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  September 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)

         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 November 7, 1997 was:
                 Common Stock, $.01 par value, 8,098,603 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 - (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                   December 31,          September 30,
                                                                                      1996                     1997
                                                                                   ------------          ------------
<S>                                                                                 <C>                   <C>  
ASSETS
CURRENT ASSETS:
    Accounts and notes receivable, less allowance for doubtful
        accounts of $245,000 and $810,000, respectively                             $ 4,656,876           $ 5,285,802
    Inventories                                                                         454,254               580,863
    Prepaid expenses and other                                                          433,413               292,436
                                                                                  -------------           -----------
        Total current assets                                                          5,544,543             6,159,101
PROPERTY, net                                                                         2,185,335             3,389,459
OTHER ASSETS:
    Goodwill, less accumulated amortization of $961,424
        and $1,251,807, respectively                                                  9,376,367            10,077,980
    Noncompete agreements, less accumulated amortization
        of $84,874 and $160,731, respectively                                           346,976               593,119
    Trade accounts and notes receivable not expected to be collected
        within one year, less allowance for doubtful accounts of
        $240,000 and $300,000, respectively                                             640,000               977,757
    Other                                                                                85,676               631,400
                                                                                  -------------           -----------
                                                                                    $18,178,897           $21,828,816
                                                                                  =============           ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Checks written in excess of bank balances                                     $      94,643          $    349,245
    Notes payable                                                                     2,090,000             1,575,000
    Trade accounts payable                                                            1,662,077             1,061,591
    Accrued salaries, wages, and payroll taxes                                        1,302,770             1,388,277
    Other accrued liabilities                                                           622,182               816,914
    Current portion of long-term debt                                                   281,278               897,708
    Deferred revenue                                                                  1,577,186             1,492,075
                                                                                  -------------           -----------
        Total current liabilities                                                     7,630,136             7,580,810
LONG-TERM DEBT, less current portion                                                    576,490             3,325,742
DEFERRED LEASE OBLIGATION                                                                80,183                47,887
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 8,096,603 shares issued and outstanding, 
        respectively                                                                     71,733                80,966
    Additional paid-in capital                                                       11,693,617            12,849,618
    Accumulated deficit                                                              (1,795,689)           (1,985,842)
                                                                                  -------------           -----------
                                                                                      9,969,661            10,944,742
    Stockholder note and interest receivable                                            (77,573)              (70,365)
                                                                                  -------------           -----------
                                                                                      9,892,088            10,874,377
                                                                                  -------------           -----------
                                                                                    $18,178,897           $21,828,816
                                                                                  =============           ===========
</TABLE>
                 See notes to consolidated financial statements.
<PAGE>
                   HEALTH FITNESS CORPORATION AND SUBSIDIARIES
                (Formerly Health Fitness Physical Therapy, Inc.)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                         Three Months Ended                        Nine Months Ended
                                                            September 30                             September 30,
                                                            ------------                             -------------
                                                      1996              1997                     1996            1997
                                                      ----              ----                     ----            ----
<S>                                                   <C>              <C>                     <C>              <C>   
REVENUES:
    Preventive healthcare                             $5,209,608       $6,046,823              $15,755,012      $18,102,411
    Rehabilitative healthcare                          1,661,238        2,203,008                4,988,487        6,263,798
                                                       ---------       ----------              -----------      -----------
                                                       6,870,846        8,249,831               20,743,499       24,366,209

COST OF REVENUES:
    Salaries                                           3,725,974        4,719,818               11,479,294       13,878,809
    Equipment                                            973,957        1,198,501                2,935,880        3,530,774
    Occupancy                                            334,052          277,240                  974,294          960,430
    Support                                              414,297          292,560                  979,748        1,133,806
                                                       ---------        ---------               ----------       ----------
                                                       5,448,280        6,488,119               16,369,216       19,503,819
                                                       ---------        ---------               ----------       ----------
GROSS PROFIT                                           1,422,566        1,761,712                4,374,283        4,862,390

