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

                                   FORM 10-QSB

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

                    For quarterly period ended March 31, 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)

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                               9,347,496
-------------------------------                               ---------
           (Class)                                 (Outstanding at May 10, 1999)

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

<PAGE>

                              VALUESTAR CORPORATION
                                      INDEX

                                                                            Page
                                                                            ----
PART I. FINANCIAL INFORMATION

         Item 1. Financial Statements (unaudited):

                  Consolidated Balance Sheets as of March 31, 1999
                  and June 30, 1998                                           3

                  Consolidated Statements of Operations for the three
                  and nine months ended March 31, 1999 and 1998               4

                  Consolidated Statements of Cash Flows for the six
                  months ended March 31, 1999 and 1998                        5

                  Notes to Interim Consolidated Financial Statements          6

         Item 2. Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                      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                                                                   17

                                       2
<PAGE>

<TABLE>
                              VALUESTAR CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<CAPTION>
                                                            MARCH 31,        JUNE 30,
                                                              1999             1998
<S>                                                        <C>            <C>
             ASSETS
CURRENT ASSETS
     Cash                                                  $ 1,700,813    $   398,604
     Receivables                                               421,494        361,369
     Inventory                                                   9,332         24,396
     Prepaid expenses                                           10,071          3,902
                                                           -----------    -----------

             Total current assets                            2,141,710        788,271

PROPERTY AND EQUIPMENT - net                                   245,720         56,697
DEFERRED COSTS                                                  78,403        130,930
OTHER ASSETS - net                                             183,155           --
                                                           -----------    -----------

             Total assets                                  $ 2,648,988    $   975,898
                                                           ===========    ===========

             LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
     Bank line of credit                                   $      --      $   250,000
     Accounts payable                                          561,795        197,410
     Accrued liabilities and other payables                    232,306        145,445
     Current portion of long-term debt                          39,719           --
     Deferred revenues                                          33,515         27,020
     Shareholder loans                                         300,000           --
                                                           -----------    -----------

             Total current liabilities                       1,167,335        619,875
                                                           -----------    -----------

LONG-TERM DEBT                                               2,725,854      1,525,357
                                                           -----------    -----------

STOCKHOLDERS' DEFICIT
     Common stock, $.00025 par value; 20,000,000 shares
         authorized, 9,312,996 and 8,682,496 shares
          issued and outstanding, respectively                   2,329          2,171
     Additional paid-in capital                              6,404,877      4,247,160
     Accumulated deficit                                    (7,651,407)    (5,418,665)
                                                           -----------    -----------

             Total stockholders' deficit                    (1,244,201)    (1,169,334)
                                                           -----------    -----------

             Total liabilities and stockholders' deficit   $ 2,648,988    $   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            Nine Months Ended
                                             March 31,                     March 31,
                                        1999           1998           1999          1998
                                        ----           ----           ----          ----
<S>                                 <C>            <C>            <C>            <C>        
REVENUES                            $   693,485    $   300,884    $ 1,769,753    $ 1,092,577
                                    -----------    -----------    -----------    -----------

OPERATING EXPENSES
     Cost of revenues                   259,966        158,088        710,570        412,346
     Selling                            474,183        176,649      1,184,126        547,170
     Marketing and promotion            221,422        295,349        650,334        590,465
     General and administrative         405,323        243,466      1,225,417        562,236
                                    -----------    -----------    -----------    -----------

                                      1,360,894        873,552      3,770,447      2,112,217
                                    -----------    -----------    -----------    -----------

LOSS FROM OPERATIONS                   (667,409)      (572,668)    (2,000,694)    (1,019,640)
                                    -----------    -----------    -----------    -----------

OTHER INCOME (EXPENSE)
     Interest expense                   (94,271)       (34,790)      (230,339)       (49,987)
     Miscellaneous                        3,690           --           (1,709)          --
                                    -----------    -----------    -----------    -----------

                                        (90,581)       (34,790)      (232,048)       (49,987)
                                    -----------    -----------    -----------    -----------

NET LOSS                            $  (757,990)   $  (607,458)   $(2,232,742)   $(1,069,627)
                                    ===========    ===========    ===========    ===========

LOSS PER COMMON SHARE               $     (0.08)   $     (0.07)   $     (0.25)   $     (0.13)
                                    ===========    ===========    ===========    ===========

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                      9,159,173      8,591,246      8,841,258      8,439,695
                                    ===========    ===========    ===========    ===========

