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

                                   FORM 10-QSB

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

                 For quarterly period ended September 30, 1998.
                                            -------------------

                 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)

1120A Ballena Blvd., Alameda, California                     94501
----------------------------------------                     -----
(Address of principal executive offices)                   (Zip Code)

                                 (510) 814-7070
                                 --------------
                           (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, $.00001 par value                            8,682,496
-------------------------------                            ---------
           (Class)                             (Outstanding at October 31, 1998)

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

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<PAGE>


                              VALUESTAR CORPORATION
                                      INDEX

                                                                            Page
PART I. FINANCIAL INFORMATION

     Item 1. Financial Statements (unaudited):

             Consolidated Balance Sheets as of September 30, 1998 and
             and June 30, 1998                                                3

             Consolidated Statements of Operations for the three
             months ended September 30, 1998 and 1997                         4

             Consolidated Statements of Cash Flows for the three
             months ended September 30, 1998 and 1997                         5

             Notes to Interim Consolidated Financial Statements               6

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

PART II. OTHER INFORMATION

     Item 1. Legal Proceedings                                                15
     Item 2. Changes in Securities                                            15
     Item 3. Defaults upon Senior Securities                                  15
     Item 4. Submission of Matters to a Vote of Security Holders              15
     Item 5. Other Information                                                15
     Item 6. Exhibits and Reports on Form 8-K                                 15


SIGNATURES                                                                    16


<PAGE>


<TABLE>
                                          VALUESTAR CORPORATION
                                       CONSOLIDATED BALANCE SHEETS
                                               (UNAUDITED)
<CAPTION>
                                                                             SEPTEMBER 30,        JUNE 30,
                                                                                 1998               1998
<S>                                                                           <C>                <C>      
             ASSETS

CURRENT ASSETS
     Cash                                                                     $ 118,515          $ 398,604
     Receivables                                                                453,900            361,369
     Inventory                                                                   18,982             24,396
     Prepaid expenses                                                               --               3,902
                                                                      -------------------------------------

             Total current assets                                               591,397            788,271

PROPERTY AND EQUIPMENT                                                          151,050             56,697

DEFERRED COSTS                                                                   49,142            130,930
                                                                      -------------------------------------

             Total assets                                                     $ 791,589          $ 975,898
                                                                      =====================================

             LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
     Bank line of credit                                                      $ 250,000          $ 250,000
     Accounts payable                                                           433,780            197,410
     Accrued liabilities and other payables                                     126,175            145,445
     Current portion of term note                                                 9,195               --
     Deferred revenues                                                           44,889             27,020
     Shareholder loans                                                          200,000               --
                                                                      -------------------------------------

             Total current liabilities                                        1,064,039            619,875
                                                                      -------------------------------------

LONG-TERM DEBT                                                                1,607,451          1,525,357
                                                                      -------------------------------------

STOCKHOLDERS' DEFICIT
     Common stock, $.00025 par value; 20,000,000 shares
         authorized, 8,682,496 shares issued and outstanding
         each period                                                              2,171              2,171
     Additional paid-in capital                                               4,257,160          4,247,160
     Accumulated deficit                                                     (6,139,232)        (5,418,665)
                                                                      -------------------------------------

             Total stockholders' deficit                                     (1,879,901)        (1,169,334)
                                                                      -------------------------------------

             Total liabilities and stockholders' deficit                      $ 791,589          $ 975,898
                                                                      =====================================

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

                                                    3

<PAGE>


                              VALUESTAR CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                    Three Months Ended
                                                       September 30,
                                                  1998                 1997
                                        -------------------  -------------------

REVENUES                                       $   605,660          $   524,216
                                        -------------------  -------------------

OPERATING EXPENSES
     Cost of revenues                              193,347              153,515
     Selling                                       382,220              176,572
     Marketing and promotion                       294,329              261,678
     General and administrative                    392,703              155,654
                                        -------------------  -------------------

                                                 1,262,599              747,419
                                        -------------------  -------------------

LOSS FROM OPERATIONS                              (656,939)            (223,203)
                                        -------------------  -------------------

OTHER INCOME (EXPENSE)
     Interest expense                              (59,559)              (5,229)
     Miscellaneous                                  (4,069)                   -
                                        -------------------  -------------------

                                                   (63,628)              (5,229)
                                        -------------------  -------------------

NET LOSS                                       $  (720,567)         $  (228,432)
                                        ===================  ===================

LOSS PER COMMON SHARE                          $     (0.08)         $     (0.03)
                                        ===================  ===================

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                                 8,682,496            8,326,246
                                        ===================  ===================


      See accompanying notes to interim consolidated financial statements.

