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                                  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 September 30, 1997.
                                                    -------------------
                         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, $.00025 par value                             8,376,246
-------------------------------                             ---------
           (Class)                             (Outstanding at October 31, 1997)

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:

              Consolidated Balance Sheets as of September 30, 1997 and
              and June 30, 1997 (unaudited)                                   3

              Consolidated Statements of Operations for the three
              months ended September 30, 1997 and 1996 (unaudited)            4

              Consolidated Statements of Cash Flows for the three months
              ended September 30, 1997 and 1996 (unaudited)                   5

              Notes to Interim Consolidated Financial Statements              6

     Item 2. Management's Discussion and Analysis of Financial
                Condition and Results of Operations                           8

PART II. OTHER INFORMATION
      
     Item 1. Legal Proceedings                                                *
     Item 2. Changes in Securities                                            *
     Item 3. Defaults upon Senior Securities                                  *
     Item 4. Submission of Matters to a Vote of Security Holders              *
     Item 5. Other Information                                                13
     Item 6. Exhibits and Reports on Form 8-K                                 *



SIGNATURES                                                                    13


     *  No information provided due to inapplicability of the item.

                                       2

<PAGE>

<TABLE>
 PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements

                              VALUESTAR CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)


<CAPTION>
                                                          September 30,     June 30,
                                                             1997             1997

                  ASSETS
<S>                                                       <C>            <C>        
Current Assets
     Cash                                                 $    17,562    $    44,225
     Accounts receivable, net                                 325,021        295,542
     Inventories                                               17,157         27,863
     Prepaid and other                                           --            7,035
                                                          -----------    -----------
                                                              359,740        374,665

Deferred costs - net  (Note 4)                                157,551        134,085
Property, equipment, and intangibles-net                       50,160         49,422
                                                          -----------    -----------
                                                          $   567,451    $   558,172
                                                          ===========    ===========



                  LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
     Bank line of credit (Note 5)                         $   250,000    $      --
       Accounts payable                                       341,614        373,226
     Accrued expenses                                          87,846        112,277
     Deferred revenue                                          14,225         22,720
     Current maturities of notes payable (Note 6)             130,000         30,000
                                                          -----------    -----------
                                                              823,685        538,223

Long-term notes (Note 6)                                         --          100,000
                                                          -----------    -----------
     Total liabilities                                        823,685        638,223

Stockholders' Deficit (Note 7)
     Common stock, $.00025 par value,
       20,000,000 shares authorized,
       8,326,246 shares issued and
          outstanding each period                               2,082          2,082
     Additional paid in capital                             3,759,351      3,759,351
     Common stock subscribed                                   50,000           --
     Accumulated Deficit                                   (4,067,250)    (3,841,484)
                                                          -----------    -----------
                  Total Stockholders' Deficit                (255,817)       (80,051)
                                                          -----------    -----------
                                                          $   567,868    $   558,172
                                                          ===========    ===========
<FN>
      See accompanying notes to interim consolidated financial statements.
</FN>
                                       3


</TABLE>

<PAGE>

<TABLE>
                              VALUESTAR CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<CAPTION>
                                                           Three months ended
                                                              September 30,
                                                          1997           1996

<S>                                                    <C>            <C>        
Revenues                                               $   524,216    $   269,255

Costs and expenses:
     Cost of revenues                                      153,515        113,173
     Sales costs                                           176,572        239,927
     Marketing and promotion                               261,678        180,382
     General and administrative                            155,654        131,096
                                                       -----------    -----------
                  Total costs and expenses                 747,419        664,578
                                                       -----------    -----------

Loss from operations                                      (223,203)      (395,323)

Interest expense                                            (5,229)          (500)
                                                       -----------    -----------

Net loss                                               $  (228,432)   $  (395,823)
                                                       ===========    ===========

Net loss per share                                     $     (0.03)   $     (0.06)
                                                       ===========    ===========

Weighted average number of common shares outstanding     8,326,246      7,026,818
                                                       ===========    ===========

<FN>
      See accompanying notes to interim consolidated financial statements.
</FN>
                                       4

