<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, 2003.

( )   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, 2003, 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 period
     ended September 30, 2002 and 2003 (Unaudited)

     Condensed Consolidated Balance Sheets at December 31, 2002        2
      and September 30, 2003 (Unaudited)

     Condensed Consolidated Statements of Cash Flows                   3
     for the nine-month periods ended
     September 30, 2002 and 2003 (Unaudited)

     Notes to Financial Statements                                     4

   ITEM 2   -   MANAGEMENT'S DISCUSSION AND ANALYSIS OF                9
                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   -   CHANGE IN 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
                                      -----------------------------------------------
                                      (In thousands, except share and per share data)
<CAPTION>

                                                     Three months ended September 30       Nine months ended September 30
                                                       2002        2003        2003        2002        2003         2003
                                                     ---------   ---------   ---------   ---------   ---------   ---------
                                                        HK$         HK$         US$         HK$          HK$         US$

<S>                                                  <C>         <C>         <C>          <C>        <C>         <C>
Operating Revenues
Fitness service                                        79,281      67,670       8,676     213,467     193,768      24,842
Beauty treatments                                      33,593      47,309       6,065      97,099     129,246      16,570
Others                                                     --         103          13          --         296          38
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total operating revenues                              112,874     115,082      14,754     310,566     323,310      41,450
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Operating Expenses
Salaries and commissions                              (37,698)    (39,674)     (5,086)   (101,993)   (115,518)    (14,810)
Rent and related expenses                             (35,011)    (39,869)     (5,111)    (97,456)   (115,027)    (14,747)
Depreciation                                          (13,487)    (15,142)     (1,941)    (47,863)    (46,951)     (6,019)
Other selling and administrative expenses             (27,597)    (28,381)     (3,639)    (76,262)    (79,170)    (10,150)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total operating expenses                             (113,793)   (123,066)    (15,777)   (323,574)   (356,666)    (45,726)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Loss from operations                                     (919)     (7,984)     (1,023)    (13,008)    (33,356)     (4,276)
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Non-operating income (expenses)
Other income, net                                          82         168          22         279         396          51
Interest expenses                                      (1,554)     (2,137)       (275)     (3,511)     (5,266)       (676)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Total non-operating expenses                           (1,472)     (1,969)       (253)     (3,232)     (4,870)       (625)
                                                     ---------   ---------   ---------   ---------   ---------   ---------

Loss before income taxes and minority
interests and cumulative effect of
a change in an accounting principle                    (2,391)     (9,953)     (1,276)    (16,240)    (38,226)     (4,901)

(Provision) Benefit for income taxes                   (1,085)        201          26      (1,173)        (51)         (6)
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Loss before minority interests and
cumulative effect of a change
in an accounting principle                             (3,476)     (9,752)     (1,250)    (17,413)    (38,277)     (4,907)

Minority interests                                       (327)        131          17        (317)        364          46
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Loss before cumulative effect of
a change in an accounting principle                    (3,803)     (9,621)     (1,233)    (17,730)    (37,913)     (4,861)

Cumulative effect on prior years (to December
31, 2001) of deferral of sales rebates, net
of income taxes and minority interests                     --          --          --       3,857          --          --
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Net loss                                               (3,803)     (9,621)     (1,233)    (13,873)    (37,913)     (4,861)

Other comprehensive loss
- Foreign currency translation adjustments                 --          --         --          (11)         --          --
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Comprehensive loss                                     (3,803)     (9,621)     (1,233)    (13,884)    (37,913)     (4,861)
                                                     =========   =========   =========   =========   =========   =========

Loss per share before cumulative effect
of a change in an accounting principle                  (0.38)      (0.96)      (0.12)      (1.77)      (3.79)      (0.49)

Cumulative effect on prior years (to December
31, 2001) of deferral of sales rebates                     --          --          --        0.38          --          --
                                                     ---------   ---------   ---------   ---------   ---------   ---------
Loss per common share                                   (0.38)      (0.96)      (0.12)      (1.39)      (3.79)      (0.49)
                                                     =========   =========   =========   =========   =========   =========
Number of shares of common stock outstanding
(in thousands)                                         10,000      10,000      10,000      10,000      10,000      10,000
                                                     =========   =========   =========   =========   =========   =========

</TABLE>

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, 2003 or at any other certain rate.

