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                                  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 March 31, 2000

                         Commission File Number 0-22619

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

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


360-22nd Street,  #210, Oakland,  California                      94612
--------------------------------------------                      -----
  (Address of principal executive offices)                      (Zip Code)


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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

YES  _X_   NO ___


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

Common Stock, $.00025 par value                           15,242,059
-------------------------------                           ----------
          (Class)                               (Outstanding at April 28, 2000)

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 March 31, 2000 and
                 June 30, 1999                                                 3

                 Consolidated Statements of Operations for the three
                 and nine months ended March 31, 2000 and 1999                 4

                 Consolidated Statements of Cash Flows for the nine
                 months ended March 31, 2000 and 1999                          5

                 Notes to Interim Consolidated Financial Statements            6

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


PART II. OTHER INFORMATION

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

SIGNATURES                                                                    20

                                       2

<PAGE>


<TABLE>
                                                        VALUESTAR CORPORATION
                                                     CONSOLIDATED BALANCE SHEETS
                                                             (Unaudited)

                                                               ASSETS

<CAPTION>
                                                                                                   March 31,              June 30,
                                                                                                     2000                  1999
                                                                                                 ------------          ------------
<S>                                                                                              <C>                   <C>
CURRENT ASSETS
     Cash                                                                                        $ 10,533,486          $    270,149
     Receivables                                                                                      388,844               409,806
     Inventory                                                                                         22,771                 4,008
     Prepaid expenses                                                                                 213,903                59,446
                                                                                                 ------------          ------------

           Total current assets                                                                    11,159,004               743,409

PROPERTY AND EQUIPMENT                                                                              2,422,441               501,605

DEFERRED COSTS                                                                                         60,433               100,839

INTANGIBLE AND OTHER ASSETS                                                                            84,536               194,130
                                                                                                 ------------          ------------

           Total assets                                                                          $ 13,726,414          $  1,539,983
                                                                                                 ============          ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                                                            $    996,576               461,825
     Accrued liabilities and other payables                                                           256,194               189,759
     Deferred revenues                                                                                 55,160                27,430
     Note payable - shareholder                                                                       295,000               280,000
     Current portion of capitalized leases                                                             42,423                30,018
     Current portion of long-term debt                                                                506,485             1,032,664
                                                                                                 ------------          ------------

           Total current liabilities                                                                2,151,838             2,021,696

CAPITAL LEASE OBLIGATIONS, net of current portion                                                     100,709               113,541
LONG-TERM DEBT, net of current portion                                                                114,397             1,795,438
                                                                                                 ------------          ------------

           Total liabilities                                                                        2,366,944             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 March 31, 2000 (liquidation
          preference of $10.00 per share)                                                                  56                  --
        800,000 shares designated Series B Convertible, with 688,586
          shares issued and outstanding at March 31, 2000 (liquidation
          preference of $17.50 to $30.00 per share, see note 8)                                           172                  --
     Common stock, $.00025 par value; 50,000,000 shares
        authorized, 14,500,123 and 9,374,132 shares issued
          and outstanding, respectively                                                                 3,625                 2,344
     Additional paid-in capital                                                                    29,331,155             6,485,373
     Unearned stock-based compensation                                                                (98,917)                 --
     Subscribed common stock                                                                          837,150                  --
     Accumulated deficit                                                                          (18,713,771)           (8,878,409)
                                                                                                 ------------          ------------

           Total stockholders' equity                                                              11,359,470            (2,390,692)
                                                                                                 ------------          ------------

           Total liabilities and stockholders' equity                                            $ 13,726,414          $  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                    Nine Months Ended
                                                                        March 31,                              March 31,
                                                               2000                1999                2000                1999
                                                           ------------        ------------        ------------        ------------
<S>                                                        <C>                 <C>                 <C>                 <C>
REVENUES                                                   $    478,750        $    693,485        $  1,670,878        $  1,769,753
                                                           ------------        ------------        ------------        ------------

OPERATING EXPENSES
     Cost of revenues                                           195,072             259,966           1,022,711             710,570
     Selling                                                  1,163,815             474,183           2,432,509           1,184,126
     Marketing and promotion                                    957,917             221,422           1,737,337             650,334
     Product and content development                          1,664,051                --             2,845,531                --
     General and administrative                                 565,517             405,323           1,378,349           1,225,417
     Stock-based compensation                                    66,250                --               142,083                --
                                                           ------------        ------------        ------------        ------------

                                                              4,612,622           1,360,894           9,558,520           3,770,447
                                                           ------------        ------------        ------------        ------------

LOSS FROM OPERATIONS                                         (4,133,872)           (667,409)         (7,887,642)         (2,000,694)
                                                           ------------        ------------        ------------        ------------

