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

                                  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, 1999

                         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, #210, Oakland, California                       94612
------------------------------------------                       -----
 (Address of principal executive offices)                      (Zip Code)

                                 (510) 808-1400
                                 --------------
                           (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                           11,822,674
-------------------------------                           ----------
            (Class)                            (Outstanding at February 7, 2000)

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

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

<PAGE>


                              VALUESTAR CORPORATION
                                      INDEX

                                                                            Page
PART I. FINANCIAL INFORMATION

         Item 1. Financial Statements (unaudited):

                  Consolidated Balance Sheets as of December 31, 1999
                  and June 30, 1999                                           3

                  Consolidated Statements of Operations for the three
                  and six months ended December 31, 1999 and 1998             4

                  Consolidated Statements of Cash Flows for the six
                  months ended December 31, 1999 and 1998                     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                              20
         Item 4. Submission of Matters to a Vote of Security Holders          20
         Item 5. Other Information                                            21
         Item 6. Exhibits and Reports on Form 8-K                             21



SIGNATURES                                                                    22


                                       2

<PAGE>

<TABLE>
                                           VALUESTAR CORPORATION
                                        CONSOLIDATED BALANCE SHEETS
                                                (Unaudited)

                                                   ASSETS
<CAPTION>

                                                                             December 31,      June 30,
                                                                               1999              1999
                                                                           --------------    -------------
<S>                                                                          <C>              <C>
CURRENT ASSETS
     Cash                                                                    $ 7,579,577      $   270,149
     Receivables                                                                 329,359          409,806
     Inventory                                                                     1,982            4,008
     Prepaid expenses                                                             72,438           59,446
                                                                           --------------    -------------
            Total current assets                                               7,983,356          743,409

PROPERTY AND EQUIPMENT                                                           897,330          501,605
DEFERRED COSTS                                                                   145,806          100,839
INTANGIBLE AND OTHER ASSETS                                                      231,046          194,130
                                                                           --------------    -------------
            Total assets                                                     $ 9,257,538      $ 1,539,983
                                                                           ==============    =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                                          $ 591,219          461,825
     Accrued liabilities and other payables                                      277,794          189,759
     Deferred revenues                                                            28,755           27,430
     Note payable - shareholder                                                  290,000          280,000
     Current portion of capitalized leases                                        47,322           30,018
     Current portion of long-term debt                                           449,759        1,032,664
                                                                           --------------    -------------
            Total current liabilities                                          1,684,849        2,021,696

CAPITAL LEASE OBLIGATIONS, net of current portion                                150,180          113,541
LONG-TERM DEBT, net of current portion                                           903,107        1,795,438
                                                                           --------------    -------------
            Total liabilities                                                  2,738,136        3,930,675

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 at December 31, 1999 (liquidation
          preference of $10.00 per share)                                             56              --
        800,000 shares designated Series B Convertible, with 517,157
          shares issued and outstanding at December 31, 1999 (liquidation
          preference of $17.50 to $30.00 per share, see note 8)                      129              --
     Common stock, $.00025 par value; 20,000,000 shares
        authorized, 11,428,073 and 9,374,132 shares issued
          and outstanding, respectively                                            2,857            2,344
     Additional paid-in capital                                               20,279,728        6,485,373
     Unearned stock-based compensation                                          (130,167)             --
     Accumulated deficit                                                     (13,633,201)      (8,878,409)
                                                                           --------------    -------------
            Total stockholders' equity                                         6,519,402       (2,390,692)
                                                                           --------------    -------------
            Total liabilities and stockholders' equity                       $ 9,257,538      $ 1,539,983
                                                                           ==============    =============

<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,
                                                                 1999            1998           1999             1998
                                                             --------------   ------------  --------------   --------------
<S>                                                                <C>          <C>           <C>              <C>
REVENUES                                                     $     470,003     $  470,608   $   1,192,128     $  1,076,268
                                                             --------------   ------------  --------------   --------------

OPERATING EXPENSES
     Cost of revenues                                              445,364        257,257         827,640          450,604
     Selling                                                       619,973        327,723       1,268,693          709,943
     Marketing and promotion                                       229,352        134,583         779,420          428,912
     Product development                                           907,611           --         1,181,480             --
     General and administrative                                    388,098        427,391         826,661          760,094
     Stock-based compensation                                       42,336           --            75,833           60,000
                                                             --------------   ------------  --------------   --------------

                                                                 2,632,734      1,146,954       4,959,727        2,409,553
                                                             --------------   ------------  --------------   --------------

LOSS FROM OPERATIONS                                            (2,162,731)      (676,346)     (3,767,599)      (1,333,285)
                                                             --------------   ------------  --------------   --------------

OTHER INCOME (EXPENSE)
     Interest income                                                18,410           --            25,334             --
     Interest expense - cash                                      (102,487)       (41,692)       (214,739)         (84,002)
     Non-cash interest expense                                    (651,228)       (34,817)       (719,111)         (52,066)
     Miscellaneous                                                    --           (1,330)           (800)          (5,399)
                                                             --------------   ------------  --------------   --------------

                                                                  (735,305)       (77,839)       (909,316)        (141,467)
                                                             --------------   ------------  --------------   --------------

NET LOSS                                                     $  (2,898,036)    $ (754,185)  $  (4,676,915)    $ (1,474,752)
                                                             ==============   ============  ==============   ==============

NET LOSS AVAILABLE TO COMMON
     STOCKHOLDERS  (NOTE 11)                                 $ (27,831,217)    $ (754,185)  $ (29,642,973)    $ (1,474,752)
                                                             ==============   ============  ==============   ==============

LOSS PER COMMON SHARE                                        $       (2.81)    $    (0.09)  $       (3.07)    $      (0.17)
                                                             ==============   ============  ==============   ==============

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                                                 9,910,757      8,689,018       9,642,447        8,685,756
                                                             ==============   ============  ==============   ==============



<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,
                                                                           1999             1998
                                                                      ---------------   --------------
<S>                                                                   <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                         $   (4,676,915)   $  (1,474,752)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
            Depreciation                                                     124,959           21,278
            Amortization of intangible assets                                 13,828             --
            Amortization of bond discount                                    706,887           36,316
            Change in allowance for doubtful accounts                        (10,826)            --
            Other non-cash interest                                           12,224             --
            Stock-based compensation                                          75,833           60,000
         Changes in:
            Receivables                                                       91,273           25,248
            Inventory                                                          2,026            9,496
            Prepaid expenses                                                 (12,992)           3,902
            Deferred costs                                                   (44,967)          73,979
            Intangibles and other assets                                     (50,744)            --
            Accounts payable                                                 129,394          236,422
            Accrued liabilities and other payables                            88,035           31,159
            Deferred revenues                                                  1,325            2,886
                                                                      ---------------   --------------
                Net cash used by operating activities                     (3,550,660)        (974,066)
                                                                      ---------------   --------------
CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                                    (451,684)        (110,952)
                                                                      ---------------   --------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of preferred stock, net of issuance cost           9,935,247             --
     Proceeds from sale of common stock                                    1,170,280          300,000
     Proceeds from debt                                                      250,000          485,000
     Payments on capital leases                                              (15,057)            --
     Payments on debt                                                        (28,698)          (3,911)
                                                                      ---------------   --------------
                Net cash provided by financing activities                 11,311,772          781,089
                                                                      ---------------   --------------

NET INCREASE (DECREASE) IN CASH                                            7,309,428         (303,929)
CASH, beginning of period                                                    270,149          398,604
                                                                      ---------------   --------------

CASH, end of period                                                   $    7,579,577    $      94,675
                                                                      ===============   ==============

SUPPLEMENTAL CASH-FLOW INFORMATION
     Cash paid during the year for:
         Interest                                                     $      214,739    $      84,002
     Non-cash investing and financing activities:
         Accrued dividends on Series A Preferred Stock                        77,877             --
         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, 1999

1. OPERATIONS

The Company, a Colorado corporation,  conducts its operations through ValueStar,
Inc., a wholly-owned subsidiary.  ValueStar, Inc. was incorporated in California
in 1991, and is a rating company that has pioneered a new business certification
mark  (ValueStar  Certified(R))  - - signifying  high customer  satisfaction - -
enabling consumers to quickly determine the best local service  businesses.  The
Company generates revenues by conducting customer satisfaction research on local
service companies in 300 industries;  certifying  highly rated  businesses;  and
selling ancillary materials and services.  The Company communicates  information
about highly rated service and  professional  firms that have earned  "ValueStar
Certified" to consumers  through  various media  including its Internet Web site
(www.valuestar.com) and the ValueStar Report, a bi-annual publication.

