U. S. Securities and Exchange Commission

                             Washington, D.C. 20549

                                   FORM 10-QSB

(Mark One)
[ X ]             QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 1998

[   ]          TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
                                  EXCHANGE ACT

         For the transition period from _____________ to _____________
                         Commission file number 0-19499

                                 HEALTHSTAR CORP
                    (Exact name of small business issuer as
                            specified in its charter)

             DELAWARE                                            91-1934592
  (State or other jurisdiction                                (I.R.S. employer
of incorporation or organization)                            identification no.)

                         8745 West Higgins, Suite 300,
                            CHICAGO, ILLINOIS 60631
                    (Address of principal executive offices)

                                 (773) 693-7827
                           (ISSUER'S TELEPHONE NUMBER)

Champion Financial Corporation 9495 E. San Salvador Dr. Scottdale, Arizona 85258
--------------------------------------------------------------------------------
   (Former name, former address and former fiscal year, if changed since last
                                    report)

     Check whether the issuer (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act 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. Yes X   No
                                                                      ---    ---
                      APPLICABLE ONLY TO CORPORATE ISSUERS

    State the number of shares outstanding of each of the issuer's classes of
                common equity, as of the last practicable date:

 Common stock, $0.001 par value, 3,385,089 outstanding as of February 10, 1999

                                        1
<PAGE>

                                HealthStar Corp.
                                      Index

Part I: Financial Information

     Item 1. Financial Statements

          Consolidated Balance Sheets as of December 31, 1998 and
          March 31, 1998 ......................................................3

          Consolidated Statements of Operations for the Three Months
          and Nine Months Ended December 31, 1998 and 1997 ....................4

          Consolidated Statements of Cash Flows for the Nine Months
          Ended December 31, 1998 and 1997 ....................................5

          Notes to Unaudited Consolidated Financial Statements ................6

     Item 2. Management's Discussion and Analysis of Financial
          Condition and Results of Operations ................................10

Part II: Other Information

     Exhibits - None

     Signatures ..............................................................14

                                        2
<PAGE>

                       HEALTHSTAR CORP. AND SUBSIDIARIES
                          Consolidated Balance Sheets


                                                       December 31,
                                                          1998         March 31,
                                                       (UNAUDITED)       1998
                                                       -----------   -----------
                                     Assets
Current assets:
  Cash and cash equivalents                           $    23,875   $   199,466
  Trade accounts receivable, less allowance
    for doubtful accounts of $103,580 and
    $250,000, respectively                              2,431,543     2,512,446
  Other current assets                                    101,956        69,126
                                                      -----------   -----------
          Total current assets                          2,557,374     2,781,038

Property and equipment, net                             2,620,906     2,851,957
Investment in healthcare technology company               309,626       309,626
Intangibles, net of accumulated amortization
  of $494,596 and $146,030, respectively                8,657,899     9,006,465
Other assets, at cost                                      83,477       499,577
                                                      -----------   -----------
          Total assets                                $14,229,282   $15,448,663
                                                      ===========   ===========
                      Liabilities and Shareholders' Equity

Current liabilities:
  Accounts payable                                    $   883,000   $ 1,163,741
  Accrued expenses                                      1,449,540     2,269,678
  Current portion of long-term debt                       500,000       400,000
  Note payable                                            200,000       200,000
                                                      -----------   -----------
      Total current liabilities                         3,032,540     4,033,419

Line of credit                                            850,000       300,000
Long-term debt                                          2,700,000     6,100,000
                                                      -----------   -----------
      Total liabilities                                 6,582,540    10,433,419
                                                      -----------   -----------
Shareholders' equity:
   Common stock, $.001 par value 15,000,000
     shares authorized, 3,385,089 shares
     issued and outstanding at December 31, 1998
     and 2,927,901 at March 31, 1998                        3,385         2,928
   Additional paid-in-capital                           7,151,564     4,619,943
   Retained earnings                                      491,793       392,373
                                                      -----------   -----------
      Total shareholders' equity                        7,646,742     5,015,244

                                                      -----------   -----------
      Total liabilities and shareholders' equity      $14,229,282   $15,448,663
                                                      ===========   ===========

See accompanying notes to unaudited consolidated financial statements.

