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, 1996
                              
                                       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 PHYSICAL THERAPY, INC.
             (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  11,  1996 was:  

                 Common Stock, $.01 par value, 7,154,376 shares

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








                                        1
<PAGE>



                         PART I - FINANCIAL INFORMATION
                           Item 1.Financial Statements

             HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                           December 31,           September 30,
                                                                               1995                  1996
                                                                           ------------           -------------
<S>                                                                        <C>                <C>

ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                              $    506,652        $        9,297
    Accounts receivable                                                       3,926,332             4,196,549
    Inventory                                                                     -                   436,701
    Prepaid expenses and other                                                  457,638               178,203
                                                                            -----------           -----------
        Total current assets                                                  4,890,622             4,820,750
PROPERTY (net)                                                                  807,414             1,544,551
OTHER ASSETS:
    Goodwill (net)                                                            7,925,834             8,128,390
    Non-compete agreement (net)                                                 363,823               347,375
    Trade accounts receivable (long-term)                                       210,000               370,000
    Other                                                                        85,931               102,148
                                                                            -----------           -----------
                                                                           $ 14,283,624           $15,313,214
                                                                            ===========           ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Notes payable                                                          $  2,654,749           $ 1,430,000
    Trade accounts payable                                                      322,833               491,682
    Accrued salaries, wages and payroll taxes                                 1,212,640             1,278,953
    Other accrued liabilities                                                   745,055               654,203
    Current portion of long-term debt                                           195,168               263,516
    Current portion of obligations under capital leases                          33,388                16,672
    Deferred revenue                                                          1,122,666             1,194,005
                                                                            -----------           -----------
        Total current liabilities                                             6,286,499             5,329,031
LONG-TERM DEBT, less current portion                                            470,965               296,901
OBLIGATIONS UNDER CAPITAL LEASES, less current portion                            3,113                 -
DEFERRED LEASE OBLIGATION                                                       124,113                91,923
STOCKHOLDERS' EQUITY:
    Preferred stock, $.01 par value, authorized 5,000,000 shares,
        none issued or outstanding
    Common stock, $.01 par value; 12,000,000 and 25,000,000
        shares authorized, 6,437,429  and 7,139,376 shares
        issued and outstanding, respectively                                     64,374                71,394
    Additional paid-in capital                                               10,200,233            11,630,639
    Accumulated deficit                                                      (2,801,270)            (2,026,601)
                                                                            -----------           -----------
                                                                              7,463,337             9,675,432
    Stockholder note and interest receivable                                    (64,403)              (80,073)
                                                                            -----------           -----------
                                                                              7,398,934             9,595,359
                                                                            -----------           -----------
                                                                            $14,283,624           $15,313,214
                                                                            ===========           ===========
</TABLE>

                 See notes to consolidated financial statements.

                                        2

<PAGE>




             HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>


                                                          Three Months Ended                     Nine Months Ended
                                                              September 30,                        September 30,
                                                          ------------------                    ------------------
                                                        1995            1996                   1995            1996
                                                      --------        --------                -------         ------
<S>                                                  <C>              <C>                     <C>              <C>

REVENUES:
    Preventative healthcare                          $3,799,998       $5,209,608              $ 8,322,892      $15,755,012
    Rehabilitative healthcare                         1,417,113        1,661,238                4,588,382        4,988,487
                                                      ---------        ---------              -----------       ----------    
                                                      5,217,111        6,870,846               12,911,274       20,743,499

COST OF REVENUES:
    Salaries                                          3,461,736        3,725,974                8,268,791       11,479,294
    Support                                             294,357          414,297                  880,039          979,748
    Occupancy                                           239,237          334,052                  704,244          974,294
    Equipment                                             -              973,957                 -               2,935,880
                                                      ---------       ----------              -----------      -----------
                                                      3,995,330        5,448,280                9,853,074       16,369,216
                                                      ---------       ----------              -----------      -----------
        Gross profit                                  1,221,781        1,422,566                3,058,200        4,374,283
OPERATING EXPENSES:
    Salaries                                            458,187          436,458                1,243,435        1,523,342
    Selling, general, and administrative                526,453          702,917                1,294,601        1,864,070
                                                      ---------       ----------              -----------      -----------
                                                        984,640        1,139,375                2,538,036        3,387,412
                                                      ---------       ----------               ----------      -----------
OPERATING INCOME                                        237,141          283,191                  520,164          986,871


INTEREST INCOME                                           3,313            6,481                   28,007           11,238
INTEREST EXPENSE                                       (265,149)         (27,211)                (459,966)        (223,440)
                                                      ---------       ----------               ----------      -----------
NET (LOSS) INCOME                                    $  (24,695)      $  262,461              $    88,205      $   774,669
                                                      =========       ==========               ==========      ===========

NET  (LOSS) INCOME PER
   COMMON AND COMMON
   EQUIVALENT SHARE                                  $      NIL       $      .04              $       .02      $       .11
                                                      =========       ==========               ==========      ===========

WEIGHTED AVERAGE COMMON
   AND COMMON EQUIVALENT
   SHARES OUTSTANDING                                 5,405,005        7,356,682                5,730,128        7,354,503
                                                      =========       ==========               ==========       ==========
</TABLE>


                 See notes to consolidated financial statements.


