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

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

                                   FORM 10-QSB

                QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                                        
                  For quarterly period ended December 31, 1998
                                             -----------------
                         Commission File Number 0-22619
                                                -------
                              VALUESTAR CORPORATION
             (Exact name of registrant as specified in its charter)

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

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

                                 (510) 814-7070
                                 --------------
                           (Issuer's telephone number)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. YES X NO 
                                                             ---  ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

Common Stock, $.00025 par value                           9,182,496
-------------------------------                           ---------
             (Class)                           (Outstanding at February 5, 1999)

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

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<PAGE>

<TABLE>
                              VALUESTAR CORPORATION
                                      INDEX

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

         Item 1. Financial Statements (unaudited):

                  Consolidated Balance Sheets as of December 31, 1998 and
                  June 30, 1998                                                     3

                  Consolidated Statements of Operations for the three and six
                  months ended December 31, 1998 and 1997                           4

                  Consolidated Statements of Cash Flows for the six
                  months ended December 31, 1998 and 1997                           5

                  Notes to Interim Consolidated Financial Statements                6

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

PART II. OTHER INFORMATION

         Item 1. Legal Proceedings                                                 15
         Item 2. Changes in Securities                                             15

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



SIGNATURES                                                                         16
</TABLE>


                                       2
<PAGE>
<TABLE>
                             VALUESTAR CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<CAPTION>
                                                                      DECEMBER 31,         JUNE 30,
                                                                         1998               1998
<S>                                                                   <C>                <C>
             ASSETS
CURRENT ASSETS
     Cash                                                            $   94,675         $  398,604
     Receivables                                                        336,121            361,369
     Inventory                                                           14,900             24,396
     Prepaid expenses                                                        --              3,902
                                                                     ------------------------------

             Total current assets                                       445,696            788,271

PROPERTY AND EQUIPMENT - net                                            146,371             56,697

DEFERRED COSTS                                                           56,951            130,930
                                                                     ------------------------------

             Total assets                                            $  649,018         $  975,898
                                                                     ==============================

             LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
     Bank line of credit                                             $  350,000         $  250,000
     Accounts payable                                                   433,832            197,410
     Accrued liabilities and other payables                             176,604            145,445
     Current portion of term note                                         6,244                 --
     Deferred revenues                                                   29,906             27,020
     Shareholder loans                                                  300,000                 --
                                                                     ------------------------------

             Total current liabilities                                1,296,586            619,875
                                                                     ------------------------------

LONG-TERM DEBT                                                        1,626,518          1,525,357
                                                                     ------------------------------

STOCKHOLDERS' DEFICIT
     Common stock, $.00025 par value; 20,000,000 shares
         authorized, 8,982,496 and 8,682,496 shares
         issued and outstanding, respectively                             2,246              2,171
     Additional paid-in capital                                       4,617,085          4,247,160
     Accumulated deficit                                             (6,893,417)        (5,418,665)
                                                                     ------------------------------

             Total stockholders' deficit                             (2,274,086)        (1,169,334)
                                                                     ------------------------------

             Total liabilities and stockholders' deficit             $  649,018         $  975,898
                                                                     ==============================
<FN>
         See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>

                                       3
<PAGE>
<TABLE>
                                                    VALUESTAR CORPORATION
                                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                                         (UNAUDITED)
<CAPTION>
                                                                Three Months Ended                 Six Months Ended
                                                                   December 31,                      December 31,
                                                              1998             1997             1998              1997
                                                        -----------------  --------------  ---------------    --------------
<S>                                                            <C>             <C>            <C>               <C>
REVENUES                                                      $ 470,608        $ 267,477      $ 1,076,268       $   791,693
                                                        -----------------  --------------  ---------------    --------------

OPERATING EXPENSES
     Cost of revenues                                            257,257         100,743          450,604           254,258
     Selling                                                     327,723         193,949          709,943           370,521
     Marketing and promotion                                     134,583          33,438          428,912           295,116
     General and administrative                                  427,391         163,116          820,094           318,770
                                                        -----------------  --------------  ---------------    --------------

                                                               1,146,954         491,246        2,409,553         1,238,665
                                                        -----------------  --------------  ---------------    --------------

LOSS FROM OPERATIONS                                            (676,346)       (223,769)      (1,333,285)         (446,972)
                                                        -----------------  --------------  ---------------    --------------

OTHER INCOME (EXPENSE)
     Interest expense                                            (76,509)         (9,968)        (136,068)          (15,197)
     Miscellaneous                                                (1,330)             --           (5,399)               --
                                                        -----------------  --------------  ---------------    --------------

