<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

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

For the quarterly period ended March 31, 2006.

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

Commission file number 0-26573

                           PHYSICAL SPA & FITNESS INC.
                           ---------------------------
             (Exact name of Registrant as specified in its charter)

               Delaware                              98-0203281
   --------------------------------              ------------------
     (State or other jurisdiction                   (IRS Employer
   of incorporation or organization)              Identification No.)

                          40/F RBS Tower, Times Square
                       No. 1 Matheson Street, Causeway Bay
                                    Hong Kong
                    (Address of principal executive offices)

                              (011) (852) 2917-0000
                         (Registrant's telephone number)

Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ]

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: March 31, 2006, 10,000,000 shares.



<PAGE>

                                TABLE OF CONTENTS

PART I  -  FINANCIAL INFORMATION                                    PAGE
                                                                    ----
   ITEM 1   -   FINANCIAL STATEMENTS

     Condensed Consolidated Statements of Operations                   1
     for the three-month periods
     ended March 31, 2005 and 2006 (Unaudited)

     Condensed Consolidated Balance Sheets at December 31, 2005        2
      and March 31, 2006 (Unaudited)

     Condensed Consolidated Statements of Cash Flows                   3
     for the three-month periods ended
     March 31, 2005 and 2006 (Unaudited)

     Notes to Financial Statements                                     4

   ITEM 2   -   MANAGEMENT'S DISCUSSION AND ANALYSIS OF                7
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   ITEM 3   -   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT        12
                MARKET RISK

   ITEM 4   -   CONTROLS AND PROCEDURES                               12

PART II  -   OTHER INFORMATION

   ITEM 1   -   LEGAL PROCEEDINGS                                     13

   ITEM 2   -   UNREGISTERED SALES OF EQUITY SECURITIES
                  AND USE OF PROCEEDS                                 13

   ITEM 3   -   DEFAULTS UPON SENIOR SECURITIES                       13

   ITEM 4   -   SUBMISSION OF MATTERS TO A VOTE                       13
                OF SECURITY HOLDERS

   ITEM 5   -   OTHER INFORMATION                                     13

   ITEM 6   -   EXHIBITS AND REPORTS ON FORM 8-K                      13



<PAGE>
<TABLE>
<S>     <C>
                     PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                     --------------------------------------------

               UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    -----------------------------------------------
                    (In thousands, except share and per share data)


                                                       Three months ended March 31
                                                       2005        2006        2006
                                                     ---------   ---------   ---------
                                                        HK$         HK$         US$

Operating Revenues
Fitness service                                        69,451      55,182       7,075
Beauty treatments                                      48,989      54,039       6,928
Others                                                  1,454         167          21
                                                     ---------   ---------   ---------
Total operating revenues                              119,894     109,388      14,024
                                                     ---------   ---------   ---------

Operating Expenses
Salaries and commissions                              (40,024)    (37,218)     (4,772)
Rent and related expenses                             (41,841)    (40,705)     (5,219)
Depreciation                                          (15,406)    (12,814)     (1,642)
Other selling and administrative expenses             (26,931)    (24,307)     (3,116)
                                                     ---------   ---------   ---------
Total operating expenses                             (124,202)   (115,044)    (14,749)
                                                     ---------   ---------   ---------
Loss from operations                                   (4,308)     (5,656)       (725)
                                                     ---------   ---------   ---------

Non-operating (expenses) income
Other income, net                                          68         531          68
Interest expenses                                      (1,207)       (495)        (63)
                                                     ---------   ---------   ---------
Total non-operating (expenses) income                  (1,139)         36           5
                                                     ---------   ---------   ---------

Loss before income taxes and minority interests        (5,447)     (5,620)       (720)

Provision for income taxes                               (188)         --          --
                                                     ---------   ---------   ---------
Loss before minority interests                         (5,635)     (5,620)       (720)

Minority interests                                        145        (493)        (63)
                                                     ---------   ---------   ---------
Net loss                                               (5,490)     (6,113)       (783)
                                                     =========   =========   =========

Loss per share of common stock                          (0.55)      (0.61)      (0.08)
                                                     =========   =========   =========
Number of shares of common stock outstanding
(in thousands)                                         10,000      10,000      10,000
                                                     =========   =========   =========


Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts could
have been, or could be, converted into United States Dollars, at that rate on March
31, 2006 or at any other certain rate.

