UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

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

For the quarterly period ended      June 30, 1997

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the transition period from _________________ to ______________________

Commission file number:          0-25064

                           HEALTH FITNESS CORPORATION
             (Exact name of registrant as specified in its charter)

Minnesota                                                          41-1580506
(State of incorporation or organization)    (I.R.S. Employer Identification No.)

3500 West 80th Street, Bloomington, Minnesota                           55431
(Address of principal executive offices)                              (Zip Code)

                                 (612) 831-6830
              (Registrant's telephone number, including area code)

                      Health Fitness Physical Therapy, Inc.
                                  (former name)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 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.                                                            [X] Yes [ ] No

     The number of shares  outstanding  of each of the  registrant's  classes of
capital  stock,  as of  August  11,  1997 was:  

                 Common Stock, $.01 par value, 7,969,203 shares

Transitional Small Business Issuer Format:                    [  ] Yes   [X] No

                                      
<PAGE>

                         PART I - FINANCIAL INFORMATION
                           Item 1.Financial Statements
                         HEALTH FITNESS CORPORATION AND SUBSIDIARIES
                (Formerly Health Fitness Physical Therapy, Inc.)
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                   December 31,             June 30,
                                                                                       1996                  1997
<S>                                                                                 <C>                  <C>    
ASSETS
------
CURRENT ASSETS:
    Accounts and notes receivable, less allowance for doubtful accounts
        of $245,000 and $381,000, respectively                                      $ 4,656,876          $ 5,268,539
    Inventories                                                                         454,254              616,114
    Prepaid expenses and other                                                          433,413              330,089
                                                                                    -----------          -----------
        Total current assets                                                          5,544,543            6,214,742
PROPERTY (net)                                                                        2,185,335            2,830,424
OTHER ASSETS:
    Goodwill, less accumulated amortization of $961,424
        and $1,089,659, respectively                                                  9,376,367            9,963,230
    Noncompete agreements, less accumulated amortization
        of $84,874 and $130,757, respectively                                           346,976              576,093
    Trade accounts and notes receivable not expected to be collected within one
        year, less allowance for doubtful accounts of $240,000
        and $150,000, respectively                                                      640,000              890,072
    Other                                                                                85,676              500,361
                                                                                    -----------          -----------
                                                                                    $18,178,897          $20,974,922
                                                                                    ===========          ===========
LIABILITIES AND STOCK HOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
    Checks written in excess of bank balances                                       $   94,643           $   101,235
    Notes payable                                                                    2,090,000             1,500,000
    Trade accounts payable                                                           1,662,077               560,848
    Accrued salaries, wages and payroll taxes                                        1,302,770             1,688,850
    Other accrued liabilities                                                          622,182               799,181
    Current portion of long-term debt                                                  281,278               680,828
    Deferred revenue                                                                 1,577,186             1,551,517
                                                                                    ----------            ----------
        Total current liabilities                                                    7,630,136             6,882,459
LONG-TERM DEBT, less current portion                                                   576,490             2,903,242
DEFERRED LEASE OBLIGATION                                                               80,183                58,819
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
    Preferred stock, $.01 par value; authorized 5,000,000 shares,
         none issued or outstanding
    Common stock, $.01 par value; 25,000,000 shares authorized,
        7,173,293 and 7,909,563 shares issued and outstanding, respectively             71,733                79,096
    Additional paid-in capital                                                      11,693,617            12,449,824
    Accumulated deficit                                                             (1,795,689)           (1,320,714)
                                                                                    -----------           -----------
                                                                                     9,969,661            11,208,206
    Stockholder note and interest receivable                                           (77,573)              (77,804)
                                                                                   ------------          ------------
                                                                                     9,892,088            11,130,402
                                                                                   -----------            ----------
                                                                                   $18,178,897           $20,974,922
                                                                                    ==========            ==========
</TABLE>
                 See notes to consolidated financial statements

<PAGE>
                   HEALTH FITNESS CORPORATION AND SUBSIDIARIES
                (Formerly Health Fitness Physical Therapy, Inc.)
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                        Three Months Ended                      Six Months Ended
                                                            June 30,                                June 30,
                                                     ---------------------------           --------------------------
                                                        1996            1997                     1996            1997
                                                      --------        --------                 -------         ------
<S>                                                  <C>             <C>                      <C>               <C>  

REVENUES:

    Preventive healthcare                            $5,137,779      $5,771,228               $10,545,404       $12,055,588
    Rehabilitative healthcare                         1,759,942       2,111,717                 3,327,249         4,060,790
                                                      ---------      ----------               -----------       -----------
                                                      6,897,721       7,882,945                13,872,653        16,116,378

COST OF REVENUES:

    Salaries                                          3,860,036       4,728,898                 7,753,320         9,158,991
    Equipment                                           854,896         898,997                 1,961,923         2,332,273
    Occupancy                                           429,714         372,920                   744,522           683,190
    Support                                             181,381         439,860                   461,171           841,246
                                                      ---------      ----------                ----------        ----------
                                                      5,326,027       6,440,675                10,920,936        13,015,700
                                                      ---------      ----------                ----------        ----------
GROSS PROFIT                                          1,571,694       1,442,270                 2,951,717         3,100,678

OPERATING EXPENSES:

    Salaries                                            624,740         530,659                 1,123,728         1,018,356
    Selling, general, and administrative                578,774         876,805                 1,125,804         1,603,551
                                                      ---------       ---------                ----------        ----------
                                                      1,203,514       1,407,464                 2,249,532         2,621,907
                                                      ---------       ---------                ----------        ----------
OPERATING INCOME                                        368,180          34,806                   702,185           478,771


OTHER (EXPENSE) INCOME:

    Interest expense                                    (89,214)        (170,911)                (196,853)         (299,772)
    Other income                                          4,023          407,554                    6,876           474,381
                                                      ---------       ----------               ----------        ----------
                                                        (85,191)         236,643                 (189,977)          174,609
                                                     ----------       ----------               ----------        ----------
INCOME BEFORE INCOME TAXES                              282,989          271,449                  512,208           653,380

INCOME TAXES                                               -              63,345                     -              178,405
                                                     ----------       ----------               ----------        ----------
NET INCOME                                           $  282,989      $   208,104             $    512,208        $  474,975
                                                     ===========      ==========              ===========        ==========
NET INCOME PER COMMON AND COMMON
   EQUIVALENT SHARE                                  $      .04      $       .03             $        .07        $      .06
                                                     ==========       ==========              ===========        ==========
WEIGHTED AVERAGE COMMON
   AND COMMON EQUIVALENT
   SHARES OUTSTANDING                                 6,935,726        8,015,288                6,847,896         7,833,393
                                                     ==========       ==========              ===========        ==========
</TABLE>
                 See notes to consolidated financial statements.
                                        
<PAGE>
                   HEALTH FITNESS CORPORATION AND SUBSIDIARIES
                (Formerly Health Fitness Physical Therapy, Inc.)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                   Six Months Ended
                                                                                        June 30,
                                                                                -----------------------
                                                                              1996                  1997
                                                                              ----                  ----
<S>                                                                       <C>                    <C>   

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                            $ 512,208              $  474,975
    Adjustment to reconcile net income to net cash
        provided by (used in) operating activities:
        Depreciation and amortization                                       542,667                 617,031
        Deferred revenue                                                     (7,642)                (43,769)
        Gain on sale of physical therapy clinics                                -                  (496,461)
        Change in assets and liabilities, net of acquisitions:
           Trade accounts and notes receivable                             (272,872)               (516,443)
           Inventories                                                      (24,257)               (148,368)
           Prepaid expenses and other                                       232,971                 233,642
           Other assets                                                    (290,915)                (51,659)
           Trade accounts payable                                          (272,630)             (1,329,870)
           Accrued liabilities                                              347,237                 186,625
                                                                           --------              ----------
    Net cash provided (used in) by operating activities                     766,767              (1,074,297)

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property                                                   (130,059)               (912,019)
    Payments for acquisitions, net of liabilities assumed                  (130,784)             (1,221,825)
    Payments in connection with earnout provisions                             -                   (178,966)
    Payment in connection with noncompete agreements                           -                   (275,000)
    Proceeds from sale of physical therapy clinics                             -                  1,220,600
                                                                           --------              ----------
        Net cash used in investing activities                              (260,843)             (1,367,210)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Increase in checks written in excess of bank balances                      -                      6,592
    Borrowings under line of credit                                       2,065,000                 972,500
    Repayment of line of credit                                          (1,110,000)               (962,500)
    Repayment of notes payable                                           (1,854,986)                    -
    Borrowings of long-term debt                                            113,000               2,519,269
    Repayment of long-term debt                                            (262,730)               (246,663)
    Proceeds from issuance of common stock                                   95,305                 152,540
    Advances on notes receivable                                            (12,569)                 (4,281)
    Payments received on notes receivable                                      -                      4,050
                                                                          ---------              ----------
           Net cash (used in) provided by financing activities             (966,980)              2,441,507
                                                                          ---------              ----------
NET DECREASE IN CASH AND
    CASH EQUIVALENTS                                                       (461,056)                    -
CASH AND CASH EQUIVALENTS AT
    BEGINNING OF PERIOD                                                     506,652                     -
                                                                         ----------              ----------
CASH AND CASH EQUIVALENTS AT END OF
    PERIOD                                                              $    45,596              $      -
                                                                         ==========              ===========
</TABLE>
                 See notes to consolidated financial statements            
<PAGE>

                   HEALTH FITNESS CORPORATION AND SUBSIDIARIES
                (Formerly Health Fitness Physical Therapy, Inc.)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1.        BASIS OF PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information.  They  should  be read in  conjunction  with the  annual
financial  statements included in the Company's Annual Report on Form 10-KSB for
the year ended  December 31,  1996.  In the opinion of  management,  the interim
consolidated financial statements include all adjustments  (consisting of normal
recurring  accruals)  necessary  for the fair  presentation  of the  results for
interim periods presented.  Operating results for the three and six months ended
June 30, 1997 are not  necessarily  indicative of the operating  results for the
year ending December 31, 1997.

