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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 September 30, 1999

                         Commission File Number 0-22619

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

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

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

                                 (510) 808-1400
                           (Issuer's telephone number)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. YES X NO ___

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

Common Stock, $.00025 par value                            9,569,132
-------------------------------                            ---------
         (Class)                             (Outstanding at November 8, 1999)

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



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<PAGE>

<TABLE>

                                       VALUESTAR CORPORATION
                                             INDEX

<CAPTION>

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

         Item 1. Financial Statements (unaudited):

                 Consolidated Balance Sheets as of September 30, 1999 and
                 June 30, 1999                                                                 3

                 Consolidated Statements of Operations for the three
                 months ended September 30, 1999 and 1998                                      4

                 Consolidated Statements of Cash Flows for the three
                 months ended September 30, 1999 and 1998                                      5

                 Notes to Interim Consolidated Financial Statements                            6

         Item 2. Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                                        11

PART II. OTHER INFORMATION

         Item 1. Legal Proceedings                                                            16
         Item 2. Changes in Securities                                                        16
         Item 3. Defaults upon Senior Securities                                              17
         Item 4. Submission of Matters to a Vote of Security Holders                          17
         Item 5. Other Information                                                            17
         Item 6. Exhibits and Reports on Form 8-K                                             17



SIGNATURES                                                                                    18


</TABLE>


                                       2
<PAGE>

<TABLE>
                                            VALUESTAR CORPORATION
                                         CONSOLIDATED BALANCE SHEETS
                                                 (Unaudited)
<CAPTION>

                                                   ASSETS
                                                                       September 30,             June 30,
                                                                            1999                   1999
                                                                        ------------           ------------
<S>                                                                     <C>                    <C>
CURRENT ASSETS
     Cash                                                               $    671,949           $    270,149
     Receivables                                                             454,785                409,806
     Inventory                                                                12,725                  4,008
     Prepaid expenses                                                         35,571                 59,446
                                                                        ------------           ------------

            Total current assets                                           1,175,030                743,409

PROPERTY AND EQUIPMENT                                                       606,947                501,605

DEFERRED COSTS                                                               117,379                100,839

INTANGIBLE AND OTHER ASSETS                                                  190,027                194,130
                                                                        ------------           ------------

            Total assets                                                $  2,089,383           $  1,539,983
                                                                        ============           ============

                                    LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
     Accounts payable                                                   $    364,261                461,825
     Accrued liabilities and other payables                                  285,101                189,759
     Deferred revenues                                                        48,369                 27,430
     Note payable - shareholder                                              285,000                280,000
     Current portion of capitalized leases                                    31,658                 30,018
     Current portion of long-term debt                                     1,041,654              1,032,664
                                                                        ------------           ------------

            Total current liabilities                                      2,056,043              2,021,696

CAPITAL LEASE OBLIGATIONS, net of current portion                            104,984                113,541
LONG-TERM DEBT, net of current portion                                     1,828,927              1,795,438
                                                                        ------------           ------------

            Total liabilities                                              3,989,954              3,930,675

STOCKHOLDERS' DEFICIT
     Preferred stock, $.00025 par value; 5,000,000 shares
        authorized, 500,000 shares designated Series A Convertible,
        225,000 Series A shares issued and outstanding at
        September 30, 1999                                                        56                   --
     Common stock, $.00025 par value; 20,000,000 shares
        authorized, 9,374,132 shares issued and outstanding                    2,344                  2,344
     Additional paid-in capital                                            8,787,194              6,485,373
     Accumulated deficit                                                 (10,690,165)            (8,878,409)
                                                                        ------------           ------------

            Total stockholders' deficit                                   (1,900,571)            (2,390,692)
                                                                        ------------           ------------

            Total liabilities and stockholders' deficit                 $  2,089,383           $  1,539,983
                                                                        ============           ============

<FN>

                    See accompanying notes to interim consolidated financial statements.