The financial statements should be read in conjunction with the accompanying notes.


                                          -1-


<PAGE>

                                     PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                                     --------------------------------------------
                                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                        -------------------------------------
                                   (In thousands, except share and per share data)


                                                                                       As of
                                                               ------------------------------------------------------
                                                       Note       December 31, 2005               March 31, 2006
                                                                                                   (Unaudited)
                                                                          HK$                HK$                US$
ASSETS

Current assets
Cash and bank balances                                                   2,484              4,578                587
Marketable securities, collateralized                                    1,540                 --                 --
Trade receivables                                                       12,925              7,882              1,011
Other receivables                                                        8,173              8,173              1,048
Rental and utility deposits                                             31,486             31,969              4,099
Prepayments to vendors and suppliers and other current assets           11,235             14,136              1,812
Inventories                                                              4,492              4,131                530
Income taxes recoverable                                                 2,129              2,129                273
                                                              -----------------  -----------------  -----------------

Total current assets                                                    74,464             72,998              9,360
                                                              -----------------  -----------------  -----------------

Marketable securities, collateralized                                    2,740              2,740                351
Bank deposits, collateralized                                            9,213             10,352              1,327
Due from a stockholder                                                   9,480              9,480              1,215
Property, plant and equipment,
   net of accumulated depreciation of
   HK$343,105 as of March 31, 2006 (2005: HK$331,415)                  155,853            146,549             18,788
                                                              -----------------  -----------------  -----------------

Total assets                                                           251,750            242,119             31,041
                                                              =================  =================  =================

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
Short-term bank loans                                                    8,415                512                 66
Long-term bank loans - current portion                   5                  --                336                 43
Trade and other payables                                                50,073             34,738              4,454
Obligations under finance leases - current portion                         286                692                 89
Deferred income - current portion                                      135,008            152,743             19,583
Deferred liabilities - current portion                                   2,795              1,877                240
Income taxes payable                                                       141                141                 18
Taxes other than income                                                  7,581              7,320                938
                                                              -----------------  -----------------  -----------------

Total current liabilities                                              204,299            198,359             25,431
                                                              -----------------  -----------------  -----------------

Deferred income - non-current portion                                   52,878             54,740              7,018
Deferred liabilities -  non-current portion                              5,898              5,448                698
Long-term bank loans - non-current portion               5                  --                147                 19
Obligations under finance leases - non-current portion                     119                489                 63
Minority interests                                                       6,156              6,649                852

Commitments and contingencies                            6

Stockholders' deficit:
Common stock, par value US$0.001 each,
   100 million shares of stock authorized;
   10 million shares of stock issued and outstanding                        78                 78                 10
Cumulative translation adjustments                                         825                825                105
Accumulated losses                                                     (18,503)           (24,616)            (3,155)
                                                              -----------------  -----------------  -----------------

Total stockholders' deficit                                            (17,600)           (23,713)            (3,040)
                                                              -----------------  -----------------  -----------------

Total liabilities and stockholders' deficit                            251,750            242,119             31,041
                                                              =================  =================  =================

Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars ("US$") for the convenience of the
reader has been made at the exchange rate of US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar
amounts could have been, or could be, converted into United States Dollars, at that rate on March 31, 2006 or at any
other certain rate.

The financial statements should be read in conjunction with the accompanying notes.


                                                         -2-


<PAGE>

                         PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                         --------------------------------------------
                   UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                   ---------------------------------------------------------
                                        (in thousands)


                                                               Three Months Ended March 31
                                                            ---------------------------------
                                                             2005         2006         2006
                                                            -------      -------      -------
                                                              HK$          HK$          US$

Cash flows from operating activities:
Net loss                                                     (5,490)      (6,113)        (783)

Adjustments to reconcile net loss to net cash provided
  by operating activities:
    Minority interests                                         (145)         493           63
    Depreciation                                             15,406       12,814        1,642
    Gain on disposal of property, plant and equipment            --           (2)          --

