--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                  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, 2001

                         Commission File Number 0-22619

                              VALUESTAR CORPORATION
        (Exact name of small business issuer as specified in its charter)

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

         360-22nd Street,  #400, Oakland, California            94612
         -------------------------------------------            -----
         (Address of principal executive offices)            (Zip Code)

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

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

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

Common Stock, $.00025 par value                              16,022,219
-------------------------------                              ----------
           (Class)                                 (Outstanding at May 15, 2001)

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

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>

<TABLE>
                                             VALUESTAR CORPORATION
                                                     INDEX
<CAPTION>

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

         Item 1.  Financial Statements (unaudited):

                  Consolidated Balance Sheets as of March 31, 2001 and
                  June 30, 2000                                                                           3

                  Consolidated Statements of Operations for the three and nine
                  months ended March 31, 2001 and 2000                                                    4

                  Consolidated Statements of Cash Flows for the nine
                  months ended March 31, 2001 and 2000                                                    5

                  Notes to Interim Consolidated Financial Statements                                      6

         Item 2.  Management's Discussion and Analysis or Plan
                  of Operation
12

PART II. OTHER INFORMATION

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



SIGNATURES                                                                                                20

</TABLE>
                                                        2

<PAGE>

<TABLE>
                                             VALUESTAR CORPORATION
                                         CONSOLIDATED BALANCE SHEETS
                                                  (UNAUDITED)

                                                    ASSETS
<CAPTION>

                                                                                  March 31,              June 30,
                                                                                    2001                   2000
                                                                            ----------------------    ----------------
<S>                                                                                   <C>                <C>
CURRENT ASSETS
     Cash                                                                             $    11,566        $  5,287,385
     Receivables                                                                          149,107             454,233
     Inventory                                                                              4,517              16,898
     Prepaid expenses                                                                   1,119,155             416,573
                                                                            ----------------------    ----------------

            Total current assets                                                        1,284,345           6,175,089

PROPERTY AND EQUIPMENT                                                                  6,214,604           5,415,358

RESTRICTED CASH                                                                           296,000             296,000

DEFERRED COSTS                                                                                  -              23,949

OTHER ASSETS                                                                               88,747              89,489
                                                                            ----------------------    ----------------

            Total assets                                                              $ 7,883,696        $ 11,999,885
                                                                            ======================    ================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                                                 $ 1,808,372        $  1,665,030
     Accrued liabilities and other payables                                               830,126           1,254,035
     Demand notes payable                                                                  68,750                   -
     Bridge note advances                                                               1,180,000                   -
     Deferred revenues                                                                    400,812             137,520
     Current portion of capitalized leases                                                305,268             285,458
     Current portion of long-term debt                                                    590,313             450,503
                                                                            ----------------------    ----------------

            Total current liabilities                                                   5,183,641           3,792,546

CAPITAL LEASE OBLIGATIONS, net of current portion                                         177,613             408,492
LONG-TERM DEBT, net of current portion                                                    960,776             853,997
                                                                            ----------------------    ----------------

            Total liabilities                                                           6,322,030           5,055,035
                                                                            ----------------------    ----------------

STOCKHOLDERS' EQUITY
     Preferred stock, $.00025 par value; 5,000,000 shares authorized:
         500,000 shares designated Series A Convertible, with
           225,000 shares issued and outstanding                                               56                  56
         800,000 shares designated Series B Convertible, with
           688,586 shares issued and outstanding                                              172                 172
         1,333,333 shares designated Series C Convertible, with
           0 shares issued and outstanding at March 31, 2001                                    -                   -
         500,000 shares designated Series CC Convertible, with
           192,739 amd 0 shares issued and outstanding respectively                            48                   -
     Common stock, $.00025 par value; 50,000,000 shares
         authorized, 15,674,990 and 15,587,543 shares issued
         and outstanding respectively                                                       3,919               3,897
     Additional paid-in capital                                                        41,170,068          32,162,473
     Accumulated deficit                                                              (39,612,597)        (25,221,748)
                                                                            ----------------------    ----------------

            Total stockholders' equity                                                  1,561,666           6,944,850
                                                                            ----------------------    ----------------

            Total liabilities and stockholders' equity                                $ 7,883,696        $ 11,999,885
                                                                            ======================    ================
<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,
                                                             2001             2000             2001              2000
                                                         --------------   --------------  ---------------    --------------

REVENUES                                                  $    257,198     $    478,750    $     765,436      $  1,670,878
                                                         --------------   --------------  ---------------    --------------
<S>                                                       <C>              <C>             <C>                <C>
OPERATING EXPENSES
     Buyer benefits                                             39,066           80,912          144,589           126,128
     Ratings and content                                        64,600          170,000          388,418           952,423
     Sales and marketing                                     1,118,136        2,065,893        5,205,758         4,114,006
     Product and content development                         1,111,294        1,664,051        5,219,924         2,845,531
     General and administrative                                512,187          448,927        1,873,939         1,212,634
     Depreciation and amortization                             685,935          343,086        1,862,660           481,874
                                                         --------------   --------------  ---------------    --------------

                                                             3,531,218        4,772,869       14,695,288         9,732,596
                                                         --------------   --------------  ---------------    --------------

LOSS FROM OPERATIONS                                        (3,274,020)      (4,294,119)     (13,929,852)       (8,061,718)
                                                         --------------   --------------  ---------------    --------------

OTHER INCOME (EXPENSE)
     Interest Income                                             1,018          118,900           76,254           144,234
     Interest expense                                          (91,797)        (856,773)        (283,919)       (1,790,623)
     Miscellaneous                                                   -           (3,578)             377            (4,378)
                                                         --------------   --------------  ---------------    --------------

                                                               (90,779)        (741,451)        (207,288)       (1,650,767)
                                                         --------------   --------------  ---------------    --------------

NET LOSS                                                  $ (3,364,799)    $ (5,035,570)   $ (14,137,140)     $ (9,712,485)
                                                         ==============   ==============  ===============    ==============

NET LOSS AVAILABLE TO COMMON
     STOCKHOLDERS                                         $ (7,129,371)    $ (8,080,578)   $ (21,434,241)     $(21,485,617)
                                                         ==============   ==============  ===============    ==============

LOSS PER COMMON SHARE                                     $      (0.45)    $      (0.68)   $       (1.37)     $      (2.07)
                                                         ==============   ==============  ===============    ==============

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                                            15,674,990       11,873,812       15,658,641        10,380,824
                                                         ==============   ==============  ===============    ==============

<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,
                                                                     2001                2000
                                                               ------------------   ----------------
<S>                                                                <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                      $ (14,137,140)      $ (9,712,485)
     Adjustments to reconcile net loss to net
        cash used by operating activities:
            Depreciation                                               1,861,918            307,798
            Amortization of intangible assets                                742            174,076
            Amortization of bond discount                                 29,490          1,491,936
            Change in allowance for doubtful accounts                     42,686             (3,783)
            Accrued interest included in long-term debt                        -             12,224
            Warrants, options & stock issued for services                252,131            142,083
            Gain on disposal of assets                                    (4,136)                 -
        Changes in:
            Receivables                                                  262,440             24,745
            Inventory                                                     12,381            (18,763)
            Prepaid expenses                                            (213,191)          (154,457)
            Deferred costs                                                23,949             40,406
            Other assets                                                       -            (64,482)
            Accounts payable                                             143,342            534,751
            Accrued liabilities and other payables                       824,841             66,435
            Deferred revenues                                            263,292             27,730
                                                               ------------------   ----------------
               Net cash used by operating activities                 (10,637,255)        (7,131,786)
                                                               ------------------   ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions, net of dispositions         (1,792,850)        (2,198,634)
                                                               ------------------   ----------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of preferred stock                             7,098,458         12,935,255
     Proceeds from sale of common stock                                   50,001          5,645,635
     Proceeds from subscribed common stock                                     -            837,150
     Payments due on conversion of C to CC                                  (203)                 -
     Proceeds from debt                                                  732,796            250,000
     Payments on capital leases                                         (211,070)           (30,427)
     Payments on debt                                                   (515,696)           (43,856)
                                                               ------------------   ----------------
               Net cash provided by financing activities               7,154,286         19,593,757
                                                               ------------------   ----------------

NET INCREASE (DECREASE) IN CASH                                       (5,275,819)        10,263,337
CASH, beginning of period                                              5,287,385            270,149
                                                               ------------------   ----------------

CASH, end of period                                                $      11,566       $ 10,533,486
                                                               ==================   ================

SUPPLEMENTAL CASH-FLOW INFORMATION Cash paid during the period for:
        Interest                                                       $ 254,431          $ 214,739
     Non-cash investing and financing activities:
        Series CC Stock issued for capitalized development
          costs, services and prepaid costs                            1,500,000                  -
        Accrued dividends on Series A Preferred Stock                    144,564            122,877
        Accrued dividends on Series CC Preferred Stock                   109,145                  -
        Warrants issued in connection with Series B preferred stock            -            400,000
        Equipment acquired under capital leases                                -             30,000
        8% Secured Notes converted to Series B Stock                           -          1,000,000
        Shareholder advances converted to Series B Stock                       -            250,000
        12% notes converted upon warrant exercise                              -            625,000
        6% Convertible Notes and interest converted to equity                  -            546,274
        8% Secured Notes converted upon warrant exercise                       -          1,450,000
        12% subordinated notes converted upon warrant exercise                 -             31,250
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
</TABLE>
                                       5

<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 2001

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 provider of branded ratings on local service  businesses.  The
Company generates  revenues from research and rating fees and is launching a new
program  to collect  transaction  commissions  from  connecting  member  service
businesses with member buyers.

The  Company's  revenues  have been  primarily  from  rating  and  certification
services.  Rating services  consist of collection and verification of credential
information,  a survey of a  business'  customers  and the  delivery  of ratings
reports.  Services associated with certification  include an orientation and the
delivery of certification  materials and manuals.  Sales of marketing  materials
and other  services  are  recognized  as  materials  are shipped or services are
rendered.

Starting in December 1999 the Company  began a transition  from fixed rating and
certification  fees to developing a commission  based program based on the value
of transactions between member service businesses and member buyers. The Company
has  also  changed  its  program  to  automatically  rate  businesses  based  on
transactions and to provide benefits to buyers purchasing from and rating member
businesses.  The Company  completed  development of the systems required to rate
buyer  transactions  and  collect  commission  fees from  credit  card and other
transactions in March 2001. The Company plans to commence the collection of fees
and incur related  benefit costs,  on a limited basis,  during the fourth fiscal
quarter ending June 30, 2001.  Benefit costs include loyalty points and customer
satisfaction  guarantees.  In the future the Company expects the majority of its
revenues to be derived from transaction commissions.

The Company plans to recognize  commission  revenues as reported and earned.  On
July 1, 2000 the Company began recognizing  fixed rating and certification  fees
on a  straight-line  basis over the term of a  participating  business  license,
generally  one year.  In the future some  businesses  will remain on a fixed fee
basis. Costs of benefits provided to buyers will be recognized as provided, with
accruals for future benefit obligations.

Because of the changes  described  above,  certain amounts in the current period
are not comparable to the prior period and certain  amounts in the  consolidated
interim  statements  have  been  reclassified  to  conform  to the  fiscal  2001
presentation.

The  Securities  and  Exchange  Commission's  staff (the  "Staff")  issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"),  in  December  1999,   which  provides   guidance  on  the   recognition,
presentation  and  disclosure  of revenue in financial  statements of all public
companies. The provisions of SAB 101 are effective for transactions beginning in
the  Company's  current  fiscal  year.  The Company  believes it is  recognizing
revenues within the guidance provided by SAB 101.

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, 2000.

The  Company  has  experienced  recurring  losses  and  the  use  of  cash  from
operations.  A portion of the losses is attributable to research and development
of the  Company's new  transaction  system,  and  marketing and promotion  costs
associated  with  increasing  consumers'  awareness of the meaning of ValueStar;
marketing to  businesses  the  advantages  of becoming  ValueStar  members;  and
discounting certain fees to encourage businesses to become ValueStar members.


                                       6

<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 2001


2. STATEMENT PRESENTATION (Cont'd)

It is management's plan to seek additional  financing through private placements
as well as other means. The capital markets have been unpredictable in the past,
especially for early stage companies such as the Company. The ability and amount
of capital that can be raised depends on factors  beyond the Company's  control.
As a result  there  can be no  guarantee  that  management's  efforts  to secure
additional  financing  will be  successful  or that the  amounts  raised will be
sufficient  for the Company's  future needs.  If the Company  raises  additional
funds  through  the  issuance  of equity or  convertible  debt  securities,  the
percentage ownership of existing stockholders will be reduced.  Stockholders may
experience  extreme  dilution due to the current stock price and the significant
amount of financing the Company needs to raise.  New  securities may have rights
senior  to those of  holders  of  preferred  or  common  stock.  See Note 11 for
information  regarding the  substantial  dilution  resulting  from recent bridge
financing.

The  consolidated  interim  financial  statements  have been prepared on a going
concern basis,  which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business.  Cash flows from future operations
may not be sufficient to enable the Company to meet its obligations,  and market
conditions  and the  Company's  financial  position  may  inhibit its ability to
achieve profitable operations.

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 ended March 31, 2001 are not necessarily  indicative of the results that
may be expected for the year ending June 30, 2001.

3. CHANGE IN ACCOUNTING PRINCIPLES

During the second fiscal quarter, the Company adopted Emerging Issues Task Force
Issue No. 00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities  with  Beneficial  Conversion  Features  or  Contingently  Adjustable
Conversion Ratios, to Certain Convertible  Instruments",  which is effective for
all such  instruments.  This issue clarifies the accounting for instruments with
beneficial conversion features or contingently adjustable conversion ratios. The
Company has modified  the  previous  calculation  of the  beneficial  conversion
features associated with previously issued convertible preferred stock. Based on
further clarification, the beneficial conversion feature should be calculated by
allocating the proceeds received in each financing to the convertible instrument
and to any detachable  warrants  included in the transaction,  and measuring the
intrinsic value based on the effective  conversion  price based on the allocated
proceeds.  The  previous  calculation  was based on a  comparison  of the stated
conversion  price  in the  terms  of the  instrument  to the  fair  value of the
issuer's  common stock at the  commitment  date.  The Company has  presented the
effect of adoption as a cumulative  change in  accounting  principles as allowed
for in EITF No. 00-27. Accordingly,  the Company recognized in the second fiscal
quarter an additional $1,715,000 in imputed deemed dividends based on a discount
at issuance of previously issued convertible preferred stock. See Note 10 below.

4. RESEARCH AND DEVELOPMENT COSTS

Research and development expenses are charged to operations as incurred. Certain
internal  software  and web site  development  costs,  which are  related to the
Company's new revenue model, have been capitalized as prescribed by the American
Institute  of  Certified  Public   Accountant's   Statement  of  Position  98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal  Use," and the  Emerging  Issues  Task  Force  consensus  at EITF 00-2,
"Accounting for Web Site Development Costs."

5. INVENTORY

Inventory  consists  of  promotional  materials  for  sale to  ValueStar  member
businesses and direct advertising  material,  and is stated at the lower of cost
(first-in, first-out method) or market.


                                       7

<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 2001

<TABLE>
6. LONG-TERM DEBT

Long-term debt at March 31, 2001 consists of the following:
<CAPTION>
<S>                                                                                              <C>
15%  Equipment  Note due in monthly  installments  of principal  and interest of
$39,023  through March 2003,  with a balloon payment of $191,810 due on April 1,
2003; secured by equipment; net of unamortized note discount
of $76,666                                                                                       $    869,370

15%  Equipment  Note due in monthly  installments  of principal  and interest of
$22,363 through July 2003, with a balloon payment of $109,919 due on
September 1, 2003; secured by equipment                                                               602,400

15% Equipment Note due in monthly installments of principal and interest of
$5,500 to maturity in June 2002; secured by equipment and software                                     30,384

15% Equipment Note due in monthly installments of principal and interest of
$2,022 to maturity in August 2003; secured by equipment and software                                   48,935
                                                                                                 ------------
                                                                                                    1,551,089
Less current portion                                                                                  590,313
                                                                                                 ------------
                                                                                                 $    960,776
                                                                                                 ============
</TABLE>
7. STOCKHOLDERS' EQUITY
<TABLE>
The following table summarizes equity  transactions during the nine months ended
March 31, 2001:
<CAPTION>

                                                                              Additional
                                                                               Paid-in
                                Preferred Stock       Common Stock             Capital      Accumulated
                                --------------------- ----------------------
                                 Shares      Amount     Shares      Amount     Common        Deficit        Total
                                ----------  --------- ------------ --------- ------------  -------------  -----------

<S>                              <C>           <C>     <C>          <C>      <C>           <C>            <C>
Balance, June 30, 2000            913,586      $ 228   15,587,543   $ 3,897  $32,162,473   $ (25,221,748) $ 6,944,850
Sale of Series C Convertible
   Preferred at $22.50 per
   share, net of issuance
   costs of $35,000               238,469         60                           5,330,493                    5,330,553
Sale of Series CC Convertible
   Preferred at $45.00
   per share, net of
   issuance costs of $40,000       73,509         18                           3,267,887                    3,267,905
2 for 1 Exchange of Series C
   Convertible Preferred to
   Series CC Convertible
   Preferred                     (119,239)       (30)                               (173)                        (203)
Accrued 8% dividends on
   Series A                                                                      144,564        (144,564)           -
Accrued 8% dividends on
   Series CC                                                                     109,145        (109,145)           -
Stock issued on exercise
   of options                                              75,001        19       49,982                       50,001
Stock issued on exercise
   of options in exchange
   for shares                                              12,446         3           (3)                           -
Value assigned to warrants
   issued for services                                                           105,700                      105,700
Net loss                                -          -            -         -            -     (14,137,140) (14,137,140)
                                ----------  --------- ------------ --------- ------------  -------------  -----------

Balance, March 31, 2001         1,106,325      $ 276   15,674,990   $ 3,919  $ 41,170,068  $ (39,612,597) $ 1,561,666
                                ==========  ========= ============ ========= ============  =============  ===========

</TABLE>

During the first nine months of fiscal 2001 the Company issued 238,469 shares of
Series C Convertible  Preferred  Stock, par value $.00025 ("Series C Stock") for
cash of $22.50 per share. In connection with the sale of the Series C Stock, the
Company granted the purchasers  warrants on an aggregate of 1,192,345  shares of
common stock ("C-Warrants").  During the third fiscal quarter all the holders of
Series  C  Stock  and  C-Warrants  exchanged  their  securities  (a two  for one
exchange) for 119,230 shares of Series CC Convertible Preferred Stock, par value
$.00025  ("Series CC Stock") and  warrants on  3,576,900  shares of common stock
("CC-Warrants")  exercisable at $0.75 per share. At March 31, 2001 there were no
shares of Series C Stock outstanding and no C-Warrants outstanding.


                                       8

<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 2001


7. STOCKHOLDERS' EQUITY (Cont'd)

During the third fiscal  quarter the Company also issued 73,509 shares of Series
CC Stock for $45.00 per share for cash of $1,807,905 and an agreement with First
Data  Merchant  Services   Corporation   (FDMS),  a  subsidiary  of  First  Data
Corporation ("FDC"), to perform $1,500,000 of services.

Purchasers of Series CC Stock were granted  CC-Warrants to purchase 30 shares of
common stock for each share of Series CC Stock. In connection with the aggregate
of 192,739 shares of Series CC Stock issued or exchanged,  the Company issued an
aggregate  of 5,782,170  CC-Warrants  that expire on January 5, 2004. A total of
72,669  shares of the  Series  CC Stock  and  related  CC-Warrants  sold  and/or
exchanged were issued to entities affiliated with directors of the Company.

Cumulative dividends of 8% per annum are payable on the Series CC Stock when and
if declared by the Board of Directors or upon  liquidation  or  conversion.  The
dollar amount of Series CC Stock is convertible into shares of common stock at a
conversion  price  equal  to  $0.75  per  common  share,  and are  automatically
converted on the occurrence of certain  events.  The Series CC Stock has certain
antidilution and registration rights, has a liquidation preference of $45.00 per
share, plus accrued and unpaid dividends, pari passu with the Series B preferred
stock, but after payment of the  preferential  amount for the Series A preferred
stock.  The  Series CC Stock has  voting  rights  equal to the  number of common
shares into which it is convertible.  In addition, as long as there are at least
100,000 shares of Series CC Stock outstanding,  then the holders are entitled to
elect one member of the Company's Board of Directors.

The Company issued to a financial advisor, controlled by a director, warrants to
purchase an aggregate of 445,607  shares of common stock at an exercise price of
$0.75 per share with a five-year term in connection  with the sale of the Series
CC Stock.

At March 31, 2001 the Company's  Series A, B and CC convertible  preferred stock
were convertible into  approximately 11.7 million shares of common stock. Due to
the  antidilution  provisions  of the  preferred  stock,  and as a result of the
subsequent  financing  described in Note 11,  additional  shares of common stock
will be issuable to preferred holders in future periods.

8. STOCK OPTIONS AND WARRANTS

The following  table  summarizes  option activity for the period ended March 31,
2001:
                                                  Weighted Average    Weighted
                                      Shares       Exercise Price   Average Life
Outstanding July 1, 2000            2,233,938          $4.19             3.75
Granted                             2,506,801          $1.90
Canceled                             (774,058)         $5.77
Exercised                             (90,001)         $0.64
Expired                                (5,000)         $0.50
                                    ---------
Outstanding March 31, 2001          3,871,680          $2.50             3.90
                                    =========
Exercisable at March 31, 2001       1,804,976          $1.96             3.49
                                    =========

In January 2001 the Company  granted  warrants on 500,000 shares of common stock
exercisable at $1.00 per share to a financial  consulting firm,  controlled by a
director,  for financial advisory  services.  A total of 250,000 warrants vested
and were  exercisable  at issuance  and the balance at the end of one year.  The
warrants  expire in January 2006. The Company  valued the 250,000  warrants that
have  vested at  $99,000,  which is being  expensed  over the  initial  one-year
service period.

In February 2001 the Company granted  warrants on 150,000 shares of common stock
exercisable  at $1.00  per  share to a  consulting  firm  for  public  relations
services. A total of 18,750 warrants vested and were exercisable at issuance and
the balance  vest at the rate of 18,750 at the end of each three  month  period.
The warrants  expire in February 2006. The Company has expensed the value of the
18,750 warrants that vested in the third quarter of $6,700.


                                       9

<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 2001


8. STOCK OPTIONS AND WARRANTS (Cont'd)

At  March  31,  2001 the  Company  had the  following  stock  purchase  warrants
outstanding each exercisable into one common share:

                 Number               Exercise Price             Expiration Date
                 ------               --------------             ---------------
                   187,500 (1)             $1.25                 September 2002
                    20,000 (1)             $1.25                 December 2002
                    66,300 (2)             $5.85                 March 2003
                    64,713 (2)             $5.85                 April 2003
                    30,000                 $5.85                 April 2005
                    50,000                $10.00                 April 2003
                    12,500 (3)             $2.00                 April 2003
                    50,000                 $1.75                 May 2003
                   350,000 (1)             $1.00                 December 2003
                 5,782,170 (4)             $0.75                 January 2004
                   152,728 (1)             $1.375                March 2004
                    30,000 (1)             $1.50                 March 2004
                    75,000                 $2.50                 December 2004
                    33,163 (5)             $4.22                 April 2005
                   500,000 (6)             $1.00                 January 2006
                   150,000 (6)             $1.00                 February 2006
                   445,607                 $0.75                 March 2006
                ----------
                 7,999,681

(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 $5.00 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 $3.00 per share after two
     years  subject to  certain  conditions.
(5)  These  warrants have certain  antidilution  adjustments  subject to certain
     conditions.
(6)  A portion of these warrants are subject to future vesting.

9. INCOME TAXES

At March 31,  2001 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  $26.5
million,  which expire  through 2020,  of which  certain  amounts are subject to
limitations  under the Internal  Revenue Code,  as amended.  The Company has for
state income tax purposes net operating loss  carryforwards of approximately $13
million,  which expire  through 2005,  of which  certain  amounts are subject to
limitations under the laws of California.


                                       10

<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 2001


10. LOSS PER COMMON SHARE

Loss per common share is computed  using the weighted  average  number of common
shares outstanding.  Since a loss from operations exists, a diluted earnings per
common  share  number is not  presented  because the  inclusion  of common stock
equivalents in the computation  would be antidilutive.  Common stock equivalents
associated  with  warrants,   stock  options  and  preferred  stock,  which  are
exercisable into  approximately 23.6 million shares of common stock at March 31,
2001 could potentially dilute earnings per share in future periods.

The  provisions  of the Series A and Series CC Stock  provide for  cumulative 8%
dividends and provide, upon conversion,  a similar accretion whether or not such
dividends have been declared by the Board of Directors.  These amounts  increase
the net loss available to common  stockholders.  Net loss attributable to common
stockholders  was also  increased by imputed  deemed  dividends  from a discount
provision  included in the Series C and Series CC Stock,  which  provided for an
effective  conversion  price,  after  allocating a fair value of the proceeds to
detachable  warrants,  less than the market price on the date of  issuance.  The
imputed non-cash  dividends are not a contractual  obligation on the part of the
Company to pay such  dividend.  Net loss  available  to common  stockholders  is
computed as follows:
<TABLE>
<CAPTION>
                                                                  Three Months Ended             Nine Months Ended
                                                                       March 31,                      March 31,
                                                                   2001          2000            2001            2000
                                                                   ----          ----            ----            ----
<S>                                                         <C>              <C>              <C>             <C>
Net loss                                                    $(3,364,799)     $(5,035,570)     $(14,137,140)   $(9,712,485)
Imputed deemed dividend on Series CC Stock based on
  discount at issuance                                       (3,648,500)                        (3,648,500)
Imputed deemed dividend on Series C Stock based on
  discount at issuance                                          (17,013)           -            (1,679,892)         -
Imputed deemed dividend on Series B Stock based on
  discount at issuance                                            -           (3,000,008)            -        (11,650,255)
Accrued dividends on Series A and Series CC Stock               (99,059)         (45,000)         (253,709)      (122,877)
                                                             ----------       -----------     ------------   ------------
Net loss available to common stockholders before
  cumulative effect of a change in accounting principles    $(7,129,371)     $(8,080,578)     $(19,719,241)  $(21,485,617)
Cumulative effect of a change in accounting
 principles (note 3)                                             -                 -            (1,715,000)          -   .
                                                         --------------  ---------------        --------------------------
Net loss available to common stockholders                   $(7,129,371)     $(8,080,578)     $(21,434,241)  $(21,485,617)
                                                            ============     ============     =============  =============
</TABLE>

11. SUBSEQUENT EVENTS

Subsequent to March 31, 2001 the Company  entered into bridge notes  aggregating
$2,460,000,  of which  $1,180,000  had been advanced to the Company at March 31,
2001.  The bridge notes bear  interest at 12% per annum and are due on April 30,
2002. For each $1.00 of principal the Company has agreed to issue five shares of
common  stock or an  aggregate  of  12,300,000  common  shares.  An aggregate of
$1,262,058  of the  notes  are to  entities  affiliated  with  directors  of the
Company. The Company anticipates, but there can be no assurance, that the bridge
notes will convert into a future round of debt or equity financing.  As a result
of these issuances, the Company does not have sufficient authorized common stock
to provide for the  conversion  of all  options,  warrants and  preferred  stock
outstanding.  While the Company has  obtained  waivers  from its  obligation  to
reserve unissued shares for preferred stock holders,  the Company is required to
take steps to increase the number of authorized shares of common stock.

Subsequent to March 31, 2001 the Company  received notice that it was in default
on payments on  approximately  $1.7 million of equipment  debt.  The Company has
subsequently  negotiated  deferred  payment  terms on this debt and  removed the
default.  The Company also is working to negotiate  revised  payment  terms on a
software  lease  agreement  with an estimated  net  liability  of $64,000  after
application  of a restricted  cash balance of $296,000.  The Company has further
received notice that it is in default on occupancy payments to its landlord. The
Company has reduced the space it is  occupying  and is  attempting  to negotiate
modifications  to rental  payments and  obligations to its landlord.  Failure to
successfully  resolve these  obligations and  commitments  could have an adverse
impact on operations.  Failure to successfully  arrange additional  financing is
likely to result in an inability  to fund our  operations  in the long term,  as
cash resources will be used to satisfy our existing liabilities.

                                       11

<PAGE>

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

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE  FINANCIAL  PERFORMANCE.  ACTUAL RESULTS MAY DIFFER  MATERIALLY
FROM THOSE CURRENTLY  ANTICIPATED AND FROM HISTORICAL  RESULTS  DEPENDING UPON A
VARIETY OF FACTORS,  INCLUDING THOSE DESCRIBED BELOW AND IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2000.

Overview

We are a provider of branded rating content on local service  businesses.  As an
infomediary we enhance online and offline commerce between buyers and sellers of
services by offering ratings enabling buyers to quickly determine the best local
service  providers.  Our ValueStar  ratings are provided on the Internet at , on
other partner Internet sites, in our ValueStar Report and through  promotions by
rated  businesses.  Our goal is to position  ValueStar  as the  dominant  rating
system for local  service  providers  and operate a  commission  based system to
match buyers and sellers of local services. Our services are free to consumers.

Starting  in  December  1999  we  began  a  transition  from  fixed  rating  and
certification  fees  to  percentage  commission  fees  based  on  the  value  of
transactions  between member service companies and member buyers. Since December
1999 we invested over $11 million in development  costs creating and testing the
systems to match and  collect  transaction  commissions  and ratings for offline
transactions.  Our new systems create continuously updated customer satisfaction
ratings collected from the actual purchasers of local services.  We also provide
benefits to buyers purchasing from member businesses.

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

     o    In January  2000 we  entered  into a  strategic  data  agreement  with
          Experian,  a provider of global information  solutions.  This alliance
          provides  financial and legal status on local service  businesses as a
          part of our content development.  We provide Experian with the results
          of our branded  proprietary  research on local service  businesses for
          distribution to their clients.

     o    In April 2000 we entered into an alliance with  Netcentives  to manage
          our  ValueStar  Rating  Points  award  program.  As  a  part  of  this
          relationship,   we  expect  the  four  million   consumer  members  of
          Netcentives  shopping  network,  ClickRewards(TM),  will become  trial
          ValueStar members for opt-in activation.

     o    Commencing in May 2000 we began to form distribution partnerships with
          Internet portals and service referral  companies to broadly distribute
          our ratings. Our roster of distribution partners includes home service
          portal  Ourhouse.com  and other vertical portals such as eAttorney.com
          and rentals.com.

     o    In June 2000 we entered into a database  agreement with InfoUSA,  Inc.
          to receive certain raw database information.

     o    In September  2000 we announced a pilot  program for the San Francisco
          Bay area credit card  holders of First  National  Bank of Omaha.  This
          program is expected to be launched in the fourth fiscal  quarter ended
          June 30, 2001.

     o    In November 2000 we announced  two  strategic  and marketing  alliance
          agreements with global  electronic  commerce and payments leader First
          Data  Corp.  First  Data is  marketing  the  ValueStar  Customer-Rated
          program to merchants through participating merchant acquiring clients,
          while helping ValueStar market cardholder  benefits to issuer clients.
          First Data has also  developed  and has  agreed to operate  systems to
          match  transactions  between  registered buyers and licensed ValueStar
          rated service businesses.

     o    In January 2001 we entered into a ratings distribution  agreement with
          BellSouth RealPages.com. ValueStar expects to be a primary third-party
          content  partner for  RealPages.com  to  supplement  service  business
          listings.

     o    In April and May 2001, through the assistance of First Data Resources,
          we signed  four  letters of intent  with  credit  card  issuing  banks
          representing an estimated 49 million active  cardholders.  Our plan is
          to enter into  definitive  contracts  with these  issuers and commence
          providing  ValueStar ratings and benefits to cardholder  members while
          collecting  transaction  commissions  between  these  cardholders  and
          ValueStar member service businesses.

     o    Through  early May 2001 we have signed  marketing  and or data sharing
          agreements  with five major acquiring  merchant banks  representing an
          estimated  110,000 service merchants across the U.S. that are eligible
          to participate in the ValueStar program. Our strategy is to market our
          program to these  service  merchants  and expand  our  penetration  of
          service businesses in selected market regions.


                                       12

<PAGE>

At April 30,  2001 we had  approximately  730,000  service  businesses  rated as
either  ValueStar  Verified or ValueStar  Customer-Rated.  While this credential
information  is important to consumers  our strategy is to license our ValueStar
Customer-Rated  program to these businesses.  While we used to operate fixed fee
licensing in eight market regions,  we are currently targeting licensing efforts
in the Northern  California region for activation of our commission  program. We
had approximately  7,500 licensed service  businesses at March 31, 2001 compared
to  approximately  2,000 at March 31, 2000. We expect these  businesses  and new
businesses being enrolled to produce limited  commission revenue starting in the
fourth quarter of the current fiscal year. We also expect to license  businesses
in other  regions in the  future.  Our future  business  will be  predicated  on
creating  and  maintaining  a  growing  number  of  member  buyers  and  sellers
transacting  commerce  in local  services.  We expect a  majority  of our future
revenues to be derived from commissions from transactions  between member buyers
and sellers of local  services.  Renewals of  businesses  from year to year will
impact  future  operations as we expend funds  enrolling  new  businesses in our
member program.

In order to more  efficiently  collect  commissions  our  strategy is to capture
automated  credit card  transactions  through  the use of third  party  matching
partners.  We  currently  contract  with  two  partners  who have  access  to an
estimated  65% of all  credit  card  transactions  in the United  States.  These
matching  partners can provide data on  transactions  which occur between member
businesses and member buyers,  as permitted.  We also enter into agreements with
individual  banks or processors to authorize  access to transaction  data.  Upon
receipt and matching of  transaction  data, we are able to calculate  commission
fees and invoice or debit member businesses.

Our staffing has varied  significantly  in the current year as we have developed
new business  credential content and systems.  We have in the past and expect to
continue  to use  outside  contractors  for  certain  services.  We reduced  our
staffing  from  140 in  December  2000 to  approximately  67 at the date of this
report in  connection  with the  completion  of rating  content  on the  730,000
businesses and development of our computer  systems.  Our future activities will
include   maintenance   and  expansion  of  rating  content  on  businesses  and
maintenance  and  enhancement  of our  software and  systems.  The  reduction in
personnel and development  costs has reduced monthly operating costs by over 40%
as we streamline  operations to focus our resources on our First Data  strategic
relationship  and the major credit card issuing banks that have expressed  their
intent to incorporate our program as a benefit to their cardholders.

Future  operations  will be impacted by changes in cost  structure and elections
regarding new product  development,  advertising,  promotions  and growth rates.
Rapid growth, due to the nature of our operations,  is expected to contribute to
continued operating losses in the foreseeable future.

Revenue and Cost Recognition

During fiscal 2000 a majority of our revenues were from fixed certification fees
ranging from $995 to approximately  $2,000 depending on business size. In fiscal
2000 these fees were recognized as revenue when material  services or conditions
relating  to the  certification  had been  performed.  Due to the  change in our
product  offering  and the  benefits to be  supplied  to buyers,  we changed the
method of recording fixed fee revenue effective July 1, 2000. We recognize fixed
fees on a straight-line basis over the term of a participating business license,
generally  one year.  We will  recognize  commission  revenues as  reported  and
earned.  Costs of benefits  provided to buyers are recognized as provided,  with
accruals for any future benefit obligations.

We expect to commence collecting commission revenues, on a limited basis, in the
fourth fiscal quarter ending June 30, 2001. Due to the change in our program and
the change in recognizing  fixed  certification  fees and until we can recognize
sufficient  commission  revenues,  we expect  comparative  revenues  in  current
periods to be less than prior periods.

The  Securities  and  Exchange  Commission's  staff (the  "Staff")  issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"),  in  December  1999,   which  provides   guidance  on  the   recognition,
presentation  and  disclosure  of revenue in financial  statements of all public
companies. The provisions of SAB 101 are effective for transactions beginning in
our current  fiscal  year.  We believe we are  recognizing  revenues  within the
guidance provided by SAB 101.

Results of Operations

Revenues. Revenues consist of rating and certification fees from new and renewal
business  applicants,  sale  proceeds  from  information  materials  and premium
listings  in our  ValueStar  Report  and on our Web site,  and  other  ancillary
revenues. We


                                       13

<PAGE>

reported  total  revenues of $765,436  for the nine months  ended March 31, 2001
compared to $1,670,878  for the first nine months of the prior fiscal year.  The
decrease  in  revenues is due to the  commencement  in July 2000 of  recognizing
fixed fee revenues on a straight-line  basis over the term of the annual license
corresponding  to the term we expect to provide  benefits to buyers  transacting
with a business.  This change is due to the change in our product  offering  and
the  change  in  benefits  to be  supplied  to  consumers.  If the  Company  had
recognized  revenues in the prior  year's  first nine  months  using the current
fiscal year  method,  we would have  reported  total  revenues of  approximately
$940,000,  with the decrease  due to renewing a portion of our existing  service
provider base into the  commission  program for the Northern  California  market
instead of the fixed certification fee program.  During the first nine months of
the  current  fiscal  year,  certification  fees  accounted  for 53% of revenue,
compared to 75% for the prior year  period.  Revenues for the three months ended
March 31, 2001 were $257,198 compared to the $478,750 reported in the comparable
prior period.

We reported  approximately  $124,000  of revenue  from  premium  listings in our
ValueStar  Report and on our Web site,  a decrease of $66,000  from the $190,000
reported in the first six months of the prior year. The decrease  results from a
shift in focus  from  licensing  merchants  on a fixed  fee  basis to  licensing
merchants into our commission based systems. We expect ValueStar Report revenues
and Web site  revenues  may  increase in future  periods  when we have an active
commission-based relationship with sellers.

Our revenues can vary from quarter to quarter due to (a)  management's  decision
on the mix of sales  effort  between  enrolling  local  service  providers  into
commission  based vs. fixed fee  programs,  (b) the impact of  distributing  the
semi-annual  ValueStar Report to buyers,  (c) seasonality,  (d) effectiveness of
sales methods and promotions, (e) levels of expenditures targeted at prospective
businesses,  (f) the numbers of licensees up for renewal, (g) renewal rates, (h)
pricing  policies,  (i) timing of completion of ratings,  and (j) other factors,
many of which are  beyond  our  control.  The  timing of  implementation  of our
commission based processing will materially impact future revenues. There can be
no assurance we can successfully implement this program as scheduled in the last
fiscal quarter of 2001.  Unknown technical or business issues and barriers could
arise  that  could  delay  implementation  or  preclude  us from  executing  our
commission program. In such an event we may be required to revert to a fixed fee
basis.

Buyer  Benefits.  Buyer  benefits  consist of direct product costs for materials
provided to buyers  through the use of  marketing  and sales aids  purchased  by
service  providers,  customer service costs for buyers,  and, in future periods,
the costs of loyalty points and customer satisfaction guarantees. These costs of
$144,589  represented  19% of sales during the nine months ended March 31, 2001.
This  is an  increase  from  $126,128  or 8% of  revenues  for  the  prior  year
comparable period, although the percentage is not directly comparable due to the
change in revenue  reporting  outlined above.  Buyer customer service costs were
$107,000  compared to $55,840 in the prior  comparable  period,  although in the
prior  period,  the buyer  customer  service team had only been in existence for
three months as opposed to nine months in the current period.

Ratings and Content. Ratings and content costs consist primarily of the costs of
rating  service  businesses  in the fixed  fee  certification  program,  ongoing
content and  technology  costs  associated  with  maintaining  our databases and
supporting  our  operations.  In future  quarters  we  expect  to incur  certain
transaction and matching fees with third parties.  Rating and content costs were
$388,418,  or 51% of  revenues,  for the nine month period ended March 31, 2001,
compared to $952,423 and 57% of revenues for the prior  comparable  period.  The
decrease is due primarily to a reduction in fixed fee ratings and  conversion to
the new program.  Ratings costs totaled $64,600 for the three months ended March
31, 2001 or 25% of revenues  compared  to $170,000  and 36% of revenues  for the
third quarter of the prior fiscal year.

Selling and Marketing  Costs.  Selling and marketing costs consist  primarily of
personnel costs for outside sales consultants interacting with licensed sellers,
an inside customer  service team for licensed  sellers,  direct  marketing costs
including  lead  generation,  telemarketing  costs,  costs  associated  with our
ValueStar  Report,  costs  associated  with  marketing and business  development
personnel and marketing,  advertising and promotion expense. Sales and marketing
costs for the nine months ended March 31,  2001,  were  $5,205,758,  compared to
$4,114,006  for the first nine  months of the prior  year.  Sales and  marketing
costs  totaled  $1,118,136  for the third fiscal  quarter of the current year, a
decrease from the $2,065,893 reported for the prior year's third quarter.

Sales related expenses totaled  $2,025,253  compared to $2,376,669 for the prior
year's comparable nine-month period. The decrease is due to corporate focus from
December  2000  onward in only  Northern  California  as opposed  to  soliciting
broader new sales.  This has  allowed us to reduce our  selling  expenses in the
current year and especially in the last quarter.  Selling costs totaled $395,665
for the three months ended March 31, 2001,  compared to $1,107,976 for the third
quarter of the prior year. We expect selling costs will vary in future  periods,
resulting from levels of future revenues, variances in renewal rates,


                                       14

<PAGE>

the effect of new sales  promotions  and costs  thereof,  timing of research and
rating  completions,  levels of fixed  selling  costs,  the number of new market
regions opened, the mix of sales between fixed fee certifications and commission
based certifications and other factors, some beyond our control.

Marketing and promotion related expenses aggregated  $3,180,505 during the first
nine months of fiscal 2001, compared to $1,737,337 for the prior period.  During
the period,  we  expended  $287,000 on paid  advertising  targeted at  expanding
consumer  awareness of ValueStar  Certified.  Paid  advertising  of $606,000 was
employed in the prior year's comparable period.  Printing and distribution costs
for the ValueStar Report increased by $23,000 as we printed and distributed more
copies with additional pages. During the nine-month period, we expended $572,000
on promotions  compared to $161,000 for the prior year's  comparable period with
the increase due to a  significant  increase in the number of  promotions in the
period and in the amount of promotional  material  provided to service providers
upon their enrollment in our program. We spent approximately  $370,000 on agency
fees and market research in the current nine-month period compared to $63,000 in
the prior  comparable  period.  Expenses  related  to wages and  consultants  in
marketing were $1,592,000 in the current nine months compared to $511,000 in the
prior  year's  nine month  period with the large  increase  due to the hiring of
executives  and  increased  staff  in the  marketing  and  business  development
departments.  Marketing costs totaled  $722,471 for the three months ended March
31, 2001 compared to $957,917 for the third quarter of the prior year,  with the
decrease  due to the  reduction in force  occurring at the end of December  2000
with the  substantial  completion  of the  majority  of our  product and content
development efforts.

Marketing and promotion expenses are subject to significant variability based on
decisions  regarding  paid  advertising,  public  relations and market and brand
awareness efforts. We anticipate continuing to make significant  expenditures on
marketing  and  promotion  efforts  to  support  a  growing  business  base  but
anticipate  these  costs will  decrease as an annual  percentage  of revenues as
revenues grow.  However,  amounts and  percentages on a quarterly basis may vary
significantly.

Product and Content  Development  Costs.  Product and content  development costs
consist  primarily  of  expenses  associated  with the design,  development  and
testing of our  commission  program.  These  costs  include  development  of our
website and the associated back office  systems,  developing our new proprietary
ratings  content  for  our  website  and  wages  in  our  technology  department
associated  with new  product and  content  development.  During the nine months
ended March 31, 2001 we expended  $5,219,924  on new program  development.  This
compares to $2,845,531  during the same period last year. The major component of
product  development  costs were  compensation  and related costs of $3,145,000,
partner and alliance  implementation  costs of $474,000 and expenses  related to
the gathering of new content of $173,000. During the first nine months of fiscal
2001 we allocated  $1,267,000 of general and administrative costs to product and
content development to reflect the percentage of product and content development
expenses  relative to overall  administrative  costs.  This compares to $614,000
allocated in the prior fiscal year's nine-month period.

We have  capitalized an additional  $871,000 of product and content  development
costs as website  development  and  software  that are  specifically  related to
internal software development.  The Company capitalized  $1,001,000 in the prior
fiscal year. The Company will begin depreciation of this asset upon commencement
of tracking  transactions  between rating  partners and local service  providers
over a period not to exceed three years.

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.  General and administrative  expenses were $1,873,939 for the
nine months  ended March 31,  2001,  compared to  $1,212,634  for the prior year
comparable  period,  an  increase of  $661,305.  The major  increases  include a
$661,000  increase in  compensation  and benefits due primarily to the increased
number of executive,  administrative  and finance  personnel added in connection
with an  expansion  of the  employee  base;  a $78,000  increase  in travel  and
entertainment costs, a $526,000 increase in occupancy and telephone costs due to
additional personnel and expanded office facilities, a $94,000 increase in legal
and accounting expense due to expanded operations, a $30,000 increase in reserve
for doubtful  accounts due to conversion of markets  outside of San Francisco to
our commission based program and a $76,000 decrease in non-cash other expense in
associated with issuing warrants for services to unaffiliated entities.  General
and administrative costs in the third fiscal quarter were $512,187,  an increase
from  $448,927 for the third quarter of the prior year.  Management  anticipates
that  general and  administrative  costs will  continue to exceed  prior  period
levels due to increased  personnel added to support growth and increased general
computer, operating, occupancy and corporate costs.

Depreciation  and  Amortization.  Depreciation  and  amortization  expenses were
$1,862,660  for the nine months ended March 31,  2001,  compared to $481,874 for
the  prior  year  period.  The  large  increase  is due to  the  acquisition  of
technology


                                       15

<PAGE>

equipment and software  infrastructure  to support an expanded employee base and
our new program, our web site and various internal databases.

Interest and Other Expenses.  We incurred  interest  expense for the nine months
ended March 31, 2001 of $283,919 that included $29,489 of non-cash  amortization
of bond discount.  Interest for the prior comparable  period was $1,790,623,  of
which  $1,504,160  was  non-cash  interest  expense  and  amortization  of  bond
discount. The decrease is due to conversion of senior and subordinated debt into
equity in the prior  fiscal  year.  The  Company  generated  interest  income of
$76,254 in the first nine  months of fiscal  2001  compared  to  $144,234 in the
comparable  prior period with the decrease  due to lower  average cash  balances
during the current fiscal year.

Net Loss. We had a net loss of  $14,137,140  for the nine months ended March 31,
2001, compared to a loss of $9,712,485 for the nine months ended March 31, 2000.
Our increased loss is  attributable  to (a) increased  marketing  costs incurred
related to increased  promotions  and  increases in the number of marketing  and
business  development  personnel,  (b)  product and  content  development  costs
associated with developing our commission based program,  (c) increased  general
and administrative  costs associated with additional  management and support for
expanded  operations  and (d)  increased  depreciation  and  amortization  costs
associated with a significant increase in property,  equipment and software.  We
anticipate we will continue to  experience  operating  losses until we achieve a
combination  of a fully  functional  commission  program and a critical  mass of
buying and selling members. Future quarterly results will be greatly impacted by
future decisions regarding new markets,  advertising and promotion  expenditures
and growth rates. Achievement of positive operating results will require that we
build a  working  commission  program  and that we obtain a  sufficient  base of
buying and selling members to support our operating and corporate  costs.  There
can be no assurance we can  successfully  build a transaction  program,  sustain
sufficient  buyer  and  seller  member  rates or  achieve a  profitable  base of
operations.

The net loss  available to common  stockholders  includes an increase in the net
loss for the nine months ended March 31, 2001 due to the  beneficial  conversion
feature of the Series C and Series CC preferred  stock issued during the period.
Net loss was increased by $5,328,392 for this one-time  non-cash  imputed charge
and increased by $253,709 for non-cash accrued  dividends on Series A and Series
CC preferred stock. In addition, in the second quarter the Company recognized an
additional  $1,715,000  in  imputed  deemed  dividends  based on a  discount  at
issuance  of  previously  issued  Series C  preferred  stock  due to a change in
accounting  principle  related  to the fair  value  of  warrants  as more  fully
described in Note 3 to the interim  statements  above.  These  non-cash  imputed
amounts had no effect on our financial position.

Liquidity and Capital Resources

Since we commenced  operations,  we have had significant negative cash flow from
operating  activities.  Our negative  cash flow from  operating  activities  was
$10,637,255 for the nine months ending March 31, 2001. At March 31, 2001, we had
a working  capital deficit of $3,899,296  including  $590,313  representing  the
current portion of long-term debt and $305,268  representing the current portion
of  capitalized  leases.  For the nine months ended March 31, 2001, our negative
cash flow from operating activities was due primarily to our continued operating
losses, selling costs associated with enrolling local service companies into our
commission  based  program  with  no  immediate  revenue,  product  and  content
development costs and addition of new executive  management.  During this period
we also expended $2,586,669 on net property and equipment purchases.

At March 31, 2001,  our net accounts  receivables  were  $149,107,  representing
approximately  53  days  of  revenues  and  an  annualized   turnover  ratio  of
approximately  6.8 times. This compares to approximately 64 days of revenues and
turnover of approximately  5.7 times at March 31, 2001. The change is due to the
change in the way we recognize revenues.  We bill fixed fees in full at the time
the contract starts and extend terms throughout the contract period.  Please see
our discussion of the change in revenue recognition  practices under the section
Revenue and Cost Recognition above for further  information.  We believe that 60
to 90 days  revenues in  receivables  is  reasonable  based on the nature of our
business  and the terms we provide  licensees.  At March 31,  2001,  we have not
experienced any significant accounts receivable recoverability problems.

We have financed our  operations  primarily  through the sale of equity and debt
financing. In August 2000 we drew down the balance of $732,796 from a commitment
for $2,000,000 in equipment  financing  obtained in the prior fiscal year.  Also
during the nine months ended March 31,  2001,  we obtained  $8,648,256  from the
sale of  common  and  preferred  stock,  of  which  $1,500,000  was  contributed
services.  We have no  commitments  for future  investments  and there can be no
assurance that we can continue to finance our operations  through these or other
sources. In the past, shareholders,  including from time to time directors, have
advanced  funds and at times  cancelled debt for equity on terms of new forms of
financing.  There can be no assurance that  shareholders  or directors or others
will provide us with any future financing.


                                       16

<PAGE>

Other than cash on hand of $11,566 at March 31, 2001, net accounts receivable of
$149,107 and subsequent  bridge  financing of  $2,460,000,   we have no material
unused  sources of liquidity at this time. We are committed on lease,  equipment
note and facility rental payments aggregating  approximately $148,000 per month.
We are in arrears on certain of these commitments and the failure to make timely
payments  or to work out  revised  payment  arrangements  could  have a material
adverse impact on our operations.

We expect to incur  additional  operating  losses in future fiscal quarters as a
result of continued operations, product development expenditures and investments
in  growth.  The  timing and  amounts  of these  expenditures  and the extent of
operating  losses  will  depend on many  factors,  some of which are  beyond our
control.

We expect that we will require a minimum of $8 million of additional  capital to
finance operations during the next twelve months.  This estimate is based on the
third fiscal  quarter  level of  operations,  anticipated  revenues and budgeted
product  development  and  operating  costs.  The  launch of our new  commission
program  may  provide  some of these  revenues  but  there  can be no  assurance
thereof.  To expand the enrollment of new member buyers and sellers or to launch
new  products or  services,  we may  require  additional  financing.  Our actual
results  could differ  significantly  from plan and,  therefore,  we may require
substantially greater operating funds.

The capital markets have been  unpredictable  in the past,  especially for early
stage companies such as ValueStar. The ability and amount of capital that can be
raised,  if any,  depends on many factors beyond our control.  As a result there
can be no  guarantee  that our efforts to secure  additional  financing  will be
successful or that the amounts  raised will be sufficient  for our future needs.
If we raise  additional funds through the issuance of equity or convertible debt
securities,  the  percentage  ownership  of our  stockholders  will be  reduced.
Stockholders may experience  extreme dilution due to our current stock price and
the  significant  amount of financing we need to raise.  New securities may have
rights senior to those of holders of our preferred or common stock.  Any form of
debt  financing  could  contain  covenants  restricting  our  operations  and/or
detrimental to equity holders.

Should required and/or  additional funds not be available or planned  operations
not meet our expectations,  we may be required to significantly curtail or scale
back  staffing,  advertising,   marketing  expenditures,   product  and  content
development  and  general  operations.  We may also have to curtail  the area in
which we operate or revert to some form of fixed fee program.  If adequate funds
are not  available  or are not  available on  acceptable  terms,  our  business,
results of  operations,  financial  condition  and continued  viability  will be
materially adversely affected.

Tax Loss Carryforwards

As of June 30,  2000,  we had  approximately  $26.5  million of federal tax loss
carryforwards and $13 million in California tax loss carryforwards. These losses
create a deferred tax asset.  We have  recorded a valuation  allowance to reduce
the net deferred tax asset to zero because, in our assessment, it is more likely
than not that the  deferred  tax asset will not be  realized.  There may also be
limitations on the  utilization of tax loss  carryforwards  to offset any future
taxes.

Forward-Looking Statements and Business Risks

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

Readers are cautioned to consider the specific  business risk factors  described
in our annual  report on Form 10-KSB for the fiscal year ended June 30, 2000 and
not to place undue reliance on the forward-looking  statements contained herein,
which speak only as of the date hereof.  We undertake no  obligation to publicly
revise  forward-looking  statements to reflect events or circumstances  that may
arise after the date hereof.


                                       17

<PAGE>

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
        None

Item 2. Changes in Securities and Use of Proceeds

         (a) See  description of Series CC preferred stock in (c) below.

         (b) See description of Series CC preferred stock in (c) below.

         (c) The following is a  description  of equity  securities  sold by the
             Company  during the third fiscal  quarter ended March 31, 2001 that
             were not registered under the Securities Act:

                  During the third  fiscal  quarter,  we issued an  aggregate of
                  192,739 shares of Series CC Convertible  Preferred  Stock, par
                  value  $0.00025  ("Series C Stock"),  at $45.00 per  preferred
                  share (each share of which is initially convertible into sixty
                  shares  of  common  stock).  This  sale was made in a  private
                  offering.  A total of 500,000  shares of preferred  stock have
                  been  authorized  and  designated  by the Company as Series CC
                  Stock.

                  In connection with the sale in the second quarter, the Company
                  issued to the  purchasers  warrants  exercisable  at $0.75 per
                  share into an aggregate  of  5,782,170  shares of common stock
                  ("CC-Warrants").  These CC-Warrants  expire on January 5, 2004
                  and are  callable by the Company  after two years if the stock
                  price exceeds $3.00 per share,  subject to certain  additional
                  conditions.

                  The purchasers of Series CC Stock and CC-Warrants included all
                  the  holders of Series C Stock and  C-Warrants  who  exchanged
                  their  securities  for  119,230  shares of Series CC Stock and
                  3,576,900 CC-Warrants.  At March 31, 2001 there were no shares
                  of Series C Stock outstanding. The balance of 73,509 shares of
                  Series  CC Stock  was sold for  $45.00  per  share for cash of
                  $1,807,905  and an  agreement  First  Data  Merchant  Services
                  Corporation  (FDMS),  a subsidiary  of First Data  Corporation
                  ("FDC"), to perform $1,500,000 of services.

                  The Series CC Stock has a cumulative  dividend of 8% per annum
                  payable when and if declared by the Board of Directors or upon
                  liquidation or conversion.

                  The dollar amount of the Series CC Stock is convertible at the
                  option of the holder into shares of common stock at an initial
                  conversion   price,   negotiated  with  outside   unaffiliated
                  investors,  of $0.75 per share and are automatically converted
                  on the occurrence of certain events.

                  The Series CC Stock has a  liquidation  preference  pari passu
                  with the Series B Stock,  after  payment  of the  preferential
                  amount for the  Series A Stock,  of $45.00 per share of Series
                  CC Stock plus an additional  amount accruing at the rate of 8%
                  per annum.

                  The  Series  CC Stock  has  antidilution  rights  for  certain
                  issuances below the conversion  price. The Series CC Stock has
                  voting rights equal to the number of shares of common stock on
                  an as-converted  basis.  In addition,  as long as there are at
                  least   100,000   shares  of  Series  CC  Stock   issued   and
                  outstanding,  the holders are  entitled,  voting as a separate
                  class,   to  elect  one  member  of  the  Company's  board  of
                  directors.

                  In  connection  with the sale of Series CC Stock,  the Company
                  entered into a Registration  Rights  Agreement with the Series
                  CC Stock investors.  This agreement, as amended, provides that
                  by June 30,  2001 the  Company  will use its best  efforts  to
                  prepare  and  file  a  registration   statement  on  Form  S-3
                  (provided that at such time the Company is eligible to use S-3
                  and,  if not,  use its  best  efforts  to  prepare  and file a
                  registration  statement  on Form S-3 at such later date as the
                  Company is so eligible).

                  While the  securities  were  sold by the  Company  without  an
                  underwriter  or  cash  commission,  the  Company  issued  to a
                  financial  advisor,  affiliated  with a director,  warrants to
                  purchase  445,607  shares of common


                                       18

<PAGE>

                  stock at an exercise price of $0.75 per share with a five-year
                  term in connection with the sale of the Series CC Stock.

                  All  of  these   securities  were  offered  and  sold  without
                  registration under the Securities Act of 1933, as amended (the
                  "Act"),  in reliance  upon the  exemption  provided by Section
                  4(2) thereunder  and/or Regulation D, Rule 506 and appropriate
                  legends  were  placed on the Series C Stock and  Warrants  and
                  will be placed on the  shares of common  stock  issuable  upon
                  conversion unless registered under the Act prior to issuance.

                  The descriptions of these  transactions are qualified in their
                  entirety  by the  full  text  of the  agreements  attached  as
                  exhibits to the Company's Form 8-K dated February 5, 2001.

         (d) None

Item 3. Defaults Upon Senior Securities
         None

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

Item 5. Other Information
         None

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

                  4.39     Form of Stock Purchase Warrant dated January 23, 2001
                           issued to Hull Capital Corp. and J. Mitchell Hull for
                           an aggregate of 500,000  shares of common stock at an
                           exercise   price  of  $1.00  per  share   (individual
                           warrants differ as to holder and number)

                  4.40     Form of Stock  Purchase  Warrant  dated March 5, 2001
                           issued to three individual  assignees of Hull Capital
                           Corp for an  aggregate  of  445,607  shares of common
                           stock  at  an  exercise  price  of  $0.75  per  share
                           (individual warrants differ as to holder and number)

                  4.41     Letter  Agreement dated February 20, 2001 between the
                           Company  and  The  Investor   Relations  Group,  Inc.
                           providing  for  warrants on 150,000  shares of common
                           stock at an exercise price of $1.00 per share


         (b) Reports on Form 8-K:
                  On February 5, 2001 the Company  filed a Form 8-K reporting on
the Series CC Stock financing.


                                       19

<PAGE>

                                   SIGNATURES
Pursuant to the  requirements  of the Exchange Act, the  registrant  caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.


                                          VALUESTAR CORPORATION


Date: May 15, 2001                  By:    /s/ JAMES A. BARNES
                                          --------------------
                                          James A. Barnes
                                          Secretary and Treasurer
                                          (Principal Financial Officer and duly
                                          authorized to sign on behalf of the
                                          Registrant)