                                       3
<PAGE>

                       HEALTHSTAR CORP. AND SUBSIDIARIES
          Consolidated Statements of Operations and Retained Earnings
                                  (Unaudited)

<TABLE>
<CAPTION>
                                          Three Months Ended      Nine Months Ended
                                              December 31,           December 31,
                                      ----------------------   -----------------------
                                          1998         1997        1998        1997
                                      ----------  ----------   -----------  ----------
<S>                                   <C>         <C>          <C>          <C>
Revenues:
   Capitated fees                     $2,406,647  $  109,735   $ 7,636,855  $  347,805
   Repricing fees                      1,835,766     588,258     5,479,854   1,732,549
   Other fees                            125,266       1,600       477,311      12,185
                                      ----------  ----------   -----------  ----------
                                       4,367,679     699,593    13,594,020   2,092,539
                                      ----------  ----------   -----------  ----------
Operating expenses:
   Cost of services                      589,578     268,465     1,871,352     796,527
   Salaries and wages                  2,162,510     277,204     6,228,782     745,446
   General and administrative          1,274,212     230,488     4,105,059     532,430
   Depreciation and amortization         305,497      27,452       887,796      55,691
   Interest expense                       83,901          --       333,193          --
                                      ----------  ----------   -----------  ----------
                                       4,415,698     803,609    13,426,182   2,130,094
                                      ----------  ----------   -----------  ----------

Earnings (loss) before income taxes      (48,019)   (104,016)      167,838     (37,555)

Income tax (benefit)                      (1,582)    (10,000)       68,418          --
                                      ----------  ----------   -----------  ----------

        Net earnings (loss)              (46,437)    (94,016)       99,420     (37,555)

Retained earnings at beginning
 of period                               538,230     144,729       392,373      88,268
                                      ----------  ----------   -----------  ----------

Retained earnings at end of period    $  491,793  $   50,713   $   491,793  $   50,713
                                      ==========  ==========   ===========  ==========
Earnings (loss) per share-
 Basic and Diluted                    $    (0.01) $    (0.03)  $      0.03  $    (0.01)
                                      ==========  ==========   ===========  ==========
Weighted average shares outstanding-
 Basic and Diluted                     3,385,089   2,769,912     3,159,979   2,747,778
                                      ==========  ==========   ===========  ==========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

                                       4
<PAGE>

                       HEALTHSTAR CORP. AND SUBSIDIARIES
                     Consolidated Statements of Cash Flows
                                  (Unaudited)


                                                  Nine Months Ended December 31,
                                                  ------------------------------
                                                      1998             1997
                                                  -----------      -----------
Operating activities:
 Net earnings (loss)                              $    99,420      $   (37,555)
 Adjustments to reconcile net income to net
 cash provided by operating activities:
 Depreciation and amortization                        887,796           55,691
 Bad debt expense                                     183,000
 Stock-based employee compensation                     15,000
 Interest expense on debentures                        29,578               --
 Increase (decrease) in cash resulting from
  changes in operating assets and liabilities:
  Trade accounts receivable                          (102,097)          11,326
  Other current assets                                (32,830)         (11,715)
  Accounts payable                                   (222,118)        (104,536)
  Accrued expenses                                   (820,139)         695,231
  Deferred revenue                                         --          (58,909)
                                                  -----------      -----------
    Net cash provided by operating activities          37,610          549,533
                                                  -----------      -----------
Investing activities:
 Purchases of equipment                              (371,915)         (49,684)
 Proceeds from the sale of equipment                    5,113             --
 Cash purchase cost not yet allocated                      --       (6,965,904)
 Investment in healthcare technology company               --         (309,626)
                                                  -----------      -----------
    Net cash used in investing activities            (366,802)      (7,325,214)
                                                  -----------      -----------
Financing activities:
 Increase in other assets                             (96,399)              --
 Net proceeds (payments) from long term debt         (300,000)       6,086,146
 Net proceeds from line of credit                     550,000               --
                                                  -----------      -----------
     Net cash provided by financing activities        153,601        6,086,146
                                                  -----------      -----------

