================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

                QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For quarterly period ended December 31, 2000

                         Commission File Number 0-22619

                              VALUESTAR CORPORATION
             (Exact name of registrant as specified in its charter)

          Colorado                                           84-1202005
          --------                                           ----------
 (State or other jurisdiction of                       (I.R.S. Empl. Ident. No.)
 incorporation or organization)

                360-22nd Street, #400, Oakland, California 94612
               (Address of principal executive offices) (Zip Code)

                                 (510) 808-1300
                                 --------------
                           (Issuer's telephone number)

Check  whether the issuer (1) 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 ____


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

Common Stock, $.00025 par value                             15,674,990
-------------------------------                             ----------
          (Class)                              (Outstanding at January 31, 2001)

Transitional Small Business Disclosure Format (check one):  YES      NO   X
                                                                ---      ---

================================================================================


<PAGE>

<TABLE>

                                      VALUESTAR CORPORATION

                                              INDEX
<CAPTION>

                                                                                                         Page
                                                                                                         ----
<S>                                                                                                       <C>
PART I. FINANCIAL INFORMATION

         Item 1. Financial Statements (unaudited):

                  Consolidated Balance Sheets as of December 31, 2000 and

                  June 30, 2000                                                                           3

                  Consolidated Statements of Operations for the three and six
                  months ended December 31, 2000 and 1999                                                 4

                  Consolidated Statements of Cash Flows for the six
                  months ended December 31, 2000 and 1999                                                 5

                  Notes to Interim Consolidated Financial Statements                                      6

         Item 2. Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                                                   12

PART II. OTHER INFORMATION

         Item 1. Legal Proceedings                                                                        18
         Item 2. Changes in Securities                                                                    18
         Item 3. Defaults upon Senior Securities                                                          19
         Item 4. Submission of Matters to a Vote of Security Holders                                      19
         Item 5. Other Information                                                                        19
         Item 6. Exhibits and Reports on Form 8-K                                                         20



SIGNATURES                                                                                                20

</TABLE>

<PAGE>

<TABLE>

                                                        VALUESTAR CORPORATION
                                                     CONSOLIDATED BALANCE SHEETS
                                                             (Unaudited)

                                                               ASSETS

<CAPTION>
                                                                                                  December 31,            June 30,
                                                                                                     2000                  2000
                                                                                                 ------------          ------------
<S>                                                                                              <C>                   <C>
CURRENT ASSETS
     Cash                                                                                        $    143,486          $  5,287,385
     Receivables                                                                                      283,652               454,233
     Inventory                                                                                          8,768                16,898
     Prepaid expenses                                                                                 530,513               416,573
                                                                                                 ------------          ------------

             Total current assets                                                                     966,419             6,175,089

PROPERTY AND EQUIPMENT                                                                              6,536,499             5,415,358

RESTRICTED CASH                                                                                       296,000               296,000

DEFERRED COSTS                                                                                           --                  23,949

OTHER ASSETS                                                                                           93,993                89,489
                                                                                                 ------------          ------------

             Total assets                                                                        $  7,892,911          $ 11,999,885
                                                                                                 ============          ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                                                            $  1,713,232          $  1,665,030
     Accrued liabilities and other payables                                                         1,814,627             1,254,035
     Deferred revenues                                                                                504,277               137,520
     Current portion of capitalized leases                                                            301,950               285,458
     Current portion of long-term debt                                                                653,450               450,503
                                                                                                 ------------          ------------

             Total current liabilities                                                              4,987,536             3,792,546

CAPITAL LEASE OBLIGATIONS, net of current portion                                                     253,260               408,492
LONG-TERM DEBT, net of current portion                                                              1,099,051               853,997
                                                                                                 ------------          ------------

             Total liabilities                                                                      6,339,847             5,055,035
                                                                                                 ------------          ------------

STOCKHOLDERS' EQUITY
     Preferred stock, $.00025 par value; 5,000,000 shares authorized:
         500,000 shares designated Series A Convertible, with
           225,000 shares issued and outstanding                                                           56                    56
         800,000 shares designated Series B Convertible, with
           688,586 shares issued and outstanding                                                          172                   172
         1,333,333 shares designated Series C Convertible, with
           238,469 shares issued and outstanding at December 31, 2000                                      60                  --
     Common stock, $.00025 par value; 50,000,000 shares
         authorized, 15,674,990 and 15,587,543 shares issued
         and outstanding respectively                                                                   3,919                 3,897
     Additional paid-in capital                                                                    37,762,275            32,162,473
     Accumulated deficit                                                                          (36,213,418)          (25,221,748)
                                                                                                 ------------          ------------

             Total stockholders' equity                                                             1,553,064             6,944,850
                                                                                                 ------------          ------------

             Total liabilities and stockholders' equity                                          $  7,892,911          $ 11,999,885
                                                                                                 ============          ============

<FN>

See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>

                                                                 3


<PAGE>

<TABLE>

                                                        VALUESTAR CORPORATION
                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                                             (Unaudited)
<CAPTION>

                                                                  Three Months Ended                        Six Months Ended
                                                                      December 31,                           December 31,
                                                           --------------------------------        ---------------------------------
                                                               2000                1999                2000                1999
                                                           ------------        ------------        ------------        ------------
<S>                                                        <C>                 <C>                 <C>                 <C>
REVENUES                                                   $    234,491        $    470,003        $    508,238        $  1,192,128
                                                           ------------        ------------        ------------        ------------

OPERATING EXPENSES
     Buyer benefits                                              38,944              31,524             105,522              45,216
     Ratings and content                                        150,600             413,839             323,818             782,424
     Sales and marketing                                      1,615,218             849,325           4,087,621           2,048,113
     Product and content development                          1,782,725             907,611           4,108,630           1,181,480
     General and administrative                                 684,735             351,120           1,361,752             763,707
     Depreciation and amortization                              607,642              79,315           1,176,725             138,787
                                                           ------------        ------------        ------------        ------------

                                                              4,879,864           2,632,734          11,164,068           4,959,727
                                                           ------------        ------------        ------------        ------------

LOSS FROM OPERATIONS                                         (4,645,373)         (2,162,731)        (10,655,830)         (3,767,599)
                                                           ------------        ------------        ------------        ------------

OTHER INCOME (EXPENSE)
     Interest Income                                             31,509              18,410              75,236              25,334
     Interest expense                                           (99,243)           (753,715)           (192,123)           (933,850)
     Miscellaneous                                                 --                  --                   377                (800)
                                                           ------------        ------------        ------------        ------------

                                                                (67,734)           (735,305)           (116,510)           (909,316)
                                                           ------------        ------------        ------------        ------------

NET LOSS                                                   $ (4,713,107)       $ (2,898,036)       $(10,772,340)       $ (4,676,915)
                                                           ============        ============        ============        ============

NET LOSS AVAILABLE TO COMMON
     STOCKHOLDERS                                          $ (6,599,770)       $(11,593,283)       $(14,386,562)       $(13,404,039)
                                                           ============        ============        ============        ============

LOSS PER COMMON SHARE                                      $      (0.42)       $      (1.17)       $      (0.92)       $      (1.39)
                                                           ============        ============        ============        ============

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                                             15,674,990           9,910,757          15,650,644           9,642,447
                                                           ============        ============        ============        ============

<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>

                                                                  4


<PAGE>

<TABLE>

                                                        VALUESTAR CORPORATION
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                             (Unaudited)
<CAPTION>