OPERATING EXPENSES
    Salaries                                             436,458          757,211                1,523,342        1,775,567
    Selling, general, and administrative                 702,917        1,127,274                1,864,070        2,730,825
    Loss on disposition of
          California clinics                                  --          470,516                       --           18,197
                                                       ---------        ---------               ----------       ----------
                                                       1,139,375        2,355,001                3,387,412        4,524,589
                                                       ---------        ---------               ----------       ----------
OPERATING INCOME (LOSS)                                  283,191         (593,289)                 986,871          337,801

OTHER (EXPENSE) INCOME:
    Interest expense                                     (27,211)        (209,176)                (223,440)        (508,948)
    Other income (expense)                                 6,481          (15,157)                  11,238            6,905
                                                     -----------       -----------              ----------       ----------
                                                         (20,730)        (224,333)                (212,202)        (502,043)
                                                     -----------       -----------              -----------      -----------
INCOME (LOSS) BEFORE
    INCOME TAX BENEFIT (EXPENSE)                         262,461         (817,622)                 774,669         (164,242)

INCOME TAX BENEFIT (EXPENSE)                                   -           152,493                       -          (25,911)
                                                     -----------       -----------              ----------         ---------

NET INCOME (LOSS)                                   $    262,461     $   (665,129)           $     774,669      $  (190,153)
                                                     ===========       ===========              ==========         =========
NET  INCOME (LOSS) PER
   COMMON AND COMMON
   EQUIVALENT SHARE                                 $        .04     $      ( .08)           $         .11       $    ( .02)
                                                    ============       ===========              ==========         =========
WEIGHTED AVERAGE COMMON
   AND COMMON EQUIVALENT
   SHARES OUTSTANDING                                  7,356,682        8,007,574                7,354,503        7,689,714
                                                    ============       ===========              ==========        =========
</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>
                                                                                            Nine Months Ended
                                                                                              September 30,
                                                                                              -------------
                                                                                         1996                  1997
                                                                                         ----                  ----
<S>                                                                                <C>                    <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                              $   774,669            $  (190,153)
    Adjustment to reconcile net income (loss) to net cash
        provided by (used in) operating activities:
        Depreciation and amortization                                                  780,739                932,485
        Deferred revenue                                                                (4,940)              (103,211)
        Gain on sale of physical therapy clinics                                            --               (496,461)
        Change in assets and liabilities, net of acquisitions:
           Trade accounts and notes receivable                                        (144,551)              (320,615)
           Inventories                                                                 (68,800)              (113,117)
           Prepaid expenses and other                                                  317,111                142,867
           Other assets                                                                (32,406)              (208,480)
           Trade accounts payable                                                     (329,013)              (855,812)
           Accrued liabilities                                                         (29,110)              (141,043)
                                                                                 -------------          -------------
    Net cash provided by (used in) operating activities                              1,263,699             (1,353,540)

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property                                                              (758,017)            (1,472,020)
    Payments for acquisitions, net of liabilities assumed and
        cash acquired                                                                 (197,284)            (1,594,408)
    Payments in connection with earnout provisions                                    (102,290)              (178,966)
    Payment in connection with noncompete agreements                                   (25,000)              (322,000)
    Proceeds of notes receivable collections                                                --                174,476
    Proceeds from sale of physical therapy clinics                                          --              1,220,600
                                                                                 -------------         --------------
        Net cash used in investing activities                                       (1,082,591)            (2,172,318)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Increase in checks written in excess of bank balances                                   --                254,602
    Borrowings under line of credit                                                  3,256,938                972,500
    Repayment of line of credit                                                     (1,826,938)            (1,387,500)
    Borrowings of notes payable                                                             --                500,000
    Repayment of notes payable                                                      (2,041,928)                    --
    Proceeds from long-term debt, net of financing costs                               113,000              3,193,146
    Repayment of long-term debt                                                       (284,532)              (290,598)
    Proceeds from issuance of common stock                                             120,667                276,500
    Advances on notes receivable                                                       (15,670)                (4,281)
    Payments received on notes receivable                                                 -                    11,489
                                                                                 --------------        --------------
           Net cash (used in) provided by financing activities                        (678,463)             3,525,858
                                                                                 --------------        --------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                              (497,355)                   --

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                        506,652                    --
                                                                                 --------------        --------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            $  9,297            $        --
                                                                                 ==============        ==============
</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 nine months ended
September 30, 1997 are not necessarily  indicative of the operating  results for
the year ending December 31, 1997.