</FN>
</TABLE>




                                                                  3
<PAGE>

                              VALUESTAR CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                        Three Months Ended
                                                           September 30,
                                                  ------------------------------
                                                      1999              1998
                                                  -----------       -----------

REVENUES                                          $   722,125       $   605,660
                                                  -----------       -----------

OPERATING EXPENSES
     Cost of revenues                                 382,276           193,347
     Selling                                          648,720           382,220
     Marketing and promotion                          550,068           294,329
     Product development                              273,869              --
     General and administrative                       472,060           392,703
                                                  -----------       -----------

                                                    2,326,993         1,262,599
                                                  -----------       -----------

LOSS FROM OPERATIONS                               (1,604,868)         (656,939)
                                                  -----------       -----------

OTHER INCOME (EXPENSE)
     Interest expense                                (180,135)          (59,559)
     Miscellaneous                                      6,124            (4,069)
                                                  -----------       -----------

                                                     (174,011)          (63,628)
                                                  -----------       -----------

NET LOSS                                          $(1,778,879)      $  (720,567)
                                                  ===========       ===========

NET LOSS AVAILABLE TO COMMON
     STOCKHOLDERS                                 $(1,811,756)      $  (720,567)
                                                  ===========       ===========

LOSS PER COMMON SHARE                             $     (0.19)      $     (0.08)
                                                  ===========       ===========

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                                    9,374,132         8,682,496
                                                  ===========       ===========

       See accompanying notes to interim consolidated financial statements.


                                        4
<PAGE>
<TABLE>

                                            VALUESTAR CORPORATION
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                 (Unaudited)
<CAPTION>
                                                                                 Three Months Ended
                                                                                    September 30,
                                                                       ------------------------------------
                                                                           1999                    1998
                                                                       -----------             -----------
<S>                                                                    <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                          $(1,778,879)            $  (720,567)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
             Depreciation                                                   59,473                   8,652
             Amortization of intangible assets                               4,624                    --
             Amortization of bond discount                                  56,335                  17,249
             Change in allowance for doubtful accounts                      (8,670)                   --
             Accrued interest included in long-term debt                     7,500                    --
             Options issued for services                                    59,000                    --
         Changes in:
             Receivables                                                   (36,309)                (92,531)
             Inventory                                                      (8,717)                  5,414
             Prepaid expenses                                               23,875                   3,902
             Deferred costs                                                (16,540)                 81,788
             Other assets                                                   (2,811)                   --
             Accounts payable                                              (97,564)                236,370
             Accrued liabilities and other payables                         95,342                 (19,270)
             Deferred revenues                                              20,939                  17,869
                                                                       -----------             -----------
                 Net cash used by operating activities                  (1,622,402)               (461,124)
                                                                       -----------             -----------
CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                                  (164,815)               (103,005)
                                                                       -----------             -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of preferred stock                               2,210,000                    --
     Proceeds from debt                                                       --                   285,000
     Payments on capital leases                                             (6,917)                   --
     Payments on debt                                                      (14,066)                   (960)
                                                                       -----------             -----------
                 Net cash provided by financing activities               2,189,017                 284,040
                                                                       -----------             -----------

NET INCREASE (DECREASE) IN CASH                                            401,800                (280,089)
CASH, beginning of period                                                  270,149                 398,604
                                                                       -----------             -----------

CASH, end of period                                                    $   671,949             $   118,515
                                                                       ===========             ===========

SUPPLEMENTAL CASH-FLOW INFORMATION
     Cash paid during the year for:
         Interest                                                      $   112,252             $    42,310
         Income taxes                                                  $       800             $      --
     Non-cash investing and financing activities:
         Accrued dividends on Series A Preferred Stock                 $    32,877             $      --

<FN>

                    See accompanying notes to interim consolidated financial statements.

</FN>
</TABLE>


                                                           5
<PAGE>



                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1999

1. OPERATIONS

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

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

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

2. STATEMENT PRESENTATION

The accompanying  unaudited interim  financial  statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information.  They do not  include all  information  and  footnotes  required by
generally accepted accounting  principles.  The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended June 30, 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.  Required new  financing  may not be available and it is
unlikely cash flows from  operations will be sufficient to enable the Company to
meet its  obligations.  The Company could be forced to  dramatically  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 three month period ended
September  30, 1999 are not  necessarily  indicative  of the results that may be
expected for the year ending June 30, 2000.

3. PRODUCT DEVELOPMENT COSTS

Prior to the current  fiscal  year,  development  expenses  associated  with the
design, development and testing of programs and services have not been material.
In the  first  quarter  of  fiscal  2000,  the  Company  commenced  the  design,
development  and  testing  of an  expanded  and new  Internet  initiative  using
existing  and new content.  Product  development  expenses are being  charged to
operations as incurred.



                                       6
<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1999

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.

