<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

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

For the quarterly period ended September 30, 2005.

( )   TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from          to
                               --------    --------

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: September 30, 2005, 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 and nine-month periods
     ended September 30, 2004 and 2005 (Unaudited)

     Condensed Consolidated Balance Sheets at December 31, 2004        2
      and September 30, 2005 (Unaudited)

     Condensed Consolidated Statements of Cash Flows                   3
     for the nine-month periods ended
     September 30, 2004 and 2005 (Unaudited)

     Notes to Financial Statements                                     4

     Review Report of Independent Accountants                          7

   ITEM 2   -   MANAGEMENT'S DISCUSSION AND ANALYSIS OF                8
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   ITEM 3   -   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT        14
                MARKET RISK

   ITEM 4   -   CONTROLS AND PROCEDURES                               14

PART II  -   OTHER INFORMATION

   ITEM 1   -   LEGAL PROCEEDINGS                                     15

   ITEM 2   -   UNREGISTERED SALES OF EQUITY SECURITIES
                AND USE OF PROCEEDS                                   15

   ITEM 3   -   DEFAULTS UPON SENIOR SECURITIES                       15

   ITEM 4   -   SUBMISSION OF MATTERS TO A VOTE                       15
                OF SECURITY HOLDERS

   ITEM 5   -   OTHER INFORMATION                                     15

   ITEM 6   -   EXHIBITS AND REPORTS ON FORM 8-K                      15







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

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


                                                     Three months ended September 30       Nine months ended September 30
                                                       2004        2005        2005        2004        2005         2005
                                                     ---------   ---------   ---------   ---------   ---------   ---------
                                                        HK$         HK$         US$         HK$          HK$         US$
<S>                                                  <C>         <C>         <C>          <C>        <C>         <C>
Operating Revenues
Fitness service                                        75,018      59,281       7,600     228,270     191,505      24,552
Beauty treatments                                      50,208      48,248       6,186     154,960     147,944      18,967
Others*                                                   107         383          49       1,236       1,830         235
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total operating revenues                              125,333     107,912      13,835     384,466     341,279      43,754
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Operating Expenses
Salaries and commissions                              (40,570)    (41,282)     (5,293)   (122,714)   (122,182)    (15,664)
Rent and related expenses                             (42,579)    (41,711)     (5,347)   (122,327)   (124,758)    (15,995)
Depreciation                                          (15,460)    (14,832)     (1,902)    (47,754)    (44,694)     (5,730)
Other selling and administrative expenses             (27,944)    (28,844)     (3,698)    (86,783)    (83,442)    (10,698)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total operating expenses                             (126,553)   (126,669)    (16,240)   (379,578)   (375,076)    (48,087)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
(Loss) Income from operations                          (1,220)    (18,757)     (2,405)      4,888     (33,797)     (4,333)
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Non-operating income (expenses)
Other income, net*                                        129         156          20         509         342          44
Interest expenses                                      (1,415)       (897)       (115)     (4,602)     (2,836)       (364)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total non-operating expenses                           (1,286)       (741)        (95)     (4,093)     (2,494)       (320)
                                                     ---------   ---------   ---------   ---------   ---------   ---------

(Loss) Income before income taxes
 and minority interests                                (2,506)    (19,498)     (2,500)        795     (36,291)     (4,653)

Benefit (Provision) for income taxes                      441          --          --      (2,248)         --          --
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Loss before minority interests                         (2,065)    (19,498)     (2,500)     (1,453)    (36,291)     (4,653)

Minority interests                                        425         937         120         263       1,155         148
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Net loss                                               (1,640)    (18,561)     (2,380)     (1,190)    (35,136)     (4,505)
Other comprehensive income:
- Foreign currency translation                              -         664          85           -         664          85
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Comprehensive loss                                     (1,640)    (17,897)     (2,295)     (1,190)    (34,472)     (4,420)
                                                     =========   =========   =========   =========   =========   =========

Loss per common share                                   (0.16)      (1.79)      (0.23)      (0.12)      (3.45)      (0.44)
                                                     =========   =========   =========   =========   =========   =========
Number of shares of common stock outstanding
(in thousands)                                         10,000      10,000      10,000      10,000      10,000      10,000
                                                     =========   =========   =========   =========   =========   =========

* Other non-operating income of HK$1,055 (US$135) for the period ended
September 30, 2004 has been reallocated to Operating Revenues in consistence
with the unaudited financial statements of the current period.

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 September 30, 2005 or at any other certain rate.