NOTE 2.        ACQUISITIONS

     Acquisitions - On February 7, 1997, the Company  completed the  acquisition
of certain of the assets and assumed the  liabilities of two related and closely
held companies: Isernhagen & Associates, Inc. and Isernhagen, Ltd. (Isernhagen).
Isernhagen,   Minnesota-based  companies,  provide  comprehensive  programs  and
services to professionals who work in industrial  rehabilitation and work injury
services. The purchase agreement contained a noncompete provision which covers a
period of five years and prohibits the former owners from directly or indirectly
competing with the Company. In connection with the acquisition, assets purchased
and  liabilities  assumed,  notes issued,  and cash  consideration  paid were as
follows:

  Assets acquired:
    Accounts receivable                                        $      108,900
    Inventories                                                        13,492
    Property                                                            9,159
    Noncompete agreement                                              120,000
    Excess of purchase price over net assets acquired               1,164,260
                                                                    ---------
                                                                    1,415,811
  Liabilities assumed:
    Accounts payable                                                   72,792
    Accrued expenses                                                   74,919
    Deferred revenue                                                   18,100
                                                                    ---------
                                                                      165,811
  Notes issued                                                        250,000
                                                                    ---------
  Cash consideration paid                                          $1,000,000
                                                                    =========

     The Company  also agreed to issue  common stock with a value of $500,000 on
February 7, 1999,  provided the former owners of Isernhagen  are employed by the
Company on that date.

     The notes  issued are  convertible,  subordinated  promissory  notes,  bear
interest  at 8%,  and  are  due  May 7,  1998,  unless  converted  earlier.  The
convertible,  subordinated promissory notes and accrued interest are convertible
at the option of the holders after August 6, 1997, at a conversion  price of the
lesser of 85% of the average bid price per share of the  Company's  common stock
over the immediately preceding ten days or $4.00 per share.

     The purchase agreement requires the Company to make annual cash payments of
50% of net income from operations in excess of 25% of revenues,  as defined, for
each of the five fiscal years ending February 28, 1998 through 2002.

     The purchase  agreement also required the Company to enter into  employment
agreements  with two key employees of Isernhagen for terms of five years.  These
agreements  provide for minimum  aggregate  annual  salaries  of  $195,000.  The
Company  also  granted  stock  options to  purchase  up to 70,000  shares of the
Company's  common  stock at $4.00 per share in  connection  with the  employment
agreements.
                                       
<PAGE>
      
     This  acquisition  has been  accounted  for  using the  purchase  method of
accounting,  and the excess of purchase price over net assets  acquired is being
amortized  over 15  years  using  the  straight-line  method.  The  consolidated
statements  of income  include the results of  operations  of  Isernhagen  since
February 1, 1997.

     The following  unaudited pro forma condensed combined  statements of income
reflect the combined operations of the Company and Isernhagen for the six months
ended June 30, 1996 and 1997,  adjusted for related  financing  costs, as if the
acquisition  and the financing had occurred at the beginning of 1996. (Pro forma
information  relating  to the  acquisitions  in  1996  and the  acquisition  and
disposals  discussed  below are not  included  due to the impact of the acquired
companies  being  insignificant.)  The  unaudited pro forma  condensed  combined
statements of income may not  necessarily  reflect the actual  operations of the
Company  which would have  resulted had the  acquisition  and related  financing
occurred as of the date  presented.  The unaudited pro forma  information is not
necessarily  indicative  of  future  results  of  operations  for  the  combined
companies.
<TABLE>
<CAPTION>
                                                                                                     Six Months Ended
                                                                                                         June 30
                                                                                              -----------------------------  
                                                                                              1996                     1997
                                                                                              ----                     ----
<S>                                                                                      <C>                         <C>   

     Revenues                                                                            $14,611,000                 $16,328,000
     Cost of revenues                                                                     11,583,000                  13,127,000
                                                                                          ----------                  ----------
     Gross profit                                                                          3,028,000                   3,201,000
     Other expenses                                                                        2,512,000                   2,695,000
                                                                                          ----------                  ----------
     Net income                                                                          $   516,000                 $   506,000
                                                                                          ==========                  ==========
     Net income per common and common equivalent share                                   $       .07                 $       .06
                                                                                          ==========                  ==========
     Weighted average common and common equivalent shares outstanding                      7,038,000                   7,900,000
                                                                                          ==========                  ==========
</TABLE>

     On April 9, 1997,  the Company  acquired of all the issued and  outstanding
stock of closely  held K.A.M.  Physical  Therapy  Services  Corp.  (K.A.M.),  an
Iowa-based provider of rehabilitative services. The purchase agreement contained
a noncompete provision which covers a period of seven years and prohibits one of
the former  owners from directly or indirectly  competing  with the Company.  In
connection with the  acquisition of K.A.M.,  the Company issued 78,911 shares of
common  stock  valued  at  $200,000  and  cash  consideration  of  $200,000.  In
connection  with the  acquisition,  assets  purchased and  liabilities  assumed,
common stock issued, and cash consideration paid were as follows:

     Assets acquired:
         Cash                                                        $   3,175
         Accounts receivable                                            24,964
         Property                                                       30,110
         Noncompete agreement                                          125,000
         Excess of purchase price over net assets acquired             334,573
                                                                      --------
                                                                       517,822
     Liabilities assumed:
         Accounts payable                                               65,857
         Accrued expenses                                               51,965
                                                                       117,822
         Common stock issued                                           200,000
                                                                      --------
         Cash consideration paid                                     $ 200,000
                                                                      ========

     The purchase  agreement  requires the Company to make annual payments of up
to 39% of net income from  operations,  as defined,  for each of the five fiscal
years ending March 31, 1998 through 2002. The annual payment,  if any, is due in
a  combination  of 50% in cash and 50% in the  Company's  common stock valued at
$3.50 per share.

     The purchase  agreement also required the Company to enter into a five-year
employment agreement with, and issue stock options to, a key employee of K.A.M.
                                        
<PAGE>

     This  acquisition  will be  accounted  for  using  the  purchase  method of
accounting,  and the excess of purchase  price over net assets  acquired will be
amortized over 15 years using the straight-line method.

     In connection with the K.A.M. acquisition,  the Company also entered into a
separate  noncompete  agreement  with a  former  K.A.M.  owner.  The  noncompete
agreement  required  the  Company  to make a lump-sum  payment  of  $75,000  and
prohibits  the former  owner from  directly  or  indirectly  competing  with the
Company for a period of five years.

     On May 16, 1997,  the Company  acquired  all of the issued and  outstanding
stock of closely held Duffy and  Associates  Physical  Therapy Corp.  (Duffy and
Associates)  of Des  Moines,  Iowa.  Duffy and  Associates  provides  outpatient
physical  therapy,  sports  medicine,  and  occupational  health services at two
clinics,  one in Des Moines and one in Ankeny, Iowa. It also contracts with area
hospitals and corporations and provides  services to Ankeny high school athletic
teams. In connection with the  acquisition,  the Company issued 50,000 shares of
common  stock  valued  at  $143,750  and  cash  consideration  of  $300,000.  In
connection  with the  acquisition,  assets  purchased and  liabilities  assumed,
common stock issued, and cash consideration paid were as follows:

     Assets acquired:
        Accounts receivable                                        $ 211,428
        Property                                                     168,500
        Prepaid expenses and other                                     2,280
        Noncompete agreement                                          30,000
        Excess of purchase price over net assets acquired            248,212
                                                                     -------
                                                                     660,420
     Liabilities assumed:
        Accounts payable                                              70,000
        Notes payable                                                 83,396
        Accrued expenses                                              63,274
                                                                     -------
                                                                     216,670
        Common stock issued                                          143,750
                                                                     -------
        Cash consideration paid                                    $ 300,000
                                                                     =======

     The purchase  agreement  requires the Company to make annual payments of up
to 35% of net income from  operations,  as defined,  for each of the five fiscal
years ending April 30, 1998 through 2002. The annual payment,  if any, is due in
a combination of 33% in cash and 67% in the Company's common stock valued at the
average closing bid price of the Company's common stock for the ten trading days
ending two business days immediately preceding the date such payment is due.

