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

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                     For the fiscal year ended June 30, 2000

                         Commission file number 0-22619

                              VALUESTAR CORPORATION
                 (Name of Small Business Issuer in its charter)


             Colorado                                         84-1202005
  (State or other jurisdiction of                          (I.R.S. Employer
  incorporation or organization)                        Identification Number)


                          360 - 22nd Street, 4th Floor
                            Oakland, California 94612
                                 (510) 808-1300
          (Address and telephone number of principal executive offices)

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                        common stock, par value $0.00025
                                (Title of class)

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___

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year. $2,090,773

The aggregate  market value of the issuer's common stock held by  non-affiliates
as of  September  15,  2000  (assuming  for this  purpose  that only  directors,
officers  and  10%  or  more   shareholders  of  registrant  are  affiliates  of
registrant),  based on the average of the  closing bid and asked  prices on that
date, was approximately $32,619,000.

As of September 15, 2000 there were 15,653,323  shares of ValueStar  Corporation
common stock, par value $.00025, outstanding.


Documents Incorporated By Reference: The information required by Items 9, 10, 11
and 12 of Part III of this Report is incorporated by reference from  ValueStar's
definitive proxy statement  relating to the annual meeting of stockholders to be
held in  2000,  which  definitive  proxy  statement  shall  be  filed  with  the
Securities and Exchange  Commission  within 120 days after the end of the fiscal
year to which this Report relates-


Transitional Small Business Disclosure Format (check one): Yes ___ No _X_

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

<PAGE>

<TABLE>


                                TABLE OF CONTENTS
<CAPTION>
                                                                                                        Page
                                     PART I
<S>           <C>                                                                                       <C>
ITEM 1.       Description of Business                                                                    2
ITEM 2.       Description of Property                                                                   13
ITEM 3.       Legal Proceedings                                                                         13
ITEM 4.       Submission of Matters to a Vote of Security Holders                                       13

                                     PART II
ITEM 5.       Market for Common Equity and Related Stockholder Matters                                  13
ITEM 6.       Management's Discussion and Analysis or Plan of Operation                                 15
ITEM 7.       Financial Statements                                                                      25
ITEM 8.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      25

                                    PART III
ITEM 9.       Directors, Executive Officers, Promoters and Control Persons;                             25
              Compliance With Section 16(a) of the Exchange Act
ITEM 10.      Executive Compensation                                                                    25
ITEM 11.      Security Ownership of Certain Beneficial Owners and Management                            25
ITEM 12.      Certain Relationships and Related Transactions                                            25
ITEM 13.      Exhibits and Reports on Form 8-K                                                          26

SIGNATURES                                                                                              32

</TABLE>

                           FORWARD-LOOKING STATEMENTS

IN  ADDITION  TO   HISTORICAL   INFORMATION,   THIS   ANNUAL   REPORT   CONTAINS
FORWARD-LOOKING   STATEMENTS  WITHIN  THE  MEANING  OF  THE  PRIVATE  SECURITIES
LITIGATION  REFORM ACT OF 1995 AND THE COMPANY  DESIRES TO TAKE ADVANTAGE OF THE
"SAFE  HARBOR"  PROVISIONS  THEREOF.  THEREFORE,  THE COMPANY IS INCLUDING  THIS
STATEMENT FOR THE EXPRESS  PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH
SAFE  HARBOR  WITH  RESPECT  TO  ALL OF  SUCH  FORWARD-LOOKING  STATEMENTS.  THE
FORWARD-LOOKING  STATEMENTS IN THIS REPORT  REFLECT THE COMPANY'S  CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL  PERFORMANCE.  THESE FORWARD-LOOKING
STATEMENTS  ARE  SUBJECT TO CERTAIN  RISKS AND  UNCERTAINTIES,  INCLUDING  THOSE
DISCUSSED  HEREIN,  THAT COULD CAUSE ACTUAL  RESULTS TO DIFFER  MATERIALLY  FROM
HISTORICAL   RESULTS  OR  THOSE   ANTICIPATED.   IN  THIS   REPORT,   THE  WORDS
"ANTICIPATES,"  "ESTIMATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "GOAL,"
"OBJECTIVE" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS
ARE CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS  DESCRIBED  BELOW AND NOT TO
PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING  STATEMENTS  CONTAINED HEREIN, WHICH
SPEAK ONLY AS OF THE DATE  HEREOF.  THE  COMPANY  UNDERTAKES  NO  OBLIGATION  TO
PUBLICLY   REVISE  THESE   FORWARD-LOOKING   STATEMENTS  TO  REFLECT  EVENTS  OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF.

                                     Part I

ITEM 1. DESCRIPTION OF BUSINESS.

OUR COMPANY

We are a leading provider of branded rating content on local service businesses.
Our ratings of local  service  businesses  enhance  online and offline  commerce
between  buyers and  sellers.  We estimate  that the total  commerce in the U.S.
exceeds $2 trillion annually for all service businesses.  As an infomediary,  we
help consumer and business buyers make informed  purchasing  decisions among the
estimated 6 million local service  businesses  in America.  Our ratings  provide
service  businesses a tool to  distinguish  themselves  from their  competitors.
Service  businesses  pay us research and rating fees and we are developing a new
commission system to generate  revenues by connecting member service  businesses
with  quality  seeking  buyers.  Our  ratings and  commission  system will offer
Internet  portals,  credit card  issuers and other  aggregators  of consumer and
business buyers a new source of recurring revenue.


                                       2


<PAGE>

We are  creating a large  database  of  credential  data  consisting  of license
information,  legal status and business  profiles  that we aggregate  for buyers
from over 2,000 databases  nationwide.  At August 31, 2000 we had  approximately
6,000,000 service businesses in our database, essentially all service businesses
in the United States. We have completed ratings on approximately 350,000 service
businesses  across the United  States.  We deliver  our  credential  information
through easy to recognize  rating  symbols.  Our ValueStar  Verified(TM)  rating
indicates  that a service  business  has passed a credential  review.  ValueStar
Top-Rated(TM)  is a  premium  certification  mark  indicating  evidence  of high
customer satisfaction.  To assure unbiased customer satisfaction ratings, we use
the Public Research Institute of San Francisco State University and the Consumer
Law  Project  of the  University  of  Houston  Law  Center to audit  our  survey
research.

We market a licensing program to rated service  businesses.  Service  businesses
that are ValueStar Verified or ValueStar Top-Rated are encouraged to license the
ValueStar  program.  Our program is  designed to provide our  licensed or member
businesses  preferred  access  to  a  flow  of  quality-seeking  buyers.  Member
businesses  are also licensed to use our rating  symbols in their  marketing and
promotional activities.

Through  technology our rating and buyer  information and  proprietary  shopping
tools are available on the Internet through our Web site (valuestar.com).  While
our  customer  satisfaction  ratings are  currently  conducted  offline  through
telephone  surveys,  we are developing  technology to automate ratings by buyers
after  transactions  are  completed.   Our  proprietary  shopping  tools  assist
consumers in selecting  among  quality  service  businesses  with the freedom to
transact online or offline. We also target and promote the broad distribution of
our rating content through other Internet sites and through offline marketing by
us and by our  licensed  service  businesses.  We recently  entered into content
agreements  with  Experian,  InfoUSA  and  Netcentives  and rating  distribution
alliances   with   home   service   portals:    Contractor.com,    OurHouse.com,
SimplyDone.com;  auto portals:  CompleteCar.com  and  FindGarage.com;  and other
vertical portals: e.Attorney.com, Foodscape.com, rentals.com and geoTouch.com.

We generate  revenues from a combination of fixed  certification and rating fees
paid by  service  businesses.  We are  developing  the  technology  to collect a
commission on the value of  transactions  between  registered  buyer members and
licensed member service businesses.  Since a large number of purchases are being
researched online but still consummated  offline, a key advantage of our program
is that we expect to  receive  transaction  revenues  whether  transactions  are
consummated  online or offline.  Buyers are  registered  free  through  Internet
alliances,  credit-card  issuers and through other  aggregators of consumers and
business buyers who participate in transaction commissions.  Buyers will receive
benefits  including loyalty points,  satisfaction  guarantees and other benefits
for purchasing from ValueStar member service businesses.

Our  principal  executive  offices  are  located at  360-22nd  Street,  Oakland,
California,  94612.  Our telephone  number is 510-808-1300  and our Internet Web
site is www.valuestar.com.  The information found on our Web site is not part of
this annual report.

OUR MARKET OPPORTUNITY

We  believe  there is a  compelling  buyer  need for  unbiased  ratings on local
services.  North America contains  fragmented,  highly competitive local service
industries. This creates a large number of choices for buyers. For local service
businesses,  it is increasingly difficult and costly to differentiate on quality
or customer  satisfaction due to the proliferation of claims,  the growth of new
media outlets,  competition and increasing buyer  skepticism.  We believe buyers
want to know which  businesses  are better than  others.  This need for unbiased
reliable  information  has been a  factor  in the  growth  of  Consumer  Reports
magazine (product evaluations and ratings),  J.D. Powers (customer  satisfaction
ratings on vehicles,  computers and other businesses) and the growth experienced
by consumer and market research companies.

The total  dollar value of buyer  services  transacted  in the United  States in
categories rated by ValueStar is estimated at over two trillion dollars annually
based on U.S.  Department of Commerce  statistics.  These services include auto,
home,  health,  personal,   professional  and   business-to-business   services.
According to information analyzed from the U.S. Bureau of Labor Statistics' 1998
Consumer  Expenditures  Survey, our research indicates that American households,
numbering 107 million,  spend  approximately  $6,200 per year on local services,
while total  business-to-business  spending exceeds this amount. We believe that
there is a need and a demand for local ratings of service  providers  comparable
to that  available on many  products.  We believe that the more than six million
service  businesses  in the  United  States  (estimated  from data  supplied  by
American  Business  Information)  that  make  up the  service  and  professional
business market provide a large opportunity for ratings.  And although directory
type  information is available from yellow page listings and city guide services
and  certain  information  about  complaints  is  available  through  the Better
Business Bureau, our research indicates buyers want to know which companies have
adequate credentials and those that have been rated high in

                                       3
<PAGE>

customer  satisfaction.

International  Data  Corporation,  a leading provider of information  technology
data,  estimates that annual worldwide  commerce over the Internet will increase
from  $111.4  billion  in 1999 to $1.3  trillion  by 2003 and that the number of
shoppers  worldwide who buy goods and services  online will grow from 48 million
in 1999 to approximately 183 million in 2003.  Increasing  numbers of buyers are
drawn to the  Internet  to shop but seek  unbiased  information  needed  to make
informed  shopping  decision for local services.  Local service  businesses,  in
turn, are searching for ways to distinguish themselves from competitors,  obtain
quality  customers  through the  Internet  and to  participate  in the growth of
e-commerce.

The credit card  industry  is mature and highly  competitive.  According  to the
Nilson Report, seventy percent of American adults carry an average of 4.3 credit
cards and, even though new card solicitations flood mailboxes, cardholder growth
has slowed. We offer the credit card industry and other membership organizations
a new free  member  benefit  program to aid to reduce  member  attrition  rates,
increase  credit  card  use  for  service   shopping  and  increase  new  member
acquisition rates.

OUR SOLUTION

We respond to the needs of buyers and sellers of local services by providing:


    o  A free  searchable  database  of  qualified  service  businesses  meeting
       certain licensing and legal status. We are increasing the distribution of
       this data primarily through alliances with Internet portals.

    o  Certifications  of the top-rated  service  businesses from  statistically
       valid surveys of their prior customers.

    o  New benefits to buyers that  purchase  from  authorized  ValueStar  rated
       service businesses. These benefits include:

         o ValueStar Rating Points redeemable for travel, products and services

         o Complaint resolutions services provided by ValueStar

         o A  money-back   satisfaction   guarantee  (up  to  $500,  subject  to
           limitations)

    o  The  ability for buyers to use a variety of  technology  tools to access,
       search  and shop  among  competing,  but  qualified,  service  businesses
       without  limiting  the buyer to a limited  number of discount or referred
       businesses.

    o  The  ability  for  quality  sellers  to  participate  in  the  e-commerce
       revolution and to differentiate themselves from other sellers.


We believe  consumers want to find the best companies with the best information,
want to be  treated as a special  customer  as they  purchase,  and if things go
wrong want  outside  help getting a fair  resolution.  And finally,  if they are
still not happy, they want their money back. Our program and package of benefits
respond to these consumer needs.


We believe  businesses  want  access to quality  buyers and want to  distinguish
themselves  from  their  competitors  on  value.  We have  over  eight  years of
experience  helping  quality  service  businesses  use  ValueStar  certification
symbols to improve their operations.

OUR STRATEGY

Our objective is to be the leader in providing local service ratings and content
to enhance online and offline  commerce in local  services.  To accomplish  this
objective we intend to:

    o  Establish  ValueStar  as a widely  distributed  local  rating  brand both
       online and offline.

    o  Achieve  broad  reach and  recognition  by  providing  ValueStar  branded
       ratings to Internet  portals,  yellow pages and  shopping  engines and by
       licensing our brand to local service businesses.

    o  Deliver   accurate,   trusted  and  relevant  content  on  local  service
       businesses by:

         o Maintaining high-quality credential certifications

         o Certifying  service business customer  satisfaction only on the basis
           of proven transactions with real customers

         o Providing buyers compelling benefits to participate in rating service
           businesses

    o  Generate  transaction  based revenues by providing  relevant  benefits to
       buyers, sellers and referring partners:

         o Buyers receive  loyalty points,  satisfaction  guarantees and related
           benefits

         o Buyers  have  clout  from the  knowledge  they will rate the  service
           business

         o Sellers obtain access to new quality conscious buyers

         o Referring  partners  participate  in  a  recurring  transaction-based
           revenue stream


                                       4


<PAGE>

    o  Develop  and  improve  on   technology   to  provide  the  most  relevant
       information to facilitate commerce in local services.

    o  Expand   our  brand  and   influence   throughout   North   America   and
       internationally in selected foreign markets.

HISTORY OF DEVELOPMENT

We were  incorporated in Colorado in 1987. Our operations are conducted  through
our wholly owned California subsidiary,  ValueStar,  Inc., incorporated in 1991.
During late 1990 and 1991, James Stein (our Chief Executive  Officer)  developed
the basic  operating  concept of ValueStar.  This concept was developed from Mr.
Stein's own research and prior experience in the Yellow Page publishing industry
and studies  conducted by San Francisco  State  University  and The Institute of
Social Research at California State - Stanislaus.

Our sales and  licensing  activities  commenced in the greater San Francisco Bay
area in 1992.  On January 1, 1996,  we launched our  Internet  site on the World
Wide Web at valuestar.com.  In 1997, we expanded our Internet services by adding
our SmartShopper  buying utility, a communication link between buyers and highly
rated businesses.

In July 1999,  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 on the  majority of service  businesses  in the United  States,  and (b)
developing an Internet-based system that generates commissions from transactions
driven by the content.  The goal of our development is to position  ValueStar as
the dominant rating system for local service businesses.

In addition to creating  proprietary content on America's service companies,  we
are also developing strategic relationships to provide complementary content and
to increase the  distribution of the ValueStar brand and related  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 which are 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.

We are also working to develop other alliances and  relationships  to expand our
content,  add highly rated service  businesses to our program,  extend our brand
and distribute our ratings to consumers.  Our marketing and sales activities are
focused on increasing member service businesses and enrolling buying members. In
September  2000 we  announced  a pilot  program for the San  Francisco  Bay area
credit card holders of First National Bank of Omaha.

We  are   developing   the  systems  to  register   buyers  and  monitor  future
transactions.  Until  this  system  is  operating,  we  do  not  anticipate  any
significant  revenues from these markets. We continue to incur selling costs and
rating costs associated with enrolling member service companies in the ValueStar
program.  We  believe  this  investment  will  accelerate  the launch of our new
program by allowing us to have a number of registered  service companies already
enrolled by the time we launch our transaction fee system.

Our plan is to have the systems to monitor,  record and collect on a transaction
basis during the last quarter of calendar year 2000.  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.
                                       5
<PAGE>

INDUSTRY BACKGROUND

Delivery of Information to Buyers

We communicate  information to buyers in the form of a  certification  or rating
mark or symbol.  The certification  mark industry includes trade association and
various accrediting marks. Examples of these marks include the Good Housekeeping
Seal, AAA Approved Auto Repair,  J.D.  Powers,  ISO 9000 and various lodging and
restaurant  industry ratings and marks. Since we provide a valuable resource for
consumers  to contact to obtain a  particular  category  of  business,  we share
aspects of referral  services and agencies like 1-800  Dentists,  1-800 Plumber,
and medical and  contractor  referrals.  And since we publish and  distribute  a
periodic  listing of businesses  rated high in customer  satisfaction,  we share
industry  characteristics  of service  guide  publishers  and the  yellow  pages
industry.  And  finally,  we  maintain an Internet  site of  qualifying  service
businesses  and buyer  information  sharing  aspects of the  growing  market for
Internet content such as electronic  yellow pages,  directories,  and city guide
information services.

Factors Unique to Shopping for Services

The factors  affecting the selection of a local service are different than those
involving  a widely  available  product:  (a)  typically,  compared to a product
purchase,  a buyer has more service provider choices from which to discern,  (b)
the quality level of services is less  consistent,  (c) it is more  difficult to
experience  or  compare a service  prior to  purchase,  (d)  services  cannot be
returned,  and (e)  therefore  the entire  decision  process is riskier and more
frustrating  for buyers.  We respond to these  factors by  providing  buyers and
businesses with important information delivered in various media.

Limitations to Traditional Service Shopping Information

Although  traditional  shopping is familiar to buyers and the offline market for
services  is  quite  large,   highly  fragmented  and  geographically   diverse,
purchasing services is time-consuming, costly, inefficient and fraught with risk
to buyers who are unable to sample or return the purchased services. In order to
make  an  informed  purchase  decision,   buyers  typically  have  to  undertake
independent  research  and  interview  and evaluate a number of  businesses  and
non-standard offers with  unsubstantiated  claims. The market for local services
is  inherently  inefficient  and  information  available  to buyers is generally
limited.  We believe our ratings  provide highly  relevant and easy to use buyer
information unavailable elsewhere.

Growth of Commerce on the Internet

The rapid growth of the Internet and online commerce has  revolutionized the way
in which buyers and sellers communicate, share information and conduct business.

A number of unique  characteristics  differentiate the Internet from traditional
media.  Buyers can  communicate or access dynamic and  interactive  content on a
real-time basis without  geographic or time limitations,  access a broader range
of online offerings,  and communicate and interact  instantaneously  with one or
more sellers at minimal  cost.  As a result,  the Internet has the  potential to
support a highly  efficient  market in which  buyers and sellers will be able to
interact based on real-time supply and demand  information.  This new e-commerce
model will enable buyers to  efficiently  and  conveniently  gather  comparative
purchasing  data, to shop and to communicate with sellers in many new ways. This
model may  provide  sellers  with  additional  revenue  opportunities  by making
available a dynamic source of aggregated  customer and demand information and by
greatly  enhancing the speed and efficiency of  transactions  between buyers and
sellers.  In  addition,  sellers  may be able to acquire  more buyers at a lower
cost.

When it comes to America's six million local service businesses,  we believe the
major  search  engines  and  portals  have two major  limitations.  First,  they
currently present a list of local companies to their consumer users that include
unlicensed and bad companies,  and second,  they generate  limited or no revenue
from these local companies.  Our strategy is to provide search engines,  portals
and  related  sites with  branded  ratings  allowing  their users to make better
purchasing decisions.