                                       -1-
<PAGE>
<TABLE>
                                 PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                                 --------------------------------------------
                                      AUDITED CONDENSED CONSOLIDATED BALANCE SHEET
                                      -----------------------------------
                                            AS OF DECEMBER 31, 2002
                                                      AND
                                     UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
                                     ------------------------------------
                                             AS OF September 30, 2003
<CAPTION>
                                (In thousands, except share and per share data)
                                                                                       As of
                                                               -------------------------------------------------------
                                                               December 31, 2002               September 30, 2003
                                                                           HK$                HK$                US$
<S>                                                                     <C>                <C>                 <C>
ASSETS

Current assets
Cash and cash equivalents                                                1,336              1,115                143
Trade receivables                                                        5,672              7,140                915
Other receivables                                                        6,326              6,326                811
Rental and utility deposits                                             30,924             31,508              4,039
Prepayments to vendors and suppliers and other current assets            5,112              9,554              1,225
Inventories                                                              3,113              3,113                399
Income taxes recoverable                                                     -              2,611                335
Held-to-maturity securities, collateralized                              3,114                  -                  -
                                                              -----------------  -----------------  -----------------

Total current assets                                                    55,597             61,367              7,867
                                                              -----------------  -----------------  -----------------

Marketable securities, collateralized                                    1,540              3,290                422
Bank deposits, collateralized                                           13,340             15,531              1,991
Due from a stockholder                                                  10,955              7,454                956
Prepayments for construction-in-progress                                 1,690             12,539              1,608
Property, plant and equipment, net                                     241,768            209,101             26,808
                                                              -----------------  -----------------  -----------------

Total assets                                                           324,890            309,282             39,652
                                                              =================  =================  =================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Due to a related company                                                 3,515                344                 44
Short-term bank loans                                                   12,634             10,200              1,308
Long-term bank loans - current portion                                  18,255             14,465              1,854
Accounts payable and accrued expenses                                   73,246             73,478              9,420
Obligations under finance leases - current portion                       9,358              7,254                930
Deferred income - current portion                                       76,828            110,615             14,181
Deferred liabilities - current portion                                   5,616              9,029              1,158
Income taxes payable                                                     3,764                624                 80
Taxes other than income                                                  6,023              5,914                759
                                                              -----------------  -----------------  -----------------

Total current liabilities                                              209,239            231,923             29,734
                                                              -----------------  -----------------  -----------------

Deferred income - non-current portion                                    6,315              7,591                973
Deferred liabilities -  non-current portion                              7,173             11,072              1,419
Long-term bank loans -  non-current portion                              3,997              2,166                278
Obligations under finance leases - non-current portion                   5,032              1,518                195
Deferred taxation                                                        4,593              4,593                589
Minority interests                                                       7,285              7,076                907

Commitments and contingencies

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
Accumulated other comprehensive income                                     161                161                 21
Retained earnings                                                       81,017             43,104              5,526
                                                              -----------------  -----------------  -----------------

Total stockholders' equity                                              81,256             43,343              5,557
                                                              -----------------  -----------------  -----------------

Total liabilities and stockholders' equity                             324,890            309,282             39,652
                                                              =================  =================  =================
</TABLE>

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, 2003 or at any other certain rate.

                                            -2-
<PAGE>
<TABLE>
                            PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                            --------------------------------------------
                      UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           -----------------------------------------------
                      FOR THE NINE MONTHS FROM JANUARY 1, 2002 TO SEPTEMBER 30, 2002
                                AND JANUARY 1, 2003 TO SEPTEMBER 30, 2003
                                           (in thousands)
<CAPTION>

                                                                     Nine Months Ended September 30
                                                                     ------------------------------
                                                                       2002       2003       2003
                                                                     --------   --------   --------
                                                                       HK$        HK$         US$

<S>                                                                  <C>        <C>        <C>
Cash flows from operating activities:
Net loss                                                             (13,873)   (37,913)    (4,861)

Adjustments to reconcile net loss to net cash provided
  by operating activities:
    Minority interests                                                   442       (364)       (46)
    Depreciation                                                      47,863     46,951      6,019
    Loss in disposal of property, plant and equipment                    312        206         26

Changes in working capital:
    Trade receivables                                                  1,275     (1,468)      (188)
    Rental and utility deposits                                       (8,792)      (584)       (75)
    Prepayments to vendors and suppliers and other current assets      1,358     (4,287)      (549)
    Accounts payable and accrued expenses                             54,073        232         30
    Deferred income                                                      459     35,063      4,495
    Deferred liabilities                                               4,510      7,312        937
    Income taxes payable/recoverable                                     447     (5,751)      (737)
    Taxes other than income                                               42       (109)       (14)
                                                                     --------   --------   --------

Net cash provided by operating activities                             88,116     39,288      5,037
                                                                     --------   --------   --------

Cash flows from investing activities:
    Prepayments for construction-in-progress                          (6,092)   (10,849)    (1,391)
    Acquisition of property, plant and equipment                     (95,973)   (14,647)    (1,878)
    Acquisition of marketable securities                                  --     (1,750)      (224)
    Proceeds from disposal of held-to-maturity securities                 --      3,114        399
    Due from related companies                                        (4,853)    (3,171)      (407)
    Repayment from a stockholder                                         377      3,501        449
    Sales proceeds from disposal of property, plant and equipment        403        157         20
                                                                     --------   --------   --------