OTHER INCOME (EXPENSE)
     Interest income                                            118,900                --               144,234                --
     Interest expense - cash                                    (71,724)            (94,271)           (286,463)           (230,339)
     Non-cash interest and financing costs                     (945,296)               --            (1,678,236)               --
     Miscellaneous                                               (3,578)              3,690              (4,378)             (1,709)
                                                           ------------        ------------        ------------        ------------

                                                               (901,698)            (90,581)         (1,824,843)           (232,048)
                                                           ------------        ------------        ------------        ------------

NET LOSS                                                   $ (5,035,570)       $   (757,990)       $ (9,712,485)       $ (2,232,742)
                                                           ============        ============        ============        ============

NET LOSS AVAILABLE TO COMMON
     STOCKHOLDERS  (NOTE 11)                               $(13,866,280)       $   (757,990)       $(43,509,253)       $ (2,232,742)
                                                           ============        ============        ============        ============

LOSS PER COMMON SHARE                                      $      (1.17)       $      (0.08)       $      (4.19)       $      (0.25)
                                                           ============        ============        ============        ============

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                                             11,873,812           9,159,173          10,380,824           8,841,258
                                                           ============        ============        ============        ============

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

                                                                 -4-

<PAGE>


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

<CAPTION>
                                                                                                         Nine Months Ended
                                                                                                             March 31,
                                                                                                    2000                   1999
                                                                                                ------------           ------------
<S>                                                                                             <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                                   $ (9,712,485)          $ (2,232,742)
     Adjustments to reconcile net loss to net
        cash used by operating activities:
           Depreciation                                                                              307,798                 51,961
           Amortization of intangible assets                                                         174,076                   --
           Amortization of bond discount                                                           1,491,936                 30,850
           Change in allowance for doubtful accounts                                                  (3,783)                  --
           Other non-cash interest                                                                    12,224                 23,695
           Stock-based compensation                                                                  142,083                 60,000
        Changes in:
           Receivables                                                                                24,745                (60,125)
           Inventory                                                                                 (18,763)                15,064
           Prepaid expenses                                                                         (154,457)                (6,169)
           Deferred costs                                                                             40,406                 52,527
           Intangibles and other assets                                                              (64,482)                  --
           Accounts payable                                                                          534,751                364,385
           Accrued liabilities and other payables                                                     66,435                 86,861
           Deferred revenues                                                                          27,730                  6,495
                                                                                                ------------           ------------
               Net cash used by operating activities                                              (7,131,786)            (1,607,198)
                                                                                                ------------           ------------
CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                                                          (2,198,634)              (118,836)
                                                                                                ------------           ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of preferred stock, net of issuance cost                                  12,935,255                   --
     Proceeds from sale of common stock, net of issuance cost                                      5,645,635                597,875
     Proceeds from subscribed common stock                                                           837,150                   --
     Proceeds from debt                                                                              250,000              2,445,000
     Payments on capital leases                                                                      (30,427)                (7,657)
     Payments on debt                                                                                (43,856)                (6,975)
                                                                                                ------------           ------------
               Net cash provided by financing activities                                          19,593,757              3,028,243
                                                                                                ------------           ------------

NET INCREASE IN CASH                                                                              10,263,337              1,302,209
CASH, beginning of period                                                                            270,149                398,604
                                                                                                ------------           ------------

CASH, end of period                                                                             $ 10,533,486           $  1,700,813
                                                                                                ============           ============

SUPPLEMENTAL CASH-FLOW INFORMATION
     Cash paid during the year for:
        Interest                                                                                $    214,739           $    175,794
     Non-cash investing and financing activities:
        Stock, options and warrants issued for services                                              241,000                 60,000
        Warrants issued for other assets                                                                --                   40,000
        Accrued dividends on Series A Preferred Stock                                                122,877                   --
        Warrants issued in connection with Series B preferred stock                                  400,000                   --
        Equipment acquired under capital leases                                                       30,000                125,303
        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                                                    625,000                   --
        6% Convertible Notes and interest converted to equity                                        546,274                   --
        8% Secured Notes converted upon warrant exercise                                           1,450,000                   --
        12% subordinated notes converted upon warrant exercise                                        31,250                   --


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

                                                                 -5-

<PAGE>


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

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 developed business certification marks
including ValueStar  Certified(R) - - the symbol of high customer  satisfaction.
ValueStar's ratings enable consumers to quickly determine the best local service
providers.  The Company is expanding its ratings and creating a new  proprietary
rating database of credential  content on a large number of service providers in
the United States.

