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Diabetes, caused due to lack of insulin in human blood. This affects some parts of human body one such important organ is eye leading to Diabetic Retinopathy. Diabetic Retinopathy, a complication in diabetic patients, causes damage to retina which in later stages may lead to blindness. The disorder can be detected by regular scanning of the retina of diabetic patients. However, Indian Ophthalmologists to Indian population ratio is 1:90000 which is not proportional necessitating to automation of the system. The proposed system, using Image processing techniques, requires retinal fundus image of an eye taken from fundus camera. But sometimes it is difficult for the system to process due to the dark images leading to misinterpretation in the results. Hence system performs the quality assessment of image by dividing Image into blocks, extracting first order histogram features from retinal image, detecting exudates using AND logic and finally grading the Diabetic Retinopathy as mild, moderate or severe. This paper mainly focuses its content on Image Quality assessment and Retinopathy Grading System. System has achieved 90.9% and 90% of sensitivity and specificity in quality assessment of retinal image.