Net decrease in cash and cash equivalents            (175,591)        (689,535)

Cash and cash equivalents at beginning of year        199,466          896,096
                                                  -----------      -----------

Cash and cash equivalents at end of period        $    23,875      $   206,561
                                                  ===========      ===========
Supplemental schedule of noncash financing
 activities:
  Settlement on convertible debenture             $ 3,000,000
                                                  ===========
  Issuance of common stock                        $ 2,532,078
                                                  ===========

See accompanying notes to unaudited consolidated financial statements.

                                        5
<PAGE>

                        HEALTHSTAR CORP. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       BASIS OF PRESENTATION

       Effective November 16, 1998, Champion Financial Corporation (Champion), a
       Utah corporation,  reincorporated  in the State of Delaware.  At the same
       time,  Champion  merged all of its assets into its newly formed  Delaware
       subsidiary,  HealthStar Corp. The  effectiveness of this  reincorporation
       has caused  HealthStar Corp. to continue to operate  Champion's  business
       while Champion has ceased to exist.

       The  accompanying   unaudited   consolidated   financial   statements  of
       HealthStar Corp. and  Subsidiaries  have been prepared in accordance with
       generally   accepted   accounting   principles   for  interim   financial
       information  and pursuant to rules and  regulations of the Securities and
       Exchange  Commission.  Accordingly,  they  do  not  include  all  of  the
       information  and  footnotes  required by  generally  accepted  accounting
       principles  for a  complete  financial  statement  presentation.  In  the
       opinion of management  such unaudited  interim  information  reflects all
       adjustments,  consisting only of normal recurring adjustments,  necessary
       to present the Company's financial position and results of operations for
       the periods presented.  The results of operations for interim periods are
       not  necessarily  indicative  of the  results to be  expected  for a full
       fiscal  year.  The  consolidated  Balance  Sheet as of March 31, 1998 was
       derived from audited  consolidated  financial  statements as of that date
       but does not  include  all the  information  and  footnotes  required  by
       generally  accepted  accounting  principles.  It is suggested  that these
       consolidated  financial  statements  be  read  in  conjunction  with  the
       Company's  audited  consolidated  financial  statements  included  in the
       Company's Annual Report Form 10-KSB, for the year ended March 31, 1998.

       DESCRIPTION OF BUSINESS

       HealthStar  Corp.  is  a  healthcare   management  company  dedicated  to
       controlling the cost, improving the quality and enhancing the delivery of
       healthcare  services.  The Company  also  provides  related  products and
       services  designed to reduce  healthcare  costs.  The Company markets and
       provides  programs  and  services to  insurance  companies,  self-insured
       businesses  for their  medical  plans and third  parties that  administer
       employee  medical plans.  These  programs and services  assist clients in
       reducing  healthcare  costs  for  group  health  plans  and for  workers'
       compensation coverage and automobile accident injury claims.

       USE OF ESTIMATES

       Management of the Company has made a number of estimates and  assumptions
       relating to the reporting of assets and liabilities and the disclosure of
       contingent  assets and liabilities to prepare these financial  statements
       in conformity with generally accepted accounting principles.

       PRINCIPLES OF CONSOLIDATION

       The consolidated financial statements include the financial statements of
       the  Company  and  its two  wholly-owned  subsidiaries.  All  significant
       intercompany   balances  and   transactions   have  been   eliminated  in
       consolidation.

