##### 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 1934 
|  |  | For the quarterly period ended September 30, 2005                                           
| 
|o |  | 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


|                                                            |  |                                                    
|----------------------------------------------------------- |  | ---------------------------------------------------
|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


o þ


o þ












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Qualstar Corporation


FORM 10-Q


For The Quarterly Period Ended September 30, 2005


INDEX







|                                   |  |                                                                                                                       |    |  |    | 
|---------------------------------- |  | --------------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements                                                                                                  |    |  |    | 
|                                   |  |  Consolidated Condensed Balance
    Sheets  September 30, 2005 and June 30,
    2005                                |    |  | 1  | 
|                                   |  |  Consolidated Condensed
    Statements of Operations  Three months ended
    September 30, 2005 and 2004            |    |  | 2  | 
|                                   |  |  Consolidated Condensed
    Statements of Cash Flows  Three months ended
    September 30, 2005 and 2004            |    |  | 3  | 
|                                   |  |  Consolidated Condensed
    Statement of Changes in Shareholders Equity 
    Three months ended September 30, 2005 |    |  | 4  | 
|                                   |  |  Notes to Interim Consolidated
    Condensed Financial Statements                                                    |    |  | 5  | 
|Item 2.                            |  | Managements Discussion and
    Analysis of Financial Condition and Results of
    Operations                         |    |  | 8  | 
|Item 3.                            |  | Qualitative and Quantitative
    Disclosures About Market Risk                                                        |    |  | 12 | 
|Item 4.                            |  | Controls and Procedures                                                                                               |    |  | 12 | 
|PART II  OTHER
    INFORMATION   
|Item 6.                            |  | Exhibits                                                                                                              |    |  | 12 | 
|Signatures                         |  |                                                                                                                       | 13 | 
|Exhibit 31.1                      
|Exhibit 31.2                      
|Exhibit 32.1                      
|Exhibit 32.2                      





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##### Table of Contents






PART I  FINANCIAL INFORMATION







|        |                     
|------- | --------------------
|ITEM 1. | Financial Statements