<TABLE>
<CAPTION>

7. LONG-TERM DEBT

Long-term debt at September 30, 1999, consists of the following:
<S>                                                                                            <C>
8% Senior Secured Notes Payable; principal of $2,450,000; interest is paid
monthly, with the principal repayable in 16 quarterly payments of $153,125
commencing in March 2002, and maturing December 2005; net of unamortized note
discount of $1,378,074                                                                         $1,071,926

12% Notes;  principal of $100,000;  unsecured;  interest is paid monthly, with a
balloon principal payment due in March 2001; net of unamortized note discount
of $5,454                                                                                          94,546

12% Subordinated Notes: principal of $1,000,000; unsecured: interest is paid monthly,
with a balloon principal payment due in June 2000; net of unamortized note
discount of $20,173                                                                               979,827

6%  Convertible  Notes,  principal  of  $500,000;  subordinated  and  unsecured;
interest is payable in kind on conversion or at maturity in June 2001;  includes
$41,550 of accrued interest; net of unamortized note discount of $28,077                          513,473

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               71,575

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                139,234
                                                                                               -----------
                                                                                                2,870,581
Less current portion                                                                            1,041,654
                                                                                               -----------
                                                                                               $1,828,927
                                                                                               ===========

The 6% Convertible  Notes,  and accrued interest  thereon,  are convertible into common stock at $1.00 per common share.
</TABLE>



                                       7
<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1999

<TABLE>
8. STOCKHOLDERS' DEFICIT

The following table summarizes equity transactions during the three months ended September 30, 1999:
<CAPTION>


                                      Preferred Stock           Common Stock           Additional
                                     -----------------     ------------------------      Paid-In      Accumulated
                                      Shares   Amount       Shares        Amount         Capital       Deficit         Total
                                     -------   ------      ---------   ------------   ------------   ------------    ------------
<S>                                  <C>       <C>         <C>         <C>            <C>            <C>             <C>
Balance July 1, 1999                    --       --        9,374,132   $      2,344   $  6,485,373   $ (8,878,409)   $ (2,390,692)
Issuance of Series A Convertible
  Preferred Stock, net of issuance
  costs of $40,000                   225,000   $   56           --             --        2,209,944           --         2,210,000
Accrued 8% dividends on Series A
  Preferred Stock                       --       --             --             --           32,877        (32,877)           --
Value assigned to options granted
  for services                          --       --             --             --           59,000           --            59,000
Net loss                                --       --             --             --             --       (1,778,879)     (1,778,879)
                                    --------   ------   ------------   ------------   ------------   ------------    ------------
Balance September 30, 1999           225,000   $   56      9,374,132   $      2,344   $  8,787,194   $(10,690,165)   $ (1,900,571)
                                    ========   ======   ============   ============   ============   ============    ============
</TABLE>

During  the  first  quarter  the  Company  issued  225,000  shares  of  Series A
Convertible  Preferred Stock, par value $.00025 ("Series A Preferred Stock") for
cash of $10 per  share.  Dividends  of 8% per annum  compounded  are  payable in
additional  shares of Series A Preferred  Stock.  The dollar  amount of Series A
Preferred 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  Preferred  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 Preferred Stock outstanding, then the holders are entitled to
elect one member of the Company's Board of Directors.

<TABLE>

9. STOCK OPTIONS AND WARRANTS

The Company has reserved 250,000 shares of common stock for each of its 1992 ISO
Plan and 1992 NSO Plan, 300,000 shares of common stock for the 1996 Stock Option
Plan and  1,250,000  shares of common stock for the 1997 Stock Option Plan.  The
Company has also issued  options on 200,000  shares outside of the option plans.
The following  table  summarizes  option activity for the period ended September
30, 1999:
<CAPTION>
                                                                        Weighted Average           Weighted
                                                     Shares               Exercise Price         Average Life
                                                     ------               --------------         ------------
<S>                                                <C>                        <C>                     <C>
Outstanding July 1, 1999                           1,111,100                  $0.78                   2.49
Granted                                              583,000                  $1.94
Canceled                                             (14,999)                 $1.33
Exercised                                              --                       --
Expired                                              (15,000)                 $0.50
                                                   ---------
Outstanding September 30, 1999                     1,664,101                  $1.18                   3.20
                                                   =========
Exercisable at September 30, 1999                    809,505                  $0.68
                                                   =========
</TABLE>

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


                                       8
<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1999

9. STOCK OPTIONS AND WARRANTS (Cont'd)

The holders of the A, B and C Warrants  were  granted  antidilution  provisions,
registration  rights and certain equity and debt preemptive  rights.  Prior to a
qualifying public offering (proceeds of $15 million at a price of at least $5.00
per share and a valuation of at least $40 million), qualified sale (valuation of
at least $40 million and minimum proceeds of $5.00 to $7.00per share to Holders)
or a qualifying  stock market listing (Nasdaq  National Market or New York Stock
Exchange  and  minimum  price  and  trading  volume),  in the event of a sale or
disposition  of the Company or  substantially  all of its assets,  the number of
shares of Common Stock for which the Warrants may be exercised may be increased,
without a  corresponding  increase in the  aggregate  consideration,  to provide
additional consideration to the holders of the warrants based on a revenue based
valuation.  A sale may also be  initiated  by the  warrant  holders  in  certain
instances as described in the next paragraph.