                                                                                                           Six Months Ended
                                                                                                              December 31,
                                                                                                     2000                  1999
                                                                                                 ------------          ------------
<S>                                                                                              <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                                    $(10,772,340)         $ (4,676,915)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
             Depreciation                                                                           1,176,231               124,959
             Amortization of intangible assets                                                            494                13,828
             Amortization of bond discount                                                             19,905               706,887
             Change in allowance for doubtful accounts                                                 (4,606)              (10,826)
             Accrued interest included in long-term debt                                                 --                  12,224
             Options issued for services                                                                 --                  75,833
             Gain on disposal of assets                                                                (1,898)                 --
         Changes in:
             Receivables                                                                              175,187                91,273
             Inventory                                                                                  8,130                 2,026
             Prepaid expenses                                                                        (113,940)              (12,992)
             Deferred costs                                                                            23,949               (44,967)
             Other assets                                                                              (4,998)              (50,744)
             Accounts payable                                                                          48,202               129,394
             Accrued liabilities and other payables                                                   560,592                88,035
             Deferred revenues                                                                        366,757                 1,325
                                                                                                 ------------          ------------
                Net cash used by operating activities                                              (8,518,335)           (3,550,660)
                                                                                                 ------------          ------------
CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions, net of dispositions                                      (2,295,474)             (451,684)
                                                                                                 ------------          ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of preferred stock                                                          5,330,553             9,935,247
     Proceeds from sale of common stock                                                                50,001             1,170,280
     Proceeds from debt                                                                               732,796               250,000
     Payments on capital leases                                                                      (138,740)              (15,057)
     Payments on debt                                                                                (304,700)              (28,698)
                                                                                                 ------------          ------------
                Net cash provided by financing activities                                           5,669,910            11,311,772
                                                                                                 ------------          ------------

NET INCREASE (DECREASE) IN CASH                                                                    (5,143,899)            7,309,428
CASH, beginning of period                                                                           5,287,385               270,149
                                                                                                 ------------          ------------

CASH, end of period                                                                              $    143,486          $  7,579,577
                                                                                                 ============          ============

SUPPLEMENTAL CASH-FLOW INFORMATION
     Cash paid during the period for:
         Interest                                                                                $    172,217          $    214,739
     Non-cash investing and financing activities:
         Accrued dividends on Series A Preferred Stock                                                 96,260                77,877
         Accrued dividends on Series C Preferred Stock                                                123,070                  --
         Warrants issued in connection with Series B preferred stock                                     --                 400,000
         Equipment acquired under capital leases                                                         --                  69,000
         8% Secured Notes converted to Series B Stock                                                    --               1,000,000
         Shareholder advances converted to Series B Stock                                                --                 250,000
         12% notes converted upon warrant exercise                                                       --                 609,375
         6% Convertible Notes and interest converted to equity                                           --                 546,274

<FN>

See accompanying notes to interim consolidated financial statements

</FN>
</TABLE>
                                                             5


<PAGE>




                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2000

1. OPERATIONS

The Company, a Colorado corporation,  conducts its operations through ValueStar,
Inc.,  a  wholly  owned  subsidiary,  in major  metropolitan  areas  located  in
California, Washington, Texas, Illinois, Georgia, Pennsylvania, and the District
of Columbia.  ValueStar,  Inc. was  incorporated in California in 1991, and is a
provider of branded ratings on local service  businesses.  The Company generates
revenues from research and rating fees and is developing a new commission system
to generate revenues by connecting member service businesses with member buyers.

The  Company's  revenues  have been  primarily  from  rating  and  certification
services.  Rating  services  consist  primarily  of  a  survey  of  a  business'
customers,  verification  of credential  information and the delivery of ratings
reports.  Services associated with certification  include an orientation and the
delivery of certification  materials and manuals.  Sales of marketing  materials
and other  services  are  recognized  as  materials  are shipped or services are
rendered.

In December 1999, in all market areas except  Northern  California,  the Company
changed from a fixed rating and certification fee to a percentage commission fee
based on the value of transactions  between member service  companies and member
buyers.  The Company has also changed its program to provide  benefits to buyers
purchasing from member businesses.  The Company has not completed development of
the systems  required to commence  collection  of  commission  fees and will not
collect fees or incur certain  benefit costs,  which include  loyalty points and
customer  satisfaction  guarantees,  until the systems are  operational.  In the
future the Company  expects  the  majority  of its  revenues to be derived  from
transaction commissions.

Due  to  the  change  in the  Company's  program,  the  Company  will  recognize
commission  revenues  as  reported  and  earned.  Because of the  changes in the
program and method of generating  revenue,  commencing  July 1, 2000 the Company
began recognizing fixed rating and certification  fees on a straight-line  basis
over the term of a participating business license,  generally one year. Costs of
benefits  provided to buyers are  recognized as provided,  with accruals for any
future benefit obligations.

Because of the changes in the Company's  program  certain amounts in the current
period  are not  comparable  to the prior  period  and  certain  amounts  in the
consolidated  interim statements have been reclassified to conform to the fiscal
2001 presentation.

The  Securities  and  Exchange  Commission's  staff (the  "Staff")  issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"),  in  December  1999,   which  provides   guidance  on  the   recognition,
presentation  and  disclosure  of revenue in financial  statements of all public
companies. The provisions of SAB 101 are effective for transactions beginning in
the  Company's  current  fiscal  year.  The Company  believes it is  recognizing
revenues within the guidance provided by SAB 101.

2. STATEMENT PRESENTATION AND CHANGE IN ACCOUNTING PRINCIPLES

The accompanying  unaudited interim  financial  statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information.  They do not  include all  information  and  footnotes  required by
generally accepted accounting  principles.  The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended June 30, 2000.

During the second fiscal quarter, the Company adopted Emerging Issues Task Force
Issue No. 00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities  with  Beneficial  Conversion  Features  or  Contingently  Adjustable
Conversion Ratios, to Certain Convertible  Instruments",  which is effective for
all such  instruments.  This issue clarifies the accounting for instruments with
beneficial conversion features or contingently adjustable conversion ratios. The
Company has modified  the  previous  calculation  of the  beneficial  conversion
features associated with previously issued convertible preferred stock. Based on
further clarification, the beneficial conversion feature should be calculated by
allocating the proceeds received in each financing to the convertible instrument
and to any detachable  warrants  included in the transaction,  and measuring the
intrinsic value based on the effective  conversion  price based on the allocated
proceeds.  The  previous  calculation  was based on a  comparison  of the stated
conversion  price  in the  terms  of the  instrument  to the  fair  value of the
issuer's  common stock at the  commitment  date.  The Company has  presented the
effect of adoption as a cumulative change in


                                        6
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                December 31, 2000

2. STATEMENT PRESENTATION (Cont'd)

accounting principles as allowed for in EITF No. 00-27. Accordingly, the Company
has recognized an additional  $1,715,000 in imputed deemed  dividends based on a
discount at issuance of previously issued convertible  preferred stock. See Note
9 below.

The  Company  has  experienced  recurring  losses  and  the  use  of  cash  from
operations.  A substantial portion of the losses is attributable to research and
development  of the Company's  transaction  system,  and marketing and promotion
costs  associated  with  increasing  consumers'  awareness  of  the  meaning  of
ValueStar; marketing to businesses the advantages of becoming ValueStar members;
and  discounting  certain  fees to  encourage  businesses  to  become  ValueStar
members.

It is management's plan to seek additional  financing through private placements
as well as other means.  Management  believes,  but there can be no  assurances,
that the  additional  capital it is seeking  will be available in the future and
will enable the Company to achieve  sales  growth  and,  ultimately,  profitable
operations.

The  consolidated  interim  financial  statements  have been prepared on a going
concern basis,  which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business.  Cash flows from future operations
may not be sufficient to enable the Company to meet its obligations,  and market
conditions  and the  Company's  financial  position  may  inhibit its ability to
achieve profitable operations.

In the opinion of  management,  the  interim  financial  statements  reflect all
adjustments of a normal  recurring  nature necessary for a fair statement of the
results  for  interim  periods.  Operating  results  for the three and six month
periods ended  December 31, 2000 are not  necessarily  indicative of the results
that may be expected for the year ending June 30, 2001.