Changes in working capital:
    Trade receivables                                        (1,888)       5,043          647
    Deposits, prepayments and other current assets              (66)      (3,384)        (434)
    Inventories                                                (557)         361           46
    Trade and other payables                                 (1,180)     (15,335)      (1,966)
    Deferred income                                           8,321       19,597        2,512
    Deferred liabilities                                     (1,805)      (1,368)        (175)
    Income taxes payable/recoverable                            693           --           --
    Taxes other than income                                     (91)        (261)         (33)
                                                            -------      -------      -------

Net cash provided by operating activities                    13,198       11,845        1,519
                                                            -------      -------      -------

Cash flows from investing activities:
    Prepayments for construction-in-progress                   (149)          --           --
    Acquisition of property, plant and equipment             (6,108)      (2,663)        (342)
    Sales proceeds from disposal of marketable securities        --        1,540          197
    Sales proceeds from disposal of property, plant
     and equipment                                               --            3            1
    Increase in bank deposit, collateralized                 (1,966)      (1,139)        (146)
                                                            -------      -------      -------

Net cash used in investing activities                        (8,223)      (2,259)        (290)
                                                            -------      -------      -------

Cash flows from financing activities:
    Settlement of short-term bank loans                      (2,416)      (7,903)      (1,013)
    Proceeds from long-term bank loans                           --          510           65
    Repayment of long-term bank loans                          (471)         (27)          (3)
    Capital element of capital lease rental payments           (641)         (72)          (9)
                                                            -------      -------      -------

Net cash used in financing activities                        (3,528)      (7,492)        (960)
                                                            -------      -------      -------

Net increase in cash and cash equivalents                     1,447        2,094          269

Cash and cash equivalents at beginning of period              1,625        2,484          318

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

Cash and cash equivalents at end of period                    3,072        4,578          587
                                                            =======      =======      =======


Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars ("US$") for
the convenience of the reader has been made at the exchange rate of US$1.00 = HK$7.8. No
representation is made that the Hong Kong Dollar amounts could have been, or could be,
converted into United States Dollars, at that rate on March 31, 2006 or at any other certain
rate.

The financial statements should be read in conjunction with the accompanying notes.


                                              -3-
</TABLE>


<PAGE>
                  PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                  --------------------------------------------
                          NOTES TO FINANCIAL STATEMENTS
             -----------------------------------------------------
            (Amounts in thousands, except share and per share data)


1. BASIS OF PRESENTATION

         The accompanying unaudited consolidated financial statements include
         the accounts of Physical Spa & Fitness Inc. ("the Company") and the
         subsidiaries that it controls. The Company, through its subsidiaries,
         operates fitness and spa/beauty centers in Hong Kong and China. Unless
         otherwise specified in the text, references to the Company include the
         Company and its subsidiaries. These financial statements should be read
         in conjunction with the consolidated financial statements included in
         the Company's Annual Report on Form 10-K for the year ended December
         31, 2005.

         The accompanying unaudited condensed consolidated financial statements
         have been prepared in accordance with generally accepted accounting
         principles for interim financial information and with the instructions
         to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
         include all of the information and footnotes required by generally
         accepted accounting principles for complete financial statements. In
         the opinion of management, all adjustments (consisting of normal
         recurring accruals) considered necessary for a fair presentation have
         been included. Operating results for the three-month period ended March
         31, 2006 are not necessarily indicative of the results that may be
         expected for the year ending December 31, 2006.

         The balance sheet at December 31, 2005 has been derived from the
         audited financial statements at that date but does not include all of
         the information and footnotes required by generally accepted accounting
         principles for complete financial statements.

2. PREPARATION OF FINANCIAL STATEMENTS

         The Company had negative working capital of HK$129,835 and HK$125,361
         as of December 31, 2005 and March 31, 2006 and incurred losses of
         HK$55,946 and HK$6,113 for the year ended December 31, 2005 and the
         three months ended March 31, 2006 respectively. In addition, the
         Company had accumulated losses and deficit in stockholders' equity of
         HK$24,616 and HK$23,713 respectively as of March 31, 2006. These
         conditions raised substantial doubt about the Company's ability to
         continue as a going concern.