                                                                 (77,839)         (9,968)        (141,467)          (15,197)
                                                        -----------------  --------------  ---------------    --------------

NET LOSS                                                      $ (754,185)      $(233,737)    $ (1,474,752)      $  (462,169)
                                                        =================  ==============  ===============    ==============

LOSS PER COMMON SHARE                                         $    (0.09)      $   (0.03)    $      (0.17)      $     (0.06)
                                                        =================  ==============  ===============    ==============

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                                               8,689,018       8,404,888        8,685,756         8,365,567
                                                        =================  ==============  ===============    ==============

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


                                       4
<PAGE>
<TABLE>
                                      VALUESTAR CORPORATION
                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           (UNAUDITED)
<CAPTION>
                                                                    Six Months Ended
                                                                      December 31,
                                                                1998                1997
                                                          ------------------  ------------------
<S>                                                            <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                  $ (1,474,752)         $ (462,169)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
             Depreciation                                            21,278               5,198
             Amortization of bond discount                           36,316                  --
             Warrants issued for services                            60,000              20,000
         Changes in:
             Receivables                                             25,248               4,731
             Inventory                                                9,496              20,663
             Prepaid expenses                                         3,902               7,035
             Deferred costs                                          73,979             (19,689)
             Accounts payable                                       236,422            (123,486)
             Accrued liabilities and other payables                  31,159             (49,073)
             Deferred revenues                                        2,886                 480
                                                          ------------------  ------------------

                 Net cash used by operating activities             (974,066)           (596,310)
                                                          ------------------  ------------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                           (110,952)             (2,988)
                                                          ------------------  ------------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of stock                                    300,000             227,500
     Net borrowings under line of credit                            100,000             250,000
     Proceeds from debt                                             385,000             250,000
     Payments on debt                                                (3,911)                 --
                                                          --------------------------------------

                 Net cash provided by financing activities          781,089             727,500
                                                          ------------------  ------------------

NET INCREASE (DECREASE) IN CASH                                    (303,929)            128,202

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

CASH, end of period                                            $     94,675          $  172,427
                                                          ==================  ==================

SUPPLEMENTAL CASH-FLOW INFORMATION:
     Cash paid during the period for:
         Interest                                              $     84,002          $   15,197
         Income taxes                                          $         --          $       --
     Non-cash investing and financing activities:
         Notes converted to stock                                                    $   30,000
         Warrants issued for bank guarantee                                          $   20,000
<FN>
             See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>


                                       5
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1998

1. OPERATIONS

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

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

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

2. STATEMENT PRESENTATION

The accompanying  unaudited interim  financial  statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information.  They do not  include all  information  and  footnotes  required by
generally accepted accounting  principles.  The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended June 30, 1998.

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

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

3. INVENTORY

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

4. DEFERRED COSTS

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

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

                                       6

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1998

5. LINE OF CREDIT

The Company has a $350,000 revolving bank line of credit, with interest at prime
plus 2%. The bank's  commitment  under this agreement  matures in December 1999.
The three directors of the Company guarantee the line of credit.

6. SHAREHOLDER LOAN

The Company is  obligated  pursuant to a 15%  unsecured  subordinated  note to a
company related to a shareholder/director in the amount of $300,000 due June 30,
1999.
<TABLE>
<CAPTION>
7. LONG-TERM DEBT
<S>                                                                                             <C>
Long-term debt at December 31, 1998, consists of the following:
         12% Notes  Payable - $100,000  of Notes  payable  with  interest at 12%
         payable monthly; with all principal due on March 31, 2001, or sooner at
         the Company's discretion;  unsecured;  net of unamortized bond discount
         of $8,182                                                                              $  91,818

         12% Subordinated  Notes Payable - $1,000,000  principal of subordinated
         notes payable with interest at 12% payable monthly;  with all principal
         due on June 30, 2000, or sooner at the Company's discretion; unsecured.
         Net of unamortized bond discount of $40,345                                               959,655

         6%  Convertible  Notes  Payable - $525,000  principal  of  subordinated
         convertible  notes  payable  with  interest  at 6%  payable  in kind on
         conversion  or at maturity on June 30, 2001;  no prepayment is allowed;
         unsecured;  convertible  at $1.00 per common share.  Net of unamortized
         bond discount of $46,375.  Includes  accrued interest of $21,575 due at
         maturity                                                                                  500,200

