##### 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
    March 31, 2006o

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
  Incorporated under the laws
    of the State of California

95-3927330(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 o þ




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##### 



Qualstar
    CorporationFORM 10-Q
    For The Quarterly Period Ended March 31, 2006
    INDEX
  
  PART I  FINANCIAL
    INFORMATIONItem 1.


Financial
    Statements Consolidated
    Condensed Balance Sheets  March 31, 2006
    and June 30, 2005


1 Consolidated
    Condensed Statements of Operations  Three months
    and nine months ended March 31, 2006 and 2005


2 Consolidated
    Condensed Statements of Cash Flows  Nine months
    ended March 31, 2006 and 2005


3 Consolidated
    Condensed Statement of Changes in Shareholders
    Equity  Nine months ended March 31, 2006


4 Notes
    to Interim Consolidated Condensed Financial Statements


5Item 2.


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


8Item 3.


Qualitative
    and Quantitative Disclosures About Market Risk


13Item 4.


Controls and
    Procedures


13PART II  OTHER
    INFORMATIONItem 1A.


Risk
    Factors


13Item 4.


Submission of
    Matters to a Vote of Security Holders


14Item 6.


Exhibits


14Signatures


15EX-31.1EX-31.2EX-32.1EX-32.2




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PART I  FINANCIAL
    INFORMATION  ITEM 1.
    Financial
    Statements  QUALSTAR
    CORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS
    MARCH 31, 2006 AND JUNE 30, 2005
    (In thousands)
  March 31,


June 30,2006


2005(Unaudited)


(Audited)ASSETSCurrent assets:Cash and cash equivalents

$
7,306


$
12,210Marketable securities


26,721



21,854Receivables, net of allowances of
    $175 as of March 31, 2006, and $248 as of June 30, 2005


2,254



3,532Inventories, net


7,681



7,157Prepaid expenses and other current
    assets


512



452Prepaid income taxes


330



640Total current assets


44,804



45,845Property and equipment, net


1,018



1,188Other assets


152



190Total assets

$
45,974


$
47,223LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
718


$
763Accrued payroll and related
    liabilities


364



496Other accrued liabilities


1,311



1,311Total current liabilities


2,393



2,570Shareholders equity:Common stock, no par value;
    50,000 shares authorized, 12,253 shares issued and
    outstanding as of March 31, 2006 and June 30, 2005


18,478



18,370Accumulated other comprehensive
    loss


(341
)


(159
)Retained earnings


25,444



26,442Total shareholders equity


43,581



44,653Total liabilities and
    shareholders equity

$
45,974


$
47,223    1




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QUALSTAR
    CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONSTHREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2006 AND
    2005
    (In thousands, except per share data) (Unaudited)
  Three Months Ended


Nine Months EndedMarch 31,


March 31,2006


2005


2006


2005Net revenues

$
5,052


$
5,742


$
16,843


$
18,439Cost of goods sold


3,606



3,881



11,571



11,934Gross profit


1,446



1,861



5,272



6,505Operating expenses:Research and development


841



904



2,322



2,723Sales and marketing


763



822



2,235



2,537General and administrative


889



924



2,699



2,992Total operating expenses


2,493



2,650



7,256



8,252Loss from operations


(1,047
)


(789
)


(1,984
)


(1,747
)Investment income


363



219



900



594Loss before income taxes


(684
)


(570
)


(1,084
)


(1,153
)Provision (benefit) for income
    taxes


(86
)


65



(86
)


65Net loss

$
(598
)

$
(635
)

$
(998
)

$
(1,218
)Loss per share:Basic

$
(0.05
)

$
(0.05
)

$
(0.08
)

$
(0.10
)Diluted

$
(0.05
)

$
(0.05
)

$
(0.08
)

$
(0.10
)Shares used to compute loss per
    share:Basic


12,253



12,253



12,253



12,446Diluted


12,253



12,253



12,253



12,446    2




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QUALSTAR
    CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSFOR THE NINE MONTHS ENDED MARCH 31, 2006 AND 2005
    (In thousands) (Unaudited)
  Nine Months EndedMarch 31,2006