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

                                       4
<PAGE>

<TABLE>
                              VALUESTAR CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<CAPTION>
                                                                                       Nine Months Ended
                                                                                           March 31,
                                                                                       1999          1998
                                                                                       ----          ----
<S>                                                                                <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                      $(2,232,742)   $(1,069,627)
     Adjustments to reconcile net loss to net
        cash used by operating activities:
            Depreciation                                                                51,961          7,073
            Amortization of bond discount                                               30,850           --
            Non-cash interest                                                           23,695           --
            Warrants and stock issued for services                                      60,000        108,398
        Changes in:
            Receivables                                                                (60,125)       (16,741)
            Inventory                                                                   15,064         24,769
            Prepaid expenses                                                            (6,169)        (3,088)
            Deferred costs                                                              52,527        (71,825)
            Accounts payable                                                           364,385       (208,963)
            Accrued liabilities and other payables                                      86,861          4,927
            Deferred revenues                                                            6,495            409
                                                                                   -----------    -----------

               Net cash used by operating activities                                (1,607,198)    (1,224,668)
                                                                                   -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                                              (118,836)        (6,741)
                                                                                   -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of stock                                                       597,875        227,500
     Net proceeds from senior debt                                                   2,310,000           --
     Net borrowings (payments) under line of credit                                   (250,000)       150,000
     Proceeds from debt                                                                385,000      1,000,000
     Payments on capital leases                                                         (7,657)          --
     Payments on debt                                                                   (6,975)          --
                                                                                   -----------    -----------

               Net cash provided by financing activities                             3,028,243      1,377,500
                                                                                   -----------    -----------

NET INCREASE IN CASH                                                                 1,302,209        146,091

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

CASH, end of period                                                                $ 1,700,813    $   190,316
                                                                                   ===========    ===========

SUPPLEMENTAL CASH-FLOW INFORMATION:
     Cash paid during the period for:
        Interest                                                                   $   175,794    $    49,987
        Income taxes                                                               $      --      $      --
     Non-cash investing and financing activities:
        Stock and warrants issued for services                                     $    60,000    $   108,398
        Warrants issued for other assets                                           $    40,000    $      --
        Notes converted to stock                                                   $      --      $    30,000
        Capital lease obligations incurred for equipment                           $   125,303    $      --

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

                                       5
<PAGE>



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

1. OPERATIONS

The Company, a Colorado corporation,  conducts its operations through ValueStar,
Inc., a wholly-owned subsidiary.  ValueStar, Inc. was incorporated in California
in 1991, and is a rating company that has pioneered a new business certification
mark  (ValueStar  Certified(R))  - signifying  high  customer  satisfaction  - -
enabling consumers to quickly determine the best local service  businesses.  The
Company generates revenues by conducting customer satisfaction research on local
service companies in 300 industries;  certifying  highly rated  businesses;  and
selling ancillary materials and services. The Company's activities are currently
concentrated  within  one  industry  segment in four  major  market  territories
(Northern  California,  Southern  California,  Chicago and Dallas).  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 nine 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)
                                 March 31, 1999

5. LINE OF CREDIT

The Company retired its bank line of credit at March 31, 1999.

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.

7. LONG-TERM DEBT

<TABLE>
Long-term debt at March 31, 1999, consists of the following:

<CAPTION>
<S>                                                                                            <C>
         8% Senior  Secured  Notes  Payable  ("Senior  Notes")  with a principal
         balance of  $2,450,000  were issued on March 31,  1999 with  detachable
         warrants and are secured by substantially all assets of the Company and
         its  subsidiary,  including a key person life  insurance  policy,  bear
         interest at 8% payable monthly. Principal on the Senior Notes is due in
         16 quarterly  installments  of $153,125  commencing in March 2002, with
         the final payment scheduled in December 2005. Certain events, including
         the loss of Jim Stein as  President,  may result in certain  prepayment
         penalties and the  acceleration of payment under the Senior Notes.  The
         Senior  Notes  also  contain  various  financial  covenants,  primarily
         relating to minimum net worth,  maximum debt, capital additions and net
         income or loss.  The Company  recorded a debt  discount  and  allocated
         $1,450,000 of the proceeds to the value of the
         detachable stock warrants (see Note 9).                                                $1,000,000

         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 $7,273                                                                                  92,727

         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 $33,620                                               966,380

         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 $43,725.  Includes  accrued interest of $29,520 due at
         maturity                                                                                  510,795

         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                                                    78,025

         Capitalized lease obligations                                                             117,646
                                                                                                ----------
                                                                                                 2,765,573
         Less current portion                                                                       39,719
                                                                                                ----------
                                                                                                $2,725,854
                                                                                                ==========
</TABLE>

In connection  with the issuance of the Senior Notes the Company  incurred costs
of $180,000  including  $40,000  assigned to warrants  issued in connection with
arranging  the  financing  (see Note 9). These costs have been included in other
assets and will be amortized over the life of the debt.

At March 31, 1999, the 6% Convertible  Notes and accrued  interest thereon would
have been convertible into 552,875 common shares.

                                       7
<PAGE>

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

8. STOCKHOLDERS' DEFICIT
<TABLE>
The following table summarizes equity  transactions during the nine months ended
March 31, 1999:
<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                                                500,000             125         499,875         500,000
  Proceeds from stock warrants exercised                                     130,500              33          97,842          97,875
  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
  Value assigned to 2,285,896 warrants issued in
    connection with Senior Notes (see note 9)                                   --              --         1,450,000       1,450,000
  Value assigned to 152,728 warrants issued
    for services (see note 9)                                                   --              --            40,000          40,000
                                                                          ----------      ----------      ----------      ----------
Balance March 31, 1999                                                     9,312,996      $    2,329      $6,404,877      $6,407,206
                                                                          ==========      ==========      ==========      ==========
</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 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 March 31,
1999:
                                               Weighted Average     Weighted
                                   Shares       Exercise Price    Average Life
                                   ------       --------------    ------------
Outstanding July 1, 1998           877,550          $0.59            2.45
Granted                            368,600          $1.15          
Canceled                          (147,050)         $0.73          
Exercised                             --                           
Expired                               --                           
Outstanding March 31, 1999       1,099,100          $0.75            2.67
                                 =========          =====            ====
Exercisable at March 31, 1999      750,636          $0.57          
                                 =========          ====
                                                          
Subsequent  to March 31, 1999 a total of 15,000  stock  options  were  exercised
providing cash proceeds of $11,250.

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

The holders of the A, B and C Warrants  were  granted  antidilution  provisions,
registration  rights and certain equity and debt preemptive  rights.  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 $7.00  per  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.

                                       8
<PAGE>

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

9. STOCK OPTIONS AND WARRANTS (Cont'd)

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.

The Company  determined  the fair value of the A, B and C Warrants at $1,450,000
(see Note 7). The Company also issued warrants on 152,728 shares of common stock
to two individuals in connection with arranging the Senior Note financing.

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

             Number            Exercise Price          Expiration Date
             ------            --------------          ---------------
             19,500 (6)           $0.75                April, 2002
            200,000 (1)           $1.25                June, 2002
            300,000 (1)           $1.25                September, 2002
            200,000 (1)           $1.25                December, 2002
            500,000 (1)           $1.25                December, 2000
            262,500 (2)           $1.25                April, 2003
            262,500 (3)           $2.00                April, 2003
             50,000               $1.75                May, 2003
             50,000               $1.25                March, 2001
            200,000               $0.75                October, 2003
            500,000 (1)           $1.00                December, 2003
            152,728 (4)           $1.375               March, 2004
          1,527,250               $1.00                March, 2009 (A Warrants)
            527,514               $0.00025             March, 2009 (B Warrants)
            231,132 (5)           $1.00                March, 2009 (C Warrants)
          ---------
          4,983,124
          =========

(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 are callable at a stock price of $2.75 per share subject to
     certain conditions.

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

(6)  Subsequent  to March 31, 1999 these  warrants  were  exercised  into 19,500
     common shares providing cash proceeds of $14,625.

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.

10. INCOME TAXES

At March 31,  1999 a  valuation  allowance  has been  provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred  tax asset will not be  realized.  The Company has for federal
income tax purposes net operating loss carryforwards of approximately $4,800,000
which expire  through 2013 of which certain  amounts are subject to  limitations
under the Internal Revenue Code, as amended.

                                       9
<PAGE>

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

11. NET LOSS PER SHARE

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 6,635,099  shares of common stock were outstanding at March 31, 1999. These
securities  were not included in the  computation  of diluted EPS because of the
net losses but could potentially dilute EPS in future periods.

12. 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 March 31, 1999 and for the nine month  periods  ended March 31,
1999 and 1998. Total comprehensive  income did not differ from the Company's net
loss for the nine months ended March 31, 1999 and 1998.

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.

13. 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.

                                       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, 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  www.valuestar.com,  in print in the  Consumer  ValueStar  Report and through
service business promotions and customer interactions.

On March 31, 1999 the Company  completed an institutional  senior debt financing
providing net proceeds of approximately  $2.3 million.  A portion of these funds
are being used by  ValueStar to expand  regionally  from a  centralized  base of
operations in Northern  California.  ValueStar commenced  operations in Southern
California in July 1998, the greater  Chicago region in February 1999 and opened
the Dallas region in April 1999. Four  additional  regions are targeted for 1999
opening.

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 March  31,  1999 had an
accumulated  deficit  of  $7,651,407.  There  can  be  no  assurance  of  future
profitability.

Effect of Growth in Certified Businesses and Renewals

The  Company's  business  revenue  model,  similar  to  other  membership  based
organizations,  is predicated on a growing  number of certified  businesses  and
maintaining  high renewal  rates.  Certified  businesses  that renew  contribute
higher gross

                                       11
<PAGE>

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 www.valuestar.com  Internet site
and providing other services. The marginal fixed costs associated with increased
numbers of  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 March 31, 1999 the  Company  had  approximately  1,415  certified  businesses
(1,085 at March 31, 1998).

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  three  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.  This  increased
operating  losses.  The number of  personnel  has grown to 79  full-time  and 43
part-time  persons at March 31, 1999. During the first quarter the Company added
four new  executive  positions  to support  growth and regional  expansion.  The
Company  also  has  incurred  marketing,  selling  and  administrative  costs in
connection  with the Southern  California,  Chicago and Dallas  region  startups
contributing to the larger operating losses.

At March 31, 1999 the Company had 302 (293 new and 9 renewal) business customers
in the  application and rating phase compared to 410 (349 new and 61 renewal) at
June 30,  1998.  The total at March 31, 1999  represents  approximately  30 days
sales.  Management  has  installed  new  hardware,  software and systems to more
automate the research and rating  process  which has reduced the rating time and
correspondingly  the backlog.  Based on  management's  experience,  the business
customers in the rating phase are expected to represent  approximately  $240 000
of  revenues  that  should be  recognized  in the fourth  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 $1,769,753 for the nine months ended March
31, 1999, a 62% increase over  revenues of $1,092,577  for the first nine months
of the prior year. Revenues for the third quarter were $693,485, a 130% increase
over the third quarter of the prior fiscal year.

The growth in revenues is the result of the  regional  expansion  in the current
year, improved new sales velocity and the impact of a larger base of renewals in
the  Northern  California  region.  During the first nine  months of fiscal 1999
certification  fees  accounted  for 74% of  revenue  (72% for the  prior  year's
comparable  nine months).  Renewing  business  revenue grew in dollar amount and
represented  44% of  certification  fees in the current year's first nine months
compared to 35% in the prior comparable  period. In the Company's largest market
region, Northern California,  renewals are an important component of the revenue
base.  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.

                                       12
<PAGE>

The Company reported  approximately $179,000 of revenue from premium listings in
its CVR  publications,  an increase of $78,000 from the $101,000 reported in the
first  nine  months  of the prior  year.  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  40% of revenues
during the first nine months  ended  March 31,  1999 (37% in the third  quarter)
compared to 38% for the prior year's first nine months (53% for the prior year's
third  quarter).  The most recent  quarter's  improvement  in gross  margin is a
result of the benefits from more automated systems and procedures being employed
making  ratings more  efficient  and  economical at increased  volumes.  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
nine  months of fiscal 1999 were  $1,184,126,  or 67% of  revenues,  compared to
$547,170,  or 50% of revenues  for the prior  year's  first nine  months.  Third
quarter selling costs were 68% of revenues  compared to 59% for the prior year's
third 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 current year the Company initiated sales activities
in several new market regions,  incurring an estimated  $150,000 of non-deferred
sales costs  consisting of $89,000 of outside sales personnel  related costs and
$61,000 of lead  generation  costs.  New market  regions  provide  only  nominal
revenues due to the approximately 60 day lag from selling  activities to initial
revenues.  Other than direct targeted  telemarketing costs, the Company expenses
sales costs as incurred.  The Company  expects  sales costs as a  percentage  of
revenues will vary in future periods  resulting from levels of future  revenues,
variances  in  renewal  rates,  the  effect  of new sales  promotions  and costs
thereof, timing of research and rating completions,  timing and costs of opening
new  market  regions,  level and  percentage  of fixed  selling  costs and other
factors, some beyond the control of management.

Marketing and Promotion  Expenses.  Marketing and promotion expenses  aggregated
$650,334 or 37% of revenues during the first nine months of fiscal 1999 compared
to  $590,465  or 54% of  revenues  incurred  for the first nine months of fiscal
1999.  Marketing and promotion expenses represented 32% of revenues in the third
quarter  compared  to 98% in the prior  years  third  quarter  when the  Company
employed  more media.  The  Company  limited  media in the most  recent  quarter
pending the  closing of the Senior Note  financing.  Included in  marketing  and
selling  expenses in first and third  quarter of each period were  printing  and
distribution  costs of the  Company's  CVR  publication  targeted at  consumers.
Printing  and  distribution  costs of $265,000  in the first  three  quarters of
fiscal 1999 increased over the fiscal 1998 comparable  period total of $232,000,
resulted from the addition of the first  Southern  California  report.  Also the
company has been able to print and distribute more copies with additional  pages
due to better pricing  resulting from increased  volumes.  During the first nine
months  of fiscal  1999 the  Company  expended  approximately  $150,000  on paid
advertising  targeted at expanding  consumer  awareness of ValueStar  Certified.
Paid advertising of $240,000 was employed in the prior year's first nine months.
In the first  nine  months of  fiscal  1999 the  Company  expended  $120,000  on
promotions compared to $35,000 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  $1,225,417 for the nine months ended March 31,
1999,  compared  to $562,236  for the  comparable  period of the prior year,  an
increase  of  $663,181.  The major  increases  include a  $288,000  increase  in

                                       13
<PAGE>

compensation and benefits due primarily to the increased number of executive and
management  personnel  added in connection with regional  expansion;  a $168,000
increase in  occupancy  and  telephone  costs due to  additional  personnel  and
expanded  operations;  a $57,000  increase in bad debt and guarantee  provisions
versus the prior  comparable  period;  a $44,000 increase in depreciation due to
additional equipment; a $41,000 increase in corporate costs (legal,  accounting,
filing,  public relations and consulting) due to increased audit and legal costs
as a public company,  and; a $23,000 increase in travel and entertainment due to
expanded  operations.  General and  administrative  costs  increased to $405,323
during the third  quarter of fiscal  1999  compared  to  $243,466  for the prior
year's third quarter.  Management  anticipates  that general and  administrative
costs will  continue to exceed  prior period  levels due to increased  executive
personnel added to support future 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 nine months of fiscal 1999 of
$230,339 that included  $54,545 of non-cash  interest from  amortization of bond
discount and accrued  paid-in-kind  interest.  Interest for the prior comparable
nine-month  period was  $49,987.  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  $2,232,742  for the nine months  ended
March 31, 1999,  compared to a net loss of $1,069,627  for the  comparable  nine
months ended March 31, 1998. The increased loss is attributable primarily to (a)
the increased  selling costs  resulting from the expansion of sales personnel to
new market  regions  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  $1,607,198  for the nine months ended March 31, 1999 and $1,629,721 for the
fiscal  year ended June 30,  1998.  At March 31,  1999 the  Company  had working
capital of $974,375.  For the nine months ended March 31, 1999 the negative cash
flow  from  operating  activities  was due to the  continued  operating  losses,
expansion  to new market  regions,  addition  of new  executive  management  and
investment in business growth. Included in the working capital at March 31, 1999
is net accounts  receivable of $421,494,  representing  approximately 65 days of
revenues and an  annualized  turnover  ratio of  approximately  5.6 times.  This
compares  favorably  to  approximately  82  days of  revenues  and  turnover  of
approximately  4.4 times at June 30,  1998.  The  improved  turnover and reduced
accounts  receivable  level results  primarily from increased  revenues 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 March 31, 1999 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. On March 31, 1999 the Company obtained gross proceeds
of  $2,450,000  from the sale of  Senior  Notes  resulting  in net  proceeds  of
approximately  $2,310,000.  Also during the nine months ended March 31, 1999 the
Company obtained $385,000 in note and debt financing and approximately  $600,000
from common stock sales.  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 or others will provide any future
financing to the Company.

Other  than  cash on hand of  $1,700,813  at March  31,  1999  and net  accounts
receivable of $421,494,  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.

The Company is expanding operations into additional new market regions with four
addition  regions  (total of eight in the  aggregate)  targeted  for the  fourth
fiscal quarter.  There can be no assurance the Company can successfully open new
market

                                       14
<PAGE>

regions.  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 10,  Note 12).  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 Readiness Disclosure

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 which could
lead to business disruptions in the U.S. and internationally.

The Company has  identified  the following  areas which could be impacted by the
Year 2000  issue.  They are:  Company  products;  internally  used  systems  and
software;  products or services provided by key third parties; and 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 the Company  completed an
initial review its internal  systems.  The review  consisted of an evaluation of
significant  internal hardware systems and major software  application  programs
which are primarily packaged third party "off-the-shelf" software programs. As a
result of this review the Company has identified  certain  systems which require
further review and probable  upgrades to be Year 2000 ready,  the costs of which
are included in management's  estimates outlined below. The Company is currently
evaluating  new  business  software  applications  and one major  selection  and
evaluation  criterion  will be full  compliance  with Year 2000.  The  Company's
certification and other products do not have any material Year 2000 problems.

In addition,  the Company is in the process of assessing  the  compliance of its
customers,   suppliers  and  vendors.   Management   believes  that  third-party
relationships  upon which the Company  relies  represent  the greatest risk with
respect to the Year 2000 issue,  because the Company 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,  the Company can give no assurances
that  issues  related  to Year 2000 will not have a material  adverse  effect on
future results of operations or financial condition.

Total costs relating to the Company's compliance efforts,  based on management's
best estimates range from $10,000 to $20,000 consisting  primarily of obtaining,
installing and testing new computers and upgrades of third party "off-the-shelf"
software  programs.  To date there have been no  material  direct  out-of-pocket
costs. Maintenance or modification costs will be expensed as incurred, while the
costs of new computers or software will be  capitalized  and amortized  over the
respective useful life.

Should the Company 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

                                       15
<PAGE>

to process transactions,  deliver certifications and products,  send invoices or
engage in similar normal  business  activities at the Company or its vendors and
suppliers.  If the  Company  determines  certain  suppliers  are not  Year  2000
compliant,  it 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. The Company  cannot  estimate at this time the cost or effect
on the  Company's  financial  condition of any  stockpiling  of  inventory.  The
Company  currently  does not have any other  contingency  plans with  respect to
potential  Year 2000  failures of its  suppliers or customers and at the present
time,  after an initial  evaluation,  does not intend to develop  one.  If these
failures would occur,  depending  upon their  duration and severity,  they could
have a material adverse effect on the Company's business,  results of operations
and financial condition.

The  information  set forth  above  under  this  caption  "Year  2000  Readiness
Disclosure"  relates to the Company's  efforts to address the Year 2000 concerns
regarding the Company's (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, 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 third fiscal  quarter ended March 31, 1999 that
             were not registered under the Securities Act:

             (1) During  January  1999 the Company  sold  200,000  shares of its
                 Common  Stock  at $1.00  per  share  in cash  and  warrants  to
                 purchase  200,000  common  shares  at  $1.00  per  share  until
                 December 31, 2003. The Company without an underwriter  sold the
                 securities  to five  qualified  investors  including  a company
                 controlled by one director.  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.

             (2) On March 31, 1999 the Company and its  wholly-owned  subsidiary
                 (ValueStar,  Inc.) completed the private  offering and sale for
                 cash of an aggregate of  $2,450,000  of Senior 8% Secured Notes
                 ("Senior Notes") with detachable stock warrants ("Warrants") to
                 three  institutional  investors  ("Holders").  The Holders 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").  These securities were
                 offered and sold without  registration under the Securities Act
                 of 1933, as amended

                                       16
<PAGE>

                 (the "Act"), in reliance upon the exemption provided by Section
                 4(2)  thereunder  and  appropriate  legends  were placed on the
                 Senior  Notes and the Warrants and will be placed on the shares
                 of Common Stock  issuable upon exercise of the Warrants  unless
                 registered   under  the  Act  prior  to  issuance.   While  the
                 securities were sold by the Company without an underwriter, the
                 Company issued to two finders warrants to purchase an aggregate
                 of 152,728  shares of Common  Stock at $1.375  per share  until
                 March 31,  2004.  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 warrants.

         (d) None

Item 3. Defaults Upon Senior Securities

         None

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

         None

Item 5. Other Information

         None

Item 6. Exhibits and Reports on Form 8-K

         (a) Exhibits:

                  27       Financial Data Schedule

         (b) Reports on Form 8-K:

                  The  Company  filed a report on Form 8-K  related to an Item 5
                  event  occurring on March 31, 1999.  The Form 8-K was filed on
                  April 13, 1999.

                                   SIGNATURES

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

                                 VALUESTAR CORPORATION

Date: May 13, 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)

                                       17