                                        4

<PAGE>


<TABLE>
                                     VALUESTAR CORPORATION
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          (UNAUDITED)
<CAPTION>
                                                                        Three Months Ended
                                                                           September 30,
                                                                      1998                1997
                                                                  -----------         ------------

<S>                                                               <C>                 <C>       
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                     $ (720,567)         $ (228,432)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
             Depreciation                                              8,652               2,249
             Amortization of bond discount                            17,249                --
         Changes in:
             Receivables                                             (92,531)            (30,229)
             Inventory                                                 5,414              10,706
             Prepaid expenses                                          3,902               7,035
             Deferred costs                                           81,788             (23,466)
             Accounts payable                                        236,370             (31,612)
             Accrued liabilities and other payables                  (19,270)            (21,431)
             Deferred revenues                                        17,869              (8,495)
                                                                  -----------         ------------

                 Net cash used by operating activities              (461,124)           (323,675)
                                                                  -----------         ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                            (103,005)             (2,988)
                                                                  -----------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of stock                                        --                50,000
     Net borrowings under line of credit                                --               250,000
     Proceeds from debt                                              285,000                --
     Payments on debt                                                   (960)               --
                                                                  -----------         ------------

                 Net cash provided by financing activities           284,040             300,000
                                                                  -----------         ------------

NET INCREASE (DECREASE) IN CASH                                     (280,089)            (26,663)

CASH, beginning of year                                              398,604              44,225
                                                                  -----------         ------------

CASH, end of year                                                 $  118,515          $   17,562
                                                                  ===========         ===========

SUPPLEMENTAL CASH-FLOW INFORMATION:
     Cash paid during the period for:
         Interest                                                 $   42,310          $    5,229
         Income taxes                                             $     --            $     --
     Non-cash investing and financing activities:
         None                                                                   

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

                                        5

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1998

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 150 industries;  licensing the certification mark to highly
rated businesses;  and selling ancillary  materials and services.  The Company's
activities are currently concentrated within one industry segment in California.
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 Consumer ValueStar
Report ("CVR"), 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  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.

Costs  incurred  in  printing  and   distributing  the  Company's  CVR  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, 1998.

In the opinion of  management,  the  interim  financial  statements  reflect all
adjustments of a normal  recurring  nature necessary for a fair statement of the
results for interim periods.  Operating  results for the three month periods are
not necessarily indicative of the results that may be expected for the year.

Certain  reclassifications  have been made in the prior  year to  conform to the
current period presentation.

3. 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.

4. 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.

Based on an ongoing  evaluation of the expected  period of future  benefits from
the  direct-response  advertising,  the period of amortization  has been reduced
from twelve months to sixty days.  Revenues  associated with the direct-response
advertising costs, which are primarily certification fees from businesses new to
ValueStar, are being recognized approximately sixty days after the telemarketing
costs are incurred.  This change in estimate of the amortization period resulted
in a one-time,  non-cash  increase  in selling  expenses of $81,788 in the first
fiscal quarter ended September 30, 1998.

                                       6

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1998

5. LINE OF CREDIT
The Company has a $250,000 revolving bank line of credit, with interest at prime
plus 2%.  Subsequent to September 30, 1998 the line of credit was transferred to
a new bank and  increased to an aggregate  of  $350,000.  The bank's  commitment
under this agreement matures in December, 1999. The line of credit is guaranteed
by the three directors of the Company.

6. SHAREHOLDER LOANS
Two shareholders  advanced $200,000 at September 30, 1998 pursuant to 12% demand
notes. An additional $45,000 was advanced  subsequent to September 30, 1998. The
Company is  negotiating to convert this financing to some form of long-term debt
or equity financing.

<TABLE>
7. LONG-TERM DEBT
Long-term debt at September 30, 1998, consists of the following:

<CAPTION>
<S>                                                                                             <C>
         12% Notes  Payable - $100,000  of Notes  payable  with  interest at 12%
         payable monthly; with all principal due on March 31, 2001, or sooner at
         the Company's discretion;  unsecured;  net of unamortized bond discount
         of $10,000                                                                             $  90,000

         12% Subordinated  Notes Payable - $1,000,000  principal of subordinated
         notes payable with interest at 12% payable monthly;  with all principal
         due on June 30, 2000, or sooner at the Company's discretion; unsecured.
         Net of unamortized bond discount of $47,069                                              952,931

         6%  Convertible  Notes  Payable - $525,000  principal  of  subordinated
         convertible  notes  payable  with  interest  at 6%  payable  in kind on
         conversion  or at maturity on June 30, 2001;  no prepayment is allowed;
         unsecured;  convertible  at $1.00 per common share.  Net of unamortized
         bond discount of $49,025.  Includes  accrued interest of $13,700 due at
         maturity                                                                                 489,675

         15% Term  Equipment  Note - $85,000  of  principal,  payable in monthly
         installments  of principal and interest of $2,022 to maturity in August
         2003; secured by equipment and software                                                    84,040
                                                                                                ----------
                                                                                                $1,616,646

         Less current potion                                                                         9,195
                                                                                                ----------

                                                                                                $1,607,451
                                                                                                ==========
</TABLE>

At September 30, 1998, the 6%  Convertible  Notes and accrued  interest  thereon
would have been convertible into 538,700 common shares.

