<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 June 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: June 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 six-month periods
     ended June 30, 2004 and 2005 (Unaudited)

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

     Condensed Consolidated Statements of Cash Flows                   3
     for the six-month periods ended
     June 30, 2004 and 2005 (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        13
                MARKET RISK

   ITEM 4   -   CONTROLS AND PROCEDURES                               13

PART II  -   OTHER INFORMATION

   ITEM 1   -   LEGAL PROCEEDINGS                                     14

   ITEM 2   -   UNREGISTERED SALES OF EQUITY SECURITIES
                AND USE OF PROCEEDS                                   14

   ITEM 3   -   DEFAULTS UPON SENIOR SECURITIES                       14

   ITEM 4   -   SUBMISSION OF MATTERS TO A VOTE                       14
                OF SECURITY HOLDERS

   ITEM 5   -   OTHER INFORMATION                                     14

   ITEM 6   -   EXHIBITS AND REPORTS ON FORM 8-K                      14




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

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


                                                           Three months ended June 30         Six months ended June 30
                                                       2004        2005        2005        2004        2005         2005
                                                     ---------   ---------   ---------   ---------   ---------   ---------
                                                        HK$         HK$         US$         HK$          HK$         US$
<S>                                                  <C>         <C>         <C>          <C>        <C>         <C>
Operating Revenues
Fitness service                                        92,040      62,773       8,048     153,252     132,224      16,951
Beauty treatments                                      52,502      50,707       6,501     104,752      99,696      12,782
Others*                                                 1,040          (7)         (1)      1,129       1,447         186
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total operating revenues                              145,582     113,473      14,548     259,133     233,367      29,919
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Operating Expenses
Salaries and commissions                              (41,366)    (40,876)     (5,241)    (82,144)    (80,900)    (10,372)
Rent and related expenses                             (39,409)    (41,206)     (5,283)    (79,748)    (83,047)    (10,647)
Depreciation                                          (17,008)    (14,456)     (1,853)    (32,294)    (29,862)     (3,828)
Other selling and administrative expenses             (33,287)    (27,667)     (3,547)    (58,839)    (54,598)     (7,000)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total operating expenses                             (131,070)   (124,205)    (15,924)   (253,025)   (248,407)    (31,847)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Income (Loss) from operations                          14,512     (10,732)     (1,376)      6,108     (15,040)     (1,928)
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Non-operating income (expenses)
Other income, net*                                        292         118          15         380         186          24
Interest expenses                                      (2,028)       (732)        (94)     (3,187)     (1,939)       (249)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total non-operating expenses                           (1,736)       (614)        (79)     (2,807)     (1,753)       (225)
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Income (Loss) before income taxes
 and minority interests                                12,776     (11,346)     (1,455)      3,301     (16,793)     (2,153)

(Provision) Benefit for income taxes                   (2,689)        188          24      (2,689)         --          --
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Income (Loss) before minority interests                10,087     (11,158)     (1,431)        612     (16,793)     (2,153)

Minority interests                                       (362)         73          10        (162)        218          28
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Net income (loss)                                       9,725     (11,085)     (1,421)        450     (16,575)     (2,125)
                                                     =========   =========   =========   =========   =========   =========

Income (Loss) per common share                           0.97       (1.11)      (0.14)       0.05       (1.66)      (0.21)
                                                     =========   =========   =========   =========   =========   =========
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$981 (US$126) for 2004 has been reallocated to
Operating Revenues in consistence with the unaudited financial statements for
the period ended March 31, 2005.

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 June 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 JUNE 30, 2005

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

Current assets
Cash and bank balances                                                   1,625              1,843                236
Trade receivables                                                        4,006              9,232              1,184
Other receivables                                                        7,334              7,334                940
Rental and utility deposits                                             31,821             31,073              3,984
Prepayments to vendors and suppliers and other current assets            2,482              6,673                855
Inventories, finished products for beauty treatment and sale             5,873              6,614                848
Income taxes recoverable                                                 2,041              1,552                199
                                                              -----------------  -----------------  -----------------

Total current assets                                                    55,182             64,321              8,246
                                                              -----------------  -----------------  -----------------

Marketable securities, collateralized                                    4,280              4,280                549
Bank deposits, collateralized                                           11,523             12,527              1,606
Due from a stockholder                                                   9,480              9,480              1,215
Prepayments for construction-in-progress                                11,835              1,099                141
Property, plant and equipment,
   net of accumulated depreciation of
   HK$340,400 as of June 30, 2005 (2004: HK$313,845)                   187,892            177,818             22,797
                                                              -----------------  -----------------  -----------------

