<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 March 31, 2004.

( )   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: March 31, 2004, 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 period
     ended March 31, 2003 and 2004 (Unaudited)

     Condensed Consolidated Balance Sheets at December 31, 2003        2
      and March 31, 2004 (Unaudited)

     Condensed Consolidated Statements of Cash Flows                   3
     for the three-month periods ended
     March 31, 2003 and 2004 (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        11
                MARKET RISK

   ITEM 4   -   CONTROLS AND PROCEDURES                               11

PART II  -   OTHER INFORMATION

   ITEM 1   -   LEGAL PROCEEDINGS                                     12

   ITEM 2   -   CHANGE IN SECURITIES AND USE OF PROCEEDS              12

   ITEM 3   -   DEFAULTS UPON SENIOR SECURITIES                       12

   ITEM 4   -   SUBMISSION OF MATTERS TO A VOTE                       12
                OF SECURITY HOLDERS

   ITEM 5   -   OTHER INFORMATION                                     12

   ITEM 6   -   EXHIBITS AND REPORTS ON FORM 8-K                      12


<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 March 31
                                                       2003        2004        2004
                                                     ---------   ---------   ---------
                                                        HK$         HK$         US$

<S>                                                  <C>         <C>         <C>
Operating Revenues
Fitness service                                        62,893      61,212       7,848
Beauty treatments                                      42,872      52,250       6,699
Others                                                      -          89          11
                                                     ---------   ---------   ---------
Total operating revenues                              105,765     113,551      14,558
                                                     ---------   ---------   ---------

Operating Expenses
Salaries and commissions                              (38,297)    (40,778)     (5,228)
Rent and related expenses                             (34,943)    (40,339)     (5,172)
Depreciation                                          (16,010)    (15,286)     (1,960)
Other selling and administrative expenses             (24,199)    (25,552)     (3,275)
                                                     ---------   ---------   ---------
Total operating expenses                             (113,449)   (121,955)    (15,635)
                                                     ---------   ---------   ---------
Loss from operations                                   (7,684)     (8,404)     (1,077)
                                                     ---------   ---------   ---------

Non-operating income (expenses)
Other income, net                                          78          88          11
Interest expenses                                      (1,570)     (1,159)       (149)
                                                     ---------   ---------   ---------
Total non-operating expenses                           (1,492)     (1,071)       (138)
                                                     ---------   ---------   ---------

Loss before income taxes and minority interests        (9,176)     (9,475)     (1,215)

Provision for income taxes                               (462)         --          --
                                                     ---------   ---------   ---------
Loss before minority interests                         (9,638)     (9,475)     (1,215)

Minority interests                                        (24)        200          26
                                                     ---------   ---------   ---------
Net loss                                               (9,662)     (9,275)     (1,189)

Other comprehensive income
- Foreign currency translation adjustments                  1          --         --
                                                     ---------   ---------   ---------
Comprehensive loss                                     (9,661)     (9,275)     (1,189)
                                                     =========   =========   =========

Loss per share of common stock                          (0.97)      (0.93)      (0.12)
                                                     =========   =========   =========
Number of shares of common stock outstanding
(in thousands)                                         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 March 31, 2004 or at any other certain rate.

                                       -1-


<PAGE>
<TABLE>
                                 PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                                 --------------------------------------------
                                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                                     ---------------------------------------
                                   AS OF DECEMBER 31, 2003 AND MARCH 31, 2004
<CAPTION>
                                (In thousands, except share and per share data)
                                                                                       As of
                                                               -------------------------------------------------------
                                                               December 31, 2003               March 31, 2004
                                                                           HK$                HK$                US$
<S>                                                                     <C>                <C>                 <C>
ASSETS

Current assets
Cash and cash equivalents                                                1,806              2,091                268
Trade receivables                                                        8,938              9,731              1,248
Other receivables                                                        6,728              6,728                863
Rental and utility deposits                                             31,862             31,804              4,077
Prepayments to vendors and suppliers and other current assets            8,336              7,380                946
Inventories, finished products for beauty treatment and sale             3,992              3,991                512
Income taxes recoverable                                                 2,563              3,288                422
Due from a related company                                                  --              3,950                506
                                                              -----------------  -----------------  -----------------

Total current assets                                                    64,225             68,963              8,842
                                                              -----------------  -----------------  -----------------

Marketable securities, collateralized                                    3,290              4,280                549
Bank deposits, collateralized                                           13,103             10,704              1,372
Due from a stockholder                                                   9,481              9,199              1,179
Prepayments for construction-in-progress                                     -              9,503              1,218
Property, plant and equipment,
   net of accumulated depreciation of HK$281,491                       224,787            211,323             27,093
                                                              -----------------  -----------------  -----------------

