**SECURITIES
          AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  
 **Form
        10-Q**
 
  
 T
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934****For
                  the Quarterly Period Ended September 30, 2007****OR**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**
 
 **CALIFORNIA**
              
              **95-3927330**(State
                  of incorporation**)**
              
              (I.R.S.
                  Employer Identification No.)
 
 **3990-B
        Heritage Oak Court, Simi Valley, CA  93063**
 **(805)
        583-7744**
 
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports); and (2) has been subject to
        such filing requirements for the past 90 days.  Yes þNo 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 oNo þ
 
 Total
        shares of common stock without par value outstanding at October 31, 2007is
        12,253,117.
  
 
  **QUALSTARCORPORATION**
 **FORM
        10-Q**
 **FOR
        THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007**
 **INDEX**
 
 **PART
                  I — FINANCIAL INFORMATION****Item
                  1.**
              **Financial
                  Statements**·Consolidated
                  Condensed Balance Sheets — September 30,
                  2007(unaudited) and June 30, 2007
              1·Consolidated
                  Condensed Statements of Operations — Three months
                  ended September 30, 2007 and 2006 (unaudited)
              2·Consolidated
                  Condensed Statements of Cash Flows — Three months
                  ended September 30, 2007 and 2006 (unaudited)
              3·Consolidated
                  Condensed Statement of Changes in Shareholders’
                  Equity — Three months ended September 30, 2007
              4·Notes
                  to Interim Consolidated Condensed Financial
                  Statements
              5**Item
                  2.**
              **Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations**
              10**Item
                  3.**
              **Qualitative
                  and Quantitative Disclosures About Market
                  Risk**
              15**Item
                  4T.**
              **Controls
                  and Procedures**
              15**PART
                  II — OTHER INFORMATION****Item
                  6.**
              **Exhibits**
              15**Signatures**
              16
  ***Table
            of Contents***
 
 **PART
        I — FINANCIAL INFORMATION**
 
 **ITEM
        1.**FINANCIAL STATEMENTS**
 
 **QUALSTAR
        CORPORATION**
 **CONSOLIDATED
        CONDENSED BALANCE SHEETS**
 **(In
        thousands)**
 
 **September 30****,**
                **2007**
              
              
              **June 30****,**
                **2007****(Unaudited)**
              
              
              **(Audited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              8,602
              
              
              $
              7,697Marketable
                  securities, short-term
              
              
              8,377
              
              
              
              9,574Receivables,
                  net of allowances of $129 as of September 30, 2007, and $170 at
                  June 30,
                  2007
              
              
              3,231
              
              
              
              3,462Inventories,
                  net
              
              
              5,707
              
              
              
              5,928Prepaid
                  expenses and other current assets
              
              
              767
              
              
              
              576Prepaid
                  income taxes
              
              
              134
              
              
              
              137Total
                  current assets
              
              
              26,818
              
              
              
              27,374Property
                  and equipment, net
              
              
              590
              
              
              
              601Marketable
                  securities, long-term
              
              
              16,703
              
              
              
              15,994Other
                  assets
              
              
              94
              
              
              
              94Total
                  assets
              
              $
              44,205
              
              
              $
              44,063**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              1,127
              
              
              $
              654Accrued
                  payroll and related liabilities
              
              
              299
              
              
              
              455Other
                  accrued liabilities
              
              
              1,008
              
              
              
              1,113Total
                  current liabilities
              
              
              2,434
              
              
              
              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 as of September 30, 2007 and June 30, 2007
              
              
              18,626
              
              
              
              18,593Accumulated
                  other comprehensive income (loss)
              
              
              39
              
              
              
              (55
              )Retained
                  earnings
              
              
              23,061
              
              
              
              23,303Total
                  shareholders’ equity
              
              
              41,726
              
              
              
              41,841Total
                  liabilities and shareholders’ equity
              
              $
              44,205
              
              
              $
              44,063
 
 **See
        the accompanying notes to these interim consolidated condensed financial
        statements.**
  1
 ***Table
            of Contents***
 