The financial statements should be read in conjunction with the accompanying notes.
</TABLE>

                                            -1-



<PAGE>
<TABLE>
                                 PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                                 --------------------------------------------
                                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                     ---------------------------------------
                                   AS OF DECEMBER 31, 2004 AND SEPTEMBER 30, 2005
                              (Amounts in thousands, except share and per share data)

                                                                                      As of
                                                               -------------------------------------------------------
                                                       Note       December 31, 2004               September 30, 2005
                                                                           HK$                HK$                US$
<S>                                                                      <C>                <C>                  <C>
ASSETS

Current assets
Cash and bank balances                                                   1,625              1,169                150
Trade receivables                                                        4,006              7,141                916
Other receivables                                                        7,334              7,334                940
Rental and utility deposits                                             31,821             31,645              4,057
Prepayments to vendors and suppliers and other current assets            2,482             11,869              1,521
Inventories, finished products for beauty treatment and sale             5,873              5,932                761
Income taxes recoverable                                                 2,041              1,552                199
                                                              -----------------  -----------------  -----------------

Total current assets                                                    55,182             66,642              8,544
                                                              -----------------  -----------------  -----------------

Marketable securities, collateralized                                    4,280              4,280                549
Bank deposits, collateralized                                           11,523              9,177              1,176
Due from a stockholder                                                   9,480              9,480              1,215
Prepayments for construction-in-progress                                11,835              1,108                142
Property, plant and equipment,
   net of accumulated depreciation of
   HK$356,010 as of September 30, 2005 (2004: HK$313,845)              187,892            169,102             21,680
                                                              -----------------  -----------------  -----------------

Total assets                                                           280,192            259,789             33,306
                                                              =================  =================  =================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Short-term bank loans                                                   14,473              7,714                989
Long-term bank loans - current portion                   6                 638                 --                 --
Trade and other payables                                                60,685             50,541              6,480
Obligations under finance leases - current portion                         716                286                 37
Deferred income - current portion                                      117,526            126,307             16,193
Deferred liabilities - current portion                                   5,745              3,428                439
Income taxes payable                                                       214                298                 38
Taxes other than income                                                  6,570              6,979                895
                                                              -----------------  -----------------  -----------------

Total current liabilities                                              206,567            195,553             25,071
                                                              -----------------  -----------------  -----------------

Deferred income - non-current portion                                   18,748             46,429              5,953
Deferred liabilities -  non-current portion                              7,983              6,349                814
Obligations under finance leases - non-current portion                      --                191                 24
Deferred taxation                                                        2,202              2,202                282
Minority interests                                                       7,010              5,855                751

Commitments and contingencies                            7

Stockholders' equity:
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                                         161                825                106
Retained earnings                                                       37,443              2,307                295
                                                              -----------------  -----------------  -----------------

Total stockholders' equity                                              37,682              3,210                411
                                                              -----------------  -----------------  -----------------

Total liabilities and stockholders' equity                             280,192            259,789             33,306
                                                              =================  =================  =================

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 September 30, 2005 or at
any other certain rate.

The financial statements should be read in conjunction with the accompanying notes.
</TABLE>
                                            -2-



<PAGE>
<TABLE>
                            PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                            --------------------------------------------
                      UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           -----------------------------------------------
                 FOR THE NINE MONTHS ENDED TO SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2005
                       (Amounts in thousands, except share and per share data)


<CAPTION>

                                                                     Nine Months Ended September 30
                                                                     ------------------------------
                                                                       2004       2005       2005
                                                                     --------   --------   --------
                                                                       HK$        HK$         US$

<S>                                                                  <C>        <C>        <C>
Cash flows from operating activities:
Net loss                                                             (1,190)   (35,136)     (4,505)

Adjustments to reconcile net loss to net cash provided
  by operating activities:
    Minority interests                                                 (263)    (1,155)       (148)
    Depreciation                                                     47,754     44,694       5,730
    Loss on disposal of property, plant and equipment                    50         20           3

Changes in working capital:
    Trade receivables                                                 4,019     (3,130)       (400)
    Rental and utility deposits                                         (62)       198          26
    Prepayments to vendors and suppliers and other current assets     3,007     (9,332)     (1,196)
    Inventories                                                      (2,481)       (59)         (8)
    Due from a related company                                       (1,023)        --          --
    Trade and other payables                                        (28,922)   (10,254)     (1,315)
    Deferred income                                                  21,299     36,104       4,629
    Deferred liabilities                                             (1,957)    (3,951)       (507)
    Income taxes payable/recoverable                                  1,366        573          73
    Taxes other than income                                             226        409          52
                                                                    --------    --------   --------

