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                     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, 2001

                         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. $1,046,407

The aggregate  market value of the issuer's common stock held by  non-affiliates
as of  September  17,  2001  (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 $8,050,000.

As of September 17, 2001 there were 42,470,169  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  2001,  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_
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<TABLE>
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                                TABLE OF CONTENTS
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                                     PART I

ITEM 1.       Description of Business                                                                             2
ITEM 2.       Description of Property                                                                            12
ITEM 3.       Legal Proceedings                                                                                  12
ITEM 4.       Submission of Matters to a Vote of Security Holders                                                12

                                     PART II

ITEM 5.       Market for Common Equity and Related Stockholder Matters                                           12
ITEM 6.       Management's Discussion and Analysis or Plan of Operation                                          14
ITEM 7.       Financial Statements                                                                               24
ITEM 8.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure               24

                                    PART III

ITEM 9.       Directors, Executive Officers, Promoters and Control Persons;                                      25
              Compliance With Section 16(a) of the Exchange Act                                                  25
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                                                                   25
</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 ratings,  rewards and  guarantees on local service
purchases.   Our  ValueStar   Customer-Rated  Program  ("ValueStar  Program"  or
"program")  allows  consumers  and  corporate  buyers to search for high quality
local service merchants,  rate their satisfaction and earn rewards and receive a
guarantee on their service  transactions.  Our program is targeted to credit and
debit  cardholders and promotes  cardholder  spending on local  services.  As an
infomediary,  we enhance online and offline  commerce while providing  important
benefits to buyers and sellers of services. We generate commission revenues from
transactions between member service merchants and member buyers. We partner with
credit card  processors,  credit card  acquiring  banks and credit card  issuing
banks to provide member cardholders our ratings of local service merchants and a
package of  benefits  including  redeemable  points,  mediation

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services and a limited money back satisfaction guarantee.

Our ValueStar  Customer-Rated Program enables,  matches, rates and rewards local
service  transactions.  Our  systems  interface  with  credit  card  information
databases (the collective system is referred to as our "transaction engine") and
matches  qualifying  purchases between licensed  merchants and registered credit
cardholders.  Our transaction  engine then  automatically  presents an online or
offline  survey to  buyers  that,  once  processed,  provides  an update to each
merchant's  rating  score.   Merchants  can  stay  competitive  in  their  local
marketplace in addition to increasing customer flow and loyalty. Buyers who rate
their  satisfaction are eligible for benefits  including our dispute  resolution
services,  a limited  money-back  guarantee up to $500, and our ValueStar Reward
Points redeemable for products, charitable donations, services and travel.

We developed  our program in  partnership  with global  electronic  commerce and
payments leader First Data Corporation  ("First Data").  First Data has recently
made strategic  investments  aggregating $4 million in ValueStar.  During fiscal
2001 we entered  into two  strategic  and  marketing  alliance  agreements  with
subsidiaries of First Data as follows:

     o   First Data Merchant Services  Corporation  ("FDMS") markets our program
         to their merchant account clients (banks or organizations  which market
         card processing to local  businesses).  FDMS has also developed with us
         and  is  operating  a  technology   platform  to  automatically   match
         transactions  between  ValueStar  member  buyers and  ValueStar  member
         service  merchants.  This automated  transaction  system tracks matched
         transactions and provides billing and other processing data to us. This
         platform can also collect our commissions  from  participating  service
         merchants by direct debiting of the service merchant accounts.

     o   First Data Resources Inc. ("FDR") is marketing our cardholder  benefits
         and creating strategic  relationships  between ValueStar and FDR's card
         issuing  clients  (mostly  card  issuing  banks).  FDR has helped us to
         introduce  and  market the  cardholder  benefits  of our  program as an
         important new competitive feature to leading credit card issuers in the
         United States.

We launched our program  with First  National  Bank of Omaha,  one of the top 15
credit card issuers in America, in May 2001, activating their cardholders in the
Northern  California  market.  Through our relationship  with FDR we have signed
four letters of intent with credit card issuing banks  representing an estimated
49 million  active  cardholders.  Our strategy is to implement  our program with
these issuers by activating  cardholders  initially in the California market and
then expand operations to other market regions.

We have signed  marketing and or data sharing  agreements  with seven  acquiring
merchant banks  representing an estimated  282,000 service  merchants across the
United  States.  These  merchant  account  banks assist us in adding  individual
member service merchants. Our strategy is to market our program to these service
merchants and expand our  penetration of service  businesses in selected  market
regions.

We have  created and  continue to expand a large  database  of  credential  data
consisting of license information, credit, and legal and state compliance status
and business profiles that we aggregate for buyers from databases nationwide. We
also verify insurance coverage for merchants that participate in our program. At
August  31,  2001  we had  approximately  6,000,000  service  businesses  in our
database,  essentially  all service  businesses  in the United  States.  We have
approximately 1,050,000 service businesses rated as either ValueStar Verified or
ValueStar  Customer-Rated across the United States. Our operations are currently
focused in the  California  market  region and we have  enrolled  3,700  service
businesses in California as members in our  commission  program as of August 31,
2001. Over 7,000 service  merchants are enrolled as ValueStar  merchant  members
nationwide.

We implemented our new automated rating and commission-based transaction systems
in May 2001 and have  generated  nominal  revenues  from  this new  program.  We
expect,  but there can be no assurance,  to activate  additional  cardholders in
fiscal 2002 and expand our  operations  beyond the  Northern  California  market
region.

We pioneered rating and licensing of a service brand for local service merchants
in 1992 in Northern California.  In 1996 we launched our Internet site providing
free information and communication  links between local merchants and buyers. In
July 1998_ we expanded  operations into Southern  California and by 1999 we were
operating in eight regions in the United  States.  In July 1999 we commenced the
design and development of our new ValueStar  Customer-Rated  Program targeted at
credit cardholders described above. In July 2000 we began a marketing transition
from our prior fixed-fee  licensing  program to our new  transaction  commission
program.  At this time we also began to focus our merchant  marketing efforts on
only  the  Northern  California  region  to  support  the  First  National  Bank
cardholders  and prepare  for the  planned  activation  of  additional  Northern
California  cardholders.  While  our focus is on the  commission-based  program,
merchants may elect to join on a fixed fee basis as an option.

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We were  incorporated in Colorado in 1987. Our operations are conducted  through
our wholly owned California subsidiary,  ValueStar,  Inc., incorporated in 1991.
Our  principal  executive  offices are located at  360-22nd  Street,  Suite 400,
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 by these businesses,
the growth of new media outlets, competition and increasing buyer skepticism. We
believe buyers want to know which businesses are better.  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 1998 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  the  top 60% of
American households spend approximately $7,800 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 merchants 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 InfoUSA) 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 customer satisfaction.

The credit card industry is mature and highly competitive. According to industry
reports, 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  and debit  card  industry  and other  membership
organizations  a new,  free member  benefit  program to aid in  reducing  member
attrition rates,  increasing credit card use for service shopping and increasing
new cardholder acquisition rates.

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

     o   A free, searchable database of rated service businesses meeting certain
         licensing,  state  compliance,  credit and legal  status.  We intend to
         increase the distribution of this data primarily through alliances with
         Internet portals and yellow page listing services.

     o   Certifications of the top-rated service  businesses from  statistically
         valid  surveys  of  actual  transactions  with  prior  customers.   Our
         technology  allows  rating  surveys to be  completed  automatically  by
         customers after a transaction between a member buyer and member seller.
         We can also survey  prior  customers  by  telephone  for those  service
         merchants that wish to become rated more rapidly.

     o   New  benefits to buyers that  purchase  from  ValueStar  Customer-Rated
         service businesses. These benefits include:

               o  ValueStar  Rating Points  redeemable for travel,  products and
                  services

               o  Complaint resolution services

               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 rated, service businesses without
         limiting  the  buyer  to a  limited  number  of  discount  or  referred
         businesses.

     o   The ability for quality  sellers to attract  large  numbers of affluent
         cardholders as customers  while  differentiating  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  Customer-Rated  Program and
package of benefits respond to these consumer needs.

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

OUR STRATEGY

Our objective is to be the leader in providing local service ratings and content
to enhance  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 partners (card issuers and merchant banks):

               o  Buyers receive superior information, loyalty points, mediation
                  services and satisfaction guarantee

               o  Buyers have power because the service business knows the buyer
                  can rate satisfaction

               o  Sellers obtain access to new quality conscious buyers

               o  Sellers  obtain  access  to a  rating  brand  that  will  help
                  differentiate their company from other competitors

               o  Partners participate in a recurring  transaction-based revenue
                  stream

     o   Develop  and  improve  our  technology  and  data 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.

Prior to the development and launch of the  transaction-based  ValueStar Program
attached to credit and debit cards,  we offered only a fixed fee rating  program
for service  merchants in eight  market  regions.  Merchants  have the option to
elect a fixed fee of $995 and up as an  alternative  to the  commission  program
which is generally  capped at a maximum of $3,000 per annum.  Our strategy is to
focus the  rollout of our new  transaction  program in the  Northern  California
region and  thereafter  expand  both the  number of  participating  credit  card
issuing banks and the number of market regions. Our business strategy requires a
balance in each region between the number of member cardholder consumers and the
number of member service businesses.

THE VALUESTAR SHOPPING EXPERIENCE
Consumer  and business  buyers are  automatically  enrolled  into our program by
their credit card issuing bank or they may enroll online on our Web site. 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  (when  required) and lack of
negative legal and credit status.  Our top tier ValueStar  Customer-Rated  marks
are  based  on  passing   insurance   requirements,   listing   credentials  and
participation in ratings. A study conducted by Public Research Institute in 1993
and updated in 1996  concluded that 2 out of 3 customers who knew a business had
earned  ValueStar's  rating were  influenced  by this factor in  selecting  that
service business.

Buyers seek to avoid problems by using ValueStar rated businesses.  In addition,
by registering with ValueStar and rating the merchant  experience online after a
purchase, buyers receive a package of ValueStar benefits.

In addition to service merchant advertising and marketing, buyers are exposed to
qualified  ValueStar  merchants  on our Web site  and in  ValueStar  Reports,  a
publication  listing  highly rated  service  merchants by service  category.  We
currently distribute ValueStar Reports primarily to member cardholders.

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
rated service  companies  through e-mail and Web links from our Web site or from
associated Web sites. After conducting a

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search for a specific  type of  top-rated  business,  buyers are able to conduct
their own personal  simultaneous e-mail request search 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.

VALUESTAR SERVICE BUSINESS EXPERIENCE

Our licensed  member  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 and increase their sales rate, (h) improve  employee  morale,  (i) enhance
marketing and advertising promotions, and (j) improve business reputation.

Our free  listing of rated  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 offer businesses Web generated traffic. We
also offer  businesses the  opportunity to link their Internet site with our Web
site. As we activate more  cardholders,  member  merchants are exposed to larger
numbers of affluent buyers.

While we rate and provide  data on a large  number of local  companies,  not all
participate in the ValueStar  Customer-Rated 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
participating  service  merchants and ValueStar  member  buyers).  Local service
companies that earn the ValueStar Verified or ValueStar  Customer-Rated  symbols
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
consumers or buyers  registered with ValueStar and agree to 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   Enhanced loyalty from new and existing 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.

Our brand recognition is enhanced through 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

Our key partners  include First Data as our  credit/debit  card processor,  card
issuers,   merchant  account  banks,  content  distribution  channels  and  data
suppliers.  First Data is  marketing  our  program  for the  benefit of its card
issuing and merchant processing clients and to earn processing commissions. Card
issuers add ValueStar  benefits to their card offerings to increase the value of
their card,  reduce cardholder  attrition rates,  increase card use for services
and to earn  referring  commissions.  Merchant  account  banks and related sales
organizations elect to market our Customer-Rated  Program to their local service
merchants  to expand the number of  merchants  that accept  credit  cards and to
provide  those  merchants  access to new quality  seeking  customers and to earn
referring  commissions.  Distribution  channels add  ValueStar  Ratings to their
print  product or  Internet  site to provide  their users with  important  local
shopping  information and increase user trust.  Data and other suppliers provide
important credential information to assist us in rating service merchants across
America and support our benefit program.

First Data Corporation

We believe that our First Data partnership  provides us a significant  marketing
and competitive advantage.  First Data has a leading position in the marketplace
as the largest payment processor in the world. Its First Data Resources division
provides  processing  services for 1,400 card issuers and 343 million  consumers
worldwide.  Its  First  Data  Merchant  Services  division  provides  processing
services for more than 2 million domestic merchant locations.

We have two alliance agreements with First Data:

     o   First Data Merchant  Services  (FDMS)  operates the ValueStar  matching
         engine,  matching  registered  cardholder  transactions  with ValueStar
         Customer-Rated  companies.  In those instances where we have

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         negotiated   appropriate   agreements,    FDMS   collects   ValueStar's
         commissions  from the  participating  merchant  account  and  remits to
         ValueStar.  FDMS also markets the ValueStar  Customer  Rated Program to
         its merchant  bank  clients  that in turn market these  benefits to the
         local   service   companies   through   statement   inserts  and  sales
         representative networks.

     o   First  Data  Resources  (FDR)  has  close  relationships  with  many of
         America's top debit and credit card issuers.  FDR markets the ValueStar
         Customer Rated Program to its issuer clients and has assisted ValueStar
         in obtaining  letters of intent with four  leading  credit card issuing
         banks representing an estimated 49 million active cardholders.

We also have a service  relationship  with a provider of  ancillary  credit card
data services that allows us to access data and match certain  transactions  not
processed  by First  Data.  Accordingly,  we  believe we have the  potential  to
access,  subject to appropriate  data  agreements  with  merchants,  issuing and
merchant banks and processors, over 54% of transactions in the United States. We
have additional data agreements with American Express, NOVA and others such that
we are able to  obtain  transaction  data from  Visa,  MasterCard  and  American
Express card  merchants.  We continue to work to expand our  capability to match
transactions  and to automate the  collection of  commissions  through  merchant
accounts.

Card Issuers

We have signed a benefits agreement with First National Bank of Omaha (FNBO) and
we have activated approximately 9,400 cards in the California market. This pilot
has allowed us to test our systems, which became fully operational in June 2001.
We expect,  but there can be no assurance,  that we will activate the balance of
FNBO's cards as we expand market regions.  We have also signed letters of intent
with four leading credit card issuers (MBNA,  Wells Fargo, Fleet Bank and Chase)
with an  estimated  49 million  active  cardholders  of which an  estimated  3.8
million are in the California region. Our strategy is to activate each issuer as
mutually agreed and as technical and program  details are  coordinated  with our
organization and each issuer. We then intend to activate additional  cardholders
for issuers in new market  regions.  We continue to seek additional card issuers
and other  aggregators of buyers to enroll buying  members into our program.  We
compensate issuers by sharing transaction commissions. There can be no assurance
we will be successful in  finalizing  contracts  with the credit card issuers or
activating cards with these issuers.

