UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549







FORM
10-Q







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





For the
quarterly period ended March
31, 2008








Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12 b - 2 of the Exchange
Act)   Yes ̈Nox








Commission
File Number 0-26573








PHYSICAL PROPERTY HOLDINGS
INC.


(Exact
name of Registrant as specified in its charter)








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








23/F
AIA Tower


No.
183 Electric Road, North Point


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.    Yesx No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2
of the Exchange Act:




Large
Accelerated Filer o   Accelerated
Filer o   Non-accelerated
Filer o   Smaller
Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):    Yes o   No
x





State the
number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date: March 31, 2008, 28,329,353
shares.





PHYSICAL PROPERTY HOLDINGS
INC.





Form
10-Q for the period ended March 31, 2008





TABLE
OF CONTENTS





PagePART
      I - FINANCIAL INFORMATIONITEM
      1 - FINANCIAL STATEMENTSCondensed
      Consolidated Statements of Operations for the three-month periods ended
      March 31, 2007 and 2008 (Unaudited)
            3Condensed
      Consolidated Balance Sheets as of December 31, 2007 and March 31,
      2008 (Unaudited)
            4Condensed
      Consolidated Statements of Cash Flows for the three-month periods ended
      March 31, 2007 and 2008 (Unaudited)
            5Notes
      to Financial Statements
            6 -
      8ITEM
      2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
            9ITEM
      3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
            11ITEM
      4 (A) - CONTROLS AND PROCEDURES
            11ITEM
      4 (A)T – INTERNAL CONTROL OVER FINANCIAL REPORTING
            12PART
      II - OTHER INFORMATIONITEM
      1 - LEGAL PROCEEDINGS
            12ITEM
      2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            12ITEM
      3 - DEFAULTS UPON SENIOR SECURITIES
            12ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            12ITEM
      5 - OTHER INFORMATION
            12ITEM
      6 - EXHIBITS
            12SIGNATURES
            13





- 2
-




PHYSICAL
PROPERTY HOLDINGS INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In
thousands, except share and per share data)




Three
      months ended March 31Note
              
              2007
              
              
              2008
              
              
              2008HK$
              
              
              HK$
              
              
              US$Continuing
      OperationsOperating
      RevenuesRental income
              
              
              
              170
              
              
              
              183
              
              
              
              23Total
      operating revenues
              
              
              
              170
              
              
              
              183
              
              
              
              23Operating
      ExpensesRent and related expenses
              
              
              
              (31
              )
              
              
              (23
              )
              
              
              (3
              )Depreciation
              
              
              
              (71
              )
              
              
              (71
              )
              
              
              (9
              )Other selling and administrative expenses
              
              
              
              (15
              )
              
              
              (593
              )
              
              
              (76
              )Total
      operating expenses
              
              
              
              (117
              )
              
              
              (687
              )
              
              
              (88
              )Profit
      (Loss) from operations
              
              
              
              53
              
              
              
              (504
              )
              
              
              (65
              )Non-operating
      expensesOther
      income, net
              
              
              
              --
              
              
              
              1
              
              
              
              --Interest expenses
              
              
              
              (122
              )
              
              
              (90
              )
              
              
              (12
              )Total
      non-operating expenses
              
              
              
              (122
              )
              
              
              (89
              )
              
              
              (12
              )Loss
      before income taxes
              
              
              
              (69
              )
              
              
              (593
              )
              
              
              (77
              )Provision
      for income taxes
              
              
              
              --
              
              
              
              --
              
              
              
              --Loss
      from continuing operations
              
              
              
              (69
              )
              
              
              (593
              )
              
              
              (77
              )Discontinued
      OperationsNet
      loss attributable to discontinued operations
              3
              
              
              (8,649
              )
              
              
              --
              
              
              
              --Net
      loss and total comprehensive loss
              
              
              
              (8,718
              )
              
              
              (593
              )
              
              
              (77
              )Loss
      per share of common stock
              
              
              
              (0.53
              )
              
              
              (0.02
              )
              
              
              --Weighted
      average number of shares of common stock outstanding
              
              
              
              16,591,341
              
              
              
              28,329,353
              
              
              
              28,329,353






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, 2008 or at any other certain rate.