Net cash provided by operating activities                            41,823     18,981       2,434
                                                                    --------    --------   --------

Cash flows from investing activities:
    Prepayments for construction-in-progress                         (4,132)      (422)        (54)
    Acquisition of property, plant and equipment                    (26,310)   (13,017)     (1,669)
    Acquisition of marketable securities                               (990)        --          --
    Sales proceeds from disposal of property, plant and equipment       230         18           2
    Decrease in collateralized bank deposits                          2,591      2,346         301
    Due from a stockholder                                               --         --          --
                                                                    --------    --------   --------

Net cash used in investing activities                               (28,611)   (11,075)     (1,420)
                                                                    --------    --------   --------

Cash flows from financing activities:
    Settlement of short-term bank loans                              (3,305)    (6,859)       (879)
    Repayment of long-term bank loans                                (5,406)      (638)        (82)
    Capital element of finance lease rental payments                 (4,714)      (811)       (104)
                                                                    --------    --------   --------

Net cash used in financing activities                               (13,425)    (8,308)     (1,065)
                                                                    --------    --------   --------

Net decrease in cash and cash equivalents                              (213)      (402)        (51)

Cash and cash equivalents at beginning of period                      1,806      1,625         208

Cumulative translation adjustments                                       --        (54)         (7)
                                                                    --------    --------   --------

Cash and cash equivalents at end of period                            1,593      1,169         150
                                                                    ========    ========   ========

Non-cash operating, investing and financing activities:
New finance leases                                                        -        572          73
                                                                    ========    ========   ========


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 September 30, 2005 or at any other certain rate.

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

</TABLE>

                                       -3-




<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, 2004.

         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 nine-month period ended
         September 30, 2005 are not necessarily indicative of the results that
         may be expected for the year ending December 31, 2005. These financial
         statements have been reviewed by independent accountants, Moores
         Rowland Mazars, and their report is included in P.7 of this Form-10Q.

         The balance sheet at December 31, 2004 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 Group had a negative working capital of HK$151,385 and HK$128,911
         as of December 31, 2004 and September 30, 2005. Besides, the Group had
         incurred losses of HK$18,561 and HK$35,136 in the three-month and
         nine-month periods ended September 30, 2005 respectively. These
         conditions raise substantial doubt about the Group's ability to
         continue as a going concern.

         Continuation of the Group 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. In addition, the Principal Stockholder has undertaken to
         make available adequate funds to the Group as and when required to
         maintain the Group as a going concern. As a result, the financial
         statements have been prepared in conformity with the principles
         applicable to a going concern.

3. REVENUE RECOGNITION

         Revenue represents service income in connection with the provision of
         physical fitness and beauty treatment services and other related
         income, net of the related sales tax, if any. The non-refundable
         admission fee is recognized as revenue over a seven-month period which
         is the estimated duration projected from a sample of customers using
         the fitness services in the fiscal year ended December 31, 2004. The
         monthly dues, service income and other related income are recognized as
         revenue when services are rendered.


4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         There are no new accounting pronouncements for which adoption is
         expected to have a material effect on the Company's financial
         statements.


                                       -4-



<PAGE>

                  PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                  --------------------------------------------

                          NOTES TO FINANCIAL STATEMENTS
             -----------------------------------------------------
            (Amounts in thousands, except share and per share data)

5. 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:
<TABLE>
<CAPTION>


         CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT

                                                    THREE MONTHS ENDED SEPTEMBER 30     NINE MONTHS ENDED SEPTEMBER 30
                                                   ---------------------------------   ---------------------------------
                                                     2004        2005        2005        2004         2005        2005
                                                   ---------   ---------   ---------   ---------   ---------   ---------
                                                      HK$         HK$         US$         HK$         HK$          US$
<S>                                                <C>         <C>         <C>         <C>         <C>         <C>

         Operating revenues
             - Physical fitness                      75,018      59,281       7,600     228,270     191,505      24,552
             - Beauty treatments                     50,208      48,248       6,186     154,960     147,944      18,967
             - Others                                   107         383          49       1,236       1,830         235
                                                   ---------   ---------   ---------   ---------   ---------   ---------

                                                    125,333     107,912      13,835     384,466     341,279      43,754
                                                   =========   =========   =========   =========   =========   =========