NOTE 2.    ACQUISITIONS AND DISPOSITIONS

    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         1,165,022
                                                             --------------
                                                                  1,416,573
Liabilities assumed:
        Accounts payable                                             72,792
        Accrued expenses                                             75,681
        Deferred revenue                                             18,100
                                                              -------------
                                                                    166,573
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.
<PAGE>

     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.

     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 operations  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 nine
months ended September 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>
                                                                                              Nine Months Ended
                                                                                                  September 30
                                                                                                  ------------
                                                                                          1996                     1997
                                                                                          ----                     ----
<S>                                                                                     <C>                        <C>    

Revenues                                                                                $21,850,000                $24,578,000
Cost of revenues                                                                         17,362,000                 19,615,000
                                                                                         ----------                 ----------
Gross profit                                                                              4,488,000                  4,963,000
Other expenses                                                                            3,707,000                  5,122,000
                                                                                         ----------                 -----------
Net income (loss)                                                                       $   781,000                $  (159,000)
                                                                                         ==========                 ===========
Net income (loss) per common and common equivalent share                                $       .10                $      (.02)
                                                                                         ==========                 ===========
Weighted average common and common equivalent shares outstanding                          7,565,000                  7,690,000
                                                                                         ==========                 ===========
</TABLE>
<PAGE>

     On April 9, 1997,  the Company  acquired all of 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         343,233
                                                                -------
                                                                526,482
   Liabilities assumed:
      Accounts payable                                           74,517
      Accrued expenses                                           51,965
                                                                -------
                                                                126,482

   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.

     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.

<PAGE>

     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             266,237
                                                                    -------
                                                                    678,445
   Liabilities assumed:
      Accounts payable                                              101,421
      Notes payable                                                  70,000
      Accrued expenses                                               63,274
                                                                   --------
                                                                    234,695
   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  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.

     In August 1997 the Company completed the acquisition,  effective as of July
31,  1997,  of all the  issued  and  outstanding  stock  of  Medlink  Management
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 $425,000
(subject to adjustment).  In connection with the  acquisition,  assets purchased
and liabilities assumed, common stock issued and cash consideration paid were as
follows:


<PAGE>
   Assets acquired:
      Cash                                                       $  5,417
      Accounts receivable                                         300,776
      Property                                                     94,518
      Prepaid expenses and other                                   23,282
      Noncompete agreement                                         47,000
      Excess of purchase price over net assets acquired           249,451
                                                                  -------
                                                                  720,444
   Liabilities assumed
      Accrued expenses                                            138,963
      Notes payable                                                84,606
                                                                  -------
                                                                  223,569
   Common stock issued                                             71,875
                                                                  -------
   Cash consideration paid                                       $425,000
                                                                  =======

     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.

     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  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.

     Dispositions 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.  At  closing,  the Company
received   $1,222,500  and  notes  receivable   totaling  $445,000.   The  notes
receivables  have  interest  rates of 6% to 7% and require  annual or  quarterly
principal payments.  The notes receivables 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 payment of $330,000.
The Company recorded a gain in the second quarter of  approximately  $452,000 on
the sales of the California clinics. In the third quarter,  the Company recorded
a loss of approximately $471,000 in connection with retained accounts receivable
of these clinics.

NOTE 3.    OTHER ASSETS

     At September 30, 1997,  other assets  include  $204,00 of costs incurred in
connection with a private placement debt-offering. These costs will be amortized
using the  effective  interest rate method from the date of issuance to maturity
of the  private  placement  debt.  In the event  the  private  placement  is not
completed, these costs will be expensed.

