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 June 30, 1999

[ ]  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)

              ----------------------------------------------------
              (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,
3,819,872 outstanding as of August 10, 1999
<PAGE>
                                HEALTHSTAR CORP.
                                AND SUBSIDIARIES

                                      Index

Part I: Financial Information

  Item 1. Financial Statements

          Consolidated Balance Sheet as of June 30, 1999.......................3

          Consolidated Statements of Operations for the Three
          Months Ended June 30, 1999 and 1998..................................4

          Consolidated Statements of Cash Flows for the Three
          Months Ended June 30, 1999 and 1998..................................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..................................................................15


                                        2
<PAGE>
                                HEALTHSTAR CORP.
                                AND SUBSIDIARIES
                           Consolidated Balance Sheet
                                   (Unaudited)

                                                                      June 30,
                                                                        1999
                                                                     -----------
                                     Assets

Current assets:
  Cash and cash equivalents                                          $       820
  Trade accounts receivable, less allowance for doubtful
    accounts of $260,712                                               2,036,148
  Other current assets                                                   419,708
                                                                     -----------
    Total current assets                                               2,456,676

Property and equipment, net                                            2,296,890
Intangibles, net of accumulated amortization of $726,972               8,550,523
Other assets, at cost                                                    145,038
                                                                     -----------
    Total assets                                                     $13,449,127
                                                                     ===========
                      Liabilities and Shareholders' Equity

Current liabilities:
  Accounts payable                                                   $   901,291
  Accrued expenses                                                     1,169,483
  Current portion of long-term debt                                    3,025,000
                                                                     -----------
    Total current liabilities                                          5,095,774
                                                                     -----------
Shareholders' equity:
  Common stock, $.001 par value 15,000,000 shares authorized,
    3,819,872 shares issued and outstanding                                3,820
  Additional paid -in- capital                                         8,151,129
  Retained earnings                                                      198,404
                                                                     -----------
    Total shareholders' equity                                         8,353,353
                                                                     -----------
    Total liabilities and shareholders' equity                       $13,449,127
                                                                     ===========

See accompanying notes to unaudited consolidated financial statements.

                                        3
<PAGE>
                                HEALTHSTAR CORP.
                                AND SUBSIDIARIES
           Consolidated Statements of Operations and Retained Earnings
                                   (Unaudited)

                                                          Three Months Ended
                                                               June 30,
                                                       -------------------------
                                                          1999          1998
                                                       -----------   -----------
Revenues:
  Capitated fees                                       $ 2,094,986   $ 2,651,252
  Repricing fees                                         1,586,819     1,763,230
  Other revenue                                            239,758       191,186
                                                       -----------   -----------
                                                         3,921,563     4,605,668
                                                       -----------   -----------
Operating expenses:
  Cost of services                                         533,627       702,868
  Salaries and wages                                     1,957,559     2,029,672
  General and administrative                             1,081,631     1,267,252
  Depreciation and amortization                            318,158       289,114
  Interest expense                                          58,166       160,343
                                                       -----------   -----------
                                                         3,949,141     4,449,249
                                                       -----------   -----------
Income (loss) before income taxes                          (27,578)      156,419

Income tax expense (benefit)                                (9,279)       55,000
                                                       -----------   -----------
    Net income (loss)                                      (18,299)      101,419

Retained earnings at beginning of quarter                  216,703       392,373
                                                       -----------   -----------
Retained earnings at end of quarter                    $   198,404   $   493,792
                                                       ===========   ===========
Earnings (loss) per share-Basic and diluted            $        --   $      0.03
                                                       ===========   ===========
Weighted average shares outstanding-Basic and diluted    3,819,872     2,977,901
                                                       ===========   ===========

See accompanying notes to unaudited consolidated financial statements.

                                        4
<PAGE>
                                HEALTHSTAR CORP.
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

                                                     Three Months Ended June 30,
                                                       ----------------------
                                                         1999         1998
                                                       ---------    ---------
Operating activities:
  Net income (loss)                                    $ (18,299)   $ 101,419
  Adjustments to reconcile net income (loss) to net
    cash used in operating activities:
      Depreciation and amortization                      318,158      289,114
      Bad debt expense                                   107,654      120,783
      Interest expense on debentures                          --       29,578
  Increase (decrease) in cash resulting from changes
    in operating assets and liabilities:
      Trade accounts receivable                         (148,951)     (82,486)
      Other current assets                                   446      (38,785)
      Accounts payable                                    18,380     (253,628)
      Accrued expenses                                  (419,552)    (581,697)
                                                       ---------    ---------
        Net cash used in operating activities           (142,164)    (415,702)
                                                       ---------    ---------
Investing activities:
  Purchases of equipment                                 (27,175)      (8,190)
                                                       ---------    ---------
        Net cash used in investing activities            (27,175)      (8,190)
                                                       ---------    ---------
Financing activities:
  Decrease (Increase) in other assets                     (1,777)      63,334
  Net proceeds from line of credit                       250,000      200,000
  Net proceeds from (payments on) long-term debt        (150,000)          --
                                                       ---------    ---------
        Net cash provided by financing activities         98,223      263,334
                                                       ---------    ---------
Net decrease in cash and cash equivalents                (71,116)    (160,558)