Merchant Account Banks

A number  of  merchant  account  banks  are  agreeing  to  assist  us to  enroll
individual  service merchants in the ValueStar  Customer Rated Program.  In some
instances the merchant bank  processor  provides  sales leads to us and in other
marketing arrangements the merchant bank representatives  present and market our
program.  As of the date of this  report our  marketing  agreements  include the
following merchant processors:
                                                                     Estimated
                                                                     Number of
                                                                      Target
                                                                     Merchants
                                                                     ---------
         Cardservice International                                     50,000
         Unified Merchant Services                                     40,000
         Wells Fargo                                                   40,000
         First Virginia                                                10,000
         United California Bank                                        10,000

We have only commenced  co-marketing to the above target merchants through these
marketing  alliances and there can be no assurance we will be able to enroll any
significant number of the above merchants into our program.

We also have data sharing  agreements that allow us to match  transaction  data,
subject to appropriate  agreements  with service  merchants,  with the following
merchant account banks:

                                                                      Estimated
                                                                       Number
                                                                      of Target
                                                                      Merchants
                                                                      ---------
         Nova Information Systems                                      90,000
         Bank of America                                               42,000

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With the above merchants, if they are members of our program, we will be able to
capture  matching  transaction  data.  There  is no  assurance  any  significant
matching activity will occur with these merchants.

Our goal is to obtain  additional  data and or marketing  agreements  with other
merchant  account banks and to expand our  relationship  with existing  merchant
with whom we have data  sharing  agreements  with to expand them into  marketing
agreements,  although  there  can be no  assurance  we  will  be  successful  in
finalizing such agreements or expanding the number of merchants enrolling in our
ValueStar  Customer-Rated  Program.  Currently,  we have  marketing  and or data
agreements with four of the top ten merchant account banks.

Distribution Partners

We are granting  prospective  distribution  partners licensing rights to display
ValueStar  ratings on their Web site or in print.  The first  major  alliance we
have  developed is with online yellow page provider Bell South  (RealPages.com),
scheduled to launch in January 2002.

TECHNOLOGY AND INFRASTRUCTURE

We believe that our First Data technology  partnership and database  information
systems separate our service from other listing and referral  services.  We have
built a scalable user interface that is based primarily on internally  developed
proprietary  software.  The main  component  of our  service  is the First  Data
operated merchant processing systems and our database architecture. We have also
automated the  processing of certain data elements from  government  and private
databases important in determining aggregate credential information.

Our  systems are  designed  to provide  access to our Web site 24 hours per day,
seven days a week.  GlobalCenter,  a  provider  of Web and  application  hosting
solutions to  businesses,  which  provides  redundant  communications  lines and
emergency power backup, provides physical hosting and communications systems. 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.

Our system is designed to generate  transaction  commissions  from service sales
that are driven by ValueStar  ratings and create  continuously  updated customer
satisfaction  ratings on local businesses  driven by actual  purchases.  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 member's rating brand is automatically  changed to a higher
or lower rating symbol level.

We have developed systems to aggregate commission  information and we can either
collect   commissions   automatically   through  merchant  accounts  or  invoice
individual  service  merchants.  We have also developed systems to aggregate and
track processing fees as well as referring issuing and merchant referral sources
in order to pay commissions.  Processing and referring  commissions vary but are
expected to average approximately 20-25% of collected commissions.

We have also developed  systems to track buyer points and guarantees.  We expect
these benefits to approximate 20-25% of collected  commissions.  We have systems
to monitor these costs by buyer and service members in order to take appropriate
steps to manage abuses and control costs for these benefits.

Our buying  members may register  their  credit  cards online with  ValueStar to
conveniently receive their ValueStar benefits with each purchase. In most cases,
we expect our buying members will use a  pre-registered  credit card issued by a
participating credit-card-issuing bank or other membership organization.

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.

For the successful  operation of our system,  we rely in part on information and
processing  provided by First Data,  other  processors  and credit card  issuing
firms and merchant  account  banks.  The failure of these third party systems or
the loss of these  relationships  would  adversely  affect our revenue model and
future operating results.

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

                                       8
<PAGE>

marketplace.  A buyer may pick up the telephone and call the company,  email the
company,  or use our SmartShopper  service.  SmartShopper allows a buyer to send
one email request form to multiple companies simultaneously.

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
our  Customer-Rated  member  program.  Our  primary  method of adding  buyers is
through credit card issuers. We have designed our marketing strategy to increase
business sales, support business development and increase brand awareness.

Ratings

We continuously update our credential ratings of each local service company on a
credential  basis.  At August 31, 2001 we had  approximately  1,050,000  service
business rated as either ValueStar Verified or ValueStar Customer-Rated. We have
developed  proprietary  methodology  and systems to access  certain  government,
commercial  and  proprietary  databases  and  other  businesses  to  gather  our
credential based data.

We do not presently  charge  businesses  for credential  (Verified)  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  become
Customer-Rated through telephone surveys.

All Customer-Rated  business  applicants receive a ValueStar Research and Rating
Report with the results of our research.  Successful  applicants may license the
use of the ValueStar  Customer-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  certificate,
program manual and labels for their doors and letterhead.

Merchant Enrollment

We  market  our  license  program  to local  service  businesses  from  leads or
introductions  from  merchant  bank  processing  partners  and  through  our own
marketing and sales activities.  At August 31, 2001 approximately  7,000 service
businesses were enrolled and licensed into the ValueStar  Customer-Rated program
nationwide,  3,700 in  California.  These  businesses  have agreed to either pay
commissions  on  transactions  with our member  buyers or pay us an annual fixed
licensing fee.

All service businesses and professionals  located in market regions we serve may
apply to be rated.  These include more than 700 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 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).

Buyer Enrollment

Our primary  method of buyer member  enrollment is through  credit card issuers.
With the  assistance of First Data  marketing  representatives  we target credit
card issuers to add the ValueStar program to their card benefits.  Once a letter
of intent is negotiated,  our technical and marketing  staffs  commence  working
through the  technical  interface  and  marketing  issues unique to each issuer.
Thereafter a definitive  agreement is executed and cards are activated  into the
program.

A part of the program  activation  is one or more  communications  to individual
cardholders  informing  them of the new benefit and the  ValueStar  program.  We
intend to employ a variety of marketing  strategies  to encourage  buyers to use
their cards with ValueStar member service merchants.

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  with  ValueStar
Customer-Rated merchants as a key strategy to expand ValueStar brand awareness.

                                       9
<PAGE>

COMPETITION

We are not aware of a directly  competitive  rating service targeted for a broad
range of service  industries.  Our  agreements  with First Data contain  certain
restrictions  regarding  processing  for  competitors  of  ValueStar.   However,
competitive  offerings  may  develop in the  future.  We compete for the limited
budgets  for  spending  on  advertising   and   promotions   among  service  and
professional  businesses.  We compete  with a wide range and  variety of offline
competition including 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 online and
offline referral agencies,  listing 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 intensely  competitive with limited barriers to entry. There are
a number of potentially  competitive  companies engaged in facilitating commerce
on the  Internet  including  service  business  listings,  comparison  services,
auction sites,  merchant guides,  referrals buying guides and information sites.
We expect new Internet competition may develop and intensify in the future.

There is also intense  competition  from a large number of companies  that offer
cardholder  benefits or incentive or marketing  programs to  cardholders.  These
competitors  make it more  difficult to gain  cardholder  members and may create
confusion in the marketplace  thereby limiting the  effectiveness of ValueStar's
program.

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  categories
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  we  commenced  the  design,
development and testing of our transaction  rating and revenue  program.  In the
course of  development  we created (a)  proprietary  content on the  majority of
service  businesses  in the  United  States,  and (b) an  database  system  that
generates  commissions from transactions  driven by the content through database
links  to major  credit  card  processors.  The  goal of our  development  is to
position ValueStar as the dominant rating program of local service businesses.

During  the year  ended  June  30,  2001 and  2000 we  expended  $6,432,069  and
$5,860,062, respectively, 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.
These systems were developed and operational at June 30, 2001.

We expect to incur additional costs to modify our systems, from time to time, to
match the  databases  of specific  card  issuers.  We also 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, 2001, we employed 59 full-time persons, of whom 5 are in senior
management,  25  in  marketing  and  sales,  6 in  research  and  rating,  15 in
technology and systems, and 8 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

                                       10
<PAGE>

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.

TRADEMARKS, SERVICE MARKS AND OTHER PROPRIETARY RIGHTS

We own a U.S. federally  registered  trademark on "ValueStar" and the "ValueStar
Certified"  symbol  and have  applied  for  trademark  protection  on  "Consumer
ValueStar" in Canada and  "ValueStar  Certified" in the European  Community.  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 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 have one pending patent and review the use
of patent applications as a tool to protect new products and services. 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 in 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.

The Company has adopted, and is in the process of implementing,  a comprehensive
policy on  protection  of credit card  numbers  and other  sensitive  data.  Key
elements  of that  policy  involve  access  control  (physical  and  personnel),
prevention (firewalls,  encryption, and security updates) and detection. We have
already passed one security review by a potential  issuing  partner.  We have an
Internet  security  firm  monitoring  our  site on a daily  basis,  looking  for
vulnerabilities.

We are implementing procedural and physical restrictions limiting the ability of
unauthorized  persons to access sensitive data. Our data is behind firewalls and
encrypted, programs will be updated as new features are developed, and we intend
to  install  systems  and  equipment  for  automated  and human  monitoring  for
unauthorized access and vulnerabilities.

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<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

Our corporate and operating  offices are located in approximately  20,000 square
feet of improved  office space  consisting  of the fourth floor 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 three five-year leases expiring  simultaneously in January 2005 at a
monthly rate aggregating  approximately  $28,400.  This facility is adequate for
present  operations  but should we 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

In  February  2001,  a  former  vendor,  Insurance  Data  Services,  invoked  an
arbitration  clause in a services  contract that was executed in March 2000. The
vendor alleges  non-performance  of the contract and requested damages in excess
of  $1,500,000.  We dispute the damage  claim,  allege  that we were  improperly
induced  to sign  the  contract,  and  allege  that  the  contract  contains  an
unenforceable penalty. The vendor has not filed for an arbitration date and none
is set. Our financial  statements  include an accrual for $500,000  representing
the aggregate net penalties that we believe could be construed from the contract
should it be enforced against us.

We are  involved  from  time to time in  routine  litigation  incidental  to the
conduct of our  business.  Other than  described  above,  there are currently no
material  pending legal  proceedings  to which we are a party or to which any of
our property is subject.

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.

The following  table sets forth the high and low bid  quotations  for our common
stock for the fiscal years ended June 30, 2001 and 2000 as provided by the NASD.


                                                             Bid Quotations
                                                         High              Low
                                                         ----              ---
         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
         Fiscal Year Ending June 30, 2001
           First Quarter                                $3.9375          $1.8750
           Second Quarter                               $2.5000          $0.8750
           Third Quarter                                $1.0781          $0.6875
           Fourth Quarter                               $0.7500          $0.2700


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.

                                       12
<PAGE>

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 182  holders of record of our  common  stock at June 30,  2001,  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.

RECENT SALES OF UNREGISTERED SECURITIES

No equity  securities  were sold  during the year  ended June 30,  2001 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 25, 2001,  ValueStar  Corporation (the "Company") commenced the sale of
12% Convertible  Notes  ("Notes") with shares of common stock.  Through June 30,
2001 the Company sold an aggregate of  $3,959,590  of the Notes for cash,  prior
cash advances or in lieu of cash fees and issued a total of 19,797,950 shares of
common stock to 42 holders of the Notes ("Note Shares").

The Notes bear interest at the rate of 12% per annum payable in cash at maturity
on  April  30,  2002 or  payable  in  kind if the  Notes  are  converted  into a
subsequent  round of financing.  The Notes plus accrued interest are designed by
their terms to be automatically  convertible into a proposed senior  convertible
note and warrant financing at a later date, subject to certain conditions. There
can be no guarantee that the Notes will convert into a future round of financing
on such designated terms or otherwise.

Entities  affiliated with directors  purchased  $1,446,648 of the Notes and were
issued 7,233,240 Note Shares.  This includes  $159,590 of Notes and 797,950 Note
Shares issued in  consideration of an aggregate of $159,590 in finders fees owed
to Hull  Capital,  an entity  related to and  controlled  by a  director  of the
Company.

In  connection  with the sale of the Notes,  certain  holders  of the  Company's
Series A, B and CC preferred stock waived  preemptive rights for the sale of the
Notes.  Holders of the  Company's  Series CC  preferred  stock also (a)  amended
certain  provisions of their  registration  rights  agreement to modify the best
effort Form S-3 registration filing date to September 30, 2001.

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<PAGE>

While the  securities  were sold by the Company  without an  underwriter or cash
commission,  the  Company  paid  finders  fees  as  described  above  and may be
obligated for additional fees to an unaffiliated party of $22,500.

All of these  securities  were offered and sold without  registration  under the
Securities  Act of 1933, as amended (the "Act"),  in reliance upon the exemption
provided  by  Section  4(2)  thereunder   and/or  Regulation  D,  Rule  506  and
appropriate legends were placed on the Notes and Note Shares.

The above  description of the Note and Note Share  financing is qualified in its
entirety by the full text of the agreements  filed as exhibits to our Form 8-K's
dated May 29, 2001 and July 11, 2001.

SUBSEQUENT SALE OF CONVERTIBLE NOTES WITH COMMON STOCK
Through the date of this annual report,  we sold $1,330,000 of additional  Notes
and issued 6,650,000 Note Shares on the same terms as described above.

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

OVERVIEW

We are a leading  provider of ratings,  rewards and  guarantees on local service
purchases driven by credit and debit cardholder  spending.  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
merchants.  Our  ValueStar  ratings are  provided on the  Internet at , on other
partner Internet sites, in our ValueStar Report and through  promotions by rated
businesses.  Our goal is to position ValueStar as the dominant rating system for
local service providers and grow our commission-based system matching buyers and
sellers of local services. Our services are free to consumers.

Starting  in  December  1999  we  began  a  transition  from  fixed  rating  and
certification  fees  to  percentage  commission  fees  based  on  the  value  of
transactions  between member service companies and member buyers. In partnership
with First  Data  Corporation,  we have  created  systems  to match and  collect
transaction  commissions and perform ratings for service  transactions.  Our new
systems create continuously updated customer satisfaction ratings collected from
the actual  purchasers  of local  services.  We also provide  benefits to buyers
purchasing from member businesses.