The Company's revenues are primarily from certification and rating fees, and are
recognized  when all related  services are  provided to the  business  customer.
Rating services include a research survey of prior customers and the delivery of
a research report. Services associated with certification include an orientation
on becoming a ValueStar  Certified  business and the  delivery of  certification
materials  and manuals.  Businesses  must reapply for  certification  each year.
Sales  of  marketing  materials  and Web  advertising  and  other  services  are
recognized as materials are shipped or over the period services are rendered.

The Company currently  operates in eight market regions in the United States. In
early  December  1999, in all markets except  Northern  California,  the Company
changed  from a fixed  certification  and rating fee to a  percentage  based fee
based on the value of future  transactions  between buyers  registered  with the
Company and certified companies. The Company is currently developing the systems
to  register  buyers  and  monitor  these  transactions.  Until  this  system is
operating,  the Company does not anticipate any significant  revenues from these
markets.  The Company continues to charge a fixed  certification fee in Northern
California.

Costs  incurred in printing and  distributing  the  Company's  ValueStar  Report
consumer publication published in January and July, and any related revenues are
recognized upon publication.

2. STATEMENT PRESENTATION

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, 1999.

The interim  consolidated  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.  The  Company  has  experienced
recurring   losses  from  operations  and  the  use  of  cash  from  operations.
Management's  plan is to market and promote its existing program and develop new
rating  content  for  consumers  to  achieve  revenue  growth  and,  ultimately,
profitable operations.  Future financing may not be available and it is unlikely
cash flows from  operations will be sufficient to enable the Company to meet its
obligations.  The Company could be forced to reduce its level of operations  and
this would have a material  adverse  impact on the Company's  operations.  These
interim consolidated  financial statements do not give effect to any adjustments
which would become necessary should the Company be unable to continue as a going
concern  and  therefore  be required  to realize  its assets and  discharge  its
liabilities in other than the normal course of business and at amounts different
from  those  reflected  in  the  accompanying  interim  consolidated   financial
statements.

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 six month period ended
December  31, 1999 are not  necessarily  indicative  of the results  that may be
expected for the year ending June 30, 2000.

3. PRODUCT DEVELOPMENT COSTS

Prior to the current  fiscal  year,  development  expenses  associated  with the
design, development and testing of programs and services have not been material.
In the  first  quarter  of  fiscal  2000,  the  Company  commenced  the  design,
development and


                                        6
<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1999

3. PRODUCT DEVELOPMENT COSTS (Cont'd)

testing of a new  Internet  initiative  using  existing  and new  content.  This
initiative consists of developing proprietary content on the majority of service
businesses in the United States and  developing  an  Internet-based  system that
generates commissions from transactions driven by the content. During the second
quarter the Company continued to develop computer and related systems to support
this  new  initiative.   Product  development  expenses  are  being  charged  to
operations as incurred.

4. INVENTORY

Inventory is recorded at the lower of cost (using the first-in  first-out method
of accounting) or market.  Inventory consists of brochures and related materials
for resale.

5. DEFERRED COSTS

All  direct  costs   related  to  marketing   and   advertising   the  ValueStar
certification  to businesses and consumers are expensed in the period  incurred,
except  for  direct-response   advertising  costs,  which  are  capitalized  and
amortized  over the  expected  period of  future  benefits.  Deferred  costs are
periodically evaluated to determine if adjustments for impairment are necessary.

6. NOTE PAYABLE - SHAREHOLDER

The Company is  obligated  pursuant to a 15%  unsecured  subordinated  note to a
company related to a  shareholder/director  in the principal  amount of $300,000
due June 30, 2000.  There is a $10,000 discount being amortized over the term of
the note.


<TABLE>

7. LONG-TERM DEBT

Long-term debt at December 31, 1999, consists of the following:

<CAPTION>
<S>                                                                                                              <C>
8% Senior  Secured  Notes  Payable;  principal of  $1,450,000;  interest is paid
monthly,  with the  principal  repayable in ten  quarterly  payments of $153,125
commencing  in March 2002,  and  maturing  June 2004;  net of  unamortized  note
discount of $774,345                                                                                           $  675,655

12% Notes;  principal of $100,000;  unsecured;  interest is paid monthly, with a
balloon principal payment due in March 2001; net of unamortized note discount
of $4,545                                                                                                          95,455

12% Subordinated Notes: principal of $390,625; unsecured: interest is paid monthly,
with a balloon principal payment due in June 2000; net of unamortized note
discount of $5,046                                                                                                385,579

15% Equipment Note due to related party; due in monthly installments of principal
and interest of $2,022 to maturity in August 2003; secured by equipment and software                               68,119

15% Equipment Note due to related party; due in monthly installments of principal
and interest of $5,055 to maturity in June 2002; secured by equipment and software                                128,058
                                                                                                               ----------
                                                                                                                1,352,866
Less current portion                                                                                              449,759
                                                                                                               ----------
                                                                                                               $  903,107
                                                                                                               ==========
</TABLE>

Subsequent  to December  31,  1999 the 12%  Subordinated  Notes were  reduced by
$15,625 due to the exercise of warrants.

In  connection  with the sale of Series B Stock (see Note 8),  the  Senior  Note
holders executed certain waivers and consents and the Company agreed to increase
the interest  rate on the  $1,450,000  balance of Senior  Secured Notes from the
current 8% to a maximum of 12% at the rate of 1% per calendar quarter commencing
April 1, 2000 when the rate will increase from 8% to 9%.



                                       7
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1999

7. LONG-TERM DEBT (Cont'd)

In connection with the reduction in the principal of the Senior Secured Notes by
$1,000,000,  the  Company  accelerated  the  amortization  of the  related  note
discount by $563,126. Likewise on the reduction in the 12% Subordinated Notes by
$609,375 from the exercise of warrants, the Company accelerated the amortization
of the  related  note  discount  by $7,982.  These  amounts  increased  non-cash
interest expense by $571,108 for the second quarter.