Cash and cash equivalents at beginning of quarter         71,936      199,466
                                                       ---------    ---------
Cash and cash equivalents at end of quarter            $     820    $  38,908
                                                       =========    =========

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

     DESCRIPTION OF BUSINESS

     HealthStar  Corp.  (the  "Company")  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.  The Company
     operates  its   business   through  its  two   wholly-owned   subsidiaries,
     HealthStar,  Inc.  ("HealthStar")  and National  Health Benefits & Casualty
     Corporation ("NHBC").

     The  Company is the  successor  company to Champion  Financial  Corporation
     ("Champion"),  a Utah corporation.  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.

     BASIS OF PRESENTATION

     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.  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, 1999.

     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 (LOSS) 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.

     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

     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. The Company receives monthly capitation fees based upon the number of
     each customer's members regardless of services actually provided.

     COST OF SERVICES

     The major  components of cost of services  consist of  utilization  review,
     case management,  external marketing commissions, and costs associated with
     electronic transmission of customers' healthcare claims.

     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.

     STOCK BASED COMPENSATION

     The Company applies SFAS No. 123, ACCOUNTING FOR STOCK-BASED  COMPENSATION,
     which permits  entities to recognize as expense over the vesting period the
     fair value of all stock-based  awards on the date of grant.  Alternatively,
     SFAS No. 123 also allows  entities to continue to apply the  provisions  of
     APB  Opinion  No.  25 and  provide  pro forma  net  earnings  and pro forma
     earnings per share  disclosures  for employee  stock option  grants made in
     1995 and future years as if the fair-value-based method defined in SFAS No.
     123 had been  applied.  The  Company  has  elected to continue to apply the
     provisions  of APB  Opinion  No. 25 and  provide  the pro forma  disclosure
     provisions  of SFAS No.  123.  In  accordance  with  APB  Opinion  No.  25,
     compensation  expense is recorded on the date an option is granted  only if
     the current  market  price of the  underlying  stock  exceeds the  exercise
     price.

     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

     Debt consists of the following at June 30, 1999:


     Note payable to Harris Trust and Savings Bank, due November
       30, 1999, secured by substantially all the assets of the
       Company                                                        $1,925,000
     Line of credit with Harris Trust and Savings Bank with
       permitted outstanding borrowings of $1,500,000, and
       secured by substantially all the assets of the Company            900,000
     Unsecured note payable to an individual, interest payable
       monthly at 8%, currently due                                      200,000
                                                                      ----------
                                                                      $3,025,000
                                                                      ==========

     The note  payable and line of credit  bear  interest at the prime rate plus
1.5% (9.25% at June 30, 1999).

                                        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 June 30, 1999 and the year ended March 31, 1999
contained in the Company's  Form 10-KSB filed with the  Securities  and Exchange
Commission on June 29, 1999.

OVERVIEW

     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.

     The financial  statements  include the results of operations of the Company
and its two wholly-owned subsidiaries HealthStar,  Inc.("HealthStar"),  acquired
December 12, 1997, and National Health Benefits & Casualty Corporation ("NHBC"),
acquired January 1, 1997.

RESULTS OF OPERATIONS

     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  decreased  $684,105 to $3,921,563 for the three months ended
June 30, 1999 compared to $4,605,668 for the three months ended June 30,1998,  a
decrease of 15%. The decrease in revenue is a result of unanticipated  attrition
attributable  to the  integration  of  HealthStar.  Included  in revenue was the
recognition of a gain of approximately $115,000 on the sale of the Company's POS
vision program which was sold on June 7, 1999.

                                       10
<PAGE>
ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONT'D)

     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 decreased $169,241, or 24%, to $533,627 for the three months ended June
30, 1999 from  $702,868  in 1998.  The  majority of the  decrease is a result of
HealthStar  discontinuing its pharmacy benefit program previously made available
to  HealthStar   customers.   In  addition,   HealthStar  has  discontinued  its
relationships  with other networks and, as a result,  is no longer paying access
fees to these 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 June 30, 1999,  salaries and wages were $1,957,559  compared to $2,029,672
for the quarter ended June 30, 1998, a decrease of $72,113 or 4%.