Total assets                                                           314,886            313,972             40,253
                                                              =================  =================  =================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Short-term bank loans                                                   14,473             18,469              2,368
Long-term bank loans - current portion                                  10,274              8,045              1,031
Trade and other payables                                                92,345             74,965              9,611
Obligations under finance leases - current portion                       5,516              3,738                479
Deferred income - current portion                                      113,241            143,700             18,424
Deferred liabilities - current portion                                   8,587              7,849              1,006
Income taxes payable                                                       175                175                 22
Taxes other than income                                                  6,083              6,129                786
                                                              -----------------  -----------------  -----------------

Total current liabilities                                              250,694            263,070             33,727
                                                              -----------------  -----------------  -----------------

Deferred income - non-current portion                                    6,599              5,502                705
Deferred liabilities -  non-current portion                              9,114              7,643                980
Long-term bank loans -  non-current portion                              1,498              1,047                134
Obligations under finance leases - non-current portion                     716                 75                 10
Deferred taxation                                                        2,746              2,746                352
Minority interests                                                       7,230              6,875                881

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
Cumulative translation adjustments                                         162                162                 21
Retained earnings                                                       36,049             26,774              3,433
                                                              -----------------  -----------------  -----------------

Total stockholders' equity                                              36,289             27,014              3,464
                                                              -----------------  -----------------  -----------------

Total liabilities and stockholders' equity                             314,886            313,972             40,253
                                                              =================  =================  =================
</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 March 31, 2004 or at any other certain rate.

                                            -2-


<PAGE>
<TABLE>
                            PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
                            --------------------------------------------
                      UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           -----------------------------------------------
                      FOR THE THREE MONTHS FROM JANUARY 1, 2003 TO MARCH 31, 2003
                                AND JANUARY 1, 2004 TO MARCH 31, 2004
                                           (in thousands)
<CAPTION>

                                                                       Three Months Ended March 31
                                                                     ------------------------------
                                                                       2003       2004       2004
                                                                     --------   --------   --------
                                                                       HK$        HK$         US$

<S>                                                                  <C>        <C>        <C>
Cash flows from operating activities:
Net loss                                                              (9,662)    (9,275)    (1,189)

Adjustments to reconcile net loss to net cash provided
  by operating activities:
    Minority interests                                                    24       (200)       (26)
    Depreciation                                                      16,010     15,286      1,960
    Loss on disposal of property, plant and equipment                     59         --         --

Changes in working capital:
    Trade receivables                                                    398       (793)      (102)
    Deposits, prepayments and other current assets                    (2,133)       859        110
    Inventories                                                            1          1         --
    Due from a related company                                        (1,711)    (3,950)      (506)
    Trade and other payables                                           2,681    (17,380)    (2,228)
    Deferred income                                                    5,827     29,362      3,764
    Deferred liabilities                                                (710)    (2,209)      (283)
    Income taxes payable/recoverable                                  (4,348)      (725)       (93)
    Taxes other than income                                              (85)        46          6
                                                                     --------   --------   --------

Net cash provided by operating activities                              6,351     11,022      1,413
                                                                     --------   --------   --------

Cash flows from investing activities:
    Prepayments for construction-in-progress                          (1,651)    (9,503)    (1,218)
    Acquisition of property, plant and equipment                      (3,615)    (1,822)      (234)
    Acquisition of marketable securities                                (500)      (990)      (127)
    Sales proceeds from disposal of property, plant and equipment         29         --         --
                                                                     --------   --------   --------

Net cash used in investing activities                                 (5,737)   (12,315)    (1,579)
                                                                     --------   --------   --------

Cash flows from financing activities:
    (Increase) Decrease in bank deposits                                 (15)     2,399        308
    Due from a stockholder                                               808        282         36
    (Settlement of) Proceeds from short-term bank loans               (1,903)     3,996        512
    Proceeds from long-term bank loans                                 7,338         --         --
    Repayment of long-term bank loans                                 (4,145)    (2,680)      (344)
    Capital element of finance lease rental payments                  (2,348)    (2,419)      (310)
                                                                     --------   --------   --------

Net cash (used in) provided by financing activities                     (265)     1,578        202
                                                                     --------   --------   --------

Net increase in cash and cash equivalents                                349        285         36

Cash and cash equivalents at beginning of period                       1,336      1,806        232

Cumulative translation adjustments                                         1         --         --
                                                                     --------   --------   --------

Cash and cash equivalents at end of period                             1,686      2,091        268
                                                                     ========   ========   ========
</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 March 31, 2004 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 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, 2003.