<TABLE>
8. STOCKHOLDERS' DEFICIT

The following table summarizes equity  transactions  during the six months ended
December 31, 1999:
<CAPTION>


                                      Preferred Stock        Common Stock      Additional   Unearned
                                      ---------------       ------------        Paid-In    Stock-Based    Accumulated
                                       Shares   Amount    Shares     Amount     Capital    Compensation     Deficit       Total
                                       ------   ------    ------     ------     -------    ------------      -------       -----
<S>                                     <C>       <C>    <C>          <C>      <C>           <C>         <C>            <C>
Balance July 1, 1999                       --       --    9,374,132   $2,344   $ 6,485,373        --     $ (8,878,409)  $(2,390,692)
Issuance of Series A Convertible
  Preferred Stock, net of issuance
  costs of $40,000                      225,000       56       --       --       2,209,944        --             --       2,210,000
Accrued 8% dividends on Series A
  Preferred Stock                          --       --         --       --          77,877        --          (77,877)         --
Issuance of Series B Convertible
  Preferred Stock, net of issuance
  costs of $75,000 and value assigned
  to warrants granted of $400,00        517,157      129       --       --       8,575,118        --             --       8,575,247
Value assigned to warrants granted
  in connection with Series B Stock        --       --         --       --         400,000        --             --         400,000
Stock issued on conversion of 6%
  convertible notes and interest           --       --      546,274      136       546,138        --             --         546,274
Stock issued on exercise of warrants
  reducing 12% subordinated notes          --       --      487,500      122       609,253        --             --         609,375
Stock issued on exercise of warrants
  for cash                                 --       --      992,500      248     1,152,865        --             --       1,153,113
Stock issued on exercise of options
 for cash                                  --       --       27,667        7        17,160        --             --          17,167
Unearned stock-based compensation          --       --         --       --         206,000    (206,000)          --            --
Amortization of stock-based
  compensation                             --       --         --       --            --        75,833           --          75,833
Net loss                                   --       --         --       --            --          --       (4,676,915)   (4,676,915)
                                        -------   ------ ----------   ------   -----------   ---------   ------------   -----------
Balance December 31, 1999               742,157   $  185 11,428,073   $2,857   $20,279,728   $(130,167)  $(13,633,201)  $ 6,519,402
                                        =======   ====== ==========   ======   ===========   =========   ============   ===========

</TABLE>
During  the  first  quarter  the  Company  issued  225,000  shares  of  Series A
Convertible  Preferred  Stock,  par value $.00025 ("Series A Stock") for cash of
$10 per share.  Dividends of 8% per annum  compounded  are payable in additional
shares of Series A Stock.  The  dollar  amount of Series A Stock is  convertible
into shares of common stock at a conversion  price equal to $2.00 per share, and
are  automatically  converted on the occurrence of certain events.  The Series A
Stock has  certain  antidilution  and  registration  rights,  has a  liquidation
preference  of $10 per share plus accrued and unpaid  dividends,  and has voting
rights  equal to the number of common  shares into which it is  convertible.  In
addition,  as long as  there  are at  least  100,000  shares  of  Series A Stock
outstanding,  then the holders are entitled to elect one member of the Company's
Board of Directors.  In connection with the Series A Stock financing the Company
incurred legal and related costs of $40,000.

During  the  second  quarter  the  Company  issued  517,157  shares  of Series B
Convertible  Preferred Stock, par value $.00025 ("Series B Stock") at $17.50 per
share.  A total of  $1,000,000 of the Company's  outstanding  8% Senior  Secured
Notes and $250,000 of shareholder  advances were converted into 71,429 shares of
Series B  Convertible  Stock at $17.50 per share.  The dollar amount of Series B
Stock is convertible  into shares of common stock at a conversion price equal to
$1.75 per share,  and are  automatically  converted on the occurrence of certain
events.  The Series B Preferred Stock has certain  antidilution and registration
rights.  The Series B Stock has a liquidation  preference,  after payment of the
preferential amount for the Series A Stock, of $17.50 per share.  Thereafter the
holders of Series B Stock, on an as-converted  basis,  and the holders of common
stock, shall be paid pro-rata, from remaining assets until the holders of Series
B Stock shall have received an aggregate  preference  price of $30.00 per share.
Holders of Series B Stock are entitled to receive non-cumulative dividends at an
annual rate of 8% only when and if declared by the Board of  Directors.  However
no cash dividends shall be paid to


                                       8
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1999

8. STOCKHOLDERS' DEFICIT (Cont'd)

common stock holders unless a like cash dividend amount has been paid to holders
of  Series  B Stock on an  as-converted  basis.  As long as  there  are at least
200,000 shares of Series B Stock  outstanding,  then the holders are entitled to
elect two members of the Company's Board of Directors.

In connection with the Series B Stock  financing the Company  incurred legal and
related costs of $75,000.  The Company also issued a warrant to purchase  75,000
shares of common  stock at $2.50 per share  until  December  2004 as a placement
fee. The value assigned to the warrant was $400,000.

Subsequent to December 31, 1999 the Company sold an additional 171,429 shares of
Series B Stock at $17.50 per share providing cash proceeds of $3,000,000.

9. STOCK OPTIONS AND WARRANTS

Stock Options

The Company has reserved 250,000 shares of common stock for each of its 1992 ISO
Plan and 1992 NSO Plan, 300,000 shares of common stock for the 1996 Stock Option
Plan and  1,250,000  shares of common stock for the 1997 Stock Option Plan.  The
Company has also issued options on 510,000 shares outside of the option plans as
of December 31, 1999. The following  table  summarizes  option  activity for the
period ended December 31, 1999:
                                                  Weighted Average    Weighted
                                      Shares       Exercise Price   Average Life
Outstanding July 1, 1999             1,111,100       $   0.78            2.49
Granted                              1,004,600       $   2.13
Canceled                               (64,999)      $   1.69
Exercised                              (27,667)      $   0.62
Expired                                (15,000)      $   0.50
                                     ---------
Outstanding December 31, 1999        2,008,034       $   1.43            3.30
                                     =========
Exercisable at December 31, 1999       929,107       $   0.77
                                     =========


Warrants

In  connection  with the sale of the 8% Senior  Secured  Notes on March 31, 1999
(see note 7) the noteholders  were granted  warrants to purchase an aggregate of
1,527,250  shares of Common  Stock of the Company at an exercise  price of $1.00
per share ("A Warrants"), warrants to purchase an aggregate of 527,514 shares of
Common Stock at a nominal per share  exercise  price of $0.00025 ("B  Warrants")
and warrants to purchase an  aggregate  of 231,132  shares of Common Stock at an
exercise price of $1.00 per share ("C  Warrants").  The C Warrants or underlying
shares of Common  Stock may be  repurchased  by the  Company  at $6.00 per share
(less any unpaid exercise price) on an all or none basis until March 31, 2004 as
long as the  Company is not in  default  with  respect  to the  Senior  Notes or
related  agreements.  The  warrants  expire on the earlier of six years from the
date the Senior  Notes are paid in full or March 31,  2009.  The warrants may be
exercised by payment of cash,  cancellation of debt or on a cashless basis.  The
holders  of  the A,  B and C  Warrants  were  granted  antidilution  provisions,
registration rights and certain equity and debt preemptive rights.

In  connection  with  the  sale of the  Series  B Stock  (Note 8) the A, B and C
Warrant  holders  terminated  certain  drag along  rights which had provided the
Warrant holders additional consideration in certain instances upon a sale of the
Company.

At  December  31, 1999 the Company had the  following  stock  purchase  warrants
outstanding each exercisable into one common share:

             Number            Exercise Price             Expiration Date
             ------            --------------             ---------------
               12,500 (1)           $1.25                December, 2000
               50,000               $1.25                March, 2001
              187,500 (1)           $1.25                September, 2002
               20,000 (1)           $1.25                December, 2002


                                       9
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1999

9. STOCK OPTIONS AND WARRANTS (Cont'd)

             Number            Exercise Price           Expiration Date
             ------            --------------           ---------------
               50,000               $1.75              May, 2003
               12,500 (2)           $1.25              April, 2003
              262,500 (3)           $2.00              April, 2003
              100,000               $0.75              October, 2003
              350,000 (1)           $1.00              December, 2003
              152,728               $1.375             March, 2004
               30,000 (1)           $1.50              March, 2004
               75,000               $2.50              December, 2004
            1,527,250               $1.00              March, 2009 (A Warrants)
              527,514               $0.00025           March, 2009 (B Warrants)
              231,132 (4)           $1.00              March, 2009 (C Warrants)
           ----------
            3,588,624
           ==========
     (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 $3.00  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 may be  repurchased  by the Company at $6.00 per share
          until March 31, 2004 subject to certain conditions.