Net cash used in investing activities                               (106,138)   (23,645)    (3,032)
                                                                     --------   --------   --------

Cash flows from financing activities:
    Increase in bank deposits                                         (6,326)    (2,191)      (281)
    Proceeds from (Settlement of) short-term bank loans                7,149     (2,434)      (312)
    Proceeds from long-term bank loans                                26,170      7,338        941
    Repayment of long-term bank loans                                (13,167)   (12,959)    (1,661)
    Assumption of finance lease obligations                            7,982      1,800        231
    Capital element of finance lease rental payments                  (6,254)    (7,418)      (951)
                                                                     --------   --------   --------

Net cash provided by (used in) financing activities                   15,554    (15,864)    (2,033)
                                                                     --------   --------   --------

Net decrease in cash and cash equivalents                             (2,468)      (221)       (28)

Cash and cash equivalents at beginning of period                       4,787      1,336        171

Cumulative translation adjustment                                       (11)        --         --
                                                                     --------   --------   --------

Cash and cash equivalents at end of period                             2,308      1,115        143
                                                                     ========   ========   ========
</TABLE>

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, 2003 or at any other certain rate.

                                       -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 (collectively referred to as the "Group")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, 2002.

         The accompanying unaudited consolidated financial statements have been
         reviewed by an independent public accountant and 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, 2003 are not necessarily
         indicative of the results that may be expected for the year ending
         December 31, 2003.

         The balance sheet at December 31, 2002 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 has a negative working capital of HK$153,642 and HK$170,556
         as of December 31, 2002 and September 30, 2003. Besides, the Group has
         net loss before cumulative effect of a change in accounting principle
         of HK$37,913 and HK$17,730 for the nine-month periods ended September
         30, 2003 and 2002. The Group also experienced net loss of HK$20,238 for
         the year ended December 31,2002. 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
         obtaining additional working capital, attaining profitable operations
         and exercising tight cost and cash flow controls measures in the
         future. 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. In this connection, the Company has worked out a
         funding schedule with the Principal Stockholder whereby he agrees to
         inject funds of not less than HK$500,000 (US$64,000) whenever the Group
         is running out of operating funds and realize his net worth assets
         (including properties and shares investments)to support the Company as
         and when required. As a result, the financial statements have been
         prepared in conformity with the principles applicable to a going
         concern.

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         Since January 1, 2003, the Group has adopted Statement of Financial
         Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated
         with Exit or Disposal Activities", which addresses financial accounting
         and reporting for costs associated with exit or disposal activities.
         SFAS No. 146 requires that a liability for a cost associated with an
         exit or disposal activity be recognized when the liability is incurred.
         The adoption of SFAS 146 did not have a material impact on the Group's
         operating results or financial position.

                                       -4-
<PAGE>

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

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

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

         In January 2003, the FASB issued FASB Interpretation No. 46,
         "Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No.
         46 applies to variable interest entities created after January 31, 2003
         and to variable interest entities in which an enterprise obtains an
         interest after that date. It applies in the first fiscal year or
         interim period beginning after June 15, 2003, to variable interest
         entities in which an enterprise holds an interest that it acquired
         before February 1, 2003. Management considered that the adoption of FIN
         No. 46 does not have significant impact on its consolidated financial
         statements.

         In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133
         on Derivative Instruments and Hedging Activities. The SFAS No. 149
         amends and clarifies financial accounting and reporting for derivative
         instruments, including certain derivative instruments embedded in other
         contracts (collectively referred to as derivatives) and for hedging
         activities under SFAS No. 133, Accounting for Derivative Instruments
         and Hedging Activities. Subject to certain exception, this Statement is
         effective for contracts entered into or modified after June 30, 2003
         and for hedging relationships designated after June 30, 2003 and all
         provisions of this Statement should be applied prospectively. The Group
         had no derivative instruments outstanding. The management does not
         expect the adoption of SFAS No. 149 will have a material impact on the
         Group's consolidated financial statements.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
         Financial Instruments with Characteristics of both Liabilities and
         Equity". The SFAS No.150 improves the accounting for certain financial
         instruments that, under previous guidance, issuers could account for as
         equity and requires that those instruments be classified as liabilities
         in statements of financial position. In addition to its requirements
         for the classification and measurement of financial instruments in its
         scope, SFAS No. 150 also requires disclosures about alternative ways of
         settling the instruments and the capital structure of entities, all of
         whose shares are mandatorily redeemable. Most of the guidance in SFAS
         No. 150 is effective for all financial instruments entered into or
         modified after May 31, 2003, and otherwise is effective at the
         beginning of the first interim period beginning after June 15, 2003.
         Management considered that the adoption of SFAS No. 150 does not have
         significant impact on its consolidated financial statements.