The holders of the A, B and C Warrants have certain "Drag Along Rights". Until a
qualifying  public  offering or sale is completed by the Company or a qualifying
market  listing is  achieved,  then upon  either  (i) a change in  control  (the
current three  directors  owning less than 20% of the Company on a fully diluted
basis),  or (ii)  the loss of Mr.  Stein  as  President  without  a  replacement
acceptable to the holders,  or (iii) a non-qualifying  public offering,  or (iv)
certain  defaults under the Senior Notes, and (v) at any time between April 2004
and April 2009 (unless the rights are earlier terminated), the holders of the A,
B, and C Warrants may seek a buyer for the Company or its assets and the Company
and the current three directors are obligated to cooperate and take such actions
to complete a sale,  consistent with their fiduciary  duties.  Upon such a sale,
the A, B and C Warrants may be exercised for  additional  shares of Common Stock
resulting in additional dilution to existing  shareholders of the Company.  This
dilution could be material  should the Drag Along Rights become  exercisable and
subsequently exercised by the holders.

At September  30, 1999 the Company had the  following  stock  purchase  warrants
outstanding each exercisable into one common share:

         Number            Exercise Price            Expiration Date
         ------            --------------            ---------------
          500,000 (1)           $1.25                December, 2000
           50,000               $1.25                March, 2001
          200,000 (1)           $1.25                June, 2002
          300,000 (1)           $1.25                September, 2002
          200,000 (1)           $1.25                December, 2002
           50,000               $1.75                May, 2003
          262,500 (2)           $1.25                April, 2003
          262,500 (3)           $2.00                April, 2003
          200,000               $0.75                October, 2003
          500,000 (1)           $1.00                December, 2003
          152,728 (1)           $1.375               March, 2004
           30,000 (1)           $1.50                March, 2004
        1,527,250               $1.00                March, 2009 (A Warrants)
          527,514               $0.00025             March, 2009 (B Warrants)
          231,132 (4)           $1.00                March, 2009 (C Warrants)
        ---------
        4,993,624
        =========

     (1)  These  warrants  are  callable  at a stock  price of $5.00  per  share
          subject to certain conditions.

     (2)  These  warrants  are  callable  at a stock  price of $3.00  per  share
          subject to certain conditions.

     (3)  These  warrants  are  callable  at a stock  price of $4.50  per  share
          subject to certain conditions.

     (4)  These  warrants may be  repurchased  by the Company at $6.00 per share
          until March 31, 2004 subject to certain conditions.

Subsequent  to September 30, 1999 a total of 25,000  warrants were  exercised at
$1.25 per share by reducing the  principal  of the  Company's  12%  Subordinated
Notes by  $31,250.  An  additional  420,000  warrants  were  exercised  for cash
proceeds of $475,000.


                                       9
<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1999

10. INCOME TAXES

At September 30, 1999 a valuation  allowance has been provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred  tax asset will not be  realized.  The Company has for federal
income tax purposes net operating loss carryforwards of approximately $8 million
which expire  through 2019 of which certain  amounts are subject to  limitations
under the Internal Revenue Code, as amended.

11. LOSS PER COMMON SHARE

Loss per common share is computed  using the weighted  average  number of common
shares outstanding.  Since a loss from operations exists, a diluted earnings per
common  share  number is not  presented  because the  inclusion  of common stock
equivalents in the computation  would be antidilutive.  Common stock equivalents
associated  with  warrants,  stock options and  convertible  notes and preferred
stock,  which are exercisable  into  approximately  7.4 million shares of common
stock at  September  30, 1999 could  potentially  dilute  earnings  per share in
future periods.

The  provisions  of the Series A  Preferred  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 is computed as
follows:

                                                         Three Months Ended
                                                            September 30,
                                                         1999            1998
                                                         ----            ----
Net loss                                            $(1,778,879)      $(720,567)
Accrued dividends on Series A Preferred Stock           (32,877)             --
                                                    -----------      ----------
Net loss available to common stockholders           $(1,811,756)      $(720,567)
                                                    ===========      ==========

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  assessed  its  exposure  with  respect to Year 2000  technology
compliance as limited,  although it is not possible to quantify the effects Year
2000 compliance issues will have on customers or suppliers,  and does not expect
any interruption in its normal business  activities.  The Company has identified
and  evaluated the changes to its computer  systems  necessary to achieve a Year
2000 date conversion and has substantially  completed  conversion  efforts.  The
costs of achieving Year 2000 compliance are not material.  The Company believes,
based on  available  information,  that it will be able to manage  its Year 2000
transition  without any  material  adverse  effect on its  business  operations,
services or financial prospects.