The Company  currently  generates  revenues by rating local service companies in
300  industries;  certifying  highly  rated  businesses;  and selling  ancillary
materials and services. The Company communicates information about rated service
and professional firms 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 rating and certification fees, and are
recognized  when all related  services are  provided to the  business  customer.
Rating services include a verification of credential  information and a customer
satisfaction  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  operates in eight  market  regions in the United  States.  In early
December  1999, in all market regions except  Northern  California,  the Company
changed from a fixed certification and rating fee to a percentage based fee. The
Company also began  collecting and  aggregating a database of credential data on
many service  providers  throughout the United  States.  The Company is entering
into agreements  with rated companies  providing for the payment of a commission
fee based on the value of transactions conducted with buyers registered with the
Company.  The Company is developing  the systems to register  buyers and monitor
transactions.  Until this system is  operating  and buyers are  registered,  the
Company is not collecting fees and does not anticipate any significant  revenues
from these seven markets.  The Company continues to charge a fixed certification
fee in its Northern California market region.

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
future  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 nine month period ended
March  31,  2000  are not  necessarily  indicative  of the  results  that may be
expected for the year ending June 30, 2000.

                                       6

<PAGE>


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

3. PRODUCT AND CONTENT 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 testing of a new Internet  initiative  using existing and newly
developed data on service  businesses.  This initiative consists of developing a
proprietary database of credential data on the majority of service businesses in
the  United  States and  developing  an  Internet-based  system  that  generates
commissions from  transactions  between buyers and sellers.  The credential data
includes  information  on  licensing,  insurance,  legal  and  finance,  company
profiles and related data important to buyers.  Service  providers with verified
credentials become rated and are also eligible to earn ValueStar's top rating by
passing a customer satisfaction  research survey of prior customers.  During the
third quarter the Company  continued to develop  computer and related systems to
support this new initiative.  Product and content development expenses are being
charged to operations as incurred.  These  expenses  include costs of developing
systems and creating the content.


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.

7. LONG-TERM DEBT
Long-term debt at March 31, 2000, consists of the following:

    12% Notes; principal of $68,750; unsecured;  interest is paid
      monthly,  with a  balloon  principal  payment  due in March
      2001; net of unamortized note discount of $1,364                 $  67,386
    12%  Subordinated  Notes:  principal of $375,000;  unsecured:
      interest is paid monthly,  with a balloon principal payment
      due in June  2000;  net of  unamortized  note  discount  of
      $2,523                                                             372,477
    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          64,562
    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           116,457
                                                                       ---------
                                                                         620,882
    Less current portion                                                 506,485
                                                                       ---------
                                                                       $ 114,397


The Company's  $2,450,000 of 8% Senior  Secured Notes Payable  ("Senior  Notes")
were  exchanged  for equity  securities  during the nine months  ended March 31,
2000. In connection with a $1,000,000 principal reduction of the Senior Notes in
December  1999 the Company  accelerated  the  amortization  of the related  note
discount  by  $563,126.  In  connection  with the  reduction  of the  $1,450,000
principal  balance of the Senior Notes in March 2000 the Company  amortized  the
balance  of the note  discount  of  $741,022  and  amortized  $153,333  of other
previously  capitalized  finance  costs.  Likewise on the  reduction  in the 12%
Subordinated  Notes by  $625,000  from the  exercise  of  warrants,  the Company
accelerated  the  amortization  of the related  note  discount by $7,982.  These
amortization  accelerations  increased  non-cash  expenses by  $571,108  for the
second quarter and $894,355 in the third quarter.

                                7

<PAGE>


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

8. STOCKHOLDERS' EQUITY

<TABLE>
The following table summarizes equity  transactions during the nine months ended
March 31, 2000:

<CAPTION>
                                                                Preferred Stock                   Common Stock           Additional
                                                         ---------------------------      --------------------------      Paid-In
                                                           Shares           Amount          Shares         Amount         Capital
                                                         -----------     -----------      ----------     -----------     -----------
<S>                                                          <C>         <C>              <C>            <C>             <C>
Balance July 1, 1999                                            --              --         9,374,132     $     2,344     $ 6,485,373
Issuance of Series A Convertible
  Preferred Stock, net of issuance
  costs of $40,000                                           225,000              56            --              --         2,209,944
Accrued 8% dividends on Series A
  Preferred Stock                                               --              --              --              --           122,877
Issuance of Series B Convertible
  Preferred Stock, net of issuance
  costs of $75,000 and value assigned
  to warrants granted of $400,000                            688,586             172            --              --        11,575,083
Value assigned to warrants granted
  in connection with Series B Stock                             --              --              --              --           400,000
Stock issued on conversion of 6%
  convertible notes and interest                                --              --           546,274             136         546,138
Stock issued on exercise of warrants
  reducing 12% subordinated notes                               --              --           500,000             125         624,875
Stock issued on exercise of warrants
  reducing 12% notes                                                                          25,000               6          31,244
Stock issued on exercise of warrants
  retiring 8% Senior Secured Notes                                                         1,977,382             494       1,449,506
Sale of stock at $5.85 per unit for cash,
  consisting  of one share and one warrant
  for each ten shares, net of issuance
  costs of $25,000                                                                           663,000             166       3,853,384
Stock issued on exercise of warrants
  for cash                                                      --              --         1,355,000             339       1,743,411
Stock issued on exercise of options
 for cash                                                                                     59,335              15          48,320
Unearned stock-based compensation                               --              --              --              --           241,000
Amortization of stock-based
  compensation                                                  --              --              --              --              --
Subscribed stock                                                --              --              --              --              --
Net loss                                                        --              --              --              --              --
                                                         -----------     -----------      ----------     -----------     -----------
Balance March 31, 2000                                       913,586     $       228      14,500,123     $     3,625     $29,331,155
                                                         ===========     ===========     ===========     ===========     ===========



