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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    December 31, 2005o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission file number
    000-30083
  QUALSTAR CORPORATION
  Incorporated under the laws
    of the State of California

95-3927330(I.R.S. Employer
    Identification No.)    3990-B
    Heritage Oak Court
    Simi Valley, CA 93063(805) 583-7744
   þ o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
  Rule 12b-2 o þ




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##### 



Qualstar
    Corporation
  FORM 10-Q
  For The
    Quarterly Period Ended December 31, 2005
  INDEX
  
  PART I  FINANCIAL
    INFORMATIONItem 1.

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


1 Consolidated
    Condensed Statements of Operations  Three months
    and six months ended December 31, 2005 and 2004


2 Consolidated
    Condensed Statements of Cash Flows  Six months
    ended December 31, 2005 and 2004


3 Consolidated
    Condensed Statement of Changes in Shareholders
    Equity  Six months ended December 31,
    2005


4 Notes
    to Interim Consolidated Condensed Financial Statements


5Item 2.

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


8Item 3.

Qualitative
    and Quantitative Disclosures About Market Risk


12Item 4.

Controls and
    Procedures


13PART II  OTHER
    INFORMATIONItem 6.

Exhibits


13Signatures


14Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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PART I  FINANCIAL
    INFORMATION  ITEM 1.
    Financial
    Statements  QUALSTAR
    CORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETSDECEMBER 31, 2005 AND JUNE 30, 2005
  December 31,


June 30,2005


2005(Unaudited)


(Audited)(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
8,352


$
12,210Marketable securities


25,424



21,854Receivables, net of allowances of
    $193 as of December 31, 2005, and $248 at June 30,
    2005, respectively


3,047



3,532Inventories


7,309



7,157Prepaid expenses and other current
    assets


674



452Prepaid income taxes


642



640Total current assets


45,448



45,845Property and equipment, net


1,083



1,188Other assets


300



190Total assets

$
46,831


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

$
867


$
763Accrued payroll and related
    liabilities


458



496Other accrued liabilities


1,363



1,311Total current liabilities


2,688



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


18,442



18,370Accumulated other comprehensive
    loss


(341
)


(159
)Retained earnings


26,042



26,442Total shareholders equity


44,143



44,653Total liabilities and
    shareholders equity

$
46,831


$
47,223     1




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QUALSTAR
    CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONSTHREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2005 AND
    2004
  Three Months Ended


Six Months EndedDecember 31,


December 31,2005


2004


2005


2004(Unaudited)(In thousands, except per share
    data)Net revenues

$
5,689


$
6,392


$
11,791


$
12,697Cost of goods sold


3,767



4,081



7,965



8,053Gross profit


1,922



2,311



3,826



4,644Operating expenses:Research and development


762



865



1,481



1,819Sales and marketing


715



868



1,472



1,715General and administrative


900



1,136



1,810



2,068Total operating expenses


2,377



2,869



4,763



5,602Loss from operations


(455
)


(558
)


(937
)


(958
)Investment income


266



211



537



375Loss before income taxes


(189
)


(347
)


(400
)


(583
)Provision for income taxes














Net loss

$
(189
)

$
(347
)

$
(400
)

$
(583
)Loss per share:Basic

$
(0.02
)

$
(0.03
)

$
(0.03
)

$
(0.05
)Diluted

$
(0.02
)

$
(0.03
)

$
(0.03
)

$
(0.05
)Shares used to compute loss per
    share:Basic


12,253



12,477



12,253



12,541Diluted


12,253



12,477



12,253



12,541     2




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QUALSTAR
    CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED DECEMBER 31, 2005 AND
    2004
  Six Months EndedDecember 31,2005


2004(Unaudited)(In thousands)OPERATING ACTIVITIES:Net loss

$
(400
)

$
(583
)Adjustments to reconcile net loss
    to net cash provided by operating activities:Stock based compensation


72



Depreciation and amortization


231



231Provision for (recovery of) bad
    debts and returns


(22
)


(2
)Changes in operating assets and
    liabilities:Accounts receivable


507



1,062Inventories


(152
)


(304
)Prepaid and other assets


(356
)


(124
)Prepaid income taxes


(2
)


301Accounts payable


104



(242
)Accrued payroll and related
    liabilities


(38
)


(11
)Other accrued liabilities


52



(193
)Net cash provided by operating
    activities


(4
)


135INVESTING ACTIVITIES:Purchases of property, equipment
    and leasehold improvements


(102
)


(111
)Proceeds from sale of marketable
    securities


1,968



9,476Purchases of marketable securities


(5,720
)


(11,655
)Net cash used in investing
    activities


(3,854
)


(2,290
)FINANCING ACTIVITIES:Proceeds from exercise of stock
    options






76Repurchase of common stock






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






45Net cash used in financing
    activities






(1,706
)Net decrease in cash


(3,858
)


(3,861
)Cash and cash equivalents at
    beginning of period


12,210



6,401Cash and cash equivalents at end
    of period

$
8,352


$
2,540Supplemental cash flow disclosure:Income taxes paid

$



$
    3




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QUALSTAR
    CORPORATIONCONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
    SHAREHOLDERS EQUITYSIX MONTHS ENDED DECEMBER 31, 2005
  AccumulatedOtherCommon Stock


Comprehensive


RetainedShares


Amount


Loss


Earnings


Total(Unaudited)(In thousands)Balance at July 1, 2005


12,253


$
18,370


$
(159
)

$
26,442


$
44,653Stock based compensation






72











72Change in unrealized losses on
    investments










(182
)






(182
)Net loss














(400
)