                                       10
<PAGE>


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

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE  FINANCIAL  PERFORMANCE.  ACTUAL RESULTS MAY DIFFER  MATERIALLY
FROM THOSE CURRENTLY  ANTICIPATED AND FROM HISTORICAL  RESULTS  DEPENDING UPON A
VARIETY OF FACTORS,  INCLUDING THOSE DESCRIBED BELOW AND IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1999.

Overview

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

In the first quarter of fiscal 2000, we commenced  the design,  development  and
testing of an expanded Internet  initiative using existing and new content.  The
goal of this  development is to position  ValueStar as the dominant  infomediary
linking  buyers with local  service  businesses.  We plan to  capitalize  on our
existing  expertise in customer  satisfaction  rating systems to create this new
Internet service.

Our 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.

Certification  fees,  ranging  from $995 to  approximately  $2,000  depending on
business size, are recognized when material  services or conditions  relating to
the certification have been performed. The material services are the delivery of
certification  materials along with an orientation and the material condition is
the execution of the  certification  agreement  specifying  the  conditions  and
limitations on using the certification. Research and rating fee revenue, ranging
up to $570,  is  deferred  until  the  research  report is  delivered.  Sales of
marketing  materials and Web  advertising  and other  services are recognized as
materials  are shipped or over the period  services are  rendered.  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 Consumer  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 and  developing  our  business and have
incurred  losses in each year.  At  September  30, 1999,  we had an  accumulated
deficit of $10,690,165. There can be no assurance of future profitability.

Effect of Growth in Certified Businesses and Renewals

Our business revenue model, similar to other membership based organizations,  is
predicated on a growing  number of certified  businesses  and  maintaining  high
renewal rates.  Certified  businesses that renew contribute higher gross margins
than new applicants  due to reduced sales and rating costs.  Also, a growing and
larger base of  certified  businesses  reduces the costs  (relative to revenues)
associated  with  printing and  distributing  our Consumer  ValueStar  Report to
buyers,  maintaining  our  www.valuestar.com  Internet site and providing  other
services.  The  marginal  fixed  costs  associated  with  increased  numbers  of
certified  businesses are minimal compared to these base printing,  distribution
and maintenance costs.

                                       11
<PAGE>

Since   considerable   portions  of  our  operations  are  engaged  towards  the
solicitation  of new  service and  professional  business  applicants,  we incur
substantial  costs towards this activity.  Currently,  we defer direct telephone
sales  costs and  amortize  them at the time of  certification,  an  average  of
approximately 60 days. Other costs are expensed as incurred.

At September 30, 1999, we had 1,636 certified businesses.

As a market region matures and we attain a larger base of certified  businesses,
we expect fixed and indirect costs will decline as a percentage of revenues.  We
believe our more established  Northern  California market has achieved a base of
certificate  holders  sufficient to provide positive regional  operating margins
(prior  to  allocation  of  corporate  administration,   overhead  and  elective
advertising and promotion  costs). We believe we could reduce operating costs to
achieve break-even  operations on reduced levels of new sales and by maintaining
the existing base of renewing  businesses in California.  However,  any dramatic
cutbacks would curtail growth and our ability to expand in the future.

Future  operations  are  impacted  by changes in cost  structure  and  elections
regarding new product development, advertising, promotions and growth rates (due
to the lower margins in the first year). We have recently  increased  numbers of
sales,  marketing 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 September 30, 1999, we had 929 (823 new and 106 renewal)  business  customers
in the application and rating phase. The total represents  approximately 70 days
sales.  Business  customers  in the  rating  phase  are  expected  to  represent
approximately  $590,000 of  revenues  that  should be  recognized  in the second
quarter of fiscal 2000 (generally analogous to backlog).