 **QUALSTAR
        CORPORATION**
 **CONSOLIDATED
        CONDENSED STATEMENTS OF
        OPERATIONS**
 **(Unaudited)
        (In thousands, except per share data)**
 
 
 **Three
                  Months Ended**
                **September 30,****2007**
              
              
              **2006**Net
                  Revenues
              
              $
              5,332
              
              
              $
              4,659Cost
                  of goods sold
              
              
              3,708
              
              
              
              3,357Gross
                  profit
              
              
              1,624
              
              
              
              1,302Operating
                  expenses:Research
                  and development
              
              
              728
              
              
              
              750Sales
                  and marketing
              
              
              759
              
              
              
              768General
                  and administrative
              
              
              739
              
              
              
              744Total
                  operating expenses
              
              
              2,226
              
              
              
              2,262Loss
                  from operations
              
              
              (602
              )
              
              
              (960
              )Investment
                  Income
              
              
              413
              
              
              
              381Loss
                  before income taxes
              
              
              (189
              )
              
              
              (579
              )Provision
                  for income taxes
              
              
              17
              
              
              
              —Net
                  loss
              
              $
              (206
              )
              
              $
              (579
              )Loss
                  per share:Basic
              
              $
              (0.02
              )
              
              $
              (0.05
              )Diluted
              
              $
              (0.02
              )
              
              $
              (0.05
              )Shares
                  used to compute loss per share:Basic
              
              
              12,253
              
              
              
              12,253Diluted
              
              
              12,253
              
              
              
              12,253
 
 **See
        the accompanying notes to these interim consolidated condensed financial
        statements.**
  2
 ***Table
            of Contents***
  **QUALSTAR
        CORPORATION**
 **CONSOLIDATED
        CONDENSED STATEMENTS OF CASH
        FLOWS**
 **(Unaudited)(In
        thousands)**
 
 
 **Three
                  Months Ended**
                **September 30,****2007**
              
              
              **2006****OPERATING
                  ACTIVITIES:**Net
                  loss
              
              $
              (206
              )
              
              $
              (579
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Share
                  based compensation
              
              
              33
              
              
              
              2Gain
                  on sale of marketable securities
              
              
              (3
              )
              
              
              —Depreciation
                  and amortization
              
              
              78
              
              
              
              110(Recovery
                  of) provision for bad debts and returns
              
              
              (21
              )
              
              
              5Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              252
              
              
              
              574Inventories
              
              
              221
              
              
              
              53Prepaid
                  expenses and other assets
              
              
              (213
              )
              
              
              (86
              )Prepaid
                  income taxes
              
              
              3
              
              
              
              (7
              )Accounts
                  payable
              
              
              473
              
              
              
              (85
              )Accrued
                  payroll and related liabilities
              
              
              (156
              )
              
              
              (143
              )Other
                  accrued liabilities
              
              
              (74
              )
              
              
              (80
              )Net
                  cash provided by (used in) operating activities
              
              
              387
              
              
              
              (236
              )**INVESTING
                  ACTIVITIES:**Purchases
                  of property, equipment and leasehold improvements
              
              
              (67
              )
              
              
              (14
              )Proceeds
                  from sale of marketable securities
              
              
              6,299
              
              
              
              2,163Purchases
                  of marketable securities
              
              
              (5,714
              )
              
              
              (2,610
              )Net
                  cash provided by (used in) investing activities
              
              
              518
              
              
              
              (461
              )Net
                  change in cash and cash equivalents
              
              
              905
              
              
              
              (697
              )Cash
                  and cash equivalents, beginning of period
              
              
              7,697
              
              
              
              6,845Cash
                  and cash equivalents, end of period
              
              $
              8,602
              
              
              $
              6,148Supplemental
                  cash flow disclosure:Income
                  taxes paid
              
              $
              7
              
              
              $
              7
 
 **See
        the accompanying notes to these interim consolidated condensed financial
        statements.**
  3
 ***Table
            of Contents***
 