8. STOCKHOLDERS' DEFICIT
There were no issuances of common stock during the three months ended  September
30, 1998. The Company issued 50,000 warrants in connection  with  refinancing of
the $100,000 of 12% Notes Payable.  The Company calculated the fair value of the
warrants at issuance and is amortizing this amount as interest  expense over the
life of the debt.

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 500,000  shares of common  stock for the 1997 Stock  Option  Plan.  The
Company  has also  issued  200,000  shares  outside  of the  option  plans.  The
following  table  summarizes  option activity for the period ended September 30,
1998:

                                       7

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1998


8. STOCKHOLDERS' DEFICIT (Continued)

                                                  Weighted Average    Weighted
                                        Shares     Exercise Price   Average Life
                                        ------     --------------   ------------
Outstanding July 1, 1998                877,550        $0.59            2.45
Granted                                 267,800        $1.19
Canceled                                (65,967)       $0.70
Exercised                                  --
Expired                                    --
Outstanding September 30, 1998        1,079,383        $0.73            2.91
                                      =========        =====            ====
Exercisable at September 30, 1998       766,666        $0.56
                                      =========        =====

On March 14, 1997 the Company adopted the 1997 Employee Stock  Compensation Plan
providing  for the  issuance  of up to  4,000  common  shares  to  non-executive
employees.  At September  30, 1998 an aggregate of 2,900 common  shares had been
granted pursuant to this plan.

At September  30, 1998 the Company had the  following  stock  purchase  warrants
outstanding each exercisable into one common share:

                  Number            Exercise Price            Expiration Date
                  ------            --------------            ---------------
                   150,000               $0.75                April, 2002
                   200,000               $1.25                June, 2002
                   300,000               $1.25                September, 2002
                   200,000               $1.25                December, 2002
                   500,000               $1.25                December, 2000
                   262,500               $1.25                April, 2003
                   262,500               $2.00                April, 2003
                    50,000               $1.75                May, 2003
                    50,000               $1.25                March, 2001
                 ---------
                 1,975,000
                 =========

Subsequent to September 30, 1998 the Company granted  warrants on 200,000 common
shares at $0.75 per share.

The Company has authorized 5 million shares of capital stock as preferred stock,
with a par  value of  $0.00025  per  share.  No  preferred  stock is  issued  or
outstanding.

9. INCOME TAXES
At September 30, 1998 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 $4,800,000
which expire  through 2013 of which certain  amounts are subject to  limitations
under the Internal Revenue Code, as amended.

                                       8

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1998

10. NET LOSS PER SHARE
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." Previously the Company followed the provisions of
Accounting  Principles  Board Opinion ("APB") 15, "Earnings Per Share." SFAS No.
128 provides for the  calculation  of "Basic" and  "Diluted"  earnings per share
("EPS").  Basic EPS  includes  no dilution  and is  computed by dividing  income
available to common stockholders by the weighted average number of common shares
outstanding  for the period.  Diluted EPS  reflects  the  potential  dilution of
securities  that could  share in the  earnings  of an  entity,  similar to fully
diluted earnings per share.  The Company's net losses for the periods  presented
cause the  inclusion of potential  common stock  instruments  outstanding  to be
antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not
required to present a diluted EPS. Stock options, warrants and convertible notes
exercisable  into  3,593,083 of common stock were  outstanding  at September 30,
1998.  These  securities  were not  included in the  computation  of diluted EPS
because of the net losses but could potentially dilute EPS in future periods.

11. RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1998, the Company adopted the Financial  Accounting  Standards
Board SFAS No. 130, "Reporting Comprehensive Income". This statement established
standards for reporting and display of  comprehensive  income and its components
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements.   Reclassification  of  financial  statements  for  earlier  periods
provided for  comparative  purposes is required.  The adoption of this statement
had no  material  impact on the  Company's  financial  condition  or  results of
operation  as of  September  30,  1998 and for the  three  month  periods  ended
September 30, 1998 and 1997. Total comprehensive  income did not differ from the
Company's net loss for the three months ended September 30, 1998 or 1997.