         The accompanying unaudited condensed consolidated financial
         statements have been prepared in accordance
         with generally accepted accounting principles for interim financial
         information and with the instructions to Form 10-Q and Article 10 of
         Regulation S-X. Accordingly, they do not include all of the information
         and footnotes required by generally accepted accounting principles for
         complete financial statements. In the opinion of management, all
         adjustments (consisting of normal recurring accruals) considered
         necessary for a fair presentation have been included. Operating results
         for the three-month period ended March 31, 2004 are not necessarily
         indicative of the results that may be expected for the year ending
         December 31, 2004.

         The balance sheet at December 31, 2003 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$186,469 and HK$194,107
         as of December 31, 2003 and March 31, 2004. Besides, the Group has
         incurred losses of HK$44,968 in the year ended December 31,2003 and
         HK$9,275 in the three-month period ended March 31, 2004. 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. 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)

4. REPORT ON SEGMENT INFORMATION

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

         Information concerning consolidated operations by business segment
         is presented in the tables below:
<TABLE>
<CAPTION>

         CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT

                                                    THREE MONTHS ENDED MARCH 31
                                                   ---------------------------------
                                                     2003        2004        2004
                                                   ---------   ---------   ---------
                                                      HK$         HK$         US$
<S>                                                <C>         <C>         <C>

         Operating revenues
             - Physical fitness                      62,893      61,212       7,848
             - Beauty treatments                     42,872      52,250       6,699
             - Others                                    --          89          11
                                                   ---------   ---------   ---------

                                                    105,765     113,551      14,558
                                                   =========   =========   =========

         Operating (loss) profit
             - Physical fitness                      (9,271)    (12,532)     (1,606)
             - Beauty treatments                       (391)      3,302         423
             - Others                                    --         (45)         (6)
                                                   ---------   ---------   ---------
                                                     (9,662)     (9,275)     (1,189)

         Income taxes included in
            segment (loss) profit above                 462         --          --
         Minority interests included
            in segment profit (loss) above               24        (200)        (26)
                                                   ---------   ---------   ---------
         Consolidated loss before income
           taxes and minority interests              (9,176)     (9,475)     (1,215)
                                                   =========   =========   =========

                                       -5-
</TABLE>


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

5. LONG-TERM BANK LOANS

         The Group had not obtained additional long-term bank loans during the
three-month period ended March 31, 2004.

         During the period under review, the Group repaid HK$2,680 of its
outstanding bank loans. The outstanding loan balances as of March 31, 2004
were analyzed as follows:

              PRINCIPAL        INTEREST RATE        MATURITY
              ---------        -------------        --------
           HK$        US$

         4,700        602        5.57%                Within one year
           799        102        6.65%                Serially from 2004 to 2005
         2,353        302        HK$ prime + 1.5%     Serially from 2004 to 2005
         1,240        159        HK$ prime + 1.5%     Serially from 2004 to 2007
       -------    -------
         9,092      1,165
       =======    =======

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

                     PRINCIPAL             PAYABLES DURING THE FOLLOWING PERIODS
                     ---------             -------------------------------------
                 HK$         US$

               8,045       1,031           2004
             -------     -------
                 527          68           2005
                 360          46           2006
                 160          20           2007
             -------     -------
               1,047         134
             -------     -------
               9,092       1,165
             =======     =======

6. DUE FROM A RELATED COMPANY

The amount due from Williluck International Limited is unsecured, interest-free
and has no fixed repayment terms. The connected directors are Mr. Luk Ngai Keung
and Ms. Ho Yuk Wah.

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 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, 2003 and March 31, 2004, the Company is potentially liable to
make good in aggregate an amount of HK$12,388, of which an amount of HK$6,728
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.

                                       -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 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.

                                      -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
                                                     March 31
                                                 2003          2004
                                              -----------  -----------
<S>                                             <C>         <C>
Operating Revenues                              100.00%     100.00%

Total operating expenses                        107.27%     107.40%

Operating loss                                  (7.27%)     (7.40%)

Loss before income taxes and
minority interests                              (8.68%)     (8.34%)

Provision for income taxes                       0.44%         --

Minority interests                               0.02%      (0.18%)

Net loss                                        (9.14%)     (8.17%)
                                            ===========  ===========
</TABLE>

THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
MARCH 31, 2003 (UNAUDITED).
--------------------------------------------------------------------------------

         OPERATING REVENUES. The Company's operating revenues increased
7% to HK$113,551,000 (US$14,558,000) in the first quarter of 2004 as compared
to HK$105,765,000 (US$13,560,000) of the same period last year.

         Operating revenues derived by the Company's fitness services decreased
3% to HK$61,212,000 (US$7,848,000) compared to HK$62,893,000 (US$8,063,000) of
last year. Fitness revenues as a percentage of total revenues were 54% in the
first quarter of 2004 as compared to 59% in the first quarter of 2003.