                                                              Unearned          Subscribed
                                                            Stock-Based          Common             Accumulated
                                                           Compensation           Stock               Deficit              Total
                                                           ------------        ------------        ------------        ------------
Balance July 1, 1999                                               --                  --          $ (8,878,409)       $ (2,390,692)
Issuance of Series A Convertible
  Preferred Stock, net of issuance
  costs of $40,000                                                 --                  --                  --             2,210,000
Accrued 8% dividends on Series A
  Preferred Stock                                                  --                  --              (122,877)               --
Issuance of Series B Convertible
  Preferred Stock, net of issuance
  costs of $75,000 and value assigned
  to warrants granted of $400,000                                  --                  --                  --            11,575,255
Value assigned to warrants granted
  in connection with Series B Stock                                --                  --                  --               400,000
Stock issued on conversion of 6%
  convertible notes and interest                                   --                  --                  --               546,274
Stock issued on exercise of warrants
  reducing 12% subordinated notes                                  --                  --                  --               625,000
Stock issued on exercise of warrants
  reducing 12% notes                                               --                  --                  --                31,250
Stock issued on exercise of warrants
  retiring 8% Senior Secured Notes                                 --                  --                  --             1,450,000
Sale of stock at $5.85 per unit for cash,
  consisting  of one share and one warrant
  for each ten shares, net of issuance
  costs of $25,000                                                 --                  --                  --             3,853,550
Stock issued on exercise of warrants
  for cash                                                         --                  --                  --             1,743,750
Stock issued on exercise of options
 for cash                                                          --                                      --                48,335
Unearned stock-based compensation                              (241,000)                                   --                  --
Amortization of stock-based
  compensation                                                  142,083                                    --               142,083
Subscribed stock                                                   --               837,150                --               837,150
Net loss                                                           --                  --            (9,712,485)         (9,712,485)
                                                           ------------        ------------        ------------        ------------
Balance March 31, 2000                                     $    (98,917)       $    837,150        $(18,713,771)       $ 11,359,470
                                                           ============        ============        ============        ============
</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 for  gross  proceeds  of  $2,250,000.  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.  At March 31, 2000 the Series A Stock was  convertible
into 1,186,438 shares of common stock.

In December 1999 and January 2000 the Company  issued 688,586 shares of Series B
Convertible  Preferred Stock, par value $.00025 ("Series B Stock") at $17.50 per
share for gross proceeds of $12,050,255.  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 of these shares of Series B Convertible Stock.

                                        8

<PAGE>


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

8. STOCKHOLDERS' EQUITY (Cont'd)

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
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.  At March 31, 2000 the
Series B Stock was convertible into 6,885,860 shares of common stock.

In March  2000 the  Company  issued  663,000  shares of  common  stock in a unit
financing at $5.85 per unit ("585 Units") for gross proceeds of $3,878,550.  For
each ten units  purchased,  the Company granted  investors a warrant to purchase
one share of common  stock at $5.85 per share  resulting  in  warrants on 66,300
shares of common stock. The Company incurred legal and related costs of $25,000.

Subsequent to March 31, 2000, on April 4, 2000, the Company issued an additional
647,087  of 585 Units at $5.85 per share for gross  proceeds  of  $3,785,458.  A
total of 462,757  units were  issued for cash and  184,320  units were issued in
exchange  for call  proceeds of certain  warrants by the Company (see Note 9). A
total of $837,150 of these second closing funds were received prior to March 31,
2000 and are recorded as subscribed common stock at March 31, 2000.

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 reserved  shares and granted  options on 871,600 shares outside
of the option plans as of March 31, 2000. The following table summarizes  option
activity for the period ended March 31, 2000:

                                                 Weighted Average     Weighted
                                      Shares      Exercise Price    Average Life
                                      ------      --------------    ------------
Outstanding July 1, 1999            1,111,100       $   0.78             2.49
Granted                             1,947,922       $   4.98
Canceled                             (437,499)      $   3.09
Exercised                             (59,335)      $   0.81
Expired                               (15,000)      $   0.50
                                    ---------
Outstanding March 31, 2000          2,547,188       $   3.60             3.37
                                    ---------
Exercisable at March 31, 2000         968,172       $   0.99
                                    =========


Subsequent to March 31, 2000 a total of 17,467 options were exercised  providing
proceeds of $8,467.