                                        3

<PAGE>



             HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                            Nine Months Ended
                                                                                               September 30,
                                                                                            -----------------
                                                                                         1995                  1996
                                                                                         ----                  ----
<S>                                                                                   <C>                <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                                        $ 88,205           $   774,669
    Adjustment to reconcile net income to net cash (used in)
        provided by operating activities:
        Depreciation and amortization                                                  728,034               780,739
        Deferred revenue                                                                 5,487                (4,940)
        Change in assets and liabilities:
           Trade accounts receivable                                                  (660,277)             (144,551)
           Inventory                                                                     -                   (68,800)
           Prepaid expenses and other                                                   59,788               317,111
           Other assets                                                               (127,571)              (32,406)
           Trade accounts payable                                                     (382,749)             (329,013)
           Accrued liabilities                                                          26,444               (29,110)
                                                                                     ----------            ----------
    Net cash (used in) provided by operating activities                               (262,639)            1,263,699
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property                                                               (48,515)             (758,017)
    Payments for acquisitions, net of liabilities assumed                           (3,209,885)             (197,284)
    Payment in connection with non-compete agreement                                     -                   (25,000)
    Payments in connection with earn-out provisions                                      -                  (102,290)
                                                                                    ----------             ----------
               Net cash used in investing activities                                (3,258,400)           (1,082,591)
CASH FLOWS FROM FINANCING ACTIVITIES:
    Borrowings under line of credit                                                  1,370,000             3,256,938
    Repayment of line of credit                                                     (1,370,000)           (1,826,938)
    Proceeds from notes payable                                                      4,100,000                 -
    Repayment of notes payable                                                      (1,445,882)           (2,041,928)
    Borrowings of long-term debt                                                        -                    113,000
    Repayment of long-term debt                                                         -                   (257,937)
    Financing costs                                                                   (174,965)                -
    Payments on capital lease obligations                                              (78,395)              (26,595)
    Proceeds from issuance of common stock                                             496,812               120,667
    Payments of common stock issuance costs                                            (56,010)                -
    Advances on notes receivable                                                       (73,011)              (15,670)
    Payments received on notes receivable                                               25,000                 -
                                                                                    ----------             ----------
               Net cash provided by  (used in) financing activities                  2,793,549              (678,463)
                                                                                    ----------             ----------
NET DECREASE IN CASH AND
    CASH EQUIVALENTS                                                                  (727,490)             (497,355)
CASH AND CASH EQUIVALENTS AT
    BEGINNING OF PERIOD                                                              1,976,321               506,652
                                                                                    ----------             ----------
CASH AND CASH EQUIVALENTS AT END OF
    PERIOD                                                                         $ 1,248,831            $    9,297
                                                                                    ==========             ==========
</TABLE>

                 See notes to consolidated financial statements


                                        4

<PAGE>



             HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
                   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,  1995.  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, 1996 are not necessarily  indicative of the operating  results for
the year ending December 31, 1996.

Inventories  are recorded at the lower of cost  (First-in,  first-out  basis) or
market.

Goodwill  represents the excess of the purchase price and related costs over the
fair value of the net assets of the business acquired.  Goodwill relating to the
acquisition of operators of corporate  fitness  centers is being  amortized on a
straightline  basis over 20 years.  Goodwill  relating  to the  acquisitions  of
physical therapy clinics and a supplier of fitness  equipment is being amortized
on a straightline basis primarily over 15 years.

NOTE 2.        ACQUISITIONS

On April 6, 1995, the Company completed the acquisition of all of the issued and
outstanding stock of closely-held Fitness Centers of America dba Fitness Systems
("Fitness Systems"),  a California-based  operator of corporate fitness centers.
This acquisition was accounted for under the purchase method of accounting,  and
accordingly,  the  consolidated  statements  of operations  included  results of
operations of Fitness  Systems since April 1, 1995. The following  unaudited pro
forma  condensed   combined   statements  of  operations  reflect  the  combined
operations of the Company had the acquisition of Fitness Systems occurred at the
beginning of 1995.