<PAGE>

NOTE 4.    DEBT

     In February 1997, the Company's term loan and credit  agreement was amended
and restated (the Amended  Agreement) to enable the Company to pursue  expansion
of its rehabilitative  healthcare business.  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.  In
August 1997 the term note was further increased to $3.275 million.  At September
30, 1997,  the Company has borrowings of $3.275 million under the term loan. 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. At
September 30, 1997,  the Company was not in compliance  with certain  covenants.
The Company has discussed  these  defaults with the  financial  institution  and
expects  that  such defaults as of September 30, 1997 will be waived.

     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 on 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 August 15, 1997, the Company  entered into a $250,000 note payable.  The
note requires  monthly payments of $11,594  including  interest at 10.5% through
August  1999.  The note is secured by various  pieces of computer  and  exercise
equipment and software, and is personally guaranteed by the Company's president.

     On August 26, 1997, the Company entered into a $500,000  subordinated  note
payable with a related party.  The note issued bears interest at 12%, and is due
November  24,  1997.  The Company  also  issued a five-year  warrant to purchase
20,000 shares of common stock at $3.00 per share in connection with the note. If
the Company elects not to repay the note upon maturity,  it is required to issue
an  additional  warrant to purchase  2,500  shares of common  stock at $3.00 per
share,  and to issue an  additional  warrant to purchase  2,500 shares of common
stock at $3.00 per share for each 60-day period thereafter that the note remains
unpaid.  The number of warrant  shares and  exercise  price are also  subject to
adjustment to equal any more  favorable  warrant terms that may be granted to an
unsecured subordinated lender in a future private placement debt-offering.

     During the nine  months  ended  September  30,  1997,  the holders of three
convertible  subordinated  promissory  notes with face  values of  $300,000  due
December 1, 1998  converted  their notes and  accrued  interest of $14,756  into
130,358 shares of the Company's common stock.


<PAGE>
NOTE 5.   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.

     During the nine months ended  September 30, 1997, the Company issued 30,000
shares of common stock in return for services provided.  The value of the common
stock issued,  $75,000,  was based on the market value of the  Company's  common
stock.

     During the nine months  ended  September  30,  1997,  the Company  received
proceeds of $276,500  when the  holders of stock  options or warrants  exercised
their  right to  purchase  a total of 299,800  shares of common  stock at prices
ranging from $.65 to $2.28 per share.  The Company also issued  16,412 shares of
common stock in connection with the Company's employee stock purchase plan.

NOTE 6.  LEGAL PROCEEDINGS

     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.  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 of its financial  position,  results of operation 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 of 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 operations or cash flows.

NOTE 7. INCOME TAXES

     The provision for income taxes for the nine months ended September 30, 1996
has been offset by a reduction in the valuation allowance for deferred taxes.

     During the nine months ended September 30, 1997 the Company recorded income
tax expense of $26,000  despite having a loss before income taxes  primarily due
to a portion of  goodwill  amortization  expense  not being  deductible  for tax
purposes  which  has been  partially  offset  by a  reduction  in the  valuation
allowance.

NOTE 8.   NET INCOME (LOSS) PER SHARE

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

     The weighted average number of common and common  equivalent shares for the
three and nine months  ended  September  30,  1997 does not  include  contingent
shares, options, and warrants due to their antidilutive effect.