         In November 2002, the EITF issued EITF Issue No. 00-21, "Revenue
         Arrangements with Multiple Deliverables", which addresses certain
         aspects of the accounting by a vendor for arrangements under which it
         will perform multiple revenue-generating activities. Specifically, EITF
         Issue No. 00-21 addresses how to determine whether an arrangement
         involving multiple deliverables contains more than one unit of
         accounting. EITF Issue No. 00-21 has been effective for the Group for
         revenue arrangements entered into beginning July 1, 2003. Management
         considered that the adoption of EITF Issue No. 00-21 does not have
         significant impact on its consolidated financial statements.

                                       -5-
<PAGE>

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

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

4. REPORT ON SEGMENT INFORMATION

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

         Information concerning consolidated operations by business segment and
         geographic area is presented in the tables below and on the following
         pages:
<TABLE>
<CAPTION>

         CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT

                                                    THREE MONTHS ENDED SEPTEMBER 30      NINE MONTHS ENDED SEPTEMBER 30
                                                   ---------------------------------   ---------------------------------
                                                     2002        2003        2003        2002         2003        2003
                                                   ---------   ---------   ---------   ---------   ---------   ---------
                                                      HK$         HK$         US$         HK$         HK$          US$
<S>                                                <C>         <C>         <C>         <C>         <C>         <C>

         Operating revenues
             - Physical fitness                      79,281      67,670       8,676     213,467     193,768      24,842
             - Beauty treatments                     33,593      47,309       6,065      97,099     129,246      16,570
             - Others                                    --         103          13          --         296          38
                                                   ---------   ---------   ---------   ---------   ---------   ---------

                                                    112,874     115,082      14,754     310,566     323,310      41,450
                                                   =========   =========   =========   =========   =========   =========

         Operating (loss) profit
             - Physical fitness                       2,786     (11,383)     (1,459)     (1,938)    (33,907)     (4,347)
             - Beauty treatments                     (6,589)      1,659         213     (11,935)     (4,302)       (552)
             - Others                                    --         103          13          --         296          38
                                                   ---------   ---------   ---------   ---------   ---------   ---------
                                                     (3,803)     (9,621)     (1,233)    (13,873)    (37,913)     (4,861)
         Cumulative effect of a change
           in accounting principle
           included in segment
            (loss) profit above                          --          --          --      (3,857)         --          --
         Income taxes included in
            segment (loss) profit above               1,085       (201)        (26)       1,173          51           6
         Minority interests included
            in segment (loss) profit above              327       (131)        (17)         317        (364)        (46)
                                                   ---------   ---------   ---------   ---------   ---------   ---------
         Consolidated loss before income
           taxes and minority interests and
           the cumulative effect of a change
           in accounting principle                   (2,391)     (9,953)     (1,276)    (16,240)    (38,226)     (4,901)
                                                   =========   =========   =========   =========   =========   =========
         Depreciation
             - Physical fitness                      10,994      11,192       1,434      36,814      34,799       4,461
             - Beauty treatments                      2,493       3,950         507      11,049      12,152       1,558
                                                   ---------   ---------   ---------   ---------   ---------   ---------
                                                     13,487      15,142       1,941      47,863      46,951       6,019
                                                   =========   =========   =========   =========   =========   =========

         Property, plant and equipment additions
             - Physical fitness                       5,508       2,301         296      58,704       9,384       1,203
             - Beauty treatments                      3,080         757          97      37,269       5,263         675
                                                   ---------   ---------   ---------   ---------   ---------   ---------
                                                      8,588       3,058         393      95,973      14,647       1,878
                                                   =========   =========   =========   =========   =========   =========

                                                                         AS OF DECEMBER 31,2002   AS OF SEPTEMBER 30, 2003
                                                                         ----------------------    -------------------
                                                                                          HK$         HK$          US$
         Total assets
             - Physical fitness                                                         259,912     228,869      29,343
             - Beauty treatments                                                         64,978      80,413      10,309
                                                                                       ---------   ---------   ---------
                                                                                        324,890     309,282      39,652
                                                                                       =========   =========   =========