         Continuation of the Company as a going concern is dependent upon
         attaining profitable operations in the future, exercising tight cost
         and cash flow controls measures, and obtaining additional banking
         facilities and adequate finance as and when required. The financial
         statements do not include any adjustments that might result from the
         outcome of this uncertainty.

         The Principal Stockholder has undertaken to make available adequate
         funds to the Company as and when required to maintain the Company as a
         going concern. In addition, the negative working capital as of March
         31, 2006 was mainly because of the non-cash items including deferred
         income and deferred liabilities of HK$207,483 and HK$7,325 respectively
         while the loss for the period then ended was mainly attributable to the
         depreciation expense of HK$12,814. Having excluded these non-cash items
         and taken into consideration the undertaking provided by the Principal
         Stockholder, management believes that the Company will be able to
         settle its liabilities when they come due. As a result, the financial
         statements have been prepared in conformity with the principles
         applicable to a going concern.

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
         "Share-Based Payment" ("SFAS No. 123(R)"). This statement provides
         investors and other users of financial statements with more complete
         and neutral financial information by requiring that the compensation
         cost relating to share-based payment transactions be recognized in
         financial statements. That cost will be measured based on the fair
         value of the equity or liability instruments issued. SFAS No. 123(R)
         covers a wide range of share-based compensation arrangements including
         share options, restricted share plans, performance-based awards, share
         appreciation rights, and employee share purchase plans. SFAS No. 123(R)
         replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and
         supersedes APB Opinion No. 25, "Accounting for Stock Issued to
         Employees". Public entities (other than those filing as small business
         issuers) will be required to apply this statement as of the first
         interim or annual reporting period that begins after June 15, 2005. In
         March 2005, the SEC have published Staff Accounting Bulletin No. 107,
         "Share-Based Payment," ("SAB No. 107") to give public entities guidance
         in applying the provisions of SFAS No. 123(R), and to users of
         financial statements in analyzing the information provided under SFAS
         No. 123(R). SAB No. 107 should be applied upon the adoption of SFAS No.
         123(R). Management considers that SFAS No. 123(R) and SAB No. 107 would
         not have significant impact on its financial statements on adoption.

                                       -4-


<PAGE>

                  PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                  --------------------------------------------
                          NOTES TO FINANCIAL STATEMENTS
             -----------------------------------------------------
            (Amounts in thousands, except share and per share data)


         In March 2006, the EITF reached a consensus on EITF Issue No. 06-3,
         "How Taxes Collected from Customers and Remitted to Governmental
         Authorities Should Be Presented in the Income Statement (That is, Gross
         versus Net Presentation)" that the entities may adopt a policy of
         presenting taxes in the income statement on either a gross or net
         basis. Gross or net presentation may be elected for each different type
         of tax, but similar taxes should be presented consistently. Taxes
         within the scope of this EITF would include taxes that are imposed on a
         revenue transaction between a seller and a customer, for example, sales
         taxes, use taxes, value-added taxes, and some types of excise taxes. If
         taxes are significant an entity should disclose its policy of
         presenting taxes and the amounts of taxes that are recognized on a
         gross basis. The consensus is effective for interim and annual
         financial periods beginning after December 15, 2006. Management
         considers that the adoption of this EITF would not have significant
         impact on its financial statements.

         The FASB issued SFAS No. 154, "Accounting Changes and Error
         Corrections". SFAS 154 replaces APB No. 20, "Accounting Changes" and
         SFAS No. 3, "Reporting Accounting Changes in Interim Financial
         Statements" and establishes retrospective application as the required
         method for reporting a change in accounting principle. SFAS 154
         provides guidance for determining whether retrospective application of
         a change in accounting principle is impracticable and for reporting a
         change when retrospective application is impracticable. The reporting
         of a correction of an error by restating previously issued financial
         statements is also addressed. SFAS 154 is effective for accounting
         changes and corrections of errors made in fiscal years beginning after
         December 15, 2005, although earlier application is permitted for
         changes and corrections made in fiscal years beginning after June 1,
         2005. The Company will consider this SFAS in future periods for
         correction of error or if there is any change in accounting principle.