Total assets                                                           280,192            269,525             34,554
                                                              =================  =================  =================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Short-term bank loans                                                   14,473             11,272              1,445
Long-term bank loans - current portion                   6                 638                 --                 --
Trade and other payables                                                60,685             50,231              6,440
Obligations under finance leases - current portion                         716                286                 37
Deferred income - current portion                                      117,526            122,310             15,681
Deferred liabilities - current portion                                   5,745              4,303                552
Income taxes payable                                                       214                229                 29
Taxes other than income                                                  6,570              7,279                933
                                                              -----------------  -----------------  -----------------

Total current liabilities                                              206,567            195,910             25,117
                                                              -----------------  -----------------  -----------------

Deferred income - non-current portion                                   18,748             36,451              4,673
Deferred liabilities -  non-current portion                              7,983              6,800                872
Obligations under finance leases - non-current portion                      --                263                 33
Deferred taxation                                                        2,202              2,202                282
Minority interests                                                       7,010              6,792                871

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                161                 21
Retained earnings                                                       37,443             20,868              2,675
                                                              -----------------  -----------------  -----------------

Total stockholders' equity                                              37,682             21,107              2,706
                                                              -----------------  -----------------  -----------------

Total liabilities and stockholders' equity                             280,192            269,525             34,554
                                                              =================  =================  =================

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 June 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 SIX MONTHS ENDED TO JUNE 30, 2004 AND JUNE 30, 2005
                                           (in thousands)
<CAPTION>

                                                                       Six Months Ended June 30
                                                                     ------------------------------
                                                                       2004       2005       2005
                                                                     --------   --------   --------
                                                                       HK$        HK$         US$

<S>                                                                  <C>        <C>        <C>
Cash flows from operating activities:
Net income (loss)                                                       450    (16,575)     (2,125)

Adjustments to reconcile net income (loss) to net cash provided
  by operating activities:
    Minority interests                                                  162       (218)        (28)
    Depreciation                                                     32,294     29,862       3,828
    Loss on disposal of property, plant and equipment                    13         20           3

Changes in working capital:
    Trade receivables                                                (4,543)    (5,226)       (670)
    Rental and utility deposits                                          --        748          96
    Deposits, prepayments and other current assets                    3,196     (4,191)       (537)
    Inventories                                                      (1,602)      (741)        (95)
    Due from a related company                                         (830)        --          --
    Trade and other payables                                        (24,437)   (10,454)     (1,340)
    Deferred income                                                  26,642     22,487       2,883
    Deferred liabilities                                             (2,611)    (2,625)       (337)
    Income taxes payable/recoverable                                  1,806        504          65
    Taxes other than income                                             476        709          91
                                                                    --------    --------   --------

Net cash provided by operating activities                            31,016     14,300       1,834
                                                                    --------    --------   --------

Cash flows from investing activities:
    Prepayments for construction-in-progress                         (1,775)      (329)        (42)
    Acquisition of property, plant and equipment                    (20,757)    (8,189)     (1,050)
    Acquisition of marketable securities                               (990)        --          --
    Sales proceeds from disposal of property, plant and equipment         3         18           2
    Decrease (Increase) in collateralized bank deposits               2,596     (1,004)       (129)
    Due from a stockholder                                               28         --          --
                                                                    --------    --------   --------

Net cash used in investing activities                               (20,895)    (9,504)     (1,219)
                                                                    --------    --------   --------

Cash flows from financing activities:
    Settlement of short-term bank loans                              (2,636)    (3,201)       (410)
    Repayment of long-term bank loans                                (4,136)      (638)        (82)
    Capital element of finance lease rental payments                 (3,912)      (739)        (95)
                                                                    --------    --------   --------

Net cash used in financing activities                               (10,684)    (4,578)       (587)
                                                                    --------    --------   --------

Net (decrease) increase in cash and cash equivalents                   (563)       218          28

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

Cash and cash equivalents at end of period                            1,243      1,843         236
                                                                    ========    ========   ========

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 June 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 six-month period ended June
         30, 2005 are not necessarily indicative of the results that may be
         expected for the year ending December 31, 2005.

