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

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

                                   FORM 10-QSB

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


                   For quarterly period ended March 31, 1998.

                         Commission File Number 0-22610

                              VALUESTAR CORPORATION
             (Exact name of registrant as specified in its charter)


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

 1120A Ballena Blvd., Alameda, California                       94501
 ----------------------------------------                       -----
 (Address of principal executive offices)                     (Zip Code)

                                 (510) 814-7070
                                 --------------
                           (Issuer's telephone number)

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

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

Common Stock, $.00001 par value                             8,682,496
-------------------------------                             ---------
          (Class)                                (Outstanding at April 30, 1998)

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

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<PAGE>


                              VALUESTAR CORPORATION
                                      INDEX

                                                                            Page
PART I. FINANCIAL INFORMATION

     Item 1. Financial Statements (unaudited):

             Consolidated Balance Sheets as of March 31, 1998
             and June 30, 1997                                               3

             Consolidated Statements of Operations for the three
             and nine months ended March 31, 1998 and 1997                   4

             Consolidated Statements of Cash Flows for the nine
             months ended March 31, 1998 and 1997                            5

             Notes to Interim Consolidated Financial Statements              6

     Item 2. Management's Discussion and Analysis of Financial
             Condition and Results of Operations                             9

PART II. OTHER INFORMATION

     Item 1. Legal Proceedings                                              14
     Item 2. Changes in Securities                                          14
     Item 3. Defaults upon Senior Securities                                15
     Item 4. Submission of Matters to a Vote of Security Holders            15
     Item 5. Other Information                                              15
     Item 6. Exhibits and Reports on Form 8-K                               15


SIGNATURES                                                                  15

3

<PAGE>


PART I. FINANCIAL INFORMATION           
Item 1. Financial Statements           

<TABLE>
                                                        VALUESTAR CORPORATION
                                                     CONSOLIDATED BALANCE SHEET
                                                             (UNAUDITED)

<CAPTION>
                                                                                                March 31,                 June 30,
                                                                                                  1998                      1997
                                                                                               ------------------------------------
<S>                                                                                            <C>                      <C>        
ASSETS

Current Assets
    Cash                                                                                       $   190,316              $    44,225
    Receivables - net                                                                              312,283                  295,542
    Inventory                                                                                        3,094                   27,863
    Prepaid and other                                                                               10,123                    7,035
                                                                                               ------------------------------------
                                                                                                   515,816                  374,665

    Deferred costs - net                                                                           205,910                  134,085
    Property, equipment and intangibles - net                                                       49,090                   49,422
                                                                                               ------------------------------------

                                                                                               $   770,816              $   558,172
                                                                                               ====================================

                  LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
    Bank line of credit (Note 5)                                                               $   150,000              $      --   
    Accounts payable                                                                               164,263                  373,226
    Accrued expenses                                                                               117,204                  112,277
    Deferred revenue                                                                                23,129                   22,720
    Notes payable (Note 6)                                                                         100,000                   30,000
                                                                                               ------------------------------------
                                                                                                   554,596                  538,223
                                                                                               ------------------------------------

Long-Term Debt (Note 6)                                                                          1,000,000                  100,000
                                                                                               ------------------------------------
                                                                                                 1,554,596                  638,223
                                                                                               ------------------------------------

Stockholders' Deficit (Note 7)
    Common stock, $.00025 par value,
      20,000,000 shares authorized,
      8,682,496 and 8,326,246 shares issued
      and outstanding, respectively                                                                  2,171                    2,082
    Additional paid-in capital                                                                   4,125,160                3,759,351
    Accumulated deficit                                                                         (4,911,111)              (3,841,484)
                                                                                               ------------------------------------
                        Total Stockholders' Deficit                                               (783,780)                 (80,051)
                                                                                               ------------------------------------

                                                                                               $   770,816              $   558,172
                                                                                               ====================================

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

                                                                  3
<PAGE>


<TABLE>
                                                        VALUESTAR CORPORATION

                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                                             (UNAUDITED)

<CAPTION>
                                                                 Three months ended                        Nine months ended   
                                                                     March  31,                                March  31,       
                                                            1998                  1997                 1998                 1997
                                                         --------------------------------------------------------------------------
<S>                                                      <C>                  <C>                  <C>                  <C>        
Revenues                                                 $   300,884          $    68,719          $ 1,092,577          $   578,175

Costs and Expenses:
    Cost of revenues                                         158,088               68,002              412,346              319,348
    Sales costs                                              176,649              323,046              547,170              697,358
    Marketing and promotion                                  295,349              328,267              590,465              546,375
    General and administrative                               243,466              108,122              562,236              354,707
                                                         --------------------------------------------------------------------------
                                                             873,552              827,437            2,112,217            1,917,788
                                                         --------------------------------------------------------------------------

Loss from operations                                        (572,668)            (758,718)          (1,019,640)          (1,339,613)
                                                         --------------------------------------------------------------------------

Interest expense                                             (34,790)              (3,000)             (49,987)              (5,000)
                                                         --------------------------------------------------------------------------

Net loss                                                 $  (607,458)         $  (761,718)         $(1,069,627)         $(1,344,613)
                                                         ==========================================================================

Basic net loss per common
share (Note 9)                                           $     (0.07)         $     (0.11)         $     (0.13)         $     (0.19)
                                                         ==========================================================================
Weighted average number of
common shares outstanding                                  8,591,246            7,067,438            8,439,695            7,067,438
                                                         ==========================================================================