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


- 3
-


PHYSICAL
PROPERTY HOLDINGS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except share and per share data)


As
      ofNote
              
              December
      31, 2007
              
              March
      31, 2008
                (Unaudited)HK$
              
              HK$
              
              US$ASSETSCurrent
      assetsCash and bank balances
              
              
              
              2,549
              
              2,452
              
              314Trade receivables
              
              
              
              22
              
              --
              
              --Rental and utility deposits
              
              
              
              26
              
              24
              
              3Prepayments and other current assets
              
              
              
              779
              
              334
              
              43Total
      current assets
              
              
              
              3,376
              
              2,810
              
              360Bank deposits, collateralized
              
              
              
              80
              
              81
              
              10Property, plant and equipment,net
      of accumulated depreciation of HK$1,348 as of March 31, 2008 (2007:
      HK$1,277)
              
              
              
              11,211
              
              11,140
              
              1,428Total
      assets
              
              
              
              14,667
              
              14,031
              
              1,798LIABILITIES
      AND STOCKHOLDERS'  EQUITYCurrent
      liabilitiesLong-term bank loans - current portion
              4
              
              
              435
              
              526
              
              67Due to a stockholder
              
              
              
              531
              
              587
              
              75Other payables
              
              
              
              213
              
              228
              
              29Total
      current liabilities
              
              
              
              1,179
              
              1,341
              
              171Commitments
      and contingencies
              7Long-term bank loans - non-current portion
              4
              
              
              11,225
              
              11,020
              
              1,413Stockholders'
      equityCommon stock, par value US$0.001 each, 100 million shares of stock
      authorized; 28,329,353 shares of stock issued and
    outstanding
              
              
              
              221
              
              221
              
              28Additional paid-in capital
              
              
              
              73,608
              
              73,608
              
              9,437Accumulated losses
              
              
              
              (71,566
              )
              (72,159
              )
              (9,251
              )Total
      stockholders' equity
              
              
              
              2,263
              
              1,670
              
              214Total
      liabilities and stockholders' equity
              
              
              
              14,667
              
              14,031
              
              1,798






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, 2008 or at any other certain rate.





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


- 4
-




PHYSICAL
PROPERTY HOLDINGS INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


Three
      Months Ended March 31Note
              
              2007
              
              2008
              
              2008HK$
              
              HK$
              
              US$Cash
      flows from operating activitiesNet loss
              
              
              
              
              (8,718)
              
              
              (593
              )
              
              (77
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Minority interests
              
              
              
              
              7
              
              
              --
              
              
              --Depreciation
              
              
              
              
              7,142
              
              
              71
              
              
              9Changes
      in working capital:Trade and other receivables
              
              
              
              
              (1,743
              )
              
              22
              
              
              3Deposits, prepayments and other current assets
              
              
              
              
              661
              
              
              447
              
              
              57Inventories
              
              
              
              
              166
              
              
              --
              
              
              --Trade and other payables
              
              
              
              
              (9,926
              )
              
              15
              
              
              2Deferred income
              
              
              
              
              17,849
              
              
              --
              
              
              --Deferred liabilities
              
              
              
              
              (338
              )
              
              --
              
              
              --Income taxes payable/recoverable
              
              
              
              
              773
              
              
              --
              
              
              --Taxes other than income
              
              
              
              
              (310
              )
              
              --
              
              
              --Net
      cash provided by (used in) operating activities
              
              
              
              
              5,563
              
              
              (38
              )
              
              (6
              )Cash
      flows from investing activitiesAcquisition of property, plant and equipment
              
              
              
              
              (904
              )
              
              --
              
              
              --Disposal of subsidiaries
              
              6
              
              
              (3,911
              )
              
              --
              
              
              --Increase in bank deposit, collateralized
              
              
              
              
              (28
              )
              
              (1
              )
              
