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SECURITIES AND EXCHANGE COMMISSION

Washington,
D.C. 20549

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FORM 10-Q

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|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------

For the quarterly period ended December 31, 2002

|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 |  | (I.R.S. Employer Identification No.) 95-3927330
|------------------------------------------------------ |  | -----------------------------------------------
|                                                       |  |                                                
|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 x | No o
|----- | ----

The total shares of common stock without par value
outstanding at February 6, 2003 is 12,704,701.



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Table of Contents

|PART. I FINANCIAL INFORMATION                                                                 |                                                                                                                 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------
|                                                                                              |                                                                                                                 
|ITEM. Financial Statements                                                                    | 3                                                                                                               
|                                                                                              | Condensed consolidated balance sheets as of June 30, 2002 and December 31, 2002                                 
|                                                                                              | Condensed consolidated statements of income for the three months and six months ended December 31, 2001 and 2002
|                                                                                              | Condensed consolidated statements of cash flows for the six months ended December 31, 2001 and 2002             
|                                                                                              | Condensed consolidated statement of changes in shareholders equity for the six months ended December 31, 2002  