QUALSTAR CORPORATION





CONSOLIDATED CONDENSED BALANCE SHEETS


SEPTEMBER 30, 2005 AND JUNE 30, 2005


|                                     |                                                                                                                                                                        |                                            |       |        |           |  |       |        |        | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------ | --------- |  | ----- | ------ | ------ | 
|                                     |                                                                                                                                                                        | September 30,                              |       |        | June 30,  | 
|                                     |                                                                                                                                                                        | 2005                                       |       |        | 2005      | 
|                                     |                                                                                                                                                                        |                                            |       |        |           | 
|                                     |                                                                                                                                                                        | (Unaudited)                                |       |        | (Audited) | 
|                                     |                                                                                                                                                                        | (In thousands)                             |      
|ASSETS                              
|Current assets:                      |                                                                                                                                                                        |                                            |       |        |           |  |       |       
|                                     | Cash and cash equivalents                                                                                                                                              |                                            | $     | 11,598 |           |  | $     | 12,210 |       
|                                     | Marketable securities                                                                                                                                                  |                                            |       | 22,307 |           |  |       | 21,854 |       
|                                     | Receivables, net of allowances of $227 as of September 30,
    2005, and $248 at June 30, 2005, respectively                                                           |                                            |       | 3,321  |           |  |       | 3,532  |       
|                                     | Inventories                                                                                                                                                            |                                            |       | 7,150  |           |  |       | 7,157  |       
|                                     | Prepaid expenses and other current assets                                                                                                                              |                                            |       | 766    |           |  |       | 452    |       
|                                     | Prepaid income taxes                                                                                                                                                   |                                            |       | 642    |           |  |       | 640    |       
|                                     |                                                                                                                                                                        |                                            |       |        |           | 
|                                     |                                                                                                                                                                        | Total current assets                       |       |        | 45,784    |  |       |        | 45,845 | 
|                                     |                                                                                                                                                                        |                                            |       |        |           | 
|Property and equipment, net          |                                                                                                                                                                        |                                            | 1,164 |        |           |  | 1,188 |       
|Other assets                         |                                                                                                                                                                        |                                            | 323   |        |           |  | 190   |       
|                                     |                                                                                                                                                                        |                                            |       |        |           | 
|                                     |                                                                                                                                                                        | Total assets                               |       | $      | 47,271    |  |       | $      | 47,223 | 
|                                     |                                                                                                                                                                        |                                            |       |        |           | 
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                        |                                            |       |        |           |  |       |       
|                                     | Accounts payable                                                                                                                                                       |                                            | $     | 1,164  |           |  | $     | 763    |       
|                                     | Accrued payroll and related liabilities                                                                                                                                |                                            |       | 348    |           |  |       | 496    |       
|                                     | Other accrued liabilities                                                                                                                                              |                                            |       | 1,386  |           |  |       | 1,311  |       
|                                     |                                                                                                                                                                        |                                            |       |        |           | 
|                                     |                                                                                                                                                                        | Total current liabilities                  |       |        | 2,898     |  |       |        | 2,570  | 
|Shareholders equity:                |                                                                                                                                                                        |                                            |       |        |           |  |       |       
|                                     | Common stock, no par value; 50,000 shares authorized,
    12,253 and 12,253 shares issued and outstanding as of
    September 30, 2005 and June 30, 2005, respectively |                                            |       | 18,405 |           |  |       | 18,370 |       
|                                     | Accumulated other comprehensive loss                                                                                                                                   |                                            |       | (263   | )         |  |       | (159   | )     
|                                     | Retained earnings                                                                                                                                                      |                                            |       | 26,231 |           |  |       | 26,442 |       
|                                     |                                                                                                                                                                        |                                            |       |        |           | 
|                                     |                                                                                                                                                                        | Total shareholders equity                 |       |        | 44,373    |  |       |        | 44,653 | 
|                                     |                                                                                                                                                                        |                                            |       |        |           | 
|                                     |                                                                                                                                                                        | Total liabilities and shareholders equity |       | $      | 47,271    |  |       | $      | 47,223 | 
|                                     |                                                                                                                                                                        |                                            |       |        |           | 



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QUALSTAR CORPORATION





CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


|                                       |                            |                       |       |        |      |   |       |        |  
|-------------------------------------- | -------------------------- | --------------------- | ----- | ------ | ---- | - | ----- | ------ | -
|                                       |                            | Three Months Ended    |      
|                                       |                            | September 30,         |      
|                                       |                            |                       |      
|                                       |                            | 2005                  |       |        | 2004 |  
|                                       |                            |                       |       |        |      |  
|                                       |                            | (Unaudited)           |      
|                                       |                            | (In thousands, except |      
|                                       |                            | per share data)       |      
|Net Revenues                           |                            | $                     | 6,102 |        |      | $ | 6,305 |       
|Cost of goods sold                     |                            |                       | 4,198 |        |      |   | 3,972 |       
|                                       |                            |                       |       |        |      |  
|Gross profit                           |                            |                       | 1,904 |        |      |   | 2,333 |       
|                                       |                            |                       |       |        |      |  
|Operating expenses:                    |                            |                       |       |        |      |   |       |       
|                                       | Research and development   |                       |       | 719    |      |   |       | 954    |  
|                                       | Sales and marketing        |                       |       | 757    |      |   |       | 847    |  
|                                       | General and administrative |                       |       | 910    |      |   |       | 932    |  
|                                       |                            |                       |       |        |      |  
|Total operating expenses               |                            |                       | 2,386 |        |      |   | 2,733 |       
|                                       |                            |                       |       |        |      |  
|Loss from operations                   |                            |                       | (482  | )      |      |   | (400  | )     
|Investment Income                      |                            |                       | 271   |        |      |   | 164   |       
|                                       |                            |                       |       |        |      |  
|Loss before income taxes               |                            |                       | (211  | )      |      |   | (236  | )     
|Provision for income taxes             |                            |                       |      |        |      |   |      |       
|                                       |                            |                       |       |        |      |  
|Net loss                               |                            | $                     | (211  | )      |      | $ | (236  | )     
|                                       |                            |                       |       |        |      |  
|Loss per share:                        |                            |                       |       |        |      |   |       |       
|                                       | Basic                      |                       | $     | (0.02  | )    |   | $     | (0.02  | )
|                                       |                            |                       |       |        |      |  
|                                       | Diluted                    |                       | $     | (0.02  | )    |   | $     | (0.02  | )
|                                       |                            |                       |       |        |      |  
|Shares used to compute loss per share: |                            |                       |       |        |      |   |       |       
|                                       | Basic                      |                       |       | 12,253 |      |   |       | 12,604 |  
|                                       |                            |                       |       |        |      |  
|                                       | Diluted                    |                       |       | 12,253 |      |   |       | 12,604 |  
|                                       |                            |                       |       |        |      |  



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QUALSTAR CORPORATION





CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND
2004


|                                                 |                                                                                     |                                                   |        |      |      |   |        |        |      |  
|------------------------------------------------ | ----------------------------------------------------------------------------------- | ------------------------------------------------- | ------ | ---- | ---- | - | ------ | ------ | ---- | -
|                                                 |                                                                                     | Three Months Ended                                |       
|                                                 |                                                                                     | September 30,                                     |       
|                                                 |                                                                                     |                                                   |       
|                                                 |                                                                                     | 2005                                              |        |      | 2004 |  
|                                                 |                                                                                     |                                                   |        |      |      |  
|                                                 |                                                                                     | (Unaudited)                                       |       
|                                                 |                                                                                     | (In thousands)                                    |       
|OPERATING ACTIVITIES:                            |                                                                                     |                                                   |        |      |      |   |        |       
|                                                 | Net loss                                                                            |                                                   | $      | (211 | )    |   | $      | (236   | )   
|                                                 | Adjustments to reconcile net loss to net cash provided by
    operating activities: |                                                   |        |      |      |   |        |        |     
|                                                 |                                                                                     | Stock based compensation                          |        |      | 35   |   |        |        |     |  
|                                                 |                                                                                     | Depreciation and amortization                     |        |      | 116  |   |        |        | 114  |  
|                                                 |                                                                                     | Provision for (recovery of) bad debts and returns |        |      | 3    |   |        |        | (12  | )
|                                                 | Changes in operating assets and liabilities:                                        |                                                   |        |      |      |   |        |        |     
|                                                 |                                                                                     | Accounts receivable                               |        |      | 208  |   |        |        | 877  |  
|                                                 |                                                                                     | Inventories                                       |        |      | 7    |   |        |        | 18   |  
|                                                 |                                                                                     | Prepaid and other assets                          |        |      | (459 | ) |        |        | (123 | )
|                                                 |                                                                                     | Prepaid income taxes                              |        |      | (2   | ) |        |        | 246  |  
|                                                 |                                                                                     | Accounts payable                                  |        |      | 401  |   |        |        | (574 | )
|                                                 |                                                                                     | Accrued payroll and related liabilities           |        |      | (148 | ) |        |        | 113  |  
|                                                 |                                                                                     | Other accrued liabilities                         |        |      | 75   |   |        |        | (54  | )
|                                                 |                                                                                     |                                                   |        |      |      |  
|Net cash provided by operating activities        |                                                                                     |                                                   | 25     |      |      |   | 369    |       
|                                                 |                                                                                     |                                                   |        |      |      |  
|INVESTING ACTIVITIES:                            |                                                                                     |                                                   |        |      |      |   |        |       
|                                                 | Purchases of property, equipment and leasehold improvements                         |                                                   |        | (80  | )    |   |        | (86    | )   
|                                                 | Proceeds from sale of marketable securities                                         |                                                   |        |     |      |   |        | 1,000  |     
|                                                 | Purchases of marketable securities                                                  |                                                   |        | (557 | )    |   |        | (3,611 | )   
|                                                 |                                                                                     |                                                   |        |      |      |  
|Net cash used in investing activities            |                                                                                     |                                                   | (637   | )    |      |   | (2,697 | )     
|                                                 |                                                                                     |                                                   |        |      |      |  
|FINANCING ACTIVITIES:                            |                                                                                     |                                                   |        |      |      |   |        |       
|                                                 | Proceeds from exercise of stock options                                             |                                                   |        |     |      |   |        | 59     |     
|                                                 | Principal and interest payments on directors notes                                 |                                                   |        |     |      |   |        | 41     |     
|                                                 |                                                                                     |                                                   |        |      |      |  
|Net cash used in financing activities            |                                                                                     |                                                   |       |      |      |   | 100    |       
|                                                 |                                                                                     |                                                   |        |      |      |  
|Net decrease in cash                             |                                                                                     |                                                   | (612   | )    |      |   | (2,228 | )     
|Cash and cash equivalents at beginning of period |                                                                                     |                                                   | 12,210 |      |      |   | 6,401  |       
|                                                 |                                                                                     |                                                   |        |      |      |  
|Cash and cash equivalents at end of period       |                                                                                     | $                                                 | 11,598 |      |      | $ | 4,173  |       
|                                                 |                                                                                     |                                                   |        |      |      |  
|Supplemental cash flow disclosure:               |                                                                                     |                                                   |        |      |      |   |        |       
|                                                 | Income taxes paid                                                                   |                                                   | $      | 2    |      |   | $      | 3      |     
|                                                 |                                                                                     |                                                   |        |      |      |  



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QUALSTAR CORPORATION





CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY


THREE MONTHS ENDED SEPTEMBER 30, 2005


|                                           |  |                |        |             |               |   |        |          |  |   |          |   |  |       |        |   |  |   |        |  
|------------------------------------------ |  | -------------- | ------ | ----------- | ------------- | - | ------ | -------- |  | - | -------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                           |  |                |        | Accumulated |               |   |        |          | 
|                                           |  | Common Stock   |        |             | Other         |   |        |          |  |  
|                                           |  |                |        |             | Comprehensive |   |        | Retained |  |   |         
|                                           |  | Shares         |        |             | Amount        |   |        | Loss     |  |   | Earnings |   |  | Total |       
|                                           |  |                |        |             |               |   |        |          |  |   |          |   |  |       |       
|                                           |  | (Unaudited)    |       
|                                           |  | (In thousands) |       
|Balance at July 1, 2005                    |  |                | 12,253 |             |               | $ | 18,370 |          |  | $ | (159     | ) |  | $     | 26,442 |   |  | $ | 44,653 |  
|Stock based compensation                   |  |                |       |             |               |   | 35     |          |  |   |         |   |  |       |       |   |  |   | 35     |  
|Change in unrealized losses on investments |  |                |       |             |               |   |       |          |  |   | (104     | ) |  |       |       |   |  |   | (104   | )
|Net loss                                   |  |                |       |             |               |   |       |          |  |   |         |   |  |       | (211   | ) |  |   | (211   | )
|                                           |  |                |        |             |               |   |        |          |  |   |          |   |  |       |       
|Comprehensive loss                         |  |                |        |             |               |   |        |          |  |   |          |   |  |       |        |   |  |   | (315   | )
|                                           |  |                |        |             |               |   |        |          |  |   |          |   |  |       |       
|Balance at September 30, 2005              |  |                | 12,253 |             |               | $ | 18,405 |          |  | $ | (263     | ) |  | $     | 26,231 |   |  | $ | 44,373 |  
|                                           |  |                |        |             |               |   |        |          |  |   |          |   |  |       |       



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QUALSTAR CORPORATION





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2005


(Unaudited)


(In thousands, except per share data)




