to November 1997. Mr. Fanelli was Director, Business Development of Bally Entertainment Corporation from October 1993 to December 1996. Mr. Fanelli is 41 years of age.

           Cary A. Gaan was elected Senior Vice President and General Counsel in January 1991 and Secretary in April 1996. Mr. Gaan served as a Vice President from 1987 to 1991. Mr. Gaan is 58 years of age.

           Harold Morgan was elected Senior Vice President, Chief Administrative Officer in February 2003, was Senior Vice President, Human Resources from September 1995 to February 2003 and was Vice President from January 1992 to September 1995. Mr. Morgan was Vice President, Human Resources of Bally Entertainment Corporation between December 1992 and December 1996. Mr. Morgan is 47 years of age.

           Martin Pazzani was elected Senior Vice President and Chief Marketing Officer in August 2003. Prior to joining the Company, Mr. Pazzani was President and Founder of The Global Marketing Revolution, Inc., a marketing consultancy, from October 2002 to August 2003. From June 1997 to October 2002, Mr. Pazzani was Corporate Senior Vice President and Worldwide Director of Foote, Cone and Belding Worldwide’s global business and strategy consulting division. Prior to June 1997, Mr. Pazzani held various marketing and strategy-related positions at DDB Needham Worldwide, Western International Media (now Initiative Media), Rocket Science Advertising and Heublein/RJR Nabisco/Grand Metropolitan Plc. (now Diageo). Mr. Pazzani is 47 years of age.

           John H. Wildman was elected Senior Vice President, Chief Operating Officer in December 2002, was Senior Vice President, Sales and Marketing from November 1996 to December 2002 and Vice President, Marketing from September 1995 to November 1996. For approximately four years prior thereto, Mr. Wildman was a Senior Area Director. Mr. Wildman is 44 years of age.

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PART II

           Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “BFT”. The following table sets forth, for the periods indicated, the high and low quarterly sales prices for a share of our common stock as reported on the NYSE.

           As of February 29, 2004, there were 7,435 holders of record of our common stock.

           We have not paid a cash dividend on our common stock since we became a public company in January 1996 and do not anticipate paying dividends in the foreseeable future. The terms of our revolving credit agreement restrict us from paying dividends without the consent of the lenders during the term of the agreement. In addition, the indentures for our senior notes and senior subordinated notes generally limit dividends paid by us to the aggregate of 50% of consolidated net income, as defined, earned after January 1, 1998 and the net proceeds to us from any stock offerings and the exercise of stock options and warrants.

           In 2003, we changed our accounting for the recognition of financed initial membership fees from our prior 22-month pool deferral method to a preferable modified cash method of recognition and implemented EITF 00-21 “Revenue Arrangements with Multiple Deliverables.” We also changed our accounting for the recognition of recoveries of unpaid dues on inactive membership contracts from accrual-based estimations to a preferable cash basis of recognition. Concurrently with the change in accounting for membership fees, we also changed our method of accounting in 2003 for initial membership origination costs from our prior method where such costs were deferred and recognized over the same period used for revenue recognition to a preferable method of expensing such costs as incurred. These accounting changes were all implemented as of the beginning of 2003 as a cumulative effect of changes in accounting and as a result we recorded non-cash charges of $441 million related to the change to the modified cash basis of accounting for membership fees and adoption of EITF 00-21, $21 million related to the change regarding unpaid dues on inactive membership contracts and $119 million related to the change in accounting for initial membership fee origination costs.

           As a result of the accounting changes described in the preceding paragraph and the lower level of proforma historical earnings under the new revenue recognition policies, we additionally recorded a special tax provision of $50.5 million in 2003 to reduce previously recognized deferred tax assets.

           In applying the new accounting for membership revenues as described above, it was determined in consultation with our independent auditors that our previous methodology of accounting for the deferral of prepayments of non-obligatory dues resulted in errors in calculating deferred revenue related to prepaid dues. As a result the Company has restated prior periods in accordance with the requirements of Accounting Principles Board Opinion No. 20 “Accounting Changes.” The impact of the correction to previously reported net revenues and net income was a reduction of $8.0 million ($.25 per diluted share), $10.6 million ($.36 per diluted share),

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and $4.9 million ($.18 per diluted share) in each of the years 2002, 2001 and 1999, respectively, and an increase in reported net revenues and net income in 2000 of $4.0 million ($.14 per diluted share). The impact of the correction to previously reported deferred revenue and stockholders’ equity was an increase in deferred revenue and a decrease in stockholders’ equity of $43.0 million, $35.0 million, $24.4 million and $28.4 million at the end of each of the years 2002 through 1999, respectively.

           We also adopted in 2003 the provisions of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” and recorded a non-cash cumulative effect adjustment of $.2 million to provide for future restoration obligations on the Company’s leaseholds.

           The accompanying Selected Financial Data includes statement of operations data on a proforma basis for the accounting changes described above as if they had been in effect in each of the years presented, and on a restated basis correcting the errors in calculating deferred revenue for prepaid non-obligatory dues in the years presented.

           In 2002, the Company recorded a pre-tax non-cash charge of $55 million reflected as a reduction in net revenues to reduce the carrying value of installment accounts receivable, recorded a charge of $7.3 million to provide for amounts pursuant to a separation agreement upon the retirement of the Company’s former CEO, settled a class action lawsuit for $6.5 million and wrote down the carrying value of our retail store inventories by $3.4 million. We also adopted in 2002 the provision of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” and ceased amortization of goodwill and indefinite lived trademarks, and reduced our tax valuation allowance against net operating losses realized in prior periods by $4.0 million. Because the proforma results are presented on a modified cash basis, the $55 million charge to reduce the carrying value of installment accounts receivable does not apply to 2002 proforma results.

           In 2001, we recorded a net benefit of special items of $8.3 million to record special charges of $6.7 million primarily related to the September 11^th tragedy and a one-time markdown of retail apparel, offset by a reduction of our tax valuation allowance of $15 million. In 2000, we recorded a one-time non-cash charge of $6.5 million to write off third-party internet investments and we reduced our tax valuation allowance by $20.0 million. In 1999, in accordance with AICPA Statement of Position 98-5, Reporting Costs of Start-up Activities, we wrote off unamortized start-up costs of $.3 million as a cumulative effect of a change in accounting principle.

           EBITDA from continuing operations before special charges is defined as net income (loss) before depreciation and amortization, income taxes and interest expense (and cumulative effect of accounting change, special charges and loss from discontinued operations where applicable). EBITDA as adjusted additionally excludes stock-based compensation and other, net. We have presented EBITDA supplementally because we believe this information is useful given the significance of our depreciation and amortization and because of our highly leveraged financial position. The table below includes a reconciliation from net income (loss) to EBITDA. This data should not be considered as an alternative to any measure of performance or liquidity as promulgated under generally accepted accounting principles (such as net income or cash provided by/used in operating, investing and financing activities), nor should this data be considered as an indicator of our overall financial performance. Also, the EBITDA definition used by us may not be comparable to similarly titled measures reported by other companies.

Index

Index

           The following discussion of the financial condition and results of operations of Bally should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes in Item 8 of this Report.

General

           Our continuing business focus is to grow our membership base and maximize our yield-per-member. We expect to accomplish this by optimizing our product and services offer