</TABLE>

<PAGE>

                              VALUESTAR CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


                                                            Three months ended
                                                               September 30,
                                                            1997         1996

Cash Flows from Operating Activities
     Net (loss)                                          $(228,432)   $(395,823)
     Adjustments to reconcile net loss to net cash
     used by operating activities:
       Depreciation and amortization                         2,249        2,167
      Changes in assets and liabilities:
         Accounts receivable                               (30,229)     (60,229)
         Inventories                                        10,706       (3,865)
         Prepaid expenses and other                          7,035       (5,154)
         Deferred costs                                    (23,466)     (44,693)
         Accounts payable                                  (31,612)      24,764
         Accrued expenses                                  (21,431)      23,156
         Deferred revenue                                   (8,495)     (28,008)
                                                         ---------    ---------
Net Cash Flows Used by Operations                         (323,675)    (487,685)

Cash Flows from Investing Activities
     Equipment acquisitions                                 (2,988)      (6,278)
                                                         ---------    ---------
Net Cash Used by Investing Activities                       (2,988)      (6,278)

Cash Flows from Financing Activities
     Common stock subscribed                                50,000         --
     Proceeds from bank line                               250,000         --
     Shareholder advances                                   90,000      100,000
     Repayment of shareholder advances                     (90,000)        --
                                                         ---------    ---------
Net Cash Provided by Financing Activities                  300,000      100,000
                                                         ---------    ---------

Decrease in Cash and Cash Equivalents                      (26,663)    (393,963)

Cash and Cash Equivalents at Beginning of Period            44,225      454,809
                                                         ---------    ---------

Cash at End of Period                                    $  17,562    $  60,846
                                                         =========    =========


Supplemental Cash Flow Information:
     Cash paid for interest                                  5,229          500


       See accompanying notes to interim consolidatedfinancial statements.

                                       5

<PAGE>

                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1997

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(R) Certified 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),  a periodic publication  (Consumer ValueStar Reports) and a
voice-text service (808-STAR).

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 services 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 disclose all disclosures  provided in annual financial
statements. 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 month period 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. INVENTORIES

Inventory is recorded at the lower of cost (using the first-in  first-out method
of accounting) or market. Inventories consist 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 of direct-response
advertising programs consisting of telemarketing,  printing, and mailing 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%. The bank's  commitment under this agreement matures in August 1998. The
line of credit is guaranteed  by certain  officers and directors of the Company.
The Company  has agreed to issue  warrants to the  guarantors  exercisable  into
250,000 shares of Common Stock at $1.25 per share for five years. These warrants
have not yet been issued.

6. NOTES PAYABLE

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.  The Company is also  obligated on two 12%
demand notes aggregating $30,000 payable to shareholders.

                                       6

<PAGE>

                              VALUESTAR CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1997
<TABLE>

7. STOCKHOLDERS' DEFICIT

The following table summarizes equity transactions during the three months ended
September 30, 1997:

<CAPTION>
                                                              Shares     Dollars

<S>                                                           <C>         <C>       
Balance June 30, 1997                                         8,326,246   $3,761,433
Common stock subscribed but unissued at September 30, 1997         --         50,000
                                                              ---------   ----------

Balance September 30, 1997                                    8,326,246   $3,811,433
                                                              =========   ==========

</TABLE>
The  Company  issued  50,000  common  shares in  October  1997  related to these
subscriptions  and warrants to purchase  50,000 common shares at $1.25 per share
until 2002.

At September 30, 1997 the Company had options  outstanding  pursuant to its 1992
ISO Plan covering  250,000 common shares with exercise  prices of $0.40 to $0.50
per share  expiring in 2000 and 2001.  The Company also had options  outstanding
pursuant to its 1992 NSO Plan  covering  250,000  common  shares  with  exercise
prices of $0.40 to $0.50 per share  expiring  between 1999 and 2001. The Company
has options  outstanding  pursuant to its 1996 Stock Option Plan, as amended and
restated,  covering  147,000  common  shares with an exercise  price of $0.50 to
$0.75 per share  expiring in 2001 and 2002 and options  outstanding  pursuant to
its 1997 Stock Option Plan covering  57,000 common shares with an exercise price
of $0.75 per share expiring in 2002.