(400
)Comprehensive loss


















(582
)Balance at December 31, 2005


12,253


$
18,442


$
(341
)

$
26,042


$
44,143    4




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QUALSTAR
    CORPORATION
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 DECEMBER 31, 2005
 (Unaudited)
 (In thousands, except per share data)
  NOTE 1.
    BASIS OF
    PRESENTATION  Form 10-K ,
  NOTE 2.
    LOSS PER
    SHARE    Three Months Ended


Six Months EndedDecember 31,


December 31,2005


2004


2005


2004Numerator:Net loss

$
(189
)

$
(347
)

$
(400
)

$
(583
)Denominator:Denominator for basic net loss per
    share  weighted average shares


12,253



12,477



12,253



12,541Dilutive 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



12,477



12,253



12,541Basic net loss per share

$
(0.02
)

$
(0.03
)

$
(0.03
)

$
(0.05
)Diluted net loss per share

$
(0.02
)

$
(0.03
)

$
(0.03
)

$
(0.05
)     NOTE 3.
    STOCK
    BASED COMPENSATION   5




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QUALSTAR
    CORPORATION
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
      Three Months Ended


Six Months EndedDecember 31, 2004


December 31, 2004Net loss as reported

$
(347
)

$
(583
)Stock-based employee compensation
    cost included in reported net loss






Pro forma stock-based employee
    compensation cost under SFAS 123


(68
)


(136
)Pro forma net loss

$
(415
)

$
(719
)Loss per share:Basic  as reported

$
(0.03
)

$
(0.05
)Basic  pro forma

$
(0.03
)

$
(0.06
)Diluted  as
    reported

$
(0.03
)

$
(0.05
)Diluted  pro forma

$
(0.03
)

$
(0.06
)Basic Weighted Average Shares


12,477



12,541Diluted Weighted Average Shares


12,477



12,541   NOTE 4.
    MARKETABLE
    SECURITIES  available-for-sale, held-to-maturity. Held-to-maturity held-to-maturity available-for-sale. available-for-sale
  Available-for-sale available-for-sale available-for-sale
 6




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QUALSTAR
    CORPORATION
  NOTES TO
    CONSOLIDATED CONDENSED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 5.
    INVENTORIES  (first-in,
  December 31,


June 30,2005


2005Raw materials

$
6,462


$
6,196Finished goods


847



961$
7,309


$
7,157   NOTE 6.
    COMPREHENSIVE
    LOSS  available-for-sale
  NOTE 7.
    LEGAL
    PROCEEDINGS    NOTE 8.
    INCOME
    TAXES   7




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ITEM 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-Q Form 10-K ITEM 7-
  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
       9




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RESULTS
    OF OPERATIONS
    Three Months Ended


Six Months EndedDecember 31,


December 31,2005


2004


2005


2004Net revenues


100.0
%


100.0
%


100.0
%


100.0
%Cost of goods sold


66.2



63.8



67.6



63.4Gross profit


33.8



36.2



32.4



36.6Operating expenses:Research and development


13.4



13.5



12.6



14.3Sales and marketing


12.6



13.6



12.5



13.5General and administrative


15.8



17.8



15.3



16.3Total operating expenses


41.8



44.9



40.4



44.1Loss from operations


(8.0
)


(8.7
)


(8.0
)


(7.5
)Investment income


4.7



3.3



4.6



3.0Loss before income taxes


(3.3
)


(5.4
)


(3.4
)


(4.5
)Provision (benefit) for income
    taxes














Net loss


(3.3
)%


(5.4
)%


(3.4
)%


(4.5
)%     Three Months Ended


Six Months EndedDecember 31,


December 31,2005


2004


2005


2004Tape Library revenues:TLS


43.3
%


48.0
%


45.9
%


53.8
%RLS


12.3



16.5



12.0



12.655.6



64.5



57.9



66.4Other revenues:Service


13.2



9.3



13.0



10.2Media


11.8



9.6



12.1



9.8Power Supplies


9.9



3.4



9.3



3.4Upgrades, Spares, Other


9.5



13.2



7.7



10.2100.0
%


100.0
%


100.0
%


100.0
%   Three
    Months Ended December 31, 2005 Compared to Three Months
    Ended December 31, 2004.
  Net Revenues.
 10




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Gross Profit.
  Stock-Based Compensation.
  Research and Development.
  Sales and Marketing.
  General and Administrative.
  Investment Income.
  Provision for Income Taxes.
  Six
    Months Ended December 31, 2005 Compared to Six Months Ended
    December 31, 2004.
  Net Revenues.
  Gross Profit.
 11




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Stock-Based Compensation.
  Research and Development.
  Sales and Marketing.
  General and Administrative.
  Investment Income.
  Provision for Income Taxes.
  LIQUIDITY
    AND CAPITAL RESOURCES
          ITEM 3.
    Quantitative
    and Qualitative Disclosures About Market Risk   12




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ITEM 4.
    Controls
    and Procedures  Rule 13a-15
   PART II  OTHER
    INFORMATION  ITEM 6.
    Exhibits  Exhibits:
  ExhibitNo.

Description31
.1

Certification of Principal
    Executive Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of Principal
    Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.32
.1

Certification of Principal
    Executive Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.32
.2

Certification of Principal
    Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.  13




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SIGNATURES      By:
    /s/  WILLIAM
    J. GERVAIS        By:
    /s/  FREDERIC
    T. BOYER      14




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EXHIBIT INDEX
  ExhibitNo.

Description31
.1

Certification of Principal
    Executive Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of Principal
    Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.32
.1

Certification of Principal
    Executive Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.32
.2

Certification of Principal
    Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.