SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


______________





Form
10-Q


________________





R
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Quarterly Period Ended March 31, 2009OR£
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Transition Period
      From                   to





Commission
file number 000-30083





QUALSTAR
CORPORATION





CALIFORNIA
              95-3927330(State
      of incorporation)
              (I.R.S.
      Employer Identification No.)





3990-B
Heritage Oak Court, Simi Valley, CA  93063





(805)
583-7744





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 þ     No
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of  “accelerated filer,” “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):


Large
accelerated filer o
Accelerated filer o     Non-accelerated
filer  ̈       Smaller
reporting company þ





Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).  Yes o     No
þ





Total
shares of common stock without par value outstanding at March 31, 2009 is
12,253,117.













QUALSTARCORPORATION


FORM
10-Q


FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2009





INDEX








PART
      I — FINANCIAL INFORMATIONItem
      1.
                  Financial Statements·Condensed Consolidated Balance Sheets — March 31, 2009 and
      June 30, 2008
                  1·Condensed Consolidated Statements of Operations — Three and
      Nine Months ended March 31, 2009 and 2008
                  2·Condensed Consolidated Statements of Cash Flows — Nine Months
      ended March 31, 2009 and 2008
                  3·Condensed Consolidated Statement of Changes in Shareholders’
      Equity — Nine Months ended March 31, 2009
                  4·Notes to Interim Condensed Consolidated Financial
      Statements
                  5Item
      2.
                  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                  13Item
      3.
                  Qualitative and Quantitative Disclosures About Market
      Risk
                  19Item
      4T.
                  Controls and Procedures
                  19PART
      II — OTHER INFORMATIONItem
      1A.
                  Risk Factors
                  20Item
      4.
                  Submission of Matters to a Vote of Security
      Holders
                  20Item
      6.
                  Exhibits
                  21Signatures
                  22





Index





PARTI — FINANCIAL INFORMATION





ITEM
1.FINANCIAL
STATEMENTS





QUALSTAR
CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands)





March
      31,
                      2009
                    
                    
                    June
      30,
                      2008(Unaudited)
                    
                    
                    
                    (1
                    )ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    2,340
                    
                    
                    $
                    6,744Marketable
      securities, short-term
                    
                    
                    17,224
                    
                    
                    
                    11,091Receivables,
      net of allowances of $112 at March 31, 2009, and $82 at June 30,
      2008
                    
                    
                    2,178
                    
                    
                    
                    2,962Inventories,
      net
                    
                    
                    6,880
                    
                    
                    
                    6,109Prepaid
      expenses and other current assets
                    
                    
                    426
                    
                    
                    
                    467Total
      current assets
                    
                    
                    29,048
                    
                    
                    
                    27,373Property
      and equipment, net
                    
                    
                    414
                    
                    
                    
                    526Marketable
      securities, long-term
                    
                    
                    9,245
                    
                    
                    
                    14,703Other
      assets
                    
                    
                    57
                    
                    
                    
                    55Total
      assets
                    
                    $
                    38,764
                    
                    
                    $
                    42,657LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    954
                    
                    
                    $
                    1,197Accrued
      payroll and related liabilities
                    
                    
                    410
                    
                    
                    
                    519Other
      accrued liabilities
                    
                    
                    866
                    
                    
                    
                    1,774Total
      current liabilities
                    
                    
                    2,230
                    
                    
                    
                    3,490Other
      long term liabilities
                    
                    
                    46
                    
                    
                    
                    46Commitments
      and contingenciesShareholders’
      equity:Preferred
      stock, no par value; 5,000 shares authorized; no shares
    issued
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, no par value; 50,000 shares authorized, 12,253 shares issued and
      outstanding as of March 31, 2009 and June 30, 2008
                    
                    
                    18,773
                    
                    
                    
                    18,705Accumulated
      other comprehensive income
                    
                    
                    191
                    
                    
                    
                    108Retained
      earnings
                    
                    
                    17,524
                    
                    
                    
                    20,308Total
      shareholders’ equity
                    
                    
                    36,488
                    
                    
                    
                    39,121Total
      liabilities and shareholders’ equity
                    
                    $
                    38,764
                    
                    
                    $
                    42,657








(1)
Derived from audited financial statements





See
notes to condensed consolidated financial statements.





1
 Index





QUALSTARCORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)
(In thousands, except per share data)








Three
      Months Ended
                    March
      31,
                  
                  
                  Nine
      Months Ended
                    March
      31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      Revenues
                  
                  $
                  4,098
                  
                  
                  $
                  5,171
                  
                  
                  $
                  14,123
                  
                  
                  $
                  16,552Cost
      of goods sold
                  
                  
                  2,694
                  
                  
                  
                  3,385
                  
                  
                  
                  9,362
                  
                  
                  
                  11,097Gross
      profit
                  
                  
                  1,404
                  
                  
                  
                  1,786
                  
                  
                  
                  4,761
                  
                  
                  
                  5,455Operating
      expenses:Research
      and development
                  
                  
                  807
                  
                  
                  
                  772
                  
                  
                  
                  2,315
                  
                  
                  
                  2,270Sales
      and marketing
                  
                  
                  679
                  
                  
                  
                  810
                  
                  
                  
                  2,127
                  
                  
                  
                  2,409General
      and administrative
                  
                  
                  842
                  
                  
                  
                  904
                  
                  
                  
                  2,410
                  
                  
                  
                  2,561Total
      operating expenses
                  
                  
                  2,328
                  
                  
                  
                  2,486
                  
                  
                  
                  6,852
                  
                  
                  
                  7,240Loss
      from operations
                  
                  
                  (924
                  )
                  
                  
                  (700
                  )
                  
                  
                  (2,091
                  )
                  
                  
                  (1,785
                  )Investment
      Income
                  
                  
                  210
                  
                  
                  
                  378
                  
                  
                  
                  781
                  
                  
                  
                  1,215Loss
      before income taxes
                  
                  
                  (714
                  )
                  
                  
                  (322
                  )
                  
                  
                  (1,310
                  )
                  
                  
                  (570
                  )Provision
      for income taxes
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  4
                  
                  
                  
                  17Net
      loss
                  
                  $
                  (720
                  )
                  
                  $
                  (322
                  )
                  
                  $
                  (1,314
                  )
                  
                  $
                  (587
                  )Loss
      per common share:Basic
      and Diluted
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.05
                  )Weighted
      average common shares outstanding:Basic
      and Diluted
                  
                  
                  12,253
                  
                  
                  
                  12,253
                  
                  
                  
                  12,253
                  
                  
                  
                  12,253Cash
      dividends declared per common share
                  
                  $
                  0.06
                  
                  
                  $
                  0.06
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.06








See
notes to condensed consolidated financial statements.





2
 Index





QUALSTARCORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)
(In thousands)








Nine
      Months Ended
                          March
      31,2009
                        
                        
                        2008OPERATING
      ACTIVITIES:Net
      loss
                        
                        $
                        (1,314
                        )
                        
                        $
                        (587
                        )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Share
      based compensation
                        
                        
                        68
                        
                        
                        
                        83Gain
      on sale of marketable securities
                        
                        
                        (98
                        )
                        
                        
                        —Depreciation
      and amortization
                        
                        
                        174
                        
                        
                        
                        217Provision
      for bad debts and returns
                        
                        
                        55
                        
                        
                        
                        2Changes
      in operating assets and liabilities:Accounts
      receivable
                        
                        
                        729
                        
                        
                        
                        370Inventories
                        
                        
                        (771
                        )
                        
                        
                        58Prepaid
      expenses and other assets
                        
                        
                        39
                        
                        
                        
                        55Prepaid
      income taxes
                        
                        
                        —
                        
                        
                        
                        137Accounts
      payable
                        
                        
                        (243
                        )
                        
                        
                        354Accrued
      payroll and accrued liabilities
                        
                        
                        (109
                        )
                        
                        
                        (61
                        )Income
      taxes payable
                        
                        
                        (7
                        )
                        
                        
                        11Other
      accrued liabilities
                        
                        
                        (166
                        )
                        
                        
                        (35
                        )Net
      cash (used in) provided by operating activities
                        
                        
                        (1,643
                        )
                        
                        
                        604INVESTING
      ACTIVITIES:Purchases
      of property, equipment and leasehold improvements
                        
                        
                        (62
                        )
                        
                        
                        (113
                        )Proceeds
      from sale of marketable securities
                        
                        
                        25,749
                        
                        
                        
                        21,484Purchases
      of marketable securities
                        
                        
                        (26,243
                        )
                        
                        
                        (19,232
                        )Net
      cash (used in) provided by investing activities
                        
                        
                        (556
                        )
                        
                        
                        2,139FINANCING
      ACTIVITIES:Cash
      dividends on common shares
                        
                        
                        (2,205
                        )
                        
                        
                        (735
                        )Net
      cash used in financing activities
                        
                        
                        (2,205
                        )
                        
                        
                        (735
                        )Net
      change in cash and cash equivalents
                        
                        
                        (4,404
                        )
                        
                        
                        2,008Cash
      and cash equivalents, beginning of period
                        
                        
                        6,744
                        
                        
                        
                        7,697Cash
      and cash equivalents, end of period
                        
                        $
                        2,340
                        
                        
                        $
                        9,705Supplemental
      cash flow disclosure:Income
      taxes paid
                        
                        $
                        11
                        
                        
                        $
                        7








See
notes to condensed consolidated financial statements.





3
 Index





QUALSTARCORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY


NINE
MONTHS ENDED MARCH 31, 2009


(Unaudited)
(In thousands)








AccumulatedOtherCommon
      Stock
                    
                    
                    Comprehensive
                    
                    
                    RetainedShares
                    
                    
                    Amount
                    
                    
                    Income
                    
                    
                    Earnings
                    
                    
                    TotalBalance
      at July 1, 2008
                    
                    
                    12,253
                    
                    
                    $
                    18,705
                    
                    
                    $
                    108
                    
                    
                    $
                    20,308
                    
                    
                    $
                    39,121Share-based
      compensation
                    
                    
                    —
                    
                    
                    
                    68
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    68Cash
      dividend on common shares
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,470
                    )
                    
                    
                    (1,470
                    )Comprehensive
      loss:Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,314
                    )
                    
                    
                    (1,314
                    )Change
      in unrealized losses on investments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    83
                    
                    
                    
                    —
                    
                    
                    
                    83Comprehensive
      Loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,231
                    )Balance
      at March 31, 2009
                    
                    
                    12,253
                    
                    
                    $
                    18,773
                    
                    
                    $
                    191
                    
                    
                    $
                    17,524
                    
                    
                    $
                    36,488








See
notes to condensed consolidated financial statements





4
 Index





QUALSTARCORPORATION





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)





Note
1 – Basis of Presentation and Consolidation





Basis
of Presentation





In the
opinion of management, the accompanying consolidated condensed financial
statements, including balance sheets and related interim statements of
operations, cash flows, and stockholders’ equity, include all adjustments,
consisting primarily of normal recurring items, which are necessary for their
fair presentation in conformity with accounting principles generally accepted in
the United States of America (“U.S. GAAP”).





Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and
expenses.  Examples include estimates of loss contingencies, product
life cycles and inventory obsolescence, bad debts, sales returns, share based
compensation forfeiture rates, the potential outcome of future tax consequences
of events that have been recognized in our financial statements or tax returns,
and determining when investment impairments are
other-than-temporary.  Actual results and outcomes may differ from
management’s estimates and assumptions.





Interim
results are not necessarily indicative of results for a full
year.  The information included in this Form 10-Q should be read in
conjunction with Management’s Discussion and Analysis and the financial
statements and notes thereto included in the Qualstar Corporation Annual Report
on Form 10-K for the fiscal year ended June 30, 2008, filed with the Securities
and Exchange Commission (“SEC”) on September 24, 2008.





Basis
of Consolidation





The
consolidated financial statements include the accounts and operations of
Qualstar and its wholly owned subsidiary.  All significant
intercompany accounts have been eliminated.





Note
2 – Recent Accounting Pronouncements





Recently
Adopted Accounting Pronouncements





On July
1, 2008, we adopted Statement of Financial Accounting Standard (“SFAS”)
Statement No. 157, Fair Value
Measurements(“SFAS No. 157”) for all financial assets and liabilities
and nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. See Note 6
– Financial Instruments.





On July
1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115. SFAS No. 159 gives us the irrevocable option to elect fair value for
the initial and subsequent measurement for certain financial assets and
liabilities on a contract-by-contract basis with the difference between the
carrying value before election of the fair value option and the fair value
recorded upon election as an adjustment to beginning retained earnings. We chose
not to elect the fair value option for all marketable securities outstanding as
of March 31, 2009.





On
January 1, 2009, we adopted SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133,which requires additional disclosures about the objectives of derivative
instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on our
financial position, financial performance, and cash flows.  The
adoption of SFAS No. 161 did not have a material impact on our financial
statements.





5
 Index





QUALSTAR
CORPORATION





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)





Recent
Accounting Pronouncements Not Yet Adopted





In April
2009, the Financial Accounting Standards Board (“FASB”) issued three Staff
Positions (“FSPs”) that are intended to provide additional application guidance
and enhance disclosures about fair value measurements and impairments of
securities. FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That are Not Orderly,clarifies
the objective and method of fair value measurement even when there has been a
significant decrease in market activity for the asset being measured, FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, establishes a new model for measuring
other-than-temporary impairments for debt securities, including establishing
criteria for when to recognize a write-down through earnings versus other
comprehensive income. FSP FAS 107-1 and Accounting Principles Board Opinion
(“APB”) 28-1, Interim
Disclosures about Fair Value of Financial Instruments,expands the fair
value disclosures required for all financial instruments within the scope of
SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, to interim periods. All of
these FSPs are effective for us beginning June 15, 2009. We are assessing the
potential impact that the adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS
124-2 may have on our financial statements. FSP FAS 107-1 and APB 28-1 will
result in increased disclosures in our interim periods.





In
February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No.
157,which delays the effective date of SFAS No. 157 to July 1, 2009 for
us, for all nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). We believe the adoption of the delayed
items of SFAS No. 157 will not have a material impact on our financial
statements.





In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, which
replaces SFAS No. 141. The statement retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for us beginning July 1, 2009 and
will apply prospectively to business combinations completed on or after that
date.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests.  Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent’s equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions.  In addition, net income
attributable to the noncontrolling interest will be included in net income and,
upon a loss of control, the interest sold, as well as any interest retained,
will be recorded at fair value with any gain or loss recognized in net
income.  SFAS No. 160 is effective for us beginning July 1, 2009 and
will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively.  We believe the
adoption of SFAS No. 160 will not have a material impact on our financial
statements.





In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles.  SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will become effective July 1, 2009. We believe the
adoption  of SFAS 162 will not have a material impact on our financial
statements.





Note
3 – Concentration of Credit Risk, Other Concentration Risks and Significant
Customers





We are
exposed to interest rate risks.  Our interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in shorter duration fixed income securities. We
have no outstanding debt nor do we utilize auction rate securities or derivative
financial instruments in our investment portfolio.





6
 Index





QUALSTAR
CORPORATION





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)





Our
financial results could be affected by changes in foreign currency exchange
rates or weak economic conditions in foreign markets. As all sales are currently
made in U.S. dollars, a strengthening of the dollar could make our products less
competitive in foreign markets. Sales outside of North America represented
approximately 21.3% of net revenues in the three months ended March 31, 2009,
and 30.0% of net revenues in the three months ended March 31, 2008. Sales
outside of North America represented approximately 26.0% of net revenues in the
nine months ended March 31, 2009, and 27.8% of net revenues in the nine months
ended March 31, 2008.





One
customer accounted for 11.6% of the Company’s consolidated revenue for the
three-month period ended March 31, 2009.  The customer’s accounts
receivable balance, net of specific allowances, totaled approximately 12.2% of
net accounts receivable.  No single customer accounted for more than
ten percent of the Company’s consolidated revenue for the three-month period
ended March 31, 2008.





One
customer accounted for 11.2% of the Company’s consolidated revenue for the
nine-month period ended March 31, 2009.  The customer’s accounts
receivable balance, net of specific allowances, totaled approximately 3.0% of
net accounts receivable.  No single customer accounted for more than
ten percent of the Company’s consolidated revenue for the nine-month period
ended March 31, 2008.





Sales and
costs of goods sold related to tape library products only available from one
supplier totaled approximately 15.1% and 20.9% for the three months ended March
31, 2009 and 26.0% and 30.6% for the three months ended March 31, 2008,
respectively, of total sales and cost of goods sold. Sales and costs of goods
sold totaled approximately 15.5% and 19.8% for the nine months ended March 31,
2009 and 23.3% and 26.1% for the nine months ended March 31, 2008, respectively,
of total sales and cost of goods sold.





Note
4 – Loss Per Share





Qualstar
calculates loss per share in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 128, Earnings





per Share.  Basic
loss per share has been computed by dividing net loss by the weighted average
number of common shares outstanding.  Diluted loss per share has been
computed by dividing net loss by the weighted average common shares outstanding
plus dilutive securities or other contracts to issue common stock as if these
securities were exercised or converted to common stock.





The
following table sets forth the computation of basic and diluted net loss per
share for the periods indicated:








Three
      Months Ended
                  March
      31,
                
                
                Nine
      Months Ended
                  March
      31,In
      thousands (except per share amounts):
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      loss  (a)
                
                $
                (720
                )
                
                $
                (322
                )
                
                $
                (1,314
                )
                
                $
                (587
                )Weighted
      average outstanding shares of common stock (b)
                
                
                12,253
                
                
                
                12,253
                
                
                
                12,253
                
                
                
                12,253Dilutive
      potential common shares from employee stock options
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Common
      stock and common stock equivalents (c)
                
                
                12,253
                
                
                
                12,253
                
                
                
                12,253
                
                
                
                12,253Loss
      per share:Basic
      net loss per share (a)/(b)
                
                $
                (0.06
                )
                
                $
                (0.03
                )
                
                $
                (0.11
                )
                
                $
                (0.05
                )Diluted
      net loss per share  (a)/(c)
                
                $
                (0.06
                )
                
                $
                (0.03
                )
                
                $
                (0.11
                )
                
                $
                (0.05
                )








Stock
options are excluded for the three and nine-month periods ended March 31, 2009
and 2008, respectively, from the computation of diluted loss per share, as the
effect would have been anti-dilutive.





7
 Index





QUALSTAR
CORPORATION





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)





Note
5 – Marketable Securities





Marketable
securities consist primarily of commercial paper, U.S. government and agency
securities, mortgage-backed securities and corporate bonds. In accordance with
SFAS No. 115, “Accounting for
Certain Investments in Debt and EquitySecurities,” these securities are classified in
one of three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those securities which
Qualstar has the ability and intent to hold until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale. All of Qualstar’s marketable securities were classified as
available-for-sale at March 31, 2009 and June 30, 2008.





Available-for-sale
securities are recorded at market value. Unrealized holding gains and losses,
net of the related income tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of shareholders’
equity until





realized.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale are included in earnings
when the underlying securities are sold and are derived using the specific
identification method for determining the cost of securities sold. Gain (loss)
on the sale of securities for the three months ended March 31, 2009 and 2008 was
$35,000 and $(2,000), respectively.  Gain on the sale of securities
for the nine months ended March 31, 2009 and 2008 was $98,000 and $0,
respectively.  The change in net unrealized holding gain on
available-for-sale securities that has been included in the other comprehensive
income of shareholder’s equity during the nine months ended March 31, 2009 and
2008 was $83,000 and $328,000, respectively.





Note
6 – Financial Instruments





We
adopted SFAS No. 157 on July 1, 2008 for all financial assets and liabilities
and nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements.





SFAS No.
157 defines fair value as the price that would be received upon sale of an asset
or paid upon transfer of a liability in an orderly transaction between market
participants at the measurement date and in the principal or most advantageous
market for that asset or liability. The fair value should be calculated based on
assumptions that market participants would use in pricing the asset or liability,
not on assumptions specific to the entity. In addition, the fair value of
liabilities should include consideration of non-performance risk including our
own credit risk.





In
addition to defining fair value, SFAS No. 157 expands the disclosure
requirements around fair value and establishes a fair value hierarchy for
valuation inputs. The hierarchy prioritizes the inputs into three levels based
on the extent to which inputs used in measuring fair value are observable in the
market. Each fair value measurement is reported in one of the three levels which
is determined by the lowest level input that is significant to the fair value
measurement in its entirety. These levels are:





•
            Level
      1 – inputs are based upon unadjusted quoted prices for identical
      instruments traded in active
markets.





•
            Level
      2 – inputs are based upon quoted prices for similar instruments in active
      markets, quoted prices for identical or similar instruments in markets
      that are not active, and model-based valuation techniques for which all
      significant assumptions are observable in the market or can be
      corroborated by observable market data for substantially the full term of
      the assets or liabilities.





•
            Level
      3 – inputs are generally unobservable and typically reflect management’s
      estimates of assumptions that market participants would use in pricing the
      asset or liability. The fair values are therefore determined using
      model-based techniques that include option pricing models, discounted cash
      flow models, and similar
techniques.





In
general, and where applicable, we use quoted prices in active markets for
identical assets to determine fair value. This pricing methodology applies to
our Level 1 investments such as U.S. treasuries and agency securities and
exchange-traded mutual funds. If quoted prices in active markets for identical
assets are not available to determine fair value, then we use quoted prices for
similar assets or inputs other than the quoted prices that are observable either
directly or indirectly. These investments are included in Level 2 and consist
primarily of corporate bonds, mortgage-backed securities, and certain agency
securities.  While we own certain mortgage-backed fixed income
securities, our portfolio as of March 31, 2009 does not contain direct exposure
to subprime mortgages or structured vehicles that derive their value from
subprime collateral.  Our mortgage-backed securities are
collateralized by prime residential mortgages and carry a 100% principal and
interest guarantee, primarily from Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation.





8
 Index





QUALSTAR
CORPORATION





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)





Assets
and Liabilities Measured at Fair Value on a Recurring Basis





The
following table presents our assets and liabilities measured at fair value on a
recurring basis at March 31, 2009 (in thousands):








Level
      1
                              
                              
                              Level
      2
                              
                              
                              Net
      balanceAssetsCash
                              
                              $
                              625
                              
                              
                              
                              
                              
                              $
                              625Money
      Market Mutual fund
                              
                              
                              1,715
                              
                              
                              
                              
                              
                              
                              1,715Commercial
      paper
                              
                              
                              –
                              
                              
                              
                              
                              
                              $U.S.
      government and agency securities
                              
                              
                              11,862
                              
                              
                              
                              9,438
                              
                              
                              
                              21,300Mortgage-backed
      securities
                              
                              
                              –
                              
                              
                              
                              3,050
                              
                              
                              
                              3,050Corporate
      bonds
                              
                              
                              –
                              
                              
                              
                              1,619
                              
                              
                              
                              1,619Municipal
      securities
                              
                              
                              –
                              
                              
                              
                              500
                              
                              
                              
                              500Total
                              
                              $
                              14,202
                              
                              
                              $
                              14,607
                              
                              
                              $
                              28,809





Note
7 - Inventories





Inventories
are stated at the lower of cost (first-in, first-out basis) or market.
Inventories are comprised as follows (in thousands):





March
      31, 2009
                  
                  
                  June
      30, 2008Raw
      materials
                  
                  $
                  6,770
                  
                  
                  $
                  6,053Finished
      goods
                  
                  
                  732
                  
                  
                  
                  785Subtotal
                  
                  
                  7,502
                  
                  
                  
                  6,838Less:
      Inventory reserve
                  
                  
                  (622
                  )
                  
                  
                  (729
                  )$
                  6,880
                  
                  
                  $
                  6,109





Note
8 – Warranty Obligations





The
Company follows the provisions of the Financial Accounting Standards Board
(FASB) Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of the
Indebtedness of Others, which clarifies the requirements of Statement of
Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies,
relating to a guarantor’s accounting for disclosures for certain guarantees. FIN
45 requires enhanced disclosures, among other things, for certain guarantees,
including warranty accruals. Qualstar does not issue third party guarantees, as
defined, and therefore only the disclosure provisions of FIN 45
apply.





9
 Index





QUALSTAR
CORPORATION





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)





Activity
in the liability for product warranty for the periods presented were as follows
(in thousands):


Three
      Months Ended
                          March
      31, 2009
                        
                        
                        Nine
      Months Ended
                          March
      31, 2009Beginning
      balance
                        
                        $
                        179
                        
                        
                        $
                        180Cost
      of warranty claims
                        
                        
                        (16
                        )
                        
                        
                        (47
                        )Accruals
      for product warranties
                        
                        
                        8
                        
                        
                        
                        38Ending
      balance
                        
                        $
                        171
                        
                        
                        $
                        171





Note
9 – Comprehensive Loss





For the
nine months ended March 31, 2009 and 2008, comprehensive loss amounted to
approximately $1,231,000 and $259,000, respectively. The difference between net
loss and comprehensive loss relates to the changes in the unrealized losses or
gains the Company recorded for its available-for-sale marketable
securities.





Note
10 – Legal Proceedings





We are
from time to time involved in various lawsuits and legal proceedings that arise
in the ordinary course of business.  At this time, we are not aware of
any pending or threatened litigation against us that we expect will have a
material adverse effect on our business, financial condition, liquidity or
operating results.  Legal claims are inherently uncertain, however,
and it is possible that the Company’s business, financial condition, liquidity
and/or operating results could be adversely affected in the future by legal
proceedings.





Note
11 – Income Taxes





We
recorded a provision for income taxes of $4,000 for the nine months ended March
31, 2009. We recorded a provision for income taxes of $17,000 for the nine
months ended March 31, 2008 relating to state income taxes paid during the
quarter and interest expense accrued as part of our liability resulting from our
adoption on July 1, 2007 of FIN 48, Accounting for Uncertainties in
Income Taxes – an Interpretation of FASB Statement No. 109.





The Company has recorded a full
valuation allowance against its net deferred tax assets based on the Company’s
assessment regarding the realizability of these net deferred tax assets in
future periods.





Note
12 – Segment Information





SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information, establishes
standards for reporting information about operating segments. This standard
requires segmentation based on our internal organization and reporting of
revenue and operating income based upon internal accounting methods. Operating
segments are defined as components of an enterprise 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. Our chief operating decision maker is our Chief Executive Officer.
Our two segments are Tape Libraries and Power Supplies. The two segments
discussed in this analysis are presented in the way we internally managed and
monitored performance for the nine months ended March 31, 2009 and 2008. Our
financial reporting systems present various data for management to operate the
business, including internal profit and loss statements prepared on a basis
consistent with U.S. GAAP. The tape library business has dominated our
operations, thus, our operations and reporting have been set up to accommodate a
single segment and attribute all revenues and expenses to the tape library side,
with the power supply business being an ancillary part of overall operations.
Allocations for internal resources were made for the nine months ended March 31,
2009 and 2008.





10
 Index





QUALSTAR
CORPORATION





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)





Certain
assets are tracked separately by the power supplies segment, and all others are
recorded in the tape library segment for internal reporting presentations. Cash
is not segregated between the two segments, but retained by the library
segment.





The types
of products and services provided by each segment are summarized
below:





Tape Libraries — We design,
develop, manufacture and sell automated magnetic tape libraries used to store,
retrieve and manage electronic data primarily in network computing environments.
Tape libraries consist of cartridge tape drives, tape cartridges and robotics to
move the cartridges from their storage locations to the tape drives under
software control. Our tape libraries provide data storage solutions for
organizations requiring backup, recovery and archival storage of critical
data.





Power Supplies — We design,
manufacture, and sell small, open frame, high efficiency switching power
supplies. These power supplies are used to convert AC line voltage to DC
voltages, or DC Voltages to other DC voltages for use in a wide variety of
electronic equipment such as telecommunications equipment, machine tools,
routers, switches, wireless systems and gaming devices.





Segment
revenue, loss before taxes and total assets were as follows (in
thousands):





Three
      Months Ended
                    March
      31,
                  
                  
                  Nine
      Months Ended
                    March
      31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008RevenueTape
      Libraries:Product
                  
                  $
                  2,325
                  
                  
                  $
                  3,457
                  
                  
                  $
                  7,922
                  
                  
                  $
                  11,788Service
                  
                  
                  742
                  
                  
                  
                  641
                  
                  
                  
                  2,079
                  
                  
                  
                  1,921Total
      Tape Libraries
                  
                  
                  3,067
                  
                  
                  
                  4,098
                  
                  
                  
                  10,001
                  
                  
                  
                  13,709Power
      Supplies
                  
                  
                  1,031
                  
                  
                  
                  1,073
                  
                  
                  
                  4,122
                  
                  
                  
                  2,843Consolidated
      Revenue
                  
                  $
                  4,098
                  
                  
                  $
                  5,171
                  
                  
                  $
                  14,123
                  
                  
                  $
                  16,552





Three
      Months Ended
                    March
      31,
                  
                  
                  Nine
      Months Ended
                    March
      31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Income (Loss) before TaxesTape
      Libraries
                  
                  $
                  (638
                  )
                  
                  $
                  (440
                  )
                  
                  $
                  (1,424
                  )
                  
                  $
                  (748
                  )Power
      Supplies
                  
                  
                  (76
                  )
                  
                  
                  118
                  
                  
                  
                  114
                  
                  
                  
                  178Consolidated
      Loss before Taxes
                  
                  $
                  (714
                  )
                  
                  $
                  (322
                  )
                  
                  $
                  (1,310
                  )
                  
                  $
                  (570
                  )





March
      31, 2009
                    
                    
                    June
      30,
                      2008Total AssetsTape
      Libraries
                    
                    $
                    39,356
                    
                    
                    $
                    41,257Power
      Supplies
                    
                    
                    (592
                    )
                    
                    
                    1,400Consolidated
      Assets
                    
                    $
                    38,764
                    
                    
                    $
                    42,657





11
 Index





QUALSTAR
CORPORATION





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)





Note
13 – Subsequent Event





On
May 7, 2009, the Company announced that it’s Board of Directors declared a cash
dividend of $0.06 per share on its common stock.  The cash dividend
will be paid on June 3, 2009 to shareholders of record at the close of business
on May 26, 2009.  The dividend payment will be approximately
$735,000.




12
 Index





ITEM2.MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Statements
in this Quarterly Report on Form 10-Q concerning the future business, operating
results and financial condition of Qualstar including estimates, projections,
statements relating to our business plans, objectives and operating results, and
the assumptions upon which those statements are based, are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements inherently are subject to risks and uncertainties, some of which we
cannot predict or quantify. Our actual results may differ materially from the
results projected in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2008 in “ITEM 1
Business,” “Item 1A Risk Factors,” and in “ITEM 7 Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” You generally can
identify forward-looking statements by the use of forward-looking terminology
such as “believes,” “may,” “expects,” “intends,” “estimates,” “anticipates,”
“plans,” “seeks,” or “continues,” or the negative thereof or variations thereon
or similar terminology. Except as required by law, we undertake no obligation to
publicly update or revise any forward-looking statements to reflect the
occurrence of events or circumstances in the future.





OVERVIEW





We
design, develop, manufacture and sell automated magnetic tape libraries used to
store, retrieve and manage electronic data primarily in network computing
environments. We currently offer tape libraries for two popular tape drive
technologies, LTO (Linear Tape-Open tape format) and AIT (Advanced Intelligent
Tape).





We have
developed a network of value added resellers who specialize in delivering
complete storage solutions to end users. End users of our products range from
small businesses requiring simple automated backup solutions to large
organizations needing complex storage management solutions. We also sell our
products to original equipment manufacturers that incorporate our products into
theirs, which they sell as part of a system or solution. We assist our customers
with marketing and technical support.





We also
design, develop and sell high-efficiency switching power supplies used in
telecommunications equipment, servers, routers, switches, RAIDs, and similar
applications. Our power supplies are sold under the N2Power brand name through
independent sales representatives and distributors. The primary customers are
original equipment manufacturers and contract manufacturers. We also utilize
these power supplies in some of our tape libraries.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





Our
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to customer promotional
offers, sales returns, bad debts, inventories, warranty costs, investments,
share based compensation, and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.





We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.





13
 Index





Revenue
Recognition





Revenue
is recognized when persuasive evidence of an arrangement exists, shipment has
occurred or services have been rendered, the fee is fixed or determinable and
collectibility is reasonably assured (less estimated returns, for which
provision is made at the time of sale) in accordance with SAB 104, Revenue
Recognition.  For product sales, title and risk of loss
transfer to the customer when the product leaves our dock in Simi Valley,
California, or another shipping location designated by us. Customers are allowed
to return the product within thirty days of shipment if the product does not
meet specifications.





We record
an allowance for estimated sales returns based on past experience and current
knowledge of our customer base. Our experience has been such that only a very
small percentage of libraries are returned. Should our experience change,
however, we may require additional allowances for sales returns.





Revenues
from technical support services and other services are recognized at the time
services are performed.  Revenues from service contracts entered into
with third party service providers are recognized at the time of the contract
sale, net of costs.





Marketable
Securities





All of
Qualstar’s marketable securities were classified as available-for-sale as it is
possible that some securities will be sold prior to
maturity.  Available-for-sale securities are recorded at market value.
Unrealized holding gains and losses, net of the related income tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of shareholders’ equity until realized. Dividend and interest
income are recognized when earned. Realized gains and losses for securities
classified as available-for-sale are included in earnings when the underlying
securities are sold and are derived using the specific identification method for
determining the cost of securities sold.





Financial
Instruments





We
measure fair value on all financial assets and liabilities and nonfinancial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually) in accordance with
SFAS No. 157, “Fair Value
Measurements.”  See “Note 6 – Financial
Instruments.”





Allowance
for Doubtful Accounts





We
estimate our allowance for doubtful accounts based on an assessment of the
collectibility of specific accounts and the overall condition of accounts
receivable. In evaluating the adequacy of the allowance for doubtful accounts,
we analyze specific trade receivables, historical bad debts, customer credits,
customer credit-worthiness and changes in customers’ payment terms and patterns.
If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make additional payments, then we may need to
make additional allowances. Likewise, if we determine that we could realize more
of our receivables in the future than previously estimated, we would adjust the
allowance to increase income in the period we made this
determination.





Inventory
Valuation





We record
inventories at the lower of cost or market value. We assess the value of our
inventories periodically based upon numerous factors including expected product
or material demand, current market conditions, technological obsolescence,
current cost and net realizable value. If necessary, we write down our inventory
for estimated obsolescence, potential shrinkage, or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If technology
changes more rapidly than expected, or market conditions become less favorable
than those projected by management, additional inventory write-downs may be
required.





Warranty
Obligations





We
provide for the estimated cost of product warranties at the time revenue is
recognized. We engage in extensive product quality programs and processes,
including active monitoring and evaluation of product failure rates, material
usage and estimation of service delivery costs incurred in correcting a product
failure. However, should actual product failure rates, material usage, or
service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required. Historically our warranty costs have not
been significant.





14
 Index





Share-Based
Compensation





Share-based
compensation is accounted for in accordance with SFAS 123R, Share-Based Payment.
We use the Black-Scholes option pricing model to determine fair value of the
award at the date of grant and recognize compensation expense over the vesting
period. The inputs we use for the model require the use of judgment, estimates
and assumptions regarding the expected volatility of the stock, the expected
term the average employee will hold the option prior to the date of exercise,
and the amount of share-based awards that are expected to be forfeited. Changes
in these inputs and assumptions could occur and actual results could differ from
these estimates, and our results of operations could be materially
impacted.





Accounting
for Income Taxes





We
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (FIN 48) in the first
quarter of fiscal year 2008. See Note 11 – Income Taxes to the consolidated
condensed financial statements included in this Form 10-Q for further
discussion.





We
estimate our tax liability based on current tax laws in the statutory
jurisdictions in which we operate. These estimates include judgments about
deferred tax assets and liabilities resulting from temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes, as well as about the realization of
deferred tax assets.





We
maintain a valuation allowance to reduce our deferred tax assets due to the
uncertainty surrounding the timing of realizing the benefits of net deferred tax
assets in future years. We have considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for such a
valuation allowance. In the event we were to determine that we would be able to
realize all or part of our net deferred tax asset in the future, the valuation
allowance would be decreased accordingly.





We may
periodically undergo examinations by the federal and state regulatory
authorities and the Internal Revenue Service. We may be assessed additional
taxes and/or penalties contingent on the outcome of these examinations. Our
previous examinations have not resulted in any unfavorable or significant
assessments.





RESULTS
OF OPERATIONS





The
following table reflects, as a percentage of net revenues, statements of
operations data for the periods indicated:





Three
      Months Ended
                  March
      31,
                
                
                Nine
      Months Ended
                  March
      31,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      revenues
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of goods sold
                
                
                65.7
                
                
                
                65.5
                
                
                
                66.3
                
                
                
                67.0Gross
      profit
                
                
                34.3
                
                
                
                34.5
                
                
                
                33.7
                
                
                
                33.0Operating
      expenses:Research
      and development
                
                
                19.7
                
                
                
                14.9
                
                
                
                16.4
                
                
                
                13.7Sales
      and marketing
                
                
                16.6
                
                
                
                15.7
                
                
                
                15.1
                
                
                
                14.6General
      and administrative
                
                
                20.5
                
                
                
                17.5
                
                
                
                17.1
                
                
                
                15.5Total
      operating expenses
                
                
                56.8
                
                
                
                48.1
                
                
                
                48.6
                
                
                
                43.8Loss
      from operations
                
                
                (22.5
                )
                
                
                (13.6
                )
                
                
                (14.9
                )
                
                
                (10.8
                )Investment
      income
                
                
                5.1
                
                
                
                7.3
                
                
                
                5.5
                
                
                
                7.3Loss
      before income taxes
                
                
                (17.4
                )
                
                
                (6.3
                )
                
                
                (9.4
                )
                
                
                (3.5
                )Provision
      for income taxes
                
                
                0.1
                
                
                
                0.0
                
                
                
                0.0
                
                
                
                0.1Net
      loss
                
                
                (17.5
                )%
                
                
                (6.3
                )%
                
                
                (9.4
                )%
                
                
                (3.6
                )%





15
 Index





We have
two operating segments for financial reporting purposes: tape libraries and
power supplies, as discussed in Note 12 of the Notes to Consolidated Financial
Statements in Item 1 of this report. The following table summarizes our revenue
by major product line and by operating segment:





Three
      Months Ended
                  March
      31,
                
                
                Nine
      Months Ended
                  March
      31,2009
                
                
                2008
                
                
                2009
                
                
                2008Tape
      Library revenues:TLS
                
                
                20.9
                %
                
                
                31.4
                %
                
                
                23.5
                %
                
                
                32.4
                %RLS
                
                
                6.1
                
                
                
                7.6
                
                
                
                7.0
                
                
                
                9.8XLS
                
                
                7.5
                
                
                
                4.4
                
                
                
                6.9
                
                
                
                6.734.5
                
                
                
                43.4
                
                
                
                37.4
                
                
                
                48.9Other
      library revenues:Service
                
                
                18.1
                
                
                
                12.4
                
                
                
                14.7
                
                
                
                11.6Media
                
                
                16.4
                
                
                
                17.7
                
                
                
                13.8
                
                
                
                16.6Upgrades,
      spares
                
                
                5.8
                
                
                
                5.7
                
                
                
                4.9
                
                
                
                5.740.3
                
                
                
                35.8
                
                
                
                33.4
                
                
                
                33.9Total
      Library revenues
                
                
                74.8
                
                
                
                79.2
                
                
                
                70.8
                
                
                
                82.8Power
      Supply revenues
                
                
                25.2
                
                
                
                20.8
                
                
                
                29.2
                
                
                
                17.2100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %





Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008





Net Revenue.  Net revenues
decreased to $4.1 million for the three months ended March 31, 2009 from $5.2
million for the three months ended March 31, 2008, a decrease of $1.1 million,
or 20.8%. One customer accounted for 11.6% of the Company’s consolidated revenue
for the three-month period ended March 31, 2009.  The customer’s
accounts receivable balance, net of specific allowances, totaled approximately
12.2% of net accounts receivable.  No single customer accounted for
more than ten percent of the Company’s consolidated revenue for the three-month
period ended March 31, 2008.





Segment Revenue





Tape Libraries – Net
tape library revenues decreased to $3.1 million for the three months ended March
31, 2009 from $4.1 million for the three months ended March 31, 2008, a decrease
of $1.0 million, or 25.2%. The
decrease in revenues is attributed primarily to a $0.8 million decline in
revenues from our TLS and RLS tape library product lines and a $0.2 million
decline in revenues from sales of tape media. One customer accounted for
15.5% of tape library revenues for the three-month period ended March 31, 2009.
The customer’s accounts receivable balance, net of specific allowances, totaled
approximately 17.3% of net accounts receivable. One customer accounted for 12.0%
of tape library revenues for the three-month period ended March 31, 2008. The
customer’s accounts receivable balance, net of specific allowances, totaled
approximately 10.4% of net accounts receivable.





Power Supplies –
Net revenues from power supplies
decreased to $1.0 million for the three months ended March 31, 2009 from $1.1
million for the three months ended March 31, 2008, a decrease of $42,000, or
3.9%. The decrease in revenues is attributed to lower sales to original
equipment manufacturer customers. Two customers accounted for 28.2% and
18.5%, respectively, or 56.7% in the aggregate, of power supply sales for the
three months ended March 31, 2009. The customers’ accounts receivable balances,
net of specific allowances, totaled approximately 10.4% and 31.9%, respectively,
of net accounts receivable. Two customers accounted for 21.6% and 16.2%,
respectively, or 37.8% in the aggregate, of power supply sales for the three
months ended March 31, 2008. The customers’ accounts receivable balances, net of
specific allowances, totaled approximately 23.6% and 15.3%, respectively, of net
accounts receivable.





Gross Profit.  Gross profit
represents the difference between our net revenues and cost of goods sold. Cost
of goods sold consists primarily of purchased parts, direct and indirect labor
costs, rent, technical support costs, depreciation of plant and equipment,
utilities, and packaging costs. Gross profit decreased to $1.4 million, or 34.3%
of net revenues, for the three months ended March 31, 2009 from $1.8 million, or
34.5% of net revenues, for the three months ended March 31, 2008.  The
decrease in gross profit correlates to the decrease in revenues, partially
offset by a change in product mix.





16
 Index





Research and Development.  Research and
development expenses consist of engineering salaries, benefits, outside
consultant fees, and purchased parts and supplies used in development
activities. Research and development expenses remained comparable at $0.8
million for the three months ended March 31, 2009 and $0.8 million for the three
months ended March 31, 2008.





Sales and Marketing.  Sales and
marketing expenses consist primarily of employee salaries and benefits, sales
commissions, trade show costs, advertising and travel related expenses. Sales
and marketing expenses decreased to $0.7 million for the three months ended
March 31, 2009 from $0.8 million for the three months ended March 31,
2008.  The decrease of $0.1 million, or 16.2%, is primarily due to a
decrease in commission expense correlated to lower revenues and lower
advertising and promotion expenses.





General and
Administrative.  General and
administrative expenses include employee salaries and benefits and professional
service fees. General and administrative expenses decreased to $0.8 million for
the three months ended March 31, 2009 from $0.9 million for the three months
ended March 31, 2008.  The decrease of $0.1 million, or 6.9%, is
primarily due to a decrease in accounting and audit related expenses including
fees associated with the Sarbanes Oxley compliance efforts that were completed
in fiscal 2008, partially offset by an increase in compensation related
expenses, bad debt and legal expenses.





Investment Income.  Investment
income decreased to $0.2 million for the three months ended March 31, 2009 from
$0.4 million for the three months ended March 31, 2008. The decrease of $0.2
million, or 44.4% is primarily due to the lower interest rate environment in the
recent quarter and partially due to having approximately $4.5 million less cash,
cash equivalents and marketable securities in the quarter ended March 31, 2008
compared to the prior year quarter.





Provision for Income
Taxes.  We recorded a
provision for income taxes of $6,000 for the three months ended March 31, 2009.
We did not record a provision or benefit for income taxes for the three months
ended March 31, 2008.





Nine
Months Ended March 31, 2009 Compared to Nine Months Ended March 31,
2008





Net Revenue.  Net revenues
decreased to $14.1 million for the nine months ended March 31, 2009 from $16.5
million for the nine months ended March 31, 2008, a decrease of $2.4 million, or
14.7%. One customer accounted for 11.2% of the Company’s consolidated revenue
for the nine-month period ended March 31, 2009.  The customer’s
accounts receivable balance, net of specific allowances, totaled approximately
3.0% of net accounts receivable.  No single customer accounted for
more than ten percent of the Company’s consolidated revenue for the nine-month
period ended March 31, 2008.





Segment Revenue





Tape Libraries – Net
tape library revenues decreased to $10.0 million for the nine months ended March
31, 2009 from $13.7 million for the nine months ended March 31, 2008, a decrease
of $3.7 million, or 27.1%. The
decrease in revenues is attributed to a $2.8 million decline in revenues from
our TLS, RLS and XLS tape library product lines, a $0.8 million decline in
revenues from sales of tape media, and a $0.3 million decline in sales of
upgrades and spares, partially offset by a $0.2 million increase in service
revenues.Two customers accounted for 12.1% and 10.7%, respectively, or
22.8% in the aggregate, of tape library revenues for the nine-month period ended
March 31, 2009. The customers’ accounts receivable balances, net of specific
allowances, totaled approximately 17.3% and 9.4%, respectively, of net accounts
receivable. No single customer accounted for more than ten percent of tape
library revenues for the nine-month period ended March 31, 2008.





Power Supplies –
Net revenues from power supplies
increased to $4.1 million for the nine months ended March 31, 2009 from $2.8
million for the nine months ended March 31, 2008, an increase of $1.3 million,
or 45.0%.The increase in revenues is attributed to the launch
of a new power supply model and sales to a new original equipment manufacturer
customer under a nine-month contract. Two customers accounted for 38.5% and
10.4%, respectively, or 48.9% in the aggregate, of power supply sales for the
nine months ended March 31, 2009. The customers’ accounts receivable balances,
net of specific allowances, totaled approximately 10.4% and 31.9%, respectively,
of net accounts receivable.  Two customers accounted for 21.2% and
15.0%, respectively, or 36.2% in the aggregate, of power supply sales for the
nine months ended March 31, 2008. The customers’ accounts receivable balances,
net of specific allowances, totaled approximately 23.6% and 15.3%, respectively,
of net accounts receivable.





17
 Index





Gross Profit.  Gross profit
represents the difference between our net revenues and cost of goods sold. Cost
of goods sold consists primarily of purchased parts, direct and indirect labor
costs, rent, technical support costs, depreciation of plant and equipment,
utilities, and packaging costs. Gross profit decreased to $4.8 million for the
nine months ended March 31, 2009 from $5.5 million for the nine months ended
March 31, 2008.  The decrease of $0.7 million or 12.7% correlates to
the decrease in revenues and lower labor and overhead absorption partially
offset by efficiencies achieved in material management.





Research and Development.  Research and
development expenses consist of engineering salaries, benefits, outside
consultant fees, and purchased parts and supplies used in development
activities. Research and development expenses remained comparable at $2.3
million for the nine months ended March 31, 2009 and March 31,
2008.





Sales and Marketing.  Sales and
marketing expenses consist primarily of employee salaries and benefits, sales
commissions, trade show costs, advertising and travel related expenses. Sales
and marketing expenses decreased to $2.1 million for the nine months ended March
31, 2009 from $2.4 million for the nine months ended March 31,
2008.  The decrease of $0.3 million, or 11.7%, is primarily due to a
decrease in commission expense correlating to lower revenues, lower advertising
and promotion expenses and lower travel and entertainment expenses.





General and
Administrative.  General and
administrative expenses include employee salaries and benefits and professional
service fees. General and administrative expenses decreased to $2.4 million for
the nine months ended March 31, 2009 from $2.6 million for the nine months ended
March 31, 2008.  The decrease of $0.2 million, or 5.9%, is primarily
due to a decrease in accounting and audit related expenses including fees
associated with the Sarbanes Oxley compliance efforts that were completed in
fiscal 2008, partially offset by an increase in compensation related expenses
and bad debt expenses.





Investment Income.  Investment
income decreased to $0.8 million for the nine months ended March 31, 2009 from
$1.2 million for the nine months ended March 31, 2008. The decrease of $0.4
million, or 33.3% is primarily due to the lower interest rate environment during
the fiscal year to date and partially due to having approximately $4.5 million
less cash, cash equivalents and marketable securities in the nine month period
ended March 31, 2009 compared to the prior year nine month period.





Provision for Income
Taxes.  We recorded a
provision for income taxes of $4,000 for the nine months ended March 31, 2009.
We recorded a provision for income taxes of $17,000 for the nine months ended
March 31, 2008 relating to state income taxes paid and interest expense accrued
as part of our liability resulting from our adoption on July 1, 2007 of FIN 48,
Accounting for Uncertainties
in Income Taxes – an Interpretation of FASB Statement No.
109.





LIQUIDITY
AND CAPITAL RESOURCES





Net cash
used by operating activities was $1.6 million in the nine months ended March 31,
2009, primarily attributed to the net loss for the period, an increase in
inventories and a decrease in accounts payable, other accrued liabilities and
accrued payroll and related liabilities, partially offset by a decrease in
receivables. Net cash provided by operating activities was $604,000 in the nine
months ended March 31, 2008, primarily attributed to a decrease in receivables
and prepaid income taxes, and an increase in accounts payable, partially offset
by the net loss from operations.





Cash used
by investing activities was $556,000 in the nine months ended March 31, 2009,
primarily attributed to the purchase of marketable securities and the purchase
of property and equipment, partially offset by proceeds from the sale of
marketable securities.  Cash provided by investing activities was $2.1
million in the nine months ended March 31, 2008, primarily attributed to
proceeds from the sale of marketable securities, partially offset by the
purchase of marketable securities and the purchase of property and
equipment.





Cash used
in financing activities was $2.2 million in the nine months ended March 31,
2009, attributed to the payment of cash dividends of $0.06 per share that we
declared on June 23, 2008, November 11, 2008 and February 20, 2009 and paid on
September 5, 2008, December 4, 2008 and March 25, 2009, respectively, on shares
of our common stock.  Cash used in financing activities was $0.7
million during the nine months ended March 31, 2008 for the payment of a cash
dividend of $0.06 per share that we declared February 12, 2008 and paid March
11, 2008.





As of
March 31, 2009, we had $2.3 million in cash and cash equivalents and $26.5
million in marketable securities.  We believe that our existing cash
and cash equivalents and anticipated cash flows from our operating activities,
plus funds available from the sale of our marketable securities, will be
sufficient to fund our working capital and capital expenditure needs for at
least the next 12 months. We may utilize cash to invest in businesses, products
or technologies that we believe are strategic. We regularly evaluate other
companies and technologies for possible investment by us. In addition, we have
made and may in the future make investments in companies with whom we have
identified potential synergies. However, we have no present commitments or
agreements with respect to any material acquisition of other businesses or
technologies.





18
 Index





ITEM3.   QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK





We
develop products in the United States and sell them worldwide. As a result, our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As all
sales are currently made in U.S. dollars, a strengthening of the U.S. dollar
could make our products less competitive in foreign markets. Our interest income
is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term
instruments. We have no outstanding debt nor do we utilize derivative financial
instruments. Therefore, no quantitative tabular disclosures are
required.





ITEM4T.CONTROLS AND
PROCEDURES





We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Qualstar’s
disclosure controls and procedures as of March 31, 2009, pursuant to Rule 13a-15
under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Commission’s rules and forms, and to ensure that the information required
to be disclosed by us in reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.





We did
not make any changes in our internal control over financial reporting during the
quarter ended March 31, 2009 of Qualstar’s fiscal year ending June 30, 2009,
that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.





19
 Index





PART II — OTHER
INFORMATION





ITEM1A.   Risk Factors





There
have been no significant changes to the risk factors disclosed in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2008.





ITEM4.      Submission of Matters to a Vote of
Security Holders





The
following matters were voted upon at the Annual Meeting of Stockholders of the
Company held on March 25, 2009:





1. The
following persons were elected as directors to serve a one year term expiring at
the Annual Meeting of Stockholders to be held in 2010 or until their successors
are elected and qualified:








Number of Votes CastName
                            
                            For
                            
                            
                            AuthorityWithheldWilliam
      J. Gervais
                            
                            
                            8,351,920
                            
                            
                            
                            1,688,524Richard
      A. Nelson
                            
                            
                            8,351,920
                            
                            
                            
                            1,688,524Stanley
      W. Corker
                            
                            
                            10,020,051
                            
                            
                            
                            20,393Carl
      W. Gromada
                            
                            
                            10,020,051
                            
                            
                            
                            20,393Robert
      A. Meyer
                            
                            
                            10,019,551
                            
                            
                            
                            20,893Robert
      E. Rich
                            
                            
                            8,345,378
                            
                            
                            
                            1,695,066





2. To approve the Qualstar Corporation
2008 Stock Incentive Plan. Votes for were 8,530,324; votes against were 302,337;
and votes abstained were 9,100, and broker non-votes were
1,198,683.





3. To approve the appointment of
SingerLewak LLP as the independent registered public accounting firm to audit
our financial statements for the fiscal year ending June 30, 2009. Votes for
were 9,954,026; votes against were 3,738; and votes abstained were
82,680.




20
 Index




ITEM6.   EXHIBITS





Exhibit
                            No.
                          
                          Exhibit Index10.1
                          
                          2008
      Stock Incentive Plan31.1
                          
                          Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                          
                          Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                          
                          Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
                          
                          Certification
      of Principal Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.





21
 Index





SIGNATURES





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





QUALSTAR
      CORPORATIONDated:
      May 12, 2009
              By:
              /s/    WILLIAM J.
      GERVAISWilliam
      J. GervaisChief
      Executive Officer and President(Principal
      Executive Officer)







22