         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$131,589
         as of December 31, 2004 and June 30, 2005. Besides, the Group had
         incurred losses of HK$11,085 and HK$16,575 in the three-month and
         six-month periods ended June 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 JUNE 30           SIX MONTHS ENDED JUNE 30
                                                   ---------------------------------   ---------------------------------
                                                     2004        2005        2005        2004         2005        2005
                                                   ---------   ---------   ---------   ---------   ---------   ---------
                                                      HK$         HK$         US$         HK$         HK$          US$
<S>                                                <C>         <C>         <C>         <C>         <C>         <C>

         Operating revenues
             - Physical fitness                      92,040      62,773       8,048     153,252     132,224      16,951
             - Beauty treatments                     52,502      50,707       6,501     104,752      99,696      12,782
             - Others                                 1,040          (7)         (1)      1,129       1,447         186
                                                   ---------   ---------   ---------   ---------   ---------   ---------

                                                    145,582     113,473      14,548     259,133     233,367      29,919
                                                   =========   =========   =========   =========   =========   =========

         Net income (loss)
             - Physical fitness                      10,834     (12,791)     (1,640)     (1,698)    (17,908)     (2,296)
             - Beauty treatments                     (2,080)      1,739         223       1,222         (78)        (10)
             - Others                                   971         (33)         (4)        926       1,411         181
                                                   ---------   ---------   ---------   ---------   ---------   ---------
                                                      9,725     (11,085)     (1,421)        450     (16,575)     (2,125)

         Income taxes included in
            segment income (loss) above               2,689        (188)        (24)      2,689          --          --
         Minority interests included
            in segment income (loss) above              362         (73)        (10)        162        (218)        (28)
                                                   ---------   ---------   ---------   ---------   ---------   ---------
         Consolidated income (loss) before income
           taxes and minority interests              12,776     (11,346)     (1,455)      3,301     (16,793)     (2,153)
                                                   =========   =========   =========   =========   =========   =========


                                                           -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
         six-month period ended June 30, 2005.

         During the six-month period ended June 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 June 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 JUNE 30           SIX MONTHS ENDED JUNE 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                         2,028        732         94          3,187      1,939         249
    Income taxes                                 --       (505)       (65)           224       (505)        (65)
</TABLE>



                                       -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 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.

                                      -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, customers are invited to purchase a
standard fitness card at a fee currently 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 fully utilize the facilities, the Company
grants a special offer of admission fees at HK$200 (US$26) to off-peak
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

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

Total operating expenses                         90.03%     109.46%            97.64%     106.44%

Operating income (loss)                           9.97%      (9.46%)            2.36%      (6.44%)

Income (Loss) before income taxes and
minority interests                                8.78%     (10.00%)            1.27%      (7.20%)

(Provision) Benefit for income taxes             (1.85%)      0.17%            (1.04%)        --

Minority interests                               (0.25%)      0.06%            (0.06%)      0.10%

Net income (loss)                                 6.68%      (9.77%)            0.17%      (7.10%)
                                             ===========  ===========       ===========  ==========
</TABLE>

                                      -8-

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

         OPERATING REVENUES. The Company's total operating revenues decreased
22% to HK$113,473,000 (US$14,548,000) for the three months ended June 30, 2005,
from HK$145,582,000 (US$18,664,000) for the three months ended June 30, 2004.

         55% of operating revenues was from the fitness services, which
decreased HK$29,267,000 (US$3,752,000) 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 second quarter also saw increasing competition in the
fitness market with close competitor (California Fitness) opening new center
(Jackie Chan Sport Club) in the same building of the Company's existing center.

         45% was from the beauty services, which slightly decreased HK$1,795,000
(US$230,000) 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$124,205,000 (US$15,924,000), or 109% of operating revenues, for the second
quarter of 2005, compared to HK$131,070,000 (US$16,804,000), or 90% of operating
revenues, for the second quarter of 2004. This HK$6.9 million (US$880,000)
decrease consisted of a decrease of HK$2.5 million (US$320,000) in the leasehold
improvement of a center which had been fully depreciated by March, 2005. Other
selling and administration expenses which included purchases and supplies for
operating the centers also decreased by HK$1.6 million (US$205,000) due to lower
revenues. However, salaries, rent and related expenses had not decreased in
proportion to the revenues because they were fixed costs. There was also an
additional rental expense of HK$1.55 million (US$199,000) incurred in the second
quarter for the new center in Shanghai which commenced operation in early
February, 2005.

         TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
second quarter of 2005 totaled HK$614,000 (US$79,000) compared to HK$1,736,000
(US$223,000) in 2004. This decrease was primarily due to lower interest expenses
incurred in the period.

         PROVISION FOR INCOME TAXES. The Company reversed the tax provision
made for the first quarter in view of the significant losses incurred.

         NET LOSS. As a result of the factors described above, net loss was
HK$11,085,000 (US$1,421,000) for the second quarter of 2005, compared to a net
income of HK$9,725,000 (US$1,247,000) for the second quarter of 2004.

                                      -9-

<PAGE>

SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) COMPARED TO SIX MONTHS ENDED JUNE 30,
2004 (UNAUDITED).
----------------------------------------------------------------------------

         OPERATING REVENUES. Operating revenues for the first six months of 2005
totaled HK$233,367,000 (US$29,919,000) compared to HK$259,133,000
(US$33,222,000) of last year. This represented a decrease of 10%, mainly due to
keen competition especially in the fitness market.

         Fitness services which constituted 57% of total operating revenues,
dropped by 14% to HK$132,224,000 (US$16,951,000) in the first half of the year.

         Beauty services, being 43% of total operating revenues, dropped
slightly by 5% to HK$99,696,000 (US$12,782,000) in the first six months of 2005.

         OPERATING EXPENSES. The Company's operating expenses for the first six
months of 2005 totaled HK$248,407,000 (US$31,847,000) compared to HK$253,025,000
(US$32,439,000) in the first six months of 2004, representing a decrease of 2%.
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 six months of 2005 totaled HK$1,753,000 (US$225,000) compared to
HK$2,807,000 (US$360,000) in the first six months of 2004. This represented a
decrease of 38% primarily due to lower interest expenses.

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

         NET LOSS. The loss had widened to HK$16,575,000 (US$2,125,000) in the
six month ended June 30, 2005, compared to a net income of HK$450,000
(US$58,000) 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 second half of the year. Management
believes that the loss will be partially recovered by an increase in revenues in
the next quarter which is the traditional peak season for the fitness and beauty
industry.

                                      -10-
<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 June 30, 2005 and December 31,
2004 were HK$1,843,000 (US$236,000) and HK$1,625,000 (US$208,000).

         Net cash provided by operating activities were HK$31,016,000
(US$3,976,000) and HK$14,300,000 (US$1,834,000) for the six-month periods ended
June 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$20,895,000 (US$2,679,000)
and HK$9,504,000 (US$1,219,000) for the six-month periods ended June 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)
                                                           Six months ended June 30
                                                       2004        2005        2005
                                                     ---------   ---------   ---------
                                                        HK$         HK$         US$
<S>                                                  <C>         <C>         <C>

Cash purchases of property, plant and equipment        20,757      8,189       1,050
Non-cash property, plant and equipment purchases
financed through capital lease obligations                 --        572          73

Total capital expenditures                             20,757      8,761       1,123

          The following schedule reflects capital expenditures by type of expenditure:

                                                                (in thousands)
                                                           Six months ended June 30
                                                       2004        2005        2005
                                                     ---------   ---------   ---------
                                                        HK$         HK$         US$

Capital expenditures for new center                    12,618      5,599         718
Captial expenditures for maintenance and updating
existing centers and corporate office                   8,139      3,162         405

Total capital expenditures                             20,757      8,761       1,123

</TABLE>

         Net cash used in financing activities, which mainly include repayment
of bank loans, were HK$10,684,000 (US$1,370,000) and HK$4,578,000 (US$587,000)
in the six-month periods ended June 30, 2004 and 2005, respectively.

                                      -11-
<PAGE>

         During the six-month period ended June 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 June 30, 2005.

         During the six-month period ended June 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 June 30, 2005, was
HK$9,232,000 (US$1,184,000). 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 six-month period
ended June 30, 2005, were HK$27,066,000 (US$3,470,000) and HK$8,761,000
(US$1,123,000) 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.

                                      -12-
<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 June 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 June 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.

                                      -13-
<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

         The Company filed a report on FORM 8-K within three weeks after the
quarter ending June 30, 2005 with respect to Item 5.02.

                                      -14-

<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: August 22, 2005                  /s/ Ngai Keung Luk
                                    ------------------------------------
                                    Ngai Keung Luk,
                                    Chairman and Chief Executive Officer

Date: August 22, 2005                  /s/ Darrie Lam
                                    ------------------------------------
                                    Darrie Lam,
                                    Chief Financial Officer

                                      -15-