Challenges Facing Online Buyers and Sellers of Local Services

Although  the advent of online  commerce  has given  buyers  and  sellers a more
convenient channel to interact,  we believe the online marketplace still suffers
from  many of the  limitations  of the  offline  marketplace.  Like  traditional
service  businesses,  businesses  listed  online  are  often  limited  and offer
services  of unknown  quality and  consistency.  In  addition,  in order to make
informed purchasing decisions, buyers still have to conduct online research and,
in many cases, perform substantive offline evaluation and research.

The Internet also poses new  challenges to buyers and sellers.  Online  shoppers
compare service  information  from multiple service  businesses  before making a
selection. Online resources only provide limited information about local service
businesses.  Typical  online  shopping  engines  focus on product  shopping  and
provide only limited information on services.

                                       6
<PAGE>

Buyers need to be able to find relevant sites and  information  and sellers need
to develop a brand to distinguish  themselves from other, often similar,  online
sellers.  The increasing  number of online commerce  opportunities  and the ease
with which buyers may navigate online, has increased pressure on service sellers
to find online methods of attracting  buyers. And the fragmented nature of local
service businesses make Internet marketing a difficult challenge to meet the new
competitive pressures brought about by the Internet.

Limitations of Online Shopping for Services

For  consumers,  the Web  brings  information  and  services  to the  home  with
unparalleled usefulness and immediacy. We believe that although certain services
such as travel are experiencing rapid Internet growth, the lack of standardized,
independent and unbiased buyer information  impedes the growth of local services
being  transacted  on the  Internet.  As a result,  we believe  that ratings and
unbiased  information  on local service  businesses  delivered over the Internet
will be a catalyst for increased shopping of local services on the Internet.

To address  the  significant  challenges  faced by buyers  and  sellers of local
services,  a number of different online services have emerged:

    o  Online referral services generally take requests from buyers and refer to
       service  businesses  with  which  they  have  a  financial  relationship.
       Typically  this online  category of lead  generation  has focused on home
       improvement or contracting.

    o  General  purpose  online  portals  and  sites  (both  national  and local
       community  sites)  often  provide  a  range  of  information  on  service
       businesses consistent with the yellow pages and shopping guide approach.

    o  Comparison  shopping services generally focus on products but are capable
       of focusing on local services.

    o  Auction and reverse auction sites focus on some services and are expected
       to expand into a greater breadth of local services.

While the above sites and online services  provide some information to buyers of
local services, they do not provide the shopping content we believe is unique to
local services. This content includes data on licensing and legal status and the
important attribute of an unbiased rating based on prior customer satisfaction.

THE VALUESTAR SHOPPING EXPERIENCE

Consumer  and  business  buyers use our ratings and content to quickly  identify
highly rated local service and  professional  businesses  (including auto, home,
health,  personal and  professional  providers  of services)  and to make better
shopping  choices.  Our credential  data,  identified by the ValueStar  Verified
mark,  assures  buyers that the listed  service  businesses  have the  requisite
licensing  favorable legal and credit status.  Our top tier ValueStar  Top-Rated
ratings are based on high customer satisfaction, which we believe is intuitively
logical to most buyers.  A study conducted by Public Research  Institute in 1993
and updated through 1996 concluded that 2 out of 3 customers who knew a business
had earned  ValueStar  were  influenced  by this  factor in  selecting a service
business.

Buyers seek to avoid problems by using ValueStar rated  businesses.  In addition
by  registering  with  ValueStar,  participating  in the  ValueStar  program and
agreeing to rate businesses online after a purchase, buyers receive a package of
ValueStar benefits.

We also provide a number of technology  tools to assist  buyers of services.  In
addition  to  anytime  access  to  ValueStar  ratings  through  our Web site and
listings by alliance  partners,  buyers can directly access and communicate with
top-rated  service companies through e-mail and Web links from our or associated
Web sites. After conducting a search for a specific type of top-rated  business,
buyers are able to conduct  their own personal  "shopping  auction" by using our
SmartShopper  service to send requirements to selected top-rated  companies with
one simple form.  We intend to continue to enhance the  technology  available to
buyers by adding features, products, services and additional benefits.

We also provide relevant editorial content for buyers on our Web site including:

    o  ValueStar Company Profiles - templated  displays of shopping  information
       including owner's philosophy,  specialties,  years in business, education
       and training, company size, affiliations and equipment.  Photos and logos
       are also included when available.

    o  ValueStar  Reports - articles  researched  and written by  ValueStar  for
       buyers or sellers in selected service categories.  ValueStar Reports help
       provide buyers with industry knowledge about how to shop for and transact
       with local service companies.

                                       7
<PAGE>

VALUESTAR SERVICE BUSINESS EXPERIENCE

Our rated  businesses  use the ValueStar  program to (a) bring in more qualified
customers,  (b)  convert  shoppers  to buyers,  (c) reduce  pricing  pressure on
services, (d) distinguish their services from competitors,  (e) improve customer
loyalty,  (f) increase  customer referral rates, (g) speed up the selling cycle,
(h) improve employee morale,  (i) enhance marketing and advertising  promotions,
and (j) improve business reputation. -


Our free listing of qualified  businesses on the Internet  offers small business
owners a presence on the Web at no additional  cost. Our alliances with Internet
portals and our SmartShopper service offers businesses Web generated traffic. We
also offer  businesses the  opportunity to link their Internet site with our Web
site.

While we rate and provide  data on a large  number of local  companies,  not all
participate  in the ValueStar  benefits  program.  Licensees in this program are
offered a package of  benefits  and agree to pay either a fixed  annual fee or a
commission based fee (generally 5% of matched  transactions  between  authorized
service providers and ValueStar registered buyers). Local service companies that
earn the ValueStar Verified or ValueStar  Top-Rated symbol are invited to become
a ValueStar member company and abide by the ValueStar Customer's Bill of Rights.
ValueStar  member  companies  agree  to be rated by  ValueStar  Rating  Partners
(consumers  or  buyers  registered  with  ValueStar),  maintain  credential  and
customer  satisfaction  standards  and  abide by  written  complaint  resolution
procedures.

ValueStar licensed member companies receive the following benefits:

    o  A flow of new, quality-seeking customers.

    o  A  license  to use the  ValueStar  ratings  and  brands  in all of  their
       marketing  activities to differentiate their company based on quality and
       assurance.

    o  A package of signs,  labels,  brochures,  other materials and training to
       maximize their implementation of the ValueStar member program.

    o  Priority  position within  ValueStar  listings on most Web sites. In most
       cases the default sort order puts ValueStar  member  companies at the top
       of the list of rated companies.

Our brand  recognition  is enhanced by daily use by businesses in all manners of
advertising and media  supplementing  our marketing and promotion  activities to
create and enhance buyer, business and brand awareness.

PARTNERSHIPS AND ALLIANCES

We target  partnerships  and  alliances  for the  creation and  distribution  of
ratings content, the implementation of our online ratings and the acquisition of
buyer and seller participants by developing  strategic  partnerships in Internet
distribution,  transaction processing,  buyer reward, credit agency,  government
regulation,  financial  institution  and  membership  fields.  We have created a
program where these  partners can  participate  in  commissions  generated  from
transactions between member buyers and sellers of local services.  We categorize
these partnerships or alliances in the following categories:

Infrastructure Alliances

ValueStar's  infrastructure  alliances provide  operational  support,  software,
infrastructure  services and raw data that feed our ratings,  ValueStar benefits
and  online   ratings.   Examples  of  these   alliance   arrangements   include
relationships with Netcentives,  Experian, Sesame Technology,  MapInfo, InfoUSA,
and various government agencies.

Distribution Partners

ValueStar's  distribution partners receive licensing rights to display ValueStar
ratings on their Web site.  Examples of these  alliances  include  home  service
portals  Ourhouse.com,  Simplydone.com and Contractor.com;  auto service portals
CompleteCar.com  and   Findgarage.com;   and  other  vertical  portals  such  as
e.Attorney.com,  Foodscape.com,  rentals.com  and  geoTouch.com.  We also have a
rating  agreement  with Maid  Brigade  and COIT  Services,  Inc.  to rate  their
members.

Membership Partners

Membership  partners  provide their  customer or membership  base our package of
ValueStar  benefits.  The goal is to increase  their  member  loyalty,  increase
members'  switching costs,  increase member acquisition rates and participate in
the  ValueStar  commission  stream  as their  members  purchase  from  ValueStar
licensed companies. Examples of membership partners include a marketing alliance
with  Netcentives that creates four million opt-in trial members from their base
of  ClickReward  members  and our  relationship  with  eAttorney  that makes all
eAttorney  members eligible for opt-in  participation in the ValueStar  benefits
program.

                                       8
<PAGE>

Financial Services Partners

Financial  services  partners  provide their customers and cardholders  with our
package of ValueStar benefits. We believe their goals are to increase cardholder
loyalty, increase new card acquisition rates, increase credit balances, decrease
interest rate  sensitivity,  increase card use and participate in commissions as
their  cardholders   purchase  from  ValueStar  licensees  that  participate  in
providing benefits to buyers. An example includes our pilot agreement with First
National  Bank of Omaha to provide  our  benefit  program to their  credit  card
holders in the San Francisco Bay area.

VALUESTAR BUYING SYSTEM TECHNOLOGY AND INFRASTRUCTURE

We believe that the  technology  and database  information we are developing can
separate our service from other listing and referral services.  We are designing
our technology and an improved Web site ourselves  while using  contractors  and
off-the-shelf  systems  and  tools  where  appropriate.  We  believe  our  heavy
involvement  in our  systems and  technology  will allow us to adapt to evolving
marketing strategies and user preferences. The primary elements that distinguish
us  are  our  database-driven  architecture  that  provides  the  core  for  our
Internet-based systems.

Database-driven architecture

We have built a scalable user  interface  that is based  primarily on internally
developed  proprietary  software.  The  backbone of our service is our  merchant
processing  system  and  our  database  architecture.   We  have  automated  the
acquisition  of certain data  elements  from  government  and private  databases
important in determining aggregate credential information.

Systems

Our  systems are  designed  to provide  access to our Web site 24 hours per day,
seven days a week.  Physical hosting and communications  systems are provided by
GlobalCenter, a provider of Web and application hosting solutions to businesses,
which provides  redundant  communications  lines and emergency power backup.  We
have  designed  our systems  based on industry  standard  technologies  and have
engineered  them to  minimize  system  interruptions  in the event of outages or
catastrophic  occurrences.  We have implemented  Cisco Load Director as our load
balancing system and have redundant servers to provide for fault tolerance.  Our
database is Oracle 8i, installed on a Solaris E4500.

ValueStar Ratings

We have designed a buying utility to generate transaction commissions from sales
that are driven by ValueStar  ratings and create  continuously  updated customer
satisfaction  ratings  on local  businesses  driven  by actual  purchases.  This
ratings program is intended to be operational  during the last calendar  quarter
of 2000.

After a  ValueStar  buying  member  makes a  purchase  from a  ValueStar  member
business,  a short  customer  satisfaction  survey is generated for the buyer to
complete.  Each  completed  survey is tabulated  updating the business  member's
rating   scorecard  and   recalculates   its  total  average  rating  score.  At
predetermined   threshold   levels,   the  business   members  rating  brand  is
automatically changed to a higher or lower rating symbol level.

Our buying  members may register  their  credit  cards online with  ValueStar to
conveniently receive their ValueStar benefits with each purchase. In most cases,
our  buying  members  will be using a  pre-registered  credit  card  issued by a
participating  credit-card-issuing  bank or other  membership  organization.  We
intend to also match offline  purchases on each registered credit card with each
registered ValueStar member business.

Our buying members may also purchase  services from ValueStar member  businesses
using  cash,  checks or  unregistered  credit or debit  cards.  In these  cases,
ValueStar  buying  members  may  complete  a survey  online,  and we verify  the
purchase. After verification, the buying member receives ValueStar benefits, and
the rating score is posted.

We expect to receive a revenue stream from  transaction fees generated as buying
members make purchases from ValueStar member businesses.

For the successful  operation of our ratings system,  we will be relying in part
on information  and processing to be provided by credit card  processing  firms.
The failure to successfully  implement and operate these third party  processing
systems or the loss of these  relationships  would have an adverse impact on our
proposed revenue model and future operating results.

ValueStar SmartShopper Service

Buyers have free access to ValueStar ratings from popular Web sites, portals and
valuestar.com.  Buyers do not have to register to use ValueStar  ratings and can
shop  and  purchase  any  way  they  want.  Once a buyer  finds a list of  rated
companies in the desired area and industry,  the buyer is not forced to fill out
forms, or participate in an auction or reverse marketplace.  A buyer may pick up
the  telephone  and call the  company,  email the  company,  or use  ValueStar's


                                       9
<PAGE>

SmartShopper service. SmartShopper allows a buyer to send one email request form
to multiple companies simultaneously.

ValueStar's  strategy is to license  popular  buying  utilities  or partner with
companies  that have  developed  them,  and make them available to buyers in the
future.  The strategy is to offer buyers the best buying content and the freedom
to choose their favorite  buying  utility,  such as a phone, a personal  digital
assistant, or a personal computer.


Some aspects of our technology and programs are subject of a patent application.
We may in the future file additional patent applications on other aspects of our
technology.

RATINGS, SALES AND MARKETING

We have  designed our rating,  sales and  marketing  strategies to acquire large
numbers of buyers and sellers  interacting through the use of ValueStar ratings.
Our sales strategy focuses on adding credential verified service businesses into
both our top-rated brand and into the ValueStar  member program.  At the present
time  we are  not  focusing  sales  or  marketing  efforts  targeted  at  adding
individual  buyers into our  program.  But  alternatively,  through our business
development  team, we focus on adding buyers through  Internet  portals,  credit
card issuers and other membership organizations.  We have designed our marketing
strategy to increase business sales, support business development and increasing
brand awareness.

Ratings

We are in the  process of rating  each  local  service  company on a  credential
basis.  At  August  31,  2000  we had  information  on  approximately  6,000,000
businesses in our database. During fiscal year 2000 we developed the methodology
and systems to access more than 2,000  government,  commercial  and  proprietary
databases and other businesses to perform our credential based rating. At August
31, 2000 we had  completed  ratings on over 350,000  businesses  which have been
assigned the ValueStar Verified or ValueStar Top-Rated  certification.  Our goal
in the next four months is to rate an  aggregate  of  2,000,000  businesses  and
ultimately substantially all of the six million service businesses in the United
States.


To perform the Top-Rated customer  satisfaction  rating, we draw a random sample
of past customers and conduct a telephone survey. In the future, businesses will
also be able to qualify for the Top-Rated  designation  through  on-line ratings
performed by actual customers.

We intend to market our license  program to an increasing  number of these rated
businesses.  At August 31, 2000  approximately  6,300  service  businesses  were
enrolled and licensed into the ValueStar  program.  These businesses have agreed
to either pay commissions on transactions  with our member buyers as our systems
are completed or pay us an annual fixed licensing fee.

Prior to adding  the  ValueStar  Verified  rating in June  2000,  we only  rated
service  businesses in eight markets that had passed both the credential and the
customer satisfaction  requirements.  We do not charge businesses for credential
ratings  but  perform  these  ratings to provide  the  database  for our program
offering.  We  currently  charge a fee  ranging  from $0 to $570 to perform  the
customer  satisfaction  research for those  verified  businesses  applying to be
Top-Rated.

All  customer  satisfaction  rating  business  applicants  receive  a  ValueStar
Research  and  Rating  Report  with  the  results  of our  research.  Successful
applicants  may license the use of the  ValueStar  Top-Rated  mark,  pursuant to
contractual guidelines specified in the terms of our license agreement, in their
advertising, collateral and sales materials, stationery, signage, announcements,
bid forms, etc. A rated and certified business also receives a ValueStar plaque,
program manual and labels for their doors and letterhead.

In order to assure  buyers  that  customer  satisfaction  ratings  performed  by
ValueStar  are  independent,  scientific,  accurate  and  unbiased,  we maintain
agreements with university partners to audit our customer  satisfaction research
and reports.  In 1992, we engaged The Public  Research  Institute,  an auxiliary
unit of San  Francisco  State  University,  to perform or audit  surveys of each
applicant's  former  customers.  In June  1999,  we engaged  our first  regional
auditor,  the Consumer Law Project of the  University  of Houston,  to audit our
customer satisfaction ratings on a regional basis.

Sales

All service businesses and professionals  located in market regions we serve may
apply to be rated.  These include more than 300 industry  categories within five
broad  groups:  Automobile  Services  (examples  include  auto body shops,  auto
repair,  and towing  firms),  Health and Well Being Services  (examples  include
acupuncture,  physicians  and  dentists  and health  clubs),  Home  Services and
Repairs (examples include alarm companies,  carpet cleaners,  movers, locksmiths
and

                                       10
<PAGE>

roofers),  Personal Services (examples include beauty salons, limousine services
and travel agents) and  Professional  Services  (examples  include  accountants,
attorneys, employment services, insurance and real estate brokers).

Our sales  activities  focus on a  targeted  list of  service  and  professional
businesses  resulting  from our  rating  activities  which  identifies  the high
priority   accounts  among  the  larger   population  of  verified  service  and
professional  businesses.  We use direct  mail,  advertising,  telephone  sales,
third-party  telemarketing  firms and other methods  emphasizing the benefits of
becoming a ValueStar  program licensee.  Our field consultant  personnel deliver
Top-Rated awards to successful applicants and also handle renewals and ancillary
sales.

We have also  entered  into  sales and  marketing  alliances  that  assist us in
marketing  to  prospective   service   businesses.   These   alliances   include
OurHouse.com,  Foodscape.com,  and geoTouch.com. We pay commissions from time to
time for successful business rating leads from these alliance partners.

Our business  development team focuses its sales efforts on alliance partners in
the categories outlined in Partnerships and Alliances above.

Marketing

Our marketing  strategy  involves a variety of traditional and online  marketing
programs as well as our business development and promotional activities. We have
employed radio and billboards in the past and expect to use these methods in the
future to increase  brand  awareness  and  encourage  businesses  to apply to be
rated.

We  expect  that  our  alliance  partners  will  be an  important  part  of  our
promotional  efforts  in the  future  as they  inform  their  members  about the
advantages of ValueStar  benefits.  We also employ co-branding as a key strategy
to expand ValueStar brand awareness.

COMPETITION

We are not aware of a directly competitive rating mark or credentialing  service
targeted for a broad range of service  industries and delivered  across multiple
channels.  However, we expect competitive offerings to develop in the future. We
compete for the limited budgets for spending on advertising and promotions among
service and  professional  businesses.  We also compete with a variety of online
offerings discussed below.  Current and potential offline  competition  includes
yellow  page  publishers,  newspapers  and  periodicals,  radio  and  television
stations  and  other  forms of  advertising  employed  in the  consumer  service
marketplace.  Other current and potential competitors include referral agencies,
telephone  services,  complaint  agencies,  service guide  publishers,  industry
specific  certification  marks and others.  The competition for service business
advertising  and  promotional  funds is  intense.  There  are a large  number of
competing firms and a wide variety of product offerings.