3. RESEARCH AND DEVELOPMENT COSTS

Research and development expenses are charged to operations as incurred. Certain
internal  software  and web site  development  costs,  which are  related to the
Company's new revenue model, have been capitalized as prescribed by the American
Institute  of  Certified  Public   Accountant's   Statement  of  Position  98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal  Use," and the  Emerging  Issues  Task  Force  consensus  at EITF 00-2,
"Accounting for Web Site Development Costs."

4. INVENTORY

Inventory  consists  of  promotional  materials  for  sale to  ValueStar  member
businesses and direct advertising  material,  and is stated at the lower of cost
(first-in, first-out method) or market.

                                       7
<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2000
<TABLE>

5. LONG-TERM DEBT
Long-term debt at December 31, 2000 consists of the following:
<CAPTION>
<S>                                                                                               <C>
15%  Equipment  Note due in monthly  installments  of principal  and interest of
$39,023  through March 2003,  with a balloon payment of $191,810 due on April 1,
2003; secured by equipment; net of unamortized note discount of  $86,250                          $   939,516

15%  Equipment  Note due in monthly  installments  of principal  and interest of
$22,363 through July 2003, with a balloon payment of $109,919 due on
September 1, 2003; secured by equipment                                                               646,027

15% Equipment Note due to a company affiliated with a stockholder and
director; due in monthly installments of principal and interest of $5,500 to
maturity in June 2002; secured by equipment and software                                               45,144

12% Notes;  interest is paid monthly,  with a balloon payment due in March 2001;
net of unamortized note discount of $114; unsecured; $50,000 of the
notes is due a relative of a stockholder and director                                                  68,750

15% Equipment Note due to a company affiliated with a stockholder and
director; due in monthly installments of principal and interest of $2,022 to
maturity in August 2003; secured by equipment and software                                             53,064
                                                                                                 ------------
                                                                                                    1,752,501
Less current portion                                                                                  653,450
                                                                                                 ------------
                                                                                                   $1,099,051
                                                                                                 ============
</TABLE>

<TABLE>
6. STOCKHOLDERS' EQUITY

The following table summarizes equity  transactions  during the six months ended
December 31, 2000:
<CAPTION>


                                          Preferred Stock            Common Stock         Additional
                                          ---------------            ------------          Paid-In      Accumulated
                                          Shares    Amount        Shares       Amount      Capital         Deficit         Total
                                          ------    ------        ------       ------      -------         -------         -----
<S>                                    <C>         <C>         <C>          <C>         <C>            <C>             <C>
Balance July 1, 2000                     913,586   $   228     15,587,543   $   3,897   $ 32,162,473   $(25,221,748)   $  6,944,850
Issuance of Series C Convertible
  Preferred Stock, net of issuance
  costs of $35,000                       238,469        60           --          --        5,330,493           --         5,330,553
Accrued 8% dividends on Series A
  and Series C Preferred Stock              --        --             --          --          219,330       (219,330)           --
Stock issued on exercise of options         --        --           87,447          22         49,979                         50,001
Net loss                                    --        --             --          --             --      (10,772,340)    (10,772,340)
                                      ----------   -------   ------------   ---------   ------------   ------------    ------------
Balance December 31, 2000              1,152,055   $   288     15,674,990   $   3,919   $ 37,762,275   $(36,213,418)   $  1,553,064
                                      ==========   =======   ============   =========   ============   ============    ============

</TABLE>


                                                                      8
<PAGE>






                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2000

6. STOCKHOLDERS' EQUITY (Cont'd)

During the first six months of fiscal 2001 the Company  issued 238,469 shares of
Series C Convertible  Preferred  Stock, par value $.00025 ("Series C Stock") for
cash of $22.50 per share.  Cumulative dividends of 8% per annum are payable when
and if declared by the Board of Directors or upon liquidation or conversion. The
dollar amount of Series C Stock is convertible  into shares of common stock at a
conversion  price  equal  to  $2.25  per  common  share,  and are  automatically
converted on the  occurrence of certain  events.  The Series C Stock has certain
antidilution  and  registration  rights,  has a  liquidation  preference,  after
payment of the  preferential  amount  for the  Series A and  Series B  preferred
stock, of $22.50 per share plus accrued and unpaid dividends. The Series C Stock
has  voting  rights  equal to the  number  of  common  shares  into  which it is
convertible. In addition, as long as there are at least 200,000 shares of Series
C Stock  outstanding,  then the holders are  entitled to elect one member of the
Company's Board of Directors.

In  connection  with the sale of the Series C Stock,  the  Company  granted  the
purchasers  warrants  exercisable  at  $2.25  per  share  into an  aggregate  of
1,192,345 shares of common stock (" C-Warrants").  These C-Warrants have a three
year term and are  callable  by the Company if the common  stock  price  exceeds
$6.00 per share, subject to certain additional conditions.

The  Company  has agreed to issue to an outside  financial  advisor  warrants to
purchase an  aggregate  of  approximately  102,937  shares of common stock at an
exercise  price of $2.25 per share with a five year term in connection  with the
sale of the Series C Stock.

At December 31, 2000 the Company's Series A, B and C convertible preferred stock
were convertible into approximately 10.6 million shares of common stock.

Subsequent to December 31, 2000, on January 4, 2001, the Company  authorized the
issuance of up to 500,000 shares of Series CC Convertible  Preferred  Stock, par
value  $.00025  ("Series  CC Stock")  for $45.00 per share  payable in cash,  by
cancellation  of debt,  by agreement to perform  services or in exchange for two
shares of Series C Stock for each share of Series CC Stock. The dollar amount of
Series CC Stock is convertible into shares of common stock at a conversion price
equal  to  $0.75  per  common  share,  and are  automatically  converted  on the
occurrence  of  certain  events.  Purchasers  of Series  CC Stock are  granted a
warrant to purchase  30 shares of common  stock  exercisable  at $0.75 per share
("CC-Warrant")  for each  share of  Series CC Stock.  Those  persons  exchanging
Series C Stock must  surrender  the related  C-Warrant in exchange for Series CC
Stock and the CC-Warrant.

Through the date of this report the Company had sold 64,922 additional shares of
Series CC Stock and  issued  CC-Warrants  on  1,947,660  common  shares for cash
proceeds of $1,421,320  and had  exchanged  76,092 shares of Series CC Stock and
issued  CC-Warrants  on 2,282,760  common shares for 152,187  shares of Series C
Stock and related C-Warrants.  An aggregate of 108,772 shares of Series CC Stock
and related CC-Warrants sold and/or exchanged were issued to entities affiliated
with directors of the Company.


                                       9
<PAGE>



                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2000

<TABLE>
7. STOCK OPTIONS AND WARRANTS

The following table summarizes option activity for the period ended December 31,
2000:
<CAPTION>

                                                                         Weighted Average          Weighted
                                                     Shares               Exercise Price         Average Life
                                                     ------               --------------         ------------
<S>                                                <C>                        <C>                     <C>
Outstanding July 1, 2000                           2,233,938                  $4.19                   3.75
Granted                                              901,000                  $3.49
Canceled                                            (538,812)                 $6.82
Exercised                                            (90,001)                 $0.64
Expired                                               (5,000)                 $0.50
                                                     -------
Outstanding December 31, 2000                      2,501,125                  $3.55                   3.80
                                                   =========
Exercisable at December 31, 2000                     986,594                  $2.69                   3.12
                                                     =======
</TABLE>

<TABLE>

At  December  31, 2000 the Company had the  following  stock  purchase  warrants
outstanding each exercisable into one common share:
<CAPTION>

                           Number                    Exercise Price             Expiration Date
                           ------                    --------------             ---------------
<S>                        <C>                           <C>                    <C>
                              25,000                      $1.25                 March 2001
                             187,500 (1)                  $1.25                 September 2002
                              20,000 (1)                  $1.25                 December 2002
                              66,300 (2)                  $5.85                 March 2003
                              64,713 (2)                  $5.85                 April 2003
                              30,000                      $5.85                 April 2005
                              50,000                     $10.00                 April 2003
                              12,500 (3)                  $2.00                 April 2003
                              50,000                      $1.75                 May 2003
                           1,192,345 (4)                  $2.25                 September 2003
                             350,000 (1)                  $1.00                 December 2003
                             152,728 (1)                  $1.375                March 2004
                              30,000 (1)                  $1.50                 March 2004
                              75,000                      $2.50                 December 2004
                              25,852 (5)                  $5.42                 April 2005
                        ----------------
                           2,331,938
<FN>