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

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

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

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

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

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

     o   Through early August 2001 we have signed  marketing and or data sharing
         agreements  with seven major acquiring  merchant banks  representing an
         estimated  282,000 service  merchants across the U.S. that are eligible
         to participate in the ValueStar program.  Our strategy is to market our
         program  to these  service  merchants  and expand  our  penetration  of
         service businesses in selected market regions.

At August 31, 2001 we had approximately  1,050,000  service  businesses rated as
either  ValueStar  Verified  or  ValueStar  Customer-Rated.  While  this  rating
information is important to consumers,  our strategy is to license our ValueStar

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<PAGE>

Customer-Rated  program to these businesses.  While we used to operate fixed fee
licensing in eight market regions,  we are currently targeting licensing efforts
in the  California  region for  activation  of credit  and debit  cards into our
commission  program.  We had  approximately  7,000 licensed  service  businesses
nationwide at August 31, 2001  (approximately  3,700 in California)  compared to
approximately 5,500 nationwide at June 30, 2000.

Our future  business is predicated on creating and  maintaining a growing number
of member buyers and sellers transacting commerce in local services. We expect a
majority of our future  revenues  to be derived  from  commissions  based on the
value of  transactions  between  member  buyers and  sellers of local  services.
Renewals of  businesses  from year to year will impact  future  operations as we
expend funds enrolling new businesses in our member program.

In order to more  efficiently  collect  commissions we capture  automated credit
card  transactions  through  the use of third  party  matching  partners.  These
matching  partners  provide  data on  transactions  that  occur  between  member
businesses and member buyers, as permitted by various data agreements.  We enter
into  agreements  with  individual  banks or  processors  authorizing  access to
transaction  data. Upon receipt and matching of transaction data, we are able to
calculate commission fees and invoice or debit member businesses.

Our  staffing  has varied  significantly  in the last year as we have  developed
business rating content and systems.  We have in the past and expect to continue
to use outside  contractors for certain  services.  We reduced our staffing from
140 in  December  2000  to  approximately  59 at the  date  of  this  report  in
connection with the completion of rating content on the 1,050,000 businesses and
development  of  our  computer  systems.   Our  future  activities  may  include
maintenance  and expansion of rating content on businesses and  maintenance  and
enhancement  of our  software  and  systems.  The  reduction  in  personnel  and
development  costs has reduced  monthly  operating  costs by over 50% as we have
streamlined  operations  to focus  our  resources  on our First  Data  strategic
relationship  and the major credit card issuing banks that have expressed  their
intent to incorporate our program as a benefit for their cardholders.

Future  operations  will be impacted by changes in cost  structure and elections
regarding new product  development,  advertising,  promotions  and growth rates.
Future growth of our operations  will depend on our ability to raise  additional
working  capital  and,  due to the nature of our  operations,  such growth would
contribute  to  continued  operating  losses  in  the  foreseeable  future.  See
"Liquidity and Capital Resources" and "Business Risks" below.

REVENUE AND COST RECOGNITION

During fiscal 2001 a majority of our revenues were from fixed certification fees
ranging from $995 to approximately $2,000 depending on business size. These fees
are  recognized  on a  straight-line  basis  over  the  term  of the  fixed  fee
agreement, usually twelve months. Research and rating fee revenue, ranging up to
$570 but often waived or discounted,  is deferred  until the research  report is
delivered.  Sales  of  marketing  materials  and  other  tangible  property  are
recognized  as materials  are shipped.  From time to time we provide  discounts,
incentives  from base pricing,  refunds and payment terms on fees.  Refunds have
averaged 5% of fixed certification fees during the last two years.

We expense  sales,  research  and rating costs as  incurred.  Costs  incurred in
printing and distributing  our ValueStar  Report  publication for buyers and any
related revenues are recognized upon publication.

In  fiscal  2002 we  expect  a  majority  of our  revenues  to be  derived  from
commissions,  generally 5% subject to annual  caps,  from  transactions  between
member  buyers  and  sellers of local  services.  In  certain  industries  where
collection of commissions is prohibited and in other instances we employ a fixed
annual  license fee. We may provide  payment  terms and  discounts  from time to
time. We also provide a package of buyer benefits applicable for the term of the
business license.  These benefits are categorized under Buyer Benefits as a cost
of sales related to our revenues.

RESULTS OF OPERATIONS

REVENUES. Revenues consist of certification and rating fees from new and renewal
business   applicants,   commission  fees  on  a  percentage  of  the  value  of
transactions  between  member  buyers and member  sellers,  sale  proceeds  from
information  materials,  premium  listings in our  ValueStar  Report,  and other
ancillary revenues. We reported total revenues of $1,046,407 for the fiscal year
ended June 30,  2001, a 50% decline over  revenues of  $2,090,773  for the prior
fiscal  year.  The  substantial  decrease in revenues  is due  primarily  to the
commencement   in  July  2000  of  recognizing   certification   revenues  on  a
straight-line  basis over the term of the annual  license  corresponding  to the
term we expect to provide  benefits to buyers  transacting with a Customer-Rated
Service  Provider  and  from a  change  in  focus  from  the  fixed  rating  and
certification  fee revenue model to a commission  based program  between  member
service  companies and member  buyers,  with the  commission  based system being
activated in May 2001.  At June 30, 2001 we had deferred  revenue from such fees
of $366,208 compared to no deferred  certification revenue at June 30, 2000. The
change in recognizing


                                       15
<PAGE>

revenues  was due to the change in our  product  offering  and the  addition  of
benefits to consumers not previously  part of the program.  If we had recognized
revenues in the prior year using the current  fiscal year method,  we would have
reported total revenues of approximately  $1,357,870 in fiscal 2000. The balance
of the decrease in revenues in the current  year  compared to fiscal 2000 is due
to  our   renewing   many  of  our   existing   service   businesses   into  the
commission-based program for the Northern California market instead of the fixed
fee program. Additionally, essentially all new business sales have been enrolled
in  our  commission-based   program,  which  only  recently  began  contributing
revenues.

During fiscal 2001, certification fees accounted for 62% of revenue, compared to
77% for the  prior  year.  Revenues  from  commission  fees,  stemming  from the
transaction  matching  engine  released in May and June 2001 were nominal as the
program only commenced at June 30, 2001.  Revenues for the fourth fiscal quarter
ended June 30,  2001,  were  $280,972  compared to  $419,895  for the prior year
comparable  quarter or a 33% decrease.  In the fourth  quarter of fiscal 2001 we
were earning fixed certification fees from a portion of only one market with our
other  markets  converted  to the  commission  program.  By July 2000 we focused
merchant sales and marketing only on the Northern California market.

Revenues for the year from premium  listings in our ValueStar  Report and on our
Web site were $120,726,  a decrease of 43% from the $210,520 for the prior year.
The  decrease is due to a focus of resources on  developing  the new  commission
program during fiscal 2001 and less marketing efforts on listings.

Our revenues can vary from quarter to quarter due to (a)  management's  decision
on the mix of sales  effort  between  enrolling  local  service  providers  into
commission  based vs. fixed fee based  programs,  (b) the impact of distributing
the ValueStar Report to buyers and the adoption rate of spending by those buyers
at ValueStar  member  businesses,  (c) seasonality,  (d)  effectiveness of sales
methods and  promotions,  (e) levels of  expenditures  targeted  at  prospective
businesses,  (f) the numbers of  business  members 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 with card issuing  partners
will  materially  impact  future  revenues.  There  can be no  assurance  we can
successfully  implement our  commission-based  program with issuing  partners as
scheduled in the second fiscal quarter of 2002 or at all.  Unknown  technical or
business  issues and  barriers  could arise that could delay  implementation  or
preclude us from executing our commission-based program. In such an event we may
be required to revert to a fixed fee basis.

BUYER  BENEFITS.  Buyer  benefits  consist of direct product costs for materials
provided to buyers  through the use of  marketing  and sales aids  purchased  by
service  providers,  customer  service costs for buyers and the costs of loyalty
awards and customer satisfaction guarantees. These costs of $178,211 represented
17% of revenues for the fiscal year ending June 30,  2001,  compared to $303,280
and 15% of  revenues  for the prior  fiscal  year,  although  the  change is not
directly comparable due to the change in revenue reporting outlined above. Buyer
customer  service  costs  were  $135,733  compared  to  $215,515  in  the  prior
comparable  period.  The buyer customer  service  department  was  substantially
reduced   in  the   current   year  due  to  the   timing  of   activating   our
transaction-matching engine and in launching a large issuer agreement.

RATINGS AND CONTENT. Ratings and content costs consist primarily of the costs of
rating  service  businesses in the fixed fee  certification  program and ongoing
content and  technology  costs  associated  with  maintaining  our databases and
supporting  our  operations.   In  fiscal  2002,  we  expect  to  incur  certain
transaction and matching fees with third parties. Ratings and content costs were
$457,618,  or 44% of  revenues,  for the year ended June 30,  2001  compared  to
$1,162,424,  or 56% of revenues,  for the prior fiscal year. The decrease is due
primarily to a reduction  in the number of fixed fee ratings and sales  targeted
to the commission-based program which does not require the same level of initial
rating costs.  Ratings and content  costs  totaled  $69,200 for the three months
ended  June 30,  2001,  or 25% of  revenues,  compared  to  $210,000,  or 50% of
revenues, in the prior fiscal year's fourth fiscal quarter.

SELLING AND MARKETING  COSTS.  Selling and marketing costs consist  primarily of
personnel  costs  for  outside  sales   consultants   interacting   with  member
businesses,  an inside  customer  service  team for  member  businesses,  direct
marketing  costs  including  lead  generation  and  telemarketing  costs,  costs
associated  with our  ValueStar  Report,  costs  associated  with  marketing and
business development personnel and marketing, advertising and promotion expense.
Sales and  marketing  costs  for the  twelve  months  ended  June 30,  2001 were
$6,109,750,  or 583% of revenues,  compared to $6,619,517,  or 317% of revenues,
for the prior fiscal year.  Sales and marketing costs for the three months ended
June 30, 2001 were $903,995  compared to $2,505,512 in the fourth fiscal quarter
of the prior fiscal year.

Sales related expenses totaled  $2,378,971 in fiscal 2001 compared to $3,582,015
for the prior year.  The decrease is due to corporate  focus from  December 2000
onward in the California  region as opposed to soliciting new sales in a broader

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<PAGE>

number of  markets.  This has  contributed  to reduced  selling  expenses in the
current  year and  especially  in the last six  months.  Selling  costs  totaled
$356,721 for the three months ended June 30, 2001 compared to $1,205,347 for the
fourth  quarter of the prior year.  We expect  selling costs will vary in future
periods,  resulting from levels of future revenues,  variances in renewal rates,
the effect of new sales  promotions  and costs  thereof,  timing of research and
rating  completions,  levels of fixed  selling  costs,  the number of new market
regions,  the mix of sales between fixed fee certifications and commission-based
certifications and other factors, some beyond our control.

Marketing and promotion related expenses  aggregated  $3,730,779 during the year
ended June 30, 2001  compared  to  $3,037,502  for the prior  year.  Included in
marketing  and  promotion  expenses are printing and  distribution  costs of our
ValueStar Report publication targeted at buyers. Printing and distribution costs
were $358,000 in fiscal 2001  compared to the fiscal 2000 total of $336,000,  as
we printed and  distributed  more copies with  additional  pages.  During fiscal
2001, we expended  $323,000 on paid advertising  targeted at expanding  consumer
awareness of ValueStar  compared to $1,125,000 on paid  advertising in the prior
fiscal  year  with  the  substantial  decrease  due to  shifting  funds to other
priorities,  especially  promotional  materials  for member  businesses.  During
fiscal 2001,  we expended  $838,000 on  promotions,  compared to $391,000 in the
prior year with the increase due  primarily  to a  re-branding  effort that took
place in fiscal 2001 to  reposition  branding to our  transaction  program which
resulted in new collateral materials.  We spent approximately $403,000 on agency
fees,  public  relations and market research in the fiscal year 2001 compared to
$161,000 in the prior year with the increase due to substantial  expenses in the
first and second quarters related to efforts  associated with re-branding.  Wage
expenses in marketing during fiscal 2001 were $1,808,000  compared to $1,024,000
for the prior year,  due to  expanded  staffing in the  marketing  and  business
development  groups in the first and second quarters.  These groups were reduced
in the third and fourth  quarters  after our  marketing and promotion of our new
program was  developed.  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.  Total marketing and promotion expenses were
$550,274 for the three months ended June 30, 2001 compared to $1,300,165 for the
prior year's  fourth  quarter  with the decrease due to lowered  expenses in all
categories  described  above with the exception of promotional  material for our
member businesses.

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.  Product and content development costs
consist  primarily  of  expenses  associated  with the design,  development  and
testing of our transaction matching engine and affiliated programs, activated in
May 2001 and content  expenses.  These costs include  development of our website
and the associated back office systems,  development of our proprietary  ratings
content for our website and wages in our technology  department  associated with
new product and content  development.  During the twelve  months  ended June 30,
2001, we expended $6,432,869 on program  development,  compared to $5,860,062 in
the prior fiscal year.  The major  component of product  development  costs were
compensation   and  related   costs  of   $3,863,000,   partner   and   alliance
implementation  costs of $690,000  and the costs of  gathering of new content of
$171,000.   During   fiscal  2001  we  allocated   $1,709,000   of  general  and
administrative costs to product and content development to reflect the full cost
of such internal development. This compares to $1,269,000 allocated in the prior
fiscal year. Product and content  development  expenses in the fourth quarter of
fiscal 2001 were $1,212,945  compared to $3,014,531 in the prior year comparable
period with the reduction due primarily to reduced  staffing and  consulting due
to the completion of major systems.

We  capitalized  $941,000 of product and  content  development  costs as website
development  and software  that are  specifically  related to internal  software
development during fiscal 2001. We began depreciation of this asset in June 2001
in  concert  with the  launch of our  transaction-matching  engine in the fourth
fiscal  quarter and  commencement  of tracking of  transactions  between  member
buyers and member sellers.

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 fiscal 2000's fourth quarter we accrued and expensed
$600,000  representing  future quarterly minimum bill rates over the life of the
contract through March 2003. This penalty is shown net of a $100,000 prepayment,
or a $500,000 accrued expense.