The Internet is rapidly evolving and intensely competitive with limited barriers
to entry.  There are a number of potentially  competitive  companies  engaged in
facilitating  commerce on the Internet  including  providing  more  security for
buyers and greater  informational  content including service business  listings,
referrals and  information.  We expect new Internet  competition  to develop and
intensify  in the future.  Existing  and  potential  online  competitors  can be
divided into several groups:

    o  Comparison shopping services,  although targeting primarily products, may
       expand into providing comparison shopping information on services.  These
       services  include  companies  such  as  mySimon,   BottomDollar,   Jango,
       StoreRunner, PriceScan, ShopOnline123,  BuyBuddy, PriceWatch, PricePulse,
       PriceGrabber, 20-20 Consumer, EvenBetter and KillerApp.

    o  Online referral  companies provide online databases and matching services
       for buyers and  sellers of  services.  Companies  operating  in this area
       include  Improvenet,   ServiceMagic.com,   iMandi,  iCastle,   repairnet,
       HomesSpud, OurHouse.com, Handyman Online, BidExpress,  Contractor.com and
       Remodel.com (HomeStore.com).

    o  Reverse auction sites,  such as  Priceline.com,  Nextag and  Respond.com,
       that may enter into service industry categories in which we operate.

    o  Merchant  guides,  such as Yahoo!  Shopping,  ShopNow.com,  Shopping.com,
       Lycos Shop, eShop, Excite and 4anything.com,  although focusing primarily
       on products, may expand their data to include service industry categories
       in which we operate.

    o  Consumer  buying  guides,   such  as  Ecompare,   Comparenet,   Deja.com,
       Brandwise,  BizRate.com  and Gomez Advisors focus  primarily on Web sites
       but may also enter into categories in which we operate.

                                       11
<PAGE>

    o  Auction sites,  such as eBay, Yahoo!  Auctions,  ONSALE and Amazon.com or
       other auction sites may elect to enter into the service arena.

We  believe  that the  principal  competitive  factors  in our  market are brand
recognition,  the depth of  distribution  of our  ratings and  credential  data,
comprehensiveness  of service business  coverage,  the quality and nature of our
content, our Web site user-friendliness,  and the quality of results obtained by
buyers and sellers.

We expect to experience  significant  competition  in the future from  companies
that we have  identified  above as well as new entrants.  Other  companies  with
strong brand  recognition,  technical  expertise  and  experience  in online and
offline  commerce  and  direct  marketing  may seek to compete in the rating and
credentialing   market.  Many  of  our  competitors  have  significantly  longer
operating  histories,  larger and broader  customer bases and greater  technical
expertise,  brand recognition and online commerce  experience than we have. Many
of our competitors may be able to devote significantly greater resources than we
have available for marketing and promotional  campaigns,  attracting  traffic to
their Web sites,  hiring and retaining key employees and developing Web site and
other systems.  In addition,  barriers to entry for rudimentary service business
listings or referral  services are low, and new competitors may be able to offer
competing services at relatively low cost.

RESEARCH AND PRODUCT DEVELOPMENT

Prior to fiscal 2000, our research and product  development  expenses associated
with the design,  development  and testing of our programs and services were not
material. 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 on the  majority of service  businesses  in the
United  States,  and (b)  developing  an  Internet-based  system that  generates
commissions from transactions driven by the content. The goal of our development
is to  position  ValueStar  as the  dominant  rating  program  of local  service
businesses.  Failure  to  implement  this new  initiative  could have a material
adverse effect on our future operations.

During the year ended June 30,  2000 we  expended  $5,860,062  on  research  and
product  and  content  development.  These costs  consist of (a)  capturing  and
verifying  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  consumers  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  early fiscal
2001.

We seek to maintain and advance our market position by continually enhancing the
performance  of our Web site and the services and benefits we provide to buyers,
sellers and partners.  We expect that enhancements to our site and services will
come from both internally and externally developed technologies.

EMPLOYEES

As of August 31, 2000,  we employed  159  full-time  persons,  of which 6 are in
senior  management,  68 in marketing and sales, 43 in research and rating, 24 in
technology and systems, and 18 in accounting and administration. We employ up to
5 part-time personnel from time to time and use outside contractors from time to
time for  various  marketing  and  other  services.  None of our  employees  are
represented by a collective  bargaining  arrangement and we have  experienced no
work stoppages. We consider our relations with employees to be favorable.

Our future success will depend in large measure upon the continued contributions
of our CEO, James Stein, and our ability to attract and retain quality sales and
management  personnel.  We experience  competition for qualified sales personnel
who  are  in  demand  by  many  competitors  and  businesses  with  other  sales
activities.  The loss of the services of Mr. Stein could have a material adverse
effect on our business.  We entered into a three-year  employment  contract with
Mr. Stein  effective  July 1, 1998. We own a $3 million "key man" life insurance
policy on Mr. Stein.

TRADEMARKS, SERVICE MARKS AND OTHER PROPRIETARY RIGHTS

We own a U.S.  federally  registered  certification  mark on "ValueStar" and the
"ValueStar  Certified"  symbol and have  applied  for  protection  on  "Consumer
ValueStar" in Canada and "ValueStar  Certified" in the European  Communicty.  We
have also received a registration for "Only the Best Pass the Test" as a service
mark in the U.S. We  consider  our  trademarks  and symbol to be material to our
business.  We intend to  vigorously  protect and defend our  trademarks  against
infringement  and  other  unauthorized  use.  We are  not  aware  of  any  other
significant infringement or other unauthorized use of our trademarks.  We cannot
assure that we can protect our trademarks and symbol.  The loss or  infringement
of our  ValueStar  trademark  and symbol or our  inability  to protect  our mark
adequately  would have a material adverse effect on



                                       12
<PAGE>

our business and  operations.  It is possible  that  competitors  or others will
adopt  service  names similar to  "ValueStar",  thereby  impeding our ability to
build brand identity and possibly leading to customer and consumer confusion.


We seek to maintain certain aspects of our business operations as trade secrets.
We have developed consumer and business  databases,  training systems,  software
and systems that are  proprietary.  With the increased use of patents to protect
service  products and techniques,  we are currently  reviewing the use of patent
applications  as an additional  tool to protect new products and services we are
developing. There can be no assurance of future patents or protection.

GOVERNMENT REGULATION AND LEGAL ISSUES

We are not currently  subject to direct  regulation other than federal and state
regulation  applicable  to businesses  generally.  Some service  businesses  are
prohibited  by  state  or  other   regulations   from  paying  a  commission  or
referral-type  fee.  Examples include lawyers and certain medical  professionals
and  counselors.  These kinds of businesses will continue to be licensed under a
fixed fee program. There can be no assurance that we will not be impacted in the
future by various state and local  regulations  regarding certain aspects of our
business model.


Our operations  require that our  certification  mark only be used by qualifying
companies  and  that  its  use be  discontinued  if a  business  ceases  to be a
licensee.  We  vigorously  defend our contract  rights,  including  taking legal
action as required. As we expand to new areas and our certification becomes more
recognized and valuable, it may be increasingly difficult to police unauthorized
use of our certification mark or confusing marks.

Although we are not a direct  referral  service,  we may be subject to claims by
buyers for the  actions of  certified  businesses.  Although we do not believe a
claim would have merit,  the costs of defense could be substantial.  There is no
assurance our errors and omissions  insurance would adequately cover any claims.
To date we have  not  been  subject  to any  material  claims  by  customers  of
licensees.

Privacy is one of America's  long-standing concerns, and the issue of privacy on
the Internet is the latest  manifestation  of that concern.  We are sensitive to
those  concerns  and have created a privacy  policy to govern our Internet  data
collection,  which we believe is consistent with present laws and regulation. We
have examined our new business  model in light of the recent  Gramm-Leach-Bliley
Act ("GLB"),  signed into law November  1999,  which  regulates  many aspects of
financial  privacy,  both  on and  off  the  Internet.  Our  conclusion  is that
compliance with GLB, which primarily involves adequate and thorough  disclosure,
will not adversely impact our business model.

ITEM 2. DESCRIPTION OF PROPERTY

Our corporate and operating  offices are located in approximately  40,000 square
feet of improved office space located at 360 - 22nd Street, Oakland, California.
This facility accommodates administration,  sales and marketing and research and
rating  personnel.  This facility is leased  pursuant to four  five-year  leases
effective June 1999 and January 2000 at a monthly rate aggregating approximately
$53,000. This facility is adequate for present operations but should we continue
to expand or elect to provide  new  products  or  services,  then we may require
additional  space in the future.  We believe  that  additional  office  space at
reasonable  leasing  rates is  available  in the  greater  Oakland  area  should
additional space be required in the future.

ITEM 3. LEGAL PROCEEDINGS

We are not involved in any  threatened  or pending legal  proceeding  other than
routine litigation that is incidental to our business.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted  during the fourth  quarter of the fiscal year to a vote
of security holders.


                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

On May 28, 1997 our common stock commenced trading and is quoted on the National
Association of Securities  Dealers,  Inc. ("NASD") OTC Electronic Bulletin Board
(symbol  "VLST").  The market for our common  stock has often been  sporadic and
limited.


                                       13
<PAGE>

The following  table sets forth the high and low bid  quotations  for our common
stock for the fiscal years ended June 30, 2000 and 1999 as provided by the NASD.

                                                           Bid Quotations
                                                       High              Low
                                                       ----              ---
     Fiscal Year Ending June 30, 1999
       First Quarter                                  $0.7813          $0.5313
       Second Quarter                                 $0.9375          $0.625
       Third Quarter                                  $1.4375          $0.75
       Fourth Quarter                                 $1.6563          $1.1875
     Fiscal Year Ending June 30, 2000
       First Quarter                                  $1.9375          $1.3125
       Second Quarter                                 $8.8750          $1.7500
       Third Quarter                                  $8.0625          $5.9375
       Fourth Quarter                                 $6.5000          $2.6875


The  above  quotations  reflect  inter-dealer  prices,  without  retail  markup,
markdown or commission and may not represent actual transactions.

The OTC Electronic Bulletin Board is a screen-based  trading system administered
by the NASD.  Securities  traded on the  Bulletin  Board are, for the most part,
thinly traded and subject to special  regulations  (described below) not imposed
on securities listed or traded on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system or on a national securities exchange.


Like that of securities of other small,  growth-oriented  companies,  our shares
are  expected to  experience  future  significant  price and volume  volatility,
increasing the risk of ownership to investors.  Sales of substantial  amounts of
common stock in the public  market by one or more holders  could  adversely  and
dramatically  affect the prevailing  market price of our common stock due to its
thinly traded  attributes.  Future  changes in market price and volume cannot be
predicted as to timing or extent.  Any historical  performance  that may develop
does not guarantee or imply future performance.  Future announcements concerning
us or our competitors,  quarterly variations in operating results, announcements
of  technological  or service  innovations,  the introduction of new products or
services, changes in pricing policies by us or competitors,  litigation relating
to services or other litigation, changes in performance estimates by analysts or
others, issuances of or registration of additional securities,  or other factors
could cause the market price of our common stock to fluctuate substantially.  In
addition,  the stock market has from time to time experienced  significant price
and volume  fluctuations  that have  particularly  affected  the market price of
small  companies and have often been  unrelated to the operating  performance of
particular companies.


Our common stock is defined as a "penny stock" under the Securities Exchange Act
of 1934,  as amended  (the  "Exchange  Act"),  and rules of the  Securities  and
Exchange Commission thereunder. The Exchange Act and penny stock rules generally
impose additional sales practice and disclosure requirements upon broker-dealers
who sell our  securities  to persons other than certain  "accredited  investors"
(generally, institutions with assets in excess of $5,000,000 or individuals with
net worth in excess  of  $1,000,000  or annual  income  exceeding  $200,000,  or
$300,000  jointly  with  spouse)  or in  transactions  not  recommended  by  the
broker-dealer.   For  transactions   covered  by  the  penny  stock  rules,  the
broker-dealer  must make a  suitability  determination  for each  purchaser  and
receive the purchaser's  written  agreement prior to the sale. In addition,  the
broker-dealer   must  make   certain   mandated   disclosures   in  penny  stock
transactions,  including  the actual sale or  purchase  price and actual bid and
offer  quotations,  the  compensation  to be received by the  broker-dealer  and
certain  associated  persons,  and deliver certain  disclosures  required by the
Securities  and  Exchange  Commission.  Consequently,  the penny stock rules may
affect the ability of broker-dealers to make a market in or trade our shares and
thus may also affect the ability of purchasers of shares to resell shares in the
public markets.


We had 150  holders of record of our  common  stock at June 30,  2000,  which we
believe  represents  approximately  700 beneficial  owners. We have never paid a
cash dividend on our common stock and do not expect to pay cash dividends in the
foreseeable  future.  No cash dividends may be paid on our common stock unless a
like   cash   dividend   has   been   paid  on  our   preferred   stock   on  an
as-converted-basis.We  are  also  obligated  to  pay  accrued  cumulative  stock
dividends to our holders of Series A preferred stock on conversion to our common
stock.


                                       14
<PAGE>

Recent Sales of Unregistered Securities

No equity  securities  were sold  during the year  ended June 30,  2000 under an
exemption from the  Securities  Act that were not  previously  reported in prior
quarterly filings or described in the following paragraphs.  All such sales were
made under an exemption  from either  Section  4(2) or Rule 506 of  Regulation D
under the Securities Act.

On April 4, 2000 we completed the second closing of a private  offering and sale
of 647,087 units.  Each unit consisted of one share of common stock at $5.85 per
share and one warrant for each ten shares ("585  Unit"),  each warrant  granting
the right to  purchase  one common  share at $5.85 for a period of three  years.
Warrants  for an  aggregate  of 64,713  shares of common  stock  were  issued in
connection with this second closing.  The aggregate second closing proceeds were
approximately $3,785,500 and were raised as working capital.

In  connection  with the sale of the 585  Units,  we entered  into an  Investors
Rights  Agreement  with the  investors  providing  the  investors  with  certain
piggyback registration rights.

While the securities were sold by us without an underwriter or cash  commission,
upon the second  closing and for services  provided  during the first (March 24,
2000) and second closings, we issued to an outside financial advisor warrants to
purchase an aggregate of 30,000  shares of common stock at an exercise  price of
$5.85  per  share  until  April  4,  2005  and  issued  the  lead  investor,  in
consideration  of  guaranteeing  the purchase of a minimum of  1,000,000  units,
warrants  to  purchase  an  aggregate  of 50,000  shares  of common  stock at an
exercise price of $10.00 per share until April 4, 2003.


In  connection  with the  cancellation  of $1,450,000 of senior notes applied to
exercise  warrants for 1,977,382  common shares in March 2000, we agreed to call
and purchase  231,132 C warrants  from three  institutional  holders.  Effective
April 4, 2000 we called the C warrants.  The $1,155,660 of net call proceeds was
applied  by the  recipients  to  purchase  77,382  common  shares by  exercising
warrants and the balance to purchase 184,320 of the 585 Units described above.


All of the  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 shares of common stock and warrants and
will be placed on the  shares of common  stock  issuable  upon  exercise  of the
warrants unless registered under the Act prior to issuance.

The  descriptions  of the 585 Unit financing is qualified in its entirety by the
full text of the agreements filed as exhibits to our Form 10-QSB for the quarter
ended March 31, 2000.

Subsequent Sale of Preferred Stock

During  September  2000 and through the date of this  annual  report,  we issued
227,689  shares of  Series C  Convertible  Preferred  Stock,  par value  $.00025
("Series C stock") for cash of $22.50 per share or gross proceeds of $5,123,000.
Cumulative  dividends  of 8% per annum are  payable  when and if  declared.  The
dollar amount of Series C stock plus an amount  representing unpaid dividends 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  registration  rights, has a liquidation
preference of $22.50 per share plus accrued and unpaid dividends, and has voting
rights equal to the number of shares into which it is  convertible.  The Company
granted  purchasers  warrants to purchase  1,138,445  common shares at $2.25 per
share for a period of three years.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.


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
www.valuestar.com,  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 being
developed 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


                                       15
<PAGE>

information and develop  computer and related systems for this new service.  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.  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.

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.

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.  During the year we operated in eight  regional  markets.  In December
1999,  in all  markets  except  Northern  California,  we  changed  from a fixed
certification  and  rating fee to a  percentage  based fee based on the value of
future  transactions   between  buyers  registered  with  us  and  participating
companies rated and authorized by 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 verified  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.

In the past our business  revenue model was  predicated  on a growing  number of
certified  businesses and maintaining high renewal rates.  Certified  businesses
that renewed contributed higher gross margins than new applicants due to reduced
sales and rating costs.  We are  migrating to a transaction  based revenue model
where 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.


                                       16
<PAGE>

During the year ended June 30, 2000 we also incurred significant product, system
and  database  development  costs  consisting  of (a)  capturing  and  verifying
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 consumers 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 early fiscal 2001. 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. We
have recently  increased  numbers of sales,  marketing,  development and support
personnel.  Rapid growth,  due to the nature of our  operations,  is expected to
contribute to continued operating losses in the foreseeable future.

At June 30, 2000 we had 5,521 licensees.  On August 31, 2000 we had over 350,000
ValueStar Verified or ValueStar Top-Rated  businesses listed on our Web site and
had licensed  approximately  6,300 of these  businesses as members in either our
commission program or our annual 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. These fees
have been recognized as revenue when material services or conditions relating to
the certification have been performed. The material services are the delivery of
certification  materials along with an orientation and the material condition is
the execution of the  certification  agreement  specifying  the  conditions  and
limitations on using the certification. Research and rating fee revenue, ranging
up to $570 but often waived or discounted,  has been deferred until the research
report is delivered.  Sales of marketing materials and Web advertising and other
services  have been  recognized  as  materials  are  shipped  or over the period
services are rendered.  From time to time we provide discounts,  incentives from
basic  pricing,  refunds and payment  terms on fees.  Refunds have averaged less
than 2.5% of  certification  fees during the last two years. In the past we have
provided no ongoing support or services to certificate holders necessary to earn
the revenue.

We have  expensed  research  and rating  costs as  incurred.  Costs  incurred in
printing and distributing our ValueStar Report publication for buyers, currently
published in January and July,  and any related  revenues  have been  recognized
upon publication.

Certain direct-response  advertising costs have been deferred and amortized over
the expected  period of future  benefits,  approximately  60 days.  These costs,
which relate directly to targeted new business solicitations,  primarily include
targeted direct-response advertising programs consisting of direct telemarketing
costs.  No indirect  costs are  included in deferred  advertising  costs.  Costs
incurred for other than specific targeted customers, including general marketing
and  promotion   expenses,   are  expensed  as  incurred.   Deferred  costs  are
periodically evaluated to determine if adjustments for impairment are necessary.

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
allowedand 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.  These benefits will be a cost of sales related to
our revenues.


Because  of this  significant  change  in the  program  we  expect  that we will
recognize  commission  revenues as reported and earned by us. Commencing July 1,
2000 we began recognizing  fixed fee revenues on a straight-line  basis over the
term of the annual  license.  Costs of benefits  provided to  consumers  will be
recognized as provided with reserves made for any future benefit obligations.


The  Securities  and  Exchange  Commission  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 registrants. The
provisions  of SAB 101 are effective  for  transactions  beginning in our fiscal
year 2001.  We intend to recognize  revenues in the future  consistent  with the
requirements of SAB 101.


                                       17
<PAGE>

Results of Operations

Revenues. Revenues consist of certification and rating fees from new and renewal
business  applicants,  sale  proceeds  from  information  materials  and premium
listings  in our  ValueStar  Report  and on our Web site,  and  other  ancillary
revenues.  We reported  total  revenues of $2,090,773  for the fiscal year ended
June 30, 2000, a 10% decline over  revenues of  $2,329,219  for the prior fiscal
year.  The decrease in revenues is due to the  commencement  in December 1999 of
enrolling local service  providers into our commission  based program  described
above.  During  fiscal 2000,  certification  fees  accounted for 77% of revenue,
compared to 76% for the prior year. Revenues for the fourth fiscal quarter ended
June 30, 1999, were $419,895  compared to $559,466 for the prior year comparable
quarter or a 25% decrease.  In the fourth quarter of fiscal 2000 we were earning
fixed  certification  fees from only one market with seven markets  converted to
the commission program.