The Company has also adopted  SFAS No. 131,  "Disclosures  about  Segments of an
Enterprise and Related  Information",  which  supersedes  Statement of Financial
Accounting  Standards  No. 14,  "Financial  Reporting for Segments of a Business
Enterprise."  SFAS 131 establishes  standards for the way that public  companies
report information about operating  segments in annual financial  statements and
requires  reporting of selected  information about operating segments in interim
financial  statements  issued to the public.  It also establishes  standards for
disclosures  regarding  products  and  services,   geographic  areas  and  major
customers.  SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating  decision maker in deciding how to allocate resources and in
assessing performance. Quarterly disclosures are not required in this first year
of  adoption.  Management  believes  that  SFAS 131 will not have a  significant
impact on the Company's disclosure of segment information in the future.

12. YEAR 2000 COMPLIANCE
The Company,  like most owners of computer software,  will be required to modify
significant  potions of its  software so that it will  function  properly in the
year  2000.  Preliminary  estimates  of the total  costs to be  incurred  by the
Company to resolve this problem range from $10,000 to $20,000. Since the Company
mainly uses third  party  "off-the-shelf"  software,  it does not  anticipate  a
problem in resolving the year 2000 problem in a timely  manner.  Maintenance  or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.

                                       9

<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, 1998.

Overview
ValueStar  Corporation  is a  consumer  research  and  rating  company  that has
designed a new rating system and certification mark, ValueStar Certified(R), for
service businesses. ValueStar's rating system is designed to enable consumers to
determine  quickly and easily those local service  businesses that have attained
the highest level of customer satisfaction.

The  Company's  revenues are generated  primarily  from research and rating fees
paid by new  and  renewal  businesses,  certification  fees  from  highly  rated
businesses and from the sale of information products and services.  An important
aspect of the Company's  business model is the recurring nature of revenues from
businesses renewing their certification.

Certification  fees,  ranging  from $995 to  approximately  $2,000  depending on
business size, are recognized 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. The Company from
time to time provides discounts, incentives from basic pricing and payment terms
on fees. Cancellations by certified businesses are nominal, less than 2%.

The Company  expenses  research and rating costs as incurred.  Costs incurred in
printing and  distributing  the  Company's  Consumer  ValueStar  Report  ("CVR")
publication  for  consumers,  currently  published in January and July,  and any
related revenues are recognized upon publication.  Accordingly, the revenues and
costs in the Company's first and third fiscal quarters are impacted by the costs
and revenues from the CVR publication.

Effective  July 1,  1994,  with the  adoption  by the  Company of  Statement  of
Position  No.  93-7  (SOP  93-7),   Reporting  on  Advertising  Costs,   certain
direct-response  advertising  costs are deferred and amortized over the expected
period of future  benefits.  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.

Prior  to  July  1,  1998  the  Company  was  amortizing  deferred  costs  on  a
straight-line  basis over twelve months.  Based on an ongoing  evaluation of the
expected period of future  benefits from the  direct-response  advertising,  the
period of  amortization  has been  reduced  from  twelve  months to sixty  days.
Revenues  associated  with the  direct-response  advertising  costs,  which  are
primarily  certification  fees  from  businesses  new to  ValueStar,  are  being
recognized  approximately sixty days after the telemarketing costs are incurred.
This  change in  estimate  of the  amortization  period  resulted in a one-time,
non-cash  increase in selling  expenses of $81,788 in the first  fiscal  quarter
ended September 30, 1998.

Deferred  costs are  periodically  evaluated  to determine  if  adjustments  for
impairment are necessary.

Since inception the Company has been growing and developing its business and has
incurred  losses in each year since  inception  and at September 30, 1998 had an
accumulated  deficit  of  $6,139,232.  There  can  be  no  assurance  of  future
profitability.

Effect of Growth in Certified Businesses and Renewals
The  Company's  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.
Also a  growing  and  larger  base of  certified  businesses  reduces  the costs
(relative to revenues)  associated with printing and  distributing the Company's
Consumer ValueStar

                                       10

<PAGE>

Report to consumers,  maintaining the VALUESTAR.COM  Internet site and providing
other  services.  The  marginal  fixed  costs  associated  with  more  certified
businesses  is  minimal  compared  to  these  base  printing,  distribution  and
maintenance costs.

Since a considerable portion of the Company's operations are engaged towards the
solicitation  of new service and  professional  business  applicants in order to
expand the base of certified  businesses,  the Company incurs  substantial costs
towards this activity.  Currently the Company is only deferring direct telephone
sales  costs and  amortizing  them at the time of  certification,  an average of
approximately 60 days. Other costs are expensed as occurred.