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<PAGE>

We  expect  that  product  and  content   development   expenses  will  decrease
substantially  in fiscal 2002 as we have  implemented our  transaction  matching
engine and our current  focus is on working with card  issuers to implement  the
ValueStar benefits program to cardholders.  Future levels of product and content
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  $2,534,076 or 242% of revenues for the fiscal
year ended June 30,  2001,  compared to  $1,639,423  or 78% of revenues  for the
prior  year,  an  increase  of  $894,653.  As  discussed  above we  allocated  a
proportion of general and administrative costs, totaling $1,709,000,  to product
and  content  development  during  fiscal  2001.  This  compares  to  $1,269,000
allocated  in the  prior  fiscal  year.  The  major  increases  in  general  and
administrative  costs included a $361,000  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,  especially in
the first and second quarters;  a $377,000 increase in occupancy,  telephone and
insurance costs due to additional personnel and expanded operations,  especially
in the first three quarters; a $143,000 increase in legal and accounting expense
due to increased  costs  related to  financing;  a $103,000  increase in general
corporate costs due primarily to increased  expenditures  with public  relations
consultants;  and a $173,000 increase in loss on disposal for assets impaired or
disposed  of during the year.  General and  administrative  costs  increased  to
$660,136  during the fourth  quarter of fiscal 2001 compared to $426,788 for the
prior year's fourth quarter, primarily due to an increase in loss on disposal of
assets of $175,073 over the prior year. Management  anticipates that general and
administrative costs will remain at current levels in fiscal 2002 as we have the
personnel and  infrastructure  in place to support  anticipated  growth over the
next twelve months.

We incurred $75,300 of non-cash stock-based compensation expense during the year
ended June 30, 2001 resulting from non-employee options and warrants compared to
$77,000 for the prior fiscal year.

DEPRECIATION  AND  AMORTIZATION.  Depreciation  and  amortization  expenses were
$2,518,231 for the twelve months ended June 30, 2001, compared to $1,056,416 for
the prior year  period,  or a 138%  increase.  The large  increase is due to the
acquisition  of  equipment  and software  infrastructure  to support an expanded
employee  base, our new commission  program,  our web site and various  internal
databases. Deprecation and amortization expense for the fourth fiscal quarter of
the  current  year was  $1,310,894  compared  to  $574,543  for the  prior  year
comparable quarter.

INTEREST AND OTHER  EXPENSES.  We incurred  interest  expense for the year ended
June 30, 2001 of $1,502,326 that included $1,051,910 of non-cash amortization of
bond discount,  paid-in-kind interest and amortized financing expense.  Included
in the  $1,051,910  of non-cash  interest  and  financing  costs are $992,806 of
amortized  financing  expense  associated  with the issuance of common stock for
short-term  convertible  notes and $20,033 of paid-in-kind  interest  associated
therewith.  Interest  for  the  prior  fiscal  year  was  $1,902,196,  including
$1,696,150  of non-cash  amortization  of bond  discount,  accrued  paid-in-kind
interest and amortized financing expense.  The Company generated interest income
of $94,020 in fiscal 2001 compared to $279,785 in interest income in fiscal 2000
with the decrease due to lower cash balances during the year.

NET LOSS.  We had a net loss of  $18,592,277  for the fiscal year ended June 30,
2001, compared to a loss of $16,175,462 for the fiscal year ended June 30, 2000.
Our increased loss is attributable primarily to (a) decreased revenues resulting
from a change in focus from the fixed rating and certification fee revenue model
to a commission  based  program  between  member  service  companies  and member
buyers,  with the  commission  based  system being  activated  in May 2001,  (b)
product and content  development costs associated with developing our commission
based program,  (c) increased general and  administrative  costs associated with
additional   space  leases  and  support  for   employee   growth  and  business
development,  and (d) increased non-cash  depreciation and amortization  expense
due to  substantially  increased  levels of plant,  property and equipment  over
prior years. We anticipate we will continue to experience operating losses until
we  achieve 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 obtain a sufficient  base of buying and
selling  members to support our operating and corporate  costs.  There can be no
assurance we can successfully  achieve  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, 2001 due to the  beneficial  conversion
feature of the preferred stock issued during the year. Net loss was increased by
$7,043,392  for the one-time  non-cash  imputed  beneficial  conversion  feature
charge and by $475,165 for non-cash accrued  dividends on Series A and Series CC
preferred  stock.  These non-cash imputed amounts had no effect on our financial
position.

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<PAGE>

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 $13,641,693 for the year ended June 30, 2001 ,and
$11,415,947  for the year ended June 30, 2000. At June 30, 2001 we had a working
capital  deficit of $7,017,923,  including  $3,959,590  representing  short-term
convertible notes,  $806,049  representing the current portion of long-term debt
and $308,575  representing  the current portion of capitalized  leases.  For the
year ended June 30, 2001, our negative cash flow from  operating  activities was
due primarily to our continued  operating losses,  selling costs associated with
enrolling  service merchants into our commission based program with no immediate
revenue and significant product and content development costs. At June 30, 2001,
our net accounts receivables were $142,018,  representing  approximately 50 days
of revenues and an annualized  turnover ratio of approximately  7.3 times.  This
compares  favorably  to  approximately  90  days of  revenues  and  turnover  of
approximately  4.0 times at June 30, 2000.  This  improvement  is due in part to
decreased revenues in fiscal 2001 and aggressive  collection efforts on past due
accounts.  We believe that 60 to 90 days revenues in  receivables  is reasonable
based on the nature of our business and the terms we provide  member  businesses
on  certain  fees.  At June  30,  2001,  we have not  experienced  and we do not
anticipate any significant accounts receivable recoverability problems.

We have financed our operations  primarily through the sale of common equity and
debt  financing.  In August 2000 we drew down on the balance of $732,796  from a
commitment  for $2,000,000 in equipment  financing  obtained in the prior fiscal
year  and  obtained  $3,800,000  in  short-term  convertible  notes  in the last
quarter.  Also during the year ended June 30, 2001, we obtained  $8,648,256 from
the sale of common and preferred  stock,  of which  $1,500,000  was  contributed
services.

Other than cash on hand of $697,564 at June 30, 2001, net accounts receivable of
$142,018,  and the cash proceeds from additional short-term convertible notes in
July and August of $1,330,000,  we have no material  unused sources of liquidity
at this time. We expect to incur  additional  operating  losses in future fiscal
quarters as a result of continued operations,  product development  expenditures
and investments in growth.  The timing and amounts of these expenditures and the
extent of operating losses will depend on many factors, some of which are beyond
our control.

Subsequent  to June 30, 2001 we obtained  approximately  $1.33  million from the
issuance of new short-term  convertible  notes. We expect that we will require a
minimum of $12 million of additional  capital to finance  operations  during the
next  twelve  months.  This  estimate is based on current  level of  operations,
anticipated revenues, the planned launch of our transaction-matching engine with
certain issuing banks and costs thereof and planned product  development  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 will be
required to significantly curtail or scale back staffing, advertising, marketing
expenditures and general operations.

As of the date of this annual  report,  we have working  capital  sufficient  to
continue  operations  only for the  next two  weeks  without  additional  funds.
Accounts  payable,  lease  payments  and  other  liabilities  in the  amount  of
approximately  $1,950,000 are currently  past due vendor terms.  There can be no
assurance  that  additional  funding  will be  available to us or on what terms.
Potential  sources of funds include loans from  existing  shareholders  or other
debt financing or additional equity offerings. We have no commitments,  however,
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.  Since April
2001 we have financed our  operations  from the sale of  short-term  convertible
notes,  primarily to existing  shareholders and directors or entities affiliated
with them and also to new  investors  many based in the New York City area.  The
September 11, 2001 terrorist  attack on the East coast may adversely  impact our
ability to finance  future  operations  and may increase the risk of defaults on
existing  past due note and  lease  payments.  There  can be no  assurance  that
shareholders  or directors or others will provide us with any future  financing.
If we are unable to obtain  additional short term working capital,  we will need
to substantially curtail or cease our operations. See "Business Risks" below.

NEW ACCOUNTING PRONOUNCEMENTS AND ISSUES

The  Financial  Accounting  Standards  Board  has  issued  Financial  Accounting
Standards  (FAS) No. 140,  "Accounting  for Transfers and Servicing of Financial
Assets and  Extinguishments  of Liabilities - a replacement of FAS Statement No.
125." The Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities  occurring after March 31, 2000. The adoption
of FAS No.  140 is not  expected  to have a  material  effect  on our  financial
statements.

                                       19
<PAGE>

In June 2001,  the  Financial  Accounting  Standards  Board  issued FAS No. 141,
"Business  Combinations",  and FAS  No.  142,  "Goodwill  and  Other  Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill, and intangible assets deemed to have indefinite lives, will
no  longer be  amortized  but will be  subject  to  annual  impairment  tests in
accordance  with the  Statements.  Other  intangible  assets will continue to be
amortized  over their useful  lives.  The adoption of FAS No. 141 and 142 is not
expected to have a material effect on our financial statements.

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 were effective for transactions  beginning
in the Company's fiscal year 2001. We believe we are recognizing revenues within
the guidance provided by SAB 101.

Statement of  Financial  Accounting  Standards  (SFAS) No. 133,  Accounting  for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended,  establishes accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments  embedded in other contracts and for hedging activities.  Under SFAS
133,  certain  contracts that were not formerly  considered  derivatives may now
meet the  definition of a derivative.  We will adopt SFAS 133 effective  July 1,
2001 and do not expect the adoption of SFAS 133 to have a significant  impact on
financial position, results of operations, or cash flows.

During the second fiscal quarter of 2001, we adopted  Emerging Issues Task Force
Issue No. 00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities  with  Beneficial  Conversion  Features  or  Contingently  Adjustable
Conversion Ratios, to Certain Convertible  Instruments",  which is effective for
all such  instruments.  This issue clarifies the accounting for instruments with
beneficial conversion features or contingently  adjustable conversion ratios. We
modified  our  previous  calculation  of  the  beneficial   conversion  features
associated with previously issued convertible  preferred stock. Based on further
clarification,  the  beneficial  conversion  feature  should  be  calculated  by
allocating the proceeds received in each financing to the convertible instrument
and to any detachable  warrants  included in the transaction,  and measuring the
intrinsic value based on the effective  conversion  price based on the allocated
proceeds.  The  previous  calculation  was based on a  comparison  of the stated
conversion  price  in the  terms  of the  instrument  to the  fair  value of the
issuer's common stock at the commitment date.

The Emerging  Issues Task Force  ("EITF") is reviewing  several  issues that may
impact the Company  including  Issue No.  00-14,  "Accounting  for Certain Sales
Incentives",   Issue  No  00-21,   "Accounting  for   Multiple-Element   Revenue
Arrangements",  and Issue No. 00-22,  "Accounting for 'Points' and Certain Other
Time-Based or Volume-Based Sales Incentives Offers, and Offers for Free Products
or Services to Be Delivered in the Future."  EITF 00-14 is related to our use of
discounts  and free  products  and  services  from time to time to  license  new
service  business  members and became  effective in our 2001 fiscal  year.  EITF
00-21 is related to revenue  recognition when multiple  products or services are
offered  to  customers  over  different   periods  of  time  and  its  tentative
conclusions   provide   guidance  on  revenue   recognition  and  allocation  of
consideration among revenue elements.  At this time, we believe that the Company
will not be  materially  affected  by Issue No.  00-21.  EITF  00-22 is  closely
related to our benefits  program,  which include  points  redeemable  for future
products  or  services  and the way  revenue is  recognized  for these  types of
programs.  The EITF is expected provide guidance on certain issues identified in
EITF  00-22  sometime  in 2001.  When  further  information  on  Issue  00-22 is
pronounced,  if that requires  modification of our present  revenue  recognition
policy, we expect we will adhere to the guidance  provided.  Without knowing how
the EITF will rule on this  issue,  we are  unable to assess the impact of Issue
No. 00-22 at this time.

TAX LOSS CARRYFORWARDS

As of June 30,  2001,  we had  approximately  $41.9  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 under  Internal  Revenue Code Section
382,  which limits the loss  carryforwards  when an  ownership  change has taken
place.

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

                                       20
<PAGE>

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
         2002  -  We  have  incurred  significant  operating  losses  since  our
         inception and anticipate a  continuation  of losses in fiscal 2002. 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  Negative  Working  Capital  and  This  Factor  Combined  with
         Continued Losses Require New Capital in Order to Continue  Operations -
         At June 30, 2001 we had  negative  working  capital of $7.0 million and
         current  liabilities of $8.5 million.  We have limited  working capital
         and will  require  new  capital  within  the next two weeks in order to
         continue  operations.  The September 11, 2001  terrorist  attack on the
         East  coast  may  adversely   impact  our  ability  to  finance  future
         operations  since much of our recent  financing has been from investors
         based in New York City. If we are unable to raise additional capital in
         the near term, our business  would be adversely  affected and we may be
         unable to continue our operations.

         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 developing our commission and
         automated rating systems. These systems became operational only late in
         fiscal 2001. As a result,  we have a limited history upon which you can
         evaluate our business and the performance of our systems and commission
         program. 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.

         Competition and Technological Changes May Adversely Affect Our Business
         - The  possibility  exists that a business  rating service and benefits
         program 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 direct  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
         issues and is our public  spokesperson for events,  including  customer
         meetings and various radio and television appearances. . We do not have
         any key-man  insurance  on Mr.  Stein.  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 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 are reliant on First Data for the operation of our matching
         system  and to  assist us in  marketing  our  program.  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 point
         reward program but have alternatives  available to us. We are dependent
         on third parties for printing and distribution of our ValueStar Report.
         We depend on third  parties for certain  marketing  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 a New Market with No Proven  Acceptance - We 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

                                       21
<PAGE>

         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.

         Because  our  Business  Model is  Unproven,  We Cannot  Assure That Our
         Revenue  Will Grow or That We will  Become  Profitable  - Our  business
         model  depends on our ability to manage a balance of member  buyers and
         member  sellers in  particular  regions that we operate.  The potential
         profitability  of our business model is unproven,  and to be successful
         we must, among other things,  generate sufficient transaction volume to
         support our operating costs.  There can be no assurance we can progress
         from letters of intent with major card issuers to actual  activation of
         card  members  and the  failure  to do so,  for any  reason,  would  be
         detrimental  to our  business.  We may be forced to change our business
         model,  reduce our  commission  rate,  increase  or change  benefits or
         referral  fees or make other changes to our program that could harm our
         financial results.

         The  Implementation  of Our  Program  with Large  Credit and Debit Card
         Issuers is Complex,  Time  Consuming  and  Expensive - Once a letter of
         intent is signed with a card issuer,  the implementation of our program
         is complex,  time consuming and  expensive.  We must work with multiple
         departments of each issuer to coordinate  computer and database systems
         and data elements and link  important  data for the program to operate.
         We must  coordinate  marketing and materials  with various  departments
         including  legal  departments of each issuer.  The  introduction of the
         program and activation of individual cards requires significant cost to
         communicate  the  program to new  members.  The  implementation  of our
         program  requires a significant  commitment by new card issuers.  There
         can be no  assurance  that  existing  letters of intent  will  actually
         result in program implementation and future revenues.