                                                  1995                    1996
                                                         
Revenues                                     $15,519,000             $20,743,000
Cost of revenues                              12,060,000              16,519,000
                                              ----------              ----------
Gross profit                                   3,459,000               4,224,000
Operating expenses                             3,193,000               3,449,000
                                              ----------              ----------
Net income                                   $   266,000             $   775,000
                                             ===========              ==========
Net income per common and
   common equivalent share                   $       .05             $       .11
                                             ===========              ==========
Weighted average common and common
   equivalent shares outstanding               5,730,000               7,355,000
                                             ===========              ==========



                                        5

<PAGE>


On January 11, 1996, the Company  completed the acquisition of all of the assets
and assumed the  liabilities  of  closely-held  Pro Source  Fitness,  Inc. ("Pro
Source"),  a Minnesota-based  supplier of fitness  equipment and services.  This
acquisition  was  accounted  for under the purchase  method of  accounting,  and
accordingly,  the  Consolidated  statements  of operations  included  results of
operations  of Pro  Source  since  January  1,  1996.  In  connection  with  the
acquisition, assets purchased,  liabilities assumed, and cash consideration paid
were as follows:

Assets acquired:
     Cash                                                 $       9,648
     Accounts receivable                                        285,666
     Inventory                                                  367,901
     Property                                                   237,745
     Prepaid expenses and other                                  37,676
     Excess of purchase price over net assets acquired          135,369
                                                           ------------
                                                              1,074,005
Liabilities assumed:
     Accounts payable                                           497,862
     Accrued expenses and other                                 116,795
     Debt                                                       361,752
                                                           ------------
                                                                976,409
                                                           ------------
Cash consideration paid                                    $     97,596
                                                           ============

The purchase agreement requires the Company to make an annual cash payment of up
to 30% of gross  profits,  as  defined,  to the seller for four  calendar  years
starting  in 1996.  For the fiscal  year ended  December  31,  1995,  Pro Source
reported revenues of $4,992,000.

The Company entered into employment agreements with certain key employees of Pro
Source for terms of two to four  years.  These  agreements  provide  for minimum
aggregate  annual  salaries  of  approximately  $135,000  and also  provide  for
incentive awards based on performance. The Company also granted stock options to
the former owners of Pro Source to purchase up to 75,000 shares of the Company's
common stock at $3.00 per share in connection with these employment agreements.

On April 1, 1996, the Company  purchased the assets of Christopher  Breuleux,  a
sole  proprietor  engaged in the business of providing  preventative  healthcare
development  consulting services, for $84,336 plus certain stock options granted
to Mr. Breuleux.  The Company has granted Mr. Breuleux stock options to purchase
up to 25,000 shares of the Company's stock at $3.00 per share.

On July 2, 1996,  the Company  purchased  the assets of Physical  Therapy of Red
Wing, a general  partnership  engaged in the operation of an outpatient physical
therapy  clinic,  for  $25,000.  The Company  also  entered  into a  non-compete
agreement  with the sellers which called for a lump sum payment of $25,000.  The
non-compete  agreement  covers a period of two years and  prohibits  the sellers
from directly or indirectly  competing with the Company within twenty-five miles
of the city of Red Wing, Minnesota.



                                        6

<PAGE>
NOTE 3.    DEBT

In January 1996, the Company paid $354,986 to retire the debt assumed in the Pro
Source  acquisition.  On  February 1, 1996 the Company  paid  $500,000  plus the
related  accrued   interest  on  the  $1,000,000   unsecured   Convertible  Note
outstanding  at December 31, 1995,  which was then cancelled and exchanged for a
replacement  $500,000 unsecured  Convertible Note (the "Replacement  Convertible
Note") due August 1, 1996. The Replacement Convertible Note bore interest at the
prime  rate plus 2%.  The  holder of the  Replacement  Convertible  Note had the
option to  convert  the debt  into  shares of the  Company's  common  stock at a
conversion  price of the lesser of 85% of the average bid price of the Company's
stock over the  immediately  preceding 10 days or $3.33 per share beginning June
1, 1996. In connection with the cancellation of the $1,000,000  Convertible Note
and exchange  for the  Replacement  Convertible  Note,  the Company  reduced the
purchase  price  of the  warrants  issued  in  connection  with  the  $1,000,000
unsecured Convertible Note from $4 per share to $3 per share. A value of $40,000
was assigned to the repricing of the warrants  based on  independent  appraisal.
This cost was amortized  using the interest  method from the date of issuance to
the earlier of the due date or conversion.  On June 26, 1996, the holder of this
$500,000  unsecured  Convertible  Note  converted  the debt and related  accrued
interest  into 222,856  shares of the Company's  common stock at the  conversion
price of $2.3375  per share  representing  85% of the  average  bid price of the
Company's stock over the immediately preceding 10 days.

In February 1996, the Company entered into a revolving line of credit  agreement
which  provides  for a maximum  borrowing  of  $1,500,000  through May 31, 1997.
Interest on outstanding  borrowings  under the line of credit is payable monthly
and is computed at the prime rate plus 2%.  Borrowings  under the line of credit
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  minimum  levels of net  worth and  quarterly  net  income  levels,
limitations on additional indebtedness,  and other matters. The $850,000 line of
credit  existing at December 31, 1995,  was  terminated in February  1996. As of
September 30, 1996 the Company has borrowed  $1,430,000 on the revolving line of
credit.

On April 6, 1996, the Company paid the $1,000,000  non-interest  bearing note to
the Seller of Fitness Systems using $1,000,000 from the revolving line of credit
to finance the transaction.