     For the three and nine months  ended  September  30,  1996,  these  amounts
includes  257,143  contingent  shares,  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 nine  months  ended
September 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 September 30,
                                                       -----------------------------------------------------------------
                                                             1996                                1997
                                                             ----                                ----
<S>                                                     <C>             <C>                  <C>                  <C>   
REVENUES:
      Preventive healthcare                             $ 5,210,000       75.8%              $ 6,047,000            73.3%
      Rehabilitative healthcare                           1,661,000       24.2                 2,203,000            26.7
                                                          ---------     ------                 ---------          ------
       Total revenues                                     6,871,000      100.0                 8,250,000           100.0
COST OF REVENUES                                          5,449,000       79.3                 6,488,000            78.6
                                                          ---------     ------                 ---------          ------
GROSS PROFIT                                              1,422,000       20.7                 1,762,000            21.4
OPERATING EXPENSES                                        1,139,000       16.6                 2,355,000            28.6
                                                          ---------     ------                 ---------          ------
OPERATING INCOME (LOSS):
      Preventive healthcare                                 686,000                              469,000
      Rehabilitative healthcare                             115,000                              252,000
      Corporate                                            (518,000)                            (844,000)
      Loss on disposition of California clinics                  --                             (470,000)
                                                          ---------                            ---------
      Total operating income (loss)                         283,000        4.1                  (593,000)           (7.2)
OTHER (EXPENSES) INCOME, NET                              (  21,000)      (0.3)                 (225,000)           (2.7)
                                                          ---------     ------                 ---------           -----
                                                            262,000        3.8                  (818,000)           (9.9)
INCOME TAX BENEFIT (EXPENSE)                                     --          -                   153,000             1.8
                                                          ---------     ------                 ---------           -----
NET INCOME (LOSS)                                       $   262,000        3.8%               $( 665,000)           (8.1)%
                                                          =========     ======                 =========           ======
</TABLE>
<TABLE>
<CAPTION>
                                                                           For The Nine Months
                                                                            Ended September 30,
                                                       -----------------------------------------------------------------
                                                             1996                                1997
                                                             ----                                ----
<S>                                                    <C>              <C>                    <C>                <C>    
REVENUES:
      Preventive healthcare                            $15,755,000        76.0%                $18,102,000          74.3%
      Rehabilitative healthcare                          4,988,000        24.0                   6,264,000          25.7
                                                        ----------      ------                  ----------        ------
       Total revenues                                   20,743,000       100.0                  24,366,000         100.0
COST OF REVENUES                                        16,369,000        78.9                  19,504,000          80.0
                                                        ----------      ------                  ----------        ------
GROSS PROFIT                                             4,374,000        21.1                   4,862,000          20.0
OPERATING EXPENSES                                       3,387,000        16.3                   4,524,000          18.6
                                                        ----------      ------                  ----------        ------
OPERATING INCOME (LOSS):
      Preventive healthcare                              1,727,000                               1,881,000
      Rehabilitative healthcare                            650,000                                 358,000
      Corporate                                         (1,390,000)                             (1,883,000)
      Loss on disposition of California clinics                 --                                 (18,000)
                                                        ----------                              ----------
      Total operating income                               987,000         4.8                     338,000           1.4
OTHER (EXPENSES) INCOME, NET                              (212,000)       (1.1)                   (502,000)         (2.1)
                                                        ----------      ------                  ----------        ------
                                                           775,000         3.7                    (164,000)         (0.7)
INCOME TAX BENEFIT (EXPENSE)                                    --           -                     (26,000)         (0.1)
                                                        ----------      ------                  ----------        ------
NET INCOME (LOSS)                                      $   775,000         3.7%                $  (190,000)         (0.8)%
                                                        ==========      ======                  ==========        ======
</TABLE>
<PAGE>

     General.  The Company is engaged in two  principal  lines of business:  (i)
preventive healthcare and (ii) rehabilitative health care. Preventive healthcare
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.

     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
(loss).
<PAGE>

     Revenues.  Revenues  increased  $1,379,000 or 20.1% to  $8,250,000  for the
three months ended  September 30, 1997 from $6,871,000 for the same period ended
September 30, 1996.  Revenues  increased  $3,623,000 or 17.5% to $24,366,000 for
the nine months ended  September 30, 1997 from  $20,743,000  for the same period
ended September 30, 1996.

     Preventive  healthcare  revenues  increased $837,000 and $2,347,000 for the
three and nine month  periods  ended  September  30,  1997  compared to the same
periods in 1996. The increases  were  primarily due to the annualized  effect of
adding a net of four  corporate  fitness  center  management  contracts  and the
increase in sales of fitness  equipment and service of $302,000 and $908,000 for
the three and nine month periods ended September 30, 1997.