(1)      These warrants are callable at a stock price of $5.00 per share subject to certain conditions.
(2)      These warrants are callable at a stock price of $5.00 per share subject to certain conditions.
(3)      These warrants are callable at a stock price of $4.50 per share subject to certain conditions.
(4)      These warrants are callable at a stock price of $6.00 per share subject to certain conditions.
         These C-Warrants may be exchanged for CC-Warrants as described in Note 6 above.
(5)      These warrants have certain antidilution adjustments subject to certain conditions.
</FN>
</TABLE>


8. INCOME TAXES

At December 31, 2000 a valuation  allowance  has been provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred  tax asset will not be  realized.  The Company has for federal
income tax purposes net operating  loss  carryforwards  of  approximately  $26.5
million  which  expire  through  2020 of which  certain  amounts  are subject to
limitations  under the Internal  Revenue Code,  as amended.  The Company has for
state income tax purposes net operating loss  carryforwards of approximately $13
million  which  expire  through  2005 of which  certain  amounts  are subject to
limitations under the laws of California.




                                       10
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2000

9. LOSS PER COMMON SHARE

Loss per common share is computed  using the weighted  average  number of common
shares outstanding.  Since a loss from operations exists, a diluted earnings per
common  share  number is not  presented  because the  inclusion  of common stock
equivalents in the computation  would be antidilutive.  Common stock equivalents
associated  with  warrants,   stock  options  and  preferred  stock,  which  are
exercisable into  approximately  15.4 million shares of common stock at December
31, 2000 could potentially dilute earnings per share in future periods.

<TABLE>
The  provisions  of the Series A and Series C Stock  provide for  cumulative  8%
dividends and provide, upon conversion,  a similar accretion whether or not such
dividends have been declared by the Board of Directors.  These amounts  increase
the net loss available to common  stockholders.  Net loss attributable to common
stockholders  was also  increased by imputed  deemed  dividends  from a discount
provision  included  in the  Series C Stock,  which  provided  for an  effective
conversion  price,  after  allocating a fair value of the proceeds to detachable
warrants,  less  than the  market  price on the date of  issuance.  The  imputed
non-cash  dividends are not a contractual  obligation on the part of the Company
to pay such dividend.  Net loss available to common  stockholders is computed as
follows:
<CAPTION>

                                                                  Three Months Ended             Six Months Ended
                                                                       December 31,                   December 31,
                                                                   2000          1999            2000            1999
                                                                   ----          ----            ----            ----
<S>                                                         <C>              <C>              <C>             <C>
Net loss                                                    $(4,713,107)     $(2,898,036)     $(10,772,340)   $(4,676,915)
Imputed deemed dividend on Series C Stock based on
  discount at issuance                                          (17,013)           -            (1,679,892)         -
Imputed deemed dividend on Series B Stock based on
  discount at issuance                                            -           (8,650,247)            -         (8,650,247
Accrued dividends on Series A and Series C Stock               (154,650)         (45,000)         (219,330)       (77,877)
                                                            -----------       -----------     ------------    -----------
Net loss available to common stockholders before
  cumulative effect of a change in accounting principles    $(4,884,770)    $(11,593,283)     $(12,671,562)  $(13,404,039)
Cumulative effect of a change in accounting
  principles (note 2)                                        (1,715,000)           -            (1,715,000)          -
                                                             ----------- ---------------        --------------------------
Net loss available to common stockholders                   $(6,599,770)    $(11,593,283)     $(14,386,562)  $(13,404,039)
                                                            ============    =============     =============  =============
</TABLE>

10. SUBSEQUENT EVENT

Subsequent to December 31, 2000 the Company  authorized and sold Series CC Stock
as  described  in Note 6.  Purchasers  included  First  Data  Merchant  Services
Corporation  (FDMS), a subsidiary of First Data Corporation  ("FDC"). On January
16,  2001 FDMS made a  strategic  investment  of $2 million  consisting  of $0.5
million in cash and $1.5 million in a binding and irrevocable agreement to build
and maintain a transaction  engine on behalf of ValueStar.  At December 31, 2000
FDMS had invested $750,000 into this transaction engine and this amount has been
capitalized and is reflected in Accrued  Liabilities on the balance sheet.  Once
completed,  this asset will be depreciated over the life of the contract through
September  2005.  The  Company  has  two  existing  strategic   agreements  with
subsidiaries of FDC. The Company has also entered into an additional  investment
and marketing Agreement with FDMS providing: (a) an option to FDMS or affiliates
to purchase for cash up to $8 million of additional  Series CC Stock and related
warrants until March 31, 2001,  (b) certain  marketing  exclusivity  wherein the
Company will not sign certain  marketing  agreements with non-FDMS and affiliate
customer banks for six months, and (c) so long as FDC owns 50% of the securities
purchased, FDMS shall have the right to designate a nominee to be elected to the
Company's board of directors.


                                       11
<PAGE>


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

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE  FINANCIAL  PERFORMANCE.  ACTUAL RESULTS MAY DIFFER  MATERIALLY
FROM THOSE CURRENTLY  ANTICIPATED AND FROM HISTORICAL  RESULTS  DEPENDING UPON A
VARIETY OF FACTORS,  INCLUDING THOSE DESCRIBED BELOW AND IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2000.

Overview

We are a provider of branded rating content on local service  businesses.  As an
infomediary we enhance online and offline commerce between buyers and sellers of
services by offering ratings enabling buyers to quickly determine the best local
service  providers.  Our ValueStar  ratings are provided on the Internet at , on
other partner Internet sites, in our ValueStar Report and through  promotions by
rated businesses.

Capitalizing on our expertise in customer  satisfaction research and ratings, we
have been  developing a new program  consisting  of (a)  developing  proprietary
content and ratings on a large number of service providers in the United States,
and (b)  developing an  Internet-based  system that generates  commissions  from
transactions driven by the content. The content includes credential  information
such as licensing,  insurance,  legal and finance,  company profiles and related
information.   During  fiscal  year  2000  we  expended  significant   resources
(approximately  $5.8  million)  to  generate  database  information  and develop
computer and related  systems for this new program.  During the first six months
of fiscal 2001 we expended  approximately $4.1 million towards these activities.
The goal of our new  program is to position  ValueStar  as the  dominant  rating
system for local  service  providers  and operate a  commission  based system to
match buyers and sellers of local services. Our services are free to consumers.

Our plan is to have the systems to monitor,  record and collect on a transaction
basis during the first quarter of calendar  year 2001 (third  fiscal  quarter of
2001).  However,  we have experienced  delays in the past and unknown  technical
issues and  barriers  could arise that could  further  delay  implementation  or
preclude  us from  executing  this plan.  In such an event we may be required to
revert to a fixed fee basis.  Due to the change in our  program and until we can
recognize  sufficient  commission  revenues  we expect  comparative  revenues in
current periods to be less than prior periods.

