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
      1934
 
 For
the Quarterly Period Ended December 31, 2007
  OR
 
 £
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the Transition Period
From                   to
 
 Commission
file number 000-30083
 
 
 QUALSTAR
CORPORATION
 
 CALIFORNIA
              
              95-3927330(State
      of incorporation)
              
              (I.R.S.
      EmployerIdentification
      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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
 Large
      accelerated filer o
              Accelerated
      filer o
              Non-accelerated
      filer 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 December 31, 2007 is
12,253,117.
  
 
  QUALSTAR
CORPORATION
 FORM
10-Q
 FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007
 INDEX
 
 
 PART
      I — FINANCIAL INFORMATIONItem
      1.
              
              Financial Statements·Condensed Consolidated Balance Sheets — December 31,
      2007 and June 30, 2007
              
              1·Condensed Consolidated Statements of Operations —
      Three and Six Months ended December 31, 2007 and 2006
              
              2·Condensed Consolidated Statements of Cash Flows —
      Six Months ended December 31, 2007 and 2006
              
              3·Condensed Consolidated Statement of Changes in
      Shareholders’ Equity — Six months ended December 31,
    2007
              
              4·Notes to Interim Condensed Consolidated Financial
      Statements
              
              5Item
      2.
              
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              
              11Item
      3.
              
              Qualitative and Quantitative Disclosures About Market
      Risk
              
              17Item
      4T.
              
              Controls and Procedures
              
              17PART
      II — OTHER INFORMATIONItem
      6.
              
              Exhibits
              
              18Signatures
              
              19
  
  PART
I — FINANCIAL INFORMATION
 
 ITEM1.FINANCIAL
STATEMENTS
 
 QUALSTAR CORPORATION
 CONDENSEDCONSOLIDATED BALANCE SHEETS
 (In
thousands)
 
 December 31,
      2007
              
              
              June 30,
      2007(Unaudited)
              
              
              (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              10,656
              
              
              $
              7,697Marketable
      securities, short-term
              
              
              8,145
              
              
              
              9,574Receivables,
      net of allowances of $183 at December 31, 2007, and $170 at June 30,
      2007
              
              
              3,532
              
              
              
              3,462Inventories,
      net
              
              
              5,264
              
              
              
              5,928Prepaid
      expenses and other current assets
              
              
              659
              
              
              
              576Prepaid
      income taxes
              
              
              134
              
              
              
              137Total
      current assets
              
              
              28,390
              
              
              
              27,374Property
      and equipment, net
              
              
              538
              
              
              
              601Marketable
      securities, long-term
              
              
              15,278
              
              
              
              15,994Other
      assets
              
              
              94
              
              
              
              94Total
      assets
              
              $
              44,300
              
              
              $
              44,063LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              954
              
              
              $
              654Accrued
      payroll and related liabilities
              
              
              469
              
              
              
              455Other
      accrued liabilities
              
              
              1,092
              
              
              
              1,113Total
      current liabilities
              
              
              2,515
              
              
              
              2,222Other
      long-term liabilities
              
              
              45
              
              
              
              —Commitments
      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 at December 31, 2007 and June 30, 2007
              
              
              18,653
              
              
              
              18,593Accumulated
      other comprehensive income (loss)
              
              
              85
              
              
              
              (55
              )Retained
      earnings
              
              
              23,002
              
              
              
              23,303Total
      shareholders’ equity
              
              
              41,740
              
              
              
              41,841Total
      liabilities and shareholders’ equity
              
              $
              44,300
              
              
              $
              44,063
  See
the accompanying notes to these interim condensed consolidated financial
statements.
  1
 Index
  QUALSTAR
CORPORATION
 CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands, except per share data)
 
 Three
      Months Ended December 31,
              
              
              Six
      Months Ended December 31,2007
              
              
              2006
              
              
              2007
              
              
              2006Net
      revenues
              
              $
              6,049
              
              
              $
              5,283
              
              
              $
              11,381
              
              
              $
              9,942Cost
      of goods sold
              
              
              4,004
              
              
              
              3,649
              
              
              
              7,712
              
              
              
              7,006Gross
      profit
              
              
              2,045
              
              
              
              1,634
              
              
              
              3,669
              
              
              
              2,936Operating
      expenses:Research
      and development
              
              
              770
              
              
              
              756
              
              
              
              1,498
              
              
              
              1,507Sales
      and marketing
              
              
              840
              
              
              
              883
              
              
              
              1,600
              
              
              
              1,650General
      and administrative
              
              
              918
              
              
              
              812
              
              
              
              1,656
              
              
              
              1,556Total
      operating expenses
              
              
              2,528
              
              
              
              2,451
              
              
              
              4,754
              
              
              
              4,713Loss
      from operations
              
              
              (483
              )
              
              
              (817
              )
              
              
              (1,085
              )
              
              
              (1,777
              )Investment
      Income
              
              
              424
              
              
              
              371
              
              
              
              837
              
              
              
              752Loss
      before income taxes
              
              
              (59
              )
              
              
              (446
              )
              
              
              (248
              )
              
              
              (1,025
              )Provision
      for income taxes
              
              
              —
              
              
              
              —
              
              
              
              17
              
              
              
              —Net
      loss
              
              $
              (59
              )
              
              $
              (446
              )
              
              $
              (265
              )
              
              $
              (1,025
              )Loss
      per share:Basic
              
              $
              (0.00
              )
              
              $
              (0.04
              )
              
              $
              (0.02
              )
              
              $
              (0.08
              )Diluted
              
              $
              (0.00
              )
              
              $
              (0.04
              )
              
              $
              (0.02
              )
              
              $
              (0.08
              )Shares
      used to compute loss per share:Basic
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253Diluted
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253
  See
the accompanying notes to these interim condensed consolidated financial
statements.
  2
 Index
  QUALSTAR CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)(In
thousands)
 
 Six
      Months Ended December 31,2007
              
              
              2006OPERATING
      ACTIVITIES:Net
      loss
              
              $
              (265
              )
              
              $
              (1,025
              )Adjustments
      to reconcile net loss to net cash provided by (used in)
      operating       activities:Share
      based compensation
              
              
              60
              
              
              
              25Realized
      gain on marketable securities
              
              
              (2
              )
              
              
              —Depreciation
      and amortization
              
              
              153
              
              
              
              216(Recovery
      of) provision for bad debts and returns, net of recoveries
              
              
              (11
              )
              
              
              31Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (59
              )
              
              
              (384
              )Inventories,
      net
              
              
              664
              
              
              
              791Prepaid
      and other assets
              
              
              (83
              )
              
              
              15Prepaid
      income taxes
              
              
              3
              
              
              
              (7
              )Accounts
      payable
              
              
              300
              
              
              
              90Accrued
      payroll and related liabilities
              
              
              14
              
              
              
              (44
              )Other
      accrued liabilities
              
              
              (12
              )
              
              
              (157
              )Net
      cash provided by (used in) operating activities
              
              
              762
              
              
              
              (449
              )INVESTING
      ACTIVITIES:Purchases
      of property, equipment and leasehold improvements
              
              
              (90
              )
              
              
              (14
              )Proceeds
      from sale of marketable securities
              
              
              16,874
              
              
              
              4,052Purchases
      of marketable securities
              
              
              (14,587
              )
              
              
              (4,548
              )Net
      cash provided by (used in) investing activities
              
              
              2,197
              
              
              
              (510
              )Net
      change in cash and cash equivalents
              
              
              2,959
              
              
              
              (959
              )Cash
      and cash equivalents, beginning of period
              
              
              7,697
              
              
              
              6,845Cash
      and cash equivalents, end of period
              
              $
              10,656
              
              
              $
              5,886Supplemental
      cash flow disclosure:Income
      taxes paid
              
              $
              7
              
              
              $
              7
  See
the accompanying notes to these interim condensed consolidated financial
statements.
  3
 Index
  QUALSTAR CORPORATION
 CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
 SIX
MONTHS ENDED DECEMBER 31, 2007
 (Unaudited)
(In thousands)
 
 AccumulatedOtherCommon
      Stock
              
              
              Comprehensive
              
              
              RetainedShares
              
              
              Amount
              
              
              (Loss) Income
              
              
              Earnings
              
              
              TotalBalance
      at July 1, 2007
              
              
              12,253
              
              
              $
              18,593
              
              
              $
              (55
              )
              
              $
              23,303
              
              
              $
              41,841Share
      based compensation
              
              
              —
              
              
              
              60
              
              
              
              —
              
              
              
              —
              
              
              
              60Cumulative
      effect of change in accounting principle
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (36
              )
              
              
              (36
              )Comprehensive
      loss:Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (265
              )
              
              
              (265
              )Change
      in unrealized gains (losses) on investments
              
              
              —
              
              
              
              —
              
              
              
              140
              
              
              
              —
              
              
              
              140Comprehensive
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (125
              )Balance
      at December 31, 2007
              
              
              12,253
              
              
              $
              18,653
              
              
              $
              85
              
              
              $
              23,002
              
              
              $
              41,740
  See
the accompanying notes to these condensed consolidated financial
statements.
  4
 Index
  QUALSTAR
CORPORATION
 NOTESTO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
 (Unaudited)
  Note
1 – Basis of Presentation and Consolidation
  Basis
of Presentation
  In the
opinion of management, the accompanying condensed consolidated financial
statements, including balance sheets and related interim statements of
operations, cash flows, and shareholders’ 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, 2007.
  Basis of
Consolidation
  The
consolidated financial statements include the accounts and operations of
Qualstar and its wholly owned subsidiary, Qualstar Sales and Service
Corporation.  All significant intercompany accounts have been
eliminated.
  Note
2 – Loss Per Share
  Qualstar
calculates loss per share in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 128, “Earnings per Share.”  Basic earnings 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.
  5
 Index
  QUALSTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 
 The
following table sets forth the computation of basic and diluted net loss per
share for the three and six months ended December 31, 2007 and
2006:
 
 (In
      thousands, except per share amounts)Three
      Months Ended December 31,
              
              
              Six
      Months Ended December 31,2007
              
              
              2006
              
              
              2007
              
              
              2006Net
      loss (a)
              
              $
              (59
              )
              
              $
              (446
              )
              
              $
              (265
              )
              
              $
              (1,025
              )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)
              
              $
              (0.00
              )
              
              $
              (0.04
              )
              
              $
              (0.02
              )
              
              $
              (0.08
              )Diluted
      net loss per share  (a)/(c)
              
              $
              (0.00
              )
              
              $
              (0.04
              )
              
              $
              (0.02
              )
              
              $
              (0.08
              )
 
 Stock
options are excluded for the three months and six months ended December 31,
2007, and 2006, from the computation of diluted loss per share as the effect
would have been antidilutive.
 
 Note
3 – Marketable Securities
  
 Marketable
securities consist primarily of high-quality U.S. corporate securities and U.S.
federal government and state government debt securities. 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 December 31, 2007 and June 30, 2007.
 
 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.
 
 Note
4 – Inventories
  
 Inventories
are stated at the lower of cost (first-in, first-out basis) or market. Inventory
is comprised as follows (in thousands):
 
 December 31,
      2007
              
              
              June 30,
      2007Raw
      materials, net
              
              $
              4,820
              
              
              $
              5,234Finished
      goods
              
              
              444
              
              
              
              694$
              5,264
              
              
              $
              5,928
  6
 Index
  QUALSTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
 (Unaudited)
 
  Note
5 – 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.
 
 Activity
in the liability for product warranty for the periods presented were as follows
(in thousands):
 
 Three
      Months Ended December 31, 2007
              
              
              Six
      Months Ended December 31, 2007Beginning
      balance
              
              $
              191
              
              
              $
              174Cost
      of warranty claims
              
              
              (16
              )
              
              
              (35
              )Accruals
      for product warranties
              
              
              9
              
              
              
              45Ending
      balance
              
              $
              184
              
              
              $
              184
 
 
 Note
6 – Comprehensive Loss
 
 For the
six months ended December 31, 2007 and 2006, comprehensive loss amounted to
approximately $125,000 and $764,000, 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 securities.
 
 Note
7 – 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
8 – Income Taxes
  On
July 1, 2007, the Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109,which provides
a financial statement recognition threshold and measurement attribute for a tax
position taken or expected to be taken in a tax return. Under FIN 48, we may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. FIN 48 also provides guidance on
derecognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, and income tax
disclosures.
  7
 Index
  QUALSTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
 (Unaudited)
 
 Adopting
FIN 48 had the following impact on our financial statements: increased long-term
liabilities by $45,000, and reduced our retained earnings by $36,000. In
addition, $144,000 was recorded as a FIN 48 contingent liability and offset
against our net deferred tax assets.  As of July 1, 2007, we had
$3.3 million of gross unrecognized tax benefits offset by a full valuation
allowance.  Thus, future changes in the unrecognized tax benefit will
have no impact on our effective tax rate due to the existence of the valuation
allowance. Our policy is to include interest and penalties on unrecognized tax
benefits in income tax expense, but is not significant at December 31,
2007.  The Company reasonably estimates that the unrecognized tax
benefit will not change significantly within the next twelve
months.  The Company files its tax returns by the laws of the
jurisdictions in which it operates.  The Company’s federal tax returns
after 2002 and California tax returns after 2003 are still subject to
examination.  Various state jurisdictions tax years remain open to
examination as well, though the Company believes any additional assessment will
be immaterial to its consolidated financial statements.
  Note
9 – 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 manage and
monitor performance. 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. As the power supply segment grew in the
last two years to represent greater than 10% of combined revenues, a framework
for internal resource allocations has been implemented for the three months and
six months ended December 31, 2007 and December 31, 2006.  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 for use in a wide variety of electronic equipment such as
telecommunications equipment, machine tools, routers, switches, wireless systems
and gaming devices.
  8
 Index
  QUALSTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
 (Unaudited)
  
 Segment
revenue, loss before taxes and total assets were as follows (in
thousands):
  
 Three
      Months Ended December 31
              
              
              Six
      Months Ended December 31,2007
              
              
              2006
              
              
              2007
              
              
              2006RevenueTape
      Libraries:Product
              
              $
              4,379
              
              
              $
              3,604
              
              
              $
              8,331
              
              
              $
              6,751Service
              
              
              624
              
              
              
              813
              
              
              
              1,280
              
              
              
              1,538Total
      Tape Libraries
              
              
              5,003
              
              
              
              4,417
              
              
              
              9,611
              
              
              
              8,289Power
      Supplies
              
              
              1,046
              
              
              
              866
              
              
              
              1,770
              
              
              
              1,653Consolidated
      Revenue
              
              $
              6,049
              
              
              $
              5,283
              
              
              $
              11,381
              
              
              $
              9,942
 
 
 Three
      Months Ended December 31
              
              
              Six
      Months Ended December 31,2007
              
              
              2006
              
              
              2007
              
              
              2006Income (Loss) before
      TaxesTape
      Libraries
              
              $
              (220
              )
              
              $
              (499
              )
              
              $
              (325
              )
              
              $
              (1,089
              )Power
      Supplies
              
              
              161
              
              
              
              53
              
              
              
              60
              
              
              
              64Consolidated
      Loss before Taxes
              
              $
              (59
              )
              
              $
              (446
              )
              
              $
              (265
              )
              
              $
              (1,025
              )
 
 
 December 31
              
              
              June 30,2007
              
              
              2007Total
      AssetsTape
      Libraries
              
              $
              43,378
              
              
              $
              43,228Power
      Supplies
              
              
              922
              
              
              
              835Consolidated
      Assets
              
              $
              44,300
              
              
              $
              44,063
 
 
 Note
10 – Recent Accounting Pronouncements
  In
September 2006, the FASB issued SFAS 157, Fair Value
Measurements.SFAS No. 157 defines fair value and provides
guidance on measuring fair value in generally accepted accounting principles,
and expands disclosure requirements associated with fair value.  SFAS
157 is effective for our fiscal year beginning July 1, 2008.  We do
not expect the adoption of SFAS 157 to have a material impact on our financial
statements.
  9
 Index
  QUALSTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
 (Unaudited)
  
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 gives us the
irrevocable option to carry many financial assets and liabilities at fair
values, with changes in fair value recognized in earnings. SFAS No. 159 is
effective for us beginning July 1, 2008, although early adoption is
permitted. We do not expect the adoption of SFAS 159 to have a material impact
on our financial statements.
  10
 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, 2007 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 including LTO (Linear Tape-Open tape format) and AIT (Advanced
Intelligent Tape).  We have discontinued sales of libraries with SAIT
(Super Advanced Intelligent Tape), and DLT (Digital Linear Tape) tape drives due
to declining demand for those tape drive technologies.
 
 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.
  11
 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 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.
 
 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.
  12
 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 8 – Income Taxes to the condensed
consolidated 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.
  13
 Index
  
 RESULTS
OF OPERATIONS
  The
following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:
 
 Three
      Months Ended December 31,
              
              
              Six
      Months Ended December 31,2007
              
              
              2006
              
              
              2007
              
              
              2006Net
      revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of goods sold
              
              
              66.2
              
              
              
              69.1
              
              
              
              67.8
              
              
              
              70.5Gross
      profit
              
              
              33.8
              
              
              
              30.9
              
              
              
              32.2
              
              
              
              29.5Operating
      expenses:Research
      and development
              
              
              12.7
              
              
              
              14.3
              
              
              
              13.2
              
              
              
              15.2Sales
      and marketing
              
              
              13.9
              
              
              
              16.7
              
              
              
              14.1
              
              
              
              16.6General
      and administrative
              
              
              15.2
              
              
              
              15.4
              
              
              
              14.6
              
              
              
              15.7Total
      operating expenses
              
              
              41.8
              
              
              
              46.4
              
              
              
              41.9
              
              
              
              47.5Loss
      from operations
              
              
              (8.0
              )
              
              
              (15.5
              )
              
              
              (9.7
              )
              
              
              (18.0
              )Investment
      income
              
              
              7.0
              
              
              
              7.0
              
              
              
              7.4
              
              
              
              7.6Loss
      before income taxes
              
              
              (1.0
              )
              
              
              (8.5
              )
              
              
              (2.3
              )
              
              
              (10.4
              )Provision
      (benefit) for income taxes
              
              
              —
              
              
              
              —
              
              
              
              0.1
              
              
              
              —Net
      loss
              
              
              (1.0
              )%
              
              
              (8.5
              )%
              
              
              (2.4
              )%
              
              
              (10.4
              )%
 
 We have
two operating segments for financial reporting purposes: tape libraries and
power supplies, as discussed in      Note 9 of the
Notes to Condensed 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 December 31
              
              
              Six
      Months Ended December 312007
              
              
              2006
              
              
              2007
              
              
              2006Tape
      Library revenues:TLS
              
              
              33.1
              %
              
              
              35.3
              %
              
              
              32.9
              %
              
              
              34.7
              %RLS
              
              
              10.6
              
              
              
              6.8
              
              
              
              10.8
              
              
              
              8.5XLS
              
              
              8.8
              
              
              
              5.7
              
              
              
              7.7
              
              
              
              5.452.5
              
              
              
              47.8
              
              
              
              51.4
              
              
              
              48.6Other
      library revenues:Service
              
              
              10.3
              
              
              
              15.4
              
              
              
              11.3
              
              
              
              15.5Media
              
              
              15.1
              
              
              
              14.8
              
              
              
              16.1
              
              
              
              13.6Miscellaneous
              
              
              4.8
              
              
              
              5.6
              
              
              
              5.7
              
              
              
              5.730.2
              
              
              
              35.8
              
              
              
              33.1
              
              
              
              34.8Total
      Library revenues
              
              
              82.7
              
              
              
              83.6
              
              
              
              84.4
              
              
              
              83.4Power
      Supply revenues
              
              
              17.3
              
              
              
              16.4
              
              
              
              15.6
              
              
              
              16.6100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
  14
 Index
  Three
Months Ended December 31, 2007 Compared to Three Months Ended December 31,
2006
 
 Net Revenue.  Net revenues
increased to $6.0 million for the three months ended December 31, 2007 from $5.3
million for the three months ended December 31, 2006, an increase of $0.7
million, or 14.5%. No single customer accounted for more than ten percent of the
Company’s consolidated revenue for the three month periods ended December 31,
2007 or December 31, 2006.
 
 Segment
Revenue.  Revenues reported for the segments shown below are
presented on a basis consistent with U.S. GAAP.  Revenues reported in
Note 9 – Segment Information, in Notes to Condensed Consolidated Financial
Statements included in Item 1 of this report, are presented in accordance with
SFAS 131, Disclosures about
Segments of an Enterprise and Related Information.
  
 Tape Libraries – Net
revenues increased to $5.0 million for the three months ended December 31, 2007
from $4.4 million for the three months ended December 31, 2006, an increase of
$0.6 million, or 13.3%.  The increase is attributed to higher revenues
from our XLS, TLS and RLS tape libraries and from media, partially offset by
lower service revenues.  No single customer accounted for more than
ten percent of tape library revenues for the three-month periods ended December
31, 2007 or December 31, 2006.
 
 Power Supplies – Net
revenues increased to $1,046,000 for the three months ended December 31, 2007
from $866,000 for the three months ended December 31, 2006, an increase of
$180,000, or 20.8%.  The increase in revenues is attributed primarily
to growth in sales to contract manufacturers.  Two customers on a
standalone basis accounted for 28.9%, and 15.0%, respectively, or 43.9% in the
aggregate, of power supply sales for the three months ended December 31,
2007.  Three customers on a standalone basis accounted for 36.0%,
16.5% and 13.1%, respectively, or 65.6% in the aggregate, of power supply sales
for the three months ended December 31, 2006.
 
 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 increased to $2.0 million for the
three months ended December 31, 2007 from $1.6 million for the three months
ended December 31, 2006.  The increase of $0.4 million, or 25.2%, is
primarily due to 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 increased to $770,000 for the
three months ended December 31, compared to $756,000 for the three months ended
December 31, 2006.  The increase of $14,000 or 1.9% is primarily due
to higher prototype material and engineering salaries expenses, partially offset
by lower consulting expenses.
 
 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 $840,000 for the three months ended December
31, 2007 from $883,000 for the three months ended December 31,
2006.  The decrease of $42,000, or 4.8% is primarily due to the
closure of our UK office and lower advertising and promotion expenses partially
offset by increased commissions and recruitment expenses.
 
 General and
Administrative.  General and
administrative expenses include employee salaries and benefits and professional
service fees. General and administrative expenses increased to $918,000 for the
three months ended December 31, 2007 from $812,000 for the three months ended
December 31, 2006. The increase of $105,000, or 12.9% is primarily due to
increased accounting consulting expenses attributed to Sarbanes Oxley compliance
efforts partially offset by lower depreciation and amortization and bad debt
expenses.
 
 Investment Income.  Investment
income increased to $424,000 for the three months ended December 31, 2007 from
$371,000 for the three months ended December 31, 2006. The increase of $53,000,
or 14.3% is primarily due to the reinvestment of proceeds from the maturities of
longer-term securities into higher yielding securities.
  15
 Index
  
 Provision (Benefit) for Income
Taxes.  We did not
record a provision or benefit for income taxes for either the three months ended
December 31, 2007 or for the three months ended December 31, 2006. We have
recorded a full valuation allowance against our net deferred tax assets based on
our assessment regarding the realizability of these net deferred tax assets in
future periods.
 
 Six
Months Ended December 31, 2007 Compared to Six Months Ended December 31,
2006
 
 Net Revenue.  Net revenues
increased to $11.4 million for the six months ended December 31, 2007 from $9.9
million for the six months ended December 31, 2006, an increase of $1.4 million,
or 14.5%. No single customer accounted for more than ten percent of the
Company’s consolidated revenue for the six-month periods ended December 31, 2007
and December 31, 2006.
 
 Segment
Revenue.  Revenues reported for the segments shown below are
presented on a basis consistent with U.S. GAAP.  Revenues reported in
Note 9 – Segment Information, in Notes to Condensed Consolidated Financial
Statements included in Item 1 of this report, are presented in accordance with
SFAS 131, Disclosures about
Segments of an Enterprise and Related Information.
 
 Tape Libraries – Net
revenues increased to $9.6 million for the six months ended December 31, 2007
from $8.3 million for the six months ended December 31, 2006, an increase of
$1.3 million, or 15.9%.  The increase in revenues is attributed to
higher revenues from our XLS, TLS and RLS tape libraries and from media,
partially offset by lower service revenues. No single customer accounted for
more than ten percent of tape library revenues for the six-month periods ended
December 31, 2007 or December 31, 2006.
 
 Power Supplies – Net
revenues increased to $1.8 million for the six months ended December 31, 2007
from $1.7 million for the six months ended December 31, 2006, an increase of
$0.1 million, or 7.1%.  The increase in revenues is attributed
primarily to growth in sales to contract manufacturers.  Two customers
on a standalone basis accounted for 20.9% and 14.3%, respectively, or 35.2% in
the aggregate, of power supply sales for the six months ended December 31,
2007.  Two customers on a standalone basis accounted for 29.1% and
13.4%, respectively, or 42.5% in the aggregate, of power supply sales for the
six months ended December 31, 2006.
 
 Gross Profit.  Gross profit
increased to $3.7 million for the six months ended December 31, 2007 from $2.9
million for the six months ended December 31, 2006.  The increase of
$0.7 million, or 25.0%, is primarily due to efficiencies achieved in material
management.
 
 Research and Development.   Research
and development expenses remained comparable at $1.5 million for the six months
ended December 31, 2007 and for the six months ended December 31,
2006.
 
 Sales and Marketing.  Sales and
marketing expenses decreased to $1.6 million for the six months ended December
31, 2007 from $1.7 million for the six months ended December 31,
2006.  The decrease of $0.1 million, or 3.0% is primarily due to
closure of our United Kingdom office and lower advertising and promotion
expenses partially offset by increased commissions, travel and recruitment
expenses.
 
 General and
Administrative.  General and
administrative expenses increased to $1.7 million for the six months ended
December 31, 2007 from $1.6 million for the six months ended December 31, 2006.
The increase of $0.1 million, or 6.4% is primarily due to increased salaries and
related expenses and accounting consulting expenses attributed to Sarbanes Oxley
compliance efforts partially offset by lower depreciation and amortization and
bad debt expenses.
 
 Investment Income.  Investment
income increased to $837,000 for the six months ended December 31, 2007 from
$752,000 for the six months ended December 31, 2006. The increase of $85,000, or
11.3% is primarily due to the reinvestment of proceeds from the maturities of
longer-term securities into higher yielding securities.
  16
 Index
  Provision (Benefit) for Income
Taxes.We
recorded a provision for income taxes of $17,000 for the six months ended
December 31, 2007 relating to state income taxes paid during the three months
ended September 30, 2007 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.  See Note 8 of Notes to Condensed Consolidated Financial
Statements in Item 1 of this report for a further discussion of FIN 48. We did
not record a provision or benefit for income taxes for the six months ended
December 31, 2006.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Cash
provided by operating activities was $762,000 in the six months ended December
31, 2007, primarily attributed to a decrease in inventories and an increase in
accounts payable, partially offset by an increase in prepaids and other assets
and the net loss from operations.  Cash used in operating activities
was $449,000 in the six months ended December 31, 2006, primarily attributed to
the net loss from operations and an increase in receivables, partially offset by
a decrease in inventories and prepaids and other assets, and an increase in
accounts payable.
 
 Cash
provided by investing activities was $2.2 million in the six months ended
December 31, 2007, primarily attributed to the sale of marketable securities,
partially offset by the purchase of marketable securities and the purchase of
fixed assets.  Cash used in investing activities was $510,000 in the
six months ended December 31, 2006, primarily attributed to the purchase of
marketable securities, partially offset by the sale of marketable
securities.
 
 Cash was
not used in or provided by financing activities during the six months ended
December 31, 2007 or the six months ended December 31, 2006.
 
 As of
December 31, 2007, we had $10.7 million in cash and cash equivalents and $23.4
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.
 
 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 December 31, 2007, 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.
  17
 Index
  
 We did
not make any changes in our internal control over financial reporting during the
quarter ended December 31, 2007 that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 PART
II — OTHER INFORMATION
 
 ITEM6.   EXHIBITS
 
 Exhibit
      No.
              
              Exhibit
      Index3.2
              
              Bylaws,
      as amended and restated January 14, 2000.3.3
              
              Amendment
      to Bylaws, adopted December 21, 2007.31.1
              
              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.
  18
 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:
      February 14, 2008
              
              By:
              /s/    WILLIAM
      J. GERVAISWilliam
      J. GervaisChief
      Executive Officer, President and Director(Principal
      Executive Officer)By:
              /s/    ANDREW
      A. FARINAAndrew
      A. FarinaChief
      Financial Officer(Principal
      Financial Officer)
  19