       CASH EQUIVALENTS

       The  Company  considers  all  highly  liquid  instruments  with  original
       maturities of three months or less to be cash equivalents.

                                       6
<PAGE>

                        HEALTHSTAR CORP. AND SUBSIDIARIES

         Notes to Unaudited Consolidated Financial Statements, Continued

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

       EARNINGS PER SHARE

       The Company adopted  Statement of Accounting  Standards No. 128 "Earnings
       per Share"  (SFAS 128) during  1997.  The  Company's  Earnings per Common
       Share (EPS) figures for the prior period were not effected by adoption of
       SFAS 128. In accordance  with SFAS 128, basic EPS is computed by dividing
       net income,  after deducting  preferred stock dividends  requirements (if
       any),  by  the  weighted   average  number  of  shares  of  common  stock
       outstanding.  Diluted EPS reflects the maximum dilution that would result
       after  giving  effect to dilutive  stock  options and warrants and to the
       assumed conversion of all dilutive convertible securities and stock.

       For  purposes  of  the  diluted  earnings  per  share  calculation,   the
       convertible debentures had an antidilutive effect.

       FAIR VALUE OF FINANCIAL INSTRUMENTS

       The fair  value of a  financial  instrument  is the  amount  at which the
       instrument  could be exchanged in a current  transaction  between willing
       parties.  Management believes that the recorded amounts of current assets
       and  current  liabilities  approximate  fair  value  because of the short
       maturity of these  instruments.  The recorded  balance of long-term  debt
       approximates  fair  value,  as the terms of the debt are similar to rates
       currently offered to the Company for similar debt instruments.

       REVENUE RECOGNITION

       The Company  receives  monthly  capitation  fees based upon the number of
       each  customer's   members  regardless  of  services  actually  provided.
       Repricing  fees are derived from a negotiated  percentage  of the medical
       savings generated from customer claims managed by the Company or on a per
       member per month basis.  The percentage of savings fees are recognized as
       revenue as the Company  renders  services  and  notifies  the health care
       provider of their required  billings  reduction for a specified period of
       time.

       COST OF SERVICES

       The major components of cost of services  consist of utilization  review,
       case management and external marketing commissions.

       PROPERTY AND EQUIPMENT

       Property and  equipment  are stated at cost.  Depreciation  is calculated
       using the  straight-line  method over the  estimated  useful lives of the
       assets,  which  approximates three years for equipment to seven years for
       furniture and fixtures. Computer software is amortized over three to five
       years.

       INTANGIBLES

       Intangibles, which represent the excess of purchase price over fair value
       of net tangible assets acquired,  are amortized on a straight-line  basis
       over the  expected  periods  to be  benefited,  generally  20 years.  The
       Company assesses the  recoverability  of intangible assets by determining
       whether the  amortization of the  intangibles  over their remaining lives
       can be recovered through  undiscounted future operating cash flows of the
       acquired  operation.  The amount of  intangible  impairment,  if any,  is
       measured based on projected  discounted future operating cash flows using
       a discount  rate  reflecting  the  Company's  average cost of funds.  The
       assessment  of the  recoverability  of  intangibles  will be  impacted if
       estimated future operating cash flows are not achieved.

                                       7
<PAGE>

                        HEALTHSTAR CORP. AND SUBSIDIARIES

         Notes to Unaudited Consolidated Financial Statements, Continued

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

       INCOME TAXES

       The  Company  accounts  for income  taxes  under the asset and  liability
       method. Deferred tax assets and liabilities are recognized for the future
       tax  consequences  attributable  to  differences  between  the  financial
       statement  carrying  amounts of existing assets and liabilities and their
       respective  tax bases and  operating  loss and tax credit  carryforwards.
       Deferred tax assets and  liabilities are measured using enacted tax rates
       expected to apply to taxable income in the years in which those temporary
       differences  are  expected  to be  recovered  or  settled.  The effect on
       deferred  tax  assets  and  liabilities  of a  change  in  tax  rates  is
       recognized in income in the period that includes the enactment date.