On April 24, 1996, the holder of a $500,000 unsecured Convertible Note converted
the debt and related  accrued  interest  into  234,099  shares of the  Company's
common stock at the conversion  price of $2.3375 per share  representing  85% of
the average bid price of the Company's stock over the  immediately  preceding 10
days.

On June 15, 1996,  the Company  entered into a $113,000 note  payable.  The note
requires  monthly  payments of $5,209  including  interest at 9.9%  through June
1998. The note is secured by various pieces of exercise equipment.

On July 31,  1996,  the Company paid  $206,938,  including  accrued  interest of
$19,996, to the holder of a note payable.

NOTE 4.   STOCKHOLDERS' EQUITY

On April 6,  1996,  the  Company  issued  40,000  shares of common  stock to the
sellers of Fitness Systems as a portion of the consideration,  that was withheld
for one year, pursuant to the Stock Purchase Agreement dated March 24, 1995.

On April 24, 1996, the holder of a $500,000 unsecured Convertible Note converted
the debt and related  accrued  interest  into  234,099  shares of the  Company's
common stock at the conversion  price of $2.3375 per share  representing  85% of
the average bid price of the Company's stock over the  immediately  preceding 10
days.

On June 26,  1996,  the  holder of the  $500,000  Replacement  Convertible  Note
converted  the debt and related  accrued  interest  into  222,856  shares of the
Company's common stock at the conversion price of $2.3375 per share representing
85% of the  average  bid  price of the  Company's  stock  over  the  immediately
preceding 10 days.

During the nine months ended September 30, 1996, the Company  received  proceeds
of  $120,667  when a stock  option and  warrant  holder  exercised  his right to
purchase a total of  204,992  shares of common  stock at a price of $.58875  per
share.

                                        7
<PAGE>


NOTE 5. INCOME TAXES

The provision for income taxes at September 30, 1996 and 1995 has been offset by
net operating loss carryforwards through a reduction in the valuation allowance.

As of September 30, 1996,  the Company has  approximately  $2,300,000 of federal
and  state net  operating  loss  carryforwards.  These  carryforwards  expire in
varying amounts from 2004 to 2009. Approximately $2,000,000 of the net operating
loss is limited under Internal Revenue Code Section 382.

NOTE 6.   NET INCOME PER SHARE

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

This  amount  includes  257,143  contingent  shares  assumed to be issued to the
sellers of Fitness  Systems for the three and nine months  ended  September  30,
1996,  based on the closing sale price of the  Company's  stock on September 30,
1996. The Company has  contractually  agreed with the Sellers of Fitness Systems
that if the average  closing sale price of the Company's  publicly  traded stock
during the  fourth  calendar  quarter of 1996 does not reach at least  $6.00 per
share, the Company is 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.

This amount  also  includes  common  stock  equivalents  of 454,574 for the nine
months ended September 30, 1995 from the assumed exercise of outstanding options
and  warrants  using the  treasury  stock  method and the  assumed  issuance  of
contingent  shares.  Common stock  equivalents were not included as common stock
equivalents  for  the  three  months  ended  September  30,  1995  due to  their
antidilutive effect for the period in which the Company had a net loss.


                                        8

<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,
                                                                    ----------------------------------------
                                                                1995                                     1996
                                                                ----                                     ----
<S>                                                   <C>                <C>                  <C>                 <C>   

REVENUES:
Preventative healthcare                               $3,800,000          72.8%                $5,210,000           75.8%
Rehabilitative healthcare                              1,417,000          27.2                  1,661,000           24.2
                                                      ----------        ------                  ---------         ------
      Total revenues                                   5,217,000         100.0                  6,871,000          100.0
COST OF REVENUES                                       3,995,000          76.6                  5,449,000           79.3
                                                       ---------        ------                  ---------         ------
GROSS PROFIT                                           1,222,000          23.4                  1,422,000           20.7
OPERATING EXPENSES                                       985,000          18.9                  1,139,000           16.6
                                                      ----------        ------                  ---------         ------
OPERATING INCOME (LOSS):
Preventative healthcare                                  544,000                                  686,000
Rehabilitative healthcare                                101,000                                  115,000
Corporate                                               (408,000)                                (518,000)
                                                       ---------                                ---------
      Total operating income                             237,000           4.5                    283,000            4.1
OTHER EXPENSES, NET                                      262,000           5.0                     21,000            0.3
                                                      ----------        ------                  ---------         ------
NET (LOSS) INCOME                                     $  (25,000)         (0.5)%                $ 262,000            3.8%
                                                      ==========        =======                 =========         ======