         15% Term  Equipment  Note - $85,000  of  principal,  payable in monthly
         installments  of principal and interest of $2,022 to maturity in August
         2003; secured by equipment and software                                                    81,089
                                                                                               -----------
                                                                                                $1,632,762
         Less current potion                                                                         6,244
                                                                                               -----------
                                                                                                $1,626,518
                                                                                               ===========
</TABLE>

At December 31, 1998,  the 6%  Convertible  Notes and accrued  interest  thereon
would have been convertible into 546,575 common shares.
<TABLE>
8. STOCKHOLDERS' DEFICIT

The following table summarizes equity  transactions  during the six months ended
December 31, 1998:
<CAPTION>
                                                            Shares            Par Value    Paid in Capital       Total $
                                                            ------            ---------    ---------------       -------
<S>                                                         <C>               <C>          <C>               <C>  
Balance June 30, 1998                                       8,682,496           $2,171        $4,247,160     $4,249,331
  Private placement at $1.00 per unit, consisting of
    one share and one warrant                                 300,000               75           299,925        300,000
  Value assigned to 50,000 warrants granted for
    note refinancing                                               --               --            10,000         10,000
  Value assigned to 200,000 warrants issued for services           --               --            60,000         60,000
                                                            ---------           ------        ----------     ----------
Balance December 31, 1998                                   8,982,496           $2,246        $4,617,085     $4,619,331
                                                            =========           ======        ==========     ==========
</TABLE>
In January 1999 the Company sold an additional  200,000 units at $1.00 per unit,
each unit consisting of one share and one warrant exercisable into an additional
share at $1.00 per share until December 31, 2003.



                                       7
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1998

8. STOCKHOLDERS' DEFICIT (Continued)
<TABLE>
The Company has reserved 250,000 shares of common stock for each of its 1992 ISO
Plan and 1992 NSO Plan, 300,000 shares of common stock for the 1996 Stock Option
Plan and 500,000  shares of common  stock for the 1997 Stock  Option  Plan.  The
Company has also issued  options on 200,000  shares outside of the option plans.
The following table summarizes option activity for the period ended December 31,
1998:
<CAPTION>
                                                                          Weighted Average        Weighted
                                                     Shares               Exercise Price         Average Life
                                                   ---------               --------------         ------------
<S>                                                 <C>                       <C>                     <C>
Outstanding July 1, 1998                             877,550                  $0.59                   2.45
Granted                                              341,600                  $1.15
Canceled                                            (107,050)                 $0.71
Exercised                                              --
Expired                                                --
Outstanding December 31, 1998                      1,112,100                  $0.75                   2.85
                                                   =========                  =====                   ====
Exercisable at December 31, 1998                     753,800                  $0.56
                                                   =========                  =====
</TABLE>

At  December  31, 1998 the Company had the  following  stock  purchase  warrants
outstanding each exercisable into one common share:

           Number            Exercise Price             Expiration Date
           ------            --------------             ---------------
            150,000               $0.75                April, 2002
            200,000               $1.25                June, 2002
            300,000               $1.25                September, 2002
            200,000               $1.25                December, 2002
            500,000               $1.25                December, 2000
            262,500               $1.25                April, 2003
            262,500               $2.00                April, 2003
             50,000               $1.75                May, 2003
             50,000               $1.25                March, 2001
            200,000               $0.75                October, 2003
            300,000               $1.00                December, 2003
          ---------
          2,475,000
          =========
Subsequent to December 31, 1998 the Company  issued  warrants on 200,000  common
shares  at $1.00 per share in  connection  with the sale of the units  described
above.

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

9. INCOME TAXES

At December 31, 1998 a valuation  allowance  has been provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred  tax asset will not be  realized.  The Company has for federal
income tax purposes net operating loss carryforwards of approximately $4,800,000
which expire  through 2013 of which certain  amounts are subject to  limitations
under the Internal Revenue Code, as amended.



                                       8
<PAGE>



                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1998
10. NET LOSS PER SHARE

The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." Previously the Company followed the provisions of
Accounting  Principles  Board Opinion ("APB") 15, "Earnings Per Share." SFAS No.
128 provides for the  calculation  of "Basic" and  "Diluted"  earnings per share
("EPS").  Basic EPS  includes  no dilution  and is  computed by dividing  income
available to common stockholders by the weighted average number of common shares
outstanding  for the period.  Diluted EPS  reflects  the  potential  dilution of
securities  that could  share in the  earnings  of an  entity,  similar to fully
diluted earnings per share.  The Company's net losses for the periods  presented
cause the  inclusion of potential  common stock  instruments  outstanding  to be
antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not
required to present a diluted EPS. Stock options, warrants and convertible notes
exercisable  into  4,133,675  of common stock were  outstanding  at December 31,
1998.  These  securities  were not  included in the  computation  of diluted EPS
because of the net losses but could potentially dilute EPS in future periods.