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

                                                                  4
<PAGE>



                              VALUESTAR CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                          Nine months ended
                                                              March 31,
                                                        1998            1997

Cash Flows from Operating Activities
     Net loss                                        $(1,069,627)   $(1,344,613)
     Adjustments to reconcile net loss to net cash
      used by operating activities:
        Depreciation and amortization                      7,073          6,496
        Warrants issued for services                      20,000           --   
        Common stock issued for services                  88,398          2,175
        Changes in assets and liabilities:
          Accounts receivable                            (16,741)      (109,574)
          Inventories                                     24,769        (23,707)
          Prepaid expenses and other                      (3,088)        (3,024)
          Deferred costs                                 (71,825)       (13,781)
          Accounts payable                              (208,963)       259,111
          Accrued Expenses                                 4,927         79,826
          Deferred revenue                                   409        (16,299)
                                                     --------------------------
Net Cash Flows Used by Operations                     (1,224,668)    (1,163,390)

Cash Flows from Investing Activities
     Equipment acquisitions                               (6,741)       (17,565)
                                                     --------------------------
Net Cash Used by Investing Activities                     (6,741)       (17,565)

Cash Flows from Financing Activities
     Sale of common stock                                227,500        750,000
     Common stock subscribed                                --           40,000
     Proceeds from bank line                             250,000           --   
     Repayment of bank line                             (100,000)          --
     Sale of long-term debt                            1,000,000        100,000
     Stockholder advances                                 90,000           --   
     Repayment of stockholder advances                   (90,000)          --   
                                                     --------------------------
Net Cash Provided by Financing Activities              1,377,500        890,000
                                                     --------------------------
Increase (Decrease) in Cash and Cash Equivalents         146,091       (290,955)

Cash at Beginning of Period                               44,225        454,809
                                                     --------------------------
Cash at End of Period                                $   190,316    $   163,854
                                                     ==========================

Supplemental Cash Flow Information:
   Cash paid for interest                            $    49,987    $     5,000
   Non-cash investing and financing activities:
      Common stock issued for services               $    88,398    $      --
      Common stock issued for accrued expenses       $      --      $    32,396
      Notes converted to stock                       $    30,000    $      --
      Value assigned for warrants issued             $    20,000    $       500

See accompanying notes to interim consolidated financial statements.            

                                       5
<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 1998

1. OPERATIONS
The Company, a Colorado corporation,  conducts its operations through ValueStar,
Inc., a wholly-owned subsidiary.  ValueStar, Inc. was incorporated in California
in  1991,  and  is a  provider  of  service  and  professional  business  rating
information to consumers. A certification  trademark,  ValueStar Certified(R) is
issued to businesses  that have  successfully  passed an  independent  rating of
their   customer's   satisfaction.   The  Company's   activities  are  currently
concentrated in Northern California.  The Company communicates information about
highly  rated  service  and  professional  firms  that  have  earned  "ValueStar
Certified" through various media including its Internet site (www.valuestar.com)
and a periodic publication Consumer ValueStar Reports.

The Company's  revenues are primarily  from research and rating fees paid by new
and renewal customers,  annual  certification fees from qualified applicants and
renewal customers,  and sales of information service products. The Company, from
time to time,  provides  discounts,  incentives and  satisfaction  guarantees to
first time applicants,  and may extend payment terms on the annual certification
fee.  Certification  fees and related cost of sales  consisting  of research and
rating  fees are  recognized  when all  related  services  are  provided  to the
customer.  The Company provides a reserve for customer satisfaction  guarantees.
Sales of  information  services are  recognized  as materials  are  delivered or
shipped or services are rendered.

Costs incurred in printing and distributing the Company's consumer  publication,
Consumer  ValueStar  Report,  published  in January  and July,  and any  related
revenues are recognized upon publication.

2. STATEMENT PRESENTATION
The accompanying  unaudited interim  financial  statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information.  They do not  include all  information  and  footnotes  required by
generally accepted accounting  principles.  The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended June 30, 1997.

In the opinion of  management,  the  interim  financial  statements  reflect all
adjustments of a normal  recurring  nature necessary for a fair statement of the
results  for  interim  periods.  Operating  results for the three and nine month
periods are not  necessarily  indicative of the results that may be expected for
the year.

Certain  reclassifications  have been made in the prior  year to  conform to the
current period presentation.

3. INVENTORY
Inventory is recorded at the lower of cost (using the first-in  first-out method
of accounting) or market.  Inventory consists of brochures and related materials
for resale.

4. DEFERRED COSTS
All  direct  costs   related  to  marketing   and   advertising   the  ValueStar
certification  to business and  consumers  are expensed in the period  incurred,
except  for  direct-response   advertising  costs,  which  are  capitalized  and
amortized  over  a  twelve  month  period.  Deferred  costs  consist  solely  of
telemarketing costs.  Deferred costs are periodically  evaluated to determine if
adjustments for impairment are necessary.

5. LINE OF CREDIT
The Company has a $250,000 revolving bank line of credit, with interest at prime
plus 2%. At March 31, 1998 the Company had $100,000 available under this line of
credit.  The bank's  commitment under this agreement matures in August 1998. The
line of credit is guaranteed by certain officers,  directors and shareholders of
the Company.

                                       6

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 1998

6. LONG-TERM DEBT
The Company is  obligated  on two 12% notes in the amount of $50,000 each for an
aggregate of $100,000 one of which is payable to the spouse of a director. These
notes are due on September 30, 1998 and included in current liabilities.