     The purchase  agreement also required the Company to enter into a five-year
employment  agreement  with, and issue stock options to, a key employee of Duffy
and Associates.

     This  acquisition  will be  accounted  for  using  the  purchase  method of
accounting,  and the excess of purchase  price over net assets  acquired will be
amortized over 15 years using the straight-line method.

     In August, 1997 the Company completed the acquisition, effective as of July
31, 1997, of all the issued and outstanding stock of Medlink Services,  Inc. and
Medlink  Corporation  (collectively  Medlink),  two  closely  held  and  related
rehabilitation   services  companies  based  in  Iowa.  The  purchase  agreement
contained  a  noncompete  provision  which  covers a period  of five  years  and
prohibits  the former  owners from  directly or  indirectly  competing  with the
company.  In connection  with the Medlink  acquisition the Company issued 25,000
shares of common stock valued at $71,875 and cash consideration of approximately
$94,125 (subject to adjustment).

     The purchase  agreement  requires the Company to make annual payments up to
35% of net income from operations, as defined, for each of the five fiscal years
ending  July 31,  1998  through  2002.  The annual  payment if any,  is due in a
combination  of 33% cash and 67% in the  Company's  common stock valued at $3.50
per share.

<PAGE>

     The purchase  agreement also required the Company to enter into a five-year
employment agreements with, and issue stock options to, certain key employees of
Medlink.

     This  acquisition  will be  accounted  for  using  the  purchase  method of
accounting  and the excess of purchase  price over net assets  acquired  will be
amortized over 15 years using the straight-line method.

     Sales of  Under-performing  Physical  Therapy Clinics -In January 1997, the
Company sold one physical therapy clinic located in San Diego,  California,  and
three clinics in Delaware. In May 1997, the Company sold seven clinics in Orange
County,  Sacramento  and North Tahoe,  California.  These clinics  accounted for
revenues of approximately $4,146,000 in 1996. The Company recorded a gain on the
sales of approximately $496,000. At closing, the Company received $1,222,500 and
notes rceivable totaling  $445,000.  The notes receivable have interest rates of
6% to  7%  and  require  annual  or  quarterly  principal  payments.  The  notes
receivable are recorded in Other Assets,  except for the current portion of such
notes which are  included in Prepaid  Expenses and Other.  One of the  acquiring
companies also assumed the Company's non-interest bearing note payable requiring
total future payments of $330,000.

NOTE 3. DEBT

     In February 1997, the Company's term loan and credit  agreement was amended
and restated (the Amended  Agreement).  The Amended Agreement increased the term
note to $2.5 million, subject to certain conditions,  and extended the due dates
of the term loan and the $1.5  million  revolving  line of credit to January 31,
2000. In May 1997, the term note was further increased to $2.85 million. At June
30, 1997,  the Company has  borrowings  of $2.85 million under the term loan. In
August 1997,  the term note was further  increased to $3.275  million.  The term
note is due in eight quarterly  installments of $100,000,  beginning January 31,
1998,  and a final  payment of $2.475  million on January 31, 2000.  Interest on
outstanding term loan borrowings is payable monthly and is computed at the prime
rate plus 6%. Revolving line of credit  borrowings are limited based on eligible
borrowings,  as  defined.  Interest  on  outstanding  revolving  line of  credit
borrowings  is  payable  monthly  and is  computed  at the  prime  rate plus 2%.
Borrowings  under the Amended  Agreement  are secured by  substantially  all the
Company's  assets and  personally  guaranteed  by the Company's  president.  The
agreement contains various  restrictive  covenants relating to quarterly minimum
levels of net worth and net income,  limitations on additional  indebtedness and
capital expenditures, prohibition on dividend payments, and other matters.

     On February 7, 1997,  the Company  entered into  convertible,  subordinated
promissory  notes totaling  $250,000 with the sellers of  Isernhagen.  The notes
issued bear interest at 8%, and are due May 7, 1998,  unless converted  earlier.
The  convertible,   subordinated  promissory  notes  and  accrued  interest  are
convertible  at the option of the holders  after August 6, 1997, at a conversion
price of the lesser of 85% of the average  bid price per share of the  Company's
common stock over the immediately preceding ten days or $4.00 per share. A value
of $44,118 has been assigned to the conversion feature based on the value of the
Company's common stock on February 7, 1997.

     On April 7, 1997, the Company paid the  outstanding  balance of $15,000 and
terminated the unsecured revolving line of credit.

     On April 15, 1997,  the Company  entered into a $319,000 note payable.  The
note requires monthly  payments of $7,223  including  interest at 12.77% through
April 2002. The note is secured by various pieces of exercise equipment.

     On June 4, 1997, the holders of two  convertible,  subordinated  promissory
notes with a face value of $200,000 due December 1, 1998  converted  their notes
and accrued interest of $8,000 into 91,264 shares of the Company's common stock.

NOTE 4. STOCKHOLDERS' EQUITY

     On January 30, 1997,  the Company  issued 292,829 shares of common stock to
the sellers of Fitness Systems as a portion of the consideration,  contractually
agreed upon , pursuant to the Stock  Purchase  Agreement  dated March 24,  1995,
which required that the aggregate value of the stock consideration  issued equal
$1,200,000.

     On June 26, 1997 the Company  issued 2,000 shares of common stock in return
for services  provided.  The fair value of the common stock issued,  $5,000, was
based on the market value of the Company's common stock.

<PAGE>

     During the six months ended June 30, 1997, the Company received proceeds of
$152,540 when the holders of stock options or warrants  exercised their right to
purchase a total of 217,160  shares of common stock at prices  ranging from $.65
to $2.28 per share.  The Company  also issued  4,106  shares of common  stock in
connection with the Company's employee stock purchase plan.

NOTE 5. LEGAL PROCEEDINGS

     On April 17, 1996, a former  employee filed a cliam  entitled  Julian Gatza
vs. Health Fitness  Corporation  and Hurley Health  Services  before the Circuit
Court of Genessee County in the State of Michigan, alleging wrongful termination
of  employment  and  discrimination.  The  plaintiff has not claimed a specified
amount of  damages.  The  Company  tendered  the  defense  of this  claim to its
insurance  carrier;  and the  insurance  carrier's  response has been that there
would be no insurance coverage for the liability represented by this litigation.
The Company  believes this claim is without merit and will defend it vigorously.

     The Company  believes that the outcome of the foregoing claim will not have
a material  adverse  effect on the  Company's  financial  condition,  results of
operations  or cash flows.  The Company is also involved in various other claims
and  lawsuits  incident to the  operations  of its  business,  including  claims
arising from  accidents  or from the  negligent  provision  of physical  therapy
services.  The  Company  believes  that their  outcome  will not have a material
adverse effect on its financial condition, results of oeprations or cash flows.

NOTE 6. INCOME TAXES

     The  provision  for income taxes for the six months ended June 30, 1996 has
been offset by a reduction in the valuation  allowance for deferred  taxes.  The
provision  for  income  taxes for the six months  ended  June 30,  1997 has been
partially offset by a reduction in the valuation allowance.

NOTE 7. NET INCOME PER SHARE

     Income per share of common and common  equivalent  was computed by dividing
net  income by the  weighted  average  number of  shares  of common  and  common
equivalent shares outstanding during each period.

     For the three and six months  ended June 30,  1997,  this  amount  includes
190,476 and 207,265 contingent shares, respectively, assumed to be issued to the
Sellers  of  Fitness  Systems  and to the  Sellers of  Isernhagen.  Options  and
warrants  were not  included as common stock  equivalents  for the three and six
months ended June 30, 1997 due to their antidilutive effect.