         Operating revenues from the Company's beauty treatment business totaled
HK$52,250,000 (US$6,699,000) compared to HK$42,872,000 (US$5,496,000) of last
year, representing an increase of 22%. Beauty treatment revenues as a percentage
of total revenues increased from 41% to 46% in the first quarter of 2004 as
compared to 2003.

                                      -8-


<PAGE>



         OPERATING EXPENSES. The Company's operating expenses for the first
quarter of 2004 totaled HK$121,955,000 (US$15,635,000) compared to
HK$113,449,000 (US$14,545,000) in 2003, representing an increase of 7%. Total
operating expenses, after taking into account all corporate expenses, were 107%
of total operating revenue in the periods ended March 31, 2004 and 2003.The
increase was mainly due to additional expenses incurred by the Citylink, Shatin
center which has not yet commenced operation in the corresponding period of last
year.

         TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
first quarter of 2004 totaled HK$1,071,000 (US$138,000) compared to HK$1,492,000
(US$191,000) in 2003. This represents a decrease of 28% mainly due to lower
interest expenses.

         PROVISION FOR INCOME TAXES. No provision for income taxes was made for
the first quarter of 2004 as a result of losses incurred.

         NET LOSS. The Company has suffered a net loss of HK$9,275,000
(US$1,189,000) for the first quarter of 2004, compared to a net loss of
HK$9,662,000 (US$1,239,000) for 2003, representing a decrease of 4%. Management
believes that the bottom line will improve in the next quarter when the deferred
income is gradually recognized. There is an increase of HK$29,362,000
(US$3,764,000) in the provision of deferred income for the first quarter of
2004.

                                      -9-


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

         Cash and cash equivalent balances as of March 31, 2004 and December 31,
2003 were HK$2,091,000 (US$268,000) and HK$1,806,000 (US$232,000).

         Net cash provided by operating activities were HK$6,351,000
(US$814,000) and HK$11,022,000 (US$1,413,000) for the three-month periods ended
March 31, 2003 and 2004, respectively. The Company's operating activities are
historically financed by cash flows from operations. Net cash used in investing
activities were HK$5,737,000 (US$736,000) and HK$12,315,000 (US$1,579,000) for
the three-month periods ended March 31, 2003 and 2004 respectively, primarily as
a result of expenditures for property, plant and equipment. Net cash (used in)
provided by financing activities, which mainly include proceeds from bank loans,
net interest and repayment, were HK$(265,000) (US$(34,000)) and HK$1,578,000
(US$202,000) in the three-month periods ended March 31, 2003 and 2004,
respectively.

         During the three-month period ended March 31, 2004, 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 5.57% to 6.65% per annum. The
total balance outstanding as of March 31, 2004 on such loans was HK$9,092,000
(US$1,165,000). The last repayment on the loans is due in 2007. 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, Physical
Health Centre (E House) Limited, and Physical Health center (TST) Limited) and
personal guarantees from Mr. Luk, respectively.

         During the three-month period ended March 31, 2004, the Company
purchased marketable securities of HK$990,000 (US$127,000). 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 March 31, 2004, was
HK$9,731,000 (US$1,248,000). 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 2003, and the three-month period
ended March 31, 2004, were HK$46,159,000 (US$5,918,000) and HK$1,822,000
(US$234,000) respectively.

         And as mentioned in note 2 to the financial statements, the Company has
negative working capital and net loss. 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.

                                      -10-


<PAGE>

CRITICAL ACCOUNTING POLICIES

Besides the accounting policies as described in note 3 to the financial
statements for the year ended December 31, 2003, the management considers that
the Group has not adopted any other critical accounting policies.

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.

                                      -11-


<PAGE>

PART II - OTHER INFORMATION

ITEM 1  - LEGAL PROCEEDINGS

          NONE

ITEM 2  - CHANGES IN SECURITIES AND USE OF PROCEEDS

          NONE

ITEM 3  - DEFAULTS UPON SENIOR SECURITIES

          NONE

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

          NONE

ITEM 5  - OTHER INFORMATION

          NONE

ITEM 6  - EXHIBITS AND REPORTS ON FORM 8-K

          NONE

                                      -12-


<PAGE>

                                   SIGNATURES

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

                                    PHYSICAL SPA & FITNESS INC.
                                    (Registrant)

Date: May 24, 2004                  /s/ Ngai Keung Luk
                                    ------------------------------------
                                    Ngai Keung Luk,
                                    Chairman and Chief Executive Officer

Date: May 24, 2004                  /s/ Robert Chui
                                    ------------------------------------
                                    Robert Chui,
                                    Chief Financial Officer

                                      -13-


<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.

5/24/04                                   /s/ Ngai Keung Luk
---------------                            -------------------------------------
Date                                       Chairman and Chief Executive Officer

5/24/04                                   /s/ Robert Chui
---------------                            -------------------------------------
Date                                       Chief Financial Officer