              --Repayment
      to a stockholder
              
              
              
              
              (2,446
              )
              
              --
              
              
              --Net
      cash used in investing activities
              
              
              
              
              (7,289
              )
              
              (1
              )
              
              --Cash
      flows from financing activitiesSettlement of short-term bank loans
              
              
              
              
              (66
              )
              
              --
              
              
              --Repayment of long-term bank loans
              
              
              
              
              (346
              )
              
              (114
              )
              
              (14
              )Capital element of capital lease rental payments
              
              
              
              
              (267
              )
              
              --
              
              
              --Advance from a stockholder
              
              
              
              
              --
              
              
              56
              
              
              7Net
      cash used in financing activities
              
              
              
              
              (679
              )
              
              (58
              )
              
              (7
              )Net
      decrease in cash and cash equivalents
              
              
              
              
              (2,405
              )
              
              (97
              )
              
              (13
              )Cash
      and cash equivalents at beginning of period
              
              
              
              
              2,436
              
              
              2,549
              
              
              327Cash
      and cash equivalents at end of period
              
              
              
              
              31
              
              
              2,452
              
              
              314





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, 2008 or at any other certain rate.





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


- 5
-


PHYSICAL
PROPERTY HOLDINGS 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 Property Holdings Inc. ("the Company") (formerly known as Physical Spa
& Fitness Inc.) and the subsidiaries that it controls. The Company, through
its subsidiaries, engaged in the real estate business by holding five
residential apartments in Hong Kong. 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, 2007.





On
October 31, 2006, the Company entered into two material definitive agreements:
(a) a Share Exchange Agreement (the “Share Exchange Agreement”) with Mr. Ngai
Keung Luk, the Chairman, CEO, and a majority shareholder of the Company (“Mr.
Luk”), pursuant to which Mr. Luk agreed to transfer 100% of the shares which he
owned of Ableforce International Limited, a British Virgin Islands corporation
(“Ableforce”), to the Company in exchange for the issuance by the Company to Mr.
Luk of 12,000,000 shares of our common stock, $0.001 par value, and the issuance
of an additional 3,328,070 shares of common stock as the repayment of amounts
due to Mr. Luk on Ableforce’s books and records as of September 30, 2006, or a
total of 15,328,070 shares of common stock. Ableforce is primarily engaged in
the real estate business in Hong Kong, and through Good Partner Limited, its
wholly-owned subsidiary, owns five residential apartments that it leases to
tenants; and (b) a Disposal Agreement (the “Disposal Agreement”), with Mr. Luk,
pursuant to which the Company agreed to transfer to Mr. Luk the sole outstanding
common share of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation and wholly owned subsidiary of the Company (“Physical
Limited”), which is a holding company for subsidiaries that operate fitness and
spa centers located in Hong Kong and the People’s Republic of China (including
one in Macau), in exchange for the indemnification of the Company by Mr. Luk for
all liabilities associated with the operations and assets of Physical Limited.
The transactions contemplated by the Share Exchange Agreement were consummated
on February 5, 2007 and the transactions contemplated by the Disposal Agreement
were consummated on February 27, 2007. As a result of the transactions
contemplated by the Disposal Agreement, including the sale of the stock of
Physical Limited, the Company is no longer engaged in the fitness and spa center
business, and owns and operates residential apartments. Mr. Luk continues to own
100% of the stock of Physical Limited and plans to continue to operate the spa
and fitness centers. In addition, the Company changed its name to Physical
Property Holdings Inc. on March 5, 2007. Reference is made to a Definitive
Information Statement on Schedule 14C, which was filed with the Commission on
February 2, 2007 for additional details concerning these matters.





The
Company continued to engage in the spa and fitness business during the first
quarter of fiscal 2007, until February 27, 2007, when the transactions
contemplated by the Disposal Agreement were consummated. Accordingly, the
Company’s results of operations included in this Quarterly Report on Form 10-Q
do not include the results of operations of the disposed businesses after such
date.