     For the three and six months  ended June 30,  1996,  this  amount  includes
200,000 and 221,319 contingent shares, respectively, assumed to be issued to the
Sellers of Fitness Systems. The Company contractually agreed with the Sellers of
Fitness Systems that if the average  closing sale price of the Company's  common
stock  during the fourth  calendar  quarter of 1996 did not reach at least $6.00
per share,  the Company was obligated to issue sufficient  additional  shares of
stock so that the aggregate value of the stock  consideration  equals $1,200,000
based on the same three month  average price  calculation.  Options and warrants
were not included as common stock  equivalents for the three or six months ended
June 30, 1996 due to their antidilutive effect.
<PAGE>

Item 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS 

Results of Operations

The following table sets forth, for the periods indicated,  information  derived
from the  consolidated  statements of  operations of the Company:  
<TABLE>
<CAPTION>
                                                                     For The Three Months 
                                                                       Ended June 30, 
                                               -----------------------------------------------------------------
                                                          1996                                      1997 
                                                          ----                                      ----
<S>                                            <C>               <C>                   <C>                 <C>   

REVENUES:
      Preventive healthcare                    $5,138,000         74.5%                $5,771,000           73.2%
      Rehabilitative healthcare                 1,760,000         25.5                  2,112,000           26.8
                                               ----------       ------                  ---------         ------
 Total revenues                                 6,898,000        100.0                  7,883,000          100.0
COST OF REVENUES                                5,326,000         77.2                  6,441,000           81.7
                                               ----------       ------                  ---------         ------
GROSS PROFIT                                    1,572,000         22.8                  1,442,000           18.3
OPERATING EXPENSES                              1,204,000         17.5                  1,407,000           17.9
                                               ----------       ------                 ----------         ------
OPERATING INCOME (LOSS):
      Preventive healthcare                       911,000                                 679,000
      Rehabilitative healthcare                   358,000                                 ( 1,000)
     Corporate                                   (901,000)                               (643,000)
                                               ----------                              ----------
     Total operating income                       368,000          5.3                     35,000             .4
OTHER (EXPENSES) INCOME, NET                      (85,000)        (1.2)                   236,000            3.0
                                               ----------       ------                 ----------          -----
                                                  283,000          4.1                    271,000            3.4
INCOME TAXES                                        -               -                      63,000             .8
                                               ----------       ------                 ----------          -----
NET INCOME                                    $   283,000          4.1%               $   208,000            2.6%
                                               ==========       ======                 ==========          =====

                                                                     For The Six Months
                                                                       Ended June 30,
                                                        1996                                     1997
                                                        ----                                     ----
REVENUES:
      Preventive healthcare                   $10,546,000         76.0%               $12,056,000           74.8%
      Rehabilitative healthcare                 3,327,000         24.0                  4,061,000           25.2
                                               ----------       ------                  ---------         ------
 Total revenues                                13,873,000        100.0                 16,117,000          100.0
COST OF REVENUES                               10,921,000         78.7                 13,016,000           80.8
                                               ----------       ------                 ----------         ------
GROSS PROFIT                                    2,952,000         21.3                  3,101,000           19.2
OPERATING EXPENSES                              2,250,000         16.2                  2,622,000           16.3
                                               ----------       ------                 ----------         ------
OPERATING INCOME (LOSS):
      Preventive healthcare                     1,409,000                               1,412,000
      Rehabilitative healthcare                   575,000                                 106,000
     Corporate                                 (1,282,000)                             (1,039,000)
                                               ----------                              ----------
     Total operating income                       702,000          5.1                    479,000            2.9
OTHER (EXPENSES) INCOME, NET                     (190,000)        (1.4)                   174,000            1.1
                                               ----------        -----                 ----------         ------
                                                  512,000          3.7                    653,000            4.0
INCOME TAXES                                        -               -                     178,000            1.1
                                               ----------        -----                 ----------         ------
NET INCOME                                    $   512,000          3.7%               $   475,000            2.9%
                                               ==========        =====                 ==========         ======
</TABLE>

     General.  The Company is engaged in two  principal  lines of business:  (i)
preventive healthcare;  and (ii) rehabilitative  healthcare.  Preventive health-
care  includes the  development,  marketing  and  management  of  corporate  and
hospital-based  fitness centers and the sale and servicing of fitness equipment.
Rehabilitative  healthcare  relates to the operation of physical therapy clinics
that  provide a full range of  rehabilitative  services,  provides  occupational
health (injury prevention and work-injury management consulting services), and a
network of independent physical therapy clinics.
<PAGE>

     The  Company's  preventive  healthcare  revenues  come from fitness  center
management  and  consulting  contracts  and the sales  and  service  of  fitness
equipment.   The  management  and  consulting  contracts  provide  for  specific
management,   consulting,   and  program   fees  and  contain   provisions   for
modification, termination, and non-renewal.

     The Company's  rehabilitation  revenues come from physical therapy services
provided to patients at Company  owned  locations  and at hospital and corporate
locations,  annual fees paid by  independent  physical  therapy  clinic  network
members for  consulting  and group buying  services,  and program and consulting
fees paid by employers,  insurers and others for  occupational  health services.
Net revenues provided to patients at Company owned and worksite  locations are a
function  of the number of patients  treated,  the payor mix and the average net
charge per treatment.  Consequently, two patients provided substantially similar
treatments   may  result  in  different   net  revenues   because  of  differing
reimbursement environments.

     The Company  incurs costs at three levels:  (i) revenue  generating  sites;
(ii) regional  sites that work closely with the revenue  generating  sites;  and
(iii) general corporate costs.  Management views the operational expenses of the
regional  sites to be an integral  component  of the revenue  generating  sites.
Therefore, the discussion that follows is of revenues and operating income.

     Revenues.  Revenues increased $985,000 or 14.3% to $7,883,000 for the three
months  ended June 30, 1997 from  $6,898,000  for the same period ended June 30,
1996.  Revenues increased  $2,244,000 or 16.2% to $16,117,000 for the six months
ended June 30, 1997 from $13,873,000 for the same period ended June 30, 1996.

     Preventive healthcare revenues  increased  $633,000 and $1,510,000 for the
three and six month  periods ended June 30, 1997 compared to the same periods in
1996.  The  increases  were  primarily  due to the  annualized  effect of adding
several  hospital and  corporate  fitness  center  management  contracts and the
increase in sales of fitness  equipment and service of $114,000 and $606,000 for
the three and six month periods ended June 30, 1997, partially offset by the net
loss of four management contracts for the three months ended June 30, 1997.

     Rehabilitative  healthcare  revenues increased by $352,000 and $734,000 for
the three and six month  periods ended June 30, 1997 compared to the same period
in 1996. The increases  were  primarily due to the  acquisition of The Preferred
Companies in December 1996, the Isernhagen Companies in February 1997, K.A.M. in
April 1997 and Duffy & Associates in May 1997, and the increase in the number of
patient  visits  at  several  clinics,  partially  offset  by the  sale  of four
under-performing  clinics in January 1997 and seven under-performing  clinics in
May 1997.  The eleven  clinics sold had revenues of $439,000 and  $1,236,000 for
the three and six month periods ended June 30, 1997,  and revenues of $1,009,000
and  $1,950,000  for the  three and six  months  ended  June 30 1996.  The newly
acquired  clinics and clinic  networks  accounted  for  revenues of $416,000 and
$1,214,000 for the three and six month periods ended June 30, 1997.

     Operating Income.  Operating income decreased  $333,000 or 90.8% to $35,000
for the three months ended June 30, 1997 from $368,000 when compared to the same
period in 1996.  Operating income decreased by $223,000 or 31.8% to $479,000 for
the six months  ended June 30,  1997 from  $702,000  when  compared  to the same
period in 1996. The decrease in operating income for the three months ended June
30, 1997 was due to a decrease in operating income for preventive  healthcare of
$232,000 and a decrease in operating  income for  rehabilitative  healthcare  of
$359,000,  partially  offset by a reduction in corporate costs of $258,000.  The
decrease in operating income for the six months ended June 30, 1997 was due to a
decrease  in  operating  income  for  rehabilitative  health  care of  $469,000,
partially offset by and increase in operating  income for preventive  healthcare
of $3,000 and a reduction in coporate costs of $243,000.

     The decrease in operating  income for the three and six month periods ended
June 30, 1997 is due to an increase in clinic and regional  salaries and support
for  rehabilitative  health  care  and  an  increase  in  regional  support  for
preventive healthcare,  partially offset by a decrease in corporate salaries and
support.  The increase in operating  costs was related to the  Company's  growth
strategy which has required expanded services and support,  increased  personnel
and expanded operational and financial systems.
<PAGE>

     Other Expense.  Other  expenses is comprised of interest  expense and other
income.  Interest  expense  increased  $82,000 to $171,000  for the three months
ended June 30,  1997 from  $89,000 for the same  period in 1996,  and  increased
$103,000 to $300,000  for the six months  ended June 30, 1997 from  $197,000 for
the same period in 1996. The increase in interest  expense was due to the higher
average  borrowings  and  interest  rates in 1997 when  compared to 1996.  Other
income  increased  $404,000 to $408,000 for the three months ended June 30, 1997
from $4,000 for the same period in 1996, and increased  $467,000 to $474,000 for
the six months ended June 30, 1997 from $7,000 for the same period in 1996.  The
increase is  primarily  due to the gain on the sale of the four  underperforming
clinics in January  1997 and the sale of the seven under  performing  clinics in
May 1997.
                                   
     Income Taxes.  Income taxes were calculated based on management's  estimate
of the  Company's  effective  tax rate.  The  provision for income taxes for the
three and six  months  ended  June 30,  1996 was  offset by a  reduction  in the
valuation  allowance for deferred taxes.  The provision for income taxes for the
three  months  ended June 30, 1997 was  partially  offset by a reduction  in the
valuation allowance for deferred taxes.