                                                           -6-
</TABLE>
<PAGE>
<TABLE>
                  PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                  --------------------------------------------
                          NOTES TO FINANCIAL STATEMENTS
             -----------------------------------------------------
            (Amounts in thousands, except share and per share data)
4. REPORT ON SEGMENT INFORMATION (CONTINUED)
         CONSOLIDATED OPERATIONS BY GEOGRAPHIC AREA
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30       NINE MONTHS ENDED SEPTEMBER 30
                                          ---------------------------------   ---------------------------------
                                            2002        2003        2003        2002        2003        2003
                                          ---------   ---------   ---------   ---------   ---------   ---------
                                             HK$         HK$         US$         HK$         HK$         US$
<S>                                       <C>         <C>         <C>         <C>         <C>         <C>
         Operating revenues
             - Hong Kong                   102,641     100,055      12,828     281,875     282,865      36,265
             - PRC                          10,233      15,027       1,926      28,691      40,445       5,185
                                          ---------   ---------   ---------   ---------   ---------   ---------
                                           112,874     115,082      14,754     310,566     323,310      41,450
                                          =========   =========   =========   =========   =========   =========
         Operating profit (loss)
             - Hong Kong                     1,394      (6,100)       (782)     (5,617)    (26,518)     (3,400)
             - PRC                          (3,655)     (1,451)       (185)     (8,653)     (6,252)       (801)
                                          ---------   ---------   ---------   ---------   ---------   ---------
         Segment loss                       (2,261)     (7,551)       (967)    (14,270)    (32,770)     (4,201)
         Interest income not included
           in segment loss above                12          67          9          51         123          16
         Interest expenses not included
          in segment loss above             (1,554)     (2,137)       (275)     (3,511)     (5,266)       (676)
         Income taxes included in
           in segment loss above             1,085        (201)        (26)      1,173          51           6
         Minority interests included
           in segment loss above               327        (131)        (17)        317        (364)        (46)
                                          ---------   ---------   ---------   ---------   ---------   ---------
         Consolidated loss before
           income taxes and minority
           interests and the cumulative
           effect of a change in
           accounting principle             (2,391)     (9,953)     (1,276)    (16,240)    (38,226)     (4,901)
                                          =========   =========   =========   =========   =========   =========

                                                                AS OF DECEMBER 31,2002   AS OF SEPTEMBER 30, 2003
                                                                ----------------------     -------------------
                                                                                 HK$         HK$           US$
         Segment assets
             - Hong Kong                                                       247,305     238,956      30,636
             - PRC                                                              77,585      70,326       9,016
                                                                              ---------   ---------   ---------
                                                                               324,890     309,282      39,652
                                                                              =========   =========   =========
</TABLE>
5. LONG-TERM BANK LOANS

         The Group did not obtain any new bank loans during the three-month
         period ended September 30, 2003 and had obtained additional bank loans
         of HK$7,338 during the nine-month period ended September 30, 2003 from
         creditworthy commercial banks in Hong Kong to finance its operations.
         These loans are collateralized by the Group's marketable securities,
         fixed deposits and personal guarantee from its stockholder.

         During the nine-month period ended September 30, 2003, the Group repaid
         HK$12,959 of its outstanding bank loans. The outstanding loan balances
         as of September 30, 2003 were analyzed as follows:

           Principal        Interest rate             Repayable during the
           HK$                                        following periods

           4,700            5.57%                     Within one year
           1,195            3.66%                     Serially from 2003 to 2004
           1,538            HK$ prime + 0.25%         Serially from 2003 to 2004
             688            HK$ prime + 3%            Serially from 2003 to 2004
           3,471            HK$ prime + 1.5%          Serially from 2003 to 2005
           3,619            6.65%                     Serially from 2003 to 2004
           1,420            HK$ prime + 1.5%          Serially from 2003 to 2007
          ------
          16,631
          ======

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

           Principal         Payables during the following periods
           HK$
           14,465            October 2003 to September 2004
            1,466            October 2004 to September 2005
              360            October 2005 to September 2006
              340            October 2006 to September 2007
           ------
           16,631
           ======
                                       -7-
<PAGE>

REVIEW REPORT OF INDEPENDENT ACCOUNTANT

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, 2003 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,
2003. These financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. 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.

Based on our reviews, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with accounting principles generally accepted in the United States
of America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Physical Spa & Fitness Inc. and subsidiaries as of December 31, 2002, 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 11, 2003, 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, 2002, 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, 2002,
and for the year then ended discloses that the Company has suffered losses from
operations during the year 2002 and has a 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, 2003, and for the
nine months then ended, the Company continued to suffer losses from operations
and 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
November 19, 2003

                                      -8-
<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). 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
100,000 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.