                                                               For The Nine Months Ended September 30,
                                                               ---------------------------------------
                                                             1995                                     1996
                                                             ----                                     ----
REVENUES:
Preventative healthcare                               $8,323,000          64.5%               $15,755,000           76.0%
Rehabilitative healthcare                              4,588,000          35.5                  4,988,000           24.0
                                                     -----------        ------                  ---------         ------
      Total revenues                                  12,911,000         100.0                 20,743,000          100.0
COST OF REVENUES                                       9,853,000          76.3                 16,369,000           78.9
                                                     -----------        ------                 ----------         ------
GROSS PROFIT                                           3,058,000          23.7                  4,374,000           21.1
OPERATING EXPENSES                                     2,538,000          19.7                  3,387,000           16.3
                                                     -----------        ------                -----------         ------
OPERATING INCOME (LOSS):
Preventative healthcare                                  922,000                                1,727,000
Rehabilitative healthcare                                633,000                                  650,000
Corporate                                             (1,035,000)                              (1,390,000)
                                                     -----------                              -----------
      Total operating income                             520,000           4.0                    987,000            4.8
OTHER EXPENSES, NET                                      432,000           3.3                    212,000            1.1
                                                     -----------        ------                -----------         ------
NET INCOME                                           $    88,000           0.7%              $    775,000            3.7%
                                                     ===========        ======                ===========         ======
</TABLE>


                                        9

<PAGE>

General.  The Company is engaged in two principal lines of business  (segments):
(i) preventative  healthcare and (ii)  rehabilitative  healthcare.  Preventative
healthcare  includes the development,  marketing and management of corporate and
hospital-based  fitness  centers and the sale of fitness  equipment and service.
Rehabilitative  healthcare  relates to the operation of physical therapy clinics
that provide a full range of rehabilitation services.

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

The Company's rehabilitation revenues are comprised of physical therapy services
provided to patients at Company  owned  locations  and at hospital and corporate
locations.  Net revenues are a function of the number of patients  treated,  the
payor mix and the average net charge per treatment.  Consequently,  two patients
provided  substantially  similar treatments may result in different net revenues
because of differing reimbursement environments.

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

Revenues.  Revenues  increased  $1,654,000 or 31.7% to $6,871,000  for the three
months  ended  September  30, 1996 from  $5,217,000  for the same  period  ended
September 30, 1995.  Revenues  increased  $7,832,000 or 60.7% to $20,743,000 for
the nine months ended  September 30, 1996 from  $12,911,000  for the same period
ended  September 30, 1995. The increase in preventative  healthcare  revenues of
$1,410,000 for the three months ended  September 30, 1996 is due to the addition
of several  fitness  center  management  contracts,  the increase in  consulting
revenue and the acquisition of a fitness  equipment  dealer on January 11, 1996.
The increase in  preventative  healthcare  revenues of  $7,432,000  for the nine
months ended  September 30, 1996 is primarily due to the  acquisition of Fitness
Systems on April 6, 1995 and the  acquisition of a fitness  equipment  dealer on
January 11, 1996. The increase in rehabilitative healthcare revenues of $244,000
and $400,000 for the three and nine month periods ended September 30, 1996, when
compared to the same periods in 1995,  is  primarily  due to the increase in the
number of patient  visits at one  clinic as the  result of adding an  additional
physical therapist.

Preventative  healthcare revenues are expected to be relatively  consistent on a
quarterly basis in 1996. On a quarterly basis in 1997,  preventative  healthcare
revenues are expected to increase as a result of adding management contracts and
increased sales of fitness  equipment.  Rehabilitative  healthcare  revenues are
anticipated  to  fluctuate  on a  quarterly  basis  in 1996.  Based  on  limited
historical  information,   rehabilitative  healthcare  revenues  are  relatively
consistent  in the first three  quarters but decrease  approximately  25% in the
fourth quarter.  Rehabilitative  healthcare revenues are anticipated to increase
on a quarterly basis in 1997 as a result of performing  physical therapy on site
at  additional  corporate  fitness  centers,  increasing  the number of physical
therapists at existing clinics,  and potential  acquisitions of physical therapy
clinics. See "Liquidity and Capital Resources."

Operating  Income.  Operating income increased  $46,000 or 19.4% to $283,000 for
the three  months  ended  September  30, 1996 from  $237,000 for the same period
ended  September  30,  1995.  Operating  income  increased  $467,000 or 89.8% to
$987,000 for the nine months ended September 30, 1996 from $520,000 for the same
period ended September 30, 1995. The increase in operating  income for the three
months  ended  September  30,  1996  is  due  to an  increases  of  $142,000  in
preventative  healthcare  and $14,000 in  rehabilitative  healthcare,  partially
offset by an increase of $110,000 in corporate  operating costs. The increase in
operating  income  for  the  nine  months  ended  September  30,  1996 is due to
increases   of  $805,000  in   preventative   healthcare   and  $17,000  in  the
rehabilitative healthcare, partially offset an increase of $355,000 in corporate
operating costs.

                                       10
<PAGE>

The increase in operating income in preventative healthcare for the three months
ended  September  30,  1996 is  primarily  due to the  acquisition  of a fitness
equipment dealer on January 11, 1996 and an increase in consulting revenue.  The
increase in preventative  healthcare  operating income for the nine months ended
September  30,  1996 is  primarily  due to the  acquisition  of an  operator  of
corporate  fitness  centers  on April 6, 1995 and the  acquisition  of a fitness
equipment dealer on January 11, 1996.