4. REPORT ON SEGMENT INFORMATION

         The Group's operations are mainly classified into two reportable
         business segments: provision of physical fitness and beauty treatment
         services. Each separately managed segment offers different products
         requiring different marketing and distribution strategies.

         Information concerning consolidated operations by business segment is
         presented in the tables below:

         CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT

                                                  THREE MONTHS ENDED MARCH 31
                                               ---------------------------------
                                                 2005        2006        2006
                                               --------    --------    --------
                                                  HK$         HK$         US$

      Operating revenues
          - Physical fitness                     69,451      55,182       7,075
          - Beauty treatments                    48,989      54,039       6,928
          - Others                                1,454         167          21
                                               --------    --------    --------

                                                119,894     109,388      14,024
                                               ========    ========    ========

      Operating loss
          - Physical fitness                     (4,487)     (8,132)     (1,043)
          - Beauty treatments                    (1,265)      2,345         301
          - Others                                1,444         131          17

      Other income, net                              68         531          68
      Interest expenses                          (1,207)       (495)        (63)
      Provision for income taxes                   (188)         --          --
      Minority interests                            145        (493)        (63)
                                               --------    --------    --------
Net loss                                         (5,490)     (6,113)       (783)
                                               ========    ========    ========


                                       -5-


<PAGE>

                  PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                  --------------------------------------------
                          NOTES TO FINANCIAL STATEMENTS
             -----------------------------------------------------
            (Amounts in thousands, except share and per share data)


5. LONG-TERM BANK LOANS

         The Group had obtained additional long-term bank loans of HK$510 during
         the three-month period ended March 31, 2006.

         During the period under review, the Group repaid HK$27 of its
         outstanding bank loans. The outstanding loan balances as of March 31,
         2006 were analyzed as follows:

PRINCIPAL                     INTEREST RATE                  MATURITY
   HK$        US$

   483        62            HK$ prime - 0.5%        Serially from 2006 to 2007
 ======     ======

Aggregate maturities of the long-term bank loans are as follows:

PRINCIPAL                    PAYABLE DURING THE FOLLOWING PERIODS
   HK$        US$

   336        43                          2006

   147        19                          2007

--------   --------
   483        62
========   ========


6. CONTINGENT LIABILITIES

         The Company imported beauty products from suppliers in Hong Kong into
         the PRC for beauty treatment and sales to its customers. Under the
         prevailing PRC rules and regulations governing imports into the PRC,
         the Company is required to make import declarations and to pay various
         taxes including, inter alia, customs duty, consumption tax and
         value-added tax, on such imports. The Company faced further penalty,
         additional to the original amount of taxes payable, ranging from 50% to
         500% of the original amount of taxes payable, had the Company been
         found in breach of any of such rules and regulations.

         As of December 31, 2005 and March 31, 2006, the Company is potentially
         liable to make good in aggregate an amount of HK$13,833, of which an
         amount of HK$8,173 has been provided for in both balance sheet dates as
         Taxes Other Than Income and as Other Receivables in the liabilities and
         assets respectively. No further provision has been made for the
         difference and any potential amount of penalty which might be imposed.
         In this respect, the directors are of the opinion that the probability
         that such potential liabilities will be crystallized would be remote.

7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                                                 THREE MONTHS ENDED MARCH 31
                                               ---------------------------------
                                                 2005        2006        2006
                                               --------    --------    --------
                                                  HK$         HK$         US$
Cash paid (received) for:
    Interest expenses                            1,207        495          63
    Income taxes                                  (505)        --          --
Non-cash operating, investing and financing
  activities:
Acquisition of property, plant and
  equipment under capital leases                    --        848         109


                                       -6-


<PAGE>

ITEM 2 -  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

              PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.

Overview of Company's Business:

         The Company, through its predecessor companies and its subsidiaries,
has been an established commercial operator of fitness and spa centers in Hong
Kong and China since 1986. The Company currently operates seventeen facilities:
thirteen in Hong Kong and four in China (including one in Macau). In addition,
the Company is appointed by an outside investor to manage a fitness and spa
center in Dalian, China. The Company also grants the use of the trade name
to a third party for operating a fitness and spa center in Hangzhou, China.
Management believes that the Company is one of the top providers of fitness
facilities and spa and beauty treatment services in Hong Kong and China, with
approximately 110,000 customers. The Company offers to its customers, at each
location, access to a wide range of U.S.- styled fitness and spa services.