The Company has obtained  $1,000,000  from the sale of long-term  unsecured  12%
subordinated  notes due June 30, 2000 (12% Notes).  Interest on the 12% Notes is
payable  monthly.  In  connection  with the sale of the 12% Notes,  the  Company
issued warrants  exercisable into 500,000 common shares at $1.25 per share until
December 31, 2000.

7. STOCKHOLDERS' DEFICIT
<TABLE>
The following table summarizes equity  transactions during the nine months ended
March 31, 1998:

<CAPTION>
                                                                         Shares         Par Value     Paid in Capital      Total $
                                                                       ----------       ----------    ---------------     ----------
<S>                                                                     <C>             <C>              <C>              <C>       
Balance June 30, 1997                                                   8,326,246       $    2,082       $3,759,351       $3,761,433
  Private placement at $1.00 per unit, consisting of
    one share and one warrant                                             250,000               62          249,938          250,000
  Value assigned to 250,000 warrants granted for
    bank guarantee                                                           --               --             20,000           20,000
   Common stock issued for services rendered                               91,250               23           88,375           88,398
  Exercise of stock options                                                15,000                4            7,496            7,500
                                                                       ----------       ----------       ----------       ----------
Balance March 31, 1998                                                  8,682,496       $    2,171       $4,125,160       $4,127,331
                                                                       ==========       ==========       ==========       ==========
</TABLE>

The Company has reserved 250,000 shares of common stock for each of its 1992 ISO
Plan and 1992 NSO Plan, 300,000 shares of common stock for the 1996 Stock Option
Plan and 500,000  shares of common  stock for the 1997 Stock  Option  Plan.  The
following table summarizes option activity for the period ended March 31, 1998:

                                                 Weighted Average     Weighted
                                      Shares     Exercise Price     Average Life
                                      ------     --------------     ------------
Outstanding July 1, 1997              704,000       $   0.47            3.28
Granted                               190,550       $   1.00            5.00
Canceled                               (2,000)      $   1.00             --
Exercised                             (15,000)      $   0.50             --
Expired                                  --            --                --
                                      -------
Outstanding March 31, 1998            877,550       $   0.59            3.00
                                      =======       ========            ====
Exercisable at March 31, 1998         753,998       $   0.56            2.84
                                      =======       ========            ====


On March 14, 1997 the Company adopted the 1997 Employee Stock  Compensation Plan
providing  for the  issuance  of up to  4,000  common  shares  to  non-executive
employees.  At March 31,  1998 an  aggregate  of 2,900  common  shares  had been
granted pursuant to this plan.

At  March  31,  1998 the  Company  had the  following  stock  purchase  warrants
outstanding each exercisable into one common share:

       Number           Exercise Price       Expiration Date
       ------           --------------       ---------------
       150,000             $   0.75          April, 2002
        10,000             $   0.75          September, 1998
       200,000             $   1.25          June, 2002
       300,000             $   1.25          September, 2002
       200,000             $   1.25          December, 2002
       500,000             $   1.25          December, 2000
     ---------
     1,360,000
     =========

The Company has authorized 5 million shares of capital stock as preferred stock,
with a par  value of  $0.00025  per  share.  No  preferred  stock is  issued  or
outstanding.

                                       7

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 March 31, 1998


8. INCOME TAXES
At March 31,  1998 a  valuation  allowance  has been  provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred  tax asset will not be  realized.  The Company has for federal
income tax purposes net operating loss carryforwards of approximately $3,300,000
which expire  through 2012 of which certain  amounts are subject to  limitations
under the Internal Revenue Code, as amended.

9. NET LOSS PER SHARE
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." Previously the Company followed the provisions of
Accounting  Principles  Board Opinion ("APB") 15, "Earnings Per Share." SFAS No.
128 provides for the  calculation  of "Basic" and  "Diluted"  earnings per share
("EPS").  Basic EPS  includes  no dilution  and is  computed by dividing  income
available to common stockholders by the weighted average number of common shares
outstanding  for the period.  Diluted EPS  reflects  the  potential  dilution of
securities  that could  share in the  earnings  of an  entity,  similar to fully
diluted earnings per share.  The Company's net losses for the periods  presented
cause the  inclusion of potential  common stock  instruments  outstanding  to be
antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not
required  to present a diluted  EPS.  Stock  options  and  warrants  to purchase
2,237,550 and 817,000 shares of common stock were  outstanding at March 31, 1998
and 1997, respectively. These securities were not included in the computation of
diluted EPS because of the net losses but could potentially dilute EPS in future
periods.  All prior period loss per share data is presented in  conformity  with
the requirements of SFAS No. 128.

10. RECENT ACCOUNTING PRONOUNCEMENTS
The  Financial  Accounting  Standards  Board  ("FASB")  has issued  SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related  Information" and SFAS No. 132,  "Employers'  Disclosures
about  Pensions and Other  Postretirement  Benefits."  SFAS No. 130  establishes
standards for reporting and display of comprehensive  income, its components and
accumulated balances.  Comprehensive income is defined to include all changes in
equity except those resulting from  investments by owners and  distributions  to
owners.  Among other disclosures,  SFAS No. 130 requires that all items that are
required to be recognized  under current  accounting  standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.  SFAS No. 131 supersedes SFAS
No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes  standards  on  the  way  that  public  companies  report  financial
information about operating segments in annual financial statements and requires
reporting of selected  information about operating segments in interim financial
statements  issued to the public.  It also establishes  standards for disclosure
regarding products and services,  geographic areas and major customers. SFAS No.
131 defines  operating  segments as components of a company about which separate
financial  information  is available  that is  evaluated  regularly by the chief
operating  decision maker in deciding how to allocate resources and in assessing
performance.  SFAS No. 132 standardizes the disclosure requirements for pensions
and other postretirement benefits and requires additional information on changes
in the benefit  obligations  and fair values of plan assets that will facilitate
financial analysis.