         Net (loss) income
             - Physical fitness                        (300)    (16,079)     (2,062)    (1,998)     (33,988)     (4,357)
             - Beauty treatments                     (1,314)     (2,907)       (373)       (92)      (2,985)       (383)
             - Others                                   (26)        425          55        900        1,837         235
                                                   ---------   ---------   ---------   ---------   ---------   ---------
                                                     (1,640)    (18,561)     (2,380)    (1,190)     (35,136)     (4,505)

         Income taxes included in
            segment (loss) income above                (441)         --         --       2,248          --          --
         Minority interests included
            in segment (loss) income above             (425)       (937)       (120)      (263)      (1,155)       (148)
                                                   ---------   ---------   ---------   ---------   ---------   ---------
         Consolidated (loss) income before income
           taxes and minority interests              (2,506)    (19,498)     (2,500)       795      (36,291)     (4,653)
                                                   =========   =========   =========   =========   =========   =========


                                                           -5-
</TABLE>
<PAGE>
                  PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                  --------------------------------------------
                          NOTES TO FINANCIAL STATEMENTS
             -----------------------------------------------------
            (Amounts in thousands, except share and per share data)

6. LONG-TERM BANK LOANS

         The Group had not obtained additional long-term bank loans during the
         nine-month period ended September 30, 2005.

         During the nine-month period ended September 30, 2005, the Group repaid
         all of its outstanding bank loans.

7. 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, 2004 and September 30, 2005, the Company is
         potentially liable to make good in aggregate an amount of HK$12,994, of
         which an amount of HK$7,334 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.

<TABLE>

8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                                             THREE MONTHS ENDED SEPTEMBER 30     NINE MONTHS ENDED SEPTEMBER 30
                                            ---------------------------------   ---------------------------------
                                              2004        2005        2005        2004         2005        2005
                                           ---------   ---------   ---------   ---------   ---------   ---------
                                               HK$         HK$         US$         HK$         HK$          US$
<S>                                           <C>          <C>         <C>         <C>        <C>           <C>
Cash paid (received) for:
    Interest expenses                         1,415        897        115          4,602      2,836         364
    Income taxes                                 --        (69)        (9)           224       (573)        (73)
</TABLE>



                                       -6-
<PAGE>

REVIEW REPORT OF INDEPENDENT ACCOUNTANTS

We have reviewed the condensed consolidated balance sheet and the related
condensed consolidated statements of operations of Physical Spa & Fitness Inc.
(a Delaware Corporation) and subsidiaries as of September 30, 2005 and for the
three-month and nine-month periods then ended. We have also reviewed the related
condensed statement of cash flows for the nine-month period ended September 30,
2005. These financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards established by the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.

During the first and second quarters of 2005, the Company suffered losses from
its operations while in the third quarter of 2005, the Company experienced a
further decline in the operating performance of its operation and management
does not expect that there will be any substantial improvement in the operating
results of the Company in the foreseeable future. These circumstances gave rise
to indication that the carrying amount of the Company's long-lived assets may
not be recoverable and the long-lived assets should be tested for
recoverability. However, the Company did not perform impairment evaluation of
their long-lived assets, which is not in compliance with Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" issued by the Financial Accounting Standards Board in the
United States of America. It is not practicable for us to quantify the amount of
any impairment loss, if any, that would be necessary.

Based on our review, with the exception of the effects on the financial
statements of not assessing the impairment losses of the long-lived assets as
described in the preceding paragraph, we are not aware of any material
modifications that should be made to the accompanying interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Physical Spa & Fitness Inc. and subsidiaries as of December 31, 2004, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
April 14, 2005, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2004, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.

Note 3(b) of the Company's audited financial statements as of December 31, 2004,
and for the year then ended discloses that the Company had negative working
capital. Our auditor's report on those financial statements includes an
explanatory paragraph referring to the matters in note 3(b) of those financial
statements and indicating that these matters raised substantial doubt about the
Company's ability to continue as a going concern. Management's plan in regard to
these matters are also described in Note 3(b). As indicated in Note 2 of the
Company's unaudited interim financial statements as of September 30, 2005, and
for the nine months then ended, the Company suffered losses from operations and
continued to have a negative working capital. The accompanying interim financial
information does not include any adjustments that might result from the outcome
of this uncertainty.


Moores Rowland Mazars
Chartered Accountants
Certified Public Accountants
Hong Kong
November 21, 2005

                                       -7-

<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 Hang Zhou, 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 (Serleo), a 100%
shareholder of Physical Limited, whereby the Company entered into a Share
Exchange Agreement with Ngai Keung Luk (Serleo), pursuant to which the Company
issued 8,000,000 pre-split (6,000,000 post-split) shares of its Common Stock to
Ngai Keung Luk (Serleo) 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.