On
February 5, 2007, the transactions contemplated by the Share Exchange Agreement
were consummated, resulting in the Company’s acquisition of all of the issued
and outstanding shares of common stock of Ableforce. As discussed above,
Ableforce, through its wholly-owned subsidiary Good Partner Limited, owns five
residential apartments located in Hong Kong. The results of operations of
Ableforce have been reflected in the Company’s financial statements since the
quarter ended March 31, 2007.





The
Company currently has two subsidiaries, which are: Ableforce International
Limited and its wholly-owned subsidiary Good Partner Limited. Ableforce is
organized and existing under the laws of the British Virgin Islands, and Good
Partner Limited is organized and existing under the laws of Hong
Kong.





In
accordance with the requirements of the Statement of Financial Accounting
Standards No. 141 and indication from SEC staff as referred to EITF Abstracts
Issue No. 02-05, the Company has accounted for its acquisition of the stock of
Ableforce pursuant to the Share Exchange Agreement as a merger with Ableforce
since the business combination is being effected through the transfer of assets
to the Company in a share exchange.





In
accordance with the requirements of generally accepted accounting practices, the
transactions contemplated by the Disposal Agreement had been accounted for in
the accounting records of the Company as a contribution from the majority
stockholder. The Company recorded a credit to additional paid-in capital to the
extent that the consideration received by the Company relating to these
transactions was higher than the net book values of these assets as reflected in
the accounting records of the Company as at the date of the Disposal
Agreement.





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, 2008
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008.





The
balance sheet at December 31, 2007 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.


- 6
-
 PHYSICAL
PROPERTY HOLDINGS INC. AND SUBSIDIARIES
 NOTES TO
FINANCIAL STATEMENTS
 (Amounts
in thousands, except share and per share data)






2.
ADOPTION AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS




In 2006,
the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157,
"Fair Value Measurements" (SFAS 157), which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS 157 applies under
other existing accounting pronouncements that require or permit fair value
measurement, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. However,
the application of this statement may change the current practice for fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. The adoption of SFAS 157 did not have a material impact on the Company's
financial statements.


3.
DISCONTINUED OPERATIONS





As more
fully explained in note 1 to the financial statements, the Company entered into
the Disposal Agreement with Mr. Luk, which was consummated in February 2007, to
dispose of all its interests in Physical Limited, at nil
consideration.





The
results of the discontinued operations for the period ended March 31, 2007 are
summarized as follows:




THREE
      MONTHS ENDED MARCH 31,2007
              
              2008
              
              2008HK$
              
              HK$
              
              US$Turnover
              77,881
              
              --
              
              
              --Operating
      costs
              (85,824
              )
              --
              
              
              --Finance
      costs
              (1,065
              )
              --
              
              
              --Other
      income
              366
              
              --
              
              
              --Loss
      before taxation
              (8,642
              )
              --
              
              
              --Taxation
              --
              
              --
              
              
              --Loss
      before minority interest
              (8,642
              )
              --
              
              
              --Minority interest
              (7
              )
              --
              
              
              --Net
      loss attributable to discontinued operations
              (8,649
              )
              --
              
              
              --




4.
LONG-TERM BANK LOANS





During
the period under review, the Company repaid HK$114 of its outstanding bank loans
which are secured by five residential properties owned by the Company. The
outstanding loan balances as of March 31, 2008 were analyzed as
follows:





PRINCIPAL
            
            INTEREST
      RATE
            MATURITYHK$
            
            
            US$11,546
            
            
            
            1,480
            
            HK$
      prime – 3.2% to HK$ prime – 3.15%
            2026




Maturities
of the long-term bank loans are as follows:





PRINCIPAL
            
            PAYABLE DURING THE FOLLOWING
      PERIODSHK$
            
            US$526
            
            
            67
            
            2008
      - 200911,020
            
            
            1,413
            
            2009
      - 202611,546
            
            
            1,480


- 7
-


PHYSICAL
PROPERTY HOLDINGS INC. AND SUBSIDIARIES
 NOTES TO
FINANCIAL STATEMENTS
 (Amounts
in thousands, except share and per share data)