 **QUALSTAR
        CORPORATION**
 **CONSOLIDATED
        CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’
EQUITY**
 **THREE
        MONTHS ENDED SEPTEMBER 30, 2007**
 **(Unaudited)(In
        thousands)**
 
 **Accumulated****Other****Common
                  Stock**
              
              
              **Comprehensive**
              
              
              **Retained****Shares**
              
              
              **Amount**
              
              
              **(Loss)/Income**
              
              
              **Earnings**
              
              
              **Total**Balance
                  at July 1, 2007
              
              
              12,253
              
              
              $
              18,593
              
              
              $
              (55
              )
              
              $
              23,303
              
              
              $
              41,841Share
                  based compensation
              
              
              —
              
              
              
              33
              
              
              
              —
              
              
              
              —
              
              
              
              33Comprehensive
                  loss:Net
                  loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (206
              )
              
              
              (206
              )Cumulative
                  effect of a change in accounting principle (FIN 48)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (36
              )
              
              
              (36
              )Change
                  in unrealized losses on investments
              
              
              —
              
              
              
              —
              
              
              
              94
              
              
              
              —
              
              
              
              94Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (148
              )Balance
                  at September 30, 2007
              
              
              12,253
              
              
              $
              18,626
              
              
              $
              39
              
              
              $
              23,061
              
              
              $
              41,726
  **See
        the accompanying notes to these consolidated condensed financial
        statements**
  4
 ***Table
            of Contents***
 
 **QUALSTAR
        CORPORATION**
 **NOTES
        TO CONSOLIDATED CONDENSED FINANCIAL
        STATEMENTS**
 **(Unaudited)****(In
        thousands, except per share data)**
 
 **Note
        1 – Basis of Presentation and Consolidation**
 
 ***Basis
        of Presentation***
  In
        the
        opinion of management, the accompanying consolidated condensed financial
        statements, including balance sheets and related interim statements of
        operations, cash flows, and stockholders’ equity, include all adjustments,
        consisting primarily of normal recurring items, which are necessary for their
        fair presentation in conformity with accounting principles generally accepted
        in
        the United States of America (“U.S. GAAP”).
 
 Preparing
        financial statements requires management to make estimates and assumptions
        that
        affect the reported amounts of assets, liabilities, revenue and
        expenses.  Examples include estimates of loss contingencies, product
        life cycles and inventory obsolescence, bad debts, sales returns, share based
        compensation forfeiture rates, the potential outcome of future tax consequences
        of events that have been recognized in our financial statements or tax returns,
        and determining when investment impairments are
        other-than-temporary.  Actual results and outcomes may differ
        from  management’s estimates and assumptions.
 
 Interim
        results are not necessarily indicative of results for a full
        year.  The information included in this Form 10-Q should be read in
        conjunction with Management’s Discussion and Analysis and the financial
        statements and notes thereto included in the Qualstar Corporation Annual
        Report
        on Form 10-K for the fiscal year ended June 30, 2007, filed with the Securities
        and Exchange Commission (“SEC”) on September 26, 2007.
 
 ***Basis
        of Consolidation***
  The
        consolidated financial statements include the accounts and operations of
        Qualstar and its wholly owned subsidiary.  All significant
        intercompany accounts have been eliminated.
 
 ***Recent
        Accounting Pronouncements***
 
 On
        July 1, 2007, the Company adopted the provisions of the Financial
        Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”),
*Accounting for Uncertainty in Income Taxes – an interpretation of FASB
        Statement No. 109*.  FIN 48 prescribes a recognition and
        measurement threshold for tax positions taken or expected to be taken on
        a tax
        return and relates to the uncertainty in income taxes recognized in the
        financial statements in accordance with FAS109, *Accounting for Income
        Taxes*.  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.Upon
        adoption, we recognized a $36,000 charge to our beginning retained earnings
        as a
        cumulative effect of a change in accounting principle.  See Note 8 –
Income Taxes.
 