         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.  If 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.  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 our Web site with new alliance partners;

               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.

         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

                                       22
<PAGE>

         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
         Customer-Rated  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  offer  benefits   including  rating  points,
         complaint  resolution and certain money-back  satisfaction  guarantees.
         Should  the  cost  of  providing  these  benefits  exceed  management's
         estimates or should corresponding anticipated revenues not be realized,
         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 Could be Held Liable for  Services by Rated  Merchants  and May Face
         Legal Uncertainties That Could Harm Our Business - We may be subject to
         claims by consumers for the actions of rated businesses. Homeowners may
         bring claims against us for referring  service  merchants who may have,
         among  other  things,  provided  them with poor  workmanship  or caused
         bodily injury or damage to property.  Our existing  insurance  coverage
         may not cover all potential claims,  may not adequately  coverall costs
         incurred in defense of potential  claims,  may not indemnify us for all
         liability that may be imposed or may not be renewable in future periods
         or renewable on terms and conditions  satisfactory  to us. In addition,
         claims,  with or  without  merit,  would  result  in  diversion  of our
         financial resources and management resources. In addition to the direct
         legal  and  defense  costs,  litigation  could  negatively  impact  our
         reputation and make selling to and rating businesses more difficult.

         We May be Unable to Raise Additional  Financing - We will need to raise
         additional  funds in the future in order to  continue  our  operations,
         implement our business plan, fund more aggressive marketing programs or
         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,  respond  to  competitive
         pressures or continue our operations.

                                       23
<PAGE>

         Existing Stockholders  Significantly Influence Us and Could Prevent New
         Investors  From  Influencing  Significant  Corporate  Decisions  - Five
         holders of our  securities  effectively  own  approximately  56% of our
         Company  assuming they  converted  their  Preferred  Stock and exercise
         warrants and options. The holders of each of our Series A, Series B and
         Series CC  Preferred  Stock each have the right to elect one  director.
         The holders could also possibly elect the additional  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.   Also  three  existing  stockholders,   formerly  senior
         lenders,  have certain  contractual  rights requiring their consent for
         certain actions including changes to our articles or bylaws, payment of
         dividends or distributions,  certain sales of assets, and certain other
         corporate  transactions.  In  consideration  of certain  investments by
         First Data we have  agreed to appoint a First Data  representative  for
         election  to our board and we have  provided  First  Data with  certain
         rights  to  first   negotiate  with  us  prior  to  certain   corporate
         transactions with competitors.  These rights could limit our ability to
         negotiate the sale of our Company.

         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.



                                       24
<PAGE>



                                    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.

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.

         3.5          Certificate   of   Designation  of  Series  C  Convertible
                      Preferred  Stock  filed  with  the  Secretary  of State of
                      Colorado on September  14, 2000 as filed as Exhibit 3.5 to
                      the Company's Form 8-K dated September 29, 2000.

         3.6          Certificate   of  Designation  of  Series  CC  Convertible
                      Preferred  Stock  filed  with  the  Secretary  of State of
                      Colorado on January 5, 2001 as filed as Exhibit 3.6 to the
                      Company's Form 8-K dated February 5, 2001.

         3.7*         Amended  and  Restated   Articles  of   Incorporation   of
                      ValueStar Corporation as filed with the

                                       25
<PAGE>

                      Secretary of State of Colorado on July 27, 2001.

         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.

         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,

                                       26
<PAGE>

                      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.

         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.

         4.19.4       Third  Amendment  to  Shareholder  Agreement  between  the
                      Company,   three   institutional   investors  and  certain
                      stockholders of the Company dated as of September 14, 2000
                      as filed as Exhibit 4.19.4 to the Company's report on Form
                      8-K dated September 29, 2000.

         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.

                                       27
<PAGE>

         4.20.1       Consent and  Amendment by  Purchasers of Senior Debt dated
                      as of  April  24,  2001  between  the  Company  and  three
                      institutional  investors as filed as Exhibit 4.20.1 to the
                      Company's report on Form 8-K dated May 29, 2001.

         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.

         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.

         4.29.2       Second Amendment to Investor Rights Agreement  between the
                      Company  and  five  institutional  investors  dated  as of
                      September  14,  2000 as filed  as  Exhibit  4.29.2  to the
                      Company's report on Form 8-K dated September 29, 2000.

         4.29.3       Third  Amendment and Waiver of Investor  Rights  Agreement
                      between the Company and five institutional investors dated
                      as of January  4, 2001 as filed as  Exhibit  4.29.3 to the
                      Company's report on Form 8-K dated February 5, 2001.

                                       28
<PAGE>

         4.29.4       Waiver of Investor  Rights  Agreement  between the Company
                      and five  institutional  investors  dated as of April  24,
                      2001 as filed as Exhibit 4.29.4 to the Company's report on
                      Form 8-K dated May 29, 2001.

         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.

         4.33         Form of  Series C  Preferred  Stock and  Warrant  Purchase
                      Agreement  dated as of  September  14,  2000  between  the
                      Company and Series C stock  purchasers as filed as Exhibit
                      4.33 to the Company's  report on Form 8-K dated  September
                      29, 2000.

         4.34         Form  of  Registration   Rights   Agreement  dated  as  of
                      September  14, 2000 between the Company and Series C stock
                      purchasers  as  filed  as  Exhibit  4.34 to the  Company's
                      report on Form 8-K dated September 29, 2000.

         4.34.1       Form of First Amended  Registration Rights Agreement dated
                      as of January 4, 2001  between  the  Company and Series CC
                      stock  purchasers  as  filed  as  Exhibit  4.34.1  to  the
                      Company's report on Form 8-K dated February 5, 2001.

         4.35         Form of three year Warrant  exercisable at $2.25 per share
                      between the Company and Series C stock purchasers as filed
                      as Exhibit 4.35 to the Company's  report on Form 8-K dated
                      September 29, 2000.

         4.36         Form of Series CC  Preferred  Stock and  Warrant  Purchase
                      Agreement  dated as of January 4, 2001 between the Company
                      and Series CC stock purchasers as filed as Exhibit 4.36 to
                      the Company's report on Form 8-K dated February 5, 2001.

         4.36.1       Form of First  Amendment  to  Series  CC  Preferred  Stock
                      Purchase  Agreement and Amendment to Amended  Registration
                      Rights  Agreement  dated as of April 24, 2001  between the
                      Company and certain  Series CC holders as filed as Exhibit
                      4.36.1 to the  Company's  report on Form 8-K dated May 29,
                      2001.

         4.36.2*      Form of Second  Amendment  to Series  CC  Preferred  Stock
                      Purchase  Agreement and Amendment to Amended  Registration
                      Rights  Agreement  dated as of June 27,  2001  between the
                      Company and certain Series CC holders.

         4.37         Form of three year Series CC Warrant  exercisable at $0.75
                      per  share   between  the  Company  and  Series  CC  Stock
                      purchasers  as  filed  as  Exhibit  4.37 to the  Company's
                      report on Form 8-K dated February 5, 2001.

         4.38         Investment and Marketing  Agreement  dated January 9, 2001
                      between  the  Company  and First  Data  Merchant  Services
                      Corporation  as filed  as  Exhibit  4.38 to the  Company's
                      report on Form 8-K dated February 5, 2001.

         4.39         Form of Stock  Purchase  Warrant  dated  January  23, 2001
                      issued to Hull Capital  Corp.  and J. Mitchell Hull for an
                      aggregate of 500,000 shares of common stock at an exercise
                      price of $1.00 per share (individual warrants differ as to
                      holder  and  number)  as  filed  as  Exhibit  4.39  to the
                      Company's  Form  10-QSB for the  quarter  ended  March 31,
                      2001.

                                       29
<PAGE>

         4.40         Form of Stock Purchase  Warrant dated March 5, 2001 issued
                      to three individual  assignees of Hull Capital Corp for an
                      aggregate of 445,607 shares of common stock at an exercise
                      price of $0.75 per share (individual warrants differ as to
                      holder  and  number)  as  filed  as  Exhibit  4.40  to the
                      Company's  Form  10-QSB for the  quarter  ended  March 31,
                      2001.

         4.41         Letter  Agreement  dated  February  20,  2001  between the
                      Company and The Investor  Relations Group, Inc.  providing
                      for  warrants  on  150,000  shares of  common  stock at an
                      exercise price of $1.00 per share as filed as Exhibit 4.41
                      to the  Company's  Form 10-QSB for the quarter ended March
                      31, 2001.

         4.42         Form of Bridge Loan and Common  Stock  Purchase  Agreement
                      dated as of April 24, 2001 as filed as Exhibit 4.42 to the
                      Company's report on Form 8-K dated May 29, 2001.

         4.42.1       First  Amendment to Bridge Loan and Common Stock  Purchase
                      Agreement  dated as of June 11,  2001  between the Company
                      and  certain  Bridge  Loan  investors  as filed as Exhibit
                      4.42.1 to the Company's  report on Form 8-K dated July 11,
                      2001.

         4.42.2       Form of Amended and Restated  Bridge Loan and Common Stock
                      Purchase  Agreement  dated as of July 25, 2001 as filed as
                      Exhibit  4.42.2 to the Company's  report on Form 8-K dated
                      August 21, 2001.

         4.43         Form of  Convertible  Promissory  Note  (Bridge  Note) due
                      April 30, 2002  between the Company and an aggregate of 40
                      investors  (individual notes differ as to date and amount)
                      as filed as Exhibit 4.43 to the  Company's  report on Form
                      8-K dated May 29, 2001.

         4.44         Right of First  Negotiation  Agreement dated June 21, 2001
                      between the Company and First Data Corporation as filed as
                      Exhibit  4.44 to the  Company's  report  on Form 8-K dated
                      July 11, 2001.

         4.44.1       Amended and Restated Right of First Negotiation  Agreement
                      dated  August 7, 2001  between  the Company and First Data
                      Corporation  as filed as Exhibit  4.44.1 to the  Company's
                      report on form 8-K dated August 21, 2001.

         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.

         10.5.1       Addendums dated as May 16, 2001 to three lease  agreements
                      (originally dated December 30, 1999,  January 27, 2000 and
                      March  3,  2000)  between  the  Company's  subsidiary  and
                      Broadlake  Partners  as filed  as  Exhibit  10.5.1  to the
                      Company's report on Form 8-K dated May 29, 2001.

                                       30
<PAGE>

         10.6         (not used)

         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.

                                       31
<PAGE>

         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.

         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  and   ratified   by  the
                      Shareholders  on November 30, 2000 and as filed as Exhibit
                      10.21 to the Company's Form 10-KSB for the year ended June
                      30, 2000.

         10.21.1      Standard  form of stock  option  agreement  under the 2000
                      Equity  Incentive Plan as filed as Exhibit  10.21.1 to the
                      Company's Form 10-KSB for the year ended June 30, 2000.

         10.22        Lease  Agreement  between  the  Company's  subsidiary  and
                      Amplicon  Financial  dated  March  23,  2000 as  filed  as
                      Exhibit  10.22 to the  Company's  Form 10-KSB for the year
                      ended June 30, 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 as filed as Exhibit 10.23
                      to the  Company's  Form 10-KSB for the year ended June 30,
                      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 as filed as Exhibit  10.23.1 to the  Company's  Form
                      10-KSB for the year ended June 30, 2000.

         10.23.2      Forbearance  Agreement and Restructure  Agreement dated as
                      of May 15,  2001  between  the  Company's  subsidiary  and
                      Transamerica  Business  Credit  Corporation  as  filed  as
                      Exhibit 10.23.2 to the Company's  report on Form 8-K dated
                      May 29, 2001

         10.23.3      Amended and Restated Stock  Subscription  Warrant  between
                      the Company and TBCC  Funding  Trust II dated May 21, 2001
                      for an  aggregate  of 50,000  shares  at $0.575  per share
                      (replaces  Exhibit 10.23.1  previously  filed) as filed as
                      Exhibit 10.23.3 to the Company's  report on Form 8-K dated
                      May 29, 2001

         10.24        Database   License   Agreement   between   the   Company's
                      subsidiary  and  InfoUSA.com,  Inc. dated June 14, 2000 as
                      filed as Exhibit  10.24 to the  Company's  Form 10-KSB for
                      the year ended June 30,  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 as filed as  Exhibit
                      10.25 to the Company's Form 10-KSB for the year ended June
                      30,  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 as  filed as  Exhibit  10.26  to the  Company's  Form
                      10-KSB for the year ended June 30, 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)]

         10.27        Strategic  Development,  Marketing and Services  Agreement
                      between the Company's  subsidiary  and First Data Merchant
                      Services  Corporation dated September 29, 2000 as filed as
                      Exhibit 10.27 to the

                                       32
<PAGE>

                      Company's  Form 10-QSB for the quarter ended  December 31,
                      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].

         10.28        Strategic  Development and Marketing Agreement between the
                      Company's  subsidiary  and First Data Resources Inc. dated
                      November  1,  2000  as  filed  as  Exhibit  10.28  to  the
                      Company's  Form 10-QSB for the quarter ended  December 31,
                      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].

         10.29*       Consulting  and Financial  Community  Relations  Agreement
                      between Hull Capital  Corp.  and the Company dated January
                      25, 2001.

         10.30*       Finders' Fee agreement  between Hull Capital Corp. and the
                      Company dated August 15, 2000.

         21.1*        Subsidiary of the Company

         23.1*        Consent of Moss Adams LLP



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

         *        Filed herewith.

(B) REPORTS ON FORM 8-K.

The  Company  filed a report on Form 8-K on May 29, 2001  reporting  an Item 5 -
Other Events.


                                       33
<PAGE>


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


                                    CONTENTS


                                                                            PAGE

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


CONSOLIDATED FINANCIAL STATEMENTS

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

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

     Statements of stockholders' deficit....................................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,  2001  and  2000,  and  the  related  consolidated
statements of operations,  stockholders'  deficit,  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 auditing standards generally accepted
in the United  States.  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, 2001 and 2000, and the results of its operations and
cash flows for the years then ended, in conformity  with  accounting  principles
generally accepted in the United States.