                                      -9-
<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          Nine Months Ended
                                                     September 30                September 30
                                                 2002          2003           2002         2003
                                              -----------  -----------    -----------  -----------
<S>                                             <C>         <C>               <C>         <C>
Operating Revenues                              100.00%     100.00%           100.00%     100.00%

Total operating expenses                        100.81%     106.94%           104.19%     110.32%

Operating loss                                  (0.81%)     (6.94%)           (4.19%)     (10.32%)

Loss before income taxes and
minority interests                              (2.12%)     (8.65%)           (5.23%)     (11.82%)

Provision for income taxes                       0.96%      (0.17%)            0.38%        0.02%

Minority interests                               0.29%      (0.11%)            0.10%       (0.11%)

Net loss                                        (3.37%)     (8.36%)           (4.47%)     (11.73%)
                                            ===========  ===========       ===========  ==========
</TABLE>

THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002 (UNAUDITED).
--------------------------------------------------------------------------------

         OPERATING REVENUES. The Company's operating revenues slightly increased
2% to HK$115,082,000 (US$14,754,000) in the third quarter of 2003 as compared
to HK$112,874,000 (US$14,471,000) of the same period last year.

         Operating revenues derived by the Company's fitness services decreased
15% to HK$67,670,000 (US$8,676,000) compared to HK$79,281,000 (US$10,164,000) of
last year. Fitness revenues as a percentage of total revenues were 59% in the
third quarter of 2003 as compared to 70% in the third quarter of 2002.

         Operating revenues from the Company's beauty treatment business totaled
HK$47,309,000 (US$6,065,000) compared to HK$33,593,000 (US$4,307,000) in the
third quarter of 2002, representing an increase of 41%. Beauty treatment
revenues as a percentage of total revenues increased from 30% to 41% in the
third quarter of 2003 as compared to 2002.

                                      -10-
<PAGE>

         Operating revenues derived from the Company's Hong Kong locations
remain an important contributor to the Company's business, generating
HK$100,055,000 (US$12,828,000), or 87% of total operating revenues in the third
quarter of 2003 as compared to HK$102,641,000 (US$13,159,000) or 91% of total
operating revenues in the third quarter of 2002.

         Operating revenues derived from the Company's China locations generated
HK$15,027,000 (US$1,926,000), or 13% of total operating revenues in the third
quarter of 2003 as compared to HK$10,233,000 (US$1,312,000) or 9% of total
operating revenues in the third quarter of 2002.

         OPERATING EXPENSES. The Company's operating expenses for the third
quarter of 2003 totaled HK$123,066,000 (US$15,777,000) compared to
HK$113,793,000 (US$14,588,000) in 2002, representing an increase of 8%. Total
operating expenses, after taking into account all corporate expenses, were 107%
of total operating revenue as compared to 101% of last year. This reflects the
additional costs incurred by the Company in following its business expansion
plan.

         Operating expenses associated with the Company's Hong Kong locations
were HK$106,511,000 (US$13,655,000) in the third quarter of 2003, representing
an increase of 7% as compared to HK$99,902,000 (US$12,808,000) in 2002. The
increase was mainly due to additional expenses incurred by the Citylink, Shatin
center (will open in November, 2003). Hong Kong operating expenses represented
87% of total operating expenses in the third quarter of 2003 as compared to 88%
in 2002.

         Operating expenses associated with the Company's China locations were
HK$16,555,000 (US$2,122,000) in the third quarter of 2003, representing an
increase of 19% as compared to HK$13,891,000 (US$1,781,000) in 2002 primarily
due to additional expenses incurred by the enhanced facilities in Shanghai.
Operating expenses in China represented 13% of total operating expenses in the
third quarter of 2003 as compared to 12% of the same period last year.

         TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
third quarter of 2003 totaled HK$1,969,000 (US$253,000) compared to
HK$1,472,000 (US$188,000) in 2002. This represents an increase of 34% mainly due
to higher interest expenses resulting from increasing bank facilities obtained.

         PROVISION FOR INCOME TAXES. Provision for income taxes for the third
quarter of 2003 totaled HK$(201,000) (US$(26,000)) compared to HK$1,085,000
(US$139,000) in the third quarter of 2002, reflecting an adjustment of
overprovision in the previous quarter.

         NET LOSS. The Company has generated a net loss of HK$9,621,000
(US$1,233,000) for the third quarter of 2003, compared to a net loss of
HK$3,803,000 (US$487,000) for 2002, representing an increase of 153%. The loss
was mainly due to the narrowing margin of the existing centers and the
absorption of the pre-opening overhead associated with a proposed new center.


NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002 (UNAUDITED).
----------------------------------------------------------------------------

         OPERATING REVENUES. Operating revenues for the first nine months of
2003 totaled HK$323,310,000 (US$41,450,000) compared to HK$310,566,000
(US$39,816,000) of last year, representing a moderate increase of 4%.

         Operating revenues derived by the Company's fitness services decreased
9% to HK$193,768,000 (US$24,842,000) compared to HK$213,467,000 (US$27,368,000)
in 2002. Fitness revenues as a percentage of total revenues were 60% in the
first nine months of 2003 as compared to 69% in the same period last year.