In addition to creating  proprietary content on America's service companies,  we
are also developing strategic  relationships to provide data and to increase the
distribution of ValueStar's branded ratings:

o        In  January  2000 we  entered  into a  strategic  data  agreement  with
         Experian,  a provider of global  information  solutions.  This alliance
         provides  financial and legal status on local  service  businesses as a
         part of our content  development.  We provide Experian with the results
         of our branded  proprietary  research on local service  businesses  for
         distribution to their clients.

o        In April 2000 we entered into an alliance  with  Netcentives  to manage
         our  ValueStar  Rating  Points  award  program.   As  a  part  of  this
         relationship,   we  expect  the  four  million   consumer   members  of
         Netcentives  shopping  network,  ClickRewards(TM),  will  become  trial
         ValueStar members for opt-in activation.

o        Commencing in May 2000 we began to form distribution  partnerships with
         Internet portals and service referral  companies to broadly  distribute
         our ratings. Our roster of distribution  partners includes home service
         portal Ourhouse.com,  technology provider NextDoor Networks;  and other
         vertical portals such as eAttorney.com and rentals.com.

o        In June 2000 we entered into a database agreement with InfoUSA, Inc. to
         provide certain raw database information.

o        We are developing Internet-based software to match transactions between
         licensed  businesses and registered  member buyers. We are working with
         several processors of credit card transactions to support our program.

o        In September  2000 we announced a pilot  program for the San  Francisco
         Bay area credit card holders of First National Bank of Omaha.

o        In November 2000 we announced  two  strategic  and  marketing  alliance
         agreements  with global  electronic  commerce and payments leader First
         Data Corp. First Data is marketing the ValueStar Customer-Rated program
         to merchants through participating  clients, while marketing cardholder
         benefits  through  participating  issuer  clients.  First Data has also
         agreed to develop and operate a matching  system to match  transactions
         between   registered  buyers  and  licensed   ValueStar  rated  service
         businesses.

o        In January 2001 we entered into a ratings  distribution  agreement with
         BellSouth RealPages.com.  ValueStar expects to be a primary third-party
         content  partner  for  RealPages.com  to  supplement  service  business
         listings.

                                       12
<PAGE>

We have a four-person  business  development team to develop other alliances and
relationships to expand our content, add highly rated service providers,  extend
our brand and  distribute  our ratings to  consumers  and other  buyers of local
services.

Changing Revenue Model

During  fiscal 2000 our revenues  were  generated  primarily  from  research and
rating  fees  paid  by new  and  renewal  businesses,  certification  fees  from
qualified  applicants and renewals and from the sale of information products and
services.  In  December  1999,  in all eight  current  markets  except  Northern
California, we changed from a fixed rating and certification fee to a percentage
commission fee based on the value of transactions between buyers registered with
us and  participating  companies  rated and licensed  with us. We are  currently
developing the systems to register buyers and monitor  transactions.  Until this
system is operating,  we do not anticipate any  significant  revenues from these
markets.  We will continue to incur  selling  costs and rating costs  associated
with enrolling  participating service businesses in our program. We believe this
investment  will accelerate the launch of our new program by allowing us to have
a number of rated and licensed service companies already enrolled by the time we
launch our transaction fee system.  We continue to charge a fixed  certification
fee in  Northern  California  but expect to also  change  this market to the new
program at a later date, not yet determined.

At December 31, 2000 we had  approximately  7,260  licensed  service  businesses
compared to approximately 1,755 at December 31, 1999. We expect these businesses
and new  businesses  being  enrolled  to  produce  commission  revenue in future
periods.  In our new business  model our business will be predicated on creating
and  maintaining a growing number of registered  buyers and sellers  transacting
commerce in local  services.  In the future we expect a majority of our revenues
to be derived from commissions from transactions  between  registered buyers and
sellers of local  services.  Renewals of businesses from year to year will still
impact future  operations as we expend funds on enrolling new  businesses in our
licensing program.

During  the first six  months of fiscal  2001 we  incurred  product,  system and
database  development  costs  consisting  of (a)  capturing  and  verifying  new
credential data on a large number of service companies in the United States (our
proprietary  content),  (b)  testing  systems to store,  monitor and update this
content,  (c)  developing  and  testing  systems  to  register  buyers  and  (d)
developing  and testing  systems to monitor and  generate  commissions  based on
transactions  between  buyers and  sellers of local  services.  We expect  these
product,  system and content development costs to reduce in the third quarter as
we expect to begin operating our new commission program.

Our staffing has varied  significantly during the last year as we have developed
new  content  and  systems.  We have in the past and expect to  continue  to use
outside  contractors for certain  services.  We reduced our staffing from 140 in
December 2000 to  approximately 85 at the date of this report in connection with
the substantial  completion of the development activities listed above. This has
reduced  monthly  operating  costs as we  streamline  operations  to  focus  our
resources on our First Data strategic relationship.  After our content databases
are developed, we will incur costs to maintain and update the data on an ongoing
basis. Exact amounts and timing of these expenditures and costs are subject to a
variety of factors and are not currently determinable by management.

Future  operations  will be impacted by changes in cost  structure and elections
regarding new product  development,  advertising,  promotions  and growth rates.
Rapid growth, due to the nature of our operations,  is expected to contribute to
continued operating losses in the foreseeable future.

During the first  quarter we refined  our  measurement  criteria  for  ValueStar
Verified or ValueStar  Top-Rated  businesses  listed on our Web site. At January
31,  2001 we  listed  approximately  720,000  ValueStar  Verified  or  ValueStar
Top-Rated businesses and had licensed approximately 7,300 of these businesses as
members in either our commission program or our fixed-fee license program.

Revenue and Cost Recognition

During fiscal 2000 a majority of our revenues were from fixed certification fees
ranging from $995 to approximately  $2,000 depending on business size. In fiscal
2000 these fees were recognized as revenue when material  services or conditions
relating  to the  certification  had been  performed.  Due to the  change in our
product  offering and the benefits to be supplied to  consumers,  we changed the
method of recording fixed fee revenue effective July 1, 2000. We recognize fixed
fees on a straight-line basis over the term of a participating business license,
generally  one year.  We will  recognize




                                       13
<PAGE>

commission revenues as reported and earned. Costs of benefits provided to buyers
are recognized as provided, with accruals for any future benefit obligations.

In late  fiscal 2001 we expect a growing  amount of revenues to be derived  from
commissions from  transactions  between  registered  buyers and sellers of local
services.  In certain  industries where collection of commissions is not allowed
and in other  instances we expect to obtain a fixed  annual  license fee. We may
provide  payment terms and discounts from time to time. We have also changed our
program  offering by providing a package of buyer  benefits  applicable  for the
term of the business license.

We expense rating and content  maintenance costs as incurred.  Costs incurred in
printing and distributing our ValueStar Report publication to buyers,  currently
published  in January and July,  and any related  revenues are  recognized  upon
publication.

The  Securities  and  Exchange  Commission's  staff (the  "Staff")  issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"),  in  December  1999,   which  provides   guidance  on  the   recognition,
presentation  and  disclosure  of revenue in financial  statements of all public
companies. The provisions of SAB 101 are effective for transactions beginning in
our current  fiscal  year.  We believe we are  recognizing  revenues  within the
guidance provided by SAB 101.

Results of Operations

Revenues. Revenues consist of rating and certification fees from new and renewal
business  applicants,  sale  proceeds  from  information  materials  and premium
listings  in our  ValueStar  Report  and on our Web site,  and  other  ancillary
revenues.  We  reported  total  revenues of  $508,238  for the six months  ended
December 31, 2000 compared to  $1,192,128  for the first six months of the prior
fiscal year. The decrease in revenues is due to the commencement in July 2000 of
recognizing  fixed fee  revenues on a  straight-line  basis over the term of the
annual license corresponding to the term we expect to provide benefits to buyers
transacting  with a  business.  This  change is due to the change in our product
offering and the change in benefits to be supplied to consumers.  If the Company
had  recognized  revenues in the prior year's first six months using the current
fiscal year  method,  we would have  reported  total  revenues of  approximately
$525,000.  During the first six months of the current fiscal year, certification
fees  accounted  for 44% of revenue,  compared to 79% for the prior year period.
Revenues for the three months ended  December 31, 2000 were $234,491  comparable
to the $470,003  reported in the comparable prior period.  In fiscal 2001 we are
earning fixed new and renewal certification fees from only one market with seven
markets converted to the commission program.