5.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION





THREE
      MONTHS ENDED MARCH 312007
            
            2008
            
            2008HK$
            
            HK$
            
            US$Cash
      paid for:Interest expenses
            1,120
            
            
            90
            
            12





6.
DISPOSAL OF SUBSIDIARIES DURING THE 3 MONTHS ENDED MARCH 31, 2007





2007HK$Net
      assets disposed of:Property, plant and equipment
            
            
            114,925Investments
            
            
            2,740Inventories
            
            
            2,648Trade and other receivables
            
            
            79,760Cash and bank balances
            
            
            14,482Trade and other payables
            
            
            (284,059
            )Minority interest
            
            
            (459
            )Accumulated other comprehensive losses
            
            
            (2,062
            )(72,025
            )Goodwill realized upon disposal of subsidiaries
            
            
            6,791Amount
      transferred to additional paid-in capital
            
            
            (65,234
            )





Analysis
of outflow of cash and cash equivalents in respect of disposal of businesses
during the 3 months ended March 31, 2007:





2007HK$Cash
      consideration
            
            
            --Cash
      and cash equivalents disposed
            
            
            (3,911
            )Net
      outflow of cash and cash equivalents
            
            
            (3,911
            )





7.COMMITMENTS AND
CONTINGENCIES





The
Company has provided corporate guarantee to the extent of HK$8,000 to secure
overdraft facilities granted to a related company, of which HK$2,743 and
HK$2,743 was utilized as of March 31, 2008 and December 31, 2007. The Company is
in the process of canceling the corporate guarantee upon the renewal of such
facilities, which is expected to conclude by the end of June, 2008.





As of
March 31, 2008 and December 31, 2007, the Company had no material outstanding
commitment.




- 8
-







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




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





On
October 31, 2006, the Company entered into two material
definitive agreements: (a) a Share Exchange Agreement (the “Share Exchange
Agreement”) with Mr. Ngai Keung Luk, the Chairman, CEO, and a majority
shareholder of the Company (“Mr. Luk”), pursuant to which Mr. Luk agreed to
transfer 100% of the shares which he owned of Ableforce International
Limited, a British Virgin Islands corporation (“Ableforce”), to the Company in
exchange for the issuance by the Company to Mr. Luk of 12,000,000 shares of our
common stock, $0.001 par value, and the issuance of an additional 3,328,070
shares of common stock as the repayment of amounts due to Mr. Luk on Ableforce’s
books and records as of September 30, 2006, or a total of 15,328,070 shares of
common stock. Ableforce is primarily engaged in the real estate business in Hong
Kong, and through Good Partner Limited, its wholly-owned subsidiary, owns five
residential apartments that it leases to tenants; and (b) a Disposal Agreement
(the “Disposal Agreement”), with Mr. Luk, pursuant to which the Company agreed
to transfer to Mr. Luk the sole outstanding common share of Physical Beauty
& Fitness Holdings Limited, a British Virgin Islands corporation and wholly
owned subsidiary of the Company (“Physical Limited”), which is a holding company
for subsidiaries that operate fitness and spa centers located in Hong Kong and
the People’s Republic of China (including one in Macau), in exchange for the
indemnification of the Company by Mr. Luk for all liabilities associated with
the operations and assets of Physical Limited. The transactions contemplated by
the Share Exchange Agreement were consummated on February 5, 2007 and the
transactions contemplated by the Disposal Agreement were consummated on February
27, 2007. As a result of the transactions contemplated by the Disposal
Agreement, including the sale of the stock of Physical Limited, the Company is
no longer engaged in the fitness and spa center business, and will own and
operate residential apartments. Mr. Luk will continue to own 100% of the stock
of Physical Limited and plans to continue to operate the spa and fitness
centers. In addition, the Company changed its name to Physical Property Holdings
Inc. on March 5, 2007. Reference is made to a Definitive Information Statement
on Schedule 14C, which was filed with the Commission on February 2, 2007 for
additional details concerning these matters.