       A valuation  allowance must be established to reduce  deferred income tax
       benefits  if it is more  likely  than not that a portion of the  deferred
       income tax benefits will not be realized. It is management's opinion that
       the entire  deferred tax benefit may not be  recognized  in future years.
       Therefore,  a valuation  allowance  equal to the deferred tax benefit has
       been established.

       IMPAIRMENT OF LONG-LIVED ASSETS

       Management  reviews the  possible  impairment  of  long-lived  assets and
       certain  identifiable  intangible  assets  whenever  events or changes in
       circumstances  indicate  that the carrying  amount of an asset may not be
       recoverable.  Recoverability of assets to be held and used is measured by
       a comparison of the carrying  amount of an asset to future net cash flows
       expected to be generated by the asset.  If such assets are  considered to
       be impaired,  the  impairment to be recognized is the amount by which the
       carrying amount of the assets exceeds the fair value of the assets.

       YEAR 2000

       Management  has developed a plan to address the Year 2000 problem and all
       computer  systems  are in the  process  of  conversion  to be  Year  2000
       compliant. The Year 2000 problem is the result of computer programs being
       written using two digits rather than four digits to define the applicable
       year.  The total cost of the project is not  material  and the Company is
       expensing all associated costs as they are incurred.

       RECLASSIFICATIONS

       Certain  reclassifications  have been made to the prior period  financial
       statements to conform to the current period presentation.

                                       8
<PAGE>

                        HEALTHSTAR CORP. AND SUBSIDIARIES

         Notes to Unaudited Consolidated Financial Statements, Continued

(2)    DEBT

       The Company  maintains a $1,500,000  line of credit with Harris Trust and
       Savings  Bank.  The line of  credit  bears  interest  at prime  (7.75% at
       December 31, 1998). The line is  collateralized  by substantially all the
       assets of the Company. There was $850,000 in borrowings against this line
       of credit at December 31, 1998.

       In connection with the acquisition of HealthStar Inc., the Company issued
       $4,000,000  Series  A  8%  Senior  Subordinated   Convertible  Redeemable
       debentures.  On  August  31,  1998,  $3,000,000  of the  debentures  were
       converted  into  800,000  shares of common  stock and  $1,000,000  of the
       debentures  were converted  into a promissory  note. At the present time,
       management  does  not  intend  to  use  working  capital  to  redeem  the
       promissory note.

       Debt consists of the following at December 31, 1998:

         8% Convertible Promissory Note                            1,000,000


         Note payable to Harris Trust and Savings Bank due
            on December 14, 2000, with quarterly principal
            payments ranging from $100,000 - $150,000 plus
            interest on the unpaid balance at prime (7.75%
            at December 31, 1998), secured by substantially
            all the assets of the Company                          2,200,000

         Unsecured note payable to an individual, interest
            payable monthly at 8%, due currently                     200,000
                                                                  ----------
                                                                   3,400,000
         Less current maturities                                     700,000
                                                                  ----------
                                                                  $2,700,000
                                                                  ==========
(3)    REVERSE STOCK SPLIT

       On November 16, 1998,  the Company  effected a 1for 2 reverse stock split
       of the  Company's  outstanding  common  stock.  The effect of the reverse
       stock split is reflected in earnings per share.

                                        9
<PAGE>

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

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  should be read in  conjunction  with the  financial  statements  and
footnotes for the quarter  ended  December 31, 1998 and the year ended March 31,
1998  contained  in the  Company's  Form 10-KSB  filed with the  Securities  and
Exchange Commission on June 29, 1998.

