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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 December 31, 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, $.00001 par value                             8,591,246
-------------------------------                             ---------
          (Class)                              (Outstanding at February 2, 1998)

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

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

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


<PAGE>


<TABLE>
                                            VALUESTAR CORPORATION
                                                    INDEX

<CAPTION>
                                                                                                        Page
PART I. FINANCIAL INFORMATION

         Item 1. Financial Statements (unaudited):

<S>                                                                                                      <C>
                 Consolidated Balance Sheets as of December 31, 1997 and
                 and June 30, 1997                                                                        3

                 Consolidated Statements of Operations for the three and six
                 months ended December 31, 1997 and 1996                                                  4

                 Consolidated Statements of Cash Flows for the six
                 months ended December 31, 1997 and 1996                                                  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
</TABLE>

                                                      2
<PAGE>


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

                                                        VALUESTAR CORPORATION
                                                     CONSOLIDATED BALANCE SHEET
                                                             (UNAUDITED)
<CAPTION>
                                                                                              December 31,               June 30,
                                                                                                  1997                     1997
                                                                                               -----------              -----------
                    ASSETS
<S>                                                                                            <C>                      <C>        
Current Assets
    Cash                                                                                       $   172,427              $    44,225
    Receivables - net                                                                              290,811                  295,542
    Inventory                                                                                        7,200                   27,863
    Prepaid and other                                                                                 --                      7,035
                                                                                                   470,438                  374,665

    Deferred costs - net                                                                           153,774                  134,085
    Property, equipment and intangibles - net                                                       47,212                   49,422

                                                                                               $   671,424              $   558,172

                  LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
    Bank line of credit (Note 5)                                                               $   250,000              $      --   
    Accounts payable                                                                               249,740                  373,226
    Accrued expenses                                                                                63,204                  112,277
    Deferred revenue                                                                                23,200                   22,720
    Notes payable (Note 6)                                                                         100,000                   30,000
                                                                                                   686,144                  538,223

Long-Term Debt (Note 6)                                                                            250,000                  100,000
                                                                                                   936,144                  638,223

Stockholders' Deficit (Note 7)
    Common stock, $.00025 par value,
      20,000,000 shares authorized,
      8,591,246 and 8,326,246 shares issued
      and outstanding, respectively                                                                  2,148                    2,082
    Additional paid-in capital                                                                   4,036,785                3,759,351
    Accumulated deficit (4,303,653)                                                             (3,841,484)
                        Total Stockholders' Deficit                                               (264,720)                 (80,051)

                                                                                               $   671,424              $   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                          Six months ended    
                                                                    December  31,                             December  31,    
                                                             1997                 1996                 1997                 1996
                                                         -----------          -----------          -----------          -----------
<S>                                                      <C>                  <C>                  <C>                  <C>        
Revenues                                                 $   267,477          $   240,201          $   791,693          $   509,456

Costs and Expenses:
    Cost of revenues                                         100,743              138,173              254,258              251,346
    Sales costs                                              193,949              134,385              370,521              374,312
    Marketing and promotion                                   33,438               37,726              295,116              218,108
    General and administrative                               163,116              115,489              318,770              246,585
                                                         --------------------------------------------------------------------------
                                                             491,246              425,773            1,238,665            1,090,351
                                                         --------------------------------------------------------------------------

Loss from operations                                        (223,769)            (185,572)            (446,972)            (580,895)
                                                         --------------------------------------------------------------------------

Interest expense                                              (9,968)              (1,500)             (15,197)              (2,000)
                                                         --------------------------------------------------------------------------

Net loss                                                 $  (233,737)         $  (187,072)         $  (462,169)         $  (582,895)
                                                         ==========================================================================

Net loss per common share                                $     (0.03)         $     (0.03)         $     (0.06)         $     (0.08)
                                                         ==========================================================================
Weighted average number of
common shares outstanding                                  8,404,888            7,026,818            8,365,567            7,026,818
                                                         ==========================================================================


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

                                                                 4

<PAGE>

                              VALUESTAR CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                             Six months ended
                                                               December 31,
                                                            1997        1996
                                                         ---------    --------- 
Cash Flows from Operating Activities
     Net loss                                            $(462,169)   $(582,895)
     Adjustments to reconcile net loss to net cash
      used by operating activities:
        Depreciation and amortization                        5,198        4,333
        Warrants issued for services                        20,000         --   
        Changes in assets and liabilities:
          Accounts receivable                                4,731      (73,444)
          Inventories                                       20,663       10,071
          Prepaid expenses and other                         7,035          829
          Deferred costs                                   (19,689)     (98,482)
          Accounts payable                                (123,486)      34,123
          Accrued Expenses                                 (49,073)      53,509
          Deferred revenue                                     480      (42,688)
                                                         ---------------------- 
Net Cash Flows Used by Operations                         (596,310)    (694,644)