The
Company no longer engages in the spa and fitness business and is entirely
engaged in the real estate development business through its two subsidiaries
Good Partner Limited and Ableforce International Limited. Accordingly, the
Company’s results of operations included in this Quarterly Report on Form 10-Q
do not include the results of operations of the disposed
businesses.





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RESULTS
OF OPERATIONS





Prior to
February 27, 2007, the Company's revenues were mainly derived from its two 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.





Subsequent
to the entering into and consummation of the two material definitive agreements
as mentioned above, the Company’s principal activities have been changed from
fitness and spa businesses to properties investments.





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




Three
      Months Ended March 31,2007
            
            
            2008Operating
      Revenues
            
            
            100.00
            %
            
            
            100.00
            %Total
      operating expenses
            
            
            68.82
            %
            
            
            375.41
            %Operating
      profit (loss)
            
            
            31.18
            %
            
            
            (275.41
            %)Loss
      before income taxes
            
            
            (40.59
            %)
            
            
            (324.04
            %)Provision
      for income taxes
            
            
            --
            
            
            
            --Net
      loss
            
            
            (5,128.24
            %)
            
            
            (324.04
            %)





THREE
MONTHS ENDED MARCH 31, 2008 (UNAUDITED) COMPARED TO THREE MONTHS ENDED MARCH 31,
2007 (UNAUDITED)





OPERATING
REVENUES. Operating revenues for the first quarter of 2008 totaled HK$183,000
(US$23,000) compared to HK$170,000 (US$22,000) of last period. This represented
an increase of 8% mainly due to full occupancy for this quarter as opposed to
a 2-week vacancy of one property in the first quarter of 2007.





OPERATING
EXPENSES. The Company's operating expenses totaled HK$687,000 (US$88,000), or
375% of operating revenues, for the first quarter of 2008, compared to
HK$117,000 (US$15,000), or 69% of operating revenues, for the first quarter of
2007. This represented an increase of HK$570,000 (US$73,000) or 487% mainly due
to amortization of prepaid management consultancy service fee of HK$444,600
(US$57,000) being included this quarter but no provision has yet been made for
the first quarter of 2007.





TOTAL
NON-OPERATING EXPENSES. Total non-operating expenses for the first quarter of
2008 totaled HK$89,000 (US$12,000) compared to HK$122,000 (US$16,000) for the
first quarter of 2007. This represented a decrease of 27% due to reduction in
interest expenses.





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





NET LOSS
AND TOTAL COMPREHENSIVE LOSS. The Company has recorded a net loss and total
comprehensive loss of HK$593,000 (US$77,000) for the first quarter of 2008,
compared to a net loss and total comprehensive loss of HK$8,718,000
(US$1,118,000) for the first quarter of 2007. This represented a decrease of
HK$8,125,000 (US$1,041,000) mainly due to the net loss attributable to
discontinued operations in the first quarter of 2007.





LIQUIDITY
AND CAPITAL RESOURCES





The
Company has financed its operations primarily through cash generated from
operations and long-term bank loans.





Cash and
cash equivalent balances as of March 31, 2008 and December 31, 2007 were
HK$2,452,000 (US$314,000) and HK$2,549,000 (US$327,000).





Net cash
provided by (used in) operating activities were HK$5,563,000 (US$713,000) and
HK$(38,000) (US$(6,000)) for the three-month periods ended March 31, 2007 and
2008, respectively. The Company's operating activities are historically financed
by cash flows from operations.





Net cash
used in investing activities were HK$(7,289,000) (US$(934,000)) and HK$1,000
(US$128) for the three-month periods ended March 31, 2007 and 2008 respectively,
primarily as a result of amounts due to a stockholder.





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-




Net cash
used in financing activities, which mainly include settlement of bank loans,
were HK$679,000 (US$87,000) and HK$58,000 (US$7,000) in the three-month periods
ended March 31, 2007 and 2008, respectively.





During
the three-month period ended March 31, 2008, 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
effective interest rates varying from 2.3% to 2.35% per annum during the
quarter. The total balance outstanding as of March 31, 2008 on such loan was
HK$11,546,000 (US$1,480,000). The last repayment on the loan is due in
2026.