     Rehabilitative healthcare revenues increased by $542,000 and $1,276,000 for
the three and nine month periods  ended  September 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, Duffy & Associates in May 1997 and Medlink in August 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
$1,236,000  for the nine month period ended  September 30, 1997; and revenues of
$992,000 and $2,942,000 for the three and nine months ended  September 30, 1996.
The newly  acquired  clinics and clinic  networks had revenues of $1,158,000 and
$2,372,000 for the three and nine month periods ended September 30, 1997.

     Operating Income (Loss).  Operating income decreased  $876,000 to a loss of
($593,000)  for the three months ended  September 30, 1997 from $283,000 for the
same period in 1996.  Operating income decreased by $649,000 to $338,000 for the
nine months ended  September 30, 1997 from $987,000 for the same period in 1996.
Losses  associated with the disposition of the California  clinics accounted for
$470,000  and  $18,000  of this  decrease  for the three and nine  months  ended
September  30, 1997.  The remaining  decrease in operating  income for the three
months ended  September  30, 1997 was due to a decrease in operating  income for
preventive healthcare of $217,000 and an increase in corporate costs of $326,000
partially  offset  by  an  increase  in  operating  income  for   rehabilitative
healthcare of $137,000.  The remaining decrease in operating income for the nine
months ended  September  30, 1997 was due to a decrease in operating  income for
rehabilitative  healthcare  of  $292,000,  an  increase  in  corporate  costs of
$493,000,  partially  offset by an increase in operating  income for  preventive
health care of $154,000.

     The decrease in operating income for the three and nine month periods ended
September  30, 1997 is due to an increase in regional  salaries  and support for
rehabilitative  healthcare,  an  increase in  regional  support  for  preventive
healthcare,  and an increase 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  $182,000 to $209,000 for the three months
ended September 30, 1997 from $27,000 for the same period in 1996, and increased
$286,000 to $509,000 for the nine months ended  September 30, 1997 from $223,000
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.

     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 nine
months  ended  September  30,  1996 was offset by a reduction  in the  valuation
allowance for deferred  taxes.  The Company  recorded a provision for income tax
for the nine months ended September 30, 1997 despite having a loss before income
taxes  primarily  due to a portion of  goodwill  amortization  expense not being
deductible for tax purposes  which has been  partially  offset by a reduction in
the valuation allowance.

     Net Income (Loss). The Company's net income decreased $927,000 to a loss of
($665,000)  or ($.08) per share for the three  months ended  September  30, 1997
from $262,000 or $.04 per share for the same period in 1996. For the nine months
ended September 30, 1997, the Company's net income decreased  $965,000 to a loss
of  ($190,000)  or ($.02) per share from $775,000 or $.11 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 $1,422,000 as of September 30, 1997. The
change was  primarily  due to the decrease 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.  Notes
payable at September 30, 1997 included  $1,075,000  on its  $1,500,000  existing
line of credit.  The Company's  principal  sources of liquidity at September 30,
1997  included  trade  accounts  and  notes  receivable  of  $5,286,000,  net of
allowance  for  doubtful  accounts  which was  increased  in the  third  quarter
primarily with respect to trade accounts receivable of the Company's  previously
sold California physical therapy clinic operations.

     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 payment 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  acquisition 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.

<PAGE>

     In August 1997,  the Company paid $425,000 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.