         The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions with no material assets or liabilities. Prior
to acquisition of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation ("Physical Limited"), the Company had no revenue producing
operations, but planned to enter into joint ventures and/or acquisitions
originally in the area of real estate, to expand its operations. In October,
1996, the Company closed a transaction with Ngai Keung Luk (Mr. Luk), a 100%
shareholder of Physical Limited, whereby the Company entered into a Share
Exchange Agreement with Mr. Luk, pursuant to which the Company issued 8,000,000
pre-split (6,000,000 post-split) shares of its Common Stock to Mr. Luk in
exchange for all of the outstanding shares of Physical Limited (the "Closing").
At the Closing, the then current management of the Company resigned and was
replaced by the current management of the Company.


                                      -7-


<PAGE>

RESULTS OF OPERATIONS

         The Company's revenues are derived from its two main lines of business
of fitness and spa services in the following principal ways: admission fees and
monthly subscription fees from the fitness customers, and the sale of beauty
treatments and skin care products to the beauty patrons.

         In respect to fitness services, each customer will be charged a monthly
due of HK$299 (US$38) for the usage of the fitness centers. During promotional
period, discounts on the monthly dues will be offered to customers.

         In respect to beauty services, the customers may purchase single
treatment, or in packages of ten or more treatments, with quantity discounts
available. There is a wide range of beauty treatments available at prices
ranging from HK$400 (US$51) to HK$15,000 (US$1,923).

         The following table sets forth selected income data as a percentage of
total operating revenue for the periods indicated.

RESULTS OF OPERATIONS

                                                 Three Months Ended
                                                     March 31
                                                 2005        2006
                                              ----------  ----------

Operating Revenues                              100.00%     100.00%

Total operating expenses                        103.59%     105.17%

Operating loss                                   (3.59%)     (5.17%)

Loss before income taxes and
minority interests                               (4.54%)     (5.14%)

Provision for income taxes                       (0.16%)        --

Minority interests                                0.12%      (0.45%)

Net loss                                         (4.58%)     (5.59%)
                                              ==========  ==========

THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
MARCH 31, 2005 (UNAUDITED).
--------------------------------------------------------------------------------

         OPERATING REVENUES. Operating revenues for the first quarter of
2006 totaled HK$109,388,000 (US$14,024,000) compared to HK$119,894,000
(US$15,371,000) of last year. This represented a decrease of 9%, mainly due to
keen competition especially in the fitness market.

         Fitness services which constituted 50% of total operating revenues,
dropped by 21% to HK$55,182,000 (US$7,075,000) in the first quarter of the
year.

         Beauty services, being 49% of total operating revenues, increased
by 10% to HK$54,039,000 (US$6,928,000). This quarter has seen a successful
launching of new equipments to cater to the needs of consumers.


                                      -8-


<PAGE>

         Operating revenues from others decreased 89% to HK$167,000 (US$21,000)
in the first quarter compared to HK$1,454,000 (US$186,000) of the same quarter
last year. The significant decrease was mainly due to the amendment to the terms
of the licence agreement. Since June 1, 2005, the Company has ceased to provide
management service to the Hangzhou center but granted it a licence for using the
trade name of the Company.

         OPERATING EXPENSES. The Company's operating expenses totaled
HK$115,044,000 (US$14,749,000), or 105% of operating revenues, for the first
quarter of 2006, compared to HK$124,202,000 (US$15,923,000), or 104% of
operating revenues, for the first quarter of 2005. This represented a decrease
of HK$9,158,000 (US$1,174,000) mainly due to an effective cost control over the
operating expenses, especially salaries which decreased by HK$2,806,000
(US$360,000). However, certain fixed costs remained high. In particular, rent
and related expenses had increased from 35% to 37% of total operating revenues.
Having regard to the continuous increase in the market rent, the Company will
closely monitor the performance of each centers to determine whether or not a
renewal of tenancy upon expiration is justifiable.