Subsequent  to December  31,  1999 a total of 375,000  warrants  were  exercised
providing cash proceeds of $590,625 and reducing debt by $15,625.  Subsequent to
December 31, 1999 options on 19,601 common shares were exercised  providing cash
proceeds of $17,101.

10. INCOME TAXES

At December 31, 1999 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 $8 million
which expire  through 2019 of which certain  amounts are subject to  limitations
under the Internal Revenue Code, as amended.

11. 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  convertible  notes and preferred
stock,  which are exercisable into  approximately  10.9 million shares of common
stock at December 31, 1999 could potentially dilute earnings per share in future
periods.

The provisions of the Series A Stock provide for cumulative 8% dividends payable
in additional shares of preferred stock and provide, upon conversion,  a similar
accretion  whether  or not such  dividends  have been  declared  by the Board of
Directors. This amount increases the net loss available to common stockholders.

Net loss available to common  stockholders  was also increased by $24,888,181 in
computing  net loss per  share  for the  second  quarter  by an  imputed  deemed
dividend from a discount  provision  included in the Series B Stock. The imputed
dividend is not a contractual  obligation on the part of the Company to pay such
imputed dividend.  In January 2000 the Company sold an additional 171,429 shares
of  Series  B Stock  and  estimates  it  will  report  an  imputed  dividend  of
approximately $8.8 million in its third fiscal quarter.


                                       10
<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1999

11. LOSS PER COMMON SHARE (Cont'd)
<TABLE>

Net loss available to common stockholders is computed as follows:

<CAPTION>
                                                                        Three Months Ended                  Six Months Ended
                                                                           December 31,                       December 31,
                                                                      1999              1998              1999            1998
                                                                      ----              ----              ----            ----
<S>                                                              <C>               <C>               <C>               <C>
Net loss                                                         $ (2,898,036)     $   (754,185)     $ (4,676,915)     $ (1,474,752)
Imputed Series B stock dividend based on discount
  provision                                                       (24,888,181)             --         (24,888,181)             --
Accrued dividends on Series A Preferred Stock                         (45,000)             --             (77,877)             --
                                                                 ------------      ------------      ------------      ------------
Net loss available to common stockholders                        $(27,831,217)     $   (754,185)     $(29,642,973)     $ (1,474,752)
                                                                 ============      ============      ============      ============

</TABLE>

12. RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has issued SFAS No. 133 "Accounting for
Derivative  Instruments and Hedging  Activities."  SFAS No. 133 is effective for
fiscal years  beginning  after June 15, 2000,  and requires  companies to record
derivatives  on the  balance  sheet as assets or  liabilities,  measured at fair
market  value.  Gains or losses  resulting  from  changes in the values of those
derivatives are accounted for depending on the use of the derivative and whether
it qualifies for hedge  accounting.  The key  criterion for hedge  accounting is
that the hedging  relationship must be highly effective in achieving  offsetting
changes in fair value or cash flows. The Company does not expect the adoption of
SFAS No. 133 to have a material effect on the Company's  consolidated  financial
statements.

13. YEAR 2000 COMPLIANCE

The Company has not  experienced any material Year 2000 problems in our computer
systems or  operations.  Prior to December 31, 1999 the Company had assessed its
exposure with respect to Year 2000  technology  compliance as limited.  Although
the Company,  or companies with which it does business,  could experience latent
Year 2000  problems,  management  does not  expect  any  interruption  in normal
business activities. The costs of Year 2000 compliance have not been material.




                                       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, 1999.

Overview

We are a  research  and rating  company  and have  designed a rating  system and
certification mark, ValueStar Certified(R),  for service businesses.  Our rating
system is designed to enable  buyers to quickly  determine  those local  service
businesses  that have attained the highest level of customer  satisfaction.  Our
ratings are  provided  on the  Internet  at  www.valuestar.com,  in print in our
ValueStar Report,  through promotions by, and buyer interactions with, certified
businesses.

In the first quarter of fiscal 2000,  capitalizing  on our expertise in customer
satisfaction  research and ratings,  we commenced  the design,  development  and
testing of an expanded  Internet  initiative.  This  initiative  consists of (a)
developing  proprietary  content on the  majority of service  businesses  in the
United  States,  and (b)  developing  an  Internet-based  system that  generates
commissions from transactions  driven by the content.  During the second quarter
we expended additional resources to generate content for this planned initiative
and develop  computer and related systems for this new service.  The goal of our
development  is to position  ValueStar as the dominant  rating  system for local
service businesses.

In addition to creating  proprietary content on America's service companies,  we
are also developing strategic relationships to provide complementary content and
to increase the  distribution  of the ValueStar  brand and related  content.  In
January 2000 we entered into a strategic data alliance with Experian,  a leading
provider of global information  solutions.  This alliance provides financial and
legal status on local service  businesses as a part of our content  development.
We will provide Experian with the results of our branded proprietary research on
local service businesses for distribution to their clients.  We are also working
to develop other alliances and  relationships to expand our content,  add highly
rated service  businesses to our program,  extend our brand and  distribute  our
ratings to consumers.

Our present  operations  are  conducted  in eight  market  regions in the United
States. In December 1999, in all markets except Northern California,  we changed
from a fixed certification and rating fee to a percentage based fee based on the
value of future transactions between buyers registered with us and participating
companies  enrolled and/or rated by us. We are currently  developing the systems
to  register  buyers and  monitor  future  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 companies in our program. We believe this investment will
accelerate  the  launch of our new  program by  allowing  us to have a number of
registered  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.

Our plan is to have the systems to monitor,  record and collect on a transaction
basis during the second half of calendar year 2000.  However  unknown  technical
issues and barriers could arise that could delay  implementation  or preclude us
from  executing  this plan.  In such an event we may be  required to revert to a
fixed fee basis.

Our present revenues are 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.  An important
aspect of our business model is the recurring nature of revenues from businesses
renewing their certification. 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.

Currently our fixed  certification fees range from $995 to approximately  $2,000
depending  on  business  size.  They are  recognized  as revenue  when  material
services or conditions  relating to the certification  have been performed.  The
material  services are the  delivery of  certification  materials  along with an
orientation  and the material  condition is the  execution of the  certification
agreement  specifying the conditions and limitations on using the certification.
Research  and rating fee  revenue,  ranging up to $570,  is  deferred  until the
research report is delivered.  Sales of marketing  materials and Web advertising
and other  services are  recognized  as materials are shipped or over the period
services are rendered.  From time to time we provide discounts,  incentives from
basic pricing and payment terms on fees.



                                       12
<PAGE>

We expense research and rating costs as incurred. Costs incurred in printing and
distributing our ValueStar Report publication for buyers, currently published in
January and July,  and any related  revenues are  recognized  upon  publication.
Accordingly,  the costs and revenues from this  publication  impact the revenues
and costs in our first and third fiscal quarters.

Certain  direct-response  advertising  costs are deferred and amortized over the
expected period of future benefits,  approximately  60 days. These costs,  which
relate  directly to  targeted  new  business  solicitations,  primarily  include
targeted direct-response advertising programs consisting of direct telemarketing
costs.  No indirect  costs are  included in deferred  advertising  costs.  Costs
incurred for other than specific targeted customers, including general marketing
and  promotion   expenses,   are  expensed  as  incurred.   Deferred  costs  are
periodically evaluated to determine if adjustments for impairment are necessary.

Since inception, we have been growing,  developing and changing our business and
have incurred  losses in each year. At December 31, 1999, we had an  accumulated
deficit of $13.6 million. There can be no assurance of future profitability.

Changing Revenue Model

Our  current  business   revenue  model,   similar  to  other  membership  based
organizations,  is predicated on a growing  number of certified  businesses  and
maintaining  high renewal  rates.  Certified  businesses  that renew  contribute
higher gross margins than new  applicants due to reduced sales and rating costs.
We plan to migrate to a transaction  based revenue model where our business will
be predicated on creating and maintaining a growing number of registered  buyers
and sellers transacting commerce in local services.