     Net Income.  The Company's net income decreased $75,000 to $208,000 or $.03
per share for the three  months  ended June 30,  1997 from  $283,000 or $.04 per
share for the same  period in 1996.  For the six months  ended June 30, 1997 the
Company's  net  income  decreased  $37,000  to  $475,000  or $.06 per share from
$512,000 or $.07 per share for the same period in 1996.

     Liquidity and Capital Resources

     The Company had a working  capital  deficit of  $2,086,000  at December 31,
1996 and a working  capital  deficit of $668,000 as of June 30, 1997. The change
was  primarily  due to the  decreases  in  accounts  and notes  payable  and the
increases in accounts and notes receivable and inventories,  which are partially
offset by the increases in checks written in excess of bank balances and accrued
salaries,  wages and payroll taxes.  Notes payable at June 30, 1997 consisted of
$1,500,000 on its existing line of credit.  The Company's  principal  sources of
liquidity included trade accounts and notes receivable of $5,269,000.

     In February  1997,  the Company  entered into a Second Amended and Restated
Credit  and  Security  Agreement  which  provides  for a line of credit of up to
$1,500,000  at the prime  rate plus 2% and a  $2,500,000  term loan at the prime
rate plus 6%. The amount of the term loan was  increased  to  $2,850,000  in May
1997, and further  increased to $3,275,000 in August 1997. To fund operations at
current  levels,  management has  implemented  plans to extend payments terms of
existing  obligations,  obtain  additional  debt and/or equity  financing and to
generate  cash flow from  operating  activities.  However,  to  finance  planned
infrastructure development and the acquisition of free-standing physical therapy
clinics  in the  rehabilitative  business  segment,  the  Company  will  require
additional financing.

     In February 1997, the Company paid  $1,000,000 of cash and issued  $250,000
of subordinated  convertible  promissory  notes in connection with the Company's
acquisition  of the Isernhagen  Companies.  The cash for such  acquisitions  was
provided by the Company's bank term loan.

     In April 1997,  the Company paid  $200,000 of cash and issued 78,911 shares
of the Company's  common stock in connection  with the Company's  acquisiiton of
K.A.M.  The cash for such  acquisition  was provided by the Company's  bank term
loan.

     In May 1997,  the Company paid $300,000 of cash and issued 50,000 shares of
the Company's common stock in connection with the Company's acquisition of Duffy
and Associates. The cash for such acquisition was provided by the Company's bank
term loan.

     In August 1997, the Company paid  approximately  $94,125 of cash and issued
25,000  shares of the Company's  common stock in  connection  with the Company's
acquisition  of  Medlink.  The cash for such  acquisition  was  provided  by the
Company's bank term loan.

     Sources of capital to meet future obligations in 1997 and the first half of
1998 are  anticipated  to be cash provided by  operations  and  additional  debt
and/or equity financing.  In order to conserve capital resources,  the Company's
policy is to lease its  physical  facilities.  The Company does not believe that
inflation has had a significant impact of the results of its operations.
<PAGE>
     Accounting Pronouncement

     In February 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting Standards (SFAS) No. 128, Earnings per Share,
which is  effective  for  interim  and annual  reporting  periods  ending  after
December 15, 1997. SFAS No. 128 supersedes  Accounting  Principles Board Opinion
No. 15, Earnings per Share,  and replaces the  presentation of primary  earnings
per share with a presentation of basic earnings per share. It also requires dual
presentation  for all entities  with  complex  capital  structures  and provides
guidance on other computational  changes.  The implementation of SFAS No. 128 is
expected to decrease earnings per share by a nominal amount.

     Outlook

     The Company's strategy is to continue to expand its  rehabilitative  health
care  operations  through  acquisitions  and  to  improve  profitability  of the
physical  therapy clinics  acquired  through the  consolidation  of the clinics'
operating  expenses.  The Company intends to focus its  acquisitions on physical
therapy  clinics   primarily  located  in  secondary  markets  in  the  Midwest.
Management  anticipates  that the purchase  prices paid for future  acquisitions
will  be  similar  to the  prices  paid  to  date  and  payment  terms  may be a
combination of cash,  notes payable,  and shares of the Company's  common stock,
with  a  portion  of the  purchase  price  to be  paid  at  closing  and,  where
appropriate,  a portion contingent upon achievement of earnout arrangements.  It
is anticipated  that funds required for future  acquisitions and the integration
of acquired  businesses  with the Company will be provided from  operating  cash
flow and the  proceeds  from future  debt or equity  financings.  Future  equity
financings,  if any, may result in dilution to holders of the  Company's  common
stock. However,  there can be no assurance that suitable acquisition  candidates
will be identified by the Company in the future, that suitable financing for any
such  acquisitions can be obtained by the Company or that any such  acquisitions
will occur.

     As a publicly-owned corporation,  the Company has and will incur additional
expenses due to being a public  company.  The  Company's  growth  strategy  will
require expanded patient services and support,  increased  personnel  throughout
the Company,  expanded  operational and financial systems and  implementation of
new control procedures. These factors will affect future results and liquidity.

     Preventive  healthcare  operating income,  as a percentage of revenues,  is
expected to remain  consistent with that experienced for the year ended December
31, 1996.

     Rehabilitative  healthcare revenues are anticipated to increase as a result
of introducing  additional  physical therapy work sites at additional  corporate
fitness  centers,  increasing  the number of  physical  therapists  at  existing
clinics, and potential  acquisitions of free-standing  physical therapy clinics.
See "Liquidity and Capital Resources." In January and May 1997, the Company sold
eight physical  therapy  clinics located in California and three clinics located
in Delaware.  These clinics  accounted  for revenues of $4,146,000 in 1996.  The
Company  anticipates  that this loss of revenue will be offset by the  Company's
acquisition  of  The  Preferred  Companies  in  December  1996,  the  Isernhagen
Companies in February  1997,  K.A.M.  in April 1997,  Duffy & Associates  in May
1997,  Medlink in July 1997 and other planned physical  therapy  acquisitions in
the second half of 1997.

     Rehabilitative  health  care  operating  income  from  existing  clinics is
expected to increase on a quarterly basis as a result of increasing revenues and
streamlining  the billing and marketing  functions of the companies  acquired to
date.  Corporate  expenses,  as a percentage of revenues,  are anticipated to be
consistent with 1996 levels.

     The foregoing  financial  statement notes and  Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operation  contain  numerous
forward-looking  statements  that  involve a number of risks and  uncertainties.
Factors that could cause actual results to differ  materially from such forward-
looking statements include but are not limited to the following:
<PAGE>

     Sufficiency of working capital

     At June 30, 1997, the Company had a negative  working  capital  position of
$688,000.  The Company's ability to fund its working capital requirements in the
future is materially  dependent  upon its ability to generate cash flow from its
existing and future management contracts, equipment sales, consulting fees, fees
generated from its work site and free-standing  physical therapy  operations and
future debt and/or equity  financings.  Future potential  acquisitions,  and the
costs  associated with the successful  integration of such  acquisitions,  could
adversely affect Company cash flows from operating activities.  In addition, the
Company materially relies on third party  reimbursement for its physical therapy
services. If such third party payors defer or delay payment, for any reason, the
Company's cash flows would be materially adversely affected.  Historically,  the
Company has experienced  excessive account  receivable aging from certain of its
physical  therapy  clinics.   The  Company   attributes  the  majority  of  such
receivables  to be the result of the poor  performance of the clinics it sold in
1997.  If the  Company's  existing  operations  would  require more capital than
currently  anticipated,  or if revenues or  expenses  are greater  than what are
currently  anticipated  the Company may need  additional  financing  in order to
maintain its operations and implement its physical therapy acquisition strategy.
Such sources of additional  financing could include,  but may not be limited to,
sales of the Company's debt or equity securities. No assurance can be given that
the Company can and will be able to secure any such  financing  when needed,  or
that such financing,  if obtained,  would be on terms favorable or acceptable to
the Company.

     Dependence  upon  successful  execution  of  acquisition  strategy;   risks
associated with integration of free-standing physical therapy clinics.

     A  major  element  of  the  Company's   business  strategy  is  to  acquire
free-standing outpatient physical therapy clinics primarily in secondary markets
throughout the Midwest.  Acquisitions have constituted,  and the Company expects
them to constitute in the future, a significant portion of the Company's growth.
Since  December  1991 to June 30,  1997,  the  Company has grown from owning and
operating one physical  therapy clinic to owning and operating 11  free-standing
clinics and 12 worksite  physical therapy clinics.  No assurance can be given as
to whether,  when or on what terms any possible  acquisitions  of  free-standing
clinics may be completed, if at all.