2005OPERATING ACTIVITIES:Net loss

$
(998
)

$
(1,218
)Adjustments to reconcile net loss
    to net cash provided by operating activities:Stock based compensation


108



Depreciation and amortization


342



349Recovery of bad debts and returns


(40
)


(2
)Gain on sale of securities






(11
)Changes in operating assets and
    liabilities:Accounts receivable


1,318



1,445Inventories, net


(524
)


(230
)Prepaid and other assets


(58
)


5Prepaid income taxes


310



434Deferred income taxes






436Accounts payable


(45
)


(339
)Other accrued liabilities


(132
)


(514
)Net cash provided by operating
    activities


281



355INVESTING ACTIVITIES:Purchases of property, equipment
    and leasehold improvements


(136
)


(137
)Proceeds from sale of marketable
    securities


4,697



18,000Purchases of marketable securities


(9,746
)


(20,479
)Net cash used in investing
    activities


(5,185
)


(2,616
)FINANCING ACTIVITIES:Proceeds from exercise of stock
    options






76Repurchase of common stock






(1,827
)Principal and interest payments on
    directors notes






45Net cash used in financing
    activities






(1,706
)Net decrease in cash


(4,904
)


(3,967
)Cash and cash equivalents at
    beginning of period


12,210



6,401Cash and cash equivalents at end
    of period

$
7,306


$
2,434Supplemental cash flow disclosure:Income taxes paid

$
2


$
3    3




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QUALSTAR
    CORPORATIONCONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
    SHAREHOLDERS EQUITYNINE MONTHS ENDED MARCH 31, 2006
    (In thousands) (Unaudited)
  AccumulatedOtherCommon Stock


Comprehensive


RetainedShares


Amount


Loss


Earnings


TotalBalance at July 1, 2005


12,253


$
18,370


$
(159
)

$
26,442


$
44,653Stock based compensation






108











108Change in unrealized losses on
    investments










(182
)






(182
)Net loss














(998
)


(998
)Comprehensive loss


















(1,180
)Balance at March 31, 2006


12,253


$
18,478


$
(341
)

$
25,444


$
43,581    4




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QUALSTAR
    CORPORATION
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS
 MARCH 31, 2006
 (In thousands, except per share data) (Unaudited)
  NOTE 1.
    BASIS OF
    PRESENTATION  Form 10-K ,
  NOTE 2.
    LOSS PER
    SHARE    Three Months Ended


Nine Months EndedMarch 31,


March 31,2006


2005


2006


2005Numerator:Net loss

$
(598
)

$
(635
)

$
(998
)

$
(1.218
)Denominator:Denominator for basic net loss per
    share  weighted average shares


12,253



12,253



12,253



12,446Denominator for diluted net loss
    per share  adjusted weighted average shares and
    assumed conversions


12,253



12,253



12,253



12,446Basic net loss per share

$
(0.05
)

$
(0.05
)

$
(0.08
)

$
(0.10
)Diluted net loss per share

$
(0.05
)

$
(0.05
)

$
(0.08
)

$
(0.10
)     NOTE 3.
    STOCK
    BASED COMPENSATION     5




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QUALSTAR
    CORPORATION
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
 (In thousands, except per share data) (Unaudited)
    Three Months Ended


Nine Months EndedMarch 31,


March 31,2005


2005Net loss as reported

$
(635
)

$
(1,218
)Pro forma stock-based employee
    compensation cost under SFAS 123


(68
)


(204
)Pro forma net loss

$
(703
)

$
(1,422
)Loss per share:Basic  as reported

$
(0.05
)

$
(0.10
)Basic  pro forma

$
(0.06
)

$
(0.11
)Diluted  as
    reported

$
(0.05
)

$
(0.10
)Diluted  pro forma

$
(0.06
)

$
(0.11
)Basic Weighted Average Shares


12,253



12,446Diluted Weighted Average Shares


12,253



12,446   NOTE 4.
    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 5.
    INVENTORIES,
    NET  (first-in,
  March 31,