SFAS No. 130 and No. 131 are  effective  for  financial  statements  for periods
beginning  after  December  15, 1997 and  require  comparative  information  for
earlier  years to be  restated.  SFAS No. 132 is effective  for years  beginning
after December 15, 1997 and requires  comparative  information for earlier years
to be restated,  unless such  information is not readily  available.  Management
believes the adoption of these  statements  will have no material  impact on the
Company's  financial  statements  and that results of  operations  and financial
position will be unaffected by their implementation.

11. YEAR 2000 COMPLIANCE
The Company,  like most owners of computer software,  will be required to modify
significant portions of its  software so that it will  function  properly in the
year  2000.  Preliminary  estimates  of the total  costs to be  incurred  by the
Company to resolve this problem range from $10,000 to $20,000. Since the Company
mainly uses third  party  "off-the-shelf"  software,  it does not  anticipate  a
problem in resolving the year 2000 problem in a timely  manner.  Maintenance  or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.

                                       8

<PAGE>


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

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE  FINANCIAL  PERFORMANCE.  ACTUAL RESULTS MAY DIFFER  MATERIALLY
FROM THOSE CURRENTLY  ANTICIPATED AND FROM HISTORICAL  RESULTS  DEPENDING UPON A
VARIETY OF FACTORS,  INCLUDING THOSE DESCRIBED BELOW AND UNDER THE  SUB-HEADING,
"BUSINESS  RISKS." SEE ALSO THE COMPANY'S  ANNUAL REPORT ON FORM 10-KSB PURSUANT
TO RULE 15d-2 FOR THE YEAR ENDED JUNE 30,  1997 AND THE  Company's  REGISTRATION
STATEMENT ON FORM 10-SB DATED MAY 29, 1997, AS AMENDED.

Overview
The Company provides a unique Internet  shopping  service allowing  consumers to
identify  and buy from  ValueStar  rated local  service  companies.  ValueStar's
proprietary,  branded  rating  information  is also  available free to consumers
through the Consumer  ValueStar Report  publication  delivered to homeowners and
millions  of  customer  interactions  by  licensed  firms  using  the  ValueStar
Certified  brand in their  own  marketing  and  sales  channels.  Consumers  use
VALUESTAR.COM  and ValueStar's  free rating  information to make better shopping
choices for local service and professional firms.

The  Company's  revenues are generated  primarily  from research and rating fees
paid by new and renewal  businesses,  annual  certification  fees from qualified
applicants and renewals and from the sale of information  products and services.
The Company from time to time provides discounts,  incentives from basic pricing
and may provide  satisfaction  guarantees to first time applicants and also from
time to time extends payment terms on the annual certification fee.

Certification fees are recognized when material services or conditions  relating
to the certification have been performed. The material services are the delivery
of certification  materials along with an orientation and the material condition
is  the  execution  of the  license  agreement  specifying  the  conditions  and
limitations  on using the  certification.  Research  and rating  fee  revenue is
deferred until the research report is delivered.  Sales of information materials
and other  services  are  recognized  as materials  are  delivered or shipped or
services rendered.

The Company  expenses  research and rating costs as incurred.  Costs incurred in
printing and distributing the Company's  Consumer  ValueStar Report  publication
published  in January  and July and any related  revenues  are  recognized  upon
publication.

Effective  July 1,  1994,  with the  adoption  by the  Company of  Statement  of
Position  No.  93-7  (SOP  93-7),   Reporting  on  Advertising  Costs,   certain
advertising  costs are  deferred and  amortized  over a twelve month period on a
straight-line  method.  These  costs,  which  relate  directly to  targeted  new
licensee solicitations,  primarily include targeted direct-response  advertising
programs consisting of telephone sales,  printing and mailing costs. No indirect
costs are included in deferred  advertising costs. Costs incurred for other than
specific targeted customers, including general marketing and promotion expenses,
are expensed as incurred.

The net effect of capitalizing and amortizing  deferred costs was a reduction in
costs and  expenses of $71,825  and $13,781 for the nine months  ended March 31,
1998 and 1997, respectively.

The Company  estimates new licensees  have an average life exceeding four years.
Accordingly,  the Company  believes  deferred  costs (which are  amortized  over
twelve  months)  will be realized  from future  operations.  Deferred  costs are
periodically evaluated to determine if adjustments for impairment are necessary.

Since inception the Company has been growing and developing its business and has
incurred  losses  in each year  since  inception  and at March  31,  1998 had an
accumulated  deficit  of  $4,911,111.  There  can  be  no  assurance  of  future
profitability.

Effect of Growth in New Licensees and License Renewals
The  Company's  business  revenue  model,  similar  to  other  membership  based
organizations,  is predicated on growing new members  (business  licensees)  and
maintaining  high renewal  rates.  The Company's  renewal  licensees  contribute
higher gross margins than new  applicants due to reduced sales and rating costs.
Also a growing  and larger base of  licensees  reduces  the costs  (relative  to
revenues)  associated  with printing and  distributing  the  Company's  Consumer
ValueStar

                                       9

<PAGE>


Report,   maintaining  the  VALUESTAR.COM  Internet  site  and  providing  other
services.  The marginal  fixed costs  associated  with more licensees is minimal
compared to these base printing, distribution and maintenance costs.