     The Company  believes that  competition for  acquisitions  will increase as
consolidation of the outpatient  rehabilitation industry continues.  Many of the
companies  actively  seeking such  acquisitions  are well  established  and have
substantially  greater  resources  than the Company.  Such  interest may lead to
increased competition for attractive acquisition candidates.  Accordingly, there
can  be no  assurance  that  existing  outpatient  rehabilitation  clinics  will
continue to be available to the Company in the secondary  markets in the Midwest
on terms and conditions  favorable or acceptable to the Company,  or at all. The
failure of the Company to be able to successfully locate,  negotiate,  close and
integrate such  free-standing  physical  therapy  acquisitions  would  adversely
affect the Company's future growth potential. In addition, the Company's ability
to secure the necessary  financing to acquire such physical  therapy  clinics on
terms and conditions  favorable to the Company may impact the Company's  ability
to  successfully  execute its acquisition  strategy.  Federal and state laws may
prohibit or restrict the use by the Company of its  securities as  consideration
for the  acquisition of clinics from referral  sources or otherwise  prohibit or
restrict the  Company's  ability to make  acquisitions.  Such  prohibitions  and
restrictions  could restrict the Company's ability to make  acquisitions,  which
could adversely  affect the Company's  growth  potential,  financial  condition,
results of operations and cash flows.

     Risks associated with expansion and rapid growth.

     The Company's growth strategy will require increased  personnel  throughout
the Company,  expanded  operational and financial systems and the implementation
of new and  additional  control  procedures.  There can be no assurance that the
Company  will  be  able  to  manage  expanded  or  newly  integrated  operations
effectively.  The failure to implement such  operational  and financial  systems
could have a material  adverse  affect on the Company's  results of  operations,
financial condition and cash flows.

<PAGE>

     Material dependence on referrals.

     Although not the Company's  primary  strategy,  the Company has acquired in
the past (and may  acquire in the  future)  certain  clinics  from  health  care
professionals  (such as physicians) who are the primary patient  referral source
for such  clinics.  Under  current and proposed  federal and state  legislation,
depending on the type of consideration paid by the Company and the nature of any
other financial relationships between the sellers, the seller and other referral
sources may be prohibited from referring  patients to the clinic.  In connection
with the  acquisition  of clinics from  physicians  in  particular,  the Company
typically   enters  into   noncompetition   agreements   with  the  sellers  for
approximately 60 months (although such sellers are not restricted from referring
patients  to other  clinics).  There  can be no  assurance,  however,  that such
contracts would be enforced according to their terms and conditions and that the
sellers would not begin competing with the Company.

     Potential adverse effects of existing and future government regulation.

     The Company's physical therapy business is subject to extensive and rapidly
changing federal,  state and local regulation  governing  licensure,  conduct of
operations,  payment of referral  fees,  purchase or leasing of  facilities  and
employment of therapists and other professionals by business corporations.

     Virtually  all states in which the Company  operates  have enacted laws and
adopted  regulations  that  restrict  healthcare  practitioners  from  referring
patients to healthcare  facilities in which the practitioner has an ownership or
other financial  interest.  Other state laws and regulations  often prohibit the
giving and accepting of referral fees or other  consideration as compensation or
inducement for patient  referrals.  The Company believes that its operations are
structured to comply with all such laws and regulations  currently in effect, as
well as laws and regulations enacted or adopted but not yet effective. There can
be no assurance,  however, that enforcement authorities will not take a contrary
position. The Company also believes that, if it is subsequently  determined that
the Company's  operations do not comply with such laws or regulations,  it could
restructure its operations to comply with such laws and  regulations.  There can
be no  assurance,  however,  that the Company would be able to  restructure  its
operations.  In addition, there can be no assurance that the states in which the
Company currently operates, or may operate in the future, will not enact similar
or more  restrictive  laws and  that  the  Company  will be able to  operate  or
restructure its operations to comply with such new legislation or regulations or
interpretations of existing or new legislation and regulations.

     Additional  federal  restrictions  became  effective  in 1995  for  certain
designated health services  (including  physical therapy) that require notice to
governmental  agencies of  ownership  on the part of  physicians  and members of
their  families of debt or equity  interests in  providers of physical  therapy,
such as the Company.  Payment will not be made for services provided to Medicare
or Medicaid  beneficiaries as a result of referrals from such  physicians.  This
law also  regulates  a wide  variety of other  relationships  between  referring
physicians and providers and imposes substantial penalties for violations of its
provisions.  Proposed federal legislation would extend these restrictions to all
services provided,  regardless of whether this source of payment is the Medicare
or Medicaid  programs or some other public or private source of payment.  In the
event such legislation at the state or national level were enacted,  the Company
may be required to restructure its  relationships  with certain of its referring
physicians.  There can be no assurance  that the Company  would be able to do so
without an adverse effect on its financial condition, operations or cash flows.

<PAGE>

     Possible limitations on third-party reimbursement.

     The  healthcare  industry  has  experienced  a material  trend  toward cost
containment as private and governmental  payors seek to respond to, and control,
rapidly escalating  healthcare costs. One response has been to place limitations
on reimbursement rates by capping or lowering fees and restricting the number of
treatments which will be reimbursed for any given condition. All states in which
the Company  currently  conducts  business  have fee  schedules  which limit the
reimbursement rates under workers'  compensation  programs.  The Company expects
that  legislation  limiting  the  reimbursement  of fees for various  outpatient
services  (including  physical  therapy and other related  services) will become
more prevalent.  Reimbursement for the Company's services may also be limited by
third  party  payors.  Such  payors  often  limit the  amount of fees per visit,
regardless of the number or type of therapy applied to the patient, or otherwise
limit, by the terms of the managed care contract, the amount of fees that may be
charged. One method of governmental and third party payors has been to institute
what  are  known as  "capitated"  programs.  Under  capitated  programs,  payors
contract with providers for specific physical therapy services in return for set
prepaid fees per individual enrollee ("capitated" monthly fees). If the provider
has accurately analyzed and negotiated its capitated monthly fees, and the costs
in  providing  services  are less than the demand for  treatment,  the  provider
benefits from positive margins in cash flow resulting from the prepayment of the
capitated  monthly  fees.  However,  to the extent that the  actuarial  analysis
underlying  such  capitated  fees  is  inaccurate  and  enrollees  require  more
treatment than is anticipated,  aggregate  capitated fees may be insufficient to
cover the costs of providing enrollees with the services required.  Although the
Company could seek to negotiate stop-loss reinsurance to contractually shift the
risk of financial  exposure beyond certain limits to an insurance carrier in the
event the Company determined to participate in such a capitated  program,  there
can be no assurance  that the Company would be able to obtain such  reinsurance.
In  addition,  the Company  could be required to obtain  licenses  from  certain
governmental authorities in order to participate in such capitated programs. The
Company does not  currently  have a license from any  governmental  authority to
offer such  programs,  and there can be no assurance  that the Company  would be
able to secure any such licenses when and if sought by the Company. Moreover, in
order to effectively  manage such capitated  contracts,  the Company may need to
acquire and implement additional operational and informational systems.

     The  Company   expects  the  trend  toward  third  party  payors   limiting
reimbursement  levels for various  out-patient  services,  including  outpatient
rehabilitation  services,  to  continue.  As a  consequence,  there  can  be  no
assurance  that  reimbursement  for the Company's  rehabilitation  services will
remain  at  current  or   anticipated   levels.   Any  reduction  or  limits  on
reimbursement  levels for the  Company's  services  would  adversely  affect the
profitability  of,  or demand  for,  the  Company's  services  and could  have a
material  adverse  effect  on the  Company's  financial  condition,  results  of
operations and liquidity.  In addition,  such payors are expected to continue to
develop programs designed to control and reduce the cost of healthcare  services
that may  adversely  affect the  profitability  of, or demand for, the Company's
services.
<PAGE>

     State limitations imposed upon the corporate practice of medicine.

     Certain  states  have  legislation  or  regulations,  or  have  interpreted
existing  physical  therapy  licensing  laws,  to prohibit or restrict  business
corporations,  such as the Company, from practicing physical therapy through the
direct employment of physical  therapists.  In other states, the courts or state
officials have issued rulings or opinions  stating or suggesting that healthcare
professionals  may not  lawfully  provide  services  as  employees  of  business
corporations  such as the  Company.  For  example,  in Texas,  an opinion of the
Attorney General suggests that unlicensed  corporate  entities may not engage in
the practice of physical therapy, although the Company believes that other Texas
regulators disagree with this conclusion and that this opinion has generally not
been followed,  or enforced,  in Texas.  Similarly however,  in California,  the
Attorney  General has opined  that  physical  therapists  may not be employed by
corporate  employers,  such  as the  Company.  The  Physical  Therapy  Examining
Committee of the California  Board of Medical Quality  Assurance,  however,  has
concluded that there is no such  prescription  under  California law, and to the
best of the Company's  knowledge,  the Attorney  General's  opinion has not been
enforced to date. There can be no assurance that regulators, or others in Texas,
California and other states,  will not seek to enforce,  or adopt,  this type of
restriction,  or that other states in which the Company operates, or may operate
in the  future,  will  not  enact  or  enforce  similar,  or  more  restrictive,
legislation  or  regulations  or that the  Company can adapt its  operations  to
comply with such legislation and regulations.

     Material  dependence upon existing  management and physical  therapy clinic
personnel.