Operating income in preventative healthcare for the three months ended September
30, 1996 did not  increase  commensurate  with the increase in revenues for this
segment  primarily due to the lower margins  associated with the equipment sales
added as a result of the acquisition of a fitness  equipment  dealer.  Operating
income,  as a percentage of revenues,  in  preventative  healthcare for the nine
months ended September 30, 1996 remained relatively  consistent with that of the
same period in 1995 due to increased  consulting  revenue  being offset by lower
margins in equipment sales.

The increase in operating income in the  rehabilitative  healthcare  segment for
the three and nine  months  ended  September  30, 1996 is due to the sale of one
underperforming  clinic in January 1995 and the addition of a physical therapist
at one  clinic in  January  1996,  which are  partially  offset by the  expenses
incurred to improve the Company's management and information systems.  Operating
income  in  rehabilitative  healthcare  for the  three  and  nine  months  ended
September 30, 1996 did not increase  commensurate  with the increase in revenues
for this segment primarily due to the expenses incurred to improve the Company's
management and information systems.

The  increase in corporate  operating  costs for the three and nine months ended
September  30, 1996 is directly  related to the  acquisitions  of an operator of
corporate  fitness  centers  in April  1995 and a  fitness  equipment  dealer in
January 1996. The increase is primarily due to the increase in depreciation  and
amortization as a result of these acquisitions.

Preventative  healthcare  operating  income is  expected to increase in both the
corporate fitness and equipment sales environments,  with operating income, as a
percentage of revenues,  remaining  consistent with that experienced  during the
nine months ended September 30, 1996. Rehabilitative healthcare operating income
is  expected  to  increase  on a  quarterly  basis  as  a  result  of  continued
centralization of accounting and marketing  functions of the companies  acquired
to date.  Corporate  expense increases are anticipated to be consistent with the
increases in revenue.

Other  Expense  (Interest  Expense/Income).  Interest  expense,  net of interest
income  decreased  $241,000  or 92.0% to  $21,000  for the  three  months  ended
September 30, 1996 from  $262,000 for the same period ended  September 30, 1995.
Interest expense, net of interest income decreased $220,000 or 50.9% to $212,000
for the nine months ended  September  30, 1996 from $432,000 for the same period
ended  September  30, 1995.  The decreases of $241,000 in the three month period
and $220,000 in the nine month period were due to the lower  average  borrowings
in 1996 when compared to 1995.

Net Income (Loss).  The Company's net income  increased  $287,000 to $262,000 or
$.04 per share for the three  months  ended  September  30,  1996 from a loss of
$25,000 for the same period ended  September 30, 1995. For the nine months ended
September  30, 1996 the  Company's  net income  increased  $687,000 or 780.7% to
$775,000  or $.11 per share from  $88,000 or $.02 per share for the same  period
ended September 30, 1995.


Liquidity and Capital  Resources.  The Company had a working  capital deficit of
$1,396,000 at December 31, 1995 and a working  capital deficit of $508,000 as of
September  30,  1996.  The change is  primarily  due to the increase in accounts
receivable  and the decrease in notes  payable.  Notes  payable at September 30,
1996 consisted of the revolving line of credit.

                                       11

<PAGE>

In January 1996, the Company paid $354,986 to retire the debt assumed in the Pro
Source  acquisition.  On February 1, 1996,  the Company paid  $500,000  plus the
related  accrued   interest  on  the  $1,000,000   unsecured   Convertible  Note
outstanding  at December 31, 1995,  which was then  cancelled and exchanged with
the Replacement Convertible Note due August 1, 1996. The Replacement Convertible
Note bore  interest at the prime rate plus 2%. On June 26, 1996,  this  $500,000
unsecured  Convertible Note was converted with its related accrued interest into
222,856 shares of the Company's  common stock at the conversion price of $2.3375
per share  representing 85% of the average bid price of the Company's stock over
the immediately preceding 10 days.

The debt paid in January and February of 1996 was financed  from cash flows from
operations, borrowings from the revolving line of credit, and cash.

In February 1996, the Company entered into a revolving line of credit  agreement
which provides for a maximum  borrowing of $1,500,000  through May 31, 1997. The
$850,000  line of credit  existing at  December  31,  1995,  was  terminated  in
February 1996.  Management believes the $1,500,000 line of credit and cash flows
from operating  activities are sufficient to fund  operations at current levels,
but that anticipated  acquisitions in the Company's rehabilitative business will
require additional  financing.  As of October 31, 1996, the Company has borrowed
$1,077,000 on the revolving line of credit.

On April 24, 1996, the holder of a $500,000 unsecured Convertible Note converted
the debt and related  accrued  interest  into  234,099  shares of the  Company's
common stock at the conversion  price of $2.3375 per share  representing  85% of
the average bid price of the Company's stock over the  immediately  preceding 10
days. The $1,000,000 non-interest bearing note was paid to the Seller of Fitness
Systems on April 6, 1996. The Company used $1,000,000 from the revolving line of
credit to retire this debt.