11. RECENT ACCOUNTING PRONOUNCEMENTS

Effective July 1, 1998, the Company adopted the Financial  Accounting  Standards
Board SFAS No. 130, "Reporting Comprehensive Income". This statement established
standards for reporting and display of  comprehensive  income and its components
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements.   Reclassification  of  financial  statements  for  earlier  periods
provided for  comparative  purposes is required.  The adoption of this statement
had no  material  impact on the  Company's  financial  condition  or  results of
operation as of December 31, 1998 and for the six month periods  ended  December
31, 1998 and 1997. Total comprehensive  income did not differ from the Company's
net loss for the six months ended December 31, 1998 or 1997.

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

The  Financial  Accounting  Standards  Board  ("FASB")  has issued SFAS No. 132,
"Employers'  Disclosure about Pensions and Other  Post-retirement  Benefits" and
SFAS No. 133  "Accounting for Derivative  Instruments  and Hedging  Activities."
SFAS No. 132  standardizes  the disclosure  requirements  for pensions and other
post-retirement  benefits and requires  additional  information on change in the
benefit  obligations  and  fair  values  of plan  assets  that  will  facilitate
financial analysis. SFAS No. 133 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.

SFAS No. 132 is effective  for years  beginning  after  December  15, 1997,  and
requires comparative  information for earlier years to be restated,  unless such
information is not readily  available.  SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management believes that
the adoption of SFAS No.
132 and SFAS No. 133 will have no material effect on its financial statements.

12. YEAR 2000 COMPLIANCE

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




                                       9
<PAGE>




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

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE  FINANCIAL  PERFORMANCE.  ACTUAL RESULTS MAY DIFFER  MATERIALLY
FROM THOSE CURRENTLY  ANTICIPATED AND FROM HISTORICAL  RESULTS  DEPENDING UPON A
VARIETY OF FACTORS,  INCLUDING THOSE DESCRIBED BELOW AND IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1998.

Overview

ValueStar  Corporation  is a  consumer  research  and  rating  company  that has
designed a new rating system and certification mark, ValueStar Certified(R), for
service businesses. ValueStar's rating system is designed to enable consumers to
quickly determine those local service  businesses that have attained the highest
level of customer satisfaction. ValueStar's ratings are provided on the Internet
at ValueStar.com,  in print in the Consumer ValueStar Report and through service
business promotions and customer interactions.

ValueStar is expanding  regionally  after  establishing  a  centralized  base of
operations in Northern  California.  In July 1998 ValueStar commenced operations
in Southern  California and in early February  commenced sales activities in the
greater Chicago market.

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

Certification  fees,  ranging  from $995 to  approximately  $2,000  depending on
business size, are recognized when material  services or conditions  relating to
the certification have been performed. The material services are the delivery of
certification  materials along with an orientation and the material condition is
the execution of the  certification  agreement  specifying  the  conditions  and
limitations on using the certification. Research and rating fee revenue, ranging
up to $570,  is  deferred  until  the  research  report is  delivered.  Sales of
marketing  materials and Web  advertising  and other  services are recognized as
materials are shipped or over the period services are rendered. The Company from
time to time provides discounts, incentives from basic pricing and payment terms
on fees. Cancellations by certified businesses are nominal, less than 2%.

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

Effective  July 1,  1994,  with the  adoption  by the  Company of  Statement  of
Position  No.  93-7  (SOP  93-7),   Reporting  on  Advertising  Costs,   certain
direct-response  advertising  costs are deferred and amortized over the expected
period of future  benefits.  These costs,  which relate directly to targeted new
business solicitations,  primarily include targeted direct-response  advertising
programs  consisting  of  direct  telemarketing  costs.  No  indirect  costs are
included in deferred  advertising  costs. Costs incurred for other than specific
targeted  customers,  including  general marketing and promotion  expenses,  are
expensed as incurred.

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

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

Since inception the Company has been growing and developing its business and has
incurred  losses in each year since  inception  and at December  31, 1998 had an
accumulated  deficit  of  $6,893,417.  There  can  be  no  assurance  of  future
profitability.




                                       10
<PAGE>

Effect of Growth in Certified Businesses and Renewals

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

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

At December 31, 1998 the Company had approximately 1,320 certified businesses.