Since a considerable portion of the Company's operations are engaged towards the
solicitation  of new service and  professional  business  applicants in order to
expand the base of licensees,  the Company incurs substantial costs towards this
activity.  Currently the Company is only deferring  direct telephone sales costs
and amortizing them over twelve months. Other costs are expensed as occurred.

At March 31, 1998 the Company had 1,085  licensees  compared to 648 licensees on
March 31, 1997.

The Company believes as a market territory matures, and the Company has a larger
base of  licensees,  fixed and indirect  costs will  decline as a percentage  of
revenues.  The Company's  operations  require that it achieve a critical mass of
licensees sufficient to cover general management, overhead and indirect costs of
operations.  Management estimates, based on the current cost structure and level
of  advertising  and  promotion   expenditures,   that  this  critical  mass  is
approximately 1,400 licensees. There can be no assurance the Company can achieve
this level of licensees and thereafter, if achieved,  operations can be impacted
by changes in the cost structure and elections regarding advertising, promotions
and  growth  rates  (due  to  the  lower  margins  associated  with  first  year
licensees).

Effective  January 1, 1997 the Company changed its new business  marketing focus
to telephone sales from a field sales force.  This has resulted in a significant
increase in  applicants  for ratings and reduced unit sales  costs.  In December
1997 the Company made a change from using an outside vendor to perform  customer
satisfaction research on applicants to in-house employees.  The Company expensed
approximately  $40,000 in  startup  costs for this  change in the third  quarter
related to  setting  up the  in-house  research  center and hiring and  training
employees.  This  change is expected  to reduce  future  unit  rating  costs and
provide improved  quality control over the research and rating process.  However
the change  resulted in a delay in completing  pending ratings during the second
and third fiscal quarters  thereby reducing each quarters  revenues.  Management
expects to complete delayed ratings in the fourth fiscal quarter.

Because of the  change,  at March 31,  1998 the  Company had 408 (388 new and 20
renewal)  prospective  licensees in the application and rating phase. At current
new sales  rates  the  normal  number of  pending  prospective  licensees  would
generally be 300. Generally there is a 60 day period between the initial sign-up
of an  applicant  and  the  execution  of a  license  agreement  for  successful
applicants.  Based on management's  experience,  these 408 prospective licensees
are expected to represent over $340,000 of revenues that should be recognized in
the fourth fiscal quarter (generally analogous to backlog).

Results of Operations
Revenues.  Revenues consist of certification  fees from new and renewal business
licensees,  rating fees from new and renewal business applicants,  sale proceeds
from information  materials and premium listings,  and other ancillary revenues.
The Company  reported  total  revenues of  $1,092,577  for the nine months ended
March 31,  1998,  an 89% increase  over  revenues of $578,175 for the first nine
months of the prior  fiscal  year.  During the first nine  months  license  fees
accounted for 72% of revenue (71% for the prior year's first nine  months).  The
growth in revenues is the result of improved  new sales  velocity and the impact
of a larger base of business  member  renewals.  Revenues  for the third  fiscal
quarter  ended  March 31, 1998 were  $300,884  compared to $68,719 for the prior
year  comparable  quarter or a 337% increase.  This large increase is the direct
effect of increased  sales  velocity,  more renewal  licensees  and a backlog of
pending licensees at December 31, 1997 resulting from the change in research and
rating described above. At March 31, 1998 the Company had reduced the backlog of
pending  licensees  and expects by the end of the fiscal year that the number of
pending licensees will represent  approximately 60 days of licensable sales. The
higher  number of pending  prospective  licensees  at March 31, 1998 over normal
levels  represents  an  estimated  $95,000 of  pending  revenue  expected  to be
realized in the fourth  fiscal  quarter  rather than the third quarter of fiscal
1998 due to this timing difference.

During  fiscal 1996 and the first half of fiscal  1997 the Company  experimented
with various direct mail and direct sales methods. Effective January 1, 1997 the
Company changed from a field sales force to telephone sales to obtain new rating
applicants. The Company believes, based on its over 75% historical renewal rate,
that investments in new licensees will contribute to greater recurring  revenues
in future  periods.  At March 31, 1998 the Company had 408 applicants in various
stages of rating,  effectively  a  (anticipated  revenue)  backlog  estimated at
$340,000 to be recognized in the fourth fiscal quarter ending June 30, 1998 from
license fees. As a result of this backlog,  management expects, but there can be
no assurance,  that fourth  quarter  fiscal 1998 (quarter  ending June 30, 1998)
revenues  will exceed both the third  quarter of the current year and the fourth
quarter of the prior year when the Company reported $476,000 in revenues.

                                       10

<PAGE>


Revenues can vary from quarter to quarter due to seasonality,  effectiveness  of
sales methods and  promotions,  levels of  expenditures  targeted at prospective
licensees,  the numbers of  licensees  up for renewal,  renewal  rates,  pricing
policies,  timing of completion of research and ratings and other factors,  some
beyond the control of management.