June 30,2006


2005Raw materials

$
6,883


$
6,196Finished goods


798



961$
7,681


$
7,157  6




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QUALSTAR
    CORPORATION
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
 (In thousands, except per share data) (Unaudited)
   NOTE 6.
    COMPREHENSIVE
    LOSS  available-for-sale
  NOTE 7.
    LEGAL
    PROCEEDINGS    NOTE 8.
    INCOME
    TAXES   7




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ITEM 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-Q Form 10-K
  OVERVIEW
        CRITICAL
    ACCOUNTING POLICIES AND ESTIMATES
     8




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Revenue
    Recognition
      Allowance
    for Doubtful Accounts
    Inventory
    Valuation
    Warranty
    Obligations
    Accounting
    for Income Taxes
       9




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RESULTS
    OF OPERATIONS
    Three Months Ended


Nine Months EndedMarch 31,


March 31,2006


2005


2006


2005Net revenues


100.0
%


100.0
%


100.0
%


100.0
%Cost of goods sold


71.4



67.6



68.7



64.7Gross profit


28.6



32.4



31.3



35.3Operating expenses:Research and development


16.6



15.7



13.8



14.8Sales and marketing


15.1



14.3



13.3



13.8General and administrative


17.6



16.1



16.0



16.2Total operating expenses


49.3



46.1



43.1



44.8Loss from operations


(20.7
)


(13.7
)


(11.8
)


(9.5
)Investment income


7.2



3.8



5.3



3.2Loss before income taxes


(13.5
)


(9.9
)


(6.5
)


(6.3
)Provision (benefit) for income
    taxes


(1.7
)


1.1



(0.5
)


0.4Net loss


(11.8
)%


(11.0
)%


(6.0
)%


(6.7
)%     Three Months Ended


Nine Months EndedMarch 31,


March 31,2006


2005


2006


2005Tape Library revenues:TLS


38.5
%


45.4
%


43.7
%


51.2
%RLS


12.1



14.1



12.0



13.050.6



59.5



55.7



64.2Other revenues:Service


17.9



10.9



14.4



10.4Media


10.8



10.5



11.7



10.0Power Supplies


14.6



7.1



10.9



4.5Upgrades, Spares, Other


6.1



12.0



7.3



10.9100.0
%


100.0
%


100.0
%


100.0
%   Three
    Months Ended March 31, 2006 Compared to Three Months Ended
    March 31, 2005.
  Net Revenues.
 10




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Gross Profit.
  Stock-Based Compensation.
  Research and Development.
  Sales and Marketing.
  General and Administrative.
  Investment Income.
  Provision for Income Taxes.
  Nine
    Months Ended March 31, 2006 Compared to Nine Months Ended
    March 31, 2005.
  Net Revenues.
  Gross Profit.
 11




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Stock-Based Compensation.
  Research and Development.
  Sales and Marketing.
  General and Administrative.
  Investment Income.
  Provision for Income Taxes.
  LIQUIDITY
    AND CAPITAL RESOURCES
         12




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ITEM 3.
    Quantitative
    and Qualitative Disclosures About Market Risk    ITEM 4.
    Controls
    and Procedures  Rule 13a-15
   PART II  OTHER
    INFORMATION  ITEM 1A.
    Risk
    Factors  Form 10-K
  We
    rely on a sole-source supplier for our N2 Products power
    supplies. If this supplier curtails or stops production for any
    reason, our revenues from power supplies could be adversely
    impacted for a number of months.
   13




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ITEM 4.
    Submission
    of Matters to a Vote of Security Holders      Number of
    Votes CastAuthorityName

For


WithheldWilliam J. Gervais


9,725,846



1,780,304Richard A. Nelson


9,725,846



1,780,304Stanley W. Corker


11,428,767



77,383Carl W. Gromada


11,428,767



77,383Robert A. Meyer


11,428,767



77,383Robert E. Rich


11,349,086



157,064   ITEM 6.
    Exhibits  Exhibits:
  ExhibitNo.

Description31
.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       By:
    /s/  WILLIAM
    J. GERVAIS       By:
    /s/  FREDERIC
    T. BOYER     15




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EXHIBIT INDEX
  ExhibitNo.

Description31
.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.  16