During
the three-month period ended March 31, 2008, the Company has no material
purchases of investments.





CRITICAL
ACCOUNTING POLICIES





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





The
critical accounting policies and use of estimates are discussed in and should be
read in conjunction with the annual consolidated financial statements and notes
included in the latest 10-K, as filed with the SEC, which includes audited
consolidated financial statements for the three fiscal years ended December 31,
2007.





ITEM
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Since the
operations of the Company are solely operated in Hong Kong, they are subject to
similar considerations and risks typically associated with investments in real
estate market of United States and Western European companies. These include
risks associated with, among others, interest rate and liquidity risk. These are
described further in the following:





INTEREST
RATE RISK





The
Company’s exposure to the risk of changes in market interest rates relates
primarily to its long term debt obligations with a floating interest
rate.  The Company monitors the movement of interest rates on an
ongoing basis and evaluates the exposure and the costs of available hedging for
its debt obligations.





LIQUIDITY
RISK





The
Company’s objective is to maintain a balance between continuity of funding and
flexibility through the use of its available cash and banking
facilities.





ITEM
4(A) - CONTROLS AND PROCEDURES





The Chief
Executive Officer and Chief Financial Officer (the principal executive officer
and principal financial officer, respectively) of the Company have concluded,
based on their evaluation as of March 31, 2008, that the design and operation of
the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are, to
the best of their knowledge, effective to ensure that information required to be
disclosed in the reports filed or submitted by the Company under the Exchange
Act is accumulated, recorded, processed, summarized and reported to the
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding whether or not disclosure is
required.





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ITEM
4(A)T – INTERNAL CONTROL OVER FINANCIAL REPORTING





(a)  The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934, as amended). Management conducted an
evaluation of the effectiveness of the Company’s internal control over financial
reporting based on the criteria set forth in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management has concluded that the
Company’s internal control over financial reporting was not effective as of
March 31, 2008.  See the discussion under Item 4(A)
above.





(b)  This
quarterly report does not include an attestation report of the company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management’s
report in this quarterly report.





(c)  There
were no changes in the Company's internal controls over financial reporting,
known to the chief executive officer or the chief financial officer that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.







PART
II - OTHER INFORMATION





ITEM
1 - LEGAL PROCEEDINGS





There are
no pending material legal proceedings to which the Company or any of its
properties is subject, nor to the knowledge of the Company, are any such legal
proceedings threatened, except as described below.





On or
about October 22, 2007, the Securities and Exchange Commission (the “SEC”) sent
a “voluntary request letter” for certain information about a company known as
Score One Inc, which had been the subject of a spam email campaign, and for
information about various matters concerning individuals allegedly connected
with this company.





Subsequently,
on or about January 11, 2008, the SEC sent a subpoena to the Company for
additional information concerning Score One Inc. and about allegedly connected
individuals. Management of the Company has retained counsel and is in the
process of dealing with the subpoena.





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





None.





ITEM
3 - DEFAULTS UPON SENIOR SECURITIES





None.





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





None.





ITEM
5 - OTHER INFORMATION





None.





ITEM
6 - EXHIBITS




31.1
            Certification
      of the Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule
      15d-14(a) of the Securities Exchange Act of 193431.2
            Certification
      of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule
      15d-14(a) of the Securities Exchange Act of 193432.1
            Certification
      of the Company's Chief Executive Officer Pursuant to 18 U.S.C. SS. 1350
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            Certification
      of the Chief Financial Officer Pursuant to 18 U.S.C. SS. 1350 Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002








- 12
-








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
PROPERTY HOLDINGS INC.


(Registrant)







May
      14, 2008
            /s/
      Ngai Keung LukNgai
      Keung LukChairman
      and Chief Executive Officer(Principal
      Executive Officer)May
      14, 2008
            /s/
      Darrie LamDarrie
      LamChief
      Financial Officer(Principal
      Financial and Accounting Officer)










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