 **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
 ***Table
            of Contents***
  **QUALSTAR
        CORPORATION**
  **NOTES
        TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-
        (Continued)**
 
 The
        following table sets forth the computation of basic and diluted net loss
        per
        share for the periods indicated:
 
 **Three
                  Months Ended September 30,****2007**
              
              
              **2006**Net
                  loss  (a)
              
              $
              (206
              )
              
              $
              (579
              )Weighted
                  average outstanding shares of common stock (b)
              
              
              12,253
              
              
              
              12,253Dilutive
                  potential common shares from employee stock options
              
              
              —
              
              
              
              —Common
                  stock and common stock equivalents (c)
              
              
              12,253
              
              
              
              12,253Loss
                  per share:Basic
                  net loss per share (a)/(b)
              
              $
              (0.02
              )
              
              $
              (0.05
              )Diluted
                  net loss per share  (a)/(c)
              
              $
              (0.02
              )
              
              $
              (0.05
              )
 
 Stock
        options are excluded for the three months ended September 30, 2007 and 2006,
        respectively, 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 September 30, 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:
 
 **September 30,
                  2007**
              
              
              **June 30,
                  2007**Raw
                  materials, net
              
              $
              5,108
              
              
              $
              5,234Finished
                  goods
              
              
              599
              
              
              
              694$
              5,707
              
              
              $
              5,928
  **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 fordisclosures
        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.
  6
 ***Table
            of Contents***
  **QUALSTAR
        CORPORATION**
  **NOTES
        TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-
        (Continued)**
  Activity
        in the liability for product warranty for the periods presented were as follows
        (in thousands):
 
 **September 30,****2007**
              
              
              **2006**Beginning
                  balance
              
              $
              174
              
              
              $
              173Cost
                  of warranty claims
              
              
              (18
              )
              
              
              (14
              )Accruals
                  for product warranties
              
              
              35
              
              
              
              14Ending
                  balance
              
              $
              191
              
              
              $
              173
  **Note
        6 – Comprehensive Loss**
 
 For
        the
        three months ended September 30, 2007 and 2006, comprehensive loss amounted
        to
        approximately $148,000 and $381,000, 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.
  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 September 30,
        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.
  7
 ***Table
            of Contents***
  **QUALSTAR
        CORPORATION**
  **NOTES
        TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-
        (Continued)**
  **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 managed and monitored performance for the three months
        ended
        September 30, 2007 and 2006. Our financial reporting systems present various
        data for management to operate the business, including internal profit and
        loss
        statements prepared on a basis consistent with U.S. GAAP. The tape library
        business has dominated our operations, thus, our operations and reporting
        have
        been set up to accommodate a single segment and attribute all revenues and
        expenses to the tape library side, with the power supply business being an
        ancillary part of overall operations. Allocations for internal resources
        were
        made for the three months ended September 30, 2007 and 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.
 
 Segment
        revenue, loss before taxes and total assets were as follows (in
        thousands):
 
 **Three
                  Months Ended**
                **September 30,****2007**
              
              
              **2006****Revenue**Tape
                  Libraries:Product
              
              
              3,952
              
              
              
              3,147Service
              
              
              656
              
              
              
              725Total
                  Tape Libraries
              
              
              4,608
              
              
              
              3,872Power
                  Supplies
              
              
              724
              
              
              
              787Consolidated
                  Revenue
              
              
              5,332
              
              
              
              4,659
  8
 ***Table
            of Contents***
  **QUALSTAR
        CORPORATION**
  **NOTES
        TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-
        (Continued)**
 
 **Three
                  Months Ended September 30,****2007**
              
              
              **2006****Income
                  (Loss) before Taxes**Tape
                  Libraries
              
              
              (117
              )
              
              
              (591
              )Power
                  Supplies
              
              
              (72
              )
              
              
              12Consolidated
                  Loss before Taxes
              
              
              (189
              )
              
              
              (579
              )
 
 **September 30,
                  2007**
              
              
              **June 30,
                  2007****Total
                  Assets**Tape
                  Libraries
              
              
              43,286
              
              
              
              43,228Power
                  Supplies
              
              
              919
              
              
              
              835Consolidated
                  Assets
              
              
              44,205
              
              
              
              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.
 