The accompanying  consolidated  financial statements have been prepared assuming
ValueStar  Corporation will continue as a going concern.  The Company is relying
on short-term funding from investors,  shareholders, and directors, as discussed
in Note 10, to meet its ongoing  cash flow  requirements.  There is no certainty
that  this  source of  capital  will be  available  in the near term or that the
Company will be able to secure the  necessary  long term capital  sufficient  to
meet its needs. This, together with recurring losses as discussed in Note 2, 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 10, 2001


                                                                        Page F-1
<PAGE>

<TABLE>
<CAPTION>

                                                                                       VALUESTAR CORPORATION
                                                                                 CONSOLIDATED BALANCE SHEETS
                                                                                      JUNE 30, 2001 AND 2000

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

                                                    ASSETS

                                                                                    2001            2000
                                                                                ------------    ------------
<S>                                                                             <C>             <C>
CURRENT ASSETS
     Cash                                                                       $    697,564    $  5,287,385
     Receivables                                                                     142,018         454,233
     Inventory                                                                          --            16,898
     Prepaid expenses                                                                628,738         416,573
                                                                                ------------    ------------

             Total current assets                                                  1,468,320       6,175,089

PROPERTY AND EQUIPMENT                                                             5,517,805       5,415,358

RESTRICTED CASH                                                                      296,000         296,000

DEFERRED COSTS                                                                          --            23,949

OTHER ASSETS                                                                          57,299          89,489
                                                                                ------------    ------------

             Total assets                                                       $  7,339,424    $ 11,999,885
                                                                                ============    ============

                     LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
     Accounts payable                                                           $  2,018,156    $  1,665,030
     Accrued liabilities and other payables                                        1,024,765       1,254,035
     Convertible short-term notes                                                  3,959,590            --
     Deferred revenues                                                               369,108         137,520
     Current portion of capitalized leases                                           308,575         285,458
     Current portion of long-term debt                                               806,049         450,503
                                                                                ------------    ------------

             Total current liabilities                                             8,486,243       3,792,546

CAPITAL LEASE OBLIGATIONS, net of current portion                                     99,917         408,492

LONG-TERM DEBT, net of current portion                                               816,919         853,997
                                                                                ------------    ------------

             Total liabilities                                                     9,403,079       5,055,035
                                                                                ------------    ------------

STOCKHOLDERS' DEFICIT
     Preferred stock, $.00025 par value; 10,000,000 shares authorized:
         500,000 shares designated Series A Convertible, with 225,000
          shares issued and outstanding each period (liquidation
          preference of $10.00 per share)                                                 56              56
         800,000 shares designated Series B Convertible, with 660,014
          and 688,586 shares issued and outstanding in 2001 and 2000
          (liquidation preference of $17.50 to $30.00 per share, see note 10)            165             172
         500,000 shares designated Series CC Convertible, with
          192,739 issued and outstanding at June 30, 2001 (liquidation
          preference of $45.00 per share)                                                 48            --
     Common stock, $.00025 par value; 200,000,000 shares
         authorized, 35,820,169 and 15,587,543 shares issued and
         outstanding in 2001 and 2000                                                  8,955           3,897
     Additional paid-in capital                                                   48,186,042      32,162,473
     Deferred debt issuance costs                                                 (5,969,731)           --
     Accumulated deficit                                                         (44,289,190)    (25,221,748)
                                                                                ------------    ------------

             Total stockholders' equity (deficit)                                 (2,063,655)      6,944,850
                                                                                ------------    ------------

             Total liabilities and stockholders' equity (deficit)               $  7,339,424    $ 11,999,885
                                                                                ============    ============

<FN>
See accompanying notes.
------------------------------------------------------------------------------------------------------------
                                                                                                    Page F-2
</FN>
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                        VALUESTAR CORPORATION
                                                                        CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                           YEARS ENDED JUNE 30, 2001 AND 2000

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

                                                                               2001                 2000
                                                                           ------------         ------------
<S>                                                                        <C>                  <C>
REVENUES                                                                   $  1,046,407         $  2,090,773
                                                                           ------------         ------------

OPERATING EXPENSES
     Buyer benefits                                                             178,211              303,280
     Ratings and content                                                        457,618            1,162,424
     Sales and marketing                                                      6,109,750            6,619,517
     Product and content development                                          6,432,869            5,860,062
     General and administrative                                               2,534,076            1,639,423
     Depreciation and amortization                                            2,518,231            1,056,416
                                                                           ------------         ------------

                                                                             18,230,755           16,641,122
                                                                           ------------         ------------

LOSS FROM OPERATIONS                                                        (17,184,348)         (14,550,349)
                                                                           ------------         ------------

OTHER INCOME (EXPENSES)
     Interest income                                                             94,020              279,785
     Interest expense                                                        (1,502,326)          (1,902,196)
     Miscellaneous                                                                  377               (2,702)
                                                                           ------------         ------------

                                                                             (1,407,929)          (1,625,113)
                                                                           ------------         ------------

NET LOSS                                                                    (18,592,277)         (16,175,462)

BENEFICIAL CONVERSION ON PREFERRED STOCK (NOTE 13)                           (7,043,392)         (11,650,255)
ACCRUED DIVIDENDS ON PREFERRED STOCK                                           (475,165)            (167,877)
                                                                           ------------         ------------

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS (NOTE 13)                        $(26,110,834)        $(27,993,594)
                                                                           ============         ============

LOSS PER COMMON SHARE                                                      $      (1.51)        $      (2.41)
                                                                           ============         ============

WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING                                17,255,443           11,630,262
                                                                           ============         ============

<FN>
See accompanying notes.
-------------------------------------------------------------------------------------------------------------
                                                                                                     Page F-3
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                                                            VALUESTAR CORPORATION
                                                                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                                                                               YEARS ENDED JUNE 30, 2001 AND 2000

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

                                                             PREFERRED STOCK                 COMMON STOCK           ADDITIONAL
                                                      ----------------------------    ---------------------------     PAID-IN
                                                        SHARES           AMOUNT         SHARES          AMOUNT        CAPITAL
                                                      ------------    ------------    ------------   ------------   ------------
<S>                                                        <C>        <C>                <C>         <C>            <C>
Balance, June 30, 1999                                        --      $       --         9,374,132   $      2,344   $  6,485,373

Issuance of Series A Convertible
                 Preferred Stock, net of issuance
                 costs of $40,000                          225,000              56            --             --        2,209,944
Accrued 8% dividends on Series A
                 Preferred Stock                              --              --              --             --          167,877
Issuance of Series B Convertible
                 Preferred Stock, net of issuance
                 costs of $75,000                          688,586             172            --             --       11,975,083
Stock issued on conversion of 6%
                 convertible notes and interest               --              --           546,274            137        546,036
Stock issued on exercise of warrants
                 reducing 12% subordinated notes              --              --           525,000            131        656,119
Stock issued on exercise of A and
                  B warrants retiring 8% Senior
                 Secured Notes                                --              --         1,977,382            494      1,449,506
Stock issued at $5.85 per share, net
                 of issuance costs of $25,000                 --              --         1,125,767            282      6,560,492
Stock issued at $5.85 per share on
                 cashless call of C warrants                  --              --           184,320             46            (46)
C warrant call proceeds applied to
                 exercise A warrants on a
                 cashless basis                               --              --            77,382             19            (19)
Stock issued on exercise of options
                 and warrants                                 --              --         1,752,479            438      1,820,114
Issuance of stock in connection with
                 contract                                     --              --            24,807              6         99,994
Value assigned to warrants granted in
                 connection with equipment note               --              --              --             --          115,000
Unearned stock-based compensation                             --              --              --             --           77,000
Net loss                                                      --              --              --             --             --
                                                      ------------    ------------    ------------   ------------   ------------

Balance, June 30, 2000                                     913,586             228      15,587,543          3,897     32,162,473
                                                      ------------    ------------    ------------   ------------   ------------

Sale of Series C Convertible Preferred
                 Stock at $22.50 per share, net of
                 issuance costs of $35,000                 238,469              60            --             --        5,330,493
Sales of Series CC Convertible Preferred
                 Stock at $45.00 per share, net of
                 issuance costs of $40,000                  73,509              18            --             --        3,267,887
2 for 1 Exchange of Series C Convertible
                 Preferred to Series CC Convertible
                 Preferred Stock                          (119,239)            (30)           --             --             (173)
Accrued 8% Dividends on Series A
                 Convertible Preferred Stock                  --              --              --             --          193,031
Accrued 8% Dividends on Series CC
                 Convertible Preferred Stock                  --              --              --             --          282,134
Stock issued as inducement for short-
                 term convertible notes (valued
                 between $0.27 and $0.37 per share)
                 (less finders fee of $182,090)               --              --        19,797,950          4,949      6,775,498
Deferred debt issuance costs                                  --              --              --             --             --
Amortization of debt issuance cost                            --              --              --             --             --
Stock issued on conversion of Series B
                 Convertible Preferred Stock               (28,572)             (7)        347,229             87            (80)
Stock issued on exercise of options
                 and warrants                                 --              --            75,001             19         49,982
Stock issued on exercise of options
                 in exchange for shares                       --              --            12,446              3             (3)
Value assigned to warrants and options
                 issued for services                          --              --              --             --          124,800
Net loss                                                      --              --              --             --             --
                                                      ------------    ------------    ------------   ------------   ------------

Balance, June 30, 2001                                   1,077,753    $        269      35,820,169   $      8,955   $ 48,186,042
                                                      ============    ============    ============   ============   ============




                                                           DEFERRED
                                                         DEBT ISSUANCE    ACCUMULATED
                                                            COSTS           DEFICIT          TOTAL
                                                          ------------    ------------    ------------
Balance, June 30, 1999                                    $       --      $ (8,878,409)   $ (2,390,692)

Issuance of Series A Convertible
                 Preferred Stock, net of issuance
                 costs of $40,000                                 --              --         2,210,000
Accrued 8% dividends on Series A
                 Preferred Stock                                  --          (167,877)           --
Issuance of Series B Convertible
                 Preferred Stock, net of issuance
                 costs of $75,000                                 --              --        11,975,255
Stock issued on conversion of 6%
                 convertible notes and interest                   --              --           546,173
Stock issued on exercise of warrants
                 reducing 12% subordinated notes                  --              --           656,250
Stock issued on exercise of A and
                  B warrants retiring 8% Senior
                 Secured Notes                                    --              --         1,450,000
Stock issued at $5.85 per share, net
                 of issuance costs of $25,000                     --              --         6,560,774
Stock issued at $5.85 per share on
                 cashless call of C warrants                      --              --              --
C warrant call proceeds applied to
                 exercise A warrants on a
                 cashless basis                                   --              --              --
Stock issued on exercise of options
                 and warrants                                     --              --         1,820,552
Issuance of stock in connection with
                 contract                                         --              --           100,000
Value assigned to warrants granted in
                 connection with equipment note                   --              --           115,000
Unearned stock-based compensation                                 --              --            77,000
Net loss                                                          --       (16,175,462)    (16,175,462)
                                                          ------------    ------------    ------------

Balance, June 30, 2000                                            --       (25,221,748)      6,944,850
                                                          ------------    ------------    ------------

Sale of Series C Convertible Preferred
                 Stock at $22.50 per share, net of
                 issuance costs of $35,000                        --              --         5,330,553
Sales of Series CC Convertible Preferred
                 Stock at $45.00 per share, net of
                 issuance costs of $40,000                        --              --         3,267,905
2 for 1 Exchange of Series C Convertible
                 Preferred to Series CC Convertible
                 Preferred Stock                                  --              --              (203)
Accrued 8% Dividends on Series A
                 Convertible Preferred Stock                      --          (193,031)           --
Accrued 8% Dividends on Series CC
                 Convertible Preferred Stock                      --          (282,134)           --
Stock issued as inducement for short-
                 term convertible notes (valued
                 between $0.27 and $0.37 per share)
                 (less finders fee of $182,090)                   --              --         6,780,447
Deferred debt issuance costs                                (6,962,537)           --        (6,962,537)
Amortization of debt issuance cost                             992,806            --           992,806
Stock issued on conversion of Series B
                 Convertible Preferred Stock                      --              --              --
Stock issued on exercise of options
                 and warrants                                     --              --            50,001
Stock issued on exercise of options
                 in exchange for shares                           --              --              --
Value assigned to warrants and options
                 issued for services                              --              --           124,800
Net loss                                                          --       (18,592,277)    (18,592,277)
                                                          ------------    ------------    ------------

Balance, June 30, 2001                                    $ (5,969,731)   $(44,289,190)   $ (2,063,655)
                                                          ============    ============    ============

<FN>
See accompanying notes.
---------------------------------------------------------------------------------------------------------------------
                                                                                                             Page F-4
</FN>
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                        VALUESTAR CORPORATION
                                                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                           YEARS ENDED JUNE 30, 2001 AND 2000
-------------------------------------------------------------------------------------------------------------

                                                                                  2001              2000
                                                                              ------------      ------------
<S>                                                                           <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                 $(18,592,277)     $(16,175,462)
     Adjustments to reconcile net loss to net cash
         from operating activities:
             Depreciation                                                        2,517,241           882,093
             Amortization of intangible assets                                         990           174,361
             Amortization of bond discount                                          39,071         1,509,667
             Change in allowance for doubtful accounts                              31,228               965
             Non cash interest expense                                           1,012,839            12,160
             Warrants and options issued for services                               75,300            77,000
             Preferred stock issued for services                                   146,847              --
             Loss on disposal of assets                                            206,577            33,899
         Changes in:
             Receivables                                                           280,987           (45,393)
             Inventory                                                              16,898           (12,890)
             Prepaid expenses                                                      212,013          (257,127)
             Deferred costs                                                         23,949            76,890
             Other assets                                                           31,200           (69,682)
             Accounts payable                                                      353,126         1,203,206
             Accrued liabilities and other payables                               (229,270)        1,064,276
             Deferred revenues                                                     231,588           110,090
                                                                              ------------      ------------

                 Net cash from operating activities                            (13,641,693)      (11,415,947)
                                                                              ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment acquisitions                                        (1,925,106)       (5,239,157)
     Proceeds from disposal of assets                                               54,816              --
                                                                              ------------      ------------

                 Net cash from investing activities                             (1,870,290)       (5,239,157)
                                                                              ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from sale of preferred stock, net of issuance cost                 7,098,458        12,935,255
     Proceeds from sale of common stock, net of issuance cost                       50,001         8,381,252
     Increase in restricted cash                                                      --            (296,000)
     Payments on exchange of Series C to Series CC Stock                              (203)             --
     Proceeds from debt                                                          4,512,763         1,528,737
     Payments on capital leases                                                   (285,458)          (40,196)
     Payments on debt                                                             (453,399)         (836,708)
                                                                              ------------      ------------

                 Net cash from financing activities                             10,922,162        21,672,340
                                                                              ------------      ------------