Revenues for the year from premium  listings in our ValueStar  Report and on our
Web site were  $210,520,  a decrease of 5% from the $222,100 for the prior year.
The decrease, as above, is due to the commencement in December 1999 of enrolling
local service providers into our commission based program.

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. subscription based 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 certificate holders up for renewal,
(g) renewal rates,  (h) pricing  policies,  (i) timing of completion of research
and ratings,  and (j) other factors,  some 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  based  transaction
plan. In such an event we may be required to revert to a fixed fee basis.

Cost of Revenues.  Cost of revenues consists  primarily of rating costs incurred
for performing  customer  satisfaction  research on business applicants enrolled
into  our  subscription  program,  costs  related  to  verifying  insurance  and
complaint  status for those same  applicants and costs of information  products.
Cost of revenues  represented 60% of sales during the fiscal year ended June 30,
2000 (54% in the fourth quarter), an increase from 44% for the fiscal year ended
June 30, 1999 (58% for the fourth quarter).  The increase in the current year is
attributable  primarily to increased  staffing and related costs from  expanding
our  rating  department  to  handle  increased  volume  in  anticipation  of the
commission based system. Cost of revenues may vary significantly from quarter to
quarter both in amount and as a percentage of sales.

We have invested in telephony  equipment that we expect to reduce the unit costs
related to performing future customer  satisfaction  research. We have also made
investments in computer and software equipment to track licensing, financial and
credit  information for local service  businesses.  We believe these investments
will reduce rating and content development unit costs in future periods.

In the future,  under the planned  commission  based program,  the components of
cost of sales will change  versus the fixed fee  certification  program of prior
years.  Costs  associated with revenues will include  benefits to buying members
and  commissions  payable to referring  partners.  We expect content costs to be
reported  separately as we provide content to various portals and others without
a corresponding revenue stream. We estimate, but there can be no assurance, that
the cost of revenues for our commission based program,  when and as implemented,
will range between 50% and 60% of revenues.


Selling Costs.  Selling costs consist  primarily of personnel  costs for outside
sales  consultants   interacting  with  customers  and  direct  marketing  costs
including lead generation and telemarketing  costs. Selling costs for the fiscal
year ended June 30, 2000,  were  $3,797,530,  or 182% of  revenues,  compared to
$1,776,390,  or 76% of revenues for the prior year. The large increase is due to
the commencement in December 1999 of enrolling local service  providers into our
commission  based  program  described  earlier.  These  sales do not  result  in
immediate revenues. Other than direct targeted telemarketing costs for fixed fee
subscription sales in Northern California, we expense selling costs as incurred.
We expect selling costs as a percentage of revenues will vary in future periods,
resulting from levels of future revenues, variances in renewal rates, the effect
of new  sales  promotions  and costs  thereof,  timing of  research  and  rating
completions,  level and percentage of fixed selling costs,  the number of market
regions opened and other factors, some of which are beyond our control.


Marketing and Promotion  Expenses.  Marketing and promotion expenses  aggregated
$3,037,502,  or 145% of revenues during fiscal 2000,  comparable to $778,435, or
33% of revenues for fiscal 1999.  Included in marketing and selling


                                       18
<PAGE>

expenses are printing and distribution costs of our ValueStar Report publication
targeted at buyers. Printing and distribution costs were $336,000 in fiscal 2000
compared to the fiscal  1999 total of  $266,000,  as we printed and  distributed
more copies with additional pages. During fiscal 2000, we expended $1,125,000 on
paid  advertising  targeted at expanding  consumer  awareness of  ValueStar.  We
embarked on an aggressive media campaign,  especially in the Northern California
market,  during fiscal 2000.  Paid  advertising  of $206,000 was employed in the
prior year. During fiscal 2000, we expended  $153,000 on promotions  compared to
$134,000  for the prior year with the  increase  due to an  increased  number of
promotions  in the period.  Wage  expenses in marketing  during fiscal 2000 were
$954,000  compared to $126,000 for the prior year, due to expanded staff related
to building  the  marketing  and  business  development  groups in the third and
fourth quarters.  Generally,  the first and third fiscal quarters have increased
costs because our ValueStar Report publication is printed and distributed during
these quarters.  Also, we generally expend less advertising in our second fiscal
quarter (fourth calendar  quarter) due to higher media rates associated with the
holiday season.

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

Product and Content Development  Expenses.  In prior years development  expenses
associated with the design, development and testing of our programs and services
have not been  material.  In the first  quarter of fiscal 2000 we commenced  the
design,  development  and  testing  of an  expanded  Internet  initiative  using
existing  and new  content.  This work has led to building a  transaction  based
rating system described  above.  During the twelve months ended June 30, 2000 we
expended  $5,860,062 on new program  development  and segregated  these costs as
product and content  development costs. Fourth quarter product development costs
were  $3,014,531,  an increase from the  $1,664,051 in the third quarter of this
fiscal year. The major components of product development costs during the twelve
months were  compensation and related costs of $3,078,220,  partner and alliance
implementation  costs of  $490,000  and  expenses  related to the  gathering  of
licensing and other  verification  information of $344,000.  We have capitalized
$1,001,000 of product and content  development costs as website  development and
software that are specifically  related to internal  software  development.  The
Company  will begin  depreciation  of this asset in fiscal 2001 over a period of
time not to exceed  three  years  upon  commencement  of  tracking  transactions
between rating partners and local service providers.

In March  2000 we  entered  into a  three-year  contract  with a third  party to
provide   certain   insurance   verification   services  on  a  national  basis.
Subsequently,  we determined we could more  effectively  perform these  services
internally.  Accordingly in the fourth quarter we accrued and expensed  $600,000
representing  future quarterly minimum bill rates over the next twelve quarters.
The penalty payable is $50,000 per quarter commencing May 2000.

We expect that  product and content  development  expenses  will  continue to be
significant  in early fiscal 2001 due to increased  numbers of personnel and the
use of outside branding, computer and system consultants employed to develop our
commission based system.  We expect costs to decline as the commission system is
implemented and initial content fully developed.  Thereafter content maintenance
costs will be treated as operating costs.  Future levels of product  development
costs will depend on many factors not currently estimable by management.


General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
and executive  management  activities,  including  legal,  accounting  and other
professional  fees.  They  totaled  $2,444,516  or 117% of revenues for the year
ended June 30,  2000,  compared to  $1,734,564  or 75% of revenues for the prior
year, an increase of $709,952. The Company allocated a proportion of general and
administrative  costs to product and content  development during the fiscal year
to reflect a proportional  share of administration  costs devoted to product and
content  development.  The major increases in general and  administrative  costs
include a $539,500  increase in  compensation  and benefits due primarily to the
increased number of executive and management  personnel added in connection with
employee  growth and  expanded  operations;  a $680,000  increase in  occupancy,
telephone  and  insurance  costs  due  to  additional   personnel  and  expanded
operations;  a $791,000  increase in  depreciation  due to additional  equipment
related to building  the  transaction  based system and  accommodating  employee
growth;  and a $107,000  increase  in travel and  entertainment  due to expanded
operations.  General and administrative costs increased to $1,108,170 or 264% of
revenues  during the fourth  quarter of fiscal 2000 compared to $577,147 or 103%
of revenues  for the prior  year's  fourth  quarter.  The major  increase in the
fourth quarter is due to increased  depreciation expense of $535,279 compared to
the prior year.  Management  anticipates that general and  administrative  costs
will continue to exceed prior period levels due to increased  personnel added to
support future growth,  increased  general  computer,  operating,  occupancy and
corporate costs.


                                       19
<PAGE>

We incurred $77,000 of stock-based  compensation  during the twelve months ended
June 30, 2000  resulting  from  non-employee  options and  warrants  compared to
$68,000 for the prior year.


We incurred interest expense for the year ended June 30, 2000 of $2,076,519 that
included  $1,696,150 of non-cash  amortization  of bond  discount,  paid-in-kind
interest  and  amortized  financing.  Included  in the  $1,696,150  of  non-cash
interest and financing costs are $1,312,130 of lump sum  amortization  resulting
from  the  early  payoff  of debt  and  $153,333  of lump  sum  amortization  of
capitalized  financing costs associated with senior debt cancellation for common
stock.  Interest for the prior fiscal year was $395,890,  including  $114,506 of
non-cash  amortization of bond discount and accrued paid-in-kind  interest.  The
Company  generated  interest  income of $279,785 in fiscal 2000. The increase in
cash  interest  expense  is a result  of higher  levels  of debt in fiscal  2000
compared to the prior year.

Net Loss.  We had a net loss of  $16,175,462  for the fiscal year ended June 30,
2000,  compared to a loss of $3,459,744 for the fiscal year ended June 30, 1999.
Our increased  loss is  attributable  primarily to (a)  increased  selling costs
resulting  from the  expansion of sales  personnel to new market  regions and to
incurring  sales  costs  related  to  bringing  on  service  providers  into the
transaction  program  that do not result in immediate  revenue,  (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 employee growth and business development,
and (d) increased non cash amortization expense related to early cancellation of
debt for equity.  We anticipate we will continue to experience  operating losses
until we achieve a combination of a fully functional  transaction  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  transaction  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 fiscal  year ended June 30, 2000 due to the  beneficial  conversion
feature of the Series B preferred  stock  issued  during the year.  Net loss was
increased by $11,650,255 for this one-time non-cash imputed charge and increased
by $167,877 for non-cash accrued  dividends on Series A 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  $11,415,947 for the year ended June 30, 2000 and
$2,941,846  for the year ended June 30, 1999. At June 30, 2000, we had a working
capital  surplus of  $2,382,543,  including  $450,502  representing  the current
portion of  long-term  debt and  $285,458  representing  the current  portion of
capitalized  leases.  For the year ended June 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
transaction  based  program  with no  immediate  revenue,  product  and  content
development  costs and addition of new executive  management.  At June 30, 2000,
our net accounts receivables were $454,233,  representing  approximately 90 days
of revenues and an annualized  turnover ratio of approximately  4.0 times.  This
compares  unfavorably  to  approximately  64 days of  revenues  and  turnover of
approximately  5.7  times at June  30,  1999.  This is due in part to  decreased
revenues in fiscal 2000. We believe that 60 to 90 days  revenues in  receivables
is  reasonable  based on the  nature of our  business  and the terms we  provide
certifying  companies on certain fees. At June 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 April  2000 we  obtained a  commitment  for  $2,000,000  in
equipment  financing.  At  June  30,  2000  we  had  drawn  $1,278,737  of  this
commitment.  We drew down an additional $732,796 on August 15, 2000. Also during
the year ended June 30, 2000, we obtained  $250,000 in  additional  net note and
debt financing and $21,316,507  from the sale of common and preferred  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 $5,287,385 at June 30, 2000, net accounts  receivable
of  $454,233,  and the proceeds  from drawing down the balance of the  equipment
financing  commitment  in August  2000,  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


                                       20
<PAGE>

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.


Subsequent  to June 30,  2000 we  obtained  approximately  $5.1  million  of new
investment  capital.  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,
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 will  require
additional  financing.  Our actual results could differ  significantly from plan
and,  therefore,  we may require  substantially  greater operating funds. Should
required and/or additional funds not be available or planned operations not meet
our  expectations,  we may be  required to  significantly  curtail or scale back
staffing,  advertising,  marketing  expenditures and general operations.  We may
also have to curtail the number of market regions in which we operate, with more
reliance on more  established  market  regions.  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.


New Accounting Pronouncements and Issues

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Investments
and Hedging  Activities"  ("SFAS No.  133")  which  establishes  accounting  and
reporting  standards  requiring that every derivative  instrument be recorded in
the balance  sheet as either an asset or  liability  measured at its fair value.
The  statement  also  requires  that changes in the  derivative's  fair value be
recognized  currently in earnings unless specific hedge accounting  criteria are
met. SFAS No. 133 is effective for fiscal years  beginning  after June 15, 2000.
The  Company  does not  expect the  adoption  of SFAS No. 133 to have a material
effect on the Company's consolidated financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
provides guidance on the recognition,  presentation and disclosure of revenue in
financial  statements of all public  registrants.  The provisions of SAB 101 are
effective  for  transactions  beginning in the  Company's  fiscal year 2001.  As
described  above,  the  Company has  modified  its program and the nature of its
future  revenues.  The Company  intends to  recognize  revenue in fiscal 2001 in
compliance  with  SAB  101.  However  there  can  be  no  assurance,  given  the
uncertainty in this area, that the SEC staff may not take a contrary position at
some future date.  Any  potential  changes  could have a material  impact on the
manner in which we recognize  revenue.  Any such changes would have no effect on
reported cash flow or the underlying economic value of our business.

On March  31,  2000,  the  Financial  Accounting  Standards  Board  issued  FASB
Interpretation  No. 44, " Accounting for Certain  Transactions  Involving  Stock
Compensation"("FIN  44").  This statement is effective for certain  transactions
from December 15, 1998 and is to be applied commencing July 1, 2000. The Company
has not completed its  assessment of the impact of FIN 44 and has not determined
its effect, if any, on its future reported results of operations.

Year 2000 Readiness Disclosure

We are aware of the issues  associated  with the  programming  code in  existing
computer  systems because of the Year 2000. The "Year 2000" problem is concerned
with whether  computer  systems  properly  recognize date sensitive  information
connected with year changes to 2000. Systems that do not properly recognize such
information  can generate  erroneous data or cause a system to fail. To date, we
have  not  experienced  any  Year  2000  problems  in our  computer  systems  or
operations. However, other companies, including us, could experience latent Year
2000 problems.

While we are not currently  aware of any internal or external Year 2000 failures
impacting  our  operations,  we continue to monitor the  compliance of our major
customers, suppliers and vendors. We believe that third-party relationships upon
which we rely  represent  the greatest risk with respect to the Year 2000 issue,
because we cannot  guarantee  that third  parties have  adequately  assessed and
addressed  their  Year  2000  compliance   issues  in  a  timely  manner.  As  a
consequence, we can give no assurances that issues related to Year 2000 will not
have a material  adverse effect on our future results of operations or financial
condition.

To date, there have been no material direct  out-of-pocket costs associated with
our Year 2000 compliance effort.  Maintenance or modification costs are expensed
as incurred,  while the costs of new computers or software are  capitalized  and
amortized over the respective useful life.

Should we not be completely  successful in mitigating internal and external Year
2000 risks,  the likely worst case scenario  could be a system  failure  causing
disruptions of operations,  including, among other things, a temporary inability
to


                                       21
<PAGE>

process  transactions,  deliver  certifications  and products,  send invoices or
engage in similar normal  business  activities at our office or with our vendors
and suppliers.  We currently do not have any  contingency  plans with respect to
potential  Year 2000  failures of our  suppliers or customers and at the present
time we do not intend to develop one. If these  failures  occur,  depending upon
their  duration and severity,  they could have a material  adverse effect on our
business, results of operations and financial condition.

The  information  set forth  above  under  this  caption  "Year  2000  Readiness
Disclosure"  relates to our efforts to address the Year 2000 concerns  regarding
our (a)  operations,  (b)  products and  technologies  licensed or sold to third
parties and (c) major  suppliers and customers.  Such statements are intended as
Year 2000 Statements and Year 2000 Readiness  Disclosures and are subject to the
"Year 2000 Information Readiness Act."

Tax Loss Carryforwards

As of June 30,  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.

Business Risks

This report  contains a number of  forward-looking  statements  that reflect our
current  views with respect to future events and  financial  performance.  These
forward-looking  statements  are  subject  to certain  risks and  uncertainties,
including  those  discussed  below,  that could cause  actual  results to differ
materially from historical  results or those  anticipated.  In this report,  the
words  "anticipates,"   "believes,"   "expects,"  "intends,"  "future,"  "goal,"
"objective" and similar expressions identify forward-looking statements. Readers
are cautioned to consider the specific risk factors  described  below 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
these  forward-looking  statements,  to reflect events or circumstances that may
arise after the date hereof.

         We Have a History of Losses and Anticipate  Continued  Losses in Fiscal
         2001  -  We  have  incurred  significant  operating  losses  since  our
         inception and anticipate a  continuation  of losses in fiscal 2001. Our
         operating  results  have  fluctuated  in the past and are  expected  to
         fluctuate  in the future due to a number of factors,  many of which are
         outside  our  control.  There can be no  assurance  that we can achieve
         profitable operations.

         We Have a New Senior  Management Team And We Have Recently Expanded Our
         Business To Offer New Services.  As A Result, We Have A Limited History
         Which  Makes It  Difficult  To  Evaluate  Our  Business - We  commenced
         operations in 1992;  however,  we did not begin developing our expanded
         ratings  and  commission  based  program  until  July  1999.  Our prior
         operations  depended  on  fixed  fee  certifications.  In July  1999 we
         commenced  recruiting an expanded senior management team, including our
         president,   chief  operating   officer,   chief   marketing   officer,
         vice-president  business  development,  vice-president  engineering and
         general counsel. Commencing in February 2000 we announced the beginning
         of our  distribution  alliances with various  portals.  In July 2000 we
         announced  details  on  our  ratings  of  a  large  number  of  service
         businesses. We are preparing to launch our new commission based revenue
         system  anticipated  in the second quarter of fiscal 2001. As a result,
         we have a limited  history upon which you can evaluate our business and
         the performance of our senior management team. Furthermore, even if our
         business is  successful,  we may change our  business to enter into new
         business  areas,  including  areas in  which  we do not have  extensive
         experience.  Before investing,  you should evaluate the risks, expenses
         and problems frequently  encountered by companies such as ours that are
         in the  early  stages  of  development  and that are  entering  new and
         rapidly changing markets like the Internet.

         Competition and Technological Changes May Adversely Affect Our Business
         -  The   possibility   exists  that  a  business   rating  service  and
         certification mark similar to or competitive to ours will be developed.
         It is also possible that future  competition  will try to duplicate our
         concept.  We could face  head-on  competition  from  vastly  larger and
         better  financed  companies  with  the  means to  launch a  high-impact
         campaign locally or nationally.  Technological changes in the manner of
         selecting service businesses and communicating information to consumers
         could also have a negative  impact on our  business.  As a provider  of
         consumer information through the Internet and various media, we will be
         required  to adapt to new and  changing  technologies.  There can be no
         assurance  that our services will remain viable or  competitive  in the
         face of technological change.


         We  Depend  on Our  CEO as  the  Public  Image  of  ValueStar  - We are
         substantially  dependent  upon the experience and knowledge of our CEO,
         James Stein.  Mr.  Stein is becoming a leader in customer  satisfaction

                                       22
<PAGE>

         issues and is our public  spokesperson for events,  including  customer
         meetings and various radio and television appearances.  The loss of Mr.
         Stein could be detrimental to our development,  especially since we may
         not have the funds to hire a replacement with the requisite  expertise.
         We have a $3 million key-man life insurance policy on Mr. Stein.

         We Rely on Third Parties for Important Services - Our operations depend
         on a number of third parties.  We have limited control over these third
         parties. We do not own a gateway onto the Internet, but instead rely on
         an Internet  service  provider to connect our Web site to the Internet.
         Disruption,  temporary  or  prolonged,  of our Web  site  could  have a
         material  adverse  effect on our business.  We depend on Netcentives to
         provide and manage our  benefits  program.  We are  dependent  on third
         parties for printing  and  distribution  of our  ValueStar  Report.  We
         depend on third parties for certain  telemarketing  and other  services
         fundamental to our  operations.  We also rely on a number of government
         agencies and database  companies to provide us  credential  information
         and  databases.  Failure  to  maintain  satisfactory  relationships  on
         acceptable  commercial  terms with these third parties could affect the
         timing and quality of our services to customers  and  adversely  affect
         our operating results.