The Company  believes as a market region  matures,  and the Company has a larger
base of  certified  businesses,  fixed and  indirect  costs  will  decline  as a
percentage of revenues. The Company also believes that the opening of new market
regions will provide  additional  revenues to cover certain base fixed  selling,
marketing,  administration and overhead costs. Management believes that the more
established  Northern  California  market  has  achieved  a base of  certificate
holders  sufficient to provide  positive  regional  operating  margins (prior to
allocation of corporate administration and overhead).  Management also estimates
that it  could  substantially  reduce  operating  costs  to  achieve  break-even
operations on reduced levels of new sales and by  maintaining  the existing base
of renewing businesses. However, any such dramatic cutbacks would curtail growth
and the ability to expand regionally in the future.

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

During  the first  two  quarters  of the  current  year,  the  Company  expanded
personnel,  computer  systems and overhead to support  expansion  into  Southern
California and to prepare for future regional  expansion,  subject to financing.
This  increased  operating  losses.  The  number  of  personnel  has grown to 59
full-time  and 26  part-time  persons at  December  31,  1998.  During the first
quarter the Company  added four new  executive  positions to support  growth and
regional   expansion.   The  Company  also  incurred   marketing,   selling  and
administrative  costs in connection with the Southern  California region startup
contributing to the larger operating losses.

At December  31,  1998 the  Company  had 405 (353 new and 52  renewal)  business
customers in the  application  and rating phase  compared to 410 (349 new and 61
renewal)  at  June  30,  1998.  The  total  at  December  31,  1998   represents
approximately 70 days sales. Management has installed new hardware, software and
systems to more automate the research and rating process.  Based on management's
experience, the business customers in the rating phase are expected to represent
approximately  $300,000  of  revenues  that  should be  recognized  in the third
quarter of fiscal 1999 (generally analogous to backlog).

Results of Operations

Revenues. Revenues consist of certification and rating fees from new and renewal
business  applicants,  sale  proceeds  from  information  materials  and premium
listings  in the CVR and on the Web site,  and  other  ancillary  revenues.  The
Company  reported total revenues of $1,076,268 for the six months ended December
31, 1998, a 36% increase  over  revenues of $791,693 for the first six months of
the prior year.  Revenues for the second quarter were  $470,608,  a 76% increase
over the second  quarter of the prior fiscal year.  The first  quarter of fiscal
1998 revenues of $524,216 was the highest  revenue quarter of the prior year due
to timing of new sales and  renewals.  This  accounts for the  difference in the
second quarter  percentage  increase  compared to the increase for the six month
period.



                                       11
<PAGE>

The growth in revenues is the result of the expansion to Southern  California in
the current year, improved new sales velocity and the impact of a larger base of
renewals.  During  the  first  six  months of  fiscal  1999  certification  fees
accounted for 74% of revenue (75% for the prior year's  comparable  six months).
Although renewing  business revenue grew in dollar amount,  they represented 56%
of certification  fees in the current year's first six months compared to 63% in
the prior comparable period.  This percentage  reduction is due to increased new
business  revenue  resulting  from the  emphasis  on new sales  and  territorial
expansion.  Management expects 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.

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

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

Cost of Revenues.  Cost of revenues consists  primarily of rating costs incurred
for performing  customer  satisfaction  research on business  applicants,  costs
related to verifying  insurance and complaint  status,  Web site operating costs
and costs of information products and certification  materials.  During December
1997, the Company made a change from using an outside vendor to perform customer
satisfaction  research on applicants to in-house  employees and related facility
and operating  costs.  This change has reduced  rating costs on a per unit basis
and as a percentage of revenues.  Cost of revenues  represented  42% of revenues
during the first six months ended December 31, 1998 (54% in the second  quarter)
compared  to 32% for the prior  year's  first  six  months  (38% for the  second
quarter).  The  increase in the current year results from the addition of rating
management  personnel in preparation for market expansion and increased staffing
employed to catch up on rating  backlog and to prepare for market  expansion and
increased  volumes.  Management is focusing  efforts on  automating  systems and
procedures to make ratings more  efficient and  economical at increased  volumes
that are expected to reduce the percentage of revenues  associated  with certain
fixed  rating  costs.  Cost of revenues may vary  significantly  from quarter to
quarter both in amount and as a percentage of sales.