                                      -8-

<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: 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, customers are invited to purchase a
standard fitness card at a fee traditionally set at HK$600(US$77) for one
person. Each customer will also be charged a monthly due of HK$299 (US$38) for
the usage of the fitness centers. In order to attract more customers, the
Company currently waives the admission fees for all purchases of fitness cards
covering a period of six months or longer.

         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

<TABLE>
<CAPTION>
                                                 Three Months Ended          Nine Months Ended
                                                     September 30                 September 30
                                                 2004          2005           2004         2005
                                              -----------  -----------    -----------  -----------
<S>                                             <C>         <C>               <C>         <C>
Operating Revenues                              100.00%     100.00%           100.00%     100.00%

Total operating expenses                        100.97%     117.38%            98.73%     109.90%

Operating (loss) income                          (0.97%)    (17.38%)            1.27%      (9.90%)

(Loss) Income before income taxes and
minority interests                               (2.00%)    (18.07%)            0.21%     (10.63%)

Benefit (Provision) for income taxes              0.35%        --              (0.58%)        --

Minority interests                                0.34%       0.87%             0.06%       0.33%

Net loss                                         (1.31%)    (17.20%)           (0.31%)    (10.30%)
                                             ===========  ===========       ===========  ==========
</TABLE>

                                      -9-

<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2004 (UNAUDITED).
--------------------------------------------------------------------------------

         OPERATING REVENUES. The Company's total operating revenues decreased
14% to HK$107,912,000 (US$13,835,000) for the three months ended September 30,
2005, from HK$125,333,000 (US$16,068,000) for the three months ended September
30, 2004.

         55% of operating revenues was from the fitness services, which
decreased HK$15,737,000 (US$2,018,000) partly due to the special offer given to
the customers. Since April, 2005, the Company has promoted a new life fitness
plan at an average monthly fee of HK$83 (US$11). The Company expects to attract
some of its existing customers to enroll the new plan upon renewal, therefore
initially lowering the revenues generated from other plans with higher monthly
fees. Moreover, the third quarter also saw increasing competition in the fitness
market with close competitor (California Fitness) beginning TV broadcast for its
new center (Jackie Chan Sport Club) located at the same building of the
Company's existing center.

         45% was from the beauty services, which slightly decreased HK$1,960,000
(US$251,000) due to the keen competition in the market that not only hinders
price increment but also distracts customers to other service providers offering
lower price than the Company.

         OPERATING EXPENSES. The Company's operating expenses totaled
HK$126,669,000 (US$16,240,000), or 117% of operating revenues, for the third
quarter of 2005, compared to HK$126,553,000 (US$16,225,000), or 101% of
operating revenues, for the third quarter of 2004. This represented an increase
of HK$116,000 (US$15,000). Although there has been a decrease of HK$930,000
(US$119,000) in the leasehold improvement of a center which had been fully
depreciated by March, 2005, operating expenses remained high. In particular, the
new Shanghai center has incurred an additional salary cost of HK$826,000
(US$106,000) following its grand opening in early February, 2005.

         TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
third quarter of 2005 totaled HK$741,000 (US$95,000) compared to HK$1,286,000
(US$165,000) in 2004. This decrease was primarily due to lower interest expenses
incurred in the period.

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

         NET LOSS. As a result of the factors described above, net loss was
HK$18,561,000 (US$2,380,000) for the third quarter of 2005, compared to a net
loss of HK$1,640,000 (US$210,000) for the third quarter of 2004.

                                      -10-

<PAGE>

NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2004 (UNAUDITED).
----------------------------------------------------------------------------

         OPERATING REVENUES. Operating revenues for the first nine months of
2005 totaled HK$341,279,000 (US$43,754,000) compared to HK$384,466,000
(US$49,291,000) of last year. This represented a decrease of 11%, mainly due to
keen competition especially in the fitness market.

         Fitness services which constituted 56% of total operating revenues,
dropped by 16% to HK$191,505,000 (US$24,552,000) in the first nine months of the
year.

         Beauty services, being 43% of total operating revenues, dropped
slightly by 5% to HK$147,944,000 (US$18,967,000) in the first nine months of
2005.