         TOTAL NON-OPERATING INCOME. Total non-operating income for the first
quarter of 2006 totaled HK$36,000 (US$5,000) compared to a non-operating expense
of HK$1,139,000 (US$146,000) in 2005. This represented an increase of 103% due
to a substantial reduction in interest expenses.

         PROVISION FOR INCOME TAXES. The Company did not make any tax provision
for the first quarter in view of the losses incurred.

         NET LOSS. The Company has suffered a net loss of HK$6,113,000
(US$783,000) for the first quarter of 2006, compared to a net loss of
HK$5,490,000 (US$704,000) for 2005, representing an increase of 11%. Management
believes that the bottom line will gradually improve when the deferred income is
recognized in the remaining of the year.


                                      -9-


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations primarily through cash
generated from operations, short-term bank credit, long-term bank loans,
advances from customers relating to prepaid fitness and spa income, and leasing
arrangements with financial institutions.

         Cash and cash equivalent balances as of March 31, 2006 and December 31,
2005 were HK$4,578,000 (US$587,000) and HK$2,484,000 (US$318,000).

         Net cash provided by operating activities were HK$13,198,000
(US$1,693,000) and HK$11,845,000 (US$1,519,000) for the three-month periods
ended March 31, 2005 and 2006, respectively. The Company's operating activities
are historically financed by cash flows from operations.

         Net cash used in investing activities were HK$8,223,000 (US$1,054,000)
and HK$2,259,000 (US$290,000) for the three-month periods ended March 31, 2005
and 2006 respectively, primarily as a result of expenditures for property, plant
and equipment. Total capital expenditures were as follows:

<TABLE>
                                                               (in thousands)
                                                        Three months ended March 31
                                                       2005        2006        2006
                                                     ---------   ---------   ---------
                                                        HK$         HK$         US$
<S>                                                     <C>        <C>          <C>

Cash purchases of property, plant and equipment         6,108      2,663        342
Non-cash property, plant and equipment purchases
financed through capital lease obligations                572        848        109

                                                      --------   --------    --------
Total capital expenditures                              6,680      3,511        451
                                                      ========   ========    ========

          The following schedule reflects capital expenditures by type of expenditure:

                                                                (in thousands)
                                                       Three months ended March 31
                                                       2005        2006        2006
                                                     ---------   ---------   ---------
                                                        HK$         HK$         US$

Capital expenditures for new center                     3,712        --          --
Capital expenditures for maintenance and updating
existing centers and corporate office                   2,968       3,511        451

                                                      --------    --------   --------
Total capital expenditures                              6,680       3,511        451
                                                      ========    ========   ========

</TABLE>

         Net cash used in financing activities, which mainly include proceeds
from bank loans, net interest and repayment, were HK$3,528,000 (US$453,000)
and HK$7,492,000 (US$960,000) in the three-month periods ended March 31, 2005
and 2006, respectively.


                                      -10-


<PAGE>

         During the three-month period ended March 31, 2006, the Company has not
entered into any transactions using derivative financial instruments or
derivative commodity instruments nor held any marketable equity securities of
publicly traded companies. Accordingly, the Company believes its exposure to
market interest rate risk and price risk is not material. The Company's
long-term loan bears interest rate of 7.75% per annum. The total balance
outstanding as of March 31, 2006 on such loan was HK$483,000 (US$62,000). The
last repayment on the loan is due in 2007.

         During the three-month period ended March 31, 2006, the Company has no
material purchases of investments.

         Consistent with the general practice of the fitness and spa industry,
the Company receives prepaid monthly fees from fitness customers, which are
non-refundable, and spa treatment dues from beauty customers. This practice
creates working capital that the Company generally utilizes for working capital
purposes. However, the unused portion of the pre-paid monthly dues and spa
treatment dues is characterized as deferred income, a liability, for accounting
purposes.

         The Company's trade receivable balance at March 31, 2006, was
HK$7,882,000 (US$1,011,000). These trade receivables are mainly amounts due from
major credible banks and the history of credit loss from these banks are none.