The managed healthcare cost containment  industry is highly  fragmented,  with a
large  number of  competitors.  The  Company  does not  believe  that any single
company  commands  significant  market  share.  The  management  of the  Company
believes the level of competition will continue to increase in the future.  Most
of the Company's  competitors  are national  managed care  providers,  insurance
companies,  HMOs, and third-party administrators that have implemented their own
managed  care  programs.   Several  large   insurance   companies  for  workers'
compensation,   health  and   automobile   have  also   implemented   their  own
cost-containment  programs  through the  carrier's  own  personnel.  Many of the
Company's current and potential  competitors are  significantly  larger and have
greater  financial,  technical,  marketing,  and  management  resources than the
Company.

The Company competes on the basis of its specialized  knowledge and expertise in
the managed healthcare services industry and on its ability to deliver effective
services to the customer  with a high level of customer  satisfaction  at a very
affordable  price.  There can be no  assurance  that the Company will be able to
compete   successfully.   The  managed   healthcare   industry  has  experienced
significant changes in recent years,  primarily as a result of rising healthcare
costs.  The Company will be required to respond to various  competitive  factors
affecting the healthcare  industry,  including new medical technologies that may
be introduced;  general trends  relating to the demand for healthcare  services;
regulatory,  economic,  and political factors;  changes in patient demographics;
and competitive pricing strategies by HMOs and other healthcare plans.

RESULTS OF OPERATIONS

         When comparing the Company's  financial  results for the three and nine
months ended  December 31, 1998 to the three and nine months ended  December 31,
1997,  it is important to note that the majority of the increase in the level of
revenues  and  expenses  is  due  primarily  to  the  Company's  acquisition  of
HealthStar, Inc., which was completed on December 15, 1997.

REVENUE

         The Company  derives the  majority of its revenue  from fees charged to
clients  for  access to the  Company's  network  of  contracted  providers.  The
Company's  client base consists of a variety of payors of medical claims such as
insurance  companies,  third-party  administrators  and self-insured  employers.
Access fees can be either a fixed,  monthly fee per enrolled subscriber which is
called a  capitated  fee or can be based on a  percentage  of the  amount of the
discount off of billed  charges which is granted by a contracted  provider.  The
Company's  participation  in the amount  saved  varies  from 20% to 25% with the
exact amount determined by contractual provisions with the Company's clients.

         Total revenue  increased  $3,668,086 to $4,367,679 for the three months
ended December 31, 1998 compared to $699,593 for the three months ended December
31,1997,  an increase of 524%.  Total revenue for the nine months ended December
31, 1998 increased  $11,501,481 or 550% to  $13,594,020,  compared to $2,092,539
for the nine months ended December 31, 1997. The increase

                                       10
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONT'D)

REVENUE (CONT'D)

was a result of operations from the newly acquired subsidiary  HealthStar,  Inc.
Revenues for the Company's National Health Benefits and Casualty (NHBC) division
remained consistent with prior year's levels.

OPERATING EXPENSES

         Cost of services  includes the cost of outsourcing  the case management
and utilization review functions, commissions paid to outside brokers, fees paid
to other regional PPO networks for access to providers not  contracted  directly
with the Company and other  products and services  provided by outside  vendors.
Cost of  services  increased  $321,113 to $589,578  for the three  months  ended
December  31, 1998 from  $268,465 in 1997.  Cost of services for the nine months
ended December 31, 1998 increased  $1,074,825 to $1,871,352 compared to $796,527
for the nine months ended December 31, 1997. The entire increase is attributable
to HealthStar Inc. and is primarily  related to the cost of outsourcing the case
management and utilization review functions. As a percentage of revenue, cost of
services for the nine months ended  December 31, 1998 decreased from 38% in 1997
to 14% in 1998. This margin  improvement is a result of the fact that HealthStar
Inc. contracts directly with healthcare  providers which limits the fees paid to
access other PPO networks.