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 September  30, 1997 an aggregate of 2,900 common  shares had been
granted pursuant to this plan.

At September  30, 1997 the Company had the  following  stock  purchase  warrants
outstanding each exercisable into one common share (see also notes):

     Number                  Exercise Price             Expiration Date
     ------                  --------------             ---------------
     150,000                    $0.75                     April, 2002
      10,000                    $0.75                     September, 1998
     200,000                    $1.25                     June, 2002
     -------
     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.

8. INCOME TAXES

At September 30, 1997 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. NEW ACCOUNTING PRONOUNCEMENTS

The  Financial  Accounting  Standards  Board has issued  Statement  of Financial
accounting  Standards  ("SFAS") No. 128,  "Earnings  Per Share" and Statement of
Financial  Accounting  Standards No. 129  "Disclosures  of Information  About an
Entity's  Capital  Structure."  SFAS No.  128  provides  a  different  method of
calculating  earnings  per  share  than is  currently  used in  accordance  with
Accounting  Principles  Board  Opinion No. 15,  "Earnings  Per Share."  SFAS 128
provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings  per share  includes  no dilution  and is  computed by dividing  income
available to common shareholders by the weighted average number of common shares
outstanding  for the period.  Diluted  earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully  diluted  earnings  per share.  SFAS No.  129  establishes  standards  for
disclosing information about an entity's

                                        7

<PAGE>

                              VALUESTAR CORPORATION

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 1997




capital  structure.  SFAS No. 128 and SFAS No. 129 are  effective  for financial
statements   issued  for  periods   ending  after   December  15,  1997.   Their
implementation  is not  expected to have a material  effect on the  consolidated
financial statements.

The Financial Accounting Standards Board has also issued SFAS No. 130 "Reporting
Comprehensive  Income"  and SFAS  No.  131  "Disclosures  About  Segments  of an
Enterprise  and Related  Information."  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 displays 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. 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. Because of the recent issuance of these standards,
management has been unable to fully  evaluate the impact,  if any, the standards
may have on the future consolidated financial statement disclosures.  Results of
operations and financial position, however, will be unaffected by implementation
of these standards.

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
STATEMENTON FORM 10-SB DATED MAY 29, 1997, AS AMENDED.

Overview

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  and  manuals  along  with an  orientation  and the
material  condition is the  execution of the license  agreement  specifying  the
conditions  and  limitation on using the  certification.  The Company  currently
charges  businesses  $795  and up for  use of the  certification  which  must be
renewed each year.

Research  and  rating fee  revenue  is  deferred  until the  research  report is
delivered.  The basic  research  and rating  price is $470 and up.  The  Company
currently  offers  a $400  promotional  discount  to new  applicants.  For  most
licensees the research  covers a two year period and the Company charges $70 for
mid-term  ratings.   Approximately  70%  of  applicants  successfully  pass  the
Company's  research and rating  requirements and are eligible for  certification
and more than 90% of eligible  applicants license the  certification.  More than
90% of renewal applicants pass subsequent ratings. The Company provides reserves
for any  satisfaction  guarantees.  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

                                       8


<PAGE>

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 $23,466 and $44,693 for the three  months ended  September
30, 1997 and 1996, respectively.

The Company  estimates new licensees  have an average life exceeding four years.
Since the  Company's  annual  licensee  renewal rate has averaged  more than 75%
during the last three  fiscal  years and  renewals  provide  margin in excess of
renewal costs, the Company believes  deferred costs 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 September 30, 1997 had an
accumulated  deficit  of  $4,067,250.  There  can  be  no  assurance  of  future
profitability.

Effect of Growth in New Licensees and License Renewals

The Company's business model,  similar to other membership based  organizations,
is predicated on growing new members  (business  licensees) and maintaining high
renewal rates and expanding the revenues from each member. The Company's renewal
licensees  contribute  higher gross margins than new  applicants  due to reduced
sales  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  Report,  maintaining the  ValueStar.com  and Internet site,
providing voice-text  services.  The marginal costs of 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  theCompany is only deferring  direct telephone sales costs
and direct response  advertising  and amortizing them over twelve months.  Other
costs are expensed as occurred.