Selling Costs.  Selling costs consist  primarily of personnel  costs for outside
sales  consultants   interacting  with  customers  and  direct  marketing  costs
including lead generation and telemarketing costs. Sales costs for the first six
months of fiscal 1999 were $709,943,  or 66% of revenues,  compared to $370,521,
or 47% of revenues for the prior year's first six months. Second quarter selling
costs were 69% of revenues  comparable  to the 72% for the prior  year's  second
quarter. The current year's first quarter included an $81,788 one-time, non-cash
expense  resulting  from the change in estimate  for  deferred  costs  described
above. Also in the first quarter the Company initiated sales activities in a new
market  region,   Southern   California,   incurring  an  estimated  $57,000  of
non-deferred  sales  costs  consisting  of $27,000 of  outside  sales  personnel
related  costs and $30,000 of lead  generation  costs.  In the first  quarter of
fiscal  1999 the  Company  reported  only  nominal  revenues  from the  Southern
California region due to the approximately 60 day lag from selling activities to
initial revenues.  Other than direct targeted  telemarketing  costs, the Company
expenses sales costs as incurred.  The Company added management personnel in the
current  period for both the Southern  California  expansion  and to prepare for
additional  expansion.  The  Company  expects  sales  costs as a  percentage  of
revenues will vary in future periods  resulting from levels of future  revenues,
variances  in  renewal  rates,  the  effect  of new sales  promotions  and costs
thereof, timing of research and rating completions,  timing and costs of opening
new  market  regions,  level and  percentage  of fixed  selling  costs and other
factors, some beyond the control of management.

Marketing and Promotion  Expenses.  Marketing and promotion expenses  aggregated
$428,912  or 40% of  revenues  during  the  first  six  months  of  fiscal  1999
comparable  to $295,116 or 37% of revenues  incurred for the first six months of
fiscal 1998. Marketing and promotion expenses represented 29% of revenues in the
second  quarter  compared  to 13% in the prior  years  second  quarter  when the
Company employed only nominal media.  Included in marketing and selling expenses
in first  quarter of each period were  printing  and  distribution  costs of the
Company's CVR publication targeted at consumers. Printing and distribution costs
of $107,000 in fiscal  1999's first  quarter were  comparable  to fiscal  1998's
first  quarter  total of  $102,000,  however  the  company was able to print and
distribute more copies with additional  pages due to better pricing.  During the
first  six  months  of  fiscal  1999  the  Company  expended  $150,000  on  paid
advertising  targeted at expanding  consumer  awareness of ValueStar  Certified.
Paid  advertising  of $65,000 was employed in the prior year's first



                                       12
<PAGE>

six months. In the first six months of fiscal 1999 the Company expended $100,000
on promotions for consumers  compared to $32,000 for the prior comparable period
with the  increase  due to an  increased  number of  promotions  in the  period.
Generally  the first and third fiscal  quarters  have  increased  marketing  and
promotions  costs because the CVR  publication  is printed and  distributed as a
service to consumers during these quarters.  Also, the Company generally expends
less  advertising  in the second fiscal quarter due to higher media costs in the
calendar fourth quarter.

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

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  $820,094 for the six months ended December 31,
1998,  compared  to $318,770  for the  comparable  period of the prior year,  an
increase  of  $501,324.  The major  increases  include a  $140,000  increase  in
compensation and benefits due primarily to the increased number of executive and
management  personnel  added in connection with regional  expansion;  a $120,000
increase in  occupancy  and  telephone  costs due to  additional  personnel  and
expanded  operations;  a $40,000  increase in bad debt and guarantee  provisions
versus the prior  comparable  period;  a $16,000 increase in depreciation due to
additional equipment; a $110,000 increase in corporate costs (legal, accounting,
filing,  public relations and consulting) due to increased audit and legal costs
as a public  company which  includes  $60,000 of non-cash  expense in the second
quarter  attributable  to the issuance of warrants for services,  and; a $15,000
increase in travel and  entertainment  due to expanded  operations.  General and
administrative costs increased to $427,391 during the second quarter compared to
$163,116  for the prior  year's  second  quarter.  Management  anticipates  that
general and administrative costs will continue to exceed prior period levels due
to increased  executive  personnel added in  anticipation  of continued  growth,
increased  general  computer,  operating,  occupancy  and  corporate  costs as a
publicly traded company.

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

The Company incurred  interest expense in the first six months of fiscal 1999 of
$136,068 that included  $52,066 of non-cash  interest from  amortization of bond
discount and accrued  paid-in-kind  interest.  Interest for the prior comparable
six-month  period  was  $15,197.  The  increase  resulted  from the  significant
additions  of debt to finance  growth and the  related  losses  incurred  by the
Company.