     On August 26, 1997, the Company borrowed $500,000 from Brightbridge Fund I,
L.P.  ("Brightbridge"),  a  limited  partnership  of which  Brightstone  Capital
Limited LLC  ("Brightstone")  is the general partner and a 20% limited  partner.
Brightstone  is  owned  50% by Jim  Bernards  and 50% by  George  Kline,  each a
director of the Company.  The loan bears interest at 12% per annum and is due on
the earlier of (i)  November  24, 1997,  or (ii) three  business  days after the
closing of any private or public  offering(s) of unsecured  subordinated debt or
equity securities of the Company resulting in cumulative  aggregate  proceeds to
the  Company  of at least  $4,000,000  (an  "Offering").  Brightbridge  received
five-year  warrants  to purchase  20,000  shares of Company  common  stock at an
exercise  price of $3.00 per share,  subject to increase by 2,500  shares if the
bridge loan is not paid when due, and an additional 2,500 shares for each 60-day
period  thereafter  that the bridge loan remains  unpaid.  The number of warrant
shares  and  exercise  price are also  subject to  adjustment  to equal any more
favorable warrant terms that may be granted to an unsecured  subordinated lender
in an Offering.

     Sources of capital to meet future obligations in the fourth quarter of 1997
and the  first  nine  months  of 1998 are  anticipated  to be cash  provided  by
operations and additional  debt and/or equity  financing.  There is no assurance
that such  additional  debt and/or  equity  financing  will be  available to the
Company.  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.

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
healthcare  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 and/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.

<PAGE>

     Preventive  healthcare  revenues are expected to increase as new  contracts
are  added.  Preventative  healthcare  operating  income,  as  a  percentage  of
revenues,  is expected to remain generally  consistent with that experienced for
the year ended December 31, 1996.

     Rehabilitative  healthcare revenues are expected 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  anticipated  that this loss of revenue would 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 fourth  quarter of 1997,  however  the  Company  is behind  schedule  on its
planned  acquisitions  due to  delays  in  obtaining  financing.  Rehabilitative
healthcare  operating income as a percentage of revenues is expected to increase
as a result of the Company's  investment in operational systems streamlining the
billing and marketing functions of the companies acquired to date. However,  the
Company is  experiencing a time lag in achieving these  anticipated  operational
efficiencies.  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:

     Sufficiency of working capital

     At  September  30,  1997,  the  Company  had  negative  working  capital of
$1,422,000.  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 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.

<PAGE>

     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 September 30, 1997, the Company has grown from owning and
operating one physical  therapy clinic to owning and operating 13  free-standing
clinics and 13 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 will 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
would 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.

     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  healthcare
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.

<PAGE>

     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.

     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.

<PAGE>


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 a 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.

     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.

<PAGE>

     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  healthcare  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.

     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 September  30, 1997,  five of the Company's 13
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 August 1997,  the Securities and Exchange  Commission  ("SEC")  approved
enhanced  listing and  maintenance  requirements  for  companies  listing  their
securities on the Nasdaq SmallCap Market and the Nasdaq National Market(R).  The
enhanced  maintenance  requirements for listing the Company's  securities on the
SmallCap  Market  include a  requirement  that the  Company  have either (1) net
tangible  assets of at least $2 million,  (2) $500,000 of net income in the most
recent  fiscal year or in two of the last three  fiscal  years,  or (3) a market
capitalization  of at least $35 million.  Nasdaq  companies  have until February
1998 to comply with the new listing requirements.  The Company does not have net
tangible  assets  of $2  million  nor a market  capitalization  of $35  million.
Moreover,  unless the  Company  earns net income of at least  $500,000 in fiscal
1997, it will also fail to meet the net income requirement. If the Company fails
to meet such  requirements by February 1998, 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.

     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.

<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,  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 September  30, 1997,  the Company had  outstanding  8,096,603  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 10,619,266 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.

Item 2. Changes in Securities

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

<TABLE>
<CAPTION>

                                                                                                  Exemption Relied
    Date          Amount                    Purchasers                     Price Per Share              Upon
    ----          ------                    ----------                     ---------------        ----------------
   <S>            <C>        <C>                                                <C>              <C>    
   7/1/97         28,000     Business broker-payment of commissions             $2.50            Section 4(2)

   7/10/97        13,120     Warrant holder-stock issued upon exercise          $1.50            Sections 3(a)(a);4(2)

   7/28/97        25,000     Sellers of acquired business                        N/A             Section 4(2)