Results of Operations

Revenues. Revenues consist of certification and rating fees from new and renewal
business  applicants,  sale  proceeds  from  information  materials  and premium
listings  in our  Consumer  ValueStar  Report  and on the Web  site,  and  other
ancillary revenues.  We reported total revenues of $722,125 for the three months
ended September 30, 1999, a 19% increase over revenues of $605,660 for the first
three months of the prior year.  During the most recent  quarter,  certification
fees accounted for 77% of revenue,  compared to 79% for the first quarter of the
prior  year.  The growth in revenues  is the result of our  regional  expansion,
improved new sales  velocity and the impact of a larger base of business  member
renewals in Northern  California.  We expect renewing  businesses to continue to
grow in dollar  amount,  however the  percentage  contribution  attributable  to
renewals  will vary  depending  in part on the  volume of new  businesses  being
certified in any particular period.

We  reported  approximately  $85,000 of revenue  from  premium  listings  in our
Consumer  ValueStar  Report and on our Web site,  a decrease  of $9,000 from the
$94,000  reported in the first  three  months of the prior  year.  The  decrease
results in a shift of focus to  licensing  revenue  on the part of the  Company.
Additionally,  we provided listings free of charge to all business  certified in
the new markets for the most recent Consumer ValueStar Report.

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

Cost of Revenues.  Cost of revenues consists  primarily of rating costs incurred
for performing  customer  satisfaction  research on business  applicants,  costs
related to verifying  insurance and complaint  status,  Web site operating costs
and  costs of  information  products.  Cost of  revenues  totaled  $382,276  and
represented  53% of sales during the three months ended September 30, 1999. This
is an increase  from 32% for the three months ended  September 30, 1998. We made
changes in fiscal 1999 to make our ratings more timely and  efficient.  However,
during the first  quarter of the current  year,  as  compared to the  comparable
period of the prior year, we incurred  increased rating costs on a higher number
of  businesses  that elected not to become  certified,  primarily in new markets
where the value of our  services is less  recognized.  Cost of revenues may vary
significantly  from  quarter to quarter  both in amount and as a  percentage  of
sales.

                                       12
<PAGE>

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 three
months ended September 30, 1999, were $648,720, or 90% of revenues,  compared to
$382,220,  or 63% of revenues for the first quarter of the prior year. In fiscal
1999 we commenced rating  businesses in seven new market regions and continue to
incur  increased  selling  costs  associated  with  early  startup  of these new
regions.  New market regions provide only nominal  revenues in the first quarter
of opening due to the approximately 60 to 90 day lag from selling  activities to
initial  revenues.  Other than direct targeted  telemarketing  costs, we expense
selling costs as incurred.  We expect  selling costs as a percentage of revenues
will vary in future periods, resulting from levels of future revenues, variances
in renewal rates, the effect of new sales  promotions and costs thereof,  timing
of research and rating completions, level and percentage of fixed selling costs,
the  number of new market  regions  opened and other  factors,  some  beyond our
control.

Marketing and Promotion  Expenses.  Marketing and promotion expenses  aggregated
$550,068,  or 76% of revenues during the first quarter of fiscal 2000,  compared
to $294,329, or 49% of revenues for the prior period.  Included in marketing and
promotion expenses are printing and distribution costs of our Consumer ValueStar
Report  publication  targeted at buyers.  Printing and  distribution  costs were
$173,000 in the first  quarter  compared to $107,000 in the prior  year's  first
quarter, as we printed and distributed more copies with additional pages. During
the first  quarter of fiscal  2000,  we expended  $218,000  on paid  advertising
targeted  at  expanding   consumer  awareness  of  ValueStar   Certified.   Paid
advertising  of $98,000 was employed in the prior year's  first  quarter.  These
increased costs reflect management  decisions to increase advertising over prior
year levels and significant advertising rate inflation. During the first quarter
of fiscal 2000, we expended  $74,000 on  promotions  compared to $54,000 for the
prior  year's first  quarter  with the  increase  due to an increased  number of
promotions in the period.  Generally,  the first and third fiscal  quarters have
increased costs because our Consumer 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  Consumer
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 as revenues grow. However, amounts and percentages on a quarterly basis
may vary significantly.

Product  Development  Expenses.  In prior years development  expenses associated
with the design,  development  and testing of our programs and services have not
been  material.  In the first  quarter of fiscal 2000 we  commenced  the design,
development and testing of an expanded  Internet  initiative  using existing and
new  content.  During the three  months  ended  September  30,  1999 we expended
$273,869  on new  program  development  and  segregated  these  costs as product
development  costs.  The major  component  of  product  development  costs  were
compensation  and  related  costs of  $181,000.  We expect,  subject to adequate
financing, that product development expenses will increase in the second quarter
due to  increased  numbers  of  personnel.  We  estimate,  but  there  can be no
assurance,  that certain new products can produce  revenue  during  fiscal 2000.
Future levels of product  development costs will depend on factors not currently
estimable by our management.