NET CHANGE IN CASH                                                              (4,589,821)        5,017,236

CASH, beginning of year                                                          5,287,385           270,149
                                                                              ------------      ------------

CASH, end of year                                                             $    697,564      $  5,287,385
                                                                              ============      ============
<FN>
See accompanying notes.
-------------------------------------------------------------------------------------------------------------
                                                                                                     Page F-5
</FN>
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                        VALUESTAR CORPORATION
                                                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                           YEARS ENDED JUNE 30, 2001 AND 2000
-------------------------------------------------------------------------------------------------------------
                                                                                    2001              2000
                                                                                 -----------      -----------
<S>                                                                              <C>              <C>
SUPPLEMENTAL CASH-FLOW INFORMATION
     Cash paid during the year for:
         Interest                                                                $   470,448      $   380,369
         Income taxes (net)                                                      $      (377)     $     2,702
     Non-cash investing and financing activities:
         Equipment acquired under capital leases                                 $      --        $   590,588
         Software acquired with Preferred Stock                                  $   955,975      $      --
         Stock issued with debt                                                  $ 6,780,447      $      --
         Warrants issued with debt                                               $      --        $   115,000
         Accrued dividends on Series A Preferred Stock                           $   193,031      $   167,877
         Accrued dividends on Series CC Preferred Stock                          $   282,134      $      --
         8% Secured Note converted to Preferred Stock                            $      --        $ 1,000,000
         Shareholder advances converted to Preferred Stock                       $      --        $   250,000
         12% Notes converted upon warrant exercise                               $      --        $   625,000
         6% Convertible Notes and interest converted to equity                   $      --        $   546,274
         8% Secured Notes converted upon warrant exercise                        $      --        $ 1,450,000
         Call of C warrants converted to stock and additional warrants           $      --        $ 1,093,754
         12% Subordinated Notes converted upon warrant exercise                  $      --        $    31,250
         Finders fees paid in convertible short-term notes                       $   159,590      $      --
         Non cash interest paid in convertible short-term notes                  $    20,033      $      --
         Series B Preferred Stock exchanged for common stock                     $   500,000      $      --


<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.  ValueStar, Inc.,
was  incorporated  in California in 1991, and is a provider of ratings,  rewards
and guarantees on local service businesses.  The Company generates revenues from
commissions on transactions  between member buyers and sellers and from research
and rating fees.

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  historically been primarily
from rating and  certification  fees,  recognized when all related services were
provided to the customer.  Rating  services  primarily  related to a survey of a
business' customers and the delivery of a ratings report. Certification services
included an orientation and the delivery of certification materials and manuals.
In the past,  the Company  would  recognize  all the  revenues  associated  with
certification fees when the business was licensed.  The Company did not have any
continuing  cost once the business was  licensed.  On July 1, 2000,  the Company
began recognizing fixed rating and certification  fees on a straight-line  basis
over the term of a participating  business license, which is generally one year.
The Company now provides  certain  services as part of the license fees over the
term of the  license.  Sales of  marketing  materials  and  other  services  are
recognized as materials are shipped or services are rendered.

The Company  began a transition  from fixed rating and  certification  fees to a
commission  program based on the value of  transactions  between  member service
businesses  and  member  buyers.   The  Company  also  changed  its  program  to
automatically  rate businesses and to provide certain benefits and guarantees to
buyers  purchasing from, and rating,  member  businesses.  The Company completed
development  of the  systems  required  to rate buyer  transactions  and collect
commission  fees from credit  card and other  transactions  in March  2001.  The
Company began billing commission revenues,  on a limited basis, in June 2001. In
the future the Company  expects the  majority of its revenues to be derived from
transaction commissions.

The Company  plans to  recognize  commission  revenues  as reported  and earned.
Revenues from businesses that choose to remain on a fixed fee will be recognized
over the term of the business license.

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 were effective for transactions  beginning
in the  Company's  fiscal  year 2001.  The Company  believes  it is  recognizing
revenues within the guidance provided by SAB 101.


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

                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.  The  Company  mitigates  this risk by  placing  demand
deposits with major financial institutions.

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 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  36,257,782 and 9,932,092
shares  of  common  stock  at  June  30,  2001  and  2000,  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.

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.

CUSTOMER  BENEFIT PROGRAM - Costs of benefits and guarantees  provided to buyers
are recognized as provided, with accruals for future benefit obligations.

RECLASSIFICATIONS   -  Certain  amounts  in  the  2000  consolidated   financial
statements  have been  reclassified to conform to the 2001  presentation.  These
reclassifications  were necessary  because of the change in the Company's method
of  generating  revenues  and the  incurrence  of costs  associated  with  those
revenues

RECENT ACCOUNTING  PRONOUNCEMENTS - The Financial Accounting Standards Board has
issued Financial  Accounting  Standards (FAS) No. 140, "Accounting for Transfers
and  Servicing  of  Financial  Assets and  Extinguishments  of  Liabilities  - a
replacement  of FAS Statement No. 125." The Statement is effective for transfers
and servicing of financial assets and  extinguishments of liabilities  occurring
after March 31,  2000.  The  adoption  of FAS No. 140 is not  expected to have a
material effect on the Company's financial statements.

In June 2001,  the  Financial  Accounting  Standards  Board  issued FAS No. 141,
"Business  Combinations",  and FAS  No.  142,  "Goodwill  and  Other  Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill, and intangible assets deemed to have indefinite lives, will
no  longer be  amortized  but will be  subject  to  annual  impairment  tests in
accordance  with the  Statements.  Other  intangible  assets will continue to be
amortized  over their useful  lives.  The adoption of FAS No. 141 and 142 is not
expected to have a material effect on the Company's financial statements.

--------------------------------------------------------------------------------
                                                                        Page F-8
<PAGE>
                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


FAS No. 133,  "Accounting for Derivative  Instruments  and Hedging  Activities",
became  effective  during the Company's  fiscal year beginning July 1, 2000. FAS
133, as amended,  established  accounting and reporting standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts and for hedging activities. Under FAS 133, certain contracts that were
not formerly considered derivatives may now meet the definition of a derivative.
The  adoption  of FAS 133 did not have a  significant  impact  on the  Company's
financial position, results of operations, or cash flows.

The Emerging Issues Task Force issued EITF No. 00-27, "Application of EITF Issue
98-5, Accounting for Convertible  Securities with Beneficial Conversion Features
or  Contingently   Adjustable   Conversion   Ratios,   to  Certain   Convertible
Instruments."  The Task  Force  reached  a  consensus  on  certain  issues  that
clarified the accounting for instruments with beneficial  conversion features or
contingently  adjustable  conversion  ratios.  Under  this  clarification,   the
beneficial  conversion feature is calculated by allocating the proceeds received
in each financing to the convertible  instrument and to any detachable  warrants
included in the  transaction,  and measuring  the  intrinsic  value based on the
effective  conversion price based on the allocated  proceeds.  The transition to
comply with the  consensus  on this issue was reported in the  Company's  second
quarter  interim  financial  statements  in a manner  similar to the  cumulative
effect of a change in accounting principle.

Other EITF  issues  that may have a future  impact on the  Company  include  the
consensus reached on EITF No. 00-14,  "Accounting for Certain Sales Incentives,"
and EITF's  No.  00-21,  "Accounting  for  Revenue  Arrangements  with  Multiple
Deliverables,"  and No.  00-22,  "Accounting  for  `Points'  and  Certain  Other
Time-Based or Volume-Based  Sales Incentive Offers, and Offers for Free Products
or  Services  to Be  Delivered  in the  Future,"  on which  there is  continuing
discussion.

EITF No. 00-14 was effective during the fiscal year ended June 30, 2001, and did
not have a material impact on the Company's financial statements. EITF No. 00-21
is related to revenue recognition when multiple products or services are offered
to customers over different periods of time. Its tentative  conclusion  provides
guidance on revenue  recognition and allocation of  consideration  among revenue
elements.  The issues  discussed  in EITF No.  00-22 are closely  related to the
Company's benefits program, which includes points redeemable for future products
or services, and how revenue is recognized for those types of programs.  Further
discussion is expected on both EITF No. 00-21 and EITF No. 00-22.


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  on  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.

Additional  operating  losses are expected in future fiscal quarters as a result
of continued  operations,  product  development  expenditures and investments in
growth. The timing and amounts of these expenditures and the extent of operating
losses  will  depend on many  factors,  some of which are beyond  the  Company's
control.  The  Company  has taken  steps to reduce  its cash  needs by  reducing
staffing from 140 in December  2000 to  approximately  59 at June 30, 2001,  and
eliminating  leases  for  surplus  office  space.   Additionally,   product  and
development  costs  associated  with the design,  development and testing of the
Company's  transaction  based method of generating  revenues will  substantially
decrease in fiscal 2002.

The Company estimates substantial additional capital will be required to finance
operations during the next fiscal year. This estimate is based on current levels
of operations,  anticipated  revenues,  and planned product  development  costs.
Should  sufficient  financing not be available,  or planned  operations not meet
expectations, the Company may be required to significantly curtail or scale back
staffing, advertising,  marketing expenditures and general operations. Potential
sources  of funds  include  loans  from  existing  stockholders  or  other  debt
financing, or additional equity offerings.

Subsequent  to June 30,  2001,  the  Company  obtained  $1,180,000  through  the
issuance of  convertible  short-term  notes while it continues to negotiate  for
more permanent financing.

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.

--------------------------------------------------------------------------------
                                                                        Page F-9
<PAGE>
                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


NOTE  3 -    RECEIVABLES
                                                           2001           2000
                                                         --------       --------

Trade receivables                                        $181,190       $499,277
Employee receivable                                        37,100           --
                                                         --------       --------
                                                          218,290        499,277
Less allowance for doubtful accounts                       76,272         45,044
                                                         --------       --------

                                                         $142,018       $454,233
                                                         ========       ========



NOTE 4 - PREPAID EXPENSES
                                                           2001           2000
                                                         --------       --------

Rent                                                     $ 27,989       $ 63,561
Development services                                      397,178           --
Other                                                     203,571        353,012
                                                         --------       --------

                                                         $628,738       $416,573
                                                         ========       ========


The Company sold  $2,000,000 of Series CC Stock to First Data Merchant  Services
(FDMS) in 2001 for cash of $500,000 and future  services of  $1,500,000.  During
the year ended June 30, 2001, FDMS or affiliates  provided  $955,975 of services
that were  capitalized  as software  costs related to the Company's  transaction
matching engine,  and provided $196,847 of other support. A balance of $397,178,
which  includes a cash  payment by the Company of  $50,000,  is  reflected  as a
prepaid at June 30, 2001.


NOTE  5 -    PROPERTY AND EQUIPMENT
                                                           2001          2000
                                                        ----------    ----------

Computer equipment                                      $2,870,831    $2,534,733
Website development                                      1,942,000     1,001,000
Software                                                 1,714,760       612,793
Office equipment                                           799,418       777,618
Equipment and software under capital leases                664,581       705,903
Fixtures and equipment                                     331,819       410,498
Leasehold improvements                                     139,761       251,445
                                                        ----------    ----------

                                                         8,463,170     6,293,990
Less accumulated depreciation and amortization           2,945,365       878,632
                                                        ----------    ----------

                                                        $5,517,805    $5,415,358
                                                        ==========    ==========



NOTE 6 - ACCRUED AND CONTINGENT LIABILITIES

                                                           2001          2000
                                                        ----------    ----------

Potential contract liability                            $  500,000    $  600,000
Payroll and payroll taxes                                  162,195       470,551
Accrued vacations                                          179,413       105,829
Other                                                      183,157        77,655
                                                        ----------    ----------

                                                        $1,024,765    $1,254,035
                                                        ==========    ==========

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

                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


The potential  contract liability consists of a contract with a third party that
calls for the Company to pay a $50,000  penalty each quarter over the three-year
life of the  agreement,  or $600,000,  if the Company did not generate a defined
level of business activity.  The third party has requested damages of $1,500,000
for  nonperformance.  The parties  are in dispute  over the  performance  of the
contract,  but  the  Company  may  remain  liable  for the  remaining  quarterly
penalties, less a $100,000 prepayment at June 30, 2001.


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,
                             --------------------
                                     2002                          $ 346,504
                                     2003                             98,347
                                     2004                             15,118
                                                            -----------------
                                                                     459,969
        Less portion representing interest                            51,477
                                                            -----------------
        Present value of net minimum lease payments                  408,492
        Less current portion                                         308,575
                                                            -----------------
                                                                    $ 99,917
                                                            =================


NOTE  8 -    LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                       2001                    2000
                                                                                --------------------    --------------------

<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 $67,084                                                                                $ 878,951             $ 1,071,202

15% Equipment  Note;  due in monthly  installments  of principal and interest of
$22,363 through July 2003, with a balloon payment of $109,919 due on
September 1, 2003; secured by equipment                                                     602,401                       -

15% Equipment Note; due to a company affiliated with a stockholder;
due in monthly installments of principal and interest of $2,022 to
maturity in August 2003; secured by equipment and software                                   47,526                  60,873

15% Equipment Note; due to a company affiliated with a stockholder;
due in monthly installments of principal and interest of $5,500 to
maturity in June 2002; secured by equipment and software                                     25,340                 104,414

15% Notes; interest is paid monthly, with a balloon payment due
August 2001; unsecured                                                                       68,750                  68,011
                                                                                --------------------    --------------------

                                                                                          1,622,968               1,304,500
Less current portion                                                                        806,049                 450,503
                                                                                --------------------    --------------------

                                                                                          $ 816,919               $ 853,997
                                                                                ====================    ====================
</TABLE>

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

                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


The Company completed drawing down a $2,000,000 debt line in September 2000 with
Transamerica  Business  Credit  Corporation.  In exchange for a  forbearance  of
principal and interest  payments from March 2001 through June 2001,  the Company
agreed to make additional  principal and interest payments  aggregating $244,879
in July through  October  2001,  and has agreed to make a $250,000  reduction in
principal  upon  successful  completion  of a minimum of $5 million in equity or
long-term debt raised after May 15, 2001. The Company also issued an amended and
restated  warrant  exercisable  for 50,000  common shares at $0.575 per share in
connection with the forbearance agreement.