Considerable  portions of our operations are engaged towards the solicitation of
new service and professional  business applicants and we incur substantial costs
towards  this  activity.  We expect that these will  continue to be  significant
costs in the  future.  During the six months  ended  December  31,  1999 we also
incurred  significant  product  development  costs  consisting  of (a) capturing
information on a large number of service companies in the United States (our new
proprietary  content),  (b) developing systems to store, monitor and update this
content, (c) developing systems to register consumers and (d) developing systems
to monitor and generate  commissions  based on  transactions  between buyers and
sellers of local services. We expect these product development costs to continue
during the  balance of fiscal  2000 and early  fiscal  2001.  Exact  amounts and
timing 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. We
have recently  increased  numbers of sales,  marketing,  development and support
personnel.  Rapid growth,  due to the nature of our  operations,  is expected to
contribute to continued operating losses in the foreseeable future.

At December 31, 1999 we had 1,755 certified businesses. At December 31, 1999, we
also had 497 (473 new and 24 renewal) business  customers in the application and
rating  phase.  The  total  represents  approximately  75  days  of  sale to new
businesses.  Northern  California  business  customers  in the rating  phase are
expected  to  represent  approximately  $325,000  of  revenues  that  should  be
recognized in the third quarter of fiscal 2000 (generally analogous to backlog).

Results of Operations

Revenues. Revenues consist of certification and rating fees from new and renewal
business  applicants,  sale  proceeds  from  information  materials  and premium
listings  in our  Consumer  ValueStar  Report  and on our Web  site,  and  other
ancillary revenues.  We reported total revenues of $1,192,128 for the six months
ended  December 31, 1999, a 11% increase  over  revenues of  $1,076,268  for the
first six  months of the prior  year.  During  the  period,  certification  fees
accounted  for 79% of  revenue,  compared to 74% for the first six months of the
prior year.  Revenues for the three months ended December 31, 1999 were $470,003
comparable to the $470,608  reported in the comparable prior period.  The growth
in  revenues  for the six months is  primarily  the result of growth in Northern
California,  our  most  established  market,  which  contributed  59%  of  total
revenues.  In early  December  1999 we  ceased  charging  and  collecting  fixed
certification  fees in our other seven  markets and commenced  enrolling  highly
rated businesses in our transaction  program.  Accordingly our revenues declined
in December and revenues  are expected to be minimal in these  markets  until we
are able to launch our transaction-based systems.



                                       13
<PAGE>

We reported  approximately  $78,000 in brochure and other revenue,  $104,000 for
premium Web and  ValueStar  Report  listings  and $78,000 in rating fees for the
first six months of the year.  This  compares to $43,000,  $127,000 and $107,000
respectively for the first six months of the prior year.  Brochure revenue is up
82% from the same period last year due to aggressive efforts in this area and an
increase in the number of qualified service providers.  Revenues for premium web
listings  and the  ValueStar  Report are down 18% from the same period last year
due to a shift in management focus toward brochure sales and  introductory  free
listings for certified firms in new markets. Rating fees are down 27% because of
an increase in rating  discounts  to new  customers  offered  during the current
period.

Our revenues can vary from quarter to quarter due to (a) the changes  being made
to our revenue model,  (b) the impact of revenues from upgraded  profiles in the
semi-annual  Consumer  ValueStar Report,  (c) seasonality,  (d) effectiveness of
sales methods and promotions, (e) levels of expenditures targeted at prospective
businesses,  (f) the numbers of certificate holders up for renewal,  (g) renewal
rates, (h) pricing  policies,  (i) customer passing and sign-up rates (j) timing
of completion of research and ratings, and (k) other factors,  some of which are
beyond our control.

Cost of Revenues.  Cost of revenues consists  primarily of rating costs incurred
for performing  customer  satisfaction  research on business  applicants,  costs
related to verifying  insurance and complaint  status,  Web site operating costs
and  costs of  information  products.  Cost of  revenues  totaled  $827,640  and
represented  69% of sales during the six months ended December 31, 1999. This is
an increase  from 42% for the six months ended  December 31, 1998.  Rating costs
totaled $445,364 for the three months ended December 31, 1999 or 95% of revenues
compared to $257,257  and 55% of  revenues  for the second  quarter of the prior
year.  The  increase  in the  six  month  period  of the  current  year  and the
significant  increase  in  the  second  quarter  is  attributable  primarily  to
increased  staffing and related costs expanding our rating  department to handle
increased volume.  Also in the second quarter we incurred an estimated  $280,000
of rating  costs  associated  with the seven  markets  where we are  rating  and
certifying  businesses without any immediate revenue.  Cost of revenues may vary
significantly  from  quarter to quarter  both in amount and as a  percentage  of
sales.

We expect to incur  significant  continued  costs of rating  businesses  without
corresponding   levels   of   revenues   until  we  are  able  to   launch   our
transaction-based systems. In future quarters the costs of rating and certifying
businesses  may exceed our  revenues.  We believe  the  advance  rating of these
businesses is a strategic  investment  necessary to have a base of rated service
companies available in key markets as we prepare to launch our transaction-based
systems.

Selling Costs.  Selling costs consist  primarily of personnel  costs for outside
sales  consultants   interacting  with  customers  and  direct  marketing  costs
including lead  generation and  telemarketing  costs.  Selling costs for the six
months ended December 31, 1999, were $1,268,693,  or 106% of revenues,  compared
to $709,943,  or 66% of revenues for the first six months of the prior year.  In
fiscal 1999 we commenced  rating  businesses in seven new market  regions and we
continue to incur increased  selling costs  associated with startup of these new
regions compared to the more mature Northern  California  market.  Selling costs
for the second  quarter  totaled  $619,973 or 132% of revenues  representing  an
increase from the $327,723 or 70% for the prior period. The significant increase
in selling costs during the most recent periods (six months and second  quarter)
reflect in part the costs  associated  with selling  businesses in seven regions
late in the second quarter without  corresponding fixed rating and certification
fees. Other than direct targeted  telemarketing  costs, we expense selling costs
as incurred.

Similar to rating and  certification  costs described  above, we expect to incur
significant   continued   selling  costs  to  attract  new  businesses   without
corresponding   levels   of   revenues   until  we  are  able  to   launch   our
transaction-based  systems. In future quarters the costs of selling may continue
to exceed aggregate revenues until we achieve a higher base of revenues. We also
expect  selling costs as a percentage  of revenues 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 and other factors, some beyond our control.

Marketing and Promotion  Expenses.  Marketing and promotion expenses  aggregated
$779,420,  or 65% of  revenues  during  the  first six  months  of fiscal  2000,
compared to $428,912,  or 40% of revenues for the prior  period.  Marketing  and
promotion expenses for the second quarter were $229,352 compared to $134,583 for
the prior year's second  quarter.  Included in marketing and promotion  expenses
are printing and distribution costs of our ValueStar Report publication targeted
at buyers. Printing and distribution costs were $175,000 in the first six months
of fiscal 2000 compared to $110,000 in the prior year's first six months,  as we
printed and distributed more copies with additional  pages.  Most of these costs
were  incurred in the first  quarter of each fiscal  year.  During the first six
months of fiscal  2000,  we expended  $305,000 on paid  advertising  targeted at
expanding  consumer  awareness  of  ValueStar  Certified.  Paid  advertising  of


                                       14
<PAGE>

$150,000  was employed in the prior  year's  first six months.  These  increased
costs  reflect  management  decisions  to increase  advertising  over prior year
levels and  advertising  rate  inflation  caused in part by  increased  Internet
advertising in general.  During the first six months of fiscal 2000, we expended
$106,000  on  promotions  compared to $100,000  for the prior  year's  first six
months.  Generally,  the first and third fiscal  quarters have  increased  costs
because our ValueStar Report publication is printed and distributed during these
quarters.  Also,  we  generally  expend less  advertising  in our second  fiscal
quarter (fourth calendar  quarter) due to higher media rates associated with the
holiday season.