     General and  administrative  expenses include all other operating  expenses
such as bad debt expense,  telephone charges,  office supplies,  postage, travel
and entertainment,  professional fees,  insurance,  rent and utilities.  For the
quarter ended June 30, 1999, general and administrative expenses were $1,081,631
compared  to  $1,267,252  for the  quarter  ended June 30,  1998,  a decrease of
$185,621 or 15%. The  d`ecrease  is a result of tighter cost control  throughout
various operating expense categories.

     For the three  months ended June 30, 1999,  depreciation  and  amortization
increased $29,044,  or 10%, to $318,158 from $289,114 for the three months ended
June 30, 1998. Goodwill of approximately  $9,000,000 recorded in connection with
the acquisition of HealthStar is being amortized over 20 years.

     For the quarter ended June 30, 1999, the Company incurred  interest expense
of $58,166  compared to interest  expense of $160,343 for the quarter ended June
30, 1998, a decrease of $102,177. The decrease was a result of the conversion of
$3,000,000 of convertible  debentures  into common stock during August 1998. The
remaining  $1,000,000  debenture was repaid on March 31, 1999. The interest rate
on the  Company's  term loan and line of credit was 9.25% at June 30, 1999.  The
interest rate on the seller note payable is 8.0%.

                                       11
<PAGE>
ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONT'D)

LIQUIDITY AND CAPITAL RESOURCES

     At  June  30,  1999,  the  Company  had a  working  capital  deficiency  of
$2,639,098  compared to a working capital  deficiency of $2,910,005 at March 31,
1999, an improvement of $270,907.

     The Company has  historically  funded its working capital  requirements and
capital  expenditures   primarily  from  cash  flow  generated  from  operations
supplemented  by  borrowings  under its credit  facility  with Harris  Trust and
Savings Bank  ("Harris").  For the three  months ended June 30, 1999,  cash flow
used by operations was $142,164  compared to $415,702 for the three months ended
June 30,1999, an increase in cash flow of $273,538.

     The Company has a $4 million  credit  facility with Harris which is secured
by substantially all the assets of the Company.  $2.5 million of the facility is
comprised of a term loan and $1.5 million represents a revolving line of credit.
In connection with this facility, the Company is required to comply with certain
financial covenants. Covenants include a minimum current ratio, maximum leverage
ratio and a minimum fixed charge coverage ratio. On June 8, 1999, Harris amended
certain  terms of the  credit  facility.  The  amended  terms,  in  addition  to
requiring  that the entire  balance  outstanding be repaid by November 30, 1999,
reset  several  of  these  ratios  and  added  an  additional  minimum  earnings
requirement  for  subsequent  periods.  At June 30,  1999,  the  Company  was in
compliance  with all of the  financial  covenants,  as restated,  except for the
leverage ratio  requirement,  which had not been restated as part of the amended
terms.  Harris has agreed to a waiver in connection  with this  requirement  and
will restate this requirement retroactive to June 8, 1999.

     At June 30, 1999, the borrowings  consisted of $1,925,000  remaining on the
term loan and $900,000  outstanding  on the line of credit,  with  approximately
$150,000 of additional borrowing capacity available. Interest on the debt due to
Harris is calculated  at the prime rate plus 1.5% (9.25% at June 30, 1999).  The
Company is actively seeking  replacement  financing  through various sources and
relationships  with other companies in a related line of business to ensure that
adequate  resources are available to meet the  accelerated  deadline of the bank
debt.

     Although there can be no assurances,  management of the Company anticipates
growth and expansion to continue to accelerate through fiscal year 2000 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.

                                       12
<PAGE>
ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONT'D)

YEAR 2000

     Many computer  programs and equipment with embedded chips or processors use
two  rather  than  four  digits  to  represent  the  year and may be  unable  to
accurately process dates after December 31, 1999. This, as well as certain other
date-related  programming  issues,  may  result  in  miscalculations  or  system
failures  which can disrupt the  businesses  which rely on them.  The term "Year
2000  Issue" is used to refer to all  difficulties  the turn of the  century may
bring to computer users.

     The Company has determined that many of its internal  computer programs and
some items of its  equipment  are  susceptible  to  potential  Year 2000  system
failures  or  processing   errors.   This  assessment  of  internal  systems  is
substantially  complete and plans have been  formulated to modify or replace the
impacted  programs or  equipment.  Remediation  efforts are underway  using both
internal  and  external  resources,  with  priority  given to the systems  whose
failure  might  have a  material  impact on the  Company.  To date all  required
changes  have  been   identified   and  made  and  testing  of  the  changes  is
approximately 85% complete.