     The success of the Company is highly dependent on the services of Mr. Loren
S. Brink, its President and Chief Executive Officer, and upon Mr. Thomas Coplin,
President  of Health  Fitness  Rehab.  The loss of  either  Mr.  Brink's  or Mr.
Coplin's  services  would  have a  material  adverse  effect  on  the  Company's
business.  In January 1997, the Company  entered into an "evergreen"  three year
employment agreement with Mr. Brink. The Company is currently negotiating a long
term employment  agreement with Mr. Coplin which should be finalized by December
31, 1997.  No assurance  can be given that such long term  employment  agreement
will be  entered  into  between  the  Company  and Mr.  Coplin or on terms,  and
conditions,  acceptable to the Company. The failure by the Company to enter into
such  long  term  employment  agreement  would  have an  adverse  effect  on the
Company's  business.  The Company owns and  maintains a key-man  life  insurance
policy on Mr. Brink's life in the amount of $3.5 million and intends to purchase
similar  key-man life insurance  policy on Mr.  Coplin's life in connection with
the execution of the employment agreement summarized above.

     The Company's  operations are also dependent upon  attracting and retaining
highly-qualified  physical  therapists.  Although,  to date, the Company has not
experienced   significant  difficulty  in  attracting  and  retaining  qualified
physical  therapists,  it is  generally  accepted  that the demand for  physical
therapists exceeds the available supply. As the Company's operations expand, the
Company could experience  difficulty  recruiting and maintaining adequate staff.
Most  of the  Company's  competitors  are  larger  and  have  greater  financial
resources,  which may provide such  competitors  with an advantage in attracting
and retaining physical therapists. In addition, the Company's ability to attract
and  retain  physical  therapists  may be limited  as the  Company's  ability to
increase  its fees to cover  such  additional  costs is  restricted  by the cost
containment  pressures  on health  care  providers.  The  inability  to  attract
therapists without  substantially  increasing their compensation could interfere
with the Company's business plans and adversely affect its results of operations
and cash flows.
<PAGE>

     Possible quarterly volatility in Company financial results.

     The Company may  experience,  as other  companies in the business of owning
and operating  physical therapy clinics have experienced,  a decrease in revenue
and income  from  operations  in the third and fourth  quarters  of each year as
patient  visits  historically  tend to decline  during  the  summer and  holiday
months.  In  addition,  the  timing,  number and  integration  of the  Company's
potential  free-standing  physical  therapy  acquisitions  may  cause  financial
results of  operations to vary on a quarterly  basis.  No assurance can be given
that  the  timing  or  integration  of  possible  future  acquisitions  will not
materially  adversely  affect  the  Company's  financial  position,  results  of
operations and cash flows on a quarterly or annual basis.

     Likely material changes in workers' compensation laws.

     Workers'  compensation  coverage is a creation of state law,  and thus,  is
subject to material change by state legislatures and is materially influenced by
the political process in each state. Several states have mandated that employers
receive  coverage only from funds operated by the state.  New laws affecting the
workers'  compensation system in Minnesota and any other state where the Company
may do business in the future  (including  laws that  require all  employers  to
participate in state-sponsored  funds or that mandate premium  reductions) would
have a  material  adverse  effect on the  Company  and its  financial  position,
results  of  operations  and cash  flows.  Several  bills to modify  Minnesota's
workers'  compensation laws have been introduced in the State legislature in the
past.  The Company is not able, at this point in time, to predict the likelihood
that any of these  bills will be enacted or the  potential  effect  these  bills
could have on the Company and its operations, if enacted into law.

     Possible risk in converting  physical  therapy  "independent  practices" to
"rehabilitation agency" status.

     Under current Medicare  standards,  a facility certified as an "independent
practice" is subject to a $900 per capita limit in connection with the provision
of physical therapy services. In contrast,  physical therapy sites or facilities
certified as  "rehabilitation  agencies" are not subject to such $900 per capita
reimbursement   limitation.   As  a  result,  management  views  the  change  in
certification from an "independent practice" to a "rehabilitation  agency" as an
important factor,  despite the fact that only  approximately 8% of the Company's
rehabilitation  revenues  are  derived  from  Medicare or  Medicaid.  Management
believes  a certain  non-quantifiable  stigma  may  apply to those  "independent
practices"  that  have  not  yet,  or do not  in the  future,  convert  to  such
"rehabilitation  agencies." As of June 30, 1997,  three of the companies  eleven
free-standing  physical  therapy  clinics had been certified as  "rehabilitation
agencies."  For five of the  Company's  free-standing  physical  therapy  sites,
"rehabilitation  agency"  status is not  applicable  due to the  nature of their
hospital  contract  business and the remaining  three sites are currently in the
certification  process. No assurance can be given that all or any portion to the
Company's future free-standing physical therapy clinics can or will be converted
to such "rehabilitation  agency" status, nor can any assurance be given that the
failure to achieve  such status will not have a material  adverse  effect on the
Company's rehabilitation business.
<PAGE>

     Competition.

     There are a significant number of companies  currently existing in, as well
as entering,  the physical  therapy  market.  The Company  competes for physical
therapy business with other  significantly  larger physical  therapy  companies.
Most  physical  therapy  companies  that  compete  with the Company have greater
capital and financial resources,  operational experience, marketing capabilities
and name recognition than the Company.  The health fitness business is also very
competitive.  The Company  competes for  management  contracts for corporate and
hospital-based   fitness  centers  with  other  health  and  fitness  management
companies.  There can be no  assurance  that the Company will be able to compete
successfully with these management and physical therapy companies.

     Possible de-listing from Nasdaq SmallCap Market(sm) ("SmallCap Market")

     In November 1996, the Board of Governors of the Nasdaq Stock Market,  Inc.,
approved and submitted for approval to the  Securities  and Exchange  Commission
("SEC")  enhanced  listing and maintenance  requirements  for companies  listing
their  securities  on the  SmallCap  Market and the Nasdaq  National  Market(R).
Although not yet approved by the SEC, the enhanced maintenance  requirements for
listing the  companies'  securities  on the SmallCap  Market would  include,  as
proposed, net tangible assets of at least $2 million,  $500,000 of net income in
two of the last three years or the Company having a market  capitalization of at
least $35 million.  At the present time,  the Company does not have net tangible
assets  of $2  million,  nor does the  Company  meet the net  income  or  market
capitalization tests summarized above.  Although the Company is currently taking
steps to meet such proposed Nasdaq maintenance requirements, no assurance can be
given by the Company that it will meet such  enhanced  maintenance  requirements
if, and when, adopted by the SEC. If such enhanced maintenance  requirements are
adopted by the SEC, and the Company then fails to meet such  requirements in any
possible  phase-in time permitted,  the Company's  securities could be de-listed
from the  SmallCap  Market.  In such event,  trading,  if any, in the  Company's
common stock would thereafter be conducted in the over-the-counter markets or in
the  so  called  "pink  sheets"  or  the  Nasdaq's  electronic  bulletin  board.
Consequently,  the liquidity of the Company's securities could be impaired,  not
only in the number of securities which could be bought or sold, but also through
delays and timing of transactions, reductions in security analysts' and the news
media's  coverage of the Company,  and possibly,  lower prices for the Company's
securities than might otherwise be attained.

     If the Company's common stock were de-listed from the SmallCap Market,  the
Company's  common  stock could  become  subject to Rule 15g-9 under the Exchange
Act, which imposes additional sales practice requirements on broker-dealers that
sell  such   securities.   Such  rule  may  adversely   affect  the  ability  of
broker-dealers  to sell the Company's  common stock and may adversely affect the
ability of the Company's  shareholders to sell any of the Company's common stock
in any secondary market.

     Possible  dilution and depressive  effect on price of the Company's  common
stock from common stock issued in connection with physical therapy acquisitions.

     In  connection  with  the  Company's  strategy  to  acquire  and  integrate
free-standing  physical therapy clinic operations,  the Company intends to issue
shares of its common stock, as well as grant certain earnout provisions that may
include  the  future  issuance  of the  Company's  common  stock.  Although  the
aggregate  number of such shares to be issued in  connection  with  existing and
future  physical  therapy  acquisitions  is not currently  ascertainable  by the
Company, such issuances may be material in the aggregate.  Such issuances of the
Company's  common  stock  in  connection  with  free-standing  physical  therapy
acquisitions  may be dilutive to existing  shareholders of the Company and sales
of such securities into the public market could have a depressive  effect on the
price of the Company's  common stock. No assurance can be given that such future
issuances of the Company's securities in connection with future physical therapy
acquisitions  will not have a  materially  dilutive  effect on existing  Company
shareholders,  nor that  sales of shares  issued in such  acquisitions  will not
materially  adversely  affect the price of the Company's common stock, as listed
and traded on the Nasdaq SmallCap Market.
<PAGE>

     Risk of litigation and insufficiency of liability insurance.