Marketing and promotion expenses are subject to significant variability based on
decisions  regarding the timing and size of distribution of our ValueStar Report
and 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 when
and as revenues grow. However,  amounts and percentages on a quarterly basis may
vary significantly.

Product  Development  Expenses.  In prior years development  expenses associated
with the design,  development  and testing of our programs and services have not
been  material.  In the first  quarter of fiscal 2000 we  commenced  the design,
development and testing of an expanded  Internet  initiative  using existing and
new  content.  During  the six  months  ended  December  31,  1999  we  expended
$1,181,480  on new program  development  and  segregated  these costs as product
development  costs.  Second quarter product  development  costs were $907,611 an
increase from the $273,869 in the first  quarter of this fiscal year.  The major
component of product  development  costs during the six months were compensation
and related costs of $620,258.  We expect,  subject to adequate financing,  that
product development expenses will increase in the third quarter due to increased
numbers  of  personnel  and the use of  outside  branding,  computer  and system
consultants employed to develop our transaction-based  systems. Future levels of
product development costs will depend on many factors not currently estimable by
our management.

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. They totaled  $826,661 or 70% of revenues for the six months
ended  December 31, 1999,  compared to $760,094 or 71% of revenues for the prior
year's  first six months,  an increase  of $66,567.  General and  administrative
costs in the second quarter were $388,098,  a decrease from the $427,391 for the
second quarter of the prior period.  The major  increases  during the six months
are an increase in  occupancy  costs due to  additional  personnel  and expanded
office facilities.  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.

We incurred  $75,833 of  stock-based  compensation  during the six months  ended
December 31, 1999 resulting from  non-employee  options  compared to $60,000 for
the prior comparable period which resulted from warrants issued for services. We
use stock options, warrants and other forms of non-cash equity compensation from
time to time to provide  incentives to employees,  directors and consultants and
others and to preserve cash resources.

We incurred  interest  expense  for the six months  ended  December  31, 1999 of
$933,850  that  included  $214,739  of cash  interest  and  $719,111 of non-cash
amortization  of  bond  discount  and  paid-in-kind  interest.  Included  in the
$719,111 of non-cash  interest  is $571,108 of lump sum  amortization  resulting
from the early  payoff of debt as a result of warrant  conversions  against debt
and senior debt converted to preferred stock.  Interest for the prior comparable
period  was  $136,068  with the  increase,  other  than  lump sum  amortization,
resulting  from  increased  amounts of debt in the current period over the prior
years' period.

Net Loss. We had a net loss of $4,676,915  for the six months ended December 31,
1999,  compared to a loss of  $1,474,752  for the six months ended  December 31,
1998. Our increased  loss is  attributable  to (a) increased  rating and selling
costs  resulting  from the expansion of personnel to new market  regions and for
non-revenue  accounts,  (b)  increased  marketing  and  promotion  costs  due to
increased market regions,  (c) product  development costs in the current period,
and (d) increased  general and  administrative  costs associated with additional
management and support for new market regions. We anticipate we will continue to
experience  operating  losses until we achieve a critical mass base of revenues.
Future quarterly results will be greatly impacted by future decisions  regarding
new markets,  advertising and promotion expenditures,  launching of new products
and services and growth rates.  Achievement of positive  operating  results will
require  that we obtain a sufficient  base of revenues to support our  operating
and corporate costs.  There can be no assurance we can achieve a profitable base
of operations.



                                       15
<PAGE>

The loss available to common  stockholders for the six months ended December 31,
1999 of $29,642,973 includes $24,888,181 of deemed dividends due to the Series B
preferred stock being  convertible at a discount to the market price on the date
of issuance and $77,877 of accrued  dividends on Series A Convertible  Preferred
Stock. The imputed  dividend is not a contractual  obligation on our part to pay
such imputed  dividend.  In January 2000 we sold  additional  shares of Series B
preferred stock and estimate we will report an imputed dividend of approximately
$8.8 million in our third fiscal quarter.  Management believes these financings,
which included two strategic  investors  currently  assisting the Company in its
growth  plans,  have  allowed  the  Company to move  forward on its new  product
initiative.

Liquidity and Capital Resources

Since we commenced  operations,  we have had significant negative cash flow from
operating  activities.  Our  negative  cash  used by  operating  activities  was
$3,550,660  for the six months ended December 31, 1999. At December 31, 1999, we
had working  capital of $6,298,507.  For the six months ended December 31, 1999,
our  negative  cash flow from  operating  activities  was due  primarily  to our
continued  operating  losses,  losses in new  market  regions,  addition  of new
executive  management  and  investment in new products and business  growth.  At
December  31, 1999,  our net accounts  receivables  were  $329,359  representing
approximately  50  days  of  revenues  and  an  annualized   turnover  ratio  of
approximately  7.2 times.  This compares  favorably to  approximately 64 days of
revenues and turnover of approximately  5.7 times at June 30, 1999. Our improved
turnover and reduced  accounts  receivable  level  results  primarily  from more
diligent  collection  efforts.  We  believe  that  60 to  90  days  revenues  in
receivables  is reasonable  based on the nature of our business and the terms we
provide certifying  companies on certain fees. At December 31, 1999, we have not
experienced  and  we do  not  anticipate  any  significant  accounts  receivable
recoverability problems.

We have financed our  operations  primarily  through the sale of equity and debt
financing.  In July and August 1999, we sold $2.25 million of Series A preferred
stock for cash.  In  December  we raised  $7.8  million in cash from the Sale of
Series B preferred  stock with an  additional  $1,250,000  of Series B preferred
stock converted from debt. During the six months ended December 31, 1999 we also
obtained $1.1 million from the exercise of warrants and options for cash.  These
funds are being used for  operations  and  product  development.  Subsequent  to
December  31, 1999 we obtained $3 million from the sale of  additional  Series B
Stock and $532,726  from the exercise of warrants and options for cash.  We have
no  commitments  for  future  investments.  In the past,  shareholders  and debt
holders, including from time to time directors, have advanced funds and at times
some have  converted  debt  funds to equity  financing  on terms of new forms of
financing.  There  can be no  assurance  that we can  continue  to  finance  our
operations through existing or new investors or from other sources. There can be
no assurance  that  shareholders  or directors or others will provide any future
financing to ValueStar.

Other  than cash on hand of  $7,579,577  at  December  31,  1999,  net  accounts
receivable of $329,359,  and the funds received  subsequent to December 31, 1999
described  above,  we have no material unused sources of liquidity at this time.
We expect to incur  significant  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.

Based  on the most  recent  quarters  level of  operations  we  believe  we have
sufficient  capital to finance  operations  during the next twelve  months.  Our
actual  results  could  differ   significantly   from  prior  expenditures  and,
therefore, we may require additional operating funds for the next twelve months.
However we expect to expend  additional  funds during the next twelve  months to
expand operations to new market regions, develop new products and systems and to
launch new Internet based  services.  Management has not determined the level of
planned future  expenditures  which will depend in part on decisions on the rate
of growth,  availability of additional  funding and other factors including some
beyond the control of management. We estimate that we will require approximately
$5 million of software and  equipment  during the next twelve  months to support
our expanded  operations  and new products and  services.  We are seeking  lease
financing  to pay for  some of these  capital  costs.  To  finance  our  planned
endeavors,   we  may  require  additional  financing.   Should  required  and/or
additional   funds  not  be  available  or  planned   operations  not  meet  our
expectations, we may be required to curtail or scale back staffing, advertising,
marketing  expenditures and general operations.  We may also have to curtail the
number of market  regions in which we operate.  There can be no  assurance  that
additional  future  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.