     The Company is also dependent on its contracted medical providers and payor
clients to successfully  address their respective Year 2000 technology issues in
connection with their claims processing functions. An important part of the Year
2000 program  involves  working with those third parties to determine the extent
to which the Company may be  vulnerable  to their  failure to address  their own
Year 2000  issues.  The Company is  communicating  with those  third  parties to
ascertain  whether  their Year 2000 issues  which  might  impact the Company are
being addressed. Where practical and appropriate, the Company will try to verify
the  information  or  assurances  they provide with testing,  particularly  with
regard to mission critical  relationships.  At present, the Company has not been
advised by any third party of any Year 2000 issue likely to materially interfere
with the Company's business. However, not all third parties have been responsive
to the Company's inquiries and there may be providers of significant services on
which the Company  relies,  such as utilities,  which are unwilling or unable to
provide  information  concerning  their Year 2000 readiness.  To the extent that
outside vendors do not provide satisfactory responses, the Company will consider
changing to vendors who have  demonstrated Year 2000 readiness.  However,  there
are no assurances that the Company will be able to do so.

     The Company  has begun to develop  contingency  plans to minimize  any Year
2000  disruptions in the event that an internal or third party mission  critical
system does not function  properly.  The 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,  manual processing of transactions,  use of alternative
service  providers,  relocation to temporary  facilities,  and other measures as
deemed  necessary.  Once developed,  these contingency plans will be continually
refined as additional information becomes available.

     The  consequences of an uncorrected  Year 2000 issue could include business
interruption,  exposure  to  monetary  claims by clients  and others and loss of
business  goodwill.  The  likelihood of these events and the possible  financial
impact if they occur cannot be predicted.

     The Company is  continuing to upgrade  equipment to be Year 2000  compliant
and total  expenditures  relating to the upgrade for the year are expected to be
approximately $20,000.

                                       13
<PAGE>

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

     The  estimates  and  conclusions  set forth above  contain  forward-looking
statements and are based on management's  best estimate of future events.  Risks
to completing  the plan include the  availability  of  resources,  the Company's
ability to  discover  and correct  material  Year 2000  issues,  and other third
parties  on which the  Company  relies  to bring  their  systems  into Year 2000
compliance.

NEW ACCOUNTING STANDARDS

     Statement  of  Financial   Accounting  Standards  No.  130,  "Reporting  of
Comprehensive  Income"  establishes  standards  for  reporting  and  display  of
comprehensive  income  (all  changes  in  equity  during a period  except  those
resulting from investments by and distributions to owners) and its components in
financial statements.

     Statement of Financial  Accounting  Standards  No. 131,  "Disclosure  about
Segments of an Enterprise  and Related  Information"  establishes  standards for
reporting  information about operating segments in annual financial  statements,
selected  information about operating  segments in interim financial reports and
disclosures about products and services, geographic area and major customers.

     Statement of Accounting  Standards No.134, " Accounting for Mortgage-Backed
Securities  Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage  Banking  Enterprise".  This  Statement  establishes  accounting  and
reporting  standards for certain activities of mortgage banking  enterprises and
other enterprises that conduct operations that are substantially  similar to the
primary  operations  of a mortgage  banking  enterprise.  The  adoption  of this
statement contains no change in disclosure requirements of the Company.

     Statement of Accounting Standards No. 135, "Recission of FASB Statement No.
75 and  Technical  Corrections".  This  Statement  rescinds  Statement  No.  75,
"Deferral of the Effective Date of Certain  Accounting  Requirements for Pension
Plans of State and Local Governmental Units," and provides technical corrections
for  over  20  accounting  pronouncements.  This  new  standard,  which  will be
effective  for fiscal  years ending after  February 15, 1999,  is not  currently
anticipated  to  have  a  significant  impact  on  the  consolidated   financial
statements  based on the  current  financial  structure  and  operations  of the
Company.

ACCOUNTING STANDARDS NOT YET ADOPTED

     Statement  of  Accounting  Standards  No. 133  "Accounting  for  Derivative
Instruments and Hedging Activities".  This Statement establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other  contracts,   (collectively   referred  to  as
derivatives)  and for  hedging  activities.  This new  standard,  which  will be
effective for all fiscal  quarters of all fiscal years  beginning after June 15,
1999,  is  not  currently  anticipated  to  have  a  significant  impact  on the
consolidated  financial  statements based on the current financial structure and
operations of the Company.  The Financial  Accounting Standards Board has issued
an exposure  draft that defers the effective  date of FASB  Statement No. 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000.

                                       14
<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: August 10, 1999                   By: /s/ Denise E. Nedza
                                            ------------------------------------
                                            Denise E. Nedza
                                            Chief Financial Officer
                                            (Principal Financial and Accounting
                                            Officer)