Cash Flows from Investing Activities
     Equipment acquisitions                                 (2,988)      (9,507)
                                                         ---------------------- 
Net Cash Used by Investing Activities                       (2,988)      (9,507)

Cash Flows from Financing Activities
     Sale of common stock                                  227,500         --   
     Common stock subscribed                                  --        155,000
     Proceeds from bank line                               250,000         --   
     Sale of long-term debt                                250,000         --   
     Stockholder advances                                   90,000      125,000
     Repayment of stockholder advances                     (90,000)        --   
                                                         ---------------------- 
Net Cash Provided by Financing Activities                  727,500      280,000
                                                         ---------------------- 
Increase (Decrease) in Cash and Cash Equivalents           128,202     (424,151)

Cash at Beginning of Period                                 44,225      454,809
                                                         ---------------------- 
Cash at End of Period+A26                                $ 172,427    $  30,658
                                                         ======================

Supplemental Cash Flow Information:
   Cash paid for interest                                $  15,197    $   2,000
   Non-cash investing and financing activities:
      Notes converted to stock                           $  30,000         --   
      Warrants issued for bank guarantee                    20,000         --   

      See accompanying notes to interim consolidated financial statements.

                                       5

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 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 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 six 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 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,  directors and shareholders of
the Company.

                                       6

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1997

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.

In  December  1997 the  Company  obtained  $250,000  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 125,000  common shares at $1.25 per
share until December 31, 2000.

Subsequent to December 31, 1997 the Company sold an  additional  $457,500 of 12%
Notes and issued warrants for 228,750 shares on the same terms as above.


7. STOCKHOLDERS' DEFICIT

<TABLE>
The following table summarizes equity  transactions  during the six months ended
December 31, 1997:
<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
  Exercise of stock options                                                15,000                4            7,496            7,500
                                                                       ----------       ----------       ----------       ----------
Balance December 31, 1997                                               8,591,246       $    2,148       $4,036,785       $4,038,933
                                                                       ==========       ==========       ==========       ==========
</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 200,000  shares of common  stock for the 1997 Stock  Option  Plan.  The
following  table  summarizes  option  activity for the period ended December 31,
1997:

                                                  Weighted Average    Weighted
                                         Shares    Exercise Price   Average Life
                                         ------    --------------   ------------
Outstanding July 1, 1997                 704,000       $ 0.47           3.28
Granted                                     --          --               --
Canceled                                    --          --               --
Exercised                                 15,000       $ 0.50            --
Expired                                     --          --               --
                                         -------
Outstanding December 31, 1997            689,000       $ 0.47           2.79
                                         =======       ======           ====
Exercisable at December 31, 1997         588,667       $ 0.44           2.61
                                         =======       ======           ====


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 December 31, 1997 an  aggregate  of 2,900 common  shares had been
granted pursuant to this plan.

At  December  31, 1997 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
             -------
             860,000
             =======

                                       7

<PAGE>


                              VALUESTAR CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 1997


Subsequent to December 31, 1997, in connection  with 12% Notes (see Note 6), the
Company issued warrants on 353,750 common shares  exercisable at $1.25 per share
until December 31, 2000.

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 December 31, 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 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.

                                       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'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.

Research  and  rating fee  revenue  is  deferred  until the  research  report is
delivered.  Approximately  70% of  applicants  successfully  pass the  Company's
research  and  rating  requirements  and  are  eligible  for  certification  and
approximately 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  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 $19,689 and $98,482 for the six months ended  December 31,
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 December  31, 1997 had an
accumulated  deficit  of  $4,303,653.  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  recurring  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 Internet site
and  providing  voice-text  services.  The marginal  costs of more  licensees is
minimal compared to these base printing, distribution and maintenance costs.

                                       9

<PAGE>


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 December 31, 1997 the Company had 1,013  licensees  compared to 576 licensees
on December 31,1996.

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 1,200 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 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.  This change is
expected to reduce 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 fiscal quarter  thereby  reducing
second quarter revenues.  Management  expects to complete delayed ratings in the
third fiscal quarter.