                                       9

<PAGE>


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

9. STOCK OPTIONS AND WARRANTS (Cont'd)

Warrants

At  March  31,  2000 the  Company  had the  following  stock  purchase  warrants
outstanding each exercisable into one common share:

                    Number          Exercise Price      Expiration Date
                    ------          --------------      ---------------
                    25,000              $1.25           March, 2001
                   187,500(1)           $1.25           September, 2002
                    20,000(1)           $1.25           December, 2002
                    66,300(2)           $5.85           March, 2003
                    50,000              $1.75           May, 2003
                    12,500(3)           $2.00           April, 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
                    77,382              $1.00           March, 2009 (A Warrants)
                   231,132(4)           $1.00           March, 2009 (C Warrants)
                 ---------
                 1,277,542

(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 $15.00 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.


In  connection  with the sale of the Senior 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 could 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.

In March 2000 the noteholders  applied the $1,450,000  principal  balance of the
Senior  Notes  towards the  exercise of the 527,514 B Warrants  and  1,449,868 A
Warrants.  The Company agreed, in connection with the Senior Note  cancellation,
to call the C Warrants  effective  April 4, 2000 and the holders agreed to apply
the  proceeds  of the call  towards  the  purchase of 585 Units (see Note 8). On
April 4, 2000 the holders of the C Warrants  converted  the net call proceeds of
$5.00 per share, $1,155,660 in the aggregate, into 77,382 shares of common stock
(A Warrant  exercise) and 184,320 units of the 585 Unit  financing.  The call of
the C Warrants and issuance of the 585 Units was on a cashless basis.

Subsequent to March 31, 2000, in connection  with the second  closing of the 585
Unit  financing,  the Company  issued 64,713  warrants  exercisable at $5.85 per
share  exercisable  until April 4, 2003. In connection  with this second closing
the Company also issued a warrant to purchase  50,000  shares of common stock at
$10.00 per share  until April 2003 and a warrant to  purchase  30,000  shares of
common stock at $5.85 per share until April 2005.  Also  subsequent to March 31,
2000 the Company  issued a warrant to purchase  22,802 shares of common stock at
$6.14 per share until April 11, 2005 in  connection  with lease  financing  (see
Note 14).

10. INCOME TAXES

At March 31,  2000 a  valuation  allowance  has been  provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred  tax asset will not be  realized.  The Company has for federal
income tax purposes net operating loss carryforwards of approximately $8 million
which expire  through 2019 of which certain  amounts are subject to  limitations
under the Internal Revenue Code, as amended.

                                       10

<PAGE>


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

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  preferred  stock,  which  are
exercisable into  approximately 10.3 million shares of common stock at March 31,
2000 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 and $8,785,710 in the third
quarter by an imputed deemed dividend from a discount  provision included in the
Series B Stock  providing  for a conversion  price less than the market price on
the date of issuance.  The imputed  dividend is not a contractual  obligation on
the part of the Company to pay such imputed dividend.

<TABLE>
Net loss available to common stockholders is computed as follows:

<CAPTION>
                                                                       Three Months Ended                 Nine Months Ended
                                                                            March 31,                           March 31,
                                                                     2000              1999              2000              1999
                                                                 ------------      ------------      ------------      ------------
<S>                                                              <C>               <C>               <C>               <C>
Net loss                                                         $ (5,035,570)     $   (757,990)     $ (9,712,485)     $ (2,232,742)
Imputed Series B stock dividend based on discount
  provision                                                        (8,785,710)             --         (33,673,891)             --
Accrued dividends on Series A Stock                                   (45,000)             --            (122,877)             --
                                                                 ------------      ------------      ------------      ------------
Net loss available to common stockholders                        $(13,866,280)     $   (757,990)     $(43,509,253)     $ (2,232,742)
                                                                 ============      ============      ============      ============
</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 its 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.

14. SUBSEQUENT EVENTS

In addition to the subsequent stock, option and warrant  transactions  described
in Notes 8 and 9, on April 19, 2000 the Company received  proceeds of $1,278,737
from a leasing  institution in connection with a software and equipment  leasing
commitment of $2 million.  These funds financed software,  equipment and related
costs incurred by the Company prior to March 31, 2000.

                                       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 provider of branded rating content on local service  businesses.  As an
infomediary we enhance online and offline commerce between buyers and sellers of
services by offering ratings enabling buyers to quickly determine the best local
service  providers.  Our  ratings  (ValueStar  Certified(R)  and other  marks in
development) are provided on the Internet at www.valuestar.com,  in print in our
ValueStar  Report,  through  promotions by, and buyer  interactions  with, rated
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  and  ratings  on a  large  number  of  service
providers in the United States, and (b) developing an Internet-based system that
generates commissions from transactions driven by the content. The content being
developed includes credential  information such as licensing,  insurance,  legal
and finance, company profiles and related information. During the current fiscal
year we have  expended  significant  resources  (approximately  $2.8 million) to
generate database  information 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 providers.