         We are Developing  New Markets with No Proven  Acceptance - Although we
         believe the factors  driving our business  acceptance in the California
         market  are  similar  throughout  the  United  States,  there can be no
         assurance of  widespread  acceptance.  We also believe the factors that
         drive  business  acceptance  on a fixed fee basis will be similar as we
         charge a commission.  As a new and evolving business format, demand and
         market  acceptance  are  subject  to a high  level of  uncertainty.  We
         believe the evolution of our business will depend in part on increasing
         brand  recognition.  Development and awareness of our rating brand will
         depend on  co-branding  with rated  businesses and  relationships  with
         distribution  partners  including  portals to  distribute  our  branded
         ratings. Our success will depend in part in maintaining our position as
         a leader in the rating of local service businesses.

         The  Failure  to  Establish  the  ValueStar   Brand  Would  Impair  our
         Competitive  Position - We are highly  dependent  on  establishing  and
         maintaining  our  brand.  Any  event or  circumstance  that  negatively
         impacts our brand could have a direct and  material  adverse  effect on
         our  business,  results  of  operations  and  financial  condition.  As
         competition  develops,  we believe  that  brand  strength  will  become
         increasingly important.  The reputation of our brand will depend on our
         ability to provide  quality  services  to our  customers  and  maintain
         quality and the  integrity of our rating and  certification  service to
         businesses and consumers. We cannot assure you we will be successful in
         maintaining   our  brand  and  delivering   quality  to  customers  and
         consumers. If customers and consumers are not satisfied, their negative
         experiences  might result in publicity that could damage our reputation
         and our competitive position could suffer.

         We are  Dependent  on Existing  and Future  Strategic  Partners for the
         Success of our Services - We intend to seek new  distribution  partners
         for our ratings content on the Internet and through  traditional media.
         We also intend to seek  partners with large numbers of buyers to enroll
         in the ValueStar benefits program.  We expect to share certain revenues
         with these  partners.  There is a risk that we will be unable to retain
         current  partners or be  successful in  recruiting  new  partners.  The
         failure to expand our  partnerships  could make it  difficult to expand
         our revenues or more costly to obtain comparable  revenues.  Should our
         partners seek to establish  competitive  programs offered by others our
         revenues could be reduced.

         If We Fail to Manage  Our  Growth,  Our  Ability  to  Market,  Sell and
         Develop Our  Services  Could be Harmed - Our growth has placed and will
         continue to place a significant  strain on our  management  systems and
         resources, and we may be unable to effectively manage our growth in the
         future.  We must plan and manage our  growth  effectively  to offer our
         services  and achieve  revenue  growth and  profitability  in a rapidly
         evolving  market.  We continue to increase the scope of our  operations
         and have added a number of employees  recently,  including employees in
         key  management and marketing  positions.  We grew from 82 employees at
         June 30, 1999 to 159 employees at June 30, 2000.  For us to effectively
         manage our growth, we must continue to:

            o  improve our  operational,  financial and  management  systems and
               controls;

            o  install new management and information systems and controls;

            o  develop and link a new web site with out alliance partners;

            o  locate   additional  office  space  in  a  number  of  geographic
               locations; and

            o  hire,  train and  motivate our  workforce.

         Failure to manage our growth  effectively  would  hinder our ability to
         develop,  market and sell our services and therefore harm our business.


                                       23
<PAGE>

         If We  Experience  System  Failures,  We  May  Lose  Revenues  and  Our
         Reputation  Could be Harmed and We May Lose  Buyers And  Sellers In Our
         Program,  Causing Us to Lose  Future  Business - We will  depend on the
         efficient   and   uninterrupted   operation   of   our   computer   and
         communications hardware and software systems some of which are still in
         development.  We cannot  guarantee  that our  systems  will  operate as
         planned and the failure of any of our systems could result in delays in
         launching new programs.  Substantially all of our computer hardware for
         operating  our Web  sites  is  currently  located  at  GlobalCenter  in
         Sunnyvale,  California.  Other systems are  maintained in our corporate
         offices.  These  systems and  operations  are  vulnerable  to damage or
         interruption   from   earthquakes,    floods,    fires,   power   loss,
         telecommunication failures and similar events. They are also subject to
         break-ins,   sabotage,   intentional  acts  of  vandalism  and  similar
         misconduct.  We do not have fully redundant  systems, a formal disaster
         recovery plan or alternative  providers of hosting services,  and we do
         not carry business  interruption  insurance to compensate us for losses
         that could occur.  Despite any  precautions we may take, the occurrence
         of a natural disaster or other  unanticipated  problems could result in
         interruptions in our services.  Any damage to or failure of our systems
         could result in interruptions in our services. Any system failure could
         create user questions and  complaints  that must be responded to by our
         customer support personnel.  The system failures of various third-party
         Internet service providers, online service providers and other Web site
         operators could result in  interruptions  in our service to those users
         who require the services of these  third-party  providers and operators
         to access our Web sites. These  interruptions could reduce our revenues
         and profits,  and our future revenues and profits will be harmed if our
         users believe that our system is unreliable.

         We Need to Protect Our Trademarks and Intellectual Property - We regard
         our  trademarks,  copyrights,  trade  secrets and similar  intellectual
         property  as  critical  to our  success.  We rely on a  combination  of
         copyright and trademark laws, trade secret protection,  confidentiality
         and contractual  provisions with certain employees and third parties to
         establish and protect our proprietary rights. There can be no assurance
         that  third  parties  will  not  infringe  upon or  misappropriate  our
         proprietary rights. Any misappropriation by competitors or unauthorized
         use by service  businesses of the trademark  ValueStar or the ValueStar
         Certified  certification  mark could have a material  adverse impact on
         our  operations.  A number of  companies  claim  proprietary  rights to
         certain  aspects of Internet  operations.  Although we are not aware of
         any aspect of our  operations  that may infringe on the rights of other
         companies,  there is no  assurance  these  claims will not arise in the
         future.  Although we have limited  resources to protect our rights,  we
         intend to take aggressive actions to protect our certification mark.

         We May Become Liable for Unexpected  Benefit Costs Reducing Our Margins
         or  Creating  Losses-  We are  preparing  to offer  ValueStar  Benefits
         including  Netcentives managed rating points,  complaint resolution and
         certain  money-back  satisfaction   guarantees.   Should  the  cost  of
         providing  these  benefits  exceed  managements   estimates  or  should
         corresponding  anticipated  revenues  not be  realized  then  we  could
         experience  reduced  margins or could  become  liable  for  significant
         benefit costs resulting in losses.

         We May Become  Subject to Government  Regulation-  We are not currently
         subject to direct  regulation  other than federal and state  regulation
         applicable to businesses generally. However, the liability for Internet
         content  is an  evolving  area of  litigation  and  regulation  and our
         operations may be impacted by litigation and regulation in the future.

         We May Face Legal  Uncertainties  That Could Harm Our Business - We may
         be  subject  to  claims  by  consumers  for the  actions  of  certified
         businesses.  Although we do not  believe a claim would have merit,  the
         costs of defense could be substantial. There is no assurance our errors
         and omissions  insurance would adequately cover any claims. In addition
         to the direct  legal and defense  costs,  litigation  could  negatively
         impact our  reputation  and make selling to and  certifying  businesses
         more difficult.

         We May be Unable to Raise Additional  Financing - We will need to raise
         additional funds in the future in order to implement our business plan,
         to fund more aggressive marketing programs or to acquire  complementary
         businesses, technologies or services. Any required additional financing
         may be  unavailable  on terms  favorable  to us, or at all. If we raise
         additional  funds by  issuing  equity  securities,  you may  experience
         significant  dilution of your ownership  interest and these  securities
         may have rights senior to those of the holders of our common stock.  If
         additional financing is not available when required or is not available
         on acceptable terms, we may be unable to fund our expansion, develop or
         enhance  our  products  and  services,   take   advantage  of  business
         opportunities or respond to competitive pressures.

         Existing Stockholders  Significantly Influence Us and Could Prevent New
         Investors From Influencing  Significant  Corporate Decisions - The five
         largest   holders  of  our  Series  A  and  Series  B  Preferred  Stock
         effectively  own

                                       24
<PAGE>

         approximately   52%  of  our  Company  assuming  they  converted  their
         Preferred  Stock. The holders of Series A Preferred Stock also have the
         right to elect one  director,  the  holders  of Series B Stock have the
         right to elect two directors and the holders of Series C Stock have the
         right to elect one director.  The holders could also possibly elect the
         additional  three  directors  elected by common  holders  through their
         right to vote with common shareholders. As a result, these stockholders
         may be able to control  all  matters  requiring  stockholder  approval,
         including  the  election  of  directors  and  approval  of  significant
         corporate  transactions,  which  could  delay or  prevent  a change  of
         control of  ValueStar  and could make some  transactions  difficult  or
         impossible without the support of these stockholders.

         Stock Trading Risks and Uncertainties Increase Risk to Investors - Like
         that of  securities  of other  small,  growth-oriented  companies,  our
         shares are expected to experience  future  significant price and volume
         volatility,  increasing  the risk of ownership to  investors.  Sales of
         substantial amounts of common stock in the public market by one or more
         holders could adversely and dramatically  affect the prevailing  market
         price of our common stock due to its thinly traded  attributes.  Future
         changes in market price and volume  cannot be predicted as to timing or
         extent. Any historical  performance that may develop does not guarantee
         or imply future performance.  Future announcements concerning ValueStar
         or  our  competitors,   quarterly   variations  in  operating  results,
         announcements of technological or service innovations, the introduction
         of new  products  or  services,  changes in pricing  policies  by us or
         competitors,  litigation  relating  to  services  or other  litigation,
         changes in performance estimates by analysts or others, issuances of or
         registration of additional securities, or other factors could cause the
         market  price  of our  common  stock  to  fluctuate  substantially.  In
         addition,   the  stock  market  has  from  time  to  time   experienced
         significant  price  and  volume  fluctuations  that  have  particularly
         affected  the  market  price of small  companies  and have  often  been
         unrelated to the operating performance of particular companies.

         Our common  stock is defined as a "penny  stock"  under the  Securities
         Exchange Act of 1934, as amended (the "Exchange Act"), and rules of the
         Securities  and Exchange  Commission  thereunder.  The Exchange Act and
         penny  stock rules  generally  impose  additional  sales  practice  and
         disclosure  requirements upon broker-dealers who sell our securities to
         persons   other  than  certain   "accredited   investors"   (generally,
         institutions  with assets in excess of $5,000,000 or  individuals  with
         net worth in excess of $1,000,000 or annual income exceeding  $200,000,
         or $300,000  jointly with spouse) or in transactions not recommended by
         the broker-dealer.  For transactions  covered by the penny stock rules,
         the  broker-dealer  must  make a  suitability  determination  for  each
         purchaser and receive the  purchaser's  written  agreement prior to the
         sale.  In  addition,  the  broker-dealer  must  make  certain  mandated
         disclosures in penny stock  transactions,  including the actual sale or
         purchase price and actual bid and offer quotations, the compensation to
         be received by the broker-dealer and certain  associated  persons,  and
         deliver  certain  disclosures  required by the  Securities and Exchange
         Commission.  Consequently, the penny stock rules may affect the ability
         of  broker-dealers to make a market in or trade our shares and thus may
         also affect the ability of purchasers of shares to resell shares in the
         public markets.

Item 7.  Financial Statements

Our consolidated financial statements required to be included in this Item 7 are
set  forth  in a  separate  section  of this  report  and  commence  on Page F-1
immediately following page 33.

Item  8. Changes  In and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure

Not applicable.

                                    PART III

The information  called for by Items 9, 10, 11 and 12 of Part III of Form 10-KSB
(consisting  of Item 9 - Directors,  Executive  Officers,  Promoters and Control
Persons;  Compliance with Section 16(a) of the Exchange Act, Item 10 - Executive
Compensation,  Item 11 - Security  Ownership  of Certain  Beneficial  Owners and
Management,  and Item 12 - Certain  Relationships  and Related  Transactions) is
incorporated by reference from ValueStar's  definitive  proxy  statement,  which
will be filed with the Securities and Exchange  Commission within 120 days after
the end of the fiscal year to which this Report relates.

                                       25
<PAGE>

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

Each  exhibit  marked with an asterisk is filed with this Annual  Report on Form
10-KSB. Each exhibit not marked with an asterisk is incorporated by reference to
the exhibit of the same number (unless otherwise indicated)  previously filed by
us as indicated below.

         Exhibit
         Number                     Description of Exhibit
         ------                     ----------------------

         3.1          Articles   of   Incorporation   of  the   Carson   Capital
                      Corporation  (Colorado)  as filed on January  28, 1987 and
                      filed  as  Exhibit  2.1  to  the  Company's   Registration
                      Statement on Form 10-SB, as amended.

         3.1.1        Amendment  to  Articles  of   Incorporation  as  filed  on
                      September  21,  1992  and  filed as  Exhibit  2.1.1 to the
                      Company's   Registration   Statement  on  Form  10-SB,  as
                      amended.

         3.1.2        Amendment to Articles of  Incorporation  as filed on April
                      24,  1997 and  filed  as  Exhibit  2.1.2 to the  Company's
                      Registration Statement on Form 10-SB, as amended.

         3.1.3        Amendment to Certificate of  Incorporation  filed with the
                      Secretary  of State of Colorado on November 23, 1999 filed
                      as Exhibit 3.1.3 to the Company's  Form 8-K dated December
                      13, 1999.

         3.2          Bylaws  of  the  Company  filed  as  Exhibit  2.2  to  the
                      Company's   Registration   Statement  on  Form  10-SB,  as
                      amended.

         3.3          Certificate   of   Designation  of  Series  A  Convertible
                      preferred  stock  filed with the State of Colorado on July
                      21, 1999 filed as Exhibit 3.3 to the Company's Form 10-KSB
                      for the year ended June 30, 1999.

         3.3.1        Certificate of Amendment to the Certificate of Designation
                      of Series A  Convertible  Preferred  Stock  filed with the
                      Secretary  of State of  Colorado on December 7, 1999 filed
                      as Exhibit 3.3.1 to the Company's  Form 8-K dated December
                      13, 1999.

         3.4          Certificate   of   Designation  of  Series  B  Convertible
                      Preferred  Stock  filed  with  the  Secretary  of State of
                      Colorado  on  December 7, 1999 filed as Exhibit 3.4 to the
                      Company's Form 8-K dated December 13, 1999.

         4.1          Form of Certificate evidencing common stock of the Company
                      filed  as  Exhibit  3.1  to  the  Company's   Registration
                      Statement on Form 10-SB, as amended.

         4.3          Form of 12%  Promissory  Note  with  Non-Detachable  Stock
                      Purchase  Warrants  Due  March  31,  2001 as  amended  and
                      restated   (aggregate  of  $100,000   principal  with  two
                      lenders)  (individual  agreements  differ as to payee) and
                      filed as Exhibit 4.3 to the Company's  Form 10-KSB for the
                      year ended June 30, 1998.

         4.4          Form of  Stock  Purchase  Warrant  dated  April  30,  1997
                      granted to five persons  exercisable  into an aggregate of
                      150,000  common  shares at $0.75 per share until April 30,
                      2002  (Individual  warrants differ as to holder and number
                      of  shares)   filed  as  Exhibit  3.4  to  the   Company's
                      Registration Statement on Form 10-SB, as amended.

         4.5          Form of Stock Purchase Warrant dated June 30, 1997 granted
                      to  three  investors  exercisable  into  an  aggregate  of
                      200,000  common  shares at $1.25 per share  until June 30,
                      2002 filed as Exhibit  3.5 to the  Company's  Registration
                      Statement on Form 10-SB, as amended.

                                       26
<PAGE>

         4.6          Form of Stock  Purchase  Warrant  dated  October  27, 1997
                      granted to two investors  exercisable into an aggregate of
                      50,000  common  shares at $1.25 per share until  September
                      30, 2002  (individual  warrants are for 25,000 shares each
                      and  differ  as to  holder)  filed as  Exhibit  4.6 to the
                      Company's  Form 10-QSB for the quarter ended  December 31,
                      1997.

         4.7          Form of Stock  Purchase  Warrant  dated  December  9, 1997
                      granted to four  persons  for bank  guarantee  exercisable
                      into an  aggregate of 250,000  common  shares at $1.25 per
                      share until  September 30, 2002  (individual  warrants are
                      for 62,500  shares each and differ as to holder).  Holders
                      include officers/directors James Stein and James A. Barnes
                      and director  Jerry E. Polis.  Filed as Exhibit 4.7 to the
                      Company's  Form 10-QSB for the quarter ended  December 31,
                      1997.

         4.8          Form of Stock  Purchase  Warrant  dated  December 12, 1997
                      granted to three investors  exercisable  into an aggregate
                      of 200,000 common shares at $1.25 per share until December
                      31,  2002  (individual  warrants  differ as to number  and
                      holder).  Officer/director  James A. Barnes is holder of a
                      warrant on 20,000 of these shares. Filed as Exhibit 4.8 to
                      the Company's  Form 10-QSB for the quarter ended  December
                      31, 1997.

         4.9          Form of unsecured 12%  Subordinated  Promissory  Notes due
                      June 30,  2000  granted  to  investors  (individual  notes
                      differ as to date, principal amount and holder).  Filed as
                      Exhibit 4.9 to the  Company's  Form 10-QSB for the quarter
                      ended December 31, 1997.

         4.10         Form of Stock Purchase Warrant granted to 12% Subordinated
                      Promissory  Note  holders  (at the rate of warrants on 500
                      common  shares for each  $1,000 of notes)  exercisable  at
                      $1.25 per  common  share  until  December  31,  2000 (each
                      individual  warrant  differs as to number of shares,  date
                      and holder).  Filed as Exhibit 4.10 to the Company's  Form
                      10-QSB for the quarter ended December 31, 1997.

         4.11         Form of unsecured 6% Convertible  Subordinated  Promissory
                      Notes  due June 30,  2001  (individual  notes  aggregating
                      $525,000  were granted to four  investors and differ as to
                      principal amount and holder). Filed as Exhibit 4.11 to the
                      Company's Form 8-K dated May 21, 1998.

         4.12         Form of Stock Purchase  Warrant  granted to 6% Convertible
                      Subordinated  Promissory  Note holders (on an aggregate of
                      262,500  common  shares)  exercisable  at $1.25 per common
                      share  until  April  30,  2003  (each  individual  warrant
                      differs  as to  number  of shares  and  holder).  Filed as
                      Exhibit 4.12 to the Company's Form 8-K dated May 21, 1998.

         4.13         Form of Stock Purchase  Warrant  granted to 6% Convertible
                      Subordinated  Promissory  Note holders (on an aggregate of
                      262,500  common  shares)  exercisable  at $2.00 per common
                      share  until  April  30,  2003  (each  individual  warrant
                      differs  as to  number  of shares  and  holder).  Filed as
                      Exhibit 4.13 to the Company's Form 8-K dated May 21, 1998.

         4.14         Stock  Purchase  Warrant  between  the Company and Jackson
                      Strategic,  Inc.  dated May 18,  1998 (for  50,000  shares
                      exercisable  at $1.75 per share)  filed as Exhibit 4.14 to
                      the  Company's  Form  10-KSB  for the year  ended June 30,
                      1998.

         4.15         Stock Purchase  warrant  between the Registrant and Viking
                      Group,  LLC,  dated  October 20, 1998 (for 200,000  shares
                      exercisable  at $0.75 per share)  filed as Exhibit 4.15 to
                      the  Company's  Registration  Statement  on Form S-3 dated
                      October 27, 1998.