At September 30, 1998 the Company had approximately 1,250 certified businesses.

The Company  believes as a market region  matures,  and the Company has a larger
base of  certified  businesses,  fixed and  indirect  costs  will  decline  as a
percentage of revenues. The Company also believes that the opening of new market
regions  will  provide  additional  revenues  to cover  certain  fixed  selling,
marketing,  administration and overhead costs. Management believes that the more
established  Northern  California  market  has  achieved  a base of  certificate
holders  sufficient to provide  positive  regional  operating  margins (prior to
allocation of corporate administration and overhead) in future periods, although
there can be no  assurance  thereof.  Management  also  estimates  that it could
substantially reduce operating costs to achieve break-even operations on reduced
levels of new sales and by maintaining the existing base of renewing businesses.
However,  any such dramatic  cutbacks  would  curtail  growth and the ability to
expand regionally in the future.

Future  operations  are impacted by changes in the cost  structure and elections
regarding advertising,  promotions and growth rates (due to the lower margins in
the first year). Management intends, subject to financial resources, to continue
to expand the  business  geographically  requiring  increased  numbers of sales,
marketing  and  support  personnel,  the  exact  number  which is not  currently
estimable and is dependent on decisions regarding  expansion.  Rapid growth, due
to the  nature  of the  Company's  operations,  is  expected  to  contribute  to
continued operating losses in the foreseeable future.

During the first quarter of the current year,  the Company  expanded  personnel,
computer systems and overhead to support the expansion into Southern  California
and to prepare for future regional expansion,  subject to financing.  The number
of personnel has grown to 49 full-time and 22 part-time persons at September 30,
1998. During the first quarter the Company added four new executive positions in
anticipation  of  continued  growth and  regional  expansion.  The Company  also
incurred  marketing,  selling and  administrative  costs in connection  with the
Southern  California  region  startup  contributing  to the  loss  in the  first
quarter.

At  September  30, 1998 the  Company  had 550 (490 new and 60 renewal)  business
customers in the  application  and rating phase  compared to 410 (349 new and 61
renewal) at June 30, 1998. Management has been installing new hardware, software
and systems to more automate the research and rating process.  The  installation
of new  systems  in the first  quarter  resulted  in some  delays in  processing
applicants.  Based on  management's  experience,  the business  customers in the
rating phase are expected to represent  over $450,000 of revenues that should be
recognized  in the  second  quarter  of  fiscal  1999  (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 the CVR and on the Web site,  and  other  ancillary  revenues.  The
Company reported total revenues of $605,660 for the three months ended September
30, 1998, a 16% increase  over revenues of $524,216 for the first quarter of the
prior year and a 19% increase over the  immediately  preceding  quarter  (fourth
quarter of fiscal  1998).  The first quarter of fiscal 1998 revenues of $524,216
was the highest revenue quarter of the prior year due to timing of new sales and
renewals.

The growth in  revenues  is the result of improved  new sales  velocity  and the
impact of a larger base of renewals. During the first quarter certification fees
accounted  for 79% of revenue  (75% for the prior  year's  comparable  quarter).
Renewing businesses  represented 58% of certification fees in the current year's
first quarter compared to only 32% in the prior year's first quarter. Management
expects  renewing  businesses to grow in dollar  amount,  however the percentage
contribution  attributable to renewals will vary depending in part on the volume
of new businesses being certified in any particular period.

                                       11

<PAGE>

The Company reported  approximately  $94,000 of revenue from premium listings in
the CVR publication in July, an increase of $49,000 from the $45,000 reported in
July,  1997. The increase  results from improved  marketing  efforts  focused on
expanding ancillary revenues.

Revenues can vary from quarter to quarter due to the impact of distributing  the
semi-annual CVR publication to consumers,  seasonality,  effectiveness  of sales
methods  and  promotions,   levels  of  expenditures   targeted  at  prospective
businesses,  the numbers of certificate  holders up for renewal,  renewal rates,
pricing  policies,  timing of  completion  of  research  and  ratings  and other
factors, some of which are beyond the control of management.

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 and certification  materials.  During December
1997, the Company made a change from using an outside vendor to perform customer
satisfaction  research on applicants to in-house  employees and related facility
and operating  costs.  This change has reduced  rating costs on a per unit basis
and as a percentage of revenues.  Cost of revenues  represented  32% of revenues
during the first fiscal quarter ended September 30, 1998 comparable to the prior
year's first  quarter  which was lower than the average of the prior 1998 fiscal
year of 36% due to the record first  quarter  fiscal 1998  revenues.  Management
focuses  efforts on  automating  systems and  procedures  to make  ratings  more
efficient and economical. Increased volume of revenues reduces the percentage of
revenues  associated with certain fixed rating costs.  Cost of revenues may vary
significantly  from  quarter to quarter  both in amount and as a  percentage  of
sales.

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.  Sales costs for the first
quarter of fiscal 1999 were $382,220, or 63% of revenues,  compared to $176,572,
or 34% of revenues for the prior year's  first  quarter.  The prior year's first
quarter was less than the average of 56% for fiscal  1998 due  primarily  to the
record  revenues for the quarter.  The current year's first quarter  included an
$81,788  one-time,  non-cash  expense  resulting from the change in estimate for
deferred costs described above.  Also in the first quarter the Company initiated
sales  activities  in a new market  region,  Southern  California,  incurring an
estimated  $57,000 of non-deferred  sales costs consisting of $27,000 of outside
sales personnel related costs and $30,000 of lead generation costs. In the first
quarter of fiscal 1999 the  Company  reported  only  nominal  revenues  from the
Southern  California  region due to the  approximately  60 day lag from  selling
activities to initial revenues.  Other than direct targeted telemarketing costs,
the Company expenses sales costs as incurred. The Company expects sales 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,  timing and costs
of opening new market  regions,  level and percentage of fixed selling costs and
other factors, some beyond the control of management.

Marketing and Promotion  Expenses.  Marketing and promotion expenses  aggregated
$294,329 or 49% of revenues  during the first quarter of fiscal 1999  comparable
to $261,678 or 50% of revenues  incurred  for the  comparable  quarter of fiscal
1997.  Included in marketing  and selling  expenses in each period were printing
and distribution  costs of the Company's CVR publication  targeted at consumers.
Printing and distribution  costs of $107,000 in fiscal 1999's first quarter were
comparable to fiscal 1998's first quarter total of $102,000, however the company
was able to print and distribute more copies with additional pages due to better
pricing. During the first quarter of fiscal 1999 the Company expended $98,000 on
paid  advertising   targeted  at  expanding   consumer  awareness  of  ValueStar
Certified.  Paid  advertising  of $65,000 was employed in the prior year's first
quarter.  In the first  quarter of fiscal 1999 the Company  expended  $54,000 on
promotions for certified businesses compared to $30,000 for the prior comparable
quarter  with the increase  due to  increased  numbers of certified  businesses.
Generally the first and third fiscal  quarters have increased  costs because the
CVR  publication  is printed and  distributed  as a service to consumers  during
these  quarters.  Also, the Company  generally  expends less  advertising in the
second fiscal quarter due to higher media costs in the calendar fourth quarter.

Marketing and promotion expenses are subject to significant variability based on
decisions  regarding the timing and size of  distribution of the CVR publication
and decisions regarding paid advertising,  public relations and market and brand
awareness  efforts.  The  Company  anticipates  continuing  to make  significant
expenditures  in  marketing  and  promotion  efforts as the  Company  supports a
growing base of certificate  holders and expands to new regions but  anticipates
these costs will decrease as an annual  percentage of revenues as revenues grow.
However, amounts and percentages on a quarterly basis may vary significantly.

                                       12

<PAGE>

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  $392,703 for the first fiscal  quarter  ended
September 30, 1998, compared to $155,654 for the comparable quarter of the prior
year, an increase of $237,049.  The major increases  include a $60,000  increase
due to the  increased  number of executive  and  management  personnel  added in
anticipation of continued  regional  expansion;  a $61,000 increase in occupancy
and telephone  costs due to  additional  personnel  and expanded  operations;  a
$35,000 increase in accounts receivable debt expense versus the prior comparable
quarter;  an $18,000  increase in depreciation and other costs due to additional
equipment and increased activity;  a $23,000 increase in corporate costs (legal,
accounting,  filing, public relations and consulting) due to increased audit and
legal  costs  as a public  company,  and;  a  $10,000  increase  in  travel  and
entertainment due to expanded  operations.  Management  anticipates that general
and  administrative  costs will  continue to exceed prior  period  levels due to
increased  executive  personnel  added  in  anticipation  of  continued  growth,
increased  general  computer,  operating,  occupancy  and  corporate  costs as a
publicly traded company.

To date,  development  expenses  associated  with the  design,  development  and
testing of the  Company's  programs and services  have not been material and are
included in sales and  marketing  or general  and  administrative  expenses  (if
performed by executive  management).  In the future, as the Company develops new
programs or services,  it anticipates that it may segregate development expenses
as an expense category.

The  Company  incurred  interest  expense in the first  fiscal  1999  quarter of
$59,559 which included  $17,249 of non-cash  interest from  amortization of bond
discount.  Interest for the prior  comparable  quarter was $5,299.  The increase
resulted  from the  significant  additions  of debt to  finance  growth  and the
related losses incurred by the Company.