Cost of Revenues.  Cost of revenues  consist  primarily of rating costs incurred
for performing  customer  satisfaction  research on business  applicants,  costs
related to auditing  insurance  and  complaint  status and costs of  information
products and licensing materials. During December 1997 the Company made a change
from  using an outside  vendor to  perform  customer  satisfaction  research  on
applicants to in-house  employees and related facility and operating costs. This
change  is  expected  to  reduce  rating  costs  on a per  unit  basis  and as a
percentage of revenues after a startup  period.  Included in cost of revenues in
the third fiscal  quarter of 1998 were startup costs of  approximately  $40,000.
Cost of  revenues  represented  38% of sales in the first nine  months of fiscal
1998 (53% in the third  quarter),  a reduction from 55% in the first nine months
of the prior year (99% for the third quarter of the prior year). The increase in
the third quarter  percentage  resulted from the startup costs and the decreased
revenue  caused by the pending  licensees.  During the current year, the Company
made changes to make ratings more efficient and more  economical.  The increased
volume of revenues in the current year also reduces the  percentage  of revenues
associated  with  certain  fixed  rating  costs.   Cost  of  revenues  may  vary
significantly  from  quarter to quarter  both in amount and as a  percentage  of
sales.

Sales Costs.  Sales costs for the nine months ended March 31, 1998 were $547,170
or 50% of revenues  compared to $697,358 or 120% of revenues for the  comparable
prior period.  In the first nine months of the prior year, the Company relied on
a direct sales force  supported by direct mail to generate sales. In the current
nine months,  the Company had implemented  the telephone  sales  approach,  also
supported by direct mail. This has resulted in reduced unit selling costs.  Also
in the first nine months of the current year  approximately  36% of license fees
came from renewals with limited sales costs,  compared to  approximately  20% of
license fees coming from renewals in the prior periods first nine months.  Sales
costs for the third  quarter were  $176,649 or 59% of revenues.  The increase in
the third  quarter  over the  average  for the nine  months is the result of the
pending  licensees  which  reduced  revenues in the third  quarter.  The Company
expects  sales costs as a  percentage  of revenues  will vary in future  periods
resulting from variances in renewal  rates,  the effect of new sales  promotions
and  costs  thereof,  timing  of  research  and  rating  completions,  level and
percentage of fixed selling costs and other factors,  some beyond the control of
management.

Marketing and Promotion  Expenses.  Marketing and promotion expenses  aggregated
$590,465  in the first nine  months of fiscal  1998  compared to $546,375 in the
first nine months of fiscal 1997.  Included in marketing and selling expenses in
each nine months were printing and distribution  costs of the Company's Consumer
ValueStar  Report  (CVR)  publication   targeted  at  consumers.   Printing  and
distribution  costs of  $104,000  in the third  fiscal  quarter  of fiscal  1998
approximated  the $109,000  expensed in the third  quarter of fiscal 1997 on the
previous publication of the CVR. During the nine months ended March 31, 1998 the
Company  expended  $240,000 on paid advertising  targeted at expanding  consumer
awareness of ValueStar  Certified.  Paid advertising of $190,000 was employed in
the prior  year's first nine  months.  Marketing  and  promotion  expenses  were
$295,349 for the three months ended March 31, 1998  compared to $328,267 for the
prior  comparable  period  primarily  the  result of  reduced  personnel  costs.
Generally the first and third fiscal  quarters have increased  costs because the
CVR publication is printed and distributed during these quarters. Also generally
the Company expends limited advertising in the second fiscal quarter due to high
calendar year end media costs.

Marketing and promotion expenses are subject to significant variability based on
decisions  regarding  the timing and size of  distribution  of CVR and decisions
regarding  paid  advertising,  public  relations and market and brand  awareness
efforts. The Company anticipates continuing to make significant  expenditures in
marketing and promotion  efforts as the Company supports a growing licensee base
but  anticipates a decreasing  annual  percentage of revenues as revenues  grow.
However, amounts and percentages on a quarterly basis may vary significantly.

General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
management activities,  including legal, accounting and other professional fees.
They  totaled  $562,236  for the nine months  ended  March 31, 1998  compared to
$354,707 for the comparable prior period.  The major increases include a $16,000
increase in personnel costs due to increased  personnel,  a $19,000  increase in
occupancy  costs  due to  additional  personnel  and  the  startup  of  in-house
research,  a $25,000  increase in corporate  costs due to the public  trading of
common  shares  of the  Company  in the  current  year,  a $24,000  increase  in
guarantees and bad debts due to increased  volumes, a $8,000 increase in postage
due  to  increased  activities  and  the  incurrence  of  $108,000  of  non-cash
compensation  expenses related to consulting and guarantees on financings during
the current fiscal year.

                                       11

<PAGE>


General and administrative expenses were $243,466 for the third quarter compared
to $108,122 for the prior year's third quarter. The primary increase was $88,398
in non-cash stock compensation. Management anticipates that current year general
and administrative costs will continue to exceed the prior year due to increased
personnel, the effect of the non-cash expenses and corporate costs as a publicly
traded company.

To date development expenses associated with the design, development and testing
of the  Company's  programs and services have not been material and are included
in sales and marketing or general and  administrative  expenses (if performed by
executive  management).  In the future,  as the Company develops new programs or
services,  it  anticipates  that it may  segregate  development  expenses  as an
expense category.