         4.16         Form of Stock  Purchase  Warrant  granted in December 1998
                      and January 1999 to seven  investors  exercisable  into an
                      aggregate  of  500,000  common  shares  at $1.00 per share
                      until December 31, 2003 (individual  warrants differ as to
                      number,  date and  holder)  filed as  Exhibit  4.16 to the
                      Company's  Form 10-QSB for the quarter ended  December 31,
                      1998.  Officer/director  James A.  Barnes is the  indirect
                      holder of a warrant on 25,000 of these shares.

         4.17         Note Purchase Agreement between the Company's wholly-owned
                      subsidiary  (ValueStar,   Inc.)  and  three  institutional
                      investors  dated March 31,  1999 filed as Exhibit  4.17 to
                      the Company's report on Form 8-K dated April 13, 1999.

                                       27
<PAGE>

         4.17.1       First Amendment to Note Purchase Agreement amendment dated
                      September  20, 1999 between the Company and the  Company's
                      wholly-owned   subsidiary  (ValueStar,   Inc.)  and  three
                      institutional  investors  filed as  Exhibit  4.17.1 to the
                      Company's Form 10-KSB for the year ended June 30, 1999.

         4.17.2       Second  Amendment to Note Purchase  Agreement  between the
                      Company's wholly-owned  subsidiary  (ValueStar,  Inc.) and
                      three institutional investors dated December 8, 1999 filed
                      as Exhibit 4.17.2 to the Company's Form 8-K dated December
                      13, 1999.

         4.18         Form of 8%  Senior  Note  dated  March  31,  1999  between
                      ValueStar,  Inc. and three institutional  investors for an
                      aggregate of $2.45 million  (individual notes differ as to
                      holder and amount)  filed as Exhibit 4.18 to the Company's
                      report on Form 8-K dated April 13, 1999.

         4.19         Shareholder   Agreement   between   the   Company,   three
                      institutional  investors and certain  stockholders  of the
                      Company  dated March 31, 1999 filed as Exhibit 4.19 to the
                      Company's report on Form 8-K dated April 13, 1999.

         4.19.1       Waiver Agreement between the Company,  three institutional
                      investors  and certain  stockholders  of the Company dated
                      July 21,  1999  filed as Exhibit  4.19.1 to the  Company's
                      Form 10-KSB for the year ended June 30, 1999.

         4.19.2       Second  Amendment  to  Shareholder  Agreement  between the
                      Company,   three   institutional   investors  and  certain
                      stockholders  of the Company dated  December 8, 1999 filed
                      as  Exhibit  4.19.2  to the  Company's  report on Form 8-K
                      dated December 13, 1999.

         4.19.3       Waiver   Agreement   between   the   Company   and   three
                      institutional  investors  dated  December 8, 1999 filed as
                      Exhibit  4.19.3 to the Company's  report on Form 8-K dated
                      December 13, 1999.

         4.20         Warrant  Purchase  Agreement  between the  Company,  three
                      institutional  investors and certain  stockholders  of the
                      Company  dated March 31, 1999 filed as Exhibit 4.20 to the
                      Company's report on Form 8-K dated April 13, 1999.

         4.21         Form of A, B and C Warrants issued by the Company to three
                      institutional  investors dated March 31, 1999  (individual
                      warrants  differ as to holder and number) filed as Exhibit
                      4.21 to the  Company's  report on Form 8-K dated April 13,
                      1999.

         4.22         Security Agreement dated March 31, 1999 between ValueStar,
                      Inc. and three  institutional  investors  filed as Exhibit
                      4.22 to the  Company's  report on Form 8-K dated April 13,
                      1999.

         4.23         Trademark  Security Agreement dated March 31, 1999 between
                      ValueStar, Inc. and three institutional investors filed as
                      Exhibit  4.23 to the  Company's  report  on Form 8-K dated
                      April 13, 1999.

         4.24         Form of Stock Purchase Warrant dated March 31, 1999 issued
                      to two  individuals  by the  Company for an  aggregate  of
                      152,728  shares of common  stock at an  exercise  price of
                      $1.375 (individual  warrants differ as to holder) filed as
                      Exhibit  4.24 to the  Company's  report  on Form 8-K dated
                      April 13, 1999.

         4.24.1       Form of First  Amendment to Stock  Purchase  Warrant dated
                      March 31, 1999. The Amendment is dated  effective July 15,
                      1999 and filed as Exhibit  10.12.1 to the  Company's  Form
                      10-KSB for the year ended June 30, 1999.

         4.25         Stock  Purchase  Warrant  dated June 30, 1999  between the
                      Company and Davric  Corporation for an aggregate of 30,000
                      common  shares  at an  exercise  price of $1.50  per share
                      filed as Exhibit 4.25 to the Company's Form 10-KSB for the
                      year ended June 30, 1999.

                                       28
<PAGE>

         4.26         Form of Series A preferred stock Purchase  Agreement dated
                      as of July 21, 1999 between the Company and  purchasers of
                      Series A stock  (including two directors) filed as Exhibit
                      4.26 to the Company's  Form 10-KSB for the year ended June
                      30, 1999.

         4.27         Form of  Registration  Rights  Agreement and  Shareholders
                      Agreement  Amendment  dated  July  21,  1999  between  the
                      Company,  senior note holders,  two directors and Series A
                      stock  purchasers  filed as Exhibit 4.27 to the  Company's
                      Form 10-KSB for the year ended June 30, 1999.

         4.28         Form of Series B Preferred Stock Purchase  Agreement dated
                      as of  December  8, 1999  between the Company and Series B
                      stock  purchasers  filed as Exhibit 4.28 to the  Company's
                      Form 8-K dated December 13, 1999.

         4.29         Form of Investors Rights Agreement dated as of December 8,
                      1999 between the Company,  three senior note holders,  two
                      directors and Series A and Series B stock purchasers filed
                      as Exhibit 4.29 to the Company's  Form 8-K dated  December
                      13, 1999.

         4.29.1       First  Amended  ValueStar   Corporation   Investor  Rights
                      Agreement  dated as of March 24, 2000  between the Company
                      and  certain  Series  A,  Series B and 585 Unit  Investors
                      filed as Exhibit  4.29.1 to the Company's  Form 10-QSB for
                      the quarter ended March 31, 2000.

         4.30         Stock Purchase  Warrant dated December 8, 1999 between the
                      Company and Jackson  Strategic,  Inc.  for an aggregate of
                      75,000  common  shares at $2.50 per share filed as Exhibit
                      4.30 to the Company's Form 8-K dated December 13, 1999.

         4.31         Form of Securities  Purchase  Agreement  dated as of March
                      24, 2000 between the Company and 585 Unit Investors  filed
                      as  Exhibit  4.31 to the  Company's  Form  10-QSB  for the
                      quarter ended March 31, 2000.

         4.32         Form of Stock Purchase  Warrant dated as of March 24, 2000
                      between  the  Company  and 585  Unit  Investors  filed  as
                      Exhibit 4.32 to the Company's  Form 10-QSB for the quarter
                      ended March 31, 2000.

         10.1         Research and Rating Agreement  between the Public Research
                      Institute of San Francisco State University and ValueStar,
                      Inc.  effective April 30, 1997 filed as Exhibit 6.1 to the
                      Company's Registration Statement on Form 10-SB, as amended

         10.2         1992 Incentive  Stock Option Plan, As Amended and filed as
                      Exhibit 6.2 to the  Company's  Registration  Statement  on
                      Form 10-SB, as amended

         10.2.1       Standard  form of Incentive  Stock  Option Plan  Agreement
                      filed  as  Exhibit  6.2.1  to the  Company's  Registration
                      Statement on Form 10-SB, as amended

         10.3         1992 Non-Statutory Stock Option Plan, As Amended and filed
                      as Exhibit 6.3 to the Company's  Registration Statement on
                      Form 10-SB, as amended

         10.3.1       Standard form of Non-Statutory Stock Option Plan Agreement
                      filed  as  Exhibit  6.3.1  to the  Company's  Registration
                      Statement on Form 10-SB, as amended

         10.4         Employment  Agreement  between the Company and James Stein
                      dated  as of July 1,  1998  filed as  Exhibit  10.4 to the
                      Company's Form 10-KSB for the year ended June 30, 1998.

         10.5         Form of Office Lease between the Company's  Subsidiary and
                      Broadlake  Partners  dated April 20,  1999,  December  30,
                      1999,  January 27, 2000 and March 3, 2000 filed as Exhibit
                      10.12.1 to the  Company's  Form  10-KSB for the year ended
                      June 30, 1999.

         10.6         (not used)

                                       29
<PAGE>

         10.7         1996 Stock Option Plan,  as amended and restated and filed
                      as Exhibit 6.7 to the Company's  Registration Statement on
                      Form 10-SB, as amended

         10.7.1       Standard  form of  1996  Stock  Plan  Agreement  filed  as
                      Exhibit 6.7.1 to the Company's  Registration  Statement on
                      Form 10-SB, as amended

         10.8         1997  Stock  Option  Plan  filed  as  Exhibit  6.8  to the
                      Company's Registration Statement on Form 10-SB, as amended

         10.8.1       Standard  form of  1997  Stock  Plan  Agreement  filed  as
                      Exhibit 6.8.1 to the Company's  Registration  Statement on
                      Form 10-SB, as amended

         10.8.2       First  Amendment to 1997 Stock Option Plan dated March 31,
                      1998 and filed as  Exhibit  10.8.2 to the  Company's  Form
                      10-KSB for the year ended June 30, 1998.

         10.8.3       Second  Amendment  to 1997 Stock  Option Plan dated August
                      31, 1999 and Approved by the  Shareholders on November 19,
                      1999 as filed as  Exhibit  10.8.3  to the  Company's  Form
                      10-QSB for the quarter ended March 31, 2000.

         10.9         (not used)

         10.10        Form of  Non-Qualified  Stock Option Agreement dated as of
                      July 6, 1998  between  the  Company  and  three  directors
                      covering  an  aggregate  of  200,000  shares   (individual
                      agreements  vary as to number of shares  and  holder,  Mr.
                      Stein as to 100,000 shares and Mr. Polis and Mr. Barnes as
                      to  50,000  shares  each)  filed as  Exhibit  10.10 to the
                      Company's Form 10-KSB for the year ended June 30, 1998.

         10.11        Promissory Note between the Company and Davric Corporation
                      dated  August  14,  1998  filed  as  Exhibit  10.11 to the
                      Company's Form 10-KSB for the year ended June 30, 1998.

         10.12        Promissory Note between the Company and Davric Corporation
                      dated  November  15,  1998 filed as  Exhibit  10.12 to the
                      Company's  Form 10-QSB for the quarter ended  December 31,
                      1998.

         10.12.1      First Amendment to Promissory Note between the Company and
                      Davric  Corporation  dated June 30,  1999 filed as Exhibit
                      10.12.1 to the  Company's  Form  10-KSB for the year ended
                      June 30, 1999.

         10.13        Press release issued by the Company on April 1, 1999 filed
                      as Exhibit 10.13 to the Company's Form 8-K dated April 13,
                      1999.

         10.14        Press  release  issued by the  Company on December 9, 1999
                      share  filed as Exhibit  10.14 to the  Company's  Form 8-K
                      dated December 13, 1999.

         10.15        Press  release  issued by the Company on December 13, 1999
                      filed as  Exhibit  10.15 to the  Company's  Form 8-K dated
                      December 13, 1999.

         10.16        Non-Qualified Stock Option Agreement dated as of September
                      29,  1999  between the Company and James Stein as filed as
                      Exhibit 10.16 to the Company's Form 10-QSB for the quarter
                      ended December 31, 1999.

         10.17        Non-Qualified  Stock Option Agreement dated as of November
                      6, 1999  between the Company and Joshua M. Felser as filed
                      as  Exhibit  10.17 to the  Company's  Form  10-QSB for the
                      quarter ended December 31, 1999.

         10.18        Non-Qualified  Stock Option  Agreement dated as of January
                      28,  2000  between the Company and Robert Sick as filed as
                      Exhibit 10.18 to the Company's Form 10-QSB for the quarter
                      ended March 31, 2000.

                                       30
<PAGE>

         10.19        Non-Qualified  Stock Option  Agreement dated as of January
                      28,  2000  between the Company and Robert Sick as filed as
                      Exhibit 10.19 to the Company's Form 10-QSB for the quarter
                      ended March 31, 2000.

         10.20        Incentive  Stock Option  Agreement dated as of January 28,
                      2000  between  the  Company  and  Robert  Sick as filed as
                      Exhibit 10.20 to the Company's Form 10-QSB for the quarter
                      ended March 31, 2000.

         10.21*       2000  Equity  Incentive  Plan  adopted  by  the  Board  of
                      Directors on July 21, 2000.

         10.21.1*     Standard  form of stock  option  agreement  under the 2000
                      Equity Incentive Plan.

         10.22*       Lease  Agreement  between  the  Company's  subsidiary  and
                      Amplicon Financial dated March 23, 2000.

         10.23*       Master Loan and Security  Agreement and Form of Promissory
                      Note between the Company and Transamerica  Business Credit
                      Corporation dated April 7, 2000.

         10.23.1*     Stock  Purchase  Warrant  between  the  Company  and  TBCC
                      Funding  Trust II for an  aggregate  of  22,802  shares at
                      $6.14.

         10.24*       Database   License   Agreement   between   the   Company's
                      subsidiary  and  InfoUSA.com,  Inc.  dated June 14,  2000.
                      [Portions of this Exhibit have been omitted  (based upon a
                      request for  confidential  treatment)  and have been filed
                      separately  with the  Securities  and Exchange  Commission
                      pursuant to Rule 24b-2)]

         10.25*       Service Agreement between the Company and Golden Retriever
                      Systems,  L.L.C.  dated  June 1, 2000.  [Portions  of this
                      Exhibit  have  been  omitted  (based  upon a  request  for
                      confidential  treatment)  and have been  filed  separately
                      with the  Securities and Exchange  Commission  pursuant to
                      Rule 24b-2)]

         10.26*       Incentives   Management   Program  Agreement  between  the
                      Company's  subsidiary  and  Netcentives  Inc. dated May 9,
                      2000.  [Portions of this Exhibit have been omitted  (based
                      upon a request for  confidential  treatment) and have been
                      filed   separately   with  the   Securities  and  Exchange
                      Commission pursuant to Rule 24b-2)]

         21.1*        Subsidiary of the Company

         23.1*        Consent of Moss Adams LLP

         27.1*        Financial Data Schedule

____________________________

         *        Filed herewith.
         (1)      Indicates management contract or compensatory plan.

(b) Reports on Form 8-K.

None
                                       31
<PAGE>



                             Form 10KSB

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


                              VALUESTAR CORPORATION

                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                        CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 2000 AND 1999

--------------------------------------------------------------------------------
<PAGE>

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






                                    CONTENTS

                                                                            PAGE

INDEPENDENT AUDITOR'S REPORT.................................................F-1


CONSOLIDATED FINANCIAL STATEMENTS

     Balance sheets..........................................................F-2

     Statements of operations................................................F-3

     Statements of stockholders' equity......................................F-4

     Statements of cash flows................................................F-5

     Notes to financial statements...........................................F-7


--------------------------------------------------------------------------------
<PAGE>


INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
ValueStar Corporation

We have  audited  the  accompanying  consolidated  balance  sheets of  ValueStar
Corporation,  as of  June  30,  2000  and  1999,  and the  related  consolidated
statements of  operations,  stockholders'  equity,  and cash flows for the years
then ended.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material   respects,   the  financial  position  of  ValueStar
Corporation  as of June 30, 2000 and 1999, and the results of its operations and
cash flows for the years then  ended,  in  conformity  with  generally  accepted
accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
ValueStar  Corporation will continue as a going concern. As discussed in Note 2,
the Company's  recurring  losses and its inability to generate  sufficient  cash
flows from operations to meet its obligations raises substantial doubt about the
Company's  ability to continue as a going concern.  The  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


                                         /s/ Moss Adams LLP


Santa Rosa, California
August 3, 2000, except for Note 15,
      as to which the date is September 22, 2000


                                                                        Page F-1

<PAGE>
<TABLE>
                                                                               VALUESTAR CORPORATION
                                                                         CONSOLIDATED BALANCE SHEETS
                                                                              June 30, 2000 and 1999
----------------------------------------------------------------------------------------------------
<CAPTION>

                                                ASSETS
                                                                             2000           1999
                                                                        ------------    ------------
<S>                                                                     <C>             <C>
CURRENT ASSETS
     Cash                                                               $  5,287,385    $    270,149
     Receivables                                                             454,233         409,806
     Inventory                                                                16,898           4,008
     Prepaid expenses                                                        416,573          59,446
                                                                        ------------    ------------
             Total current assets                                          6,175,089         743,409

PROPERTY AND EQUIPMENT                                                     5,415,358         501,605

RESTRICTED CASH                                                              296,000            --

DEFERRED COSTS                                                                23,949         100,839

OTHER ASSETS                                                                  89,489         194,130
                                                                        ------------    ------------
             Total assets                                               $ 11,999,885    $  1,539,983
                                                                        ============    ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                                   $  1,665,030    $    461,825
     Accrued liabilities and other payables                                1,254,035         189,759
     Deferred revenues                                                       137,520          27,430
     Note payable - shareholder                                                 --           280,000
     Current portion of capitalized leases                                   285,458          30,018
     Current portion of long-term debt                                       450,503       1,032,664
                                                                        ------------    ------------
             Total current liabilities                                     3,792,546       2,021,696

CAPITAL LEASE OBLIGATIONS, net of current portion                            408,492         113,541

LONG-TERM DEBT, net of current portion                                       853,997       1,795,438
                                                                        ------------    ------------
             Total liabilities                                             5,055,035       3,930,675
                                                                        ------------    ------------

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 at June 30, 2000 (liquidation
          preference of $10.00 per share)                                         56            --
         800,000 shares designated Series B Convertible, with 688,586
          shares issued and oustanding at June 30, 2000 (liquidation
          preference of $17.50 to $30.00 per share, see note 10)                 172            --
     Common stock, $.00025 par value; 50,000,000 shares
         authorized, 15,587,543 and 9,374,132 shares issued and
         outstanding in 2000 and 1999                                          3,897           2,344
     Additional paid-in capital                                           32,162,473       6,485,373
     Accumulated deficit                                                 (25,221,748)     (8,878,409)
                                                                        ------------    ------------
             Total stockholders' equity (deficit)                          6,944,850      (2,390,692)
                                                                        ------------    ------------
             Total liabilities and stockholders' equity                 $ 11,999,885    $  1,539,983
                                                                        ============    ============
<FN>
See accompanying notes.
----------------------------------------------------------------------------------------------------
                                                                                            Page F-2
</FN>
</TABLE>
<PAGE>

<TABLE>

                                                             VALUESTAR CORPORATION
                                             CONSOLIDATED STATEMENTS OF OPERATIONS
                                                Years Ended June 30, 2000 and 1999

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

<CAPTION>
                                                           2000           1999
                                                      ------------    ------------
<S>                                                   <C>             <C>
REVENUES                                              $  2,090,773    $  2,329,219
                                                      ------------    ------------
OPERATING EXPENSES
     Cost of revenues                                    1,250,189       1,035,401
     Selling                                             3,797,530       1,776,390
     Marketing and promotion                             3,037,502         778,435
     Product and content development                     5,860,062            --
     General and administrative                          2,444,516       1,734,564
     Stock-based compensation                               77,000          68,000
                                                      ------------    ------------
                                                        16,466,799       5,392,790
                                                      ------------    ------------
LOSS FROM OPERATIONS                                   (14,376,026)     (3,063,571)
                                                      ------------    ------------
OTHER INCOME (EXPENSES)
     Interest income                                       279,785            --
     Interest expense                                   (2,076,519)       (395,890)
     Miscellaneous                                          (2,702)           (283)
                                                      ------------    ------------
                                                        (1,799,436)       (396,173)
                                                      ------------    ------------
NET LOSS                                               (16,175,462)     (3,459,744)

BENEFICIAL CONVERSION ON SERIES B PREFERRED STOCK      (11,650,255)           --
ACCRUED DIVIDENDS ON SERIES A PREFERRED STOCK             (167,877)           --
                                                      ------------    ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS (NOTE 13)   $(27,993,594)   $ (3,459,744)
                                                      ============    ============
LOSS PER COMMON SHARE                                 $      (2.41)   $      (0.39)
                                                      ============    ============
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING           11,630,262       8,966,203
                                                      ============    ============

<FN>

See accompanying notes.