At September 30, 1997 the Company had 995 licensees compared to 446 licensees on
September 30,1996.

The Company believes as a market territory  matures and the Company has a larger
base of  licensees  then  many  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 1,200 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,  elections regarding  advertising and
promotions and growth rates (due to the lower margins associated with first year
licensees).

At September  30, 1997 the Company had 210 (166 new and 44 renewal)  prospective
licensees  in the  application  and rating  phase.  Generally  there is a 60 day
period between the initial signup of an applicant and the execution of a license
agreement for successful applicants. Based on management's experience, these 210
prospective  licensees  are  expected  to  represent  approximately  $200,000 of
revenues  that should be  recognized  in the second  fiscal  quarter  (generally
analogous to backlog).

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.

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 $ 524,216 for the three  months  ended
September  30,  1997,  a 95%  increase  over  revenues of $269,255 for the first
quarter of the prior fiscal year.  During the current first quarter license fees
accounted for 75% of revenue (70% for the prior years first quarter). The growth
in  revenues is the result of improved  new sales  velocity  and the impact of a
larger base of business member renewals.

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  September  30, 1997 the Company had 210  applicants  in
various stages of rating,  effectively a (anticipated revenue) backlog estimated
at $200,000 to be recognized in the second fiscal  quarter  ending  December 31,
1997 from license fees.  However due to lower sales in the second fiscal quarter
of the prior year  (affecting  prospective  renewals),  the timing of processing
applications and seasonality (sales in the fourth calendar quarter are generally
lower than other quarters),  management expects second quarter fiscal 1998 (year
ending June 30, 1998) to be less than the first  quarter,  however  greater than
the second quarter of the prior year.

                                       9
<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  service  performance  by  outside  contractors  and other
factors, some beyond the control of management.

Cost of  Revenues.  Cost of revenues  consist  primarily of rating costs paid to
third  parties  for  performing  customer   satisfaction  research  on  business
applicants,  in-house  staffing  and costs  related  to  auditing  and rating of
applicants and costs of information  products and licensing  materials.  Cost of
revenues  represented  30% of sales in the  first  quarter  of  fiscal  1998,  a
reduction  from 42% in the first  quarter of the prior year.  During the current
year,  the Company made changes to make ratings more  efficient and has arranged
for improved third party pricing to reduce rating costs. The increased volume of
revenues also reduces the percentage of revenues  associated  with certain fixed
rating  costs.  Cost of revenues may vary from quarter to quarter both in amount
and as a percentage of sales.

Sales  Costs.  Sales costs for the three months  ended  September  30, 1997 were
$176,572  or 34% of revenues  compared  to  $239,927 or 90% of revenues  for the
comparable  prior period.  In the first  quarter of the prior year,  the Company
relied on a direct sales force  supported by direct mail to generate  sales.  In
the current  quarter,  the Company had implemented the telephone sales approach,
also supported by direct mail. This has resulted in  significantly  reduced unit
selling costs.  Also in the first quarter of the current year  approximately 32%
of license  fees came from  renewals  with  limited  sales  costs,  compared  to
approximately  28% of license  fees coming from  renewals in the prior  period's
first 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,  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
$261,678 in the first  quarter of fiscal 1998  compared to $180,382 in the first
quarter of fiscal  1997.  Included in  marketing  and  selling  expenses in each
quarter were printing and distribution costs of the Company's Consumer ValueStar
Report  publication  targeted at consumers.  Printing and distribution  costs of
$102,000 in the first  fiscal 1997 quarter  were  comparable  to the fiscal 1996
first quarter,  however the company was able to print and distribute more copies
due to better  prices.  During the three  months  ended  September  30, 1997 the
Company  expended  $65,000 on paid  advertising  targeted at expanding  consumer
awareness of ValueStar Certified.  No paid advertising was employed in the prior
year's first quarter.