         Operating revenues from the Company's beauty treatment business
increased 33% to HK$129,246,000 (US$16,570,000) in the first nine months of 2003
compared to HK$97,099,000 (US$12,448,000) of last year. Beauty treatment
revenues as a percentage of total revenues were 40% in the first nine months of
2003 as compared to 31% in the first nine months of 2002.

                                      -11-
<PAGE>

         Operating revenues derived from the Company's Hong Kong locations
remain an important contributor to the Company's business, generating
HK$282,865,000 (US$36,265,000), or 87% of total operating revenues in the nine
months ended September 30, 2003 as compared to HK$281,875,000 (US$36,138,000) or
91% of total operating revenues in the nine months ended September 30, 2002.

         Operating revenues derived from the Company's China locations generated
HK$40,445,000 (US$5,185,000), or 13% of total operating revenues in the nine
months ended September 30, 2003 as compared to HK$28,691,000 (US$3,678,000) or
9% of total operating revenues in the nine months ended September 30, 2002.

         In Mid-March, 2003, an outbreak of the Severe Acute Respiratory
Syndrome (SARS) occurred in areas such as Vietnam, Toronto, Southern China, Hong
Kong, and Singapore, all of which were badly hit by the disease. Since the
consumers avoided from contacting the SARS virus by staying at home, revenues
and results of the Company, like most retailers, have been affected by weaker
demand in April and May. When the outbreak finally peaked by late May, the
Company started a series of promotional programs to boost up its revenues and
managed to maintain the same level of revenues as the corresponding period of
last year.

         OPERATING EXPENSES. The Company's operating expenses for the first nine
months of 2003 totaled HK$356,666,000 (US$45,726,000) compared to HK$323,574,000
(US$41,483,000) in the first nine months of 2002, representing an increase of
10%. Total operating expenses, after taking into account all corporate expenses,
were 110% of total operating revenue as compared to 104% of last year. This
reflects the additional costs incurred by the new centers during the period
under review.

         Operating expenses associated with the Company's Hong Kong locations
were HK$309,714,000 (US$39,707,000) in the nine months ended September 30, 2003,
representing an increase of 8% as compared to HK$286,070,000 (US$36,675,000) in
2002. Hong Kong operating expenses represented 87% of total operating expenses
in the nine months ended September 30,2003 as compared with 88% of 2002.

         Operating expenses associated with the Company's China locations were
HK$46,952,000 (US$6,019,000) in the nine months ended September 30, 2003,
representing an increase of 25% as compared to HK$37,504,000 (US$4,808,000) in
2002. Operating expenses in China represented 13% of total operating expenses in
the nine months ended September 30, 2003 as compared with 12% of 2002.

         TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
first nine months of 2003 totaled HK$4,870,000 (US$625,000) compared to
HK$3,232,000 (US$414,000) in the first nine months of 2002. This represents an
increase of 51% mainly due to higher interest expenses.

         PROVISION FOR INCOME TAXES. Provision for income taxes for the first
nine months of 2003 totaled HK$51,000 (US$6,000) compared to HK$1,173,000
(US$150,000) in the first nine months of 2002, representing a decrease of 96%.

         NET LOSS. The Company reported a net loss of HK$37,913,000
(US$4,861,000) for the first nine months of 2003, compared to a net loss of
HK$13,873,000 (US$1,778,000) for the first nine months of 2002, representing an
increase of 173%. The increase reflects the additional overhead associated with
the opening of new centers not yet recovered by their additional contribution.

                                      -12-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

         Cash and cash equivalent balances as of September 30, 2003 and December
31, 2002 were HK$1,115,000 (US$143,000) and HK$1,336,000 (US$171,000), while
total indebtedness at September 30, 2003 was HK$35,603,000 (US$4,565,000) and
HK$49,276,000 (US$6,317,000) at December 31, 2002.

         Net cash provided by operating activities were HK$88,116,000
(US$11,297,000) and HK$39,288,000 (US$5,037,000) for the nine-month periods
ended September 30, 2002 and 2003, respectively. The Company's operating
activities are historically financed by cash flows from operations. Net cash
used in investing activities were HK$106,138,000 (US$13,607,000) and
HK$23,645,000 (US$3,032,000) for the nine-month periods ended September 30, 2002
and 2003 respectively, primarily as a result of expenditures for property, plant
and equipment. Net cash provided by (used in) financing activities, which mainly
include proceeds from bank loans, net interest and repayment, were HK$15,554,000
(US$1,994,000) and HK$(15,864,000) (US$(2,033,000)) in the nine-month periods
ended September 30, 2002 and 2003, respectively.