----------------------------------------------------------------------------------
                                                                          Page F-3
</FN>
</TABLE>
<PAGE>

<TABLE>

                                                                                      VALUESTAR CORPORATION
                                                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                                         Years Ended June 30, 2000 and 1999

-----------------------------------------------------------------------------------------------------------
<CAPTION>

                                                        Preferred Stock                 Common Stock
                                                  ---------------------------   ---------------------------
                                                   Shares           Amount          Shares         Amount
                                                   ------           ------          ------         ------
<S>                                                  <C>         <C>               <C>         <C>
Balance, June 30, 1998                                    --     $       --        8,682,496   $      2,171

Sale of stock at $1.00 per unit,
       consisting of one share and one
       warrant                                            --             --          500,000            125
Exercise of warrants at $0.75 per
       share                                              --             --          150,000             37
Options exercised at $0.75 per share                      --             --           15,000              4
Conversion of debt to stock
       at $1.00 per share                                 --             --           26,636              7
Issuance of warrants with debt                            --             --             --             --
Issuance of warrants for services                         --             --             --             --
Issuance of options for services                          --             --             --             --
Net loss                                                  --             --             --             --
                                                  ------------   ------------   ------------   ------------
Balance, June 30, 1999                                    --             --        9,374,132          2,344

Issuance of Series A Convertible
       Preferred Stock, net of issuance
       costs of $40,000                                225,000             56           --             --
Accrued 8% dividends on Series A
       Preferred Stock                                    --             --             --             --
Issuance of Series B Convertible
       Preferred Stock, net of issuance
       costs of $75,000                                688,586            172           --             --
Stock issued on conversion of 6%
       convertible notes and interest                     --             --          546,274            137
Stock issued on exercise of warrants
       reducing 12% subordinated notes                    --             --          525,000            131
Stock issued on exercise of A and
       B warrants retiring 8% Senior
       Secured Notes                                      --             --        1,977,382            494
Stock issued at $5.85 per share, net
       of issuance costs of $25,000                       --             --        1,125,767            282
Stock issued at $5.85 per share on
       cashless call of C warrants                        --             --          184,320             46
C warrant call proceeds applied to
       exercise A warrants on a
       cashless basis                                     --             --           77,382             19
Stock issued on exercise of options
       and warrants                                       --             --        1,752,479            438
Issuance of stock in connection with
       contract                                           --             --           24,807              6
Value assigned to warrants granted in
               connection with equipment note             --             --             --             --
Unearned stock-based compensation                         --             --             --             --
Net loss                                                  --             --             --             --
                                                  ------------   ------------   ------------   ------------
Balance, June 30, 2000                                 913,586   $        228     15,587,543   $      3,897
                                                  ============   ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>

                                                    Additional
                                                     Paid-in         Accumulated
                                                      Capital          Deficit        Total
                                                      -------          -------        -----
<S>                                                 <C>             <C>             <C>
Balance, June 30, 1998                              $  4,247,160    $ (5,418,665)   $ (1,169,334)

Sale of stock at $1.00 per unit,
       consisting of one share and one
       warrant                                           499,875            --           500,000
Exercise of warrants at $0.75 per
       share                                             112,463            --           112,500
Options exercised at $0.75 per share                      11,246            --            11,250
Conversion of debt to stock
       at $1.00 per share                                 26,629            --            26,636
Issuance of warrants with debt                         1,520,000            --         1,520,000
Issuance of warrants for services                         60,000            --            60,000
Issuance of options for services                           8,000            --             8,000
Net loss                                                    --        (3,459,744)     (3,459,744)
                                                    ------------    ------------    ------------
Balance, June 30, 1999                                 6,485,373      (8,878,409)     (2,390,692)

Issuance of Series A Convertible
        Preferred Stock, net of issuance
        costs of $40,000                               2,209,944                       2,210,000
Accrued 8% dividends on Series A
               Preferred Stock                           167,877        (167,877)           --
Issuance of Series B Convertible
       Preferred Stock, net of issuance
       costs of $75,000                               11,975,083            --        11,975,255
Stock issued on conversion of 6%
       convertible notes and interest                    546,036            --           546,173
Stock issued on exercise of warrants
       reducing 12% subordinated notes                   656,119            --           656,250
Stock issued on exercise of A and
        B warrants retiring 8% Senior
       Secured Notes                                   1,449,506            --         1,450,000
Stock issued at $5.85 per share, net
       of issuance costs of $25,000                    6,560,492            --         6,560,774
Stock issued at $5.85 per share on
       cashless call of C warrants                           (46)           --              --
C warrant call proceeds applied to
       exercise A warrants on a
       cashless basis                                        (19)           --              --
Stock issued on exercise of options
       and warrants                                    1,820,114            --         1,820,552
Issuance of stock in connection with
       contract                                           99,994            --           100,000
Value assigned to warrants granted in
       connection with equipment note                    115,000            --           115,000
Unearned stock-based compensation                         77,000            --            77,000
Net loss                                                    --       (16,175,462)    (16,175,462)
                                                    ------------    ------------    ------------
Balance, June 30, 2000                              $ 32,162,473    $(25,221,748)   $  6,944,850
                                                    ============    ============    ============
<FN>

See accompanying notes.

-------------------------------------------------------------------------------------------------
                                                                                         Page F-4
</FN>
</TABLE>
<PAGE>

<TABLE>

                                                                          VALUESTAR CORPORATION
                                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                             Years Ended June 30, 2000 and 1999

-----------------------------------------------------------------------------------------------
<CAPTION>
                                                                       2000            1999
                                                                   ------------    ------------
<S>                                                                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                      $(16,175,462)   $ (3,459,744)
     Adjustments to reconcile net loss to net
         cash from operating activities:
             Depreciation                                               882,093          89,988
             Amortization of intangible assets                          174,361           7,657
             Amortization of bond discount                            1,509,667          84,645
             Change in allowance for doubtful accounts                      965         (30,921)
             Accrued interest included in long-term debt                 12,160          29,861
             Warrants and options issued for services                    77,000          68,000
             Loss on disposal of assets                                  33,899            --
         Changes in:
             Receivables                                                (45,393)        (17,516)
             Inventory                                                  (12,890)         20,388
             Prepaid expenses                                          (257,127)        (55,544)
             Deferred costs                                              76,890          30,091
             Other assets                                               (69,682)        (17,890)
             Accounts payable                                         1,203,206         264,415
             Accrued liabilities and other payables                   1,064,276          44,314
             Deferred revenues                                          110,090             410
                                                                   ------------    ------------
                 Net cash from operating activities                 (11,415,947)     (2,941,846)
                                                                   ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                             (5,239,157)       (381,326)
                                                                   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of preferred stock, net of issuance cost     12,935,255            --
     Proceeds from sale of common stock, net of issuance cost         8,381,252         623,750
     Proceeds from senior debt                                             --         2,450,000
     Debt acquisition fee                                                  --          (140,000)
     Increase in restricted cash                                       (296,000)           --
     Net borrowings (repayments) under line of credit                      --          (250,000)
     Proceeds from debt                                               1,528,737         781,150
     Payments on capital leases                                         (40,196)        (13,908)
     Payments on debt                                                  (836,708)       (256,275)
                                                                   ------------    ------------
                 Net cash from financing activities                  21,672,340       3,194,717
                                                                   ------------    ------------
NET INCREASE (DECREASE) IN CASH                                       5,017,236        (128,455)
CASH, beginning of year                                                 270,149         398,604
                                                                   ------------    ------------
CASH, end of year                                                  $  5,287,385    $    270,149
                                                                   ============    ============
<FN>

See accompanying notes.

------------------------------------------------------------------------------------------------
                                                                                        Page F-5
</FN>
</TABLE>

<PAGE>

<TABLE>

                                                                          VALUESTAR CORPORATION
                                              CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                                             Years Ended June 30, 2000 and 1999

------------------------------------------------------------------------------------------------
<CAPTION>
                                                                            2000         1999
                                                                         ----------   ----------
<S>                                                                      <C>          <C>
SUPPLEMENTAL CASH-FLOW INFORMATION
     Cash paid during the year for:
         Interest                                                        $  380,369   $  272,425
         Income taxes                                                    $    2,702   $      800
     Non-cash investing and financing activities:
         Equipment acquired under capital leases                         $  590,588   $  157,467
         Warrants issued with debt                                       $  115,000   $   20,000
         Accrued dividends on Series A Preferred Stock                   $  167,877   $     --
         8% Secured Noted converted to Series B Preferred Stock          $1,000,000   $     --
         Shareholder advances converted to Series B Preferred Stock      $  250,000   $     --
         12% Notes converted upon warrant exercise                       $  625,000   $     --
         6% Convertible Notes and interest converted to equity           $  546,274   $   25,000
         8% Secured Notes converted upon warrant exercise                $1,450,000   $     --
         Call of C warrants converted to stock and additional warrants   $1,093,754   $     --
         12% Subordinated Notes converted upon warrant exercise          $   31,250   $     --

<FN>
See accompanying notes.

------------------------------------------------------------------------------------------------
                                                                                        Page F-6
</FN>
</TABLE>
<PAGE>

                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


NOTE 1 -  DESCRIPTION  OF  OPERATIONS  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING
POLICIES

Description of 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.

Principles of consolidation - The consolidated  financial statements include the
accounts of Valuestar Corporation and its wholly owned subsidiary.  All material
intercompany transactions and balances have been eliminated.

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.

Property  and  equipment  -  Property  and  equipment  are  stated  at cost  and
depreciated using the straight-line method over estimated useful lives of two to
five years.

Income  taxes - Income taxes are  recognized  using  enacted tax rates,  and are
composed  of  taxes  on  financial   accounting  income  that  is  adjusted  for
requirements  of current  tax law and  deferred  taxes.  Deferred  taxes are the
expected future tax consequences of temporary  differences between the financial
statement carrying amounts and tax bases of existing assets and liabilities.

Use of estimates - The  preparation of financial  statements in conformity  with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities,  revenues and
expenses,  and the disclosure of contingent assets and liabilities.  The amounts
estimated could differ from actual results.

Revenue   recognition  -  The  Company's   revenues  have  been  primarily  from
certification  and rating fees, and are recognized when all related services are
provided to the customer. Rating services are primarily related to a survey of a
business'  customers 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 certification fee to a percentage fee based on the value of
future  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 percentage  fees or to register  buyers for
benefits and the Company will not collect fees or incur  benefit costs until the
systems are  operational.  In the future the Company expects the majority of its
revenues to be derived from commissions.

Due to the  change  in the  Company's  program,  the  Company  expects  it  will
recognize  commission  revenues as reported and earned.  Commencing July 1, 2000
the Company also intends to recognize  any fixed fees on a  straight-line  basis
over the term of a participating business license,  generally one year. Costs of
benefits  provided to buyers will be recognized  as provided,  with reserves for
any future benefits obligations.

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  fiscal year 2001. The Company intends to recognize  revenues from
its new revenue model, as described above,  within the guidance  provided by SAB
101.

--------------------------------------------------------------------------------
                                                                        Page F-7
<PAGE>

                                                           VALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


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."

Concentration of credit risk - Financial instruments  potentially subjecting the
Company to concentrations of credit risk consist primarily of demand deposits in
excess of FDIC limits and trade  receivables.  The Company's demand deposits are
placed  with  major  financial  institutions.  The risk  associated  with  trade
receivables  is  mitigated  by the  Company's  ability  to remove  certification
information from the customer's premises. For the periods presented,  there were
no customers that accounted for over 10% of revenues generated by the Company or
of accounts receivable.

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  share  number is not  presented  because  the
inclusion of common stock  equivalents in the computation would be antidilutive.
Common stock equivalents  associated with convertible preferred stock, warrants,
stock options and convertible  notes,  which are exercisable  into 9,932,092 and
6,270,977 shares of common stock at June 30, 2000 and 1999, respectively,  could
potentially dilute earnings per share in future years.

Fair value of financial  instruments - The Company measures its financial assets
and liabilities in accordance with generally accepted accounting principles. The
fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current  transaction  between willing parties.  For certain of
the Company's  financial  instruments,  including cash,  accounts receivable and
accounts  payable,  the carrying amount  approximates  fair value because of the
short maturities.  The carrying amount of the Company's short-term and long-term
debt approximates fair value because interest rates available to the Company for
issuance of similar debt with similar terms and maturities are approximately the
same.

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

Stock-based  compensation  -  The  Company  accounts  for  stock-based  employee
compensation  arrangements  in  accordance  with the  provisions  of  Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB No. 25"),  and complies  with the  disclosure  provisions  of Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation"  ("SFAS No. 123"). Under APB No. 25,  compensation  expense is the
excess,  if any, of the fair value of the Company's stock at a measurement  date
over the amount that must be paid to acquire the stock.  SFAS No. 123 requires a
fair value  method to be used when  determining  compensation  expense for stock
options  and  similar  equity  instruments.  SFAS No.  123  permits a company to
continue to use APB No. 25 to account for stock-based compensation to employees,
but proforma disclosures of net income and earnings per share must be made as if
SFAS  No.  123 had  been  adopted  in its  entirety.  Stock  options  issued  to
non-employees are valued under the provisions of SFAS No 123.

Comparative  figures  -  Certain  amounts  in the  1999  consolidated  financial
statements have been reclassified to conform to the 2000 presentation.

Recent accounting pronouncements - In December 1999, the Securities and Exchange
Commission  issued Staff Accounting  Bulletin No. 101,  "Revenue  Recognition in
Financial  Statements" ("SAB 101"),  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 fiscal year 2001. As described above under "Revenue  Recognition,"
the  Company has  addressed  this issue,  and the Company  intends to  recognize
revenues consistent with the requirements of SAB 101.

On March 31, 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation  No. 44,  "Accounting  for Certain  Transactions  Involving Stock
Compensation"  ("FIN 44"). This statement is effective for certain  transactions
from  December  15,  1998,  and is to be applied  commencing  July 1, 2000.  The
Company is in the process of  determining  the impact,  if any, of FIN 44 on the
reporting of its future operations.

--------------------------------------------------------------------------------
                                                                        Page F-8
<PAGE>

                                                           VALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


NOTE 2 - GOING CONCERN

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, 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.

The  consolidated  financial  statements  have been  prepared on a going concern
basis,  which  contemplates  the  realization  of  assets  and  satisfaction  of
liabilities in the normal course of business.  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.

NOTE 3 - RECEIVABLES

                                                           2000          1999
                                                        ----------    ----------
Trade receivables                                       $  499,277    $  453,885
Less allowance for doubtful accounts                        45,044        44,079
                                                        ----------    ----------
                                                        $  454,235    $  409,806
                                                        ==========    ==========


NOTE 4 - PROPERTY AND EQUIPMENT

                                                           2000          1999
                                                        ----------    ----------
Computer equipment                                      $2,534,733    $  336,575
Website development                                      1,001,000          --
Software                                                   612,793          --
Fixtures and equipment                                     410,498        58,056
Office equipment                                           777,618        14,079
Equipment and software under capital leases                705,903       157,467
Leasehold improvements                                     251,445        46,994
                                                        ----------    ----------
                                                         6,293,990       613,171
Less accumulated depreciation and amortization             878,632       111,566
                                                        ----------    ----------
                                                        $5,415,358    $  501,605
                                                        ==========    ==========


NOTE 5 - DEFERRED COSTS

Deferred costs consist of  direct-response  advertising  programs  consisting of
telemarketing,  printing and mailing costs.  These direct costs are  capitalized
and amortized over a sixty-day  period.  Advertising and promotion costs charged
to expense were  $2,734,265 and $1,273,400 for the years ended June 30, 2000 and
1999.

--------------------------------------------------------------------------------
                                                                        Page F-9
<PAGE>


                                                            ALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


NOTE 6 - ACCRUED LIABILITIES AND OTHER PAYABLES
                                                       2000              1999
                                                    ----------        ----------
Potential contract liability                        $  600,000        $     --
Payroll and payroll taxes                              470,551           118,880
Accrued vacations                                      105,829            32,782
Other                                                   77,655            38,097
                                                    ----------        ----------
                                                    $1,254,035        $  189,759
                                                    ==========        ==========

The Company had entered into a contract  with a third party that  obligated  the
Company to pay a $50,000  penalty each quarter over the  three-year  life of the
agreement if the Company did not generate a defined level of business  activity.
The Company  subsequently  determined to abandon this  contract,  but it remains
liable  for the  quarterly  penalties.  The  $600,000  has been  reflected  as a
liability at June 30, 2000.

NOTE 7 - CAPITAL LEASE OBLIGATIONS

The Company has entered into certain  capital lease  obligations  related to the
purchase of equipment. The leases bear interest at rates ranging from 10% to 24%
and require monthly  payments of principal and interest.  The leases are secured
by the equipment,  and mature through 2004.  Pursuant to an equipment lease, the
Company  agreed to maintain an  irrevocable  $296,000  standby  letter of credit
throughout  the lease term,  which  expires in June 2002.  The bank  issuing the
letter of credit required the Company to maintain  $296,000 on deposit until the
related  lease  expires.  This deposit is reflected  as  restricted  cash on the
balance sheet.

Future minimum lease payments on capital lease obligations are as follows:

                     Year Ending June 30,
                     --------------------

                             2001                            $ 352,148
                             2002                              341,666
                             2003                               92,526
                             2004                               15,118
                                                             ----------

                                                               801,458
Less portion representing interest                             107,508
                                                             ----------
Present value of net minimum lease payments                    693,950
Less current portion                                           285,458
                                                             ----------
                                                             $ 408,492
                                                             ==========

--------------------------------------------------------------------------------
                                                                       Page F-10
<PAGE>

<TABLE>

                                                                                VALUESTAR CORPORATION
                                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

NOTE 8 - LONG-TERM DEBT

<CAPTION>
                                                                                  2000        1999
                                                                               ----------   ----------
<S>                                                                            <C>          <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 $105,417                                                                    $1,071,202   $     --

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                          104,414      150,000

12% Notes; interest is paid monthly, with a balloon payment due in March
2001; net of unamortized note discount of $738; unsecured; $50,000 of the
notes is due a relative of a stockholder and director                              68,011       93,636

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                         60,873       74,875

8% Senior Secured Notes; converted to common and preferred stock during
fiscal 2000                                                                          --      1,034,499

12% Subordinated notes; unsecured notes repaid or converted to stock
during fiscal 2000                                                                   --        973,104

6% Convertible notes; notes repaid or converted to stock during fiscal 2000          --        501,988
                                                                               ----------   ----------
                                                                                1,304,500    2,828,102
Less current portion                                                              450,503    1,032,664
                                                                               ----------   ----------
                                                                               $  853,997   $1,795,438
                                                                               ==========   ==========

</TABLE>

The Company's  $2,450,000 of 8% Senior  Secured Notes Payable  ("Senior  Notes")
that were issued in March 1999 were exchanged for equity  securities  during the
year ended June 30, 2000. In connection with a $1,000,000 principal reduction of
the Senior Notes in December 1999 applied to purchase  57,143 shares of Series B
Preferred  Stock,  the Company  accelerated the amortization of the related note
discount  by  $563,126.  In  connection  with the  reduction  of the  $1,450,000
principal balance of the Senior Notes in March 2000, converted to exercise A and
B warrants for  1,977,382  shares of common  stock,  the Company  amortized  the
balance  of the note  discount  of  $741,022  and  amortized  $153,333  of other
previously  capitalized finance costs. Likewise, on the reduction in certain 12%
Subordinated  Notes by  $625,000  from the  exercise  of  warrants,  the Company
accelerated  the  amortization  of the related  note  discount by $7,982.  These
amortization  accelerations  increased  non-cash  expenses by $1,465,463 for the
year ended June 30, 2000.