Net Loss.  The Company had a net loss of $720,567  for the first  quarter  ended
September  30,  1998,  compared  to a net loss of  $228,432  for the  comparable
quarter ended  September 30, 1997. The increased loss is attributable to (a) the
increased  selling costs resulting from the change in amortization  estimate and
expansion  of sales  personnel to the Southern  California  market,  and (b) the
increased general and administrative  costs associated with additional executive
management and support for expanded market regions.  The Company  anticipates it
will continue to experience  operating  losses until it achieves a critical mass
base of renewing  certificate  holders as it pursues  aggressive  growth. As the
Company is  increasing  its  business  volume (new and  renewal  certifications)
immediate  future  quarterly  results  will be  greatly  impacted  by  decisions
regarding  new  markets and growth  rates.  Achievement  of  positive  operating
results will require  obtaining a  sufficient  base of new and renewal  business
certifications  to  support  operating  and  corporate  costs.  There  can be no
assurance the Company can sustain  renewal rates or achieve a profitable base of
operations.

Liquidity and Capital Resources
Since the Company  commenced  operations,  it has had significant  negative cash
flow from operating activities. The negative cash flow from operating activities
was $461,124 for the three months ended  September 30, 1998 and  $1,629,721  for
the fiscal year ended June 30,  1998.  At  September  30, 1998 the Company had a
working  capital  deficit of $472,642.  For the three months ended September 30,
1998 the negative cash flow from  operating  activities was due to the continued
operating losses,  expansion to the Southern California region,  addition of new
executive management and investment in business growth.  Included in the working
capital  deficit at September  30, 1998 is net accounts  receivable of $453,900,
representing  approximately 68 days of revenues and an annualized turnover ratio
of approximately 5.3 times. This compares  favorably to approximately 82 days of
revenues and turnover of approximately  4.4 times at June 30, 1998. The improved
turnover and reduced accounts  receivable level results primarily from increased
revenues.  Management  believes  that 60 to 90 days revenues in  receivables  is
reasonable  based on the  nature  of the  Company's  business  and the  terms it
provides  certifying  companies.  At  September  30,  1998 the  Company  has not
experienced  and  does  not  anticipate  any  significant   accounts  receivable
recoverability problems.

The Company has financed  its  operations  primarily  through the sale of common
equity and debt  financing.  During  fiscal year ended June 30, 1998 the Company
obtained  $250,000  from  a  bank  line  of  credit,  $1,000,000  in a 12%  Note
financing, $525,000 in 6% Convertible Subordinated Promissory Notes and $227,500
from common stock  sales.  During the first  quarter  ended  September  30, 1998
shareholders  advanced  $200,000  to the  Company.  The bank  line of  credit is
guaranteed  by certain  officers,  directors and a  shareholder.  Other than the
credit  line  which was fully  utilized  at  September  30,  1998,  there are no
commitments  for  future  investments  and  there can be no  assurance  that the
Company can continue to finance its  operations  through these or other sources.
In the past shareholders,  including from time to time directors,  have advanced
funds and at times converted  funds to debt or equity  financing on terms of new
forms  of  financing.  There  can be no  assurance  that  such  shareholders  or
directors will provide any future financing to the Company.

                                       13

<PAGE>

Other than cash on hand of  $118,515  at  September  30,  1998 and net  accounts
receivable of $453,900,  the Company has no material unused sources of liquidity
at this time, and the Company expects to incur  additional  operating  losses in
future fiscal  quarters as a result of continued  operations 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  the  Company's
control.  Subsequent to September 30, 1998 the bank line of credit was increased
to $350,000 and shareholders advanced an additional $45,000 of financing.

The  Company  expects  that it will  require a minimum  of  $750,000  to finance
operations during the next twelve months. This estimate is based on a base level
of operations,  anticipated renewal revenues,  anticipated sales levels,  growth
and budgeted  operating  costs. The Company has plans to continue to expand into
new market  regions and would  require and is seeking  additional  financing for
such expansion.  The Company's  actual results could differ  significantly  from
management's plans, and therefore the Company may require  substantially greater
additional  operating  funds.  In such an  event,  should  the  required  and/or
additional  funds not be available or planned  operations not meet  management's
expectations, the Company may be required to significantly curtail or scale back
staffing, advertising and other marketing expenditures and general operations in
more reliance on higher profitable  renewals and limit new growth.  There can be
no  assurance  that  additional  funding  will be  available  or on what  terms.
Potential  sources of such funds include  exercise of  outstanding  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  a  number  of  new
pronouncements  as discussed in the footnotes to the Company's interim financial
statements  (see page 9,  Note 11).  As  discussed  in the notes to the  interim
financial  statements,  the  implementation  of these new  pronouncements is not
expected to have a material effect on the financial statements.