Because of the change,  at December 31, 1997 the Company had 421 (397 new and 24
renewal)  prospective  licensees in the application and rating phase. At current
new sales  rates  the  normal  number of  pending  prospective  licensees  would
generally  be 200-250.  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 421 prospective licensees
are expected to represent over $300,000 of revenues that should be recognized in
the third 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  $791,693  for the six months  ended
December 31, 1997,  a 55% increase  over  revenues of $509,456 for the first six
months of the prior  fiscal  year.  During  the first six  months  license  fees
accounted  for 75% of revenue (74% for the prior  year's first six 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 second  fiscal
quarter ended December 31, 1997 were $267,477 compared to $240,201 for the prior
year  comparable  quarter.  This  small  increase  is the  direct  effect of the
increase  in  pending  prospective  licensees  during  the  second  quarter  (as
described  above)  which  increased  from 210 at  September  30,  1997 to 421 at
December 31, 1997. The increase in pending prospective  licensees  represents an
estimated  $100,000  of revenue  pending  expected  to be  realized in the third
fiscal quarter rather than the second quarter of fiscal 1998.

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 December  31, 1997 the  Company  had 421  applicants  in
various stages of rating,  effectively a (anticipated revenue) backlog estimated
at $300,000 to be recognized in the third fiscal  quarter  ending March 31, 1998
from license fees. As a result of this backlog,  management  expects,  but there
can be no assurance,  that third quarter fiscal 1998 (year ending June 30, 1998)
revenues  will exceed both the second  quarter of the current year and the third
quarter of the prior year.

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 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

                                       10

<PAGE>


costs  of  information  products  and  licensing  materials.  Cost  of  revenues
represented  32% of sales in the  first six  months  of fiscal  1998 (38% in the
second quarter),  a reduction from 49% in the first six months of the prior year
(57% for the  second  quarter of the prior  year).  The  increase  in the second
quarter percentage resulted from the decreased revenue caused by the increase in
pending  licensees.  During the current  year,  the Company made changes to make
ratings more  efficient and arranged for improved  third party pricing to reduce
rating costs. And in December 1997 the Company changed from third party contract
ratings to in-house  employees  as discussed  above.  This change is expected to
reduce  rating  costs on a per unit basis and as a percentage  of revenues.  The
increased  volume of revenues in the current year also reduces the percentage of
revenues  associated  with  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 six  months  ended  December  31,  1997 were
$370,521  or 47% of revenues  compared  to  $374,312 or 73% of revenues  for the
comparable prior period.  In the first six months of the prior year, the Company
relied on a direct sales force  supported by direct mail to generate  sales.  In
the  current  six  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 six months of the current year  approximately
37% of license fees came from  renewals  with limited  sales costs,  compared to
approximately  22% of license  fees  coming from  renewals in the prior  periods
first six months.  Sales costs for the second  quarter  were  $193,949 or 72% of
revenues. The increase in the second quarter over the average for the six months
is the result of the increase in pending licensees which reduced revenues in the
second 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
$295,116  in the first six months of fiscal  1998  compared  to  $218,108 in the
first six months of fiscal 1997.  Included in marketing and selling  expenses in
each six months were printing and distribution  costs of the Company's  Consumer
ValueStar  Report  (CVR)  publication   targeted  at  consumers.   Printing  and
distribution  costs of $102,000 in the first fiscal 1998 quarter were comparable
to the fiscal  1997 first  quarter,  however  the  company was able to print and
distribute  more  copies  due to better  prices.  During  the six  months  ended
December 31, 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 six months.  Marketing and promotion expenses
were $33,438 for the three months  ended  December 31, 1997  compared to $37,726
for the prior comparable period. Generally the second and fourth fiscal quarters
have reduced costs because the CVR  publication  is not printed and  distributed
during these  quarters.  Also generally the Company does not expend  significant
advertising  in the second  fiscal  quarter due to high  calendar year end media
costs. The Company  anticipates  increased  marketing and promotion costs in the
upcoming third fiscal quarter of 1998 due to the printing and  distribution of a
new CVR and a planned advertising program.

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  $318,770 for the six months  ended  December 31, 1997  compared to
$246,585 for the comparable prior period.  The major increases include a $10,000
increase in occupancy costs due to additional personnel,  an $11,000 increase in
corporate costs due to the public trading of common shares of the Company in the
current year, a $15,000  increase in  guarantees  and bad debts due to increased
volumes, a $5,000 increase in postage due to increased  activities and a $20,000
non-cash bank guarantee fee paid in warrants.