New Accounting Pronouncements and Issues

The  Financial  Accounting  Standards  Board has  issued new  pronouncements  as
discussed in the footnotes to our interim financial statements.  As discussed in
the notes to our interim financial  statements,  the implementation of these new
pronouncements  is not  expected  to have a  material  effect  on our  financial
statements.



                                       16
<PAGE>

On September  28, 1998,  the SEC issued a press release and stated that the "SEC
will formulate and augment new and existing accounting rules and interpretations
covering  revenue  recognition,   restructuring   reserves,   materiality,   and
disclosure;" for all publicly-traded  companies. In response on December 3, 1999
the SEC  issued  Staff  Accounting  Bulletin  No. 101 - Revenue  Recognition  in
Financial  Statements (SAB No. 101) which summarizes  certain of the SEC staff's
views  in  applying   generally  accepted   accounting   principles  to  revenue
recognition  in  financial  statements.  Our  practices  have been  consistently
applied  since our  initial  filing  and  review  by the SEC in 1997.  We do not
believe the  interpretations  outlined in SAB No. 101 impact our  accounting for
certification revenue. However there can be no assurance,  given the uncertainty
in this area, that the SEC staff may not take a contrary position. Any potential
changes  could  have a  material  impact  on the  manner  in which we  recognize
certification  revenue.  Any such changes  would have no effect on reported cash
flow or the underlying economic value of our certification business.

Year 2000 Readiness Disclosure

We are aware of the issues  associated  with the  programming  code in  existing
computer  systems because of the Year 2000. The "Year 2000" problem is concerned
with whether  computer  systems  properly  recognize date sensitive  information
connected with year changes to 2000. Systems that do not properly recognize such
information  can generate  erroneous data or cause a system to fail. To date, we
have  not  experienced  any  Year  2000  problems  in our  computer  systems  or
operations. However, other companies, including us, could experience latent Year
2000 problems.

We have  identified the following  areas that could be impacted by the Year 2000
issue. They are (a) our products,  (b) internally used systems and software, (c)
products or services  provided by key third  parties,  and (d) the  inability of
certifying businesses and prospective customers to process business transactions
relating to certifying revenue and product sales.

While we are not currently  aware of any internal or external Year 2000 failures
impacting  our  operations,  we continue to monitor the  compliance of our major
customers, suppliers and vendors. We believe that third-party relationships upon
which we rely  represent  the greatest risk with respect to the Year 2000 issue,
because we cannot  guarantee  that third  parties have  adequately  assessed and
addressed  their  Year  2000  compliance   issues  in  a  timely  manner.  As  a
consequence, we can give no assurances that issues related to Year 2000 will not
have a material  adverse effect on our future results of operations or financial
condition.

To date, there have been no material direct  out-of-pocket costs associated with
our Year 2000 compliance effort.  Maintenance or modification costs are expensed
as incurred,  while the costs of new computers or software are  capitalized  and
amortized over the respective useful life.

Should we not be completely  successful in mitigating internal and external Year
2000 risks,  the likely worst case scenario  could be a system  failure  causing
disruptions of operations,  including, among other things, a temporary inability
to process transactions,  deliver certifications and products,  send invoices or
engage in similar normal  business  activities at our office or with our vendors
and suppliers.  We currently do not have any  contingency  plans with respect to
potential  Year 2000  failures of our  suppliers or customers and at the present
time we do not intend to develop one. If these  failures  occur,  depending upon
their  duration and severity,  they could have a material  adverse effect on our
business, results of operations and financial condition.

The  information  set forth  above  under  this  caption  "Year  2000  Readiness
Disclosure"  relates to our efforts to address the Year 2000 concerns  regarding
our (a)  operations,  (b)  products and  technologies  licensed or sold to third
parties and (c) major  suppliers and customers.  Such statements are intended as
Year 2000 Statements and Year 2000 Readiness  Disclosures and are subject to the
"Year 2000 Information Readiness Act."

Tax Loss Carryforwards

As of June 30,  1999,  we had  approximately  $8  million  of  federal  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.


                                       17
<PAGE>


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.

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, 1999 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)   None

         (b)   None

         (c) The following is a  description  of equity  securities  sold by the
             Company  during the second fiscal  quarter ended  December 31, 1999
             that were not registered under the Securities Act:

                  On December 9, 1999 the Company completed the private offering
                  and sale of 517,157  shares of Series B Convertible  Preferred
                  Stock,  par value $0.00025  ("Series B Stock"),  at $17.50 per
                  preferred share (each share of which is initially  convertible
                  into ten shares of common stock). A total of 800,000 shares of
                  preferred  stock have been designated by the Company as Series
                  B Stock.

                  The aggregate gross proceeds of $9,050,000 included $6,050,000
                  in cash  from  lead  strategic  investor,  eCompanies  Venture
                  Group, L.P. (the "Lead  Investor").  A total of $1,405,000 was
                  purchased  by three  institutional  holders  of the  Company's
                  wholly-owned  subsidiary's  Senior 8% Secured  Notes  ("Senior
                  Notes")  of  which   $1,000,000  was  applied  to  reduce  the
                  outstanding  principal of the Senior Notes from  $2,450,000 to
                  $1,450,000.  A total of  $250,000  had been  advanced by three
                  investors on November 24 and November 29, 1999 and was applied
                  towards  their  Series  B  Stock  purchase.   The  balance  of
                  $1,345,000 was paid in cash by sixteen individual investors.

                  The Series B Stock  investors  included  two  directors of the
                  Company and entities  affiliated  with such  directors  for an
                  aggregate of $302,500 and one executive officer for $50,000.

                  The dollar amount of the Series B Stock is  convertible at the
                  option of the holder into shares of common stock at an initial
                  conversion  price  negotiated  with the Lead Investor of $1.75
                  per share and are automatically converted on the occurrence of
                  the following events:

                     o      A Qualified  Liquidation Event - a qualifying public
                            offering  (proceeds  of $15 million at a price of at
                            least  $5.00 per share and a  valuation  of at least
                            $40  million) or  qualified  sale  (valuation  of at
                            least $40 million  and minimum  proceeds of $5.00 to
                            $7.00 per common share);

                     o      A Qualified Liquidity Milestone - a qualifying stock
                            market listing  (Nasdaq  National Market or New York
                            Stock   Exchange  and  minimum   price  and  trading
                            volume);

                     o      The  conversion  of all the shares of the  Company's
                            Series A  Convertible  Preferred  Stock  ("Series  A
                            Stock");  or


                                       18
<PAGE>

                     o      A vote of 66-2/3% of outstanding  shares of Series B
                            Stock.

                  The Series B Stock has a liquidation preference, after payment
                  of the  preferential  amount for the Series A Stock, of $17.50
                  per share of Series B Stock.  Thereafter the holders of Series
                  B Stock, on an as-converted  basis,  and the holders of common
                  stock, shall be paid pro-rata, from remaining assets until the
                  holders of Series B Stock  shall have  received  an  aggregate
                  preference  price of $30.00  per  share.  Holders  of Series B
                  Stock are entitled to receive  non-cumulative  dividends at an
                  annual  rate of 8% only when and if  declared  by the Board of
                  Directors.  However no cash dividends  shall be paid to common
                  stock holders unless a like cash dividend amount has been paid
                  to holders of Series B Stock on an as-converted basis.

                  The  Series  B  Stock  has  antidilution  rights  for  certain
                  issuances below the conversion  price.  The Series B 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 B Stock issued and outstanding,
                  the holders are entitled, voting as a separate class, to elect
                  two members of the Company's board of directors.