On September  28, 1998,  the SEC issued a press release and stated 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. Until such time as the SEC staff
issues such interpretative  guidelines,  it is unclear what, if any, impact such
interpretative guidance will have on the Company's current accounting practices.
The Company's practices have been consistently  applied since its initial filing
and review by the SEC in 1997.  However,  the  potential  changes in  accounting
practice being  considered by the SEC staff, if applied to  certifications  in a
manner different than currently recognized by the Company, could have a material
impact on the manner in which the Company recognizes  revenue.  Any such changes
would  have no  effect  on  reported  cash  flow or the  economic  value  of the
Company's certifications.

Year 2000 Compliance
The  Company  is aware of the issues  associated  with the  programming  code in
existing  computer systems as the Year 2000 approaches.  The "Year 2000" problem
is  concerned  with  whether  computer  systems  will  properly  recognize  date
sensitive  information  when  the year  changes  to  2000.  Systems  that do not
properly  recognize such  information  could generate  erroneous data or cause a
system to fail.  The Year 2000 problem is pervasive  and complex as the computer
operation of virtually every company will be affected in some way.

The Company,  like most owners of computer software,  will be required to modify
significant  potions of its  software so that it will  function  properly in the
Year  2000.  Preliminary  estimates  of the total  costs to be  incurred  by the
Company to resolve this problem  range from $10,000 to $20,000.  Maintenance  or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.

Since the Company mainly uses third party "off-the-shelf"  software, it does not
anticipate a problem in resolving the Year 2000 problem in a timely manner.  The
Company is  currently  taking  steps to ensure  that its  computer  systems  and
services will continue to operate on and after January 1, 2000.  However,  there
can be no assurance  that Year 2000  problems will not occur with respect to the
Company's computer systems.  Furthermore, the Year 2000 problem may impact other
entities  with which the Company  transacts  business,  and the  Company  cannot
predict the effect of the Year 2000  problem on such  entities or the  resulting
effect on the Company. As a result, if preventative and/or corrective actions by
the Company and those the Company  does  business  with are not made in a timely
manner,  the Year  2000  issue  could  have a  material  adverse  effect  on the
Company's business,  financial condition and results of operations.  The Company
has not yet  developed  a  contingency  plan to  operate  in the event  that any
noncompliant  critical  systems  are not  remedied  by January 1, 2000,  but the
Company intends to develop such a plan in the near future.

                                       14

<PAGE>

Tax Loss Carryforwards
As of June 30, 1998, the Company had  approximately  $4.8 million of federal tax
loss carryforwards. A valuation allowance has been recorded for the net deferred
tax asset arising  primarily from such tax loss  carryforwards  because,  in the
Company's  assessment,  it is more likely than not that the  deferred  tax asset
will not be realized.

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
the  Company's  financial  position,  business  strategy,  budgets and plans and
objectives of management for future operations are  forward-looking  statements.
Although  the  Company  believes  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 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 the Company's annual report on Form 10-KSB for the fiscal year ended June 30,
1998 and not to place undue reliance on the forward-looking statements contained
herein,  which  speak only as of the date  hereof.  The  Company  undertakes  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 first fiscal  quarter ended  September 30, 1998
             that were not registered under the Securities Act:
                  During July 1998 the Company issued as an inducement to extend
                  the due  date on  $100,000  of debt to two  persons  aggregate
                  warrants  to  purchase  50,000  shares of its Common  Stock at
                  $1.25 per share until March 2001. The  securities  were issued
                  by  the  Company  without  an  underwriter  to  two  qualified
                  investors  (one the spouse of a  director).  The  issuance was
                  exempt by reason of Section 4(2) of the Act in reliance on the
                  private nature of the transaction, restrictions on transfer on
                  the   warrants   and   underlying    shares   and   based   on
                  representations  of the purchasers.  An appropriate legend was
                  placed on the warrants.
         (d) None

Item 3.  Defaults Upon Senior Securities
         None

Item 4.  Submission of Matters to a Vote of Security Holders
         None

Item 5.  Other Information
         None

Item 6.  Exhibits and Reports on Form 8-K

         (a) Exhibits:
                  27       Financial Data Schedule

         (b) Reports on Form 8-K:
                  None

                                       15

<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: November 12, 1998      By: /s/JAMES A. BARNES
                                 -------------------
                                 James A. Barnes
                                 Secretary and Treasurer
                                 (Principal Financial Officer and duly
                                 authorized to sign on behalf of the Registrant)

                                       16