     Although  the  Company  has had no history of material  legal  claims,  the
Company may be subject to claims and lawsuits from time to time arising from the
operation of its business,  including  claims arising from accidents or from the
negligent provision of physical therapy services. Damages resulting from and the
costs of defending  any such  actions  could be  substantial.  In the opinion of
management,  the Company is adequately  insured against  personal injury claims,
professional liability claims and other business-related  claims including,  but
not limited to, claims  related to the negligent  provision of physical  therapy
services.  Nevertheless,  there can be no assurance  the Company will be able to
maintain such coverage, or that it will be adequate.

     Restrictions  and  affirmative  and  negative  covenants  imposed by senior
credit facility.

     Certain of the affirmative and negative  covenants imposed upon the Company
by its senior secured lender, and senior secured lending facility,  may restrict
the  Company's  ability  to  incur  additional  senior  and  subordinated  debt.
Furthermore,  upon  certain  events of default,  such senior  secured  lender is
entitled to demand  immediate  repayment  of their  outstanding  loans.  In such
circumstances,  the Company may not be able to access other  sources of capital,
on a timely basis,  or on terms and conditions  favorable to the Company,  or at
all,  with  sufficient  speed or sufficient  size to avoid the Company's  senior
secured lender from taking  material  adverse action against the Company and its
collateral.

     Lack of proprietary protection; lack of barriers to entry.

     Although the Company holds certain trademarks,  tradenames and intellectual
property  associated with its operations,  the Company is primarily a healthcare
service  business  where  patents  or  other   intellectual   property  are  not
applicable,  or if  applicable,  do not provide  material  barriers to entry for
third parties or  competitors  to enter the Company's  existing  preventive  and
rehabilitative  lines of business and compete with the  Company.  Therefore,  no
assurance can be given that other existing competitors,  or healthcare companies
seeking to gain access to the  Company's  market or limit the  Company's  market
share, may not devote  resources to effectively  compete with the Company in the
future. No assurance can be given that if such competition  occurs in the future
that the Company's financial position,  results of operations or cash flows will
not be materially adversely affected.

     Potential  depressive effect on price of common stock arising from exercise
and sale of existing convertible securities.

     At June 30, 1997, the Company had  outstanding  7,909,563  shares of common
stock.  Upon the exercise of all  outstanding  Company  stock  options and stock
purchase  warrants  (not  including  the shares  issuable  under any  contingent
grants,  earnout  agreements  or any future  acquisition),  there  would then be
outstanding 10,429,746 shares of Company common stock outstanding.  The exercise
and sale of such outstanding  stock options and stock purchase warrants and sale
of stock acquired thereby may have a material adverse effect on the price of the
Company's  common stock.  In addition,  the exercise and sale of such  Company's
common stock could occur at a time when the Company  would  otherwise be able to
obtain  additional  equity capital on terms and conditions more favorable to the
Company.
<PAGE>

                          PART II. - OTHER INFORMATION

     Item 1. Legal Proceedings

     From time to time,  the Company may become  involved in various  claims and
lawsuits  incident to the operation of its business,  including  claims  arising
from  accidents  or from the alleged  negligent  provision  of physical  therapy
services.

     On April 17, 1996, a former employee filed a claim entitled  Julianna Gatza
vs. Health Fitness  Corporation  and Hurley Health  Services  before the Circuit
Court of Genessee County in the State of Michigan, alleging wrongful termination
of  employment  and  discrimination.  The  plaintiff has not claimed a specified
amount of  damages.  The  Company  tendered  the  defense  of this  claim to its
insurance  carrier;  and the  insurance  carrier's  response has been that there
would be no insurance coverage for the liability represented by this litigation.
The Company  believes this claim is without merit and will defend it vigorously.
The  Company  believes  that the  outcome of this claim will not have a material
adverse effect of its financial position, results of operation or cash flows.

<PAGE>
Item 2. Changes in Securities

     During the quarter  ended June 30,  1997,  the Company  sold the  following
shares of Common Stock without registration under the Securities Act:

<TABLE>
<CAPTION>
                                                                                                             Exemption
      Date              Amount                            Purchasers                 Price Per Share         Relied Upon
      ----              ------                            ----------                 ---------------         -----------
<S>                    <C>            <C>                                                 <C>                <C>    

     4/7/97             78,911        Seller of acquired business                         $2.19              Section 4(2)
    4/14/97              1,600        Warrant holder-stock issued upon exercise           $2.19              Sections 3(a)(9); 4(2)
    4/25/97            292,829        Former shareholders of Fitness Centers of            N/A               Section 4(2)
                                      America, Inc.- additional shares issued
                                      pursuant to March 24, 1995 merger
    5/16/97             50,000        Seller of acquired business                          N/A               Section 4(2)
     6/4/97              3,360        Warrant holder-stock issued upon exercise           $1.50              Sections 3(a)(9);4(2)
     6/4/97             91,264        Two convertible note holders-stock issued           $2.28              Sections 3(a)(9);4(2)
                                      upon conversion
     6/4/97                800        Warrant holder-stock issued upon exercise           $2.19              Sections 3(a)(9);4(2)
    6/30/97              2,000        Law firm-stock for services                         $2.50              Section 4(2)
</TABLE>

     During the quarter  ended June 30, 1997,  the Company  issued the following
options,  warrants,  or other equity  securities  in  consideration  of services
rendered or to be rendered without registration under the Securities Act:

<TABLE>
<CAPTION>
                                                                                             Exercise                 Exemption
     Date          Amount                 Type                    Purchasers              Price Per Share             Relied Upon
     ----          ------                 ----                    ----------              ---------------             -----------
<S>                <C>                   <C>                       <C>                         <C>                        <C>    

    4/9/97         5,000                 Option                    Employee                    $4.00                   Section 4(2)
   5/16/97         15,000                Option                    Employee                    $3.50                   Section 4(2)
   5/31/97         20,000                Option                    Employee                    $3.00                   Section 4(2)
</TABLE>

Item 3 Defaults Upon Senior Securities

       None.

Item 4. Submission of Matters to a Vote of Security Holders

     The Company held its Annual Meeting on June 4, 1997. Proxies for the Annual
Meeting were solicited  pursuant to Regulation 14 under the Securities  Exchange
Act of  1934.  There  was no  solicitation  in  opposition  to  management.  The
following actions were taken at the annual meeting:

     (a)  The  following  nominees  were  elected  to  the  Company's  Board  of
     Directors,  with the  following  number  of shares  voted for and  withheld
     authority: from the above-named nominees:

                                     Shares Voted For      Withholding Authority

     Loren S. Brink                     5,851,494                 449,641
     James A. Bernards                  6,283,643                 17,492
     Charles E. Bidwell                 6,283,643                 17,492
     George E. Kline                    6,280,843                 20,292
     William T. Simonet, M.D.           6,283,643                 17,492
     Robert K. Spinner                  6,280,543                 20,592

<PAGE>

     (b) The proposed  amendment of the Company's  Articles of  Incorporation to
     change the Company's name to "Health Fitness Corporation" was approved by a
     vote of 6,272,328  shares in favor,  22,461 shares against and 6,346 shares
     abstained.

     (c) The  proposed  increase in the number of shares  reserved  for issuance
     under the  Company's  1995  Stock  Plan from  1,000,000  to  2,000,000  was
     approved by a vote of 3,448,623  shares in favor,  643,788 shares  against,
     and  62,253  shares  abstained,  which  totals  excluded  2,146,471  broker
     non-votes.

     (d) The appointment of Deloitte and Touche LLP as the Company's independent
     auditors  for the fiscal year ending  December  31, 1997 was  approved by a
     vote of 6,201,388 shares in favor, 74,461 shares against, and 20,286 shares
     abstained, which vote excluded 5,000 broker non-votes.


Item 5. Other Information

     None.

Item 6. Exhibits and Reports on Form 8-K

     (a)      Exhibits

       3.1    Articles of Incorporation, as amended, of the Company

      *3.2    Restated Bylaws of the Company

      *4.1    Specimen of Common Stock Certificate

      10.1    First Amendment to Second Amended and Restated Credit Agreement 
              dated May 16, 1997 between the Company and Norwest Bank, N.A.

      10.2    Executive Employment Agreement dated May 22, 1997 between the 
              Company and Loren S. Brink

      27      Financial Data Schedule (in electronic version only)
---------
      *Incorporated by reference to the Company's Registration Statement on
       Form SB-2, No. 33-83784C.

     (b)      Reports on Form 8-K

              On April 23, 1997, the Registrant filed a Form 8-K/A, amending the
              Registrant's  Form 8-K filed on February 21,  1997.  No other 
              Forms 8-K were filed  during the quarter ended June 30, 1997.


<PAGE>

                                   SIGNATURES

     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934 the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                       HEALTH FITNESS CORPORATION



Dated:         August 13, 1997         By:/s/ Loren S. Brink
                                       ---------------------
                                        Loren S. Brink
                                        Chairman, President and Chief
                                        Executive Officer



Dated:         August 13, 1997         By:/s/ Charles E. Bidwell
                                       -------------------------
                                        Charles E. Bidwell
                                        Treasurer and Chief Financial Officer