         Salaries and wages includes all employee compensation including payroll
taxes,  health  insurance  and  other  employee  benefits.   Also  included  are
commissions  paid to in-house  sales and  marketing  personnel.  For the quarter
ended December 31, 1998, salaries and wages were $2,162,510 compared to $277,204
for the quarter ended December 31, 1997, an increase of $1,885,306. For the nine
months ended  December 31, 1998,  salaries  and wages  increased  $5,483,336  to
$6,228,782 from $745,446.  Approximately $1.9 million of this increase is due to
the addition of HealthStar Inc. for the three months ended December 31, 1998 and
$5.3 million of the increase for the nine months ended December 31, 1998.

         General  and  administrative   expenses  include  all  other  operating
expenses  such as  telephone  charges,  office  supplies,  postage,  travel  and
entertainment, professional fees, insurance, rent and utilities. For the quarter
ended December 31, 1998,  general and  administrative  expenses were  $1,274,212
compared to $230,488  for the  quarter  ended  December  31,  1997.  General and
administrative  expenses  for the nine  months  ended  December  31,  1998  were
$4,105,059  compared with $532,430 for the nine months ended  December 31, 1997.
The  majority of this  increase is due to the  addition of  HealthStar  Inc. and
legal  expenses  incurred by the  Company  for the  lawsuit  filed in March 1998
against the holders of the convertible debentures.

         For  the  three  months  ended  December  31,  1998,  depreciation  and
amortization  increased  $278,045 to $305,497  from $27,452 for the three months
ended  December  31,  1997.  For  the  nine  months  ended  December  31,  1998,
depreciation and  amortization  was $887,796  compared with $55,691 for the nine
months  ended  December  31, 1997,  an increase of  $832,105.  This  significant
increase is due to goodwill  created as a result of the HealthStar  acquisition.
Goodwill of approximately $9,000,000 is being amortized over 20 years.

                                       11
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONT'D)

OPERATING EXPENSES (CONT'D)

         For the quarter ended December 31, 1998, the Company incurred  interest
expense of $83,901.  The  Company's  interest  expense for the nine months ended
December 31, 1998 was $333,193.  Interest  expense  relates to the  indebtedness
incurred as a result of the  HealthStar  acquisition.  The interest  rate on the
Company's  term loan and line of credit  was 7.75% at  December  31,  1998.  The
interest rate on the convertible  promissory note is 8.0%, and the interest rate
on the seller note payable is 8.0%.

         Net loss for the three months ended December 31, 1998 decreased $47,579
or 51% to $46,437 from $94,016 in the quarter ended  December 31, 1997.  For the
nine months ended December 31, 1998, net earnings  increased $136,975 to $99,420
or 365%,  compared to a net loss of $37,555 for the nine months  ended  December
30, 1997.

YEAR 2000

         The Year 2000 concern, which is common to most companies,  concerns the
inability  of  information  and  non-information  systems,   primarily  computer
software programs,  to properly recognize and process date sensitive information
as the Year 2000 approaches.  The Company is reviewing,  modifying,  and testing
its computer applications to ensure their functionality with respect to the Year
2000  changes.  At  present,  the  Company  does not  anticipate  that  material
incremental  costs  will be  incurred.  The  Company  is also  dependent  on its
contracting  medical  providers and payer clients to successfully  address their
respective  Year  2000  technology   issues  in  connection  with  their  claims
processing  functions.  The Company has not determined whether such providers or
clients  face Year  2000  problems  that if not  resolved,  may have a  material
adverse affect on the Company's business or results of operations.

         The Company does not  anticipate  any  disruption in its  operations or
financial  reporting  as a result of  system  upgrades  or system  integrations.
However,  there can be no assurance that such  disruption will not occur or that
the desired benefits from the Year 2000 compliance of the Company's  information
and  non-information  systems  will be  attained.  In the event that the desired
results are not obtained,  the Company's contingency plans call for isolation of
the failing component and taking the appropriate  corrective  action,  which may
include  modification  or  replacement  of  the  faulty  hardware,  software  or
non-information system.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has  historically  funded its working capital  requirements
and capital  expenditures  primarily from cash flow  generated  from  operations
supplemented  by  borrowings  under the Company's  line of credit.  For the nine
months ended  December 31, 1998,  cash flow provided by  operations  was $37,610
compared to $549,533  for the nine months ended  December 31, 1997.  At December
31, 1998, the Company had a working capital deficiency of $475,166,  an increase
of $777,215 from its working capital deficiency of $1,252,381 at March 31, 1998.