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

o    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.

o    In February  2000 we entered into an alliance with  OurHouse.com  an online
     destination  providing  quality,  home improvement  products,  services and
     how-to information.  This one-year alliance provides OurHouse.com access to
     ValueStar's  database of rated  companies  and creates an  opportunity  for
     OurHouse.com suppliers to be rated by ValueStar.

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

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 rated and authorized by us. We are currently developing the systems to
register buyers and monitor transactions.  Until this system is operating, we do
not anticipate any significant  revenues from these markets. We will continue to
incur selling costs and rating costs  associated  with  enrolling  participating
service providers in our program. We believe this investment will accelerate the
launch  of our new  program  by  allowing  us to have a number of  verified  and
authorized  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.

                                       12

<PAGE>


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.

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 March 31, 2000,  we had an  accumulated
deficit of $18.5 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.
As discussed  above we are migrating 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 nine  months  ended  March  31,  2000 we also
incurred significant  product,  system and database development costs consisting
of (a)  capturing  and  verifying  credential  data on a large number of service
companies in the United States (our 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,  system and content development costs to continue at high levels during
the balance of fiscal 2000 and early  fiscal 2001.  After our content  databases
are developed, we will incur costs to maintain and update the data on an ongoing
basis. Exact amounts and timing of these expenditures and costs are subject to a
variety of factors and are not currently determinable by management.

Future  operations  will be impacted by changes in cost  structure and elections
regarding new product development,  advertising, promotions and growth rates. 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 March 31, 2000 we had 2,005 certified businesses.  At March 31, 2000, we also
had 1,137 (1,068 new and 34 renewal)  business  customers in the application and
rating  phase.  The  total  represents  approximately  130  days of sales to new
businesses.  Northern  California  business  customers  in the rating  phase are
expected  to  represent  approximately  $190,000  of  revenues  that  should  be
recognized  in the  fourth  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  ValueStar  Report  and on our Web site,  and  other  ancillary
revenues.  We reported  total  revenues of $1,670,878  for the nine months ended
March 31, 2000, a 5% decrease  from  revenues of  $1,769,753  for the first nine
months  of the  prior  year.  In early  December  1999 we  ceased  charging  and
collecting  fixed  certification  fees in  seven  markets  outside  of  Northern
California   and   commenced   enrolling   highly   rated   businesses   in  our

                                       13

<PAGE>


transaction-based  program providing for future  commissions.  Accordingly since
December we have  obtained  revenues  only from the Northern  California  market
region.  We  do  not  expect  revenues  from  other  market  regions  until  our
transaction system is fully developed and successfully operating.

During the nine months ended March 31, 2000,  certification  fees  accounted for
75% of  revenue,  compared  to 74% for the first nine  months of the prior year.
Revenues  for the three months  ended March 31, 2000 were  $478,750  compared to
$693,485  reported in the  comparable  prior period.  The decline of $214,735 is
attributable  primarily to the change in our revenue model  described above with
the third  quarter  revenues  being  only from the  Northern  California  market
region.

We reported approximately  $124,000 in brochure and other revenue,  $190,000 for
premium Web and  ValueStar  Report  listings and $105,000 in rating fees for the
first nine months of the year.  This compares to $92,000,  $214,000 and $161,000
respectively for the first nine months of the prior year. Brochure revenue is up
35% from the prior 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 11% 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 34%  because of an
increase in rating discounts to new customers  offered during the current period
and free ratings in the seven market regions.

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  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 for those
businesses  which are  charged  a fixed  certification  fee,  costs  related  to
verifying  insurance and complaint  status for these same  businesses,  Web site
operating  costs and costs of  information  products.  Cost of revenues  totaled
$1,022,711 and  represented  61% of sales during the nine months ended March 31,
2000.  This is an increase  from 41% for the nine months  ended March 31,  1999.
Rating costs  totaled  $195,072 for the three months ended March 31, 2000 or 41%
of revenues  compared to $259,966 and 38% of revenues  for the third  quarter of
the prior year.  The increase in the current year is  attributable  primarily to
increased  staffing and related costs from  expanding  our rating  department to
handle increased volume in anticipation of the transaction-based system. 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.

Rating  costs  estimated at $530,000  have been  included in product and content
development  costs for those  businesses  being added to our content database in
the seven markets in which we are not currently generating revenues.  We believe
the advance  rating of  businesses  under  transaction-based  contracts in these
market  regions  is a  strategic  investment  in new  content.  We believe it is
necessary to have a base of rated service companies  available in key markets as
we  prepare  to launch  our  transaction-based  systems  in the  second  half of
calendar 2000.