We  reported  approximately  $85,000 of revenue  from  premium  listings  in our
ValueStar  Report and on our Web site,  a decrease of $19,000  from the $104,000
reported in the first six months of the prior year. The decrease  results from a
shift in focus  from  licensing  merchants  on a fixed  fee  basis to  licensing
merchants into our commission based systems. We expect ValueStar Report revenues
and Web site  revenues  may  increase in future  periods  when we have an active
transaction-based relationship with sellers.

Our revenues can vary from quarter to quarter due to (a)  management's  decision
on the mix of sales  effort  between  enrolling  local  service  providers  into
commission  based vs. fixed fee  programs,  (b) the impact of  distributing  the
semi-annual  ValueStar Report to buyers,  (c) seasonality,  (d) effectiveness of
sales methods and promotions, (e) levels of expenditures targeted at prospective
businesses,  (f) the numbers of licensees up for renewal, (g) renewal rates, (h)
pricing  policies,  (i) timing of completion of ratings,  and (j) other factors,
many of which are  beyond  our  control.  The  timing of  implementation  of our
commission based processing will materially impact future revenues. There can be
no  assurance  we can  successfully  implement  this program as scheduled in the
third fiscal quarter of 2001.  Unknown technical or business issues and barriers
could arise that could delay  implementation  or preclude us from  executing our
commission program. In such an event we may be required to revert to a fixed fee
basis.

Buyer Benefits. Buyer benefits consist of direct product costs for materials and
information provided to buyers, customer service costs for buyers, and in future
periods the costs of loyalty points and customer satisfaction guarantees.  These
costs of $105,522  represented 21% of sales during the six months ended December
31, 2000.  This is an increase from $45,216 or 4% of revenues for the prior year
comparable period, although the percentage is not directly comparable due to the
change in revenue  reporting  outlined above.  Buyer customer service costs were
$74,500. This department did not exist in the prior period.


                                       14
<PAGE>

Ratings and Content. Ratings and content costs consist primarily of the costs of
rating service  sellers,  ongoing content and technology  costs  associated with
maintaining our databases and supporting our  operations.  In future quarters we
expect to incur certain transaction and matching fees with third parties. Rating
and content costs were  $323,818,  or 64% of revenues,  for the six month period
ended December 31, 2000,  compared to $782,424 and 66% of revenues for the prior
comparable  period.  The  decrease is due  primarily to a reduction in fixed fee
ratings and  conversion  to the new program,  still under  development.  Ratings
costs  totaled  $150,600 for the three months ended  December 31, 2000 or 65% of
revenues  compared to $413,839 and 88% of revenues for the second quarter of the
prior fiscal year.

Selling and Marketing  Costs.  Selling and marketing costs consist  primarily of
personnel costs for outside sales consultants interacting with licensed sellers,
an inside customer  service team for licensed  sellers,  direct  marketing costs
including  lead  generation,  telemarketing  costs,  costs  associated  with the
ValueStar  Report and marketing,  advertising and promotion  expense.  Sales and
marketing  costs for the six months ended  December 31, 2000,  were  $4,087,621,
compared to  $2,048,113  for the first six months of the prior  year.  Sales and
marketing costs totaled  $1,615,218 for the second fiscal quarter of the current
year, an increase over the $849,325 reported for the prior years second quarter.

Sales related expenses totaled  $1,629,587  compared to $1,268,693 for the prior
year's  comparable   six-month  period.   The  large  increase  is  due  to  the
commencement  in December  1999 of enrolling  local service  providers  into our
commission based program described  earlier.  Selling costs totaled $680,062 for
the three  months ended  December  31, 2000  compared to $619,973 for the second
quarter of the prior year. We expect selling costs will vary in future  periods,
resulting from levels of future revenues, variances in renewal rates, the effect
of new  sales  promotions  and costs  thereof,  timing of  research  and  rating
completions,  level and  percentage  of fixed selling  costs,  the number of new
market regions  opened,  the mix of sales between fixed fee  certifications  and
commission based certifications and other factors, some beyond our control.

Marketing and promotion expenses related expenses  aggregated  $2,458,033 during
the first six months of fiscal 2001,  compared to $779,420 for the prior period.
During  the  period,  we  expended  $278,000  on paid  advertising  targeted  at
expanding  consumer  awareness  of  ValueStar  Certified.  Paid  advertising  of
$316,000  was  employed in the prior  year's  comparable  period.  Printing  and
distribution  costs for the ValueStar  Report increased by $26,000 as we printed
and distributed more copies with additional pages.  During the six month period,
we expended  $363,000 on  promotions  compared to $131,000  for the prior year's
comparable period with the increase due to a significant  increase in the number
of promotions in the period. We spent approximately  $370,000 on agency fees and
market research in the current  six-month period with no comparable  expenses in
the prior  comparable  quarter.  Expenses  related to wages and  consultants  in
marketing were  $1,248,000 in the current six months compared to $138,000 in the
prior  year's  six month  period  with the large  increase  due to the hiring of
executives  and  increased  staff  in the  marketing,  product  development  and
business development departments. Marketing costs totaled $935,156 for the three
months ended  December 31, 2000  compared to $229,352 for the second  quarter of
the prior year.

Marketing and promotion expenses are subject to significant variability based on
decisions  regarding  paid  advertising,  public  relations and market and brand
awareness efforts. We anticipate continuing to make significant  expenditures on
marketing  and  promotion  efforts  to  support  a  growing  business  base  but
anticipate  these  costs will  decrease as an annual  percentage  of revenues as
revenues grow.  However,  amounts and  percentages on a quarterly basis may vary
significantly.

Product and Content  Development  Costs.  Product and content  development costs
consist  primarily  of  expenses  associated  with the design,  development  and
testing of our  expanded  Internet  initiative  using  existing and new content.
These costs include  development of our website and the  associated  back office
solutions,  developing our new  proprietary  ratings content for our website and
wages in our  technology  department  associated  with new  product  and content
development.  During  the  six  months  ended  December  31,  2000  we  expended
$4,108,630 on new program  development.  This compares to $1,181,480  during the
same period last year.  The major  component of product  development  costs were
compensation   and  related   costs  of   $2,530,000,   partner   and   alliance
implementation  costs of $400,000 and expenses  related to the  gathering of new
content of  $173,000.  During the first six months of fiscal  2001 we  allocated
$925,000 of general and administrative  costs to product and content development
to reflect the percentage of product and content  development  expenses relative
to overall expenses.



                                       15
<PAGE>

We have  capitalized an additional  $739,000 of product and content  development
costs as website  development  and  software  that are  specifically  related to
internal software development.  The Company capitalized  $1,001,000 in the prior
fiscal year. The Company will begin depreciation of this asset upon commencement
of tracking  transactions  between rating  partners and local service  providers
over a period not to exceed three years.

General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
and executive  management  activities,  including  legal,  accounting  and other
professional fees.  General and administrative  expenses were $1,361,752 for the
six months  ended  December  31,  2000,  compared to $763,707 for the prior year
comparable  period,  an  increase of  $548,045.  The major  increases  include a
$740,000  increase in  compensation  and benefits due primarily to the increased
number of executive,  administrative  and finance  personnel added in connection
with an  expansion  of the  employee  base;  a $75,000  increase  in travel  and
entertainment costs, a $446,000 increase in occupancy and telephone costs due to
additional  personnel and expanded office  facilities and a $99,000  increase in
legal and accounting  expense due to expanded  operations and a $27,000 increase
in reserve for doubtful  accounts due to  conversion  of markets  outside of San
Francisco to our commission based program.  General and administrative  costs in
the second  quarter  were  $684,735,  an increase  from  $351,120 for the second
quarter  of  the  prior   year.   Management   anticipates   that   general  and
administrative  costs  will  continue  to  exceed  prior  period  levels  due to
increased  personnel  added to support  growth and increased  general  computer,
operating, occupancy and corporate costs.