Net Loss.  The Company had a net loss of  $1,069,627  for the nine months  ended
March 31, 1998  compared to a net loss of $1,344,613 in fiscal 1997is first nine
months.  The decreased  loss resulted  primarily from improved sales volumes and
selling  efficiency  which  reduced  the effect of fixed  operating  costs.  The
Company  anticipates  it will continue to experience  operating  losses until it
achieves a critical  mass base of renewing  licensees  as it pursues  aggressive
growth in new  licensees.  As the  Company is rapidly  increasing  its  business
volume (new and  renewal)  immediate  future  quarterly  results will be greatly
impacted by decisions  regarding  new markets and growth rates.  Achievement  of
positive  operating  results  will require  obtaining a  sufficient  base of new
licensees and renewal licensees to support operating and corporate costs.  There
can be no  assurance  the  Company  can  sustain  renewal  rates  or  achieve  a
profitable base of operations.

Liquidity and Capital Resources
Since the Company commenced operations it has had significant negative cash flow
from operating activities.  The negative cash flow from operating activities was
$1,519,799  for the fiscal year ended June 30, 1997, and $722,518 for the fiscal
year ended June 30,  1996.  At June 30, 1997 the  Company had a working  capital
deficit of $163,558 and at March 31, 1998 a working  capital  deficit of $38,780
resulting  from a portion of operations  being financed by current debt. For the
nine months ended March 31, 1998  negative cash flow from  operating  activities
was $1,224,668 due to the continued  operating  losses,  heavy investment in new
licensee  growth and startup of the in-house  research  department.  Included in
working  capital  at March  31,  1998 is net  accounts  receivable  of  $312,283
representing  approximately 75 days of revenues and an annualized turnover ratio
of approximately  4.7. This compares to  approximately  102 days of revenues and
turnover of  approximately  3.6 at June 30,  1997.  The  improved  turnover  and
reduced  receivable  level  results from  increased  revenues  and  concentrated
collection efforts.  Management believes that 60 to 90 days sales in receivables
is reasonable based on the nature of the Company's  business.  At March 31, 1998
the Company has not experienced and does not anticipate any significant accounts
receivable recoverability problems.

The Company has financed  its  operations  primarily  through the sale of common
equity,  shareholder  loans  subsequently  converted  to  common  stock and debt
financing.  Other than the  $100,000  available  on the credit line there are no
commitments  for  future  investments  and  there can be no  assurance  that the
Company can continue to finance its  operations  through these or other sources.
During fiscal 1997 the Company obtained $1,122,175 from equity and debt sources.
For the nine months ended March 31, 1998 the Company  obtained  $250,000  from a
bank line of credit,  $1,000,000 in 12% Note  financing and $227,500 from common
stock sales and received and repaid $90,000 of shareholder  advances  during the
period and  reduced  the  credit  line by  $100,000.  The bank line of credit is
guaranteed by certain officers, directors and a shareholder.

Other than cash on hand of $190,316 at March 31, 1998,  accounts  receivable  of
$312,283,  and the $100,000 of bank credit,  the Company has no material  unused
sources of liquidity at this time and the Company  expects to incur  additional,
although  reduced,  operating  losses in future  fiscal  quarters as a result of
continued  operations and investments in licensee 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 believes, but there can be no assurance,  given the above sources of
liquidity and the combination of anticipated renewal revenues, current levels of
new sales and licensee growth,  that it will require funds to repay or refinance
the $250,000 bank line and the $100,000  September notes to continue  operations
for the next  twelve  months.  However  the  Company  has plans to expand to new
markets and expects to require,  in  addition,  a minimum of $500,000 to finance
planned  expansion during the next twelve months.  However should actual results
differ  significantly  from  management's  plans,  then the  Company may require
substantially greater additional operating funds. There can be no assurance that
additional funding will be available or on what terms. Potential sources of such
funds  include  shareholder  and  other  debt  financing  or  additional  equity
offerings.  In such an event,  should the refinancing or additional funds not be

                                       12

<PAGE>


available or planned operations not meet management's expectations,  the Company
may be  required  to curtail  or scale  back  staffing  and  operations  in more
reliance on higher profitable renewals and limit new licensee growth.

New Accounting Pronouncements
The  Financial   Accounting   Standards   Board  has  issued  a  number  of  new
pronouncements  for future  implementation  as discussed in the footnotes to the
Company's  interim  financial  statements (see page 8, Note 10). As discussed in
the notes to the interim financial  statements,  the implementation of these new
pronouncements  is not  expected  to have a  material  effect  on the  financial
statements.

Year 2000 Compliance
The Company,  like most owners of computer software,  will be required to modify
significant  potions of its  software so that it will  function  properly in the
year  2000.  Preliminary  estimates  of the total  costs to be  incurred  by the
Company to resolve this problem range from $10,000 to $20,000. Since the Company
mainly uses third  party  "off-the-shelf"  software,  it does not  anticipate  a
problem in resolving the year 2000 problem in a timely  manner.  Maintenance  or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.

Tax Loss Carryforwards
As of June 30,  1997,  the Company had  approximately  $3.3  million of tax loss
carryforwards.  A valuation allowance has been recorded for the net deferred tax
asset  arising  primarily  from  such tax  loss  carryforwards  because,  in the
Company's  assessment,  it is more likely than not that the  deferred  tax asset
will not be realized.

Business Risks
This quarterly  report  contains a number of  forward-looking  statements  which
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 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" 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.

         Absence of Profitable Operations and Possible  Insufficiency of Capital
         -  The  Company  has  incurred   significant   operating  losses  since
         inception.  The Company  incurred an operating loss of $1.4 million for
         the  fiscal  year  ended June 30,  1997 and $1.0  million  for the nine
         months  ended March 31,  1998.  The  Company has had limited  financial
         results upon which  investors may base an assessment of its  potential.
         There can be no  assurance  profitable  operations  can be achieved and
         management believes that additional capital will be required.