                  In connection with this transaction, the Company increased the
                  number of authorized  directors from five to seven,  resulting
                  in two vacancies.  Mr. Steven Ledger, Managing General Partner
                  of eCompanies  Venture Group, L.P. has been appointed as a new
                  director filling one vacancy and one  directorship  elected by
                  the Series B  Stockholders.  The  remaining  Series B director
                  seat is  vacant.  As a result of this  transaction  and by the
                  terms of the Company's Series A Stock, one director is elected
                  by the Series A Stockholders, two by the Series B Stockholders
                  and the  balance of  directors,  not  elected by any series of
                  preferred shares then outstanding, by the common stockholders.
                  As amended by this  transaction,  the largest holder of Senior
                  Notes,  Seacoast  Capital Partners L.P., is entitled through a
                  voting agreement,  to effectively  designate one director from
                  the common class. To date,  Seacoast Capital Partners L.P. has
                  not designated a director.

                  In  connection  with the sale of Series B Stock,  the  Company
                  entered into an Investors  Rights  Agreement with the Series B
                  Stock  investors,  certain Series A Stockholders and the three
                  Senior Note holders who also hold certain A, B, and C warrants
                  to purchase  shares of common  stock  ("Warrants")  granted in
                  connection  with  the  issuance  of  the  Senior  Notes.  This
                  agreement   provides  the  parties  with  certain  demand  and
                  piggyback  registration  rights and  grants  the  Senior  Note
                  holders  and each  holder of 20% of Series B Stock  originally
                  issued  with  certain  equity  preemptive  rights.  Previously
                  granted  antidilution  and  preemptive  rights  granted to the
                  Warrant  holders  were  terminated.  The Senior  Note  holders
                  retain certain debt preemptive rights.

                  In  connection  with this sale,  the Senior  Note and  Warrant
                  holders  (who also own a majority of Series A Stock),  amended
                  and waived  certain  provisions of  agreements  related to the
                  Senior Notes and the  Warrants.  These  amendments  included a
                  termination  of certain drag along  rights which  provided the
                  Warrant holders additional  consideration in certain instances
                  upon a sale of the Company. These terminated drag along rights
                  also had allowed  the  Warrant  holders to force a sale of the
                  Company in certain instances.

                  Other  amendments  executed by Senior Note and Warrant holders
                  included a modification of key person  insurance  requirements
                  and changes to Senior  Note  financial  covenants.  The Senior
                  Note  and  Warrant  holders  also  executed  certain  waivers,
                  including waiving any antidilution  adjustment to the Warrants
                  or  Series  A Stock as a result  of the  Series B Stock  sale,
                  waiving  the Series A and Series B Stock from the  computation
                  for a change of control  default  under the  Senior  Notes and
                  waiver of any prepayment  fee for the $1,000,000  reduction in
                  the Senior Notes. In connection with these amendments, waivers
                  and modifications by the Senior Note and Warrant holders,  the
                  Company agreed to increase the interest rate on the $1,450,000
                  balance of Senior  Notes  from the  current 8% to a maximum of
                  12% at the rate of 1% per calendar quarter commencing April 1,
                  2000 when the rate will increase from 8% to 9%.

                  While the  securities  were  sold by the  Company  without  an
                  underwriter  or cash  commission,  the  Company  issued  to an
                  outside financial advisor warrants to purchase an aggregate of
                  75,000  shares of common  stock at an exercise  price of $2.50
                  per share  until  December  7, 2004 in  connection  with these
                  transactions.  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 B Stock and will
                  be  placed  on  the  shares  of  common  stock  issuable  upon
                  conversion unless registered under the Act prior to issuance.

                                       19
<PAGE>

                  The  Company  incurred  cash  costs  estimated  at  $75,000 in
                  connection  with  the  offering.   After  the  application  of
                  $1,250,000 as debt conversions, the balance of net proceeds of
                  $7,725,000  are  intended to  supplement  working  capital and
                  provide funds to accelerate the development and implementation
                  of an  expanded  Internet  based  rating  program  for service
                  companies.   There  can  be  no  assurance   the  Company  can
                  successfully develop new services or that the proceeds will be
                  sufficient for such purpose.

                  The descriptions of these  transactions above are qualified in
                  their  entirety  by the full text of the  agreements  filed as
                  exhibits to the Company's Form 8-K dated December 13, 1999.

                  On January  18, 2000 the Company  sold an  additional  171,429
                  shares of Series B Stock to strategic  investor  TMCT Ventures
                  providing gross proceeds of $3,000,000.

         (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 1999 Annual Meeting of Stockholders held on November 19,
1999 the following members, constituting all of the members, were elected to the
Board of  Directors:  James Stein,  James A. Barnes,  Fritz T.  Beesemyer,  Josh
Felser and Jerry Polis.

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

<TABLE>
         1. Election of Directors: B

                a. By Common Stockholders:

<CAPTION>
                                    Affirmative Votes   Negative Votes   Votes Withheld
                                    -----------------   --------------   --------------
<S>                                     <C>                   <C>            <C>
                  James Stein           7,658,551            -0-             49,000
                  James A. Barnes       7,658,551            -0-             49,000
                  Jerry E. Polis        7,658,551            -0-             49,000
                  Josh Felser           7,658,551            -0-             49,000
</TABLE>

<TABLE>

                b. By Series A Stockholders:
<CAPTION>
                                    Affirmative Votes   Negative Votes    Votes Withheld
                                    -----------------   --------------    --------------
<S>                                       <C>                 <C>               <C>
                  Fritz T. Beesemyer      950,000            -0-               -0-
</TABLE>

         2.  Authorization  to approve an amendment to the Company's  1997 Stock
         Option  Plan to increase  the number of shares  reserved  for  issuance
         thereunder by 750,000 to an aggregate of 1,250,000 shares.

                  Affirmative Votes         Negative Votes       Votes Withheld
                  -----------------         --------------       --------------
                     5,811,654                  109,100              7,600

         3.  Authorization  to  increase  the number of shares of common  stock,
         $0.00025  par  value,  that  ValueStar  is  authorized  to  issue  from
         20,000,000 to 50,000,000.

                  a. Common stock votes:

                  Affirmative Votes         Negative Votes       Votes Withheld
                  -----------------         --------------       --------------
                    7,645,951                   54,100               7,600

                  b. Common and preferred stock votes:

                  Affirmative Votes         Negative Votes       Votes Withheld
                  -----------------         --------------       --------------
                    8,595,951                   54,100               7,600

         4.  Authorization  to  ratify  the  selection  of  Moss  Adams  LLP  as
         independent  auditors  for the  Company for fiscal year ending June 30,
         2000.

                  Affirmative Votes         Negative Votes       Votes Withheld
                  -----------------         --------------       --------------
                    8,649,751                   1,800                6,100


                                       20
<PAGE>

Item 5. Other Information

         None

Item 6. Exhibits and Reports on Form 8-K

         (a) Exhibits:

                  10.8.3   Second  Amendment  to 1997  Stock  Option  Plan dated
                           August 31, 1999 and Approved by the  Shareholders  on
                           November 19, 1999.

                  10.16    Non-Qualified  Stock  Option  Agreement  dated  as of
                           September  29,  1999  between  the  Company and James
                           Stein.

                  10.17    Non-Qualified  Stock  Option  Agreement  dated  as of
                           November  6, 1999  between  the Company and Joshua M.
                           Felser.

                  27       Financial Data Schedule

         (b) Reports on Form 8-K:

                  On December  13, 1999 the  Company  issued  Report on Form 8-K
                  related  to an Item 5 - Other  Events  related  to the sale of
                  Series B preferred stock.


                                       21
<PAGE>



                                   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 9, 2000      By:  /s/ JAMES A. BARNES
                                --------------------
                                 James A. Barnes
                                 Secretary and Treasurer
                                 (Principal Financial Officer and duly
                                 authorized to sign on behalf of the Registrant)



                                       22