Depreciation  and  Amortization.  Depreciation  and  amortization  expenses were
$1,176,725 for the six months ended December 31, 2000,  compared to $138,787 for
the  prior  year  period.  The  large  increase  is due to  the  acquisition  of
technology equipment and software infrastructure to support an expanded employee
base and our new program, our web site and various internal databases.

Interest and Other  Expenses.  We incurred  interest  expense for the six months
ended  December  31,  2000  of  $192,123  that  included   $19,905  of  non-cash
amortization  of bond  discount.  Interest for the prior  comparable  period was
$933,850,  of which $706,887 was non-cash  amortization  of bond  discount.  The
decrease is due to conversion of senior and subordinated debt into equity in the
prior fiscal year. The Company generated interest income of $75,236 in the first
six months of fiscal 2001 compared to $25,334 in the comparable prior period.

Net Loss. We had a net loss of $10,772,340 for the six months ended December 31,
2000,  compared to a loss of  $4,676,915  for the six months ended  December 31,
1999. Our increased loss is attributable to (a) increased  selling and marketing
costs  incurred  related to enrolling  larger  numbers of service  businesses in
anticipation  of  launching  our  commission  program,  (b)  product and content
development  costs associated with developing our commission based program,  and
(c)  increased  general and  administrative  costs  associated  with  additional
management and support for expanded  operations.  We anticipate we will continue
to  experience  operating  losses  until we  achieve  a  combination  of a fully
functional commission program and a critical mass of buying and selling members.
Future quarterly results will be greatly impacted by future decisions  regarding
new  markets,   advertising  and  promotion   expenditures   and  growth  rates.
Achievement of positive  operating  results will require that we build a working
commission  program and that we obtain a  sufficient  base of buying and selling
members to support our operating and corporate costs.  There can be no assurance
we can successfully  build a transaction  program,  sustain sufficient buyer and
seller member rates or achieve a profitable base of operations.

The net loss  available to common  stockholders  includes an increase in the net
loss for the six months ended December 31, 2000 due to the beneficial conversion
feature of the Series C preferred  stock issued during the period.  Net loss was
increased by $1,679,892 for this one-time  non-cash imputed charge and increased
by $219,330  for non-cash  accrued  dividends on Series A and Series C preferred
stock. In addition,  in the second quarter the Company  recognized an additional
$1,715,000  in imputed  deemed  dividends  based on a discount  at  issuance  of
previously  issued  Series  C  preferred  stock  due to a change  in  accounting
principle  related to the fair value of warrants as more fully described in Note
2 to the interim  statements above. These non-cash imputed amounts had no effect
on our financial position.

Liquidity and Capital Resources

Since we commenced  operations,  we have had significant negative cash flow from
operating  activities.  Our negative  cash flow from  operating  activities  was
$9,268,335 for the six months ending December 31, 2000. At December 31, 2000, we
had a working capital deficit of $3,271,117, including $653,450 representing the
current portion of long-term debt and $301,950  representing the current portion
of capitalized  leases. For the six months ended December 31, 2000, our negative
cash flow from operating activities was due primarily to our continued operating
losses, selling costs associated with enrolling local service companies into our
commission  based  program  with  no  immediate  revenue,  product  and  content
development  costs and  addition of new  executive  management.  At December 31,
2000, our net accounts receivables were $283,652, representing approximately 100
days of revenues and an annualized  turnover ratio of  approximately  3.7 times.


                                       16
<PAGE>

This compares  unfavorably to  approximately 50 days of revenues and turnover of
approximately  7.2 times at December 31, 1999. The significant  change is due to
the change in the way we  recognize  revenues.  The Company  bills fixed fees in
full at the time the contract  starts and extends terms  throughout the contract
period.  As fixed fee  revenue  recognition  builds  over the course of the next
twelve  months,  we expect ratios  should return to past levels.  Please see our
discussion  of the change in revenue  recognition  practices  under the  section
Revenue and Cost Recognition  above for further  information on this. We believe
that 60 to 90 days revenues in receivables is reasonable  based on the nature of
our business and the terms we provide  licensees.  At December 31, 2000, we have
not experienced any significant accounts receivable recoverability problems. Due
to our conversion of markets  outside of the San Francisco Bay Area from a fixed
fee to a  commission-based  program,  we have increased our reserve for doubtful
accounts.

We have financed our  operations  primarily  through the sale of equity and debt
financing. In August 2000 we drew down the balance of $732,796 from a commitment
for $2,000,000 in equipment  financing  obtained in the prior fiscal year.  Also
during the six months ended December 31, 2000, we obtained  $5,380,554  from the
sale  of  common  and  preferred  stock.  We  have  no  commitments  for  future
investments  and there can be no  assurance  that we can continue to finance our
operations through these or other sources. In the past, shareholders,  including
from time to time directors, have advanced funds and at times cancelled debt for
equity  on terms of new  forms of  financing.  There  can be no  assurance  that
shareholders or directors or others will provide us with any future financing.

Other  than  cash on  hand of  $143,486  at  December  31,  2000,  net  accounts
receivable  of $283,652  and  subsequent  sales of preferred  stock,  we have no
material unused sources of liquidity at this time. We expect to incur additional
operating losses in future fiscal quarters as a result of continued  operations,
product  development  expenditures  and  investments  in growth.  The timing and
amounts of these  expenditures and the extent of operating losses will depend on
many factors, some of which are beyond our control.

Subsequent  to December 31, 2000 the Company  issued  28,336 shares of Series CC
Stock, for cash of $1,275,000 and an additional 33,333 shares of Series CC Stock
for $1,500,000  paid in kind services.  We expect that we will require a minimum
of $8 million of additional capital to finance operations during the next twelve
months.  This  estimate  is based on the second  fiscal  2001  quarter  level of
operations  as  subsequently  reduced  by  management,   anticipated   revenues,
anticipated  launch of our commission  program and budgeted product  development
and operating  costs.  To expand the enrollment of new member buyers and sellers
or to launch  new  products  or  services,  we may  require  further  additional
financing.  Our  actual  results  could  differ  significantly  from  plan  and,
therefore, we may require substantially greater operating funds. Should required
and/or  additional  funds not be  available or planned  operations  not meet our
expectations,  we may  be  required  to  significantly  curtail  or  scale  back
staffing, advertising,  marketing expenditures,  product and content development
and general operations. We may also have to curtail the number of market regions
in which we operate or revert to some form of fixed fee program. There can be no
assurance  that  additional  funding  will be  available to us or on what terms.
Potential sources of funds include exercise of warrants and options,  loans from
existing shareholders or other debt financing or additional equity offerings.

Tax Loss Carryforwards

As of June 30,  2000,  we had  approximately  $26.5  million of federal tax loss
carryforwards and $13 million in California tax loss carryforwards. These losses
create a deferred tax asset.  We have  recorded a valuation  allowance to reduce
the net deferred tax asset to zero because, in our assessment, it is more likely
than not that the  deferred  tax asset will not be  realized.  There may also be
limitations on the  utilization of tax loss  carryforwards  to offset any future
taxes.

Forward-Looking Statements and Business Risks

This Form 10-QSB  includes  "forward-looking  statements"  within the meaning of
Section  27A of the  Securities  Act of 1933,  as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate,"  "believe,"
"expect,"  "plan,"  "intend,"   "project,"   "forecasts,"  "could"  and  similar
expressions are intended to identify forward-looking  statements. All statements
other than statements of historical facts included in this Form 10-QSB regarding
our financial position,  business strategy,  budgets and plans and objectives of
management for future  operations are  forward-looking  statements.  Although we
believe that the expectations  reflected in such forward-looking  statements are
reasonable,  no  assurance  can be given  that  actual  results  may not  differ
materially  from those in the  forward-looking  statements  herein  for  reasons
including   the  effect  of   competition,   the  level  of  sales  and  renewal
certifications,  marketing, product development and other expenditures, economic
conditions,  the legislative and regulatory environment and the condition of the
capital and equity markets.