         Possible  Inability  to Continue  as a Going  Concern - The Company has
         suffered recurring losses from operations.  This factor, in combination
         with (i)  reliance  upon debt and equity  financing to fund losses from
         operations  and cash flow  deficits,  (ii) material net losses and cash
         flow deficits from operations and (iv) the possibility that the Company
         may be unable to meet its debts as they come due, raise doubt about the
         Company's ability to continue as a going concern. The Company's ability
         to  continue  as a  going  concern  is  dependent  upon  achieving  and
         maintaining  profitable  operations or obtaining additional capital, as
         to which no assurance can be given.

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

         Dependence  on Officers  and  Directors - The Company is  substantially
         dependent  upon  the  experience  and  knowledge  of its  officers  and
         directors.  The loss to the Company of such persons,  particularly  Mr.
         James  Stein,

                                       13

<PAGE>


         could be detrimental to the Company's development,  especially since it
         may not have the funds to hire management  personnel with the requisite
         expertise.  The Company has a $2 million key-man life insurance  policy
         on Mr. Stein.

         Managing a Growing and  Changing  Business - The Company  continues  to
         experience  changes in its  operations  resulting from expansion of its
         business  and other  factors  which has and may  place  demands  on its
         administrative,  operational  and  financial  resources.  The Company's
         future  performance will depend in part on its ability to manage growth
         and to adapt its  administrative,  operational  and  financial  control
         systems to the needs of an expanding entity.  The failure of management
         to anticipate, respond to and manage changing business conditions could
         have a material adverse effect on the Company's business and results of
         operations.

         Government  Regulation  and Legal  Uncertainties  - The  Company is not
         currently  subject to direct  regulation  other than  federal and state
         regulation applicable to businesses generally.  The Company may also be
         subject to uninsured  claims by  consumers  for actions of licensees or
         other claims incident to its business operations.

         Stock Trading Risks and  Uncertainties  - On May 28, 1997 the Company's
         Common  Stock  commenced   trading  on  the  National   Association  of
         Securities   Dealers,   Inc.  (NASD)  OTC  Electronic  Bulletin  Board.
         Securities  traded on the Bulletin  Board are, for the most part thinly
         traded and subject to special  regulations.  The Company's Common Stock
         is currently  defined as "penny  stocks"  under the  Exchange  Act, and
         rules  of  the  Securities  and  Exchange  Commission  thereunder.  The
         Exchange  Act and such penny stock rules  generally  impose  additional
         sales practice and disclosure requirements upon broker-dealers who sell
         the  Company's  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 the  Company's
         shares and thus may also affect the ability of  purchasers of shares to
         resell those shares in the public markets.

         Like that of securities of other small,  growth-oriented companies, the
         Company's 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 could
         adversely  affect the  prevailing  market  price of the  Common  Stock.
         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
         the  Company or its  competitors,  quarterly  variations  in  operating
         results,  announcements of technological  or service  innovations,  the
         introduction of new products or services,  changes in pricing  policies
         by the Company 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  the  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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

         None

Item 2. Changes in Securities and Use of Proceeds

         (a) None

         (b) None

         (c) The following is a  description  of equity  securities  sold by the
Company  during the third  fiscal  quarter  ended  March 31,  1998 that were not
registered under the Securities Act:

                                       14

<PAGE>


         1.   During the quarter  ended March 31, 1998 the Company sold for cash
              $750,000 of unsecured 12%  subordinated  promissory notes due June
              30, 2000 (12% Notes) to twenty-one persons. This is the balance of
              an aggregate  of  $1,000,000  of such notes of which  $250,000 was
              sold in December  1997.  The  securities  were sold by the Company
              without  an  underwriter.  The 12% Notes are not  convertible  and
              interest is payable  monthly in cash. Each purchaser was granted a
              warrant to  purchase  500 common  shares at $1.25 per share  until
              December  31,  2000  ("Warrant")  for  each  $1,000  of 12%  Notes
              purchased.  The  Warrants  in  connection  with the 12% Notes sold
              during the quarter are  exercisable  into 375,000 common shares in
              the aggregate  (aggregate warrants on 500,000 shares for the total
              offering).   These   securities  were  offered  and  sold  without
              registration  under  the  Act,  in  reliance  upon  the  exemption
              provided by Regulation D thereunder and an appropriate  legend was
              placed on the Notes and Warrants.

         2.   During  December 1997 the Company issued for services  rendered by
              three  persons  91,250  shares of its Common Stock at $0.96875 per
              share or  $88,398.  The  securities  were  issued  by the  Company
              without  an   underwriter  to  three   qualified   investors  (one
              shareholders, one officer/director and one director). The issuance
              was exempt by reason of Section 4(2) of the Act in reliance on the
              private nature of the transaction, restrictions on transfer on the
              shares  and  based  on  representations  of  the  purchasers.   An
              appropriate legend was placed on the shares and warrants.

Item 3. Defaults Upon Senior Securities

         None

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

         None

Item 5. Other Information

         None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

         27     Financial Data Schedule

(b) Reports on Form 8-K:

         None

                                   SIGNATURES

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

                                          VALUESTAR CORPORATION


Date: May 13, 1998                 By:    /s/BENJAMIN A. PITTMAN
                                         ----------------------
                                          Benjamin A. Pittman
                                          Secretary and Controller
                                          (Principal Financial and Accounting
                                          Officer and duly authorized to sign on
                                          behalf of the Registrant)

                                       15