   7/29/97        13,120     Warrant holder-stock issued upon exercise          $1.50            Section 4(2)
                             
   8/7/97          8,400     Warrant holders-stock issued upon exercise         $1.50            Sections 3(a)(a);4(2)
                             
   8/13/97        42,960     Warrant holder-stock issued upon exercise          $1.50            Sections 3(a)(a);4(2)
                             
   8/22/97         5,040     Warrant holder-stock issued upon exercise          $1.50            Sections 3(a)(a);4(2)

   9/30/97        39,094     Convertible note holder-stock issued               $2.73            Section 4(2)
                             upon conversion
                            

</TABLE>


     During the  quarter  ended  September  30,  1997,  the  Company  issued the
following  options,  warrants,  or other equity  securities in  consideration of
services  rendered  or to be  rendered  or loans  made to the  Company,  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>   
   7/31/97         16,668             Option                   Employee                  $4.00                 Section 4(2)
   7/31/97          4,166             Option                   Employee                  $4.00                 Section 4(2)
   7/31/97          4,166             Option                   Employee                  $4.00                 Section 4(2)
   8/26/97         20,000            Warrant                 Bridge Lender               $3.00                 Section 4(2)

</TABLE>


<PAGE>


Item 3. Defaults Upon Senior Securities

        At  September  30,  1997,  the  Company was not in  compliance  with the
        minimum net worth,  maximum  debt  to net worth  ratio,  and minimum net
        income  covenants  of  its  Second  Amended  and  Restated   Credit  and
        Security  Agreement  with Norwest Bank Minnesota,  National Association.
        The  Company  has  discussed  these  defaults  with the bank and expects
        that  such  defaults as of September 30, 1997 will be waived.

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

        None.

Item 5. Other Information

        None.

Item 6. Exhibits and Reports on Form 8-K

        (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   Bridge Loan Agreement dated August 26, 1997 between the Company 
               and Brightbridge Fund I, L.P.

        10.2   Subordinated Unsecured Promissory Note dated August 26, 1997 by
               the Company to Brightbridge Fund I, L.P.

        10.3   Warrant dated August 26, 1997 issued by the Company to
               Brightbridge Fund I, L.P.

        10.4   Second Amendment to Second Amended and Restated Credit and 
               Security Agreement dated August 6, 1997 by and between the 
               Company and Norwest Bank Minnesota, National Association

        27     Financial Data Schedule (in electronic version only)
        -------------------------
         *  Incorporated by reference to the Company's Registration Statement 
            on Form SB-2, No. 33-83784C.
         ** Incorporated by reference to the Company's Quarterly Report on 
            Form 10-QSB for the quarter ended June 30, 1997.

        (b) Reports on Form 8-K

         No Forms  8-K were  filed  by the  Company  during  the  quarter  ended
           September 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:     November 14, 1997              By: /s/ Loren S. Brink
                                          Loren S. Brink
                                          Chairman, President and Chief
                                          Executive Officer


Dated:     November 14, 1997              By: /s/ Charles E. Bidwell
                                          Charles E. Bidwell
                                          Treasurer and Chief Financial Officer
<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                           EXHIBIT INDEX TO FORM 10-Q


Commission File No.:  0-25064
For the quarter ended
September 30, 1997

                           HEALTH FITNESS CORPORATION


Exhibit
Number         Description

**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          Bridge Loan Agreement dated August 26, 1997 between the Company 
               and Brightbridge Fund I, L.P.

 10.2          Subordinated Unsecured Promissory Note dated August 26, 1997 by 
               the Company to Brightbridge Fund I, L.P.

 10.3          Warrant dated August 26, 1997 issued by the Company to 
               Brightbridge Fund I, L.P.

 10.4          Second Amendment to Second Amended and Restated Credit and 
               Security Agreement dated August 6, 1997 by and between  the 
               Company and Norwest Bank Minnesota, National Association

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

**  Incorporated  by reference to the  Company's  Quarterly  Report on
    Form 10-QSB for the quarter ended June 30, 1997.