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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS OF 1934

HEALTHTRAC, INC.

Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.

Yes [X] No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes [X] No [   ]

The number of shares of common stock outstanding as of July 3, 2003 was 223,104,598.

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HEALTHTRAC, INC.

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SPECIAL NOTE REGARDING INDEPENDENT ACCOUNTANTS REVIEW

Our independent accountants, KPMG LLP, have not completed their review procedures at the time of filing this quarterly report on Form 10-Q for the three months ended May 31, 2003, as required under Article 10 of Regulation S-X. We expect completion by KPMG LLP by the end of this week and we will file an amended 10Q to remove this statement at that time

INTRODUCTORY NOTE

The Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified by the context of the statement which may include words such as the Company “believes,” “anticipates,” “expects,” “forecasts,” “estimates,” or other words of similar meaning and context. Similarly, statements that describe future plans, objectives, outlooks, targets, models or goals are also deemed forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those forecasted or anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements and elsewhere in this report, including Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Stakeholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements or construe such statements to be a representation by the Company that the objectives or plans of the Company will be achieved. The forward-looking statements included in this report are made only as of the date of this report, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)

Future operations (note 1)
Commitment and contingencies (notes 4 and 7)

See accompanying notes

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in United States dollars)

See accompanying notes

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(Expressed in United States dollars)
(Unaudited)

See accompanying notes

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)

Non-cash transactions and supplemental disclosures (note 6)

See accompanying notes

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HEALTHTRAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2003
(Unaudited)

1.     Description of the Company and Summary of Significant Accounting Policies

The Company

Healthtrac Inc. is primarily engaged in providing health management designed to improve the quality of care while reducing overall healthcare costs and the operation of a call center. The Company provides health management services to health plans, self-insured employers and government agencies via programs designed to postpone disease and disability through preventive practices and chronic disease self-management. Healthtrac operates one call center through its subsidiary, NorthNet Telecommunications, Inc., doing business as NorthStar TeleSolutions. It operates two segments: Health Management and Call center.

Future Operations

These financial statements have been prepared on the going concern basis, which assumes the realization of assets and the settlement of liabilities in the normal course of business. The application of the going concern concept is dependent on the Company’s ability to generate future profitable operations and receive continued financial support from its shareholders and from external financing. The Company incurred a loss from operations of $402,396 for the three months ended May 31, 2003 and has an accumulated deficit of $119,636,955 at May 31, 2003. For the period ended May 31, 2003, the Company used $35,052 in cash to fund operations and $1,814 to fund financing activities resulting in a decrease in cash of $36,866. As at May 31, 2003, the Company has a working capital deficiency of $1,706,241 including cash of $150,007.

Management projects that the Company will require additional cash and working capital to fund planned operations and capital asset additions for fiscal 2004 of approximately $500,000. Although management is of the opinion that sufficient cash will be obtained from operations and external financing to meet the Company’s liabilities and commitments as they become due in fiscal 2003, there can be no assurance that funds from external financings will be available when required on an economical basis to the Company. The ability of the Company to continue as a going concern and realize the carrying value of its assets is dependent on the Company’s ability to increase its revenues by increasing its customer base and reducing its operating costs so that the Company achieves profitable operations. To date, subsequent to May 31, 2003 the Company has raised $nil in external financings through common share private placements. If the Company is unable to obtain sufficient funds for operations, it will be required to reduce operations or liquidate assets.

These financial statements do not reflect any adjustments that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of operations.

Basis of presentation

These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Except as disclosed in note 17 of the Company’s annual audited consolidated financial statements as at February 28, 2003, these principles do not differ materially from accounting principles generally accepted in Canada.

These consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States or required by Canadian generally accepted accounting principles for annual financial statements, and accordingly, these consolidated financial statements should be read in conjunction with the Company’s most recent annual consolidated financial statements. In the opinion of management, all adjustments, consistently solely of normal recurring adjustments, necessary for the fair presentation of these unaudited financial statements have been made. These consolidated financial statements follow the same accounting policies and methods of application used in the Company’s audited annual consolidated financial statements as at and for the year ended February 28, 2003.

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These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All subsidiaries were acquired from unrelated parties and have been accounted for using the purchase method. Their results of operations have been included from the respective effective dates of acquisition. All significant intercompany balances and transactions have been eliminated.

Use of estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in preparing these financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates. In these consolidated financial statements, significant areas requiring the use of management estimates relate to the determination of collectibility of accounts receivable, the recoverability of equipment and intellectual property and rates for depreciation and amortization.

Recent Accounting Pronouncements

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, to clarify under what circumstances a contract with an initial net investment meets the characteristics of a derivative, to clarify when a derivative contains a financing component, to amend the definition of an underlying to conform it to language in FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and to amend certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and is to be applied prospectively. Implementation of SFAS No. 149 is not expected to have a material effect on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments issued in the form of shares that are mandatorily redeemable as well as certain other financial instruments be classified as liabilities in the financial statements. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective beginning the Company’s second quarter of 2004. The provisions of this statement are not expected to have a material impact on the Company’s consolidated financial position or results of operations.

Stock-based compensation plans:

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principle Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations to account for its employee stock options plans. Under the method, compensation expense is recorded on the measurement date, which is generally the date of grant, only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation”, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123 for employee stock option grants. Option grants to non-employees will be recognized at their fair value as the services are provided and the options earned.

Had the Company determined employee compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net loss would have been increased to the pro forma amounts indicated below (no compensation expense for the three months ended May 31, 2003 as no additional option grants and no outstanding vesting for prior options at the beginning of the period):

The weighted average fair value of employee options granted during the period ended May 31, 2002 was $0.08 estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

2.

Loss per share

Loss per share has been calculated using the weighted average number of shares outstanding during the period. Diluted loss per share does not differ from basic loss per share as the impact of all outstanding convertible securities would be to reduce the loss per share.

3.

Discontinued operations

On February 28, 2002, the Company closed its catalogue sales division. During the third quarter of fiscal 2003, the Company discontinued its e-commerce segment which had been substantially curtailed in fiscal 2002. As a result, the catalogue and e-commerce divisions represent discontinued operations to the Company. In accordance with generally accepted accounting principles in the United States, prior year and current year figures have been reclassified in the consolidated financial statements to separately reflect the assets, liabilities, revenues and expenses under discontinued operations accounting.

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Summarized financial information for the discontinued operations is as follows:

The Company expects to settle the remaining liabilities from discontinued operations in 2004. The Company is negotiating the settlements with the intention of settling at less than the recorded amount of $175,000. However, there can be no certainty that this will be achieved.

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4.

Share capital

a.

Authorized

	•		300,000,000 common stock without par value
	•		150,000,000 class A preference stock without par value
	•		150,000,000 class B preference stock without par value

	b.		Commitments to issue common shares
			The Company has committed to issue 13,000,000 shares to former creditors under a reorganization plan. As at May 31, 2003, 10,581,455 (February 28, 2003 — 10,581,455) shares have been issued to creditors leaving an outstanding commitment to issue 2,418,545 (February 28, 2003 — 2,418,545) shares.
	c.		Reduction of common share stated capital
			On August 22, 1996, the shareholders of the Company passed a special resolution to reduce the stated capital of the Company’s common shares by $86,729,000 (CDN $117,535,000). For accounting purposes, the recorded amounts for common shares and deficit have not been adjusted.
	d.		Warrants

	•		On June 4, 2001, the Company issued 65,000 share purchase warrants which expire June 4, 2004. Each warrant entitles the holder to purchase one common share for $0.56. As at May 31, 2003, 65,000 of these warrants were unexercised.
	•		On July 16, 2001, the Company issued 20,000 share purchase warrants which expire July 16, 2003. Each warrant entitles the holder to purchase one common share for $0.40. As at May 31, 2003, 20,000 of these warrants were unexercised.
	•		On August 3, 2001, the Company issued 50,000 share purchase warrants to a former employee in place of 45,000 options previously granted to that employee. The warrants expire on August 3, 2003. Each warrant entitles the holder to purchase one common share for $0.24. As at May 31, 2003, 50,000 of these warrants were unexercised.
	•		On January 2, 2002, the Company issued 6,000,000 share purchase warrants to the former President as part of his severance package. These warrants have been cancelled by the Company and are no longer outstanding.

	e.		Stock options
			The Company has a stock option plan, which allows the Company, at the discretion of the Board of Directors, to issue options to employees, directors and consultants to purchase common shares of the Company. Stock purchase options are granted having exercise prices based on the market price at the date of grant. The stock options expire at various dates ranging from July 28, 2010 to November 5, 2011. The stock options vest in accordance with each individual stock option agreement.
			The following summarizes changes in stock options since February 28, 2003:

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The Company has the following stock purchase options outstanding and vested at May 31, 2003:

	f.		Issuance of shares for non-monetary consideration
			Shares issued for employee and director compensation, to third parties for services rendered, for settlement of debt and for the acquisition of assets or businesses are recorded based upon the market trading value of the shares at the date of the related agreements to issue the shares.

5.

Segmented information

The Company’s continuing operations have two — a health promotion division (Healthtrac Corp.) and a call center division (NorthStar TeleSolutions, Inc.). The segments are located in the United States. Segmented information for the three months ended May 31, 2003 with comparative figures for May 31, 2002 are as follows:

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6.

Non-cash transactions and supplemental disclosures

7.		Commitment and contingencies
a.		The company is committed to annual office and equipment rental payments under operating leases for the next four years as follows: