##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
    Form 10-Q
     þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
    SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2006ORo

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
   þ o
   Rule 12b-2
 o o þ
   Rule 12b-2).  Yes o þ




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##### 



QUALSTAR
    CORPORATION
  FORM 10-Q
  FOR THE QUARTERLY
    PERIOD ENDED SEPTEMBER 30, 2006
  INDEX
  
  PART I 
    FINANCIAL INFORMATIONItem 1.

Financial
    Statements  Consolidated
    Condensed Balance Sheets  September 30, 2006 and
    June 30, 2006


1  Consolidated
    Condensed Statements of Operations  Three months
    ended September 30, 2006 and 2005


2  Consolidated
    Condensed Statements of Cash Flows  Three months
    ended September 30, 2006 and 2005


3  Consolidated
    Condensed Statement of Changes in Shareholders
    Equity  Three months ended September 30,
    2006


4  Notes
    to Interim Consolidated Condensed Financial Statements


5Item 2.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


9Item 3.

Qualitative and
    Quantitative Disclosures About Market Risk


14Item 4.

Controls and
    Procedures


14PART II 
    OTHER INFORMATIONItem 6.

Exhibits


14Signatures


15EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I 
    FINANCIAL INFORMATION ITEM 1.  FINANCIAL
    STATEMENTS  QUALSTAR
    CORPORATION
  CONSOLIDATED CONDENSED BALANCE SHEETS
  (In thousands)
  September 30,


June 30,2006


2006(Unaudited)


(Audited)ASSETSCurrent assets:Cash and cash equivalents

$
6,148


$
6,845Marketable securities, short-term


15,679



14,040Receivables, net of allowances of
    $121 as of September 30, 2006, and $118 at June 30,
    2006, respectively


2,121



2,700Inventories, net


7,245



7,298Prepaid expenses and other current
    assets


597



511Prepaid income taxes


166



159Total current assets


31,956



31,553Property and equipment, net


840



924Marketable securities, long-term


11,788



12,782Other assets


128



140Total assets

$
44,712


$
45,399LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
698


$
783Accrued payroll and related
    liabilities


323



466Other accrued liabilities


1,212



1,292Total current liabilities


2,233



2,541Shareholders equity:Preferred stock, no par value;
    5,000 shares authorized; no shares issued


0



0Common stock, no par value;
    50,000 shares authorized, 12,253 shares issued and
    outstanding as of September 30, 2006 and June 30, 2006


18,505



18,503Accumulated other comprehensive
    loss


(197
)


(395
)Retained earnings


24,171



24,750Total shareholders equity


42,479



42,858Total liabilities and
    shareholders equity

$
44,712


$
45,399   See the accompanying notes to these interim condensed
    consolidated financial statements.
 1




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QUALSTAR
    CORPORATION
  CONSOLIDATED CONDENSED STATEMENTS OF
    OPERATIONS
  (Unaudited) (In thousands, except per share data)
  Three Months
    EndedSeptember 30,2006


2005Net Revenues

$
4,659


$
6,102Cost of goods sold


3,357



4,198Gross profit


1,302



1,904Operating expenses:Research and development


750



719Sales and marketing


768



757General and administrative


744



910Total operating expenses


2,262



2,386Loss from operations


(960
)


(482
)Investment Income


381



271Loss before income taxes


(579
)


(211
)Provision for income taxes






Net loss

$
(579
)

$
(211
)Loss per share:Basic

$
(0.05
)

$
(0.02
)Diluted

$
(0.05
)

$
(0.02
)Shares used to compute loss per
    share:Basic


12,253



12,253Diluted


12,253



12,253   See the accompanying notes to these interim condensed
    consolidated financial statements.
 2




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QUALSTAR
    CORPORATION
  CONSOLIDATED CONDENSED STATEMENTS OF CASH
    FLOWS
  (Unaudited) (In thousands)
  Three Months
    EndedSeptember 30,2006


2005OPERATING ACTIVITIES:Net loss

$
(579
)

$
(211
)Adjustments to reconcile net loss
    to net cash (used in) provided by operating activities:Share based compensation


2



35Depreciation and amortization


110



116Provision for bad debts and
    returns, net of recoveries


5



3Changes in operating assets and
    liabilities:Accounts receivable


574



208Inventories


53



7Prepaid and other assets


(86
)


(459
)Prepaid income taxes


(7
)


(2
)Accounts payable


(85
)


401Accrued payroll and related
    liabilities


(143
)


(148
)Other accrued liabilities


(80
)


75Net cash (used in) provided by
    operating activities


(236
)


25INVESTING ACTIVITIES:Purchases of property, equipment
    and leasehold improvements


(14
)


(80
)Proceeds from sale of marketable
    securities


2,163



Purchases of marketable securities


(2,610
)


(557
)Net cash used in investing
    activities


(461
)


(637
)Net change in cash and cash
    equivalents


(697
)


(612
)Cash and cash equivalents,
    beginning of period


6,845



12,210Cash and cash equivalents, end of
    period

$
6,148


$
11,598Supplemental cash flow disclosure:Income taxes paid

$
7


$
2   See the accompanying notes to these interim condensed
    consolidated financial statements.
 3




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QUALSTAR
    CORPORATION
  CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
    SHAREHOLDERS EQUITY
  THREE MONTHS ENDED SEPTEMBER 30, 2006
 (Unaudited) (In thousands)
  AccumulatedOtherCommon
    Stock


Comprehensive


RetainedShares


Amount


Loss


Earnings


TotalBalance at July 1, 2006


12,253


$
18,503


$
(395
)

$
24,750


$
42,858Share based compensation






2











2Comprehensive loss:Net loss














(579
)


(579
)Change in unrealized losses on
    investments










198







198Comprehensive loss


















(381
)Balance at September 30, 2006


12,253


$
18,505


$
(197
)

$
24,171


$
42,479   See the accompanying notes to these condensed consolidated
    financial statements.
 4




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QUALSTAR
    CORPORATION
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (Unaudited) (In thousands, except per share data)
  Note 1 
    Basis of Presentation and Consolidation
  Basis of
    Presentation
    other-than-temporary.
  Form 10-Q Form 10-K
  Basis of
    Consolidation
    Note 2 
    Loss Per Share
      Three Months
    EndedSeptember 30,2006


2005Net loss (a)

$
(579
)

$
(211
)Weighted average outstanding
    shares of common stock (b)


12,253



12,253Dilutive potential common shares
    from employee stock options






Common stock and common stock
    equivalents (c)


12,253



12,253Loss per share:Basic net loss per
    share (a)/(b)

$
(0.05
)

$
(0.02
)Diluted net loss per
    share (a)/(c)

$
(0.05
)

$
(0.02
)  5




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QUALSTAR
    CORPORATION
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS - (Continued)
    Note 3 
    Marketable Securities
  available-for-sale, held-to-maturity. Held-to-maturity held-to-maturity available-for-sale. available-for-sale
  Available-for-sale available-for-sale available-for-sale
  Note 4 
    Inventories
  (first-in,
  September 30,


June 30,2006


2006Raw materials, net

$
6,372


$
6,473Finished goods


873



825$
7,245


$
7,298   Note 5 
    Comprehensive Loss
  available-for-sale
  Note 6 
    Legal Proceedings
  and/or
  Note 7 
    Income Taxes
   6




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QUALSTAR
    CORPORATION
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS - (Continued)
  Note 8 
    Segment Information
  Disclosures about Segments of an
    Enterprise and Related Information
    Tape Libraries
  Power Supplies
    Three Months
    EndedSeptember 30,2006


2005RevenueTape Libraries:Product


3,147



4,785Service


725



780Total Tape Libraries


3,872



5,565Power Supplies


787



537Consolidated Revenue


4,659



6,102   7




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QUALSTAR
    CORPORATION
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS - (Continued)
  Three Months
    EndedSeptember 30,2006


2005Income (Loss) before
    TaxesTape Libraries


(591
)


(93
)Power Supplies


12



(118
)Consolidated Loss before Taxes


(579
)


(211
)   Three Months
    EndedSeptember 30,2006


2005Total AssetsTape Libraries


43,945



46,436Power Supplies


767



835Consolidated Assets


44,712



47,271   Note 9 
    Recent Accounting Pronouncements
  Considering
    the Effects of Prior Year Misstatements when Quantifying Current
    Year Misstatements, , Form 10-K.
  Fair Value Measurements
   8




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ITEM 2.  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, 2006 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 offer tape
    libraries for multiple tape drive technologies including LTO
    (Linear Tape-Open tape format), AIT (Advanced Intelligent Tape),
    SAIT (Super Advanced Intelligent Tape), and DLT (Digital Linear
    Tape) tape drives and media.



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 with theirs, which they sell as a
    complete system or solution. We assist our customers with
    marketing and technical support.



We also design, develop, manufacture and sell small
    high-efficiency open-frame switching power supplies for original
    equipment manufacturers of telecommunications equipment,
    servers, routers, switches, RAIDs, and other equipment. Our
    power supplies are sold under the N2Power brand name and private
    label brand names through independent sales representatives and
    distributors. The primary customers are original equipment
    manufacturers and contract manufacturers.



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.

9




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Revenue
    Recognition
  Revenue Recognition.
      Allowance for
    Doubtful Accounts
    Inventory
    Valuation
    Warranty
    Obligations
    Share-Based
    Compensation
   10




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Accounting for
    Income Taxes
      and/or
  RESULTS OF
    OPERATIONS
    Three Months
    EndedSeptember 30,2006


2005Net revenues


100.0
%


100.0
%Cost of goods sold


72.1



68.8Gross profit


27.9



31.2Operating expenses:Research and development


16.1



11.8Sales and marketing


16.5



12.4General and administrative


16.0



14.9Total operating expenses


48.6



39.1Loss from operations


(20.7
)


(7.9
)Investment income


8.2



4.4Loss before income taxes


(12.5
)


(3.5
)Provision (benefit) for income
    taxes






Net loss


(12.5
)%


(3.5
)%  11




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Three Months
    EndedSeptember 30,2006


2005Tape Library revenues:TLS


34.1
%


48.3
%RLS


10.5



11.8XLS


5.1



0.049.7



60.1Other revenues:Service


15.6



12.8Media


12.1



12.4Power Supplies


16.9



8.8Miscellaneous


5.7



5.9100.0
%


100.0
%   Three Months
    Ended September 30, 2006 Compared to Three Months Ended
    September 30, 2005
  Net Revenue. .
  Segment Revenue
  Tape Libraries .
  Power Supplies
  Gross Profit.
 12




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Research and Development.
  Sales and Marketing.
  General and Administrative.
  Investment Income.
  Provision (Benefit) for Income Taxes.
  LIQUIDITY AND
    CAPITAL RESOURCES
         13




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ITEM 3.  QUALITATIVE
    AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK   ITEM 4.  CONTROLS
    AND PROCEDURES  Rule 13a-15
   PART II 
    OTHER INFORMATION ITEM 6.  EXHIBITS  ExhibitNo.

Exhibit Index31
.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.  14




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SIGNATURES    QUALSTAR CORPORATIONDated: November 13, 2006

By: /s/  WILLIAM
    J. GERVAISWilliam
    J. Gervais
    Chief Executive Officer, President and Director
    (Principal Executive Officer and Principal Financial Officer)  15