         OPERATING EXPENSES. The Company's operating expenses for the first nine
months of 2005 totaled HK$375,076,000 (US$48,087,000) compared to HK$379,578,000
(US$48,664,000) in the first nine months of 2004, representing a decrease of 1%.
This included only a small portion of variable costs decreasing as a result of
lower revenues and therefore allowed room for tighter cost control over staff
headcount, usage of public utilities, and efficiency in marketing and
promotional activities.

         TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
first nine months of 2005 totaled HK$2,494,000 (US$320,000) compared to
HK$4,093,000 (US$525,000) in the first nine months of 2004. This represented a
decrease of 39% primarily due to lower interest expenses.

         PROVISION FOR INCOME TAXES. No income taxes were provided for the first
nine months of 2005 because of losses incurred.

         NET LOSS. The loss had widened to HK$35,136,000 (US$4,505,000) in the
nine month ended September 30, 2005, compared to a net loss of HK$1,190,000
(US$153,000) of the same period last year. The keen competition has impacted
adversely over the business of the Company; however, Management is determined to
provide value-for-money service to its customers for further enhancing its
market share as well as reputation in the remaining of the year.

                                      -11-



<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

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

         Cash and cash equivalent balances as of September 30, 2005 and December
31, 2004 were HK$1,169,000 (US$150,000) and HK$1,625,000 (US$208,000).

         Net cash provided by operating activities were HK$41,823,000
(US$5,362,000) and HK$18,981,000 (US$2,434,000) for the nine-month periods ended
September 30, 2004 and 2005, respectively. The Company's operating activities
are historically financed by cash flows from operations.

         Net cash used in investing activities were HK$28,611,000 (US$3,668,000)
and HK$11,075,000 (US$1,420,000) for the nine-month periods ended September 30,
2004 and 2005 respectively, primarily as a result of expenditures for property,
plant and equipment. Total capital expenditures were as follows:

<TABLE>
                                                               (in thousands)
                                                      Nine months ended September 30
                                                       2004        2005        2005
                                                     ---------   ---------   ---------
                                                        HK$         HK$         US$
<S>                                                  <C>         <C>         <C>

Cash purchases of property, plant and equipment        26,310     13,017       1,669
Non-cash property, plant and equipment purchases
financed through capital lease obligations                 --        572          73

Total capital expenditures                             26,310     13,589       1,742

          The following schedule reflects capital expenditures by type of expenditure:

                                                                (in thousands)
                                                       Nine months ended September 30
                                                       2004        2005        2005
                                                     ---------   ---------   ---------
                                                        HK$         HK$         US$

Capital expenditures for new center                    13,719       6,750         865
Captial expenditures for maintenance and updating
existing centers and corporate office                  12,591       6,839         877

Total capital expenditures                             26,310      13,589       1,742

</TABLE>

         Net cash used in financing activities, which mainly include repayment
of bank loans, were HK$13,425,000 (US$1,721,000) and HK$8,308,000 (US$1,065,000)
in the nine-month periods ended September 30, 2004 and 2005, respectively.

                                      -12-



<PAGE>

         During the nine-month period ended September 30, 2005, 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 has no
outstanding long-term loans as of September 30, 2005.

         During the nine-month period ended September 30, 2005, 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 prepaid monthly dues and spa
treatment dues is characterized as deferred income, a liability, for accounting
purposes.

         The Company's trade receivable balance at September 30, 2005, was
HK$7,141,000 (US$916,000). These trade receivables are mainly amounts due from
major credible banks and the history of credit loss from these banks are none.

         Capital expenditure for Fiscal Year 2004, and the nine-month period
ended September 30, 2005, were HK$27,066,000 (US$3,470,000) and HK$13,017,000
(US$1,669,000) respectively.

         And as mentioned in note 2 to the financial statements, the Company has
negative working capital and incurred loss for the period under review. 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 this
connection, the Principal Stockholder agrees to inject funds and realize his net
worth assets to support the Company as and when required. Accordingly, the
Company believes that cash flow generated from its operations, the tight cost
and cash flow control measures and its existing and additional credit facilities
to be sought should be sufficient to satisfy its working capital and capital
expenditure requirements for at least the next 12 months.

                                      -13-



<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, 2004.

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 September 30, 2005, 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 September 30, 2005, 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.

                                      -14-



<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

          NONE

                                      -15-




<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: November 21, 2005                  /s/ Ngai Keung Luk
                                    ------------------------------------
                                    Ngai Keung Luk,
                                    Chairman and Chief Executive Officer

Date: November 21, 2005                  /s/ Darrie Lam
                                    ------------------------------------
                                    Darrie Lam,
                                    Chief Financial Officer

                                      -16-