On July 31,  1996,  the Company paid  $206,938,  including  accrued  interest of
$19,996,  to the holder of a note  payable  using  cash  provided  by  operating
activities to finance the transaction.

On October 1, 1996, the Company entered into a software license  agreement and a
computer  consulting  agreement  with  Aspen  Information  Systems,  Inc.  These
agreements require the Company to make cash payments of $420,000 within the next
calendar year. The Company expects to use cash provided by operating  activities
to finance the transaction.

On October 15, 1996, the Company entered into a system design and implementation
agreement with Practice Management  Consultants,  Inc.("PMC")  pursuant to which
PMC will design and implement various  management  systems for the management of
the Company's  rehabilitative  healthcare  business.  The agreement requires the
Company to pay all expenses  incurred by PMC in connection  with this  agreement
through 1997.  Costs  associated  with this agreement,  including  purchases for
equipment and software, are estimated to be in excess of $1,000,000. The Company
expects to use cash provided by operating  activities  and future  borrowings to
finance the design and implementation of such systems.

As of September 30, 1996, the Company's  principal sources of liquidity included
cash and cash equivalents of $9,000, trade accounts receivable of $4,567,000 and
a line of credit of  $1,500,000  at a rate of prime plus 2% of which  $1,430,000
was  outstanding  at September  30,  1996.  The decrease in cash and increase in
trade  accounts  receivable  from  December  31, 1995 to  September  30, 1996 is
primarily  due to the Company's  acquisition  of Pro Source and the repayment of
the assumed debt.


                                       12

<PAGE>


The Company's  strategy is to continue to expand its  rehabilitative  healthcare
operations  through  acquisitions  and to improve  profitability of the physical
therapy clinics purchased  through the  consolidation of the clinics'  operating
expenses.  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 where  appropriate,  shares of Common
Stock,  with a portion of the purchase  price to be paid at closing  and,  where
appropriate,  a portion contingent upon achievement of earn-out  criteria.  As a
result of government health care regulations,  however, the use in the future of
notes  payable,  earn-out  arrangements  or Common Stock may be limited.  Future
financings may result in dilution to holders of Common Stock.  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,  the
proceeds  expected from future  financings and proceeds from future  borrowings.
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.

Future  acquisitions may adversely  affect cash flows from operating  activities
due to average daily revenues  outstanding on physical therapy clinic's accounts
receivable ranging from 75 to 100 days.

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

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  Pronouncements. In March 1995,  the Financial  Accounting  Standards
Board issued Statement of Financial  Accounting  Standards No. 121,  "Accounting
for the  Impairment  of  Long-Lived  Assets  and for  Long-  Lived  Assets to be
Disposed of", which will be effective for financial  statements for fiscal years
beginning  after December 15, 1995. The statement  requires that such long-lived
assets used by the entity be  reviewed  for  impairment  whenever  the  carrying
amount of an asset may not be  recoverable.  The Company has determined that the
carrying  amounts of its long-lived  assets and intangibles at December 31, 1995
are  recoverable  through  expected cash flows from the use of such assets.  The
Company does not currently expect this new standard to have a significant impact
on future results of operations.

In October 1995, the Financial  Accounting  Standards Board issued  Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation,"  which requires  adoption of the  disclosure  provisions no later
than  fiscal  years  beginning  after  December  15,  1995 and  adoption  of the
recognition  and measurement  provisions for  nonemployee  transactions no later
than after  December 15, 1995.  The new standard  defines a fair value method of
accounting for stock options and other equity instruments.  Under the fair value
method,  compensation cost is measured at the grant date based on the fair value
of the award and is  recognized  over the service  period,  which is usually the
vesting period.

Pursuant to the new standard, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions  under
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees," but would be required to disclose in a note to financial  statements
pro forma net income (loss) and earnings  (loss) per share as if the company had
applied the new method of accounting.

The  accounting  requirements  of the new method are  effective for all employee
awards  granted after the beginning of the fiscal year of adoption.  The Company
has determined it will elect not to change to the fair value method for employee
stock based  transactions.  Adoption of the new standard for non-employee awards
did not effect the Company's cash flows.

                                       13

<PAGE>

Securities  Litigation  Reform  Act.  Except  for  the  historical   information
contained   herein,   the  matters   discussed  in  this  quarterly  report  are
forward-looking statements which involve risks and uncertainties,  including but
not limited to economic,  competitive,  governmental and  technological  factors
affecting the Company's operations,  markets, products, services and prices, and
other  factors  discussed  in the  Company's  filings  with the  Securities  and
Exchange Commission.

Therefore,  if for any reason,  the Company's  planned  operations  require more
capital  than  anticipated,  revenues do not  increase as planned,  or operating
income is less than planned,  the Company may need additional financing in order
to maintain its operations.  There can be no assurance that the Company would be
able to  obtain  any  required  additional  financing  when  needed or that such
financing,  if  obtained,  would  be on terms  favorable  or  acceptable  to the
Company.

                          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 negligent provision of physical therapy services.

On May 17,  1996,  the Company was named as a  defendant  in a lawsuit  entitled
Warren M. Hargrave v. Kathryn  Meeks,  et al,  brought in the Superior  Court of
California,  County of Santa Clara. The plaintiff alleged medical malpractice in
connection  with the  provision of physical  therapy  services at the  Company's
physical  therapy  clinic.  The  plaintiff  did not claim a specified  amount of
damages.  The  Company  tendered  the  defense  of this  claim to its  insurance
carrier.  The insurance  carrier's  initial  response was that there would be no
insurance  coverage for the liability  represented by this litigation;  however,
the carrier is  re-examining  its position.  The Company has filed its answer on
July  24,  1996,  has  taken  the  plaintiff's  deposition  and will  defend  it
vigorously.  The Company believes that the outcome of this claim will not have a
material  adverse  effect on the financial  position or results of operations of
the Company.

On July 8,  1996,  the  Company  received  a Notice of Intent to Bring an Action
within 90 days by  Florence  Bloxsom  who  resides in  California.  Ms.  Bloxsom
alleges medical malpractice in connection with the provision of physical therapy
services at the Company's physical therapy clinic in Newport Beach,  California.
The Notice made no claim for a specified amount of damages. The Company tendered
the defense of this  potential  claim to its  insurance  carrier.  No action was
taken within the 90-day period by the plaintiff,  and the Company  believes this
claim is without  merit and will defend it  vigorously  if and when it is filed.
The Company believes that outcome of this claim will not have a material adverse
effect on the financial position or results of operations of the Company.

On April 17, 1996, a former  employee filed a claim  entitled  Julianna Gatza v.
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
has filed its answer,  believes  this claim is without  merit and will defend it
vigorously.  The  Company  plans  to take  the  plaintiff's  deposition  in late
November 1996. The Company believes that the outcome of this claim will not have
a material adverse effect on its financial position or results of operations.


                                       14

<PAGE>

In July 1995, a former Fitness Systems  employee filed a claim entitled  Felicia
Davis v. Fitness  Systems before the New York Executive  Department  Division of
Human Rights, Case No. 1D-E-R-95-4602787-E,  alleging constructive discharge due
to her race in violation  of the New York state human  rights law in  connection
with her voluntary resignation of her employment with Fitness Systems. This case
was withdrawn in August 1996.

In 1994,  the former program  director of a fitness  center  operated by Fitness
Systems  initiated a lawsuit against  Fitness  Systems  entitled Joann Todara v.
Fitness Systems, Inc., Superior Court of New Jersey,  Middlesex County, Case No.
L-4191-94,  alleging  disability  discrimination  under New Jersey law.  Fitness
Systems  answered the complaint and has aggressively  defended the action.  This
case was  settled in October  1996,  the terms of which will not have a material
adverse effect on the Company's financial condition or results of operation.

In 1993, a lawsuit entitled George M. Klapakis v. Fitness Systems, Inc., et al.,
was commenced in Los Angeles  Superior  Court,  Case No.  YC007999..  The matter
involves an employee of a client of Fitness  Systems who was disciplined by that
client  for  alleged  sexual  harassment  of a  Fitness  Systems  employee.  The
discipline  involved a 30-day  suspension  without pay; the plaintiff remains an
employee of the client company. The employee has alleged sex and national origin
discrimination along with certain common law claims,  including defamation.  The
employee's  complaint  includes a request for  punitive  damages.  On August 14,
1995, the defendants in this action filed a motion for summary  judgment on each
of the plaintiff's  causes of action and summary judgment,  together with costs,
was granted in favor of the  defendants  on January 25, 1996.  Plaintiff has now
appealed  the  decision  and the  Court of  Appeals  has not yet set  dates  for
briefing or oral argument.  The Company intends to continue to vigorously defend
this lawsuit,  which it believes is without merit, and will oppose any appeal by
the plaintiff.

Item 2.            Changes in Securities

         None.

Item 3.            Defaults Upon Senior Securities

         None.

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

         None.

Item 5.            Other Information

         None.

Item 6.            Exhibits and Reports on Form 8-K

         (a)     Exhibits
                 3.1 - Articles of Incorporation,  as amended,  of the Company
                 *3.2 - Restated  By-Laws of the  Company  
                 *4.1 - Specimen  of Common Stock Certificate 
                 27 - Financial Data Schedule


         *  Incorporated by reference to the Company's Registration Statement on
            Form SB-2 No. 33-83784C.

          (b)     Reports on Form 8-K

          The Registrant was not required to file any reports on Form 8-K for
             the three months ended September 30, 1996.

                                       15

<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 PHYSICAL THERAPY, INC.




Dated:   November 11, 1996                        By: /s/Loren S. Brink
                                                   Loren S. Brink
                                                   Chairman, President and Chief
                                                   Executive Officer



Dated:   November 11, 1996                        By: /s/Charles E. Bidwell
                                                   Charles E. Bidwell
                                                   Chief Financial Officer


                                       16