 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.
  9
 ***Table
            of Contents***
  **ITEM
        2.**MANAGEMENT’S DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
 
 Statements
        in this Quarterly Report on Form 10-Q concerning the future business, operating
        results and financial condition of Qualstar including estimates, projections,
        statements relating to our business plans, objectives and operating results,
        and
        the assumptions upon which those statements are based, are forward-looking
        statements within the meaning of Section 27A of the Securities Act of 1933
        and
        Section 21E of the Securities Exchange Act of 1934. These forward-looking
        statements inherently are subject to risks and uncertainties, some of which
        we
        cannot predict or quantify. Our actual results may differ materially from
        the
        results projected in the forward-looking statements. Factors that might cause
        such a difference include, but are not limited to, those discussed in our
        Annual
        Report on Form 10-K for the fiscal year ended June 30, 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 offer tape libraries for multiple tape drive technologies
        including LTO (Linear Tape-Open tape format), AIT (Advanced Intelligent Tape),
        SAIT (Super Advanced Intelligent Tape), and DLT (Digital Linear Tape) tape
        drives and media.
 
 We
        have
        developed a network of value added resellers who specialize in delivering
        complete storage solutions to end users. End users of our products range
        from
        small businesses requiring simple automated backup solutions to large
        organizations needing complex storage management solutions. We also sell
        our
        products to original equipment manufacturers that incorporate our products
        with
        theirs, which they sell as a complete system or solution. We assist our
        customers with marketing and technical support.
 
 We
        also
        design, develop, manufacture and sell small high-efficiency open-frame switching
        power supplies for original equipment manufacturers of telecommunications
        equipment, servers, routers, switches, RAIDs, and other equipment. Our power
        supplies are sold under the N2Power brand name and private label brand names
        through independent sales representatives and distributors. The primary
        customers are original equipment manufacturers and contract
        manufacturers.
 
 **CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES**
 
 Our
        discussion and analysis of our financial condition and results of operations
        is
        based upon our financial statements, which have been prepared in accordance
        with
        accounting principles generally accepted in the United States. The preparation
        of these financial statements requires us to make estimates and judgments
        that
        affect the reported amounts of assets, liabilities, revenues and expenses
        and
        related disclosure of contingent assets and liabilities. On an on-going basis,
        we evaluate our estimates, including those related to customer promotional
        offers, sales returns, bad debts, inventories, warranty costs, investments,
        share based compensation, and income taxes. We base our estimates on historical
        experience and on various other assumptions that are believed to be reasonable
        under the circumstances, the results of which form the basis for making
        judgments about the carrying values of assets and liabilities that are not
        readily apparent from other sources. Actual results may differ from these
        estimates under different assumptions or conditions.
 
 We
        believe the following critical accounting policies affect our more significant
        judgments and estimates used in the preparation of our consolidated financial
        statements.
  10
 ***Table
            of Contents***
 
 **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.
  11
 ***Table
            of Contents***
  **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 consolidated condensed financial statements
        included in this Form 10-Q for further discussion.
 
 We
        estimate our tax liability based on current tax laws in the statutory
        jurisdictions in which we operate. These estimates include judgments about
        deferred tax assets and liabilities resulting from temporary differences
        between
        assets and liabilities recognized for financial reporting purposes and such
        amounts recognized for tax purposes, as well as about the realization of
        deferred tax assets.
 
 We
        maintain a valuation allowance to reduce our deferred tax assets due to the
        uncertainty surrounding the timing of realizing the benefits of net deferred
        tax
        assets in future years. We have considered future taxable income and ongoing
        prudent and feasible tax planning strategies in assessing the need for such
        a
        valuation allowance. In the event we were to determine that we would be able
        to
        realize all or part of our net deferred tax asset in the future, the valuation
        allowance would be decreased accordingly.
 