General  and  administrative  expenses  were  $163,116  for the  second  quarter
compared to $115,489 for the prior year's second quarter. Management anticipates
that current year general and  administrative  costs will continue to exceed the
prior year due to increased  personnel 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.

                                       11

<PAGE>


Net Loss.  The  Company  had a net loss of  $462,169  for the six  months  ended
December 31, 1997  compared to a net loss of $582,895 in fiscal 1997is first six
months.  The decreased loss resulted  primarily from improved selling efficiency
and the increase in total revenues  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.  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  December  31,  1997 a working  capital  deficit of
$215,706  resulting from a portion of operations being financed by debt. For the
six months ended December 31, 1997 negative cash flow from operating  activities
was $596,310 due to the continued  operating  losses and heavy investment in new
licensee  growth.  Included  in working  capital  at  December  31,  1997 is net
accounts receivable of $290,811  representing  approximately 67 days of revenues
and an  annualized  turnover  ratio  of  approximately  5.4.  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 December  31, 1997 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 $457,500 of additional 12% Notes sold in January 1998,
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 six  months  ended  December  31,  1997 the  Company  obtained
$250,000 from a bank line of credit, $250,000 in 12% Note financing and $257,500
from common stock sales and received and repaid $90,000 of shareholder  advances
during the period.  The bank line of credit is guaranteed  by certain  officers,
directors and a shareholder.

Other than cash on hand of $172,427 at December 31, 1997, accounts receivable of
$290,811,  and the $407,500 of proceeds  obtained from 12% Notes sold in January
1998,  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  $200,000 of
additional  funding for the next twelve  months.  However  should actual results
differ  significantly  from  managementis  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

                                       12

<PAGE>

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 $447,000 for the six months ended December
         31,  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  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.  The Company has a $0.5 million  key-man
         life  insurance  policy on Mr.  Stein  and has  applied  for  increased
         insurance to $2.0 million.

         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

                                       13
<PAGE>


         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

(a) None

(b) None

(c) The  following is a  description  of equity  securities  sold by the Company
during the fiscal quarter ended December 31, 1997 that were not registered under
the Securities Act:

         1.   The Company issued four stock purchase  warrants dated December 9,
              1997,  each  exercisable to purchase 62,500 shares of Common Stock
              at $1.25 per share until  September 30, 2002.  These warrants were
              granted to two officer/directors, one director and one shareholder
              in connection  with the guarantee of the bank line of credit.  The
              Company  expensed  $20,000 as the value  assigned to the warrants.
              The  issuance  was  exempt  by  reason  of  Section  4(2)  of  the
              Securities  Act of 1933, as amended (the "Act") in reliance on the
              private nature of the  transaction,  restrictions  on transfer and
              based on representations of the recipients.  An appropriate legend
              was placed on the warrants.

         2.   During December 1997 the Company sold $250,000  ($150,000 for cash
              and  $100,000  on   conversion   of  previous   cash  advances  by
              stockholders) of unsecured 12%  subordinated  promissory notes due
              June 30, 2000 (12% Notes) to five  persons.  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  125,000
              common shares in the aggregate.  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.

         3.   During  December  1997 the Company  completed  the sale of 200,000
              shares of its Common Stock at $1.00 per share in cash and warrants
              to  purchase  200,000  common  shares  at $1.25  per  share  until
              December 31, 2002. The securities were sold by the Company without
              an underwriter to three qualified investors (already  shareholders
              and  including one  officer/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 warrants and based on  representations  of the purchasers.  An
              appropriate legend was placed on the shares and warrants.

         4.   During  December  1997 the Company  issued  15,000 shares upon the
              payment  of  $7,500  cash in  connection  with the  exercise  of a
              non-qualified stock option by one qualified purchaser.  The shares
              were issued by the Company without the services of an underwriter.
              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
              purchaser. An appropriate legend was placed on the shares.

                                       14

<PAGE>


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:

         4.6      Form of Stock Purchase  Warrant dated October 27, 1997 granted
                  to two  investors  exercisable  into an  aggregate  of  50,000
                  common  shares at $1.25 per share  until  September  30,  2002
                  (individual  warrants are for 25,000 shares each and differ as
                  to holder).

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

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

         4.9      Form of unsecured 12%  Subordinated  Promissory Notes due June
                  30, 2000 granted to investors  (individual  notes differ as to
                  date, principal amount and holder).

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

         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: February 12, 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