                                       17
<PAGE>

Readers are cautioned to consider the specific  business risk factors  described
in our annual  report on Form 10-KSB for the fiscal year ended June 30, 2000 and
not to place undue reliance on the forward-looking  statements contained herein,
which speak only as of the date hereof.  We undertake no  obligation to publicly
revise  forward-looking  statements to reflect events or circumstances  that may
arise after the date hereof.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

         None

Item 2. Changes in Securities and Use of Proceeds

         (a) See  description of Series preferred stock in (c) below.

         (b) See description of Series C preferred stock in (c) below.

         (c) The following is a  description  of equity  securities  sold by the
             Company  during the second fiscal  quarter ended  December 31, 2000
             that were not registered under the Securities Act:

                  In November  2000,  we sold an  aggregate  of 4,780  shares of
                  Series C  Convertible  Preferred  Stock,  par  value  $0.00025
                  ("Series C Stock"),  at $22.50 per preferred share (each share
                  of which is  initially  convertible  into ten shares of common
                  stock).  This sale was made in a private offering.  A total of
                  1,333,333  shares of preferred  stock have been authorized and
                  designated by the Company as Series C Stock and 233,689 shares
                  of Series C Stock  were  previously  sold in the first  fiscal
                  quarter

                  In connection with the sale in the second quarter, the Company
                  issued to the  purchasers  warrants  exercisable  at $2.25 per
                  share  into an  aggregate  of 23,900  shares  of common  stock
                  ("Warrants").  These  Warrants  have a three year term and are
                  callable by the Company if the stock price  exceeds  $6.00 per
                  share, subject to certain additional conditions.

                  The  aggregate  gross  proceeds  from the sale of the Series C
                  Stock in the second quarter were $107,550.

                  The Series C Stock has a  cumulative  dividend of 8% per annum
                  payable when and if declared by the Board of Directors or upon
                  liquidation or conversion.

                  The dollar amount of the Series C Stock is  convertible at the
                  option of the holder into shares of common stock at an initial
                  conversion   price,   negotiated  with  outside   unaffiliated
                  investors,  of $2.25 per share and are automatically converted
                  on the occurrence of certain events.

                  The Series C Stock has a liquidation preference, after payment
                  of the  preferential  amount  for the  Series  A and  Series B
                  Stock,  of  $22.50  per  share  of  Series  C  Stock  plus  an
                  additional amount accruing at the rate of 8% per annum.

                  The  Series  C  Stock  has  antidilution  rights  for  certain
                  issuances below the conversion  price.  The Series C Stock has
                  voting rights equal to the number of shares of common stock on
                  an as-converted  basis.  In addition,  as long as there are at
                  least 200,000 shares of Series C Stock issued and outstanding,
                  the holders are entitled, voting as a separate class, to elect
                  one member of the Company's board of directors.

                  In  connection  with the sale of Series C Stock,  the  Company
                  entered into a Registration Rights Agreement with the Series C
                  Stock investors.  This agreement provides that within 120 days
                  following the initial  closing on September 15, 2000, that the
                  Company  will  use its  best  efforts  to  prepare  and file a
                  registration statement on Form S-3 (provided that at such time
                  the Company is  eligible to use S-3 and, if not,  use its best
                  efforts to prepare and file a  registration  statement on Form
                  S-3 at such later date as the Company is so eligible).

                                       18
<PAGE>

                  While the  securities  were  sold by the  Company  without  an
                  underwriter  or cash  commission,  the  Company  has agreed to
                  issue to an outside  financial advisor warrants to purchase an
                  aggregate of 8% of the underlying shares of common stock.

                  All  of  these   securities  were  offered  and  sold  without
                  registration under the Securities Act of 1933, as amended (the
                  "Act"),  in reliance  upon the  exemption  provided by Section
                  4(2) thereunder  and/or Regulation D, Rule 506 and appropriate
                  legends  were  placed on the Series C Stock and  Warrants  and
                  will be placed on the  shares of common  stock  issuable  upon
                  conversion unless registered under the Act prior to issuance.

                  The descriptions of these  transactions are qualified in their
                  entirety  by the  full  text  of the  agreements  attached  as
                  exhibits to the Company's Form 8-K dated September 29, 2000.

         (d) None

Item 3. Defaults Upon Senior Securities

         None

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

At the Company's fiscal 2000 Annual Meeting of Stockholders held on November 30,
2000 the following members, constituting all of the members, were elected to the
Board of Directors:  James Stein, James A. Barnes,  Fritz T. Beesemyer,  Josh M.
Felser, J. Mitchell Hull, Jeffrey J. Holland and Steven A. Ledger.

<TABLE>

The  following  proposals  were  approved  at the  Company's  Annual  Meeting of
Stockholders:
<CAPTION>

         1. Election of Directors:
                <S>                 <C>                     <C>                        <C>
                a. By Common Stockholders:
                                    Affirmative Votes       Negative Votes             Votes Withheld
                                    -----------------       --------------             --------------
                  James Stein          12,808,607                 100                         8,830
                  James A. Barnes      12,808,607                 100                         8,830
                  Jeffrey J. Holland   12,808,607               6,100                         8,830

                b. By Series A Stockholders:
                                    Affirmative Votes       Negative Votes             Votes Withheld
                                    -----------------       --------------             --------------
                  Fritz T. Beesemyer      908,622                  -0-                           -0-

                c. By Series B Stockholders:
                                    Affirmative Votes       Negative Votes             Votes Withheld
                                    -----------------       --------------             --------------
                  Fritz T. Beesemyer    6,081,360             285,720                            -0-
                  Joshua M. Felser      6,367,080                  -0-                           -0-

                c. By Series C Stockholders:
                                    Affirmative Votes       Negative Votes             Votes Withheld
                                    -----------------       --------------             --------------
                  J. Mitchell Hull      1,650,253                  -0-                           -0-
</TABLE>

         2.  Authorization  to approve  adoption  of the  Company's  2000 Equity
         Incentive  Plan  adopted  by the board of  directors  on July 21,  2000
         reserving an aggregate of 2,500,000 of common stock for issuance  under
         the 2000 Plan.

                  Affirmative Votes         Negative Votes        Votes Withheld
                  -----------------         --------------        --------------
                      15,995,779                194,683               86,887

         3.  Authorization  to  ratify  the  selection  of  Moss  Adams  LLP  as
         independent  auditors  for the  Company for fiscal year ending June 30,
         2001.

                  Affirmative Votes         Negative Votes        Votes Withheld
                  -----------------         --------------        --------------
                      21,716,425                  3,380               23,727

                                       19
<PAGE>

Item 5. Other Information

         None

Item 6. Exhibits and Reports on Form 8-K
         (a) Exhibits:

                  10.27    Strategic   Development,   Marketing   and   Services
                           Agreement between the Company's  subsidiary and First
                           Data Merchant  Services  Corporation  dated September
                           29, 2000. [Portions of this Exhibit have been omitted
                           (based upon a request for confidential treatment) and
                           have been filed  separately  with the  Securities and
                           Exchange Commission pursuant to Rule 24b-2]

                  10.28    Strategic Development and Marketing Agreement between
                           the  Company's  subsidiary  and First Data  Resources
                           Inc.  dated  November  1,  2000.  [Portions  of  this
                           Exhibit have been  omitted  (based upon a request for
                           confidential   treatment)   and   have   been   filed
                           separately   with   the   Securities   and   Exchange
                           Commission pursuant to Rule 24b-2]

                  27       Financial Data Schedule

         (b) Reports on Form 8-K:

                  None

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,  Registrant
has duly  caused  this  report to be signed  on its  behalf by the  undersigned,
thereunto duly authorized.

                                 VALUESTAR CORPORATION

Date: February 14, 2001     By:  /s/ JAMES A. BARNES
                                 --------------------
                                 James A. Barnes
                                 Secretary and Treasurer
                                 (Principal Financial Officer and duly
                                 authorized to sign on behalf of the Registrant)



                                       20