Marketing and promotion expenses are subject to significant variability based on
decisions  regarding the timing and size of distribution  of Consumer  ValueStar
Report and decisions regarding direct mail activities, 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 these costs will
decrease as 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  $155,654 for the three months ended September 30, 1997 compared to
$131,096 for the comparable prior period.  The major increases  include a $5,000
increase in office supplies due to additional  personnel and a $10,000  increase
in corporate costs.

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.

The Company had a net loss of $228,432 for the three months ended  September 30,
1997  compared to a net loss of $395,823 in fiscal  1997's  first  quarter.  The
significantly decreased loss resulted primarily from improved selling efficiency
and reduced rating costs. Also the increase in total revenues 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. 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  September  30, 1997 a working  capital  deficit of
$463,945  resulting from operations  being financed by short-term  debt. For the
three  months  ended  September  30,  1997  negative  cash flow  from  operating
activities  was  $323,675  due to  the  continued  operating  losses  and  heavy
investment in new licensee growth.  Included in working capital at September 30,
1997 is net accounts receivable of $325,021  representing  approximately 55 days
of revenues and an annualized turnover ratio of approximately 6.4. 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 September 30, 1997 the Company has not  experienced and
does not anticipate any significant accounts receivable recoverability problems.

                                       10
<PAGE>

The Company has financed  its  operations  primarily  through the sale of common
equity and shareholder loans  subsequently  converted to common stock. There are
no commitments for future investments by these or other parties 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 three  months  ended  September  30, 1997 the
Company  obtained  $250,000  from a bank line of credit and $50,000  from common
stock  subscriptions and repaid $90,000 of shareholder  advances obtained during
the  period.  The bank line of credit is  guaranteed  by  certain  officers  and
directors.

Other than cash on hand of $17,562 at September 30, 1997 and accounts receivable
of  $325,021,  the Company has no material  unused  sources of liquidity at this
time and the  Company  expects to incur  additional  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  approximately  $300,000 of
additional  funding for 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  without  additional  funding the  Company  will be
required to curtail or scale back  staffing and  operations  in more reliance on
higher profitable renewals and limit new licensee growth.

The Company  intends to expand  operations  beyond the greater San Francisco Bay
and  Sacramento  areas in the future,  however any  significant  expansion  will
require  additional  funds.  Potential  sources  of any such  funds may  include
shareholder  and other debt  financing or additional  offerings of the Company's
equity  securities.  There can be no assurance  that any funds will be available
from these or other potential sources.


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  $228,000  for the three months
         ended September 30, 1997. 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  obtaining  additional
         capital and ultimately achieving and maintaining profitable operations,
         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

                                       11
<PAGE>

         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,  could  be  detrimental  to  the  Company's  development,
         especially since it may not have the funds to hire management personnel
         with the requisite expertise.

         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 5. Other Information

(a)  Pursuant to the  instructions  of this item,  the Company  elects to report
sales of equity securities pursuant to Regulation S otherwise reportable on Form
8-K. On October 29, 1997 the Company  completed the sale of 50,000 shares of its
Common Stock at $1.00 per share and warrants to purchase 50,000 common shares at
$1.25 per share until  September 30, 1997. The stock was subscribed and paid for
on or prior to  September  30,  1997.  Proceeds  of $50,000  supplement  working
capital.  The shares  were sold by the  Company  without an  underwriter  to two
qualified investors (already shareholders) outside of the United States and were
issued in  accordance  with  Regulation  S of the  Securities  Act of 1933.  The
Company  obtained a signed  representation  from each person to whom  securities
were  issued  that such  person  was not a U.S.  person  within  the  meaning of
Regulation S and was not acquiring such securities for the account or benefit of
a U.S. person and each  certificate  representing the securities and warrants so
issued contains a legend indicating that transfer of the securities  represented
thereby is prohibited  except in accordance  with  Regulation S, and the Company
believes that it complied  with the other  provisions of Regulation S in respect
of such Regulation S transaction.

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<PAGE>

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: November 7, 1997                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)

                                       13