 We
        may
        periodically undergo examinations by the federal and state regulatory
        authorities and the Internal Revenue Service. We may be assessed additional
        taxes and/or penalties contingent on the outcome of these examinations. Our
        previous examinations have not resulted in any unfavorable or significant
        assessments.
 
 
 **RESULTS
        OF OPERATIONS**
 
 The
        following table reflects, as a percentage of net revenues, statements of
        operations data for the periods indicated:
 
 **Three
                  Months Ended September 30,****2007**
              
              
              **2006**Net
                  revenues
              
              
              100.0
              %
              
              
              100.0
              %Cost
                  of goods sold
              
              
              69.5
              
              
              
              72.1Gross
                  profit
              
              
              30.5
              
              
              
              27.9Operating
                  expenses:Research
                  and development
              
              
              13.7
              
              
              
              16.1Sales
                  and marketing
              
              
              14.2
              
              
              
              16.5General
                  and administrative
              
              
              13.9
              
              
              
              16.0Total
                  operating expenses
              
              
              41.8
              
              
              
              48.6Loss
                  from operations
              
              
              (11.3
              )
              
              
              (20.7
              )Investment
                  income
              
              
              7.8
              
              
              
              8.2Loss
                  before income taxes
              
              
              (3.5
              )
              
              
              (12.5
              )Provision
                  for income taxes
              
              
              .3
              
              
              
              —Net
                  loss
              
              
              (3.8
              )%
              
              
              (12.5
              )%
  12
 ***Table
            of Contents***
 
 We
        have
        two operating segments for financial reporting purposes: tape libraries and
        power supplies, as discussed in      Note 9 of the
        Notes to Consolidated Financial Statements in Item 1 of this report. The
        following table summarizes our revenue by major product line and by operating
        segment:
 
 **Three
                  Months Ended September 30,****2007**
              
              
              **2006**Tape
                  Library revenues:TLS
              
              
              32.6
              %
              
              
              34.1
              %RLS
              
              
              10.9
              
              
              
              10.5XLS
              
              
              6.6
              
              
              
              5.150.1
              
              
              
              49.7Other
                  library revenues:Service
              
              
              12.3
              
              
              
              15.6Media
              
              
              17.3
              
              
              
              12.1Upgrades,
                  spares
              
              
              6.7
              
              
              
              5.736.3
              
              
              
              33.4Total
                  Library revenues
              
              
              86.4
              
              
              
              83.1Power
                  Supply revenues
              
              
              13.6
              
              
              
              16.9100.0
              %
              
              
              100.0
              %
  **Three
        Months Ended September 30, 2007 Compared to Three Months Ended September
        30,
        2006**
 
 **Net
        Revenue***.*  Net revenues increased to $5.3 million for
        the three months ended September 30, 2007 from $4.7 million for the three
        months
        ended September 30, 2006, an increase of $0.7 million, or 14.4%. No single
        customer accounted for more than ten percent of the Company’s consolidated
        revenue for the three-month periods ended September 30, 2007 and September
        30,
        2006.
 
 **Segment
        Revenue**
 
 Tape
        Libraries– Net tape library revenues increased to $4.6 million for the three
        months ended September 30, 2007 from $3.9 million for the three months ended
        September 30, 2006, an increase of $.7 million, or 19%. The increase in revenues
        is attributed to higher revenues from our TLS RLS and XLS tape library product
        lines and higher sales of tape 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 September 30, 2007 and September 20,
        2006*.*
 
 Power
        Supplies– Net revenues from power supplies decreased to $724,000 for the
        three months ended September 30, 2007 from $787,000 for the three months
        ended September 30, 2006, a decrease of $63,000, or 8%.  The
        decrease in revenues is attributed to delays in the launch of certain power
        supply models. Three customers accounted for 19.9%, 13.4% and 9.4%,
        respectively, or 42.7% in the aggregate, of power supply sales for the three
        months ended September 30, 2007.  Three customers accounted for 21.5%,
        14.1% and 13.2%, respectively, or 48.8% in the aggregate, of power supply
        sales
        for the three months ended September 30, 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 $1.62 million for the three months ended
        September 30, 2007 from $1.3 million for the three months ended September
        30,
        2006.  The increase of $322,000, or 24.7%, is primarily due to
        efficiencies achieved in material management partially offset by lower overhead
        absorption.
  13
 ***Table
            of Contents***
 
 **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 decreased to $728,000 for the three months ended September
        30, 2007 from $750,000 for the three months ended September 30,
        2006.  The decrease of $22,000, or 2.9%, is primarily due to lower
        compensation 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 $759,000 for the three months ended September 30, 2007 from
        $768,000 for the three months ended September 30, 2006.  The decrease
        of $9,000, or 1.2%, is primarily due to the closure of the United Kingdom
        branch, offset by increases in commission and recruitment expenses.
 
 **General
        and Administrative***.*  General and administrative
        expenses include employee salaries and benefits and professional service
        fees.
        General and administrative expenses remained comparable at $739,000 for the
        three months ended September 30, 2007 and $744,000 for the three months ended
        September 30, 2006.
 
 **Investment
        Income***.*  Investment income increased to $413,000 for
        the three months ended September 30, 2007 from $381,000 for the three months
        ended September 30, 2006. The increase of $32,000, or 8.4% is primarily due
        to
        the reinvestment of our lower yielding****maturities into
        higher yielding securities in the higher interest rate environment.
  **Provision
        for Income Taxes***.*  We recorded a provision for
        income taxes of $17,000 for the three months ended September 30, 2007 relating
        to state income taxes paid during the quarter and interest expense accrued
        as
        part of our liability resulting from our adoption on July 1, 2007 of FIN
        48,
*Accounting for Uncertainties in Income Taxes – an Interpretation of FASB
        Statement No. 109*.  See Note 8 of Notes to Consolidated Condensed
        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 three
        months ended September 30, 2006.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 Net
        cash
        provided by operating activities was $387,000 in the three months ended
        September 30, 2007, primarily attributed to an increase in accounts payable
        and
        a decrease in receivables and inventories, partially offset by an increase
        in
        prepaids and other assets, and a decrease in accrued payroll and related
        liabilities and other accrued liabilities.  Net cash used in operating
        activities was $236,000 in the three months ended September 30, 2006,
        primarily attributed to the net loss for the quarter and decreases in accrued
        payroll and related liabilities, accounts payable and other accrued liabilities
        and an increase in prepaids and other assets, partially offset by a reduction
        in
        accounts receivable.
 
 Cash
        provided by investing activities was $518,000 in the three months ended
        September 30, 2007, primarily attributed to the sale of marketable securities,
        partially offset by the purchase of marketable securities.  Cash used
        in investing activities was $461,000 in the three months ended
        September 30, 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 three months ended
        September 30, 2007 or the three months ended September 30, 2006.
 
 As
        of
        September 30, 2007, we had $8.6 million in cash and cash equivalents and
        $25.1
        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.
  14
 ***Table
            of Contents***
 
 **ITEM
        3.   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.
  **ITEM
        4T.**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 September 30, 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.
 
 We
        did
        not make any changes in our internal control over financial reporting during
        the
        quarter ended September 30, 2007 of Qualstar’s fiscal year ending June 30, 2008,
        that materially affected, or are reasonably likely to materially affect,
        our
        internal control over financial reporting.
  **PART
        II — OTHER INFORMATION**
 
 **ITEM
        6.   EXHIBITS**
 
 **Exhibit**
                **No.**
              **Exhibit
                  Index**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.
  15
 ***Table
            of Contents***
  **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
        CORPORATION
  
 Dated:
                  November 14, 2007
              By:
              /s/    WILLIAM
                  J. GERVAISWilliam
                  J. GervaisChief
                  Executive Officer and President(Principal
                  Executive Officer)






16