|        |                      
|------- | ---------------------
|NOTE 1. | BASIS OF PRESENTATION

,




|        |               
|------- | --------------
|NOTE 2. | LOSS PER SHARE



|                           |                                                                                                           |                    |       |        |      |   |       |        |  
|-------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------ | ----- | ------ | ---- | - | ----- | ------ | -
|                           |                                                                                                           | Three Months Ended |      
|                           |                                                                                                           | September 30,      |      
|                           |                                                                                                           |                    |      
|                           |                                                                                                           | 2005               |       |        | 2004 |  
|                           |                                                                                                           |                    |       |        |      |  
|Numerator:                 |                                                                                                           |                    |       |        |      |   |       |       
|                           | Net loss                                                                                                  |                    | $     | (211   | )    |   | $     | (236   | )
|Denominator:               |                                                                                                           |                    |       |        |      |   |       |       
|                           | Denominator for basic net loss per share  weighted
    average shares                                    |                    |       | 12,253 |      |   |       | 12,604 |  
|                           | Dilutive potential common shares from employee stock options and
    restricted stock                     |                    |       |       |      |   |       |       |  
|                           |                                                                                                           |                    |       |        |      |  
|                           | Denominator for diluted net loss per share  adjusted
    weighted average shares and assumed conversions |                    |       | 12,253 |      |   |       | 12,604 |  
|                           |                                                                                                           |                    |       |        |      |  
|Basic net loss per share   |                                                                                                           | $                  | (0.02 | )      |      | $ | (0.02 | )     
|                           |                                                                                                           |                    |       |        |      |  
|Diluted net loss per share |                                                                                                           | $                  | (0.02 | )      |      | $ | (0.02 | )     
|                           |                                                                                                           |                    |       |        |      |  





|        |                         
|------- | ------------------------
|NOTE 3. | STOCK BASED COMPENSATION





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QUALSTAR CORPORATION


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|                                                                         |  |                    |        |  
|------------------------------------------------------------------------ |  | ------------------ | ------ | -
|                                                                         |  | Three Months Ended |       
|                                                                         |  | September 30,      |       
|                                                                         |  | 2004               |       
|                                                                         |  |                    |       
|Net loss as reported                                                     |  | $                  | (236   | )
|Stock-based employee compensation cost included in reported net
    loss |  |                    |       |  
|Pro forma stock-based employee compensation cost under
    SFAS 123      |  |                    | (69    | )
|                                                                         |  |                    |       
|Pro forma net loss                                                       |  | $                  | (305   | )
|                                                                         |  |                    |       
|Loss per share:                                                          |  |                    |        |  
|Basic  as reported                                                      |  | $                  | (0.02  | )
|                                                                         |  |                    |       
|Basic  pro forma                                                        |  | $                  | (0.02  | )
|                                                                         |  |                    |       
|Diluted  as reported                                                    |  | $                  | (0.02  | )
|                                                                         |  |                    |       
|Diluted  pro forma                                                      |  | $                  | (0.02  | )
|                                                                         |  |                    |       
|Basic Weighted Average Shares                                            |  |                    | 12,604 |  
|Diluted Weighted Average Shares                                          |  |                    | 12,604 |  



|        |                      
|------- | ---------------------
|NOTE 4. | MARKETABLE SECURITIES







|        |            
|------- | -----------
|NOTE 5. | INVENTORIES



|               |  |               |       |  |          |   |       | 
|-------------- |  | ------------- | ----- |  | -------- | - | ----- | 
|               |  | September 30, |       |  | June 30, |  
|               |  | 2005          |       |  | 2005     |  
|               |  |               |       |  |          |  
|Raw materials  |  | $             | 6,308 |  |          | $ | 6,196 | 
|Finished goods |  |               | 842   |  |          |   | 961   | 
|               |  |               |       |  |          |  
|               |  | $             | 7,150 |  |          | $ | 7,157 | 
|               |  |               |       |  |          |  

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QUALSTAR CORPORATION


NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS  (Continued)




|        |                   
|------- | ------------------
|NOTE 6. | COMPREHENSIVE LOSS





|        |                  
|------- | -----------------
|NOTE 7. | LEGAL PROCEEDINGS





|        |             
|------- | ------------
|NOTE 8. | INCOME TAXES



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations



OVERVIEW








CRITICAL ACCOUNTING POLICIES AND ESTIMATES








| |                    
| | -------------------
| | Revenue Recognition



8



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| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts





| |                    
| | -------------------
| | Inventory Valuation





| |                     
| | --------------------
| | Warranty Obligations





| |                            
| | ---------------------------
| | Accounting for Income Taxes







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RESULTS OF OPERATIONS




|                                     |  |               |       |    |      |  |       |   
|------------------------------------ |  | ------------- | ----- | -- | ---- |  | ----- | --
|                                     |  | Three Months  |      
|                                     |  | Ended         |      
|                                     |  | September 30, |      
|                                     |  |               |      
|                                     |  | 2005          |       |    | 2004 | 
|                                     |  |               |       |    |      | 
|Net revenues                         |  |               | 100.0 | %  |      |  | 100.0 | % 
|Cost of goods sold                   |  |               | 68.8  |    |      |  | 63.0  |   
|                                     |  |               |       |    |      | 
|Gross profit                         |  |               | 31.2  |    |      |  | 37.0  |   
|                                     |  |               |       |    |      | 
|Operating expenses                   |  |               |       |    |      |  |       |   
|Research and development             |  |               | 11.8  |    |      |  | 15.1  |   
|Sales and marketing                  |  |               | 12.4  |    |      |  | 13.4  |   
|General and administrative           |  |               | 14.9  |    |      |  | 14.8  |   
|                                     |  |               |       |    |      | 
|Total operating expenses             |  |               | 39.1  |    |      |  | 43.3  |   
|                                     |  |               |       |    |      | 
|Loss from operations                 |  |               | (7.9  | )  |      |  | (6.3  | ) 
|Investment income                    |  |               | 4.4   |    |      |  | 2.6   |   
|                                     |  |               |       |    |      | 
|Loss before income taxes             |  |               | (3.5  | )  |      |  | (3.7  | ) 
|Provision (benefit) for income taxes |  |               |      |    |      |  |      |   
|                                     |  |               |       |    |      | 
|Net loss                             |  |               | (3.5  | )% |      |  | (3.7  | )%
|                                     |  |               |       |    |      | 



|                           |  |               |       |   |      |  |       |  
|-------------------------- |  | ------------- | ----- | - | ---- |  | ----- | -
|                           |  | Three Months  |      
|                           |  | Ended         |      
|                           |  | September 30, |      
|                           |  |               |      
|                           |  | 2005          |       |   | 2004 | 
|                           |  |               |       |   |      | 
|Tape Library revenues:     |  |               |       |   |      |  |       |  
|TLS                        |  |               | 48.3  | % |      |  | 59.7  | %
|RLS                        |  |               | 11.8  |   |      |  | 8.6   |  
|                           |  |               |       |   |      | 
|                           |  |               | 60.1  |   |      |  | 68.3  |  
|                           |  |               |       |   |      | 
|Other revenues:            |  |               |       |   |      |  |       |  
|Service (net of costs)     |  |               | 12.8  |   |      |  | 11.0  |  
|Media                      |  |               | 12.4  |   |      |  | 10.0  |  
|Power Supplies             |  |               | 8.8   |   |      |  | 3.3   |  
|Upgrades, Spares and Other |  |               | 5.9   |   |      |  | 7.4   |  
|                           |  |               |       |   |      | 
|                           |  |               | 100.0 | % |      |  | 100.0 | %
|                           |  |               |       |   |      | 



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Three Months Ended September 30, 2005 Compared to
    Three Months Ended September 30, 2004.

Net Revenues.


10



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##### Table of Contents





Gross Profit.


Research and Development.


Sales and Marketing.


General and Administrative.


Investment Income.


Provision (Benefit) for Income Taxes.


LIQUIDITY AND CAPITAL RESOURCES






11



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##### Table of Contents












|        |                                                               
|------- | --------------------------------------------------------------
|ITEM 3. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                        
|------- | -----------------------
|ITEM 4. | Controls and Procedures








PART II  OTHER INFORMATION







|        |         
|------- | --------
|ITEM 6. | Exhibits

Exhibits:


|        |    |             |  |                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 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.

12



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##### Table of Contents






SIGNATURES






| |                     
| | --------------------
| | QUALSTAR CORPORATION



| |     |                       
| | --- | ----------------------
| | By: | /s/ WILLIAM J. GERVAIS

| |                                   
| | ----------------------------------
| |                                   
| | William J. Gervais                
| | President, Chief Executive Officer



| |     |                      
| | --- | ---------------------
| | By: | /s/ FREDERIC T. BOYER

| |                            
| | ---------------------------
| |                            
| | Frederic T. Boyer          
| | Principal Financial Officer

13



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##### Table of Contents



EXHIBIT INDEX


|        |    |             |  |                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 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.