General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
and executive  management  activities,  including  legal,  accounting  and other
professional fees. They totaled $472,060 or 65% of revenues for the three months
ended September 30, 1999,  compared to $392,703 or 65% of revenues for the prior
year's first  quarter,  an increase of $79,357.  The major  increases  include a
$45,000  increase in  compensation  and benefits due  primarily to the increased
number of executive and management  personnel  added in connection with regional
expansion;  and a $62,000  increase  in  occupancy  and  telephone  costs due to
additional personnel and expanded office facilities. Management anticipates that
general and administrative costs will continue to exceed prior period levels due
to increased  personnel added to support growth and increased  general computer,
operating, occupancy and corporate costs.

We incurred  interest  expense for the three months ended  September 30, 1999 of
$180,135 that  included  $60,959 of non-cash  amortization  of bond discount and
accrued  paid-in-kind  interest.  Interest for the prior  comparable  period was
$59,559.  The increase  resulted from the  significant  additions to our debt to
finance growth and our related losses.

                                       13
<PAGE>

Net Loss. We had a net loss of $1,778,879  for the three months ended  September
30, 1999,  compared to a loss of $720,567  for the three months ended  September
30, 1998.  Our increased  loss is  attributable  to (a) increased  selling costs
resulting  from the  expansion  of sales  personnel to new market  regions,  (b)
increased  marketing and promotion costs due to increased  market  regions,  (c)
product  development costs in the current period,  and (d) increased general and
administrative  costs associated with additional  management and support for new
market regions.  We anticipate we will continue to experience  operating  losses
until we  achieve  a  critical  mass base of  renewing  certificate  holders  or
revenues  from new  products.  We are  increasing  our business  volume (new and
renewal certifications) and 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 three months ended September
30,  1999 of  $1,811,756  includes  $32,877  of  accrued  dividends  on Series A
Convertible Preferred Stock.


Liquidity and Capital Resources

Since we commenced  operations,  we have had significant negative cash flow from
operating  activities.  Our negative  cash flow from  operating  activities  was
$1,622,402 for the three months ended September 30, 1999. At September 30, 1999,
we had a working capital deficit of $881,013,  including $1,041,654 representing
the current  portion of long-term debt. For the three months ended September 30,
1999, our negative cash flow from operating  activities was due primarily to our
continued  operating  losses,  losses in new  market  regions,  addition  of new
executive  management  and  investment in new products and business  growth.  At
September 30, 1999,  our net accounts  receivables  were  $454,785  representing
approximately  57  days  of  revenues  and  an  annualized   turnover  ratio  of
approximately  6.3 times.  This compares  favorably to  approximately 64 days of
revenues and turnover of approximately  5.7 times at June 30, 1999. Our improved
turnover and reduced accounts  receivable level results primarily from increased
revenues and more  diligent  collection  efforts.  We believe that 60 to 90 days
revenues in  receivables  is reasonable  based on the nature of our business and
the terms we provide  certifying  companies on certain  fees.  At September  30,
1999, we have not experienced and we do not anticipate any significant  accounts
receivable recoverability problems.

We have financed our operations  primarily through the sale of common equity and
debt  financing.  In July  and  August  1999,  we sold  $2,250,000  of  Series A
preferred stock for cash.  These funds are being used for operations and product
development.  Subsequent  to September  30, 1999 we obtained  $475,000  from the
exercise of warrants for cash.  We have no  commitments  for future  investments
however we are  discussing  additional  financing  with investors to support new
product  introduction and to finance operations.  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  $671,949  at  September  30,  1999,  net  accounts
receivable of $454,785,  and the funds received subsequent to September 30, 1999
described  above,  we have no material unused sources of liquidity at this time.
We expect to incur  additional  operating  losses in future fiscal quarters as a
result of continued operations, product development expenditures and investments
in  growth.  The  timing and  amounts  of these  expenditures  and the extent of
operating  losses  will  depend on many  factors,  some of which are  beyond our
control.

We expect that we will require a minimum of $5 million of additional  capital to
finance operations during the next twelve months.  This estimate is based on the
first quarter level of  operations,  anticipated  revenues and budgeted  product
development and operating costs. To expand into new market regions or launch new
products or services, we would require additional financing.  Our actual results
could  differ   significantly   from  plan  and,   therefore,   we  may  require
substantially  greater operating funds.  Should required and/or additional funds
not be  available or planned  operations  not meet our  expectations,  we may be
required to significantly curtail or scale back staffing, advertising, marketing
expenditures and general  operations.  We may also have to curtail the number of
market  regions in which we  operate,  with more  reliance  on more  established
market regions providing potentially higher profitable renewals. There can be no
assurance  that  additional  funding  will be  available to us or on what terms.
Potential sources of funds include exercise of warrants and options,  loans from
existing shareholders or other debt financing or additional equity offerings.