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 nine
months ended March 31, 2000, were $2,432,509,  or 146% of revenues,  compared to
$1,184,126,  or 67% of revenues for the first nine 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 third quarter  totaled  $1,163,815 or 243% of revenues  representing  an
increase from the $474,183 or 68% for the prior period. The significant increase
in selling costs during the most recent  periods (nine months and third quarter)
reflect in part the costs  associated  with selling  businesses in seven regions
late in the second quarter and in the third 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,

                                       14

<PAGE>


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
$1,737,337,  or 104% of revenues  during the first nine  months of fiscal  2000,
compared to $650,334,  or 37% of revenues for the prior  period.  Marketing  and
promotion  expenses for the third quarter were $957,917 compared to $221,422 for
the prior year's third 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 $333,000 in the first nine months
of fiscal 2000 compared to $265,000 in the prior year's first nine months, as we
printed and distributed more copies with additional  pages.  Most of these costs
are  incurred  in the first and third  quarter of each fiscal  year.  During the
first nine  months of fiscal  2000,  we expended  $593,000  on paid  advertising
targeted at expanding  consumer  awareness of  ValueStar.  Paid  advertising  of
$150,000 was employed in the prior  year's  first nine months.  These  increased
costs  reflect  management  decisions  to increase  advertising  over prior year
levels and advertising  rate inflation in general.  During the first nine months
of fiscal 2000, we expended  $120,000 on promotions  which was comparable to the
prior year. 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 and Content 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 nine  months  ended  March 31,  2000 we
expended  $2,845,531 on new program  development  and segregated  these costs as
product and content  development costs. Third quarter product  development costs
were  $1,664,051,  an increase  from the $907,611 in the second  quarter of this
fiscal year. The major  component of product  development  costs during the nine
months were compensation and related costs of $1,780,000.  We expect, subject to
adequate financing,  that product and content development expenses will increase
in the fourth  quarter  due to  increased  numbers of  personnel  and the use of
outside  branding,  computer  and system  consultants  employed  to develop  our
transaction-based system. Future levels of product development costs will depend
on many factors not currently estimable by 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  $1,378,349  or 82% of revenues  for the nine
months ended March 31, 2000,  compared to  $1,225,417 or 69% of revenues for the
prior year's first nine months.  General and  administrative  costs in the third
quarter were  $565,517,  an increase  from the $405,323 for the third quarter of
the prior period.  The major increases during the nine months are an increase in
occupancy  costs of $353,000 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  $142,083 of stock-based  compensation  during the nine months ended
March 31, 2000 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 nine months  ended  March  31,  2000 of
$1,964,699  that included  $286,463 of cash interest and  $1,678,236 of non-cash
amortization  of bond discount,  paid-in-kind  interest and amortized  financing
costs.  Included in the $1,678,236 of non-cash  interest and financing costs are
$1,312,130 of lump sum amortization  resulting from the early payoff of debt and
$153,333 of lump sum amortization of capitalized financing costs associated with
senior debt converted to common stock.  Interest for the prior comparable period
was $230,339 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  $9,712,485  for the nine months ended March 31,
2000, compared to a loss of $2,232,742 for the nine months ended March 31, 1999.
Our increased  loss is  attributable  to (a) increased  rating and selling costs
resulting

                                       15

<PAGE>


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 and content  development costs in the current period,  (d)
the  commencement in the seven market regions outside of Northern  California of
enrolling  businesses in our  transaction-based  model instead of charging fixed
certification fees and (e) 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.

The loss  available to common  stockholders  for the nine months ended March 31,
2000 of $43,509,253 includes $33,673,891 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 $122,877 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.  Management  believes the Series B financing,  which was
negotiated  when the  stock  was at lower  levels  and  includes  two  strategic
institutional  investors which are assisting the Company in its growth plans and
new Internet  initiative,  has allowed the Company to finance development of the
new 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 $7.1
million for the nine months  ended March 31,  2000.  At March 31,  2000,  we had
working  capital of $9 million.  For the nine months ended March 31,  2000,  our
negative cash flow from operating  activities was due primarily to our continued
operating  losses,  losses  in the  seven  market  regions  in  which we are not
currently  collecting  revenues,   addition  of  new  executive  management  and
investment in new products,  content and business growth. At March 31, 2000, our
net accounts  receivables  were $388,844  representing  approximately 64 days of
revenues and an annualized  turnover ratio of approximately  5.7 times.  This is
the same as the 64 days of revenues and turnover of  approximately  5.7 times at
June  30,  1999.  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 March 31, 2000, 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 and January we raised $10.8 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. In March we obtained $3.9 million from the
sale of common stock with warrants.  During the nine months ended March 31, 2000
we also  obtained  $1.8  million  from the  exercise of warrants and options for
cash.  These  funds  are being  used for  operations  and  product  and  content
development. Subsequent to March 31, 2000 we obtained $2.7 million cash from the
sale of  additional  shares of common  stock with  warrants  and $1.3 million of
lease financing for software and equipment previously purchased by 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  $10,533,486  at  March  31,  2000,  net  accounts
receivable  of $388,844,  and the funds  received  subsequent  to March 31, 2000
described above and  approximately of $0.7 million of leasing credit, 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  and  content  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 quarter's level of operating expenditures, and assuming
no revenues from our  transactions  based  system,  we believe we will require a
minimum of $5 million of  additional  capital to finance  operations  during the
next twelve  months.  Our actual results could differ  significantly  from prior
expenditures  and,  therefore,  we may  require  a greater  or lesser  amount of
additional  operating  funds  for  the  next  twelve  months.  We are  incurring
significant  costs to  develop  systems  and the  content  for our new  Internet
initiative.  Many of these costs are  non-recurring and the timing and amount of
such  expenditures is generally  controllable by management.  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.