During the year ended June 30, 2000 the  Company  called for the  conversion  of
$500,000 of 6% convertible notes with the principal and accrued interest thereby
converted  into 549,274  shares of common stock.  An  additional  $31,250 of 12%
unsecured  notes was applied to exercise  warrants  for 25,000  shares of common
stock.

In connection  with a commitment for $2,000,000 of equipment  financing in April
2000, the Company granted warrants for 22,802 shares of common stock exercisable
until April 2005 at $6.14 per share.  These warrants were valued at $115,000 and
recorded as a note discount that is being  amortized  over the term of the note.
At June 30, 2000, the Company had drawn $1,278,737 on this commitment.

Maturities of long-term debt are as follows:


           Year Ending June 30,
           --------------------

                   2001                              $   450,503
                   2002                                  434,544
                   2003                                  521,639
                   2004                                    3,969
                                                     ------------
                                                     $ 1,410,655
                                                     ============

--------------------------------------------------------------------------------
                                                                       Page F-11
<PAGE>


                                                           VALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


NOTE 9 - INCOME TAXES

The significant temporary differences between the carrying amounts and tax bases
of existing  assets and  liabilities  that give rise to deferred  tax assets and
liabilities  include  deferring  the  deduction,  for tax  purposes,  of various
reserves and accrued but unpaid expenses.

A valuation  allowance  is required  for those  deferred tax assets that are not
likely to be realized.  Realization is dependent upon future earnings during the
period  that  temporary   differences  and  carryforwards  are  expected  to  be
available. Because of the uncertain nature of their ultimate utilization,  based
upon the Company's past performance,  a complete valuation allowance is recorded
against these deferred tax assets.

The Tax Reform Act of 1986,  and the California  Conformity Act of 1987,  impose
restrictions  on the  utilization  of net  operating  losses  in the event of an
"ownership  change," as defined by Section  382 of the  Internal  Revenue  Code.
There has not been a determination  as to whether an ownership  change has taken
place, as defined,  but net-operating losses available to the Company for use in
future years may be limited  because a change in ownership could result from the
issuance of additional stock.

The following table summarizes the components of net deferred tax assets:
                                                     2000               1999
                                                 -----------        -----------

Federal tax loss carryforward                    $ 6,401,000        $ 2,030,000
State tax loss carryforward                        1,018,000            336,000
Reserves and allowances                               54,000             25,000
State tax deferrals                                 (262,000)          (109,000)
Unamortized bond discount                             35,000            508,000
                                                 -----------        -----------
                                                   7,246,000          2,790,000
Less valuation allowance                           7,246,000          2,790,000
                                                 -----------        -----------
                                                 $   --             $    --
                                                 ===========        ===========

The  Company's  federal and state net  operating  losses that are  available for
carryforward will expire as follows:



Date of Expiration                             Federal               California
------------------                             -------               ----------

     2001                                    $      --               $   736,000
     2002                                           --                   701,000
     2003                                           --                   759,000
     2004                                           --                 1,668,000
     2005                                           --                 9,154,000
     2007                                         98,900                    --
     2008                                        410,500                    --
     2009                                        365,700                    --
     2010                                        178,600                    --
     2011                                        736,900                    --
     2012                                      1,403,000                    --
     2013                                      1,519,000                    --
     2019                                      3,460,000                    --
     2020                                     18,308,000                    --
                                             -----------             -----------
                                             $26,480,600             $13,018,000
                                             ===========             ===========

--------------------------------------------------------------------------------
                                                                       Page F-12
<PAGE>

                                                           VALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


NOTE 10 - CAPITAL STOCK

The Company has designated 5 million shares of capital stock as preferred stock,
with a par value of  $0.00025  per share.  There  were no issued or  outstanding
shares of preferred stock at June 30, 1999.

During the first quarter of fiscal 2000,  the Company  issued  225,000 shares of
Series A Convertible  Preferred  Stock,  with a par value of $.00025  ("Series A
Stock"), for $10 per share. Dividends of 8% per annum,  compounded,  are payable
in additional  shares of Series A Stock.  The dollar amount of Series A Stock is
convertible into shares of common stock at a conversion price equal to $2.00 per
share, and is automatically  converted on the occurrence of certain events.  The
Series  A  Stock  has  certain  antidilution  and  registration  rights,  has  a
liquidation  preference of $10 per share plus accrued and unpaid dividends,  and
has  voting  rights  equal to the  number  of  common  shares  into  which it is
convertible. In addition, as long as there are at least 100,000 shares of Series
A Stock  outstanding,  then the holders are  entitled to elect one member of the
Company's Board of Directors.

In connection with the Series A Stock  financing the Company  incurred legal and
related costs of $40,000.  At June 30, 2000, the Series A Stock was  convertible
into approximately 1,209,000 shares of common stock.

In December 1999 and January 2000, the Company issued 688,586 shares of Series B
Convertible  Preferred Stock, with a par value of $.00025 ("Series B Stock"), at
$17.50 per share.  A total of $1,000,000 of the Company's  outstanding 8% Senior
Secured Notes and $250,000 of shareholder advances were converted into 71,429 of
these shares of Series B Convertible Stock.

The dollar amount of Series B Stock is  convertible  into shares of common stock
at a conversion price equal to $1.75 per share,  and is automatically  converted
on the occurrence of certain  events.  The Series B Preferred  Stock has certain
antidilution  and  registration  rights.  The  Series B Stock has a  liquidation
preference,  after payment of the preferential amount for the Series A Stock, of
$17.50 per share.  Thereafter the holders of Series B Stock,  on an as-converted
basis, and the holders of common stock,  shall be paid pro-rata,  from remaining
assets  until the  holders of Series B Stock shall have  received  an  aggregate
preference price of $30.00 per share.  Holders of Series B Stock are entitled to
receive non-cumulative dividends at an annual rate of 8% when and if declared by
the  Board of  Directors.  However,  no cash  dividends  shall be paid to common
stockholders  unless a like cash  dividend  has been paid to holders of Series B
Stock on an as-converted  basis. As long as there are at least 200,000 shares of
Series B Stock  outstanding,  then the holders are entitled to elect two members
of the Company's Board of Directors.

In connection with the Series B Stock  financing the Company  incurred legal and
related costs of $75,000.  The Company also issued a warrant to purchase  75,000
shares of common  stock at $2.50 per share  until  December  2004 as a placement
fee. At June 30, 2000, the Series B Stock was convertible  into 6,885,860 shares
of common stock.

In March and April 2000, the Company issued  1,310,087 shares of common stock in
a unit  financing  at $5.85  per unit  ("585  Units"),  for  gross  proceeds  of
approximately  $7,664,000.  For each ten units  purchased,  the Company  granted
investors  a warrant to purchase  one share of common  stock at $5.85 per share,
resulting in warrants on 131,013  shares of common stock.  A total of 184,320 of
the units were issued in exchange for call  proceeds of  $1,078,278  to call and
thereby redeem certain C warrants by the Company. The Company incurred legal and
related costs of $25,000.

In  connection  with this 585 Unit  financing,  the Company  issued a warrant to
purchase  50,000 shares of common stock at $10.00 per share until April 2003 and
a warrant to  purchase  30,000  shares of common  stock at $5.85 per share until
April 2005.

NOTE 11 - STOCK OPTIONS AND WARRANTS

Stock options - In 1992 the Board of Directors approved the 1992 Incentive Stock
Option Plan (ISO Plan) and the 1992 Non-Statutory  Stock Option Plan (NSO Plan).
Both plans expire in 2002. Each plan reserves 250,000 shares of common stock for
incentive and  nonstatutory  stock  options.  Options under the ISO Plan and NSO
Plan expire over a period not to exceed ten years from the date of grant.

--------------------------------------------------------------------------------
                                                                       Page F-13
<PAGE>

                                                           VALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


In 1996 the  stockholders  approved the 1996 Stock Option Plan. The plan expires
in 2006 and  reserves  300,000  shares of common  stock for  nonqualified  stock
options.  Options  under the plan  expire  over a period not to exceed ten years
from the date of grant.

In 1997 the  stockholders  approved the 1997 Stock Option Plan. The plan expires
in 2007  and  reserves  1,250,000  shares  of  common  stock  for  incentive  or
nonqualified  stock options.  Options under the plan expire over a period not to
exceed ten years from the date of grant.

Subsequent  to  June  30,  2000,  on July  21,  2000,  the  Board  of  Directors
authorized,  subject to shareholder  approval,  the 2000 Equity  Incentive Plan,
which expires in July 2010,  and reserved  2,500,000  shares of common stock for
Incentive or  Nonqualified  Stock Options.  Options to be granted under the Plan
expire over a period not to exceed ten years from the date of grant.

The following  tables summarize the number of options granted and exercisable at
June  30,  2000,  and  the  weighted   average  exercise  prices  and  remaining
contractual lives of the options:


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

Balance, July 1, 1998                        877,550          $   0.59
Granted                                      395,600              1.18
Canceled                                    (147,050)             0.73
Exercised                                    (15,000)             0.75
Expired                                         --                --
                                           ---------

Balance, June 30, 1999                     1,111,100          $   0.78
Granted                                    2,244,422              4.85
Canceled                                    (679,782)             3.22
Exercised                                   (426,802)             0.46
Expired                                      (15,000)             0.50
                                           ---------

Balance, June 30, 2000                     2,233,938          $   4.19
                                           =========

Exercisable at June 30, 2000                 700,689          $   1.82
                                           =========

<TABLE>
<CAPTION>
                                                                                       Weighted          Weighted average
                                                                                        average           exercise price
                           Number               Number             Weighted            remaining            of options
    Range of           outstanding at       exercisable at          average           contractual         exercisable at
 exercise prices        June 30, 2000        June 30, 2000      exercise price           life              June 30, 2000
------------------    ------------------    ----------------    ----------------    ----------------    --------------------
<S>                            <C>                  <C>               <C>                <C>                   <C>
      $      0.50               150,000             150,000           $ 0.50             0.55                  $ 0.50
             0.75                20,000              20,000             0.75             1.74                    0.75
             1.00               231,299             173,269             1.00             2.88                    1.00
       1.25-1.375               220,000             146,669             1.28             3.03                    1.25
             1.50                70,000              30,000             1.50             4.07                    1.50
        1.69-2.00               373,967              65,767             1.98             4.23                    1.99
             3.00                85,600              38,934             3.00             4.33                    3.00
             4.00               294,500                   -             4.00             4.88                    4.00
             7.00               668,572              76,050             7.00             4.46                    7.00
            10.00                40,000                   -            10.00             2.17                   10.00
            15.00                40,000                   -            15.00             2.42                   15.00
            20.00                40,000                   -            20.00             2.67                   20.00
                      ------------------    ----------------
                              2,233,938             700,689           $ 4.19             3.75                  $ 1.82
                      ==================    ================
</TABLE>
--------------------------------------------------------------------------------
                                                                       Page F-14

<PAGE>
                                                           VALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


The non-exercisable options vest over a period of up to five years.

During  fiscal  2000,  the Company  recorded  non-cash  compensation  expense of
$77,000  under its stock option plans to  non-employees  through the granting of
31,500 options.

Had  compensation  costs for the  Company's  stock option plans been  determined
based  upon the fair  value at the  grant  date for  awards  under  these  plans
consistent  with the  methodology  prescribed  under SFAS 123, the Company's net
loss and loss per common share would have been as follows:

                                                         2000          1999
                                                     ------------  ------------
Loss for the year                                    $(16,175,462) $ (3,459,744)
Compensation expense                                   (1,330,000)      (93,766)
                                                     ------------  ------------
Pro forma net loss                                    (17,505,462)   (3,553,510)
Beneficial conversion on Series B preferred stock     (11,650,255)         --
Accrued dividends on Series A preferred stock            (167,877)         --
                                                     ------------  ------------
Proforma net loss available to common stockholders   $(29,323,594) $ (3,553,510)
                                                     ============  ============
Pro forma loss per common share                      $      (2.52) $      (0.40)
                                                     ============  ============



The fair value of each  option and  warrant  granted  during  2000 and 1999,  is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:  (1) dividend yield of 0%, (2) expected volatility of
72% to 107% in 2000 and 48% to 81% in 1999,  (3) risk free interest rate of 4.6%
to 5.5%,  and (4) an expected life of the options of from 3 to 5 years.  Options
issued during 2000 and 1999,  have an estimated  weighted  average fair value of
$2.46 and $0.28.  The  non-exercisable  options vest over a period of up to five
years.

Stock Warrants

At June  30,  2000,  the  Company  had the  following  stock  purchase  warrants
outstanding, each exercisable into one common share:

    Number                   Exercise Price                Expiration Date
---------------          --------------------          -----------------------
        25,000                  $ 1.25                            March, 2001
       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
        50,000                   10.00                            April, 2003
        12,500    (3)             1.25                            April, 2003
        50,000                    1.75                              May, 2003
       350,000    (1)             1.00                         December, 2003
       152,728    (1)             1.38                            March, 2004
        30,000    (1)             1.50                            March, 2004
        75,000                    2.50                         December, 2004
        30,000                    5.85                            April, 2005
        22,802                    6.14                            April, 2005
---------------
     1,136,543
===============

(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 $15.00 per share subject to
certain conditions.

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

An aggregate of 400,148 of the above warrants are held by officers and directors
of the Company or their affiliates.  Some warrants contain certain  registration
rights.

--------------------------------------------------------------------------------
                                                                       Page F-15
<PAGE>


                                                           VALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

In connection  with the sale of the Senior Notes on March 31, 1999 (see note 8),
the  noteholders  were  granted  warrants to purchase an  aggregate of 1,527,250
shares of Common  Stock of the Company at an  exercise  price of $1.00 per share
("A  Warrants"),  warrants to purchase an aggregate of 527,514  shares of Common
Stock at a nominal per share  exercise  price of $0.00025  ("B  Warrants"),  and
warrants  to  purchase  an  aggregate  of 231,132  shares of Common  Stock at an
exercise price of $1.00 per share ("C  Warrants").  The C Warrants or underlying
shares of Common  Stock could be  repurchased  by the Company at $6.00 per share
(less any unpaid  exercise  price) on an all or none basis until March 31, 2004,
as long as the  Company is not in default  with  respect to the Senior  Notes or
related agreements.

In March 2000 the noteholders  applied the $1,450,000  principal  balance of the
Senior  Notes  towards  the  exercise  of 527,514 B  Warrants  and  1,449,868  A
Warrants.  The Company agreed, in connection with the Senior Note  cancellation,
to call the C Warrants  effective  April 4, 2000 and the holders agreed to apply
the  proceeds of the call  towards the purchase of 585 Units and exercise of the
balance  of the A  warrants.  On April 4,  2000,  the  holders of the C Warrants
converted the net call proceeds of $5.00 per share, $1,155,660 in the aggregate,
into 77,382 shares of common stock (A Warrant exercise) and 184,320 units of the
585 Unit financing. The call of the C Warrants and issuance of the 585 Units and
shares for the A warrants was on a cashless basis.

NOTE 12 - 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.

The president of the Company has an employment agreement that provides, in part,
severance benefits equal to the amount of his annual base salary, $120,000, plus
bonuses.

In June 1999, the Company leased 14,900 square feet of improved  office space in
Oakland,  California.  The  Company  executed  an  addendum to this lease for an
additional  5,400  square feet in January  2000.  The lease  expires on June 29,
2004. The Company  entered into  subsequent  leases for improved office space in
the same  building  in  February,  April  and June  2000,  for a total of 20,000
additional  square feet of improved  office space.  These three leases expire on
January  31,  2005.  Office  rent  expense for the years ended June 30, 2000 and
1999, was $430,000 and $88,000.

Minimum future commitments under the operating lease are as follows:


                   Year Ending June 30,
                   --------------------

                           2001                              $   749,726
                           2002                                  635,256
                           2003                                  635,256
                           2004                                  635,256
                           2005                                  195,923
                                                             ------------
                                                             $ 2,851,417
                                                             ============

--------------------------------------------------------------------------------
                                                                       Page F-16
<PAGE>

                                                           VALUESTAR CORPORATION
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

NOTE 13 - LOSS PER COMMON SHARE

The provisions of the Series A Stock provide for cumulative 8% dividends payable
in additional shares of preferred stock and provide, upon conversion,  a similar
accretion  whether  or not such  dividends  have been  declared  by the Board of
Directors.  This amount increases the net loss available to common  stockholders
for $167,877 for the year ended June 30, 2000.

Net loss  attributable to common  stockholders was also increased by $11,650,255
in computing net loss per share for an imputed  deemed  dividend from a discount
provision  included in the Series B Stock, which provided for a conversion price
less than the market price on the date of issuance.  The imputed dividend is not
a contractual obligation on the part of the Company to pay such dividend.

NOTE 14 - EMPLOYEE BENEFIT PLAN

The Company  provides a 401(k) Profit  Sharing Plan covering  substantially  all
employees meeting certain service  requirements.  Plan contributions are made at
the discretion of management.  There have been no  contributions to the Plan for
the years ended June 30, 2000 and 1999.

NOTE 15 - SUBSEQUENT EVENT

During  September 2000 the Company issued 227,689 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.
The dollar amount of Series C stock is  convertible  into shares of common stock
at a conversion price equal to $2.25 per share, and are automatically  converted
on the occurrence of certain events. The Series C Stock has certain registration
rights, has a liquidation preference of $22.50 per share plus accrued and unpaid
dividends,  and has voting rights equal to the number of shares into which it is
convertible.  The Company  granted  purchasers  warrants  to purchase  1,138,445
common shares at $2.25 per share for a period of three years.

--------------------------------------------------------------------------------
                                                                       Page F-17


<PAGE>


                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                  VALUESTAR CORPORATION



                                  By:      /s/ JAMES STEIN
                                           ---------------
                                           James Stein
                                           Chief Executive Officer

Date:  September 25, 2000
<TABLE>

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Registrant and in the capacities and on the
dates indicated.
<CAPTION>


         Name                               Position                                Date
         ----                               --------                                ----


<S>                                 <C>                                         <C>
/s/ JAMES STEIN                     Chief Executive Officer                     September 25, 2000
    -----------                     and Director
    James Stein                     (principal executive officer)


/s/ MICHAEL J. KELLY                Controller                                  September 25, 2000
    ----------------                (principal accounting officer)
    Michael J. Kelly

/s/ JAMES A. BARNES                 Treasurer, Secretary and Director           September 25, 2000
    ---------------                 (principal financial officer)
    James A. Barnes

/s/ JERRY E. POLIS                  Director                                    September 25, 2000
    --------------
    Jerry E. Polis

/s/ FRITZ T. BEESEMYER              Director                                    September 25, 2000
    ------------------
    Fritz T. Beesemyer

/s/ JOSH FELSER                     Director                                    September 25, 2000
    -----------
    Josh Felser

/s/ STEVE LEDGER                    Director                                    September 25, 2000
    ------------
    Steve Ledger

/s/ JEFFREY HOLLAND                 Director                                    September 25, 2000
    ---------------
    Jeffrey Holland
</TABLE>