                                       14
<PAGE>

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 the SEC's Division
of  Corporation  Finance has  established an Earnings  Management  Task Force to
focus  staff  resources  on the  review  of  filings  where  potential  earnings
management  issues  may be  present.  Until  such time as the SEC  staff  issues
interpretative   guidelines,   it  is  unclear   what,   if  any,   impact  such
interpretative  guidance  and  review  of  filings  will  have  on  our  current
accounting  practices.  Our practices have been  consistently  applied since our
initial filing and review by the SEC in 1997. However,  the potential changes in
accounting   practice  being   considered  by  the  SEC  staff,  if  applied  to
certifications in a manner different than currently recognized by us, could have
a material impact on the manner in which we recognize revenue. Any changes would
have no effect on reported cash flow or the 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  as the Year 2000  approaches.  The  "Year  2000"  problem  is
concerned with whether computer  systems will properly  recognize date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize  information could generate  erroneous data or cause a system to fail.
The Year 2000  problem is  pervasive  and complex as the  computer  operation of
virtually  every  company  will be  affected  in some way  which  could  lead to
business disruptions in the U.S. and internationally.

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.

During the first calendar  quarter ended March 31, 1999, we completed an initial
review of our  internal  systems.  The  review  consisted  of an  evaluation  of
significant  internal hardware systems and major software  application  programs
that are primarily packaged third party "off-the-shelf"  software programs. As a
result of this review,  we identified  certain  systems which  required  further
review and probable  upgrades to be Year 2000 ready.  At  September  30, 1999 we
believe we have  completed the required  upgrades to our systems to be Year 2000
compliant.  We do not  believe our  certification  and other  products  have any
material Year 2000 problems.

In addition,  we continue to assess the compliance of our  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  will be able to  adequately  assess and
address 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. If we determine certain suppliers are not Year 2000 compliant, we
may have to arrange for  alternative  sources of supply and the  stockpiling  of
inventory  (mainly  brochures) in the fall of 1999 in  preparation  for the Year
2000. We have no current plans to implement stockpiling, however should we elect
to do so, we cannot  estimate  at this time the cost or effect on our  financial
condition of such action.  We currently do not have any other  contingency plans
with respect to potential  Year 2000  failures of our suppliers or customers and
at the present time,  after an initial  evaluation,  we do not intend to develop
one. If these failures would occur,  depending upon their duration and severity,
they could have a material adverse effect on our business, results of operations
and financial condition.


                                       15
<PAGE>


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 first fiscal  quarter ended  September 30, 1999
             that were not registered under the Securities Act:

                  During  July and August we issued  225,000  shares of Series A
                  Convertible  preferred  stock, par value $.001 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
                  of $2.00  per  share and are  automatically  converted  on the
                  occurrence  of  certain  events.  The  Series  A  stock  has a
                  liquidation  preference  of $10 per  share  plus  accrued  and
                  unpaid dividends.  The Series A stock has certain antidilution
                  and  registration  rights and has voting  rights  equal to the
                  number of shares of common  stock that it is  convertible.  In
                  addition,  as long as there  are at least  100,000  shares  of
                  Series A stock  outstanding,  then  the  holders  thereof  are
                  entitled to elect one member of our board of directors.

                  We sold  the  Series A stock  without  an  underwriter  and no
                  commissions were paid. The Series A stock was offered and sold
                  without  registration  under  the  Securities  Act  solely  to
                  "accredited"  investors in reliance on the exemption  provided
                  by Regulation D and Section 4(2) thereunder and an appropriate
                  legend  was placed on the Series A stock and will be placed on
                  the shares issuable on conversion  unless registered under the
                  Securities Act prior to issuance.



                                       16
<PAGE>


         (d) None

Item 3. Defaults Upon Senior Securities
         None

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

Item 5. Other Information
         None

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

                  27       Financial Data Schedule

         (b) Reports on Form 8-K:

                  None




                                       17
<PAGE>


                                   SIGNATURES

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

                                 VALUESTAR CORPORATION

Date: November 12, 1999      By:  /s/ JAMES A. BARNES
                                 --------------------
                                 James A. Barnes
                                 Secretary and Treasurer
                                 (Principal Financial Officer and duly
                                 authorized to sign on behalf of the Registrant)


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