         The Company had $23,875 in cash and cash  equivalents  at December  31,
1998.

         In connection  with the  acquisition  of HealthStar  Inc.,  the Company
issued  $4,000,000  Series  A  8%  Senior  Subordinated  Convertible  Redeemable
debentures. The entire proceeds of the issuance and the debentures were utilized
in  the  acquisition.  Beginning  on  January  17,  1998,  the  debentures  were
convertible  into  common  shares of the  Company's  stock  based upon a formula
related to the market price of the stock.  Due to certain matters and litigation
related to assertions made by the debenture holders,  the Company entered into a
settlement  agreement.  Under the terms of that  agreement,  on August 31, 1998,
$3,000,000 of the debentures  were converted into 800,000 shares of common stock
and $1,000,000 of the

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<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONT'D)

LIQUIDITY AND CAPITAL RESOURCES (CONT'D)

debentures  were  converted  into a  promissory  note with the same terms as the
original  debentures.  The net effect of the settlement was essentially the same
as under the  original  terms of the  debentures.  The Company has the option to
make  principal  payments  on the  promissory  note as  part  of the  settlement
agreement  with the debenture  holders.  If the company does not make  principal
payments,  the settlement  agreement reverts back to the conversion terms of the
original debenture agreement. At the present time, management does not intend to
use working capital to redeem the promissory note.

         Also in connection with the acquisition of HealthStar Inc., the Company
secured a $1,500,000 line of credit with Harris Trust and Savings Bank. The line
of credit  bears  interest at the Prime rate (7.75% at December 31, 1998) and is
secured  by  substantially  all  of the  assets  of  HealthStar  Corp.  and  its
subsidiaries.  At December  31, 1998,  the Company had borrowed  $850,000 on the
line  of  credit,  and  due to a bank  covenant  restriction  had  approximately
$100,000 of additional availability.

         Although  there  can  be  no  assurances,  management  of  the  Company
anticipates  growth and expansion to continue to accelerate  through fiscal year
1999  with the  acquisition  of  complementary  businesses  or  business  lines,
management  personnel  and  infrastructure   additions.   The  Company  believes
additional  sources of cash flow may be  required in  conjunction  with any such
acquisition activity.  There can be no assurance that the Company may be able to
obtain  such funds on terms  acceptable  to the  Company.  Management  currently
believes that cash on hand, amounts available under the revolving line of credit
and  cash  generated  from  future  operations  will be  sufficient  to fund the
Company's operations and anticipated expansion plans.

LEGAL PROCEEDINGS

         On August 31, 1998,  the Company  settled and resolved its disputes and
misunderstandings   with  Thomson   Kernaghan  &  Co.,  Ltd.,  and  Bronia  Gmbh
(collectively referred to as "Thomson").  The Company dismissed Thomson from the
lawsuit  filed by the  Company  against  Thomson  in Federal  District  Court in
Arizona, and Thomson has dismissed its arbitration  proceeding commenced against
the Company in New York.

         From time to time,  the  Company  is named as a  defendant  in  routine
litigation  incidental  to its  business.  Based  on the  information  currently
available,   the  Company  believes  that  none  of  such  current  proceedings,
individually  or in the  aggregate,  will have a material  adverse effect on the
Company.

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<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.

                                HealthStar Corp.

DATE: February 10, 1999      BY:/s/ Denise E. Nedza

                                 DENISE E. NEDZA
                             CHIEF FINANCIAL OFFICER
                       (PRINCIPAL FINANCIAL AND ACCOUNTING
                                    OFFICER)

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