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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 [  ] No [X]

The number of shares of common stock outstanding as of January 7, 2004 was 222,632,398.

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HEALTHTRAC, INC.

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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.

Explanatory Note

On October 24, 2003 the Company entered into an Asset Purchase Agreement with Ultra Communications, Inc., a Delaware Corporation, to sell all assets and current operating liabilities of the Company’s call center segment business. The Company recorded the results of Discontinued Operations through October 23, 2003. As the business sold represented a separate component of the Company, discontinued operations accounting applies. As a result, information in this report separates the results of discontinued operations from continuing operations for all periods presented. As such, readers should be aware that information contained in this report will differ significantly from information contained in reports previously filed by the Company with the Securities and Exchange Commission.

Auditors Review Note

Healthrac is continuing to work with KPMG on its review of the third quarter 10Q and entries associated with the sale of Northstar. On October 24, 2004, we anticipate filing an amended 10Q by the end of the week.

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

Future operations (note 1)
Commitment and contingencies (note 7)
Subsequent event (note 10)

See accompanying notes

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HEALTHTRAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes

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

See accompanying notes

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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
November 30, 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. 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.

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 recognized losses of $524,237 and $1,333,100 for the three and nine month periods ended November 30, 2003 and has an accumulated deficit of $120,567,659 at November 30, 2003. For the nine month period ended November 30, 2003, the Company received $8,861 in cash from operations, used $113,671 to fund acquisitions of new equipment and received $27,108 from financing activities resulting in a decrease in cash of $77,722. As at November 30, 2003, the Company has a working capital deficiency of $1,846,756, including cash of $66,369.

Management projects that the Company will require additional cash and working capital to fund planned operations and capital asset additions for the next twelve months of approximately $600,000. 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 Healthcare business revenues by increasing its customer base and reducing its operating costs so that the Company achieves profitable operations and successfully negotiating concessions with the Company’s trade creditors on amounts owing. Subsequent to November 30, 2003, the Company had a judgment award against itself in the amount of $239,424.31 plus attorney fees and costs (note 7 b(i)). The Company is currently in negotiations with the plaintiff and evaluating its options. To date, subsequent to November 30, 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 divest 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.

Significant Accounting Policies

		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, consisting 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 of and for the year ended February 28, 2003, except as it relates to website development detailed below.

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		Consolidation
		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.
		Website Development
		The Company capitalizes the cost of website development costs, including customizing new software, significant upgrades and enhancements. Amortization of these costs is provided over three years on a straight line basis. Routine maintenance and operational costs that do not increase functionality are expensed as incurred.
		Recent Accounting Pronouncements
		In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (‘SFAS No. 148”), which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002 with earlier application permitted. We have adopted the disclosure provisions of SFAS No. 148 in our consolidated financial statements.
		In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosures Requirements for Guarantees, including indirect Guarantees of Indebtedness of Others”, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34 (“FIN No. 45”). FIN No. 45 clarifies the requirements of SFAS No. 5, “Accounting for Contingencies”, relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN No. 45 are effective for financial statements of interim or annual period that end after December 15, 2002. The provisions of FIN No. 45 for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. The Company has considered the disclosure requirements of FIN No. 45 in the preparation of these financial statements.
		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.

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		In November 2002, FASB issued Emerging Issues Task Force 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities are sufficiently separable, and there may be sufficient evidence of their fair values to separately account for some or all of the deliverables. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003.
		FASB interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46”), as amended, applies in the first fiscal year or interim period beginning after December 15, 2003 to enterprises that hold a variable interest in variable interest entities created before February 1, 2003.
		The adoption of FIN No. 45, SFAS 150 and EITF 00-21 did not have a material impact on the Company’s reported financial results. The adoption of FIN No. 46 is not expected to impact the Company’s consolidated financial statements on adoption.
		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 this 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 valued-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.

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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 and nine months ended November 30, 2003 as no additional option grants occurred and there were no unvested outstanding options at the beginning of the period):

The weighted average fair value of employee options granted during the period ended November 30, 2002 was $0.08 estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

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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 options and warrants would be to reduce the loss per share.

3.     Discontinued operations

On October 24, 2003, the Company entered into an Asset Purchase Agreement (“Purchase Agreement”) with Ultra Communications, Inc., a Delaware corporation (“Ultra”). In accordance with the Purchase Agreement, Ultra acquired all assets and current operating liabilities of the Call Center segment, all held by NorthNet Telecommunications, Inc. (“NorthStar”), a wholly owned subsidiary of the Company. Ultra is solely owned by Josh Thackery, NorthStar’s current President.

NorthStar was acquired by the Company in 2001. Since its acquisition, NorthStar has been an underperforming assets, unable to provide Healthtrac with ongoing income distributions. In addition, the sale of the call center business continues the Company’s ongoing effort to focus on the healthcare segment.

Under the terms of the agreement, Ultra will pay the Company $250,000 cash for the call center business’s assets and current operating liabilities at closing resulting in a gain on sale of $168,202. The sale price was derived using a fair market analysis based on a multiple times operating results. The sale agreement further stipulates that for the first eight months after the sale, the Company will have the option to repurchase the assets sold for the original sale price plus interest based on a rate of 15% per annum. The Company currently has no intention on repurchasing the call center business.

The Company can, for eight months following the payment of the purchase price, at its option, conduct an independent fair market valuation of the assets sold. If the fair market value exceeds the original purchase price by greater than $10,000 Ultra can either pay the fair value discrepancy within 60 days to the Company or sell the assets back at the original purchase price plus accrued interest. To January 19, 2004, the Company has not exercised its option to conduct an independent valuation due to its current cash resource limitations.

On February 28, 2002, the Company closed its catalogue sales division. During the third quarter of fiscal 2003, the Company discontinued its PSSP (formerly e-commerce) segment which had been substantially curtailed in fiscal 2002. As a result, the call center, catalogue and PSSP 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.

Summarized financial information for the discontinued operations is as follows:

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The Company expects to settle the remaining liabilities from discontinued operations in fiscal 2004 and fiscal 2005. The Company is negotiating the settlements with the intention of settling at less than the recorded amount of $332,550. However, there can be no certainty that this will be achieved.

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 November 30, 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 November 30, 2003, 65,000 of these warrants were unexercised.

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	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: