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

                                   FORM 10-QSB

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

                  For quarterly period ended September 30, 2000

                         Commission File Number 0-22619
                              VALUESTAR CORPORATION

             (Exact name of registrant as specified in its charter)

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

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

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

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

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

Common Stock, $.00025 par value                        15,674,990
-------------------------------                        ----------
          (Class)                           (Outstanding at October 31, 2000)

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 September 30, 2000
                  and June 30, 2000                                           3

                  Consolidated Statements of Operations for the three
                  months ended September 30, 2000 and 1999                    4

                  Consolidated Statements of Cash Flows for the three
                  months ended September 30, 2000 and 1999                    5

                  Notes to Interim Consolidated Financial Statements          6

         Item 2. Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                      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                                           18
         Item 6. Exhibits and Reports on Form 8-K                            18



SIGNATURES                                                                   19


                                       2
<PAGE>
<TABLE>

                                   VALUESTAR CORPORATION
                                CONSOLIDATED BALANCE SHEETS
                                        (Unaudited)

                                          ASSETS
<CAPTION>
                                                                         September 30,      June 30,
                                                                            2000             2000
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
CURRENT ASSETS
     Cash                                                                $  4,527,913    $  5,287,385
     Receivables                                                              499,064         454,233
     Inventory                                                                 10,230          16,898
     Prepaid expenses                                                         542,710         416,573
                                                                         ------------    ------------

            Total current assets                                            5,579,917       6,175,089

PROPERTY AND EQUIPMENT                                                      5,828,581       5,415,358

RESTRICTED CASH                                                               296,000         296,000

DEFERRED COSTS                                                                   --            23,949

OTHER ASSETS                                                                   89,241          89,489
                                                                         ------------    ------------

            Total assets                                                 $ 11,793,739    $ 11,999,885
                                                                         ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                                    $  1,656,887       1,665,030
     Accrued liabilities and other payables                                 1,042,669       1,254,035
     Deferred revenues                                                        407,647         137,520
     Current portion of capitalized leases                                    293,570         285,458
     Current portion of long-term debt                                        648,766         450,503
                                                                         ------------    ------------

            Total current liabilities                                       4,049,539       3,792,546

CAPITAL LEASE OBLIGATIONS, net of current portion                             331,976         408,492
LONG-TERM DEBT, net of current portion                                      1,231,103         853,997
                                                                         ------------    ------------

            Total liabilities                                               5,612,618       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
           233,689 shares issued and outstanding at September 30, 2000             58            --
     Common stock, $.00025 par value; 20,000,000 shares
         authorized, 15,674,990 and 15,587,543 shares issued
         and outstanding respectively                                           3,919           3,897
     Subscribed preferred stock                                                22,500            --
     Additional paid-in capital                                            37,500,077      32,162,473
     Accumulated deficit                                                  (31,345,661)    (25,221,748)
                                                                         ------------    ------------

            Total stockholders' equity                                      6,181,121       6,944,850
                                                                         ------------    ------------

            Total liabilities and stockholders' equity                   $ 11,793,739    $ 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
                                                         September 30,
                                                     2000               1999
                                                 ------------      ------------
<S>                                              <C>               <C>
REVENUES                                         $    273,747      $    722,125
                                                 ------------      ------------

OPERATING EXPENSES
     Buyer benefits                                   265,516           186,620
     Ratings and content                              173,218           368,584
     Sales and marketing                            2,273,467         1,025,860
     Product and content development                2,325,904           266,255
     General and administrative                       677,017           422,492
     Depreciation and amortization                    569,083            64,097
                                                 ------------      ------------

                                                    6,284,205         2,333,908
                                                 ------------      ------------

LOSS FROM OPERATIONS                               (6,010,458)       (1,611,783)
                                                 ------------      ------------

OTHER INCOME (EXPENSE)
     Interest Income                                   43,727             6,924
     Interest expense                                 (92,879)         (173,220)
     Miscellaneous                                        377              (800)
                                                 ------------      ------------

                                                      (48,775)         (167,096)
                                                 ------------      ------------

NET LOSS                                         $ (6,059,233)     $ (1,778,879)
                                                 ============      ============

NET LOSS AVAILABLE TO COMMON
     STOCKHOLDERS                                $ (7,786,792)     $ (1,811,756)
                                                 ============      ============

LOSS PER COMMON SHARE                            $      (0.50)     $      (0.19)
                                                 ============      ============

WEIGHTED AVERAGE OF COMMON SHARES
     OUTSTANDING                                   15,662,718         9,374,132
                                                 ============      ============
<FN>

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

                                         -4-
<PAGE>

<TABLE>
                              VALUESTAR CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (Unaudited)
<CAPTION>
                                                                Three Months Ended
                                                                   September 30,
                                                                2000          1999
                                                            -----------    -----------
<S>                                                         <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                               $(6,059,233)   $(1,778,879)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
             Depreciation                                       568,835         59,473
             Amortization of intangible assets                      248          6,914
             Amortization of bond discount                       10,208         54,045
             Change in allowance for doubtful accounts           (6,976)        (8,670)
             Accrued interest included in long-term debt           --            7,500
             Options issued for services                           --           59,000
             Gain on disposal of assets                          (1,898)          --
         Changes in:
             Receivables                                        (37,855)       (36,309)
             Inventory                                            6,668         (8,717)
             Prepaid expenses                                  (126,137)        23,875
             Deferred costs                                      23,949        (16,540)
             Other assets                                          --           (2,811)
             Accounts payable                                    (8,143)       (97,564)
             Accrued liabilities and other payables            (211,366)        95,342
             Deferred revenues                                  270,127         20,939
                                                            -----------    -----------
                Net cash used by operating activities        (5,571,573)    (1,622,402)
                                                            -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                       (980,160)      (164,815)
                                                            -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of preferred stock                    5,223,003      2,210,000
     Proceeds from sale of common stock                          50,001           --
     Proceeds from sale of subscribed preferred stock            22,500           --
     Proceeds from debt                                         732,796           --
     Payments on capital leases                                 (68,404)        (6,917)
     Payments on debt                                          (167,635)       (14,066)
                                                            -----------    -----------
                Net cash provided by financing activities     5,792,261      2,189,017
                                                            -----------    -----------

NET INCREASE (DECREASE) IN CASH                                (759,472)       401,800
CASH, beginning of period                                     5,287,385        270,149
                                                            -----------    -----------

CASH, end of period                                         $ 4,527,913    $   671,949
                                                            ===========    ===========

SUPPLEMENTAL CASH-FLOW INFORMATION
     Cash paid during the period for:
         Interest                                           $    85,672    $   112,252
         Income taxes                                       $      --      $       800
     Non-cash investing and financing activities:
         Accrued dividends on Series A Preferred Stock      $    47,630    $    32,877
         Accrued dividends on Series C Preferred Stock      $    17,050    $      --
<FN>

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

                                        -5-
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 2000

1. OPERATIONS

The Company, a Colorado corporation,  conducts its operations through ValueStar,
Inc.,  a  wholly  owned  subsidiary,  in major  metropolitan  areas  located  in
California, Washington, Texas, Illinois, Georgia, Pennsylvania, and the District
of Columbia.  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 developing a new commission system
to generate revenues by connecting member service businesses with member buyers.

The  Company's  revenues  have been  primarily  from  rating  and  certification
services.  Rating  services  are  primarily  related to a survey of a  business'
customers,  verification of credential information and the delivery of a ratings
report.  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.

In December 1999, in all market areas except  Northern  California,  the Company
changed from a fixed rating and certification fee to a percentage commission fee
based on the value of transactions  between member service  companies and member
buyers.  The Company has also changed its program to provide  benefits to buyers
purchasing from member businesses.  The Company has not completed development of
the systems  required to commence  collection  of  commission  fees and will not
collect fees or incur certain  benefit costs,  which include  loyalty points and
customer  satisfaction  guarantees,  until the systems are  operational.  In the
future the Company  expects  the  majority  of its  revenues to be derived  from
transaction commissions.

Due  to  the  change  in the  Company's  program,  the  Company  will  recognize
commission  revenues  as  reported  and  earned.  Because of the  changes in the
program and method of generating revenue, commencing July 1, 2000 the Company is
recognizing  fixed rating and certification  fees on a straight-line  basis over
the term of a  participating  business  license,  generally  one year.  Costs of
benefits  provided to buyers are  recognized as provided,  with accruals for any
future benefit obligations.

Because of the changes in the Company's  program  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 substantial portion of the losses is attributable to research and
development  of  the  Company's  commission  based  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.

It is management's plan to seek additional  financing through private placements
as well as other means.  Management  believes,  but there can be no  assurances,
that the  additional  capital it is seeking  will be available in the future and
will enable the Company to achieve  sales  growth  and,  ultimately,  profitable
operations.

                                       6
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 2000

2. STATEMENT PRESENTATION (Cont'd)

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 month period ended
September  30, 2000 are not  necessarily  indicative  of the results that may be
expected for the year ending June 30, 2001.

3. 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."

4. INVENTORY

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

<TABLE>
5. LONG-TERM DEBT

<S>                                                                                               <C>
Long-term debt at September 30, 2000 consists of the following:

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 $95,834                           $1,006,760


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                                                                        688,071


15% Equipment Note due to a company affiliated with a stockholder and
director; due in monthly installments of principal and interest of $5,500 to
maturity in June 2002; secured by equipment and software                                              59,362

12% Notes;  interest is paid monthly,  with a balloon payment due in March 2001;
net of unamortized note discount of $114; unsecured; $50,000 of the notes is due
a relative of a stockholder and director                                                              68,636

15% Equipment Note due to a company affiliated with a stockholder and
director; due in monthly installments of principal and interest of $2,022 to
maturity in August 2003; secured by equipment and software                                            57,040
                                                                                                 ------------
                                                                                                   1,879,869

Less current portion                                                                                 648,766
                                                                                                 -----------
                                                                                                  $1,231,103
                                                                                                  ==========
</TABLE>

                                       7
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 2000

6. STOCKHOLDERS' EQUITY

<TABLE>
The following table summarizes equity transactions during the three months ended
September 30, 2000:

<CAPTION>
                                      Preferred Stock           Common Stock      Additional   Subscribed
                                   -------------------   ---------------------     Paid-In     Preferred Accumulated
                                    Shares      Amount     Shares      Amount      Capital       Stock     Deficit       Total
                                   ---------   -------   ----------   --------   ------------   ------- ------------  ------------
<S>                                  <C>       <C>       <C>          <C>        <C>            <C>     <C>           <C>
Balance July 1, 2000                 913,586   $   228   15,587,543   $  3,897   $ 32,162,473      --   $(25,221,748) $  6,944,850
Issuance of Series C Convertible
  Preferred Stock, net of issuance
  costs of $35,000                   233,689   $    58         --         --        5,222,945      --          --        5,223,003
Accrued 8% dividends on Series A
  and Series C Preferred Stock          --        --           --         --           64,680      --        (64,680)         --
Stock issued on exercise of options     --        --         87,447         22         49,979      --          --           50,001
Subscribed preferred stock                                                                       22,500        --           22,500
Net loss                                --        --           --         --             --        --     (6,059,233)   (6,059,233)
                                   ---------   -------   ----------   --------   ------------   ------- ------------  ------------
Balance September 30, 2000         1,147,275   $   286   15,674,990   $  3,919   $ 37,500,077   $22,500 $(31,345,661) $  6,181,121
                                   =========   =======   ==========   ========   ============   ======= ============  ============
</TABLE>

During  the  first  quarter  the  Company  issued  233,689  shares  of  Series C
Convertible  Preferred  Stock,  par value $.00025 ("Series C Stock") for cash of
$22.50 per share.  Cumulative  dividends of 8% per annum are payable when and if
declared by the Board of Directors or upon liquidation or conversion. The dollar
amount  of  Series C Stock is  convertible  into  shares  of  common  stock at a
conversion  price  equal  to  $2.25  per  common  share,  and are  automatically
converted on the  occurrence of certain  events.  The Series C Stock has certain
antidilution  and  registration  rights,  has a  liquidation  preference,  after
payment of the  preferential  amount  for the  Series A and  Series B  preferred
stock, of $22.50 per share plus accrued and unpaid dividends. The Series C 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 200,000 shares of Series
C Stock  outstanding,  then the holders are  entitled to elect one member of the
Company's Board of Directors.

The  Company  has agreed to issue to an outside  financial  advisor  warrants to
purchase an  aggregate  of  approximately  99,100  shares of common  stock at an
exercise  price of $2.25 per share with a five year term in connection  with the
sale of the Series C Stock.

At September  30, 2000 the  Company's  Series A, B and C  convertible  preferred
stock was convertible into approximately 10.5 million shares of common stock.

At September 30, 2000 the Company had received subscriptions for 1,000 shares of
Series C Stock. See Note 13.

7. STOCK OPTIONS AND WARRANTS

The following  table  summarizes  option activity for the period ended September
30, 2000:

                                                 Weighted Average    Weighted
                                     Shares       Exercise Price   Average Life
                                     ------       --------------   ------------

Outstanding July 1, 2000            2,233,938         $4.19           3.75
Granted                               367,500         $3.69
Canceled                             (157,099)        $9.50
Exercised                             (90,001)        $0.64
Expired                                (5,000)        $0.50
                                    ---------
Outstanding September 30, 2000      2,349,338         $3.94           3.82
                                    =========
Exercisable at September 30, 2000     822,340         $2.25           3.05
                                    =========



                                       8
<PAGE>
                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1999

7. STOCK OPTIONS AND WARRANTS (Cont'd)

At September  30, 2000 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
             12,500 (3)                  $2.00                 April 2003
             50,000                      $1.75                 May 2003
             25,000                      $1.25                 March 2001
            350,000 (1)                  $1.00                 December 2003
            152,728 (1)                  $1.375                March 2004
             30,000 (1)                  $1.50                 March 2004
             75,000                      $2.50                 December 2004
             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
             22,802                      $6.14                 April 2005
          1,158,445 (4)                  $2.25                 September 2003
          ---------
          2,294,988
          =========

(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 $6.00 per share subject to
     certain conditions.



                                       9
<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 2000

8. INCOME TAXES

At September 30, 2000 a valuation  allowance has been provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred  tax asset will not be  realized.  The Company has for federal
income tax purposes net operating  loss  carryforwards  of  approximately  $26.5
million  which  expire  through  2020 of which  certain  amounts  are subject to
limitations under the Internal Revenue Code, as amended.

9. 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 13.6 million shares of common stock at September
30, 2000 could potentially dilute earnings per share in future periods.

The  provisions  of the Series A and Series C 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  $1,662,879 in computing net loss per share
for an imputed deemed dividend from a discount  provision included in the Series
C Stock,  which provided for a converson price less than the market price on the
date of issuance.  The imputed non-cash dividend is not a contractual obligation
on the part of the Company to pay such  dividend.  Net loss  available to common
stockholders is computed as follows:

                                                        Three Months Ended
                                                            September 30,
                                                         2000           1999
                                                         ----           ----
Net loss                                            $(6,059,233)    $(1,778,879)
Beneficial conversion of Series C Preferred Stock    (1,662,879)           -
Accrued dividends on Series A and Series C
 Preferred Stock                                        (64,680)        (32,877)
                                                    -----------     -----------
Net loss available to common stockholders           $(7,786,792)    $(1,811,756)
                                                    ===========     ===========

10. COMMITMENTS AND CONTINGENCIES

The  Company  entered  into a contract to  purchase a minimum of  $3,000,000  of
incentive  reward  points for its buyer  awards  program over the next 30 months
from a rewards program provider, with $1,000,000 to be purchased in the first 18
months ending January 31, 2002, and $2,000,000 in the following 12 months ending
January 31, 2003.  The Company has also agreed to purchase a minimum of $250,000
of certain information  services from a database service company over a two-year
period  ending June 13,  2002.  The  Company has entered  into a number of other
alliances  providing for the payment of commissions  and referral fees from time
to time.

11. SUBSEQUENT EVENT

Subsequent to September 30, 2000 the Company sold and issued an additional 3,780
shares of Series C Stock providing  gross cash proceeds of $85,000.  The Company
also issued 1,000 shares which was  subscribed  at September  30, 2000 (see Note
6).


                                       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, 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.

In the first quarter of fiscal 2000,  capitalizing  on our expertise in customer
satisfaction  research and ratings,  we commenced  the design,  development  and
testing of an expanded  Internet  initiative.  This  initiative  consists of (a)
developing  proprietary  content  and  ratings  on a  large  number  of  service
providers in the United States, and (b) developing an Internet-based system that
generates  commissions  from  transactions  driven by the  content.  The content
includes credential information such as licensing, insurance, legal and finance,
company  profiles and related  information.  During fiscal year 2000 we expended
significant   resources   (approximately  $5.8  million)  to  generate  database
information  and  develop  computer  and related  systems for this new  service.
During the first quarter of fiscal 2001 we expended  approximately  $2.3 towards
these  activities.  The goal of our development 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 plan is to have the systems to monitor,  record and collect on a transaction
basis during the last quarter of calendar  year 2000 (second  fiscal  quarter of
2001).  However  unknown  technical  issues and barriers  could arise that could
delay  implementation  or preclude us from executing this plan. In such an event
we may be  required  to revert to a fixed fee  basis.  Due to the  change in our
program  and until we can  recognize  sufficient  commission  revenues we expect
comparative revenues in current periods to be less than prior periods.

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

     o   In  January  2000 we  entered  into a  strategic  data  agreement  with
         Experian,  a leading  provider of global  information  solutions.  This
         alliance   provides   financial  and  legal  status  on  local  service
         businesses as a part of our content  development.  We 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
         leading  Internet  portals and service  referral  companies  to broadly
         distribute our ratings.  Our roster of distribution  partners  includes
         home service portals: Ourhouse.com,  Simplydone.com and Contractor.com;
         auto service  portals  CompleteCar.com  and  Findgarage.com;  and other
         vertical portals such as eAttorney.com, rentals.com and GeoTouch.com.

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

     o   We are developing Internet-based software to match transactions between
         licensed  businesses and registered  member buyers. We are working with
         several processors of credit card transactions to support our program.

     o   In September  2000 we announced a pilot  program for the San  Francisco
         Bay area credit card holders of First National Bank of Omaha.

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

                                       11
<PAGE>

Changing Revenue Model

During  fiscal 2000 our revenues  were  generated  primarily  from  research and
rating  fees  paid  by new  and  renewal  businesses,  certification  fees  from
qualified  applicants and renewals and from the sale of information products and
services.  In  December  1999,  in all eight  current  markets  except  Northern
California, we changed from a fixed rating and certification fee to a percentage
commission fee based on the value of transactions between buyers registered with
us and  participating  companies  rated and licensed  with us. We are  currently
developing the systems to register buyers and monitor  transactions.  Until this
system is operating,  we do not anticipate any  significant  revenues from these
markets.  We will continue to incur  selling  costs and rating costs  associated
with enrolling  participating service businesses in our program. We believe this
investment  will accelerate the launch of our new program by allowing us to have
a number of rated and licensed service companies already enrolled by the time we
launch our transaction fee system.  We continue to charge a fixed  certification
fee in  Northern  California  but expect to also  change  this market to the new
program at a later date, not yet determined.

At September 30, 2000 we had  approximately  7,350 licensed  service  businesses
compared  to  approximately  1,640  at  September  30,  1999.  We  expect  these
businesses and new businesses  being enrolled to produce  commission  revenue in
future  periods.  In our new business  model our business  will be predicated on
creating  and  maintaining  a growing  number of  registered  buyers and sellers
transacting  commerce in local  services.  In the future we expect a majority of
our revenues to be derived from commissions from transactions between registered
buyers and sellers of local  services.  Renewals of businesses from year to year
will  still  impact  future  operations  as we  expend  funds on  enrolling  new
qualified businesses in our licensing program.

Considerable  portions of our operations  have been in the past and are expected
in the  future  to be  engaged  towards  the  solicitation  of new  service  and
professional  business  applicants and we incur  substantial  costs towards this
activity.  We expect  that these will  continue to be  significant  costs in the
future.

During  the first  quarter of 2001 we  incurred  product,  system  and  database
development  costs consisting of (a) capturing and verifying new credential data
on a large  number of service  companies in the United  States (our  proprietary
content),  (b) developing systems to store, monitor and update this content, (c)
developing  systems to register buyers and (d) developing systems to monitor and
generate  commissions based on transactions  between buyers and sellers of local
services.  We expect  these  product,  system and content  development  costs to
continue at high levels during the second quarter.  After our content  databases
are developed, we will incur costs to maintain and update the data on an ongoing
basis. Exact amounts and timing of these expenditures and costs are subject to a
variety of factors and are not currently determinable by management.

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

During the first  quarter we refined  our  measurement  criteria  for  ValueStar
Verified or ValueStar  Top-Rated  businesses  listed on our Web site. At October
31,  2000 we  listed  approximately  720,000  ValueStar  Verified  or  ValueStar
Top-Rated businesses and had licensed approximately 7,390 of these businesses as
members in either our commission program or our fixed-fee license program.

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  consumers,  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.

In  fiscal  2001 we  expect  a  majority  of our  revenues  to be  derived  from
commissions from  transactions  between  registered  buyers and sellers of local
services.  In certain  industries where collection of commissions is not allowed
and in other  instances we expect to obtain a fixed  annual  license fee. We may
provide  payment terms and discounts from time to time. We have also changed our
program  offering by providing a package of buyer  benefits  applicable  for the
term of the business license.



                                       12
<PAGE>

We expense rating and content  maintenance costs as incurred.  Costs incurred in
printing and distributing our ValueStar Report publication to buyers,  currently
published  in January and July,  and any related  revenues are  recognized  upon
publication.

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 reported  total  revenues of $273,747  for the three  months ended
September  30, 2000 compared to $722,125 for the first three 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  fiscal  quarter  using the current
quarter's  method,  we would  have  reported  total  revenues  of  approximately
$260,000.  During the first fiscal quarter of 2001, certification fees accounted
for 25% of revenue,  compared to 79% for the prior year's first quarter.  In the
first quarter of fiscal 2001 we were earning fixed new and renewal certification
fees from  only one  market  with  seven  markets  converted  to the  commission
program.

We  reported  approximately  $82,000 of revenue  from  premium  listings  in our
ValueStar  Report and on our Web site,  a decrease  of $3,000  from the  $85,000
reported in the first three months of the prior year. The small 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
may increase in future periods when we have an active 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
second 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 and
information  provided to buyers,  costs  associated  with the ValueStar  report,
customer  service costs for buyers,  and in future  periods the costs of loyalty
points and customer satisfaction guarantees. These costs of $265,516 represented
97% of sales  during the three  months  ended  September  30,  2000.  This is an
increase from  $186,620 or 26% of revenues for the three months ended  September
30, 1999,  although the percentage is not directly  comparable due to the change
in revenue  reporting  outlined above.  Printing and distribution  costs for the
ValueStar  Report increased by $26,000 as we printed and distributed more copies
with  additional  pages.  Buyer  customer  service  costs  were  $48,500.   This
department did not exist in the prior period.

Ratings and Content. Ratings and content costs consist primarily of the costs of
rating service  sellers,  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  $173,218,  for the period  ending  September  30, 2000,
compared  to  $368,584  for the prior  comparable  period.  The  decrease is due
primarily to a reduction in fixed fee ratings and conversion to the new program,
still under development.

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

                                       13
<PAGE>

generation,   telemarketing  costs  and  marketing,  advertising  and  promotion
expense.  Selling  costs for the three months  ended  September  30, 2000,  were
$2,273,467,  compared  to  $1,025,860  for the first  quarter of the prior year.
Sales  related  expenses  totaled  $949,525  compared to $648,720  for the prior
year's first fiscal  quarter.  The large increase is due to the  commencement in
December 1999 of enrolling  local service  providers into our  commission  based
program described earlier.  We expect selling costs will vary in future periods,
resulting from levels of future revenues, variances in renewal rates, the effect
of new  sales  promotions  and costs  thereof,  timing of  research  and  rating
completions,  level and  percentage  of fixed selling  costs,  the number of new
market regions  opened,  the mix of sales between fixed fee  certifications  and
commission based certifications and other factors, some beyond our control.

Marketing and promotion expenses related expenses  aggregated  $1,323,942 during
the first  quarter of fiscal 2000,  compared to $351,133  for the prior  period.
During  the  first  quarter  of  fiscal  2000,  we  expended  $243,000  on  paid
advertising  targeted at expanding  consumer  awareness of ValueStar  Certified.
Paid  advertising  of $218,000 was  employed in the prior year's first  quarter.
During the first  quarter of fiscal  2001,  we expended  $262,000 on  promotions
compared to $54,000 for the prior year's first  quarter with the increase due to
an increased number of promotions in the period. We spent approximately $250,000
on agency  fees and  market  research  in the  current  fiscal  quarter  with no
comparable expenses in the prior comparable  quarter.  Expenses related to wages
and  consultants  in  marketing  were  $550,000  in the current  fiscal  quarter
compared to $71,000 in the prior fiscal  quarter with the large  increase due to
the  hiring  of  executives  and  increased  staff  in  the  marketing,  product
development and business development departments.

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  expanded  Internet  initiative  using  existing and new content.
These costs include  development of our website and the  associated  back office
solutions,  developing our new  proprietary  ratings content for our website and
wages in our  technology  department  associated  with new  product  and content
development.  During the three  months  ended  September  30,  2000 we  expended
$2,325,904 on new program development. This compares to $266,255 during the same
period  last year.  The prior year  fiscal  quarter  was the first  quarter  the
Company  began   segregating   these  costs.  The  major  component  of  product
development costs were  compensation and related costs of $998,000,  partner and
alliance  implementation costs of $225,000 and expenses related to the gathering
of new content of $96,000.  During the first quarter of fiscal 2001 we allocated
$460,000 of general and administrative  costs to product and content development
to reflect the percentage of product and content  development  expenses relative
to overall expenses.

We have  capitalized an additional  $494,000 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.

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 $677,017 for the
three months ended September 30, 2000, compared to $422,492 for the prior year's
first quarter,  an increase of $254,525.  The major increases include a $330,000
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 $42,000  increase in travel and  entertainment
costs,  a $265,000  increase in occupancy and telephone  costs due to additional
personnel and expanded  office  facilities  and a $57,000  increase in legal and
accounting  expense  due to expanded  operations.  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
$569,083 for the three months ended September 30, 2000,  compared to $64,097 for
the  prior  year  period.  The  large  increase  is due to  the  acquisition  of
technology equipment and software infrastructure to support an expanded employee
base and our new program, our web site and various internal databases.

                                       14
<PAGE>

Interest and Other Expenses.  We incurred  interest expense for the three months
ended  September  30,  2000  of  $92,879  that  included   $10,208  of  non-cash
amortization  of bond  discount.  Interest for the prior  comparable  period was
$173,220,  of which  $54,045 was non-cash  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 $43,727 in the first
three months of fiscal 2001 compared to $6,924 in the comparable prior period.

Net Loss. We had a net loss of $6,059,233  for the three months ended  September
30, 2000,  compared to a loss of $1,778,879 for the three months ended September
30, 1999.  Our  increased  loss is  attributable  to (a)  increased  selling and
marketing  costs  incurred  related  to  enrolling  larger  numbers  of  service
businesses in anticipation of launching our commission program,  (b) product and
content  development  costs  associated  with  developing our  commission  based
program,  and (c) increased  general and  administrative  costs  associated with
additional management and support for expanded operations. 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 quarter ended  September 30, 2000 due to the beneficial  conversion
feature of the Series C preferred stock issued during the quarter.  Net loss was
increased by $1,662,879 for this one-time  non-cash imputed charge and increased
by $64,680 for  non-cash  accrued  dividends  on Series A and Series C preferred
stock. 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
$5,571,573 for the three months ending September 30, 2000 and $1,622,402 for the
three  months  ended June 30, 1999.  At  September  30,  2000,  we had a working
capital  surplus of  $1,530,378,  including  $648,766  representing  the current
portion of  long-term  debt and  $293,570  representing  the current  portion of
capitalized  leases. For the three months ended September 30, 2000, 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.  At September 30,
2000, our net accounts receivables were $499,064, representing approximately 164
days of revenues and an annualized  turnover ratio of  approximately  2.2 times.
This compares  unfavorably to  approximately 57 days of revenues and turnover of
approximately 6.3 times at September 30, 1999. The significant  change is due to
the change in the way we  recognize  revenues.  The Company  bills fixed fees in
full at the time the contract  starts and extends terms  throughout the contract
period.  As fixed fee  revenue  recognition  builds  over the course of the next
twelve  months,  we expect ratios  should return to past levels.  Please see our
discussion  of the change in revenue  recognition  practices  under the  section
Revenue and Cost Recognition  above for further  information on this. 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 September 30, 2000, we have
not  experienced and we do not anticipate any  significant  accounts  receivable
recoverability problems.

We have financed our operations  primarily through the sale of common 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 three  months  ended  September  30,  2000,  we obtained
$5,295,504 from the sale of common,  preferred and subscribed  stock. 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.

Other than cash on hand of  $4,527,913  at  September  30, 2000 and net accounts
receivable of $499,064,  we have no material unused sources of liquidity at this
time. We expect to incur  additional  operating losses in future fiscal quarters
as a result  of  continued  operations,  product  development  expenditures  and
investments  in growth.  The timing and  amounts of these  expenditures  and the
extent of operating losses will depend on many factors, some of which are beyond
our control.

                                       15
<PAGE>

Subsequent  to  September  30, 2000 the Company  issued 3,780 shares of Series C
Stock,  for cash of  $85,050.  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  first  fiscal  2001  quarter  level of
operations  as  subsequently  reduced  by  management,   anticipated   revenues,
anticipated  launch of our commission  program and budgeted product  development
and operating  costs.  To expand the enrollment of new member buyers and sellers
or to launch  new  products  or  services,  we may  require  further  additional
financing.  Our  actual  results  could  differ  significantly  from  plan  and,
therefore, we may require substantially greater operating funds. Should required
and/or  additional  funds not be  available or planned  operations  not meet our
expectations,  we may  be  required  to  significantly  curtail  or  scale  back
staffing, advertising,  marketing expenditures,  product and content development
and general operations. We may also have to curtail the number of market regions
in which we operate or revert to some form of fixed fee program. There can be no
assurance  that  additional  funding  will be  available to us or on what terms.
Potential sources of funds include exercise of warrants and options,  loans from
existing shareholders or other debt financing or additional equity offerings.

Tax Loss Carryforwards

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

Forward-Looking Statements and Business Risks

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

Readers are cautioned to consider the specific  business risk factors  described
in our annual  report on Form 10-KSB for the fiscal year ended June 30, 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

         None

Item 2. Changes in Securities and Use of Proceeds

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

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

         (c) The following is a  description  of equity  securities  sold by the
             Company  during the first fiscal  quarter ended  September 30, 2000
             that were not registered under the Securities Act:

                  In September 2000, ValueStar  Corporation (the "Company") sold
                  an  aggregate  of  233,689  shares  of  Series  C  Convertible
                  Preferred  Stock,  par value $0.00025  ("Series C Stock"),  at
                  $22.50 per  preferred  share (each share of which is initially
                  convertible  into ten shares of common  stock).  This sale was
                  made in a private  offering.  A total of  1,333,333  shares of
                  preferred  stock have been  authorized  and  designated by the
                  Company as Series C Stock.

                                       16
<PAGE>

                  In  connection  with  the  sale,  the  Company  issued  to the
                  purchasers  warrants  exercisable  at $2.25 per share  into an
                  aggregate  of 1,158,445  shares of common stock  ("Warrants").
                  These  Warrants have a three year term and are callable by the
                  Company if the stock price exceeds $6.00 per share, subject to
                  certain additional conditions.

                  The  aggregate  gross  proceeds  from the sale of the Series C
                  Stock of  $5,258,003  included  $975,000 in cash from entities
                  affiliated  with  three  directors,  including  $250,000  from
                  eCompanies Venture Group, L.P.

                  The Series C 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 C 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 $2.25 per share and are automatically converted
                  on the occurrence of certain events.

                  The Series C Stock has a liquidation preference, after payment
                  of the  preferential  amount  for the  Series  A and  Series B
                  Stock,  of  $22.50  per  share  of  Series  C  Stock  plus  an
                  additional amount accruing at the rate of 8% per annum.

                  The  Series  C  Stock  has  antidilution  rights  for  certain
                  issuances below the conversion  price.  The Series C 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 200,000 shares of Series C 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 C Stock,  the  Company
                  entered into a Registration Rights Agreement with the Series C
                  Stock investors.  This agreement provides that within 120 days
                  following the initial  closing on September 15, 2000, that 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  has agreed to
                  issue to an outside  financial advisor warrants to purchase an
                  aggregate of approximately 99,100 shares of common stock at an
                  exercise  price of $2.25  per  share  with a five year term in
                  connection with this transaction.

                  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  Company  incurred  cash  costs  estimated  at  $35,000 in
                  connection with the offering.

                  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 September 29, 2000.

         (d) None

Item 3. Defaults Upon Senior Securities

         None

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

         None

                                       17
<PAGE>

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 Form 8-K on September  29, 2000  reporting
one Item 5 Other Event.


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<PAGE>

                                   SIGNATURES

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

                                 VALUESTAR CORPORATION

Date: November 13, 2000     By:   /s/ JAMES A. BARNES
                                 --------------------
                                 James A. Barnes
                                 Secretary and Treasurer
                                 (Principal Financial Officer and duly
                                 authorized to sign on behalf of the Registrant)



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