         During the nine-month period ended September 30, 2003, the Company has
not entered into any transactions using derivative financial instruments or
derivative commodity instruments nor held any marketable equity securities of
publicly traded companies. Accordingly, the Company believes its exposure to
market interest rate risk and price risk is not material. The Company's
long-term loans bear interest rates varying from 3.66% to 8% per annum. The
total balance outstanding as of September 30, 2003 on such loans was
HK$16,631,000 (US$2,132,000). The last repayment on the loans is due in 2007.
The Company had total banking facilities available from financial institutions
amounting to approximately HK$43,584,000 (US$5,588,000). These facilities were
secured by certain leasehold property in Hong Kong owned by the Company's
subsidiary (Ever Growth Limited) and a related company, a fixed charge over a
subsidiary's machinery and equipment and a floating charge over its other assets
(Physical Health Centre (Macau) Limited), fixed deposits and securities owned by
the Company's subsidiaries (Physical Health Centre Hong Kong Limited and
Physical Health Centre (E House) Limited), and personal guarantees from Mr. Luk,
respectively.

         During the nine-month period ended September 30, 2003, the Company
purchased marketable securities of HK$1,750,000 (US$224,000). The Company have
no other material purchases of investments during the period under review.

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

         The Company's trade receivable balance at September 30, 2003, was
HK$7,140,000 (US$915,000). 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 2002, and the nine-month period
ended September 30, 2003, were HK$126,364,000 (US$16,199,000) and HK$14,647,000
(US$1,878,000) respectively.

And as mentioned in note 2 to the financial statements, the Company has a
negative working capital of HK$153,642,000 (US$19,698,000) and HK$170,556,000
(US$21,867,000) as of December 31, 2002 and September 30, 2003. Besides, it has
net loss before cumulative effect of a change in accounting principle of
HK$37,913,000 (US$4,861,000) and HK$17,730,000 (US$2,273,000) respectively for
the nine-month periods ended September 30, 2003 and 2002. These conditions raise
substantial doubt about the Company's ability to continue as a going concern. In
order to maintain it as a going concern, the management is now seeking to
procure additional funding from various sources. In particular, the Company has
introduced certain plans to the potential investors. Each of these plans involve
a sum of HK$500,000 (US$64,000) for individuals to invest in either the existing
operations or the future development of the Company. If necessary, the
management would delay the capital expansion plan which would have least impact
on the Company's ongoing operation until the cash flow position of the Company
is improved. In addition, The Principal Stockholder has also undertaken to make
available adequate funds to the Company as and when required to maintain the
Company as a going concern. In this connection, the Company has worked out a
funding schedule with the Principal Stockholder whereby he agrees to inject
funds of not less than HK$500,000 (US$64,000) each time 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

Besides the accounting policies as described in note 3 to the financial
statements for the year ended December 31, 2002, the management considers that
the Group has not adopted any other critical accounting policies.


CONTINGENT LIABILITIES

The Group 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 Group 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 Group faced further
penalty, additional to the original amount of taxes payable, up to a maximum
amount equivalent to three times of the original amount of taxes payable, had
the Group been found in breach of any of such rules and regulations.

Since the Group commenced its business operation in the PRC, the Group has not
made any import declaration nor paid any of the taxes due for such imports. The
directors have represented that the suppliers have undertaken to the Group that
they would reimburse the Group for such payments had such payments been found
necessary.

As of September 30, 2003 and December 31, 2002, the Group is potentially liable
to make good in aggregate an amount of HK$12,297 and HK$12,233 respectively, of
which an amount of HK$6,326 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.

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

Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with participation of the Company's
management, including the Chief Executive Officer and Principal Financial
Officer, of the effectiveness of the disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based on
the evaluation, the Chief Executive Officer and Principal Financial Officer have
concluded that disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

                                      -14-
<PAGE>

PART II - OTHER INFORMATION

ITEM 1  - LEGAL PROCEEDINGS

          NONE

ITEM 2  - CHANGES IN SECURITIES

          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 19, 2003               /s/ Ngai Keung Luk
                                    ------------------------------------
                                    Ngai Keung Luk,
                                    Chairman and Chief Executive Officer

Date: November 19, 2003               /s/ Robert Chui
                                    ------------------------------------
                                    Robert Chui,
                                    Chief Financial Officer

                                      -16-
<PAGE>

                                  CERTIFICATION

I, Ngai Keung Luk, Chairman and Chief Executive Officer and I, Robert Chui,
Chief Financial Officer, certify that:

1. We have reviewed this quarterly report on Form 10-Q of Physical Spa & Fitness
Inc. (the "registrant");

2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
         a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
         b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
         c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and we have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
         a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
         b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and we have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

11/19/03                                   /s/ Ngai Keung Luk
---------------                            -------------------------------------
Date                                       Chairman and Chief Executive Officer

11/19/03                                   /s/ Robert Chui
---------------                            -------------------------------------
Date                                       Chief Financial Officer