         As disclosed in Note 2 to the financial statements, the Company had
negative working capital of HK$125,361,000 (US$16,071,000) as of March 31, 2006
and incurred losses of HK$6,113,000 (US$783,000) for the period ended March 31,
2006. In addition, the Company had accumulated losses and deficit in
stockholders' equity of HK$24,616,000 (US$3,155,000) and HK$23,713,000
(US$3,040,000) respectively as of March 31, 2006. These conditions raised
substantial doubt about the Company's ability to continue as a going concern. In
order to maintain it as a going concern, the management is seeking to procure
additional funding from various sources. In addition, the Principal Stockholder
has also undertaken to make available adequate funds to the Company as and when
required to maintain the Company as a going concern. Moreover, the negative
working capital was mainly because of non-cash items including deferred income
and deferred liabilities while the loss for the period was mainly attributable
to the depreciation expense. Having excluded these non-cash items and taken into
consideration the undertaking provided by the Principal Stockholder, Management
believes that cash flow generated from the operations of the Company, the tight
cost and cash flow control measures and the existing and additional credit
facilities to be sought should be sufficient to satisfy the working capital and
capital expenditure requirements of the Company for at least the next 12 months.


                                      -11-


<PAGE>

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S., or GAAP, requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In recording
transactions and balances resulting from business operations, the Company uses
estimates based on the best information available. The Company uses estimates
for such items as depreciable lives and the amortization period for deferred
income. The Company revises the recorded estimates when better information is
available, facts change or actual amounts can be determined. These revisions can
affect operating results.

The critical accounting policies and use of estimates are discussed in and
should be read in conjunction with the annual consolidated financial statements
and notes included in the latest 10-K, as filed with the SEC, which includes
audited consolidated financial statements for the three fiscal years ended
December 31, 2005.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The operations of the Company are located in Hong Kong and the PRC and most of
the operating revenues are earned in these two areas. Therefore the Company is
not exposed to risks relating to fluctuating currencies or exchange rates.
Besides, the Company has not purchased options or entered into swaps or forward
or futures contracts. The primary market risk exposure is that of interest rate
risk on borrowings that the Company may have under some future credit facility.

ITEM 4 - CONTROLS AND PROCEDURES

The Chief Executive Officer and Chief Financial Officer (the principal executive
officer and principal financial officer, respectively) of the Company have
concluded, based on their evaluation as of March 31, 2006, that the design
and operation of the Company's "disclosure controls and procedures" (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
("Exchange Act")) are, to the best of their knowledge, effective to ensure that
information required to be disclosed in the reports filed or submitted by the
Company under the Exchange Act is accumulated, recorded, processed, summarized
and reported to the management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding whether or
not disclosure is required.

During the quarter ended March 31, 2006, there were no changes in the
internal controls of the Company over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the internal controls of the Company
over financial reporting.


                                      -12-


<PAGE>

PART II - OTHER INFORMATION

ITEM 1  - LEGAL PROCEEDINGS

          NONE

ITEM 2  - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

          NONE

ITEM 3  - DEFAULTS UPON SENIOR SECURITIES

          NONE

ITEM 4  - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
          HOLDERS

          NONE

ITEM 5  - OTHER INFORMATION

          NONE

ITEM 6  - EXHIBITS AND REPORTS ON FORM 8-K

         31       Certification of the Chief Executive Officer and Chief
                  Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
                  of the Securities Exchange Act of 1934

         32.1     Certification of the Company's Chief Executive Officer
                  Pursuant to 18 U.S.C. SS. 1350 Adopted Pursuant to Section 906
                  of the Sarbanes-Oxley Act of 2002

         32.2     Certification of the Chief Financial Officer Pursuant to 18
                  U.S.C. SS. 1350 Adopted Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002


                                      -13-


<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                    PHYSICAL SPA & FITNESS INC.
                                    (Registrant)


Date: May 19, 2006                  /s/ Ngai Keung Luk
                                    ------------------------------------
                                    Ngai Keung Luk,
                                    Chairman and Chief Executive Officer

Date: May 19, 2006                  /s/ Darrie Lam
                                    ------------------------------------
                                    Darrie Lam,
                                    Chief Financial Officer


                                      -14-