                                       16

<PAGE>


Management also believes,  but there can be no guarantee,  that it could curtail
and/or delay certain  expenditures and modify operations such that existing cash
could finance operations for the next twelve months.

We  estimate  that we will  require  approximately  $3 million of  software  and
equipment  during the next twelve months to support our expanded  operations and
new products and services.  We are seeking additional lease financing to pay for
some of these capital  costs.  To finance our planned  endeavors or more rapidly
implement our transaction  revenue system, 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,
product and content development, 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.

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

                                       17

<PAGE>


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.

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 third  fiscal  quarter  ended  March 31,  2000 that were not
         registered under the Securities Act:

         1.  On January 18, 2000 the Company  completed the private offering and
             sale of 171,429 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).  These  shares  were  sold on the  same  terms  and
             conditions  as the  517,157  shares of  Series B Stock  sold by the
             Company in December 1999 as reported in the  Company's  Form 10-QSB
             for December 31, 1999.  The aggregate  gross proceeds of $3,000,000
             were from one strategic investor, TMCT Ventures.

             The Series B Stock was sold to TMCT Ventures without an underwriter
             or cash  commission.  The 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

                                       18

<PAGE>


             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.

             The  descriptions of the above Series B transaction is qualified in
             its entirety by the full text of the  agreements  filed as exhibits
             to the Company's Form 8-K dated December 13, 1999.

         2.  On March 24,  2000 the  Company  completed  the first  closing of a
             private offering and sale of 663,000 units.  Each unit consisted of
             one share of common  stock at $5.85 per share and one  warrant  for
             each ten shares ("585  Unit"),  each warrant  granting the right to
             purchase  one  common  share at $5.85 for a period of three  years.
             Warrants  for an  aggregate  of 66,300  shares of common stock were
             issued. The aggregate proceeds were $3,878,550 and will be used for
             working capital.

             In connection  with the sale of the 585 Units,  the Company entered
             into an Investors Rights Agreement with the __ investors  providing
             the investors with certain piggyback registration rights.

             While  the  securities   were  sold  by  the  Company   without  an
             underwriter or cash commission, the Company upon the second closing
             of an  additional  647,087  units  on April 4,  2000  issued  to an
             outside  financial  advisor  warrants to purchase an  aggregate  of
             30,000  shares of common  stock at an  exercise  price of $5.85 per
             share  until  April  4,  2005 and  issued  the  lead  investor,  in
             consideration   of  guaranteeing  the  purchase  of  a  minimum  of
             1,000,000 units, warrants to purchase an aggregate of 50,000 shares
             of common  stock at an  exercise  price of $10.00  per share  until
             April 4, 2003.

             All of the  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 shares of common  stock and  warrants  and will be placed on
             the shares of common stock  issuable  upon exercise of the warrants
             unless registered under the Act prior to issuance.

             The  descriptions  of the 585 Unit  financing  is  qualified in its
             entirety  by the full text of the  agreements  files as exhibits to
             this quarterly report.

     (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:

         4.29.1 First Amended  ValueStar  Corporation  Investor Rights Agreement
                dated as of March 24,  2000  between  the  Company  and  certain
                Series A, Series B and 585 Unit Investors

         4.31   Form of Securities Purchase Agreement dated as of March 24, 2000
                between the Company and 585 Unit Investors

         4.32   Form of  Stock  Purchase  Warrant  dated as of  March  24,  2000
                between the Company and 585 Unit Investors

        10.18   Non-Qualified  Stock  Option  Agreement  dated as of January 28,
                2000 between the Company and Robert Sick.

        10.19   Non-Qualified  Stock  Option  Agreement  dated as of January 28,
                2000 between the Company and Robert Sick.

                                       19

<PAGE>


        10.20   Incentive  Stock Option  Agreement  dated as of January 28, 2000
                between the Company and Robert Sick.

        27      Financial Data Schedule

         (b) Reports on Form 8-K:

                  None


                                   SIGNATURES

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


                                           VALUESTAR CORPORATION

Date: May 3, 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)

                                       20