Maturities of long-term debt are as follows:

                         Year Ending June 30,
                         --------------------
                                 2002                      $ 806,049
                                 2003                        752,009
                                 2004                         64,910
                                                     ----------------
                                                         $ 1,622,968
                                                     ================


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,  imposes
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:

                                                   2001                2000
                                               ------------        ------------
Federal tax loss carryforward                  $ 13,921,000        $  6,401,000
State tax loss carryforward                       1,724,000           1,018,000
Reserves and allowances                             499,000              54,000
State tax deferrals                                (620,000)           (262,000)
Unamortized bond discount                              --                35,000
                                               ------------        ------------
                                                 15,524,000           7,246,000
Less valuation allowance                         15,524,000           7,246,000
                                               ------------        ------------
                                               $       --          $       --
                                               ============        ============


--------------------------------------------------------------------------------
                                                                       Page F-12


<PAGE>


                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


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

                    Date of Expiration         FEDERAL               CALIFORNIA
                    ------------------         -------               ----------

                            2002             $      --               $   701,000
                            2003                    --                   759,000
                            2004                    --                 1,668,000
                            2005                    --                 6,720,000
                            2007                  98,900                    --
                            2008                 410,500                    --
                            2009                 365,700                    --
                            2010                 178,600                    --
                            2011                 736,900                    --
                            2012               1,403,000               8,923,000
                            2013               1,519,000                    --
                            2019               3,460,000                    --
                            2020              15,764,000                    --
                            2021              17,883,000                    --
                                             -----------             -----------

                                             $41,819,600             $18,771,000
                                             ===========             ===========



NOTE 10 -    CAPITAL STOCK

The Company  has  authorized  10 million  shares of capital  stock as  preferred
stock,  with a par value of $0.00025 per share. A total of 1,000,000  shares are
designated as Series A Convertible  Preferred Stock ("Series A Stock"),  800,000
shares  are  designated  as Series B  Convertible  Preferred  Stock  ("Series  B
Stock"),  and 500,000 shares are  designated as Series CC Convertible  Preferred
Stock ("Series CC Stock").

SERIES A STOCK - During the first  quarter of fiscal  2000,  the Company  issued
225,000  shares of 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 $1.28 per share at June 30, 2001, 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. At
June 30, 2001, the Series A Stock was convertible into  approximately  2,039,776
shares of common stock.

SERIES B STOCK - In December 1999 and January 2000,  the Company  issued 688,586
shares of Series B Stock at  $17.50  per  share.  A total of  $1,000,000  of the
Company's  previous   outstanding  8%  Senior  Secured  Notes  and  $250,000  of
shareholder  advances  were  converted  into 71,429 of these  shares of Series B
Stock.  During the year ended June 30, 2001 a total of 28,572 shares of Series B
Stock were converted into 347,229 shares of common stock.

The dollar amount of Series B Stock is  convertible  into shares of common stock
at a  conversion  price  equal to $1.16  per  share  at June  30,  2001,  and is
automatically  converted on the occurrence of certain events. The Series B Stock
has  certain  antidilution  and  registration  rights.  The Series B Stock has a
liquidation  preference  pari passu with Series CC Stock,  after  payment of the
preferential  amount  for the Series A Stock,  of $17.50  per  share.  After the
payment of this preference and the Series CC preference, 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 one member of the Company's Board of Directors.


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

                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


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,  2001,  the 660,014  shares of  outstanding  Series B Stock was
convertible into 9,957,106 shares of common stock.

COMMON  STOCK UNIT  FINANCING  - 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.

SERIES CC STOCK - During  the first  nine  months of fiscal  2001,  the  Company
issued  238,469  shares of  Series C  Convertible  Preferred  Stock  ("Series  C
Stock"), par value $.00025, for cash of $22.50 per share. In connection with the
sale of the Series C Stock,  the Company  granted the purchasers  warrants on an
aggregate of 1,192,345 shares of common stock  ("C-Warrants").  During the third
fiscal  quarter  of 2001  all the  holders  of  Series  C Stock  and  C-Warrants
exchanged their securities (a two for one exchange) for 119,230 shares of Series
CC Stock and  warrants  on  3,576,900  shares of  common  stock  ("CC-Warrants")
exercisable at $0.75 per share.  At June 30, 2001 there were no shares of Series
C Stock or C-Warrants outstanding.

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

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

Cumulative dividends of 8% per annum are payable on the Series CC Stock when and
if declared by the Board of Directors or upon  liquidation  or  conversion.  The
dollar amount of Series CC Stock is convertible into shares of common stock at a
conversion  price  equal to $0.63 per  common  share at June 30,  2001,  and are
automatically converted on the occurrence of certain events. The Series CC Stock
has certain antidilution and registration  rights, has a liquidation  preference
of $45.00 per share,  plus  accrued  and unpaid  dividends,  pari passu with the
Series B preferred stock,  but after payment of the preferential  amount for the
Series A preferred  stock.  The Series CC Stock has voting  rights  equal to the
number of common shares into which it is  convertible.  In addition,  as long as
there are at least  100,000  shares of  Series  CC Stock  outstanding,  then the
holders are entitled to elect one member of the Company's Board of Directors.

The Company issued to a financial advisor, controlled by a director, warrants to
purchase an aggregate of 445,607  shares of common stock at an exercise price of
$0.75 per share with a five-year term in connection  with the sale of the Series
CC Stock, and incurred legal and related costs of $40,000.

At June 30,  2001,  the  192,739  shares  of  outstanding  Series  CC Stock  was
convertible into 14,214,913 shares of common stock.

12% CONVERTIBLE SHORT-Term Notes and Stock - During the fourth quarter of fiscal
2001,  the Company sold an aggregate of  $3,959,590  of  convertible  short-term
notes, and issued  19,797,950 shares of common stock as an inducement to holders
to  purchase  the Notes.  The  Company  valued the common  shares at fair market
prices at time of issuance,  which  ranged from $0.27 to $0.37 per share,  or an
aggregate of $6,962,537,  including  $182,090 in finders'  fees.  This amount is
treated as deferred debt issuance  costs that are  amortizable  over the term of
the Notes.  During  fiscal 2001,  $992,806  was  expensed,  with the  $5,969,731
balance reported as a contra account in equity.


--------------------------------------------------------------------------------
                                                                       Page F-14
<PAGE>

                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


The Notes bear interest at the rate of 12% per annum payable in cash at maturity
on  April  30,  2002 or  payable  in  kind if the  Notes  are  converted  into a
subsequent  round of financing.  The Notes plus accrued interest are designed by
their terms to be automatically  convertible into a proposed senior  convertible
note and warrant financing at a later date, subject to certain conditions.

Entities  affiliated with directors  purchased  $1,446,648 of the Notes and were
issued  7,233,240  shares of common stock.  This includes  $159,590 of Notes and
797,950  common  shares issued in  consideration  of an aggregate of $159,590 in
finders fees owed to an entity  related to and  controlled  by a director of the
Company.


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.

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.

In 2000 the  stockholders  approved 2000 Equity Incentive Plan. The Plan expires
in 2010,  and  reserves  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.

                                                                  WEIGHTED
                                                                  AVERAGE
                                              SHARES          EXERCISE PRICE
                                              ------          --------------
Balance, July 1, 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
Granted                                     2,548,801              1.87
Canceled                                   (1,383,398)             5.17
Exercised                                     (90,001)             0.64
Expired                                       (95,000)             0.50
                                           -----------

Balance, June 30, 2001                      3,214,340          $   2.17
                                           ===========

Exercisable at June 30, 2001                2,029,469          $   2.05
                                           ===========


--------------------------------------------------------------------------------
                                                                       Page F-15
<PAGE>
                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


The following  tables summarize the number of options granted and exercisable at
June  30,  2001,  and  the  weighted   average  exercise  prices  and  remaining
contractual lives of the options:
<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, 2001        JUNE 30, 2001      EXERCISE PRICE           LIFE             JUNE 30, 2001
------------------    ------------------    ----------------    ----------------    ----------------    -------------------
<S>        <C>                   <C>                  <C>                <C>                   <C>                  <C>
           $ 0.40                42,000               2,500              $ 0.40                4.92                 $ 0.40
             1.00             1,559,197           1,140,149                1.00                3.89                   1.00
             1.25               215,000             145,002                1.25                2.00                   1.25
             1.38                 5,000               5,000                1.38                0.79                   1.38
             1.50                70,000              70,000                1.50                3.07                   1.50
             1.69                 1,000               1,000                1.69                0.85                   1.69
             1.92                26,600              13,267                1.92                3.17                   1.92
             2.00               277,534             122,777                2.00                3.25                   2.00
             3.00               325,600             149,018                3.00                4.09                   3.00
             4.00               472,750             220,600                4.00                4.19                   4.00
       7.00-10.00               219,659             160,156                7.01                3.31                   7.01
                      ------------------    ----------------

                              3,214,340           2,029,469              $ 2.17                3.72                 $ 2.05
                      ==================    ================
</TABLE>


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

During  fiscal  2001,  the Company  recorded  non-cash  compensation  expense of
$75,300  under its stock option plans to  non-employees  through the granting of
39,100 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 been
consistent  with the  methodology  prescribed  under SFAS 123, the Company's net
loss and loss per common share would have been as follows:

<TABLE>
<CAPTION>
                                                                                       2001                    2000
                                                                                --------------------    --------------------
<S>                                                                                   <C>                     <C>
Loss for the year                                                                     $ (18,592,277)          $ (16,175,462)
Compensation expense                                                                     (1,368,774)             (1,330,000)
                                                                                --------------------    --------------------

Pro forma net loss                                                                      (19,961,051)            (17,505,462)

Beneficial conversion on Series C & Series CC preferred stock                            (7,043,392)            (11,650,255)
Accrued dividends on Series A and Series CC preferred stock                                (475,165)               (167,877)
                                                                                --------------------    --------------------

Proforma net loss available to common stockholders                                    $ (27,479,608)          $ (29,323,594)
                                                                                ====================    ====================

Pro forma loss per common share                                                             $ (1.16)                $ (1.51)
                                                                                ====================    ====================
</TABLE>


The fair value of each  option and  warrant  granted  during  2001 and 2000,  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
70% in 2001 and 72% to 107% in  2000,  (3) risk  free  interest  rate of 4.6% to
5.5%,  and (4) an  expected  life of the  options of from  three to five  years.
Options  issued during 2001 and 2000,  have an estimated  weighted  average fair
value of $.21 and $2.46. The non-exercisable options vest over a period of up to
five years.

STOCK  WARRANTS - In January  2001,  in exchange for future  financial  advisory
services,  the  Company  granted  warrants  on  500,000  shares of common  stock
exercisable at $1.00 per share to a financial  consulting  firm  controlled by a
director.  A total of 250,000  warrants vested and were exercisable at issuance,
with the balance  vesting at the end of one year. The warrants expire in January
2006.

--------------------------------------------------------------------------------
                                                                       Page F-16

<PAGE>



                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


In February 2001, the Company granted warrants on 150,000 shares of common stock
exercisable at $1.00 per share to a consulting firm for future public  relations
services.  A total of 18,750 warrants  vested and were  exercisable at issuance,
and the balance vest at the rate of 18,750 per quarter.  The warrants  expire in
February 2006.

The value of the vested  warrants was  estimated  to be  $107,800,  with $58,300
expensed for services provided and $49,500 reflected in prepaid expenses at June
30, 2001.

At June  30,  2001,  the  Company  had the  following  stock  purchase  warrants
outstanding, each exercisable into one common share:

       NUMBER                      EXERCISE PRICE           EXPIRATION DATE
     ----------------           --------------------      ----------------------
             187,500    (1)                  $ 1.25             September, 2002
              20,000    (1)                    1.25              December, 2002
              66,300    (2)                    5.85                 March, 2003
              64,713    (2)                    5.85                 April, 2003
              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
              50,000                           0.58                 April, 2005
           5,782,170    (4)                    0.75               January, 2004
             500,000                           1.00               January, 2006
             150,000                           1.00              February, 2006
             445,607                           0.75                 March, 2006
     ----------------
           8,016,518
     ================



(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.

(4)  These  warrants are callable at a stock price of $3.00 per share subject to
     certain conditions.

An  aggregate  of  2,954,063  of the above  warrants  are held by  officers  and
directors of the Company or their  affiliates.  Some  warrants  contain  certain
registration rights.


NOTE 12 -    COMMITMENTS

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, $180,000, plus
bonuses.

--------------------------------------------------------------------------------
                                                                       Page F-17
<PAGE>

                                                           VALUESTAR CORPORATION
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


In the third and fourth  quarters  of the fiscal year ended June 30,  2000,  the
Company  entered into leases for 20,000 square feet of additional  office space.
These leases expire on January 31, 2005. Additional office space was also leased
during this time but  subsequently  was abandoned  during the  Company's  recent
downsizing  with the assignment of the lease.  Office rent expense for the years
ended June 30, 2001 and 2000, was $870,000 and $430,000.

Minimum future commitments under these operating leases are as follows:

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

                        2002                     $ 365,000
                        2003                       361,200
                        2004                       359,800
                        2005                       210,100
                                            ---------------

                                               $ 1,296,100
                                            ===============


NOTE 13 -    LOSS PER COMMON SHARE

The  provisions  of the  Series A and  Series CC  Preferred  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 $475,165 for the year ended June 30, 2001
and 2000, respectively.

The net loss in 2001 that is attributable to common  stockholders  was increased
by $7,043,392 for an imputed deemed dividend from a discount  provision included
in the Series C and Series CC  Preferred  Stock.  The Series C and CC  Preferred
Stock provided for a conversion  price at less than the market price on the date
of issuance.  In 2000,  the net loss  attributable  to common  stockholders  was
increased  by  $11,650,255  for an  imputed  deemed  dividend  from  a  discount
provision  included in the Series B Stock,  which also provided for a conversion
price  less  than  the  market  price  on the date of  issuance.  These  imputed
dividends  are 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, 2001 and 2000.


--------------------------------------------------------------------------------
                                                                       Page F-18

<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 20, 2001

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.

<TABLE>
<CAPTION>
         Name                                        Position                           Date
         ----                                        --------                           ----

<S>                                         <C>                                         <C>
/s/ JAMES STEIN                             Chief Executive Officer                     September 21, 2001
    -----------                             and Director
    James Stein                             (principal executive officer)


/s/ MICHAEL J. KELLY                        Controller                                  September 21, 2001
    ----------------                        (principal accounting officer)
    Michael J. Kelly

/s/ JAMES A. BARNES                         Treasurer, Secretary and Director           September 21, 2001
    ---------------                         (principal financial officer)
    James A. Barnes

/s/ STEVE A. LEDGER                         Director                                    September 21, 2001
    ---------------
    Steve A. Ledger

/s/ J. MITCHELL HULL                        Director                                    September 21, 2001
    ----------------
    J. Mitchell Hull

/s/ STEVEN VANFLEET                         Director                                    September 21, 2001
    ---------------
    Steven VanFleet

/s/ DAVID P. BAILIS                         Director                                    September 21, 2001
    ---------------
    David P. Bailis

</TABLE>