Net Loss.  The Company  had a net loss of  $1,474,752  for the six months  ended
December 31, 1998,  compared to a net loss of $462,169  for the  comparable  six
months ended December 31, 1997. The increased loss is attributable  primarily to
(a) the  increased  selling  costs  resulting  from the  change in  amortization
estimate and expansion of sales personnel to the Southern  California market and
(b) the increased  general and  administrative  costs associated with additional
executive  management  and  support for  expanded  market  regions.  The Company
anticipates  that it will  continue  to  experience  operating  losses  until it
achieves  a critical  mass base of  renewing  certificate  holders as it pursues
aggressive  growth.  As the Company is increasing  its business  volume (new and
renewal  certifications)  immediate  future  quarterly  results  will be greatly
impacted by decisions  regarding  new markets and growth rates.  Achievement  of
positive  operating  results will require obtaining a sufficient base of new and
renewal business  certifications to support operating and corporate costs. There
can be no  assurance  the  Company  can  sustain  renewal  rates  or  achieve  a
profitable base of operations.

Liquidity and Capital Resources

Since the Company  commenced  operations,  it has had significant  negative cash
flow from operating activities. The negative cash flow from operating activities
was $974,066 for the six months ended  December 31, 1998 and  $1,629,721 for the
fiscal year ended June 30, 1998.  At December 31, 1998 the Company had a working
capital  deficit of  $850,890.  For the six months  ended  December 31, 1998 the
negative cash flow from operating  activities was due to the continued operating
losses,  expansion to the Southern California region,  addition of new executive
management and investment in business  growth.  Included in the working  capital
deficit  at  December  31,  1998  is  net  accounts   receivable   of  $336,121,
representing  approximately 57 days of revenues and an annualized turnover ratio
of approximately 6.4 times. This 



                                       13
<PAGE>

compares  favorably  to  approximately  82  days of  revenues  and  turnover  of
approximately  4.4 times at June 30,  1998.  The  improved  turnover and reduced
accounts  receivable  level results  primarily from increased  revenues and more
diligent collection efforts.  Management believes that 60 to 90 days revenues in
receivables is reasonable based on the nature of the Company's  business and the
terms it provides certifying companies. At December 31, 1998 the Company has not
experienced  and  does  not  anticipate  any  significant   accounts  receivable
recoverability problems.

The Company has financed  its  operations  primarily  through the sale of common
equity and debt  financing.  During the six months  ended  December 31, 1998 the
Company obtained an additional $100,000 from a bank line of credit,  $385,000 in
note and debt  financing  and  $300,000  from  common  stock  sales.  The  three
directors  of the  Company  guarantee  the bank line of  credit.  Other than the
credit  line  that was  fully  utilized  at  December  31,  1998,  there  are no
commitments  for  future  investments  and  there can be no  assurance  that the
Company can continue to finance its  operations  through these or other sources.
In the past shareholders,  including from time to time directors,  have advanced
funds and at times converted  funds to debt or equity  financing on terms of new
forms  of  financing.  There  can be no  assurance  that  such  shareholders  or
directors  will  continue to provide any future  financing to the  Company.  The
Company is  negotiating  on new financing to fund  operations and further expand
operations to new market  regions.  There can be no assurance any such financing
can be obtained or the terms thereof.

Other  than  cash on hand of  $94,675  at  December  31,  1998 and net  accounts
receivable of $336,121,  the Company has no material unused sources of liquidity
at this time, and the Company expects to incur  additional  operating  losses in
future fiscal  quarters as a result of continued  operations and  investments in
growth. The timing and amounts of these expenditures and the extent of operating
losses  will  depend on many  factors,  some of which are beyond  the  Company's
control.  Subsequent  to December  31, 1998 the Company  obtained an  additional
$200,000 from common stock sales.

The Company  expects  that it will  require a minimum of  $1,000,000  to finance
operations during the next twelve months. This estimate is based on a base level
of operations, anticipated renewal revenues, anticipated sales levels in current
markets,  and  budgeted  operating  costs.  The Company has plans to continue to
expand  into new market  regions  and would  require  and is seeking  additional
financing  for  such  expansion.  The  Company's  actual  results  could  differ
significantly  from  management's  plans,  and therefore the Company may require
substantially  greater additional  operating funds. In such an event, should the
required and/or additional funds not be available or planned operations not meet
management's expectations,  the Company may be required to significantly curtail
or scale back staffing, advertising and other marketing expenditures and general
operations in more reliance on higher profitable  renewals and limit new growth.
There can be no assurance that  additional  funding will be available or on what
terms. Potential sources of such funds include exercise of warrants and options,
loans from existing  shareholders  or other debt financing or additional  equity
offerings.

New Accounting Pronouncements and Issues

The  Financial   Accounting   Standards   Board  has  issued  a  number  of  new
pronouncements  as discussed in the footnotes to the Company's interim financial
statements  (see page 9,  Note 11).  As  discussed  in the notes to the  interim
financial  statements,  the  implementation  of these new  pronouncements is not
expected to have a material effect on the financial statements.

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

Year 2000 Compliance

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



                                       14
<PAGE>

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

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

Tax Loss Carryforwards

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

Forward-Looking Statements and Business Risks

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

Readers are cautioned to consider the specific  business risk factors  described
in the Company's annual report on Form 10-KSB for the fiscal year ended June 30,
1998 and not to place undue reliance on the forward-looking statements contained
herein,  which  speak only as of the date  hereof.  The  Company  undertakes  no
obligation to publicly  revise  forward-looking  statements to reflect events or
circumstances that may arise after the date hereof.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
         None

Item 2. Changes in Securities and Use of Proceeds
         (a) None
         (b) None
         (c) The following is a  description  of equity  securities  sold by the
             Company  during the second fiscal  quarter ended  December 31, 1998
             that were not registered under the Securities Act: 

         (1)    During  October 1998 the Company issued to one firm for services
                warrants  exercisable  into 200,000  common  shares at $0.75 per
                share until October 20, 2003. No underwriter was utilized in the
                offering.  The Company expensed $60,000 as the value assigned to
                the  warrants.  The issuance and sale of the warrants was exempt
                by reason of Section  4(2) of the Act in reliance on the private
                nature  of the  transaction,  restrictions  on  transfer  on the
                shares  and  based  on  representations  of the  purchasers.  An
                appropriate legend was placed on the shares and warrants.
               
         (2)    During  December  1998 the Company  sold  300,000  shares of its
                Common Stock at $1.00 per share in cash and warrants to purchase
                300,000  common  shares at $1.00 per share  until  December  31,
                2003. The
             


                                       15
<PAGE>

                Company  without  an  underwriter  sold  the  securities  to two
                qualified  investors  (already  shareholders).  These securities
                were  offered and sold  without  registration  under the Act, in
                reliance upon the exemption  provided by Regulation D thereunder
                and an appropriate legend was placed on the shares and warrants.

         (d) None

Item 3. Defaults Upon Senior Securities
        None

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

At the Company's fiscal 1998 Annual Meeting of Stockholders held on December 29,
1998 the following members, constituting all of the members, were elected to the
Board of Directors: James Stein, James A. Barnes and Jerry Polis.
<TABLE>
The  following  proposals  were  approved  at the  Company's  Annual  Meeting of
Stockholders:
<CAPTION>
         1. Election of Directors:

                                    Affirmative Votes         Negative Votes        Votes Withheld
                                    -----------------         --------------        --------------
<S>                                     <C>                       <C>                    <C>
         James Stein                    4,473,406                 -0-                    1,575
         James A. Barnes                4,473,406                 -0-                    1,575
         Jerry E. Polis                 4,473,406                 -0-                    1,575

         2.  Authorization  to approve an amendment to the Company's  1997 Stock
         Option  Plan to increase  the number of shares  reserved  for  issuance
         thereunder by 300,000 to an aggregate of 500,000 shares.
                                   Affirmative Votes         Negative Votes         Votes Withheld
                                   -----------------         --------------         --------------
                                        4,396,806             28,075                    50,100

         3.  Authorization  to  ratify  the  selection  of  Moss  Adams  LLP  as
         independent  auditors  for the  Company for fiscal year ending June 30,
         1999.
                                   Affirmative Votes         Negative Votes         Votes Withheld
                                   -----------------         --------------         --------------
                                        4,471,306              3,075                       600
</TABLE>

Item 5. Other Information
        None

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

                   4.16    Form of Stock  Purchase  Warrant  granted in December
                           1998 and January 1999 to seven investors  exercisable
                           into an aggregate of 500,000  common  shares at $1.00
                           per  share  until   December  31,  2003   (individual
                           warrants  differ  as to  number,  date  and  holder).
                           Officer/director  James  A.  Barnes  is the  indirect
                           holder of a warrant on 25,000 of these shares.

                  10.12    Promissory   Note  between  the  Company  and  Davric
                           Corporation dated November 15, 1998.

                  27       Financial Data Schedule

         (b) Reports on Form 8-K:
                  None
                                   SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,  Registrant
has duly  caused  this  report to be signed  on its  behalf by the  undersigned,
thereunto duly authorized.

                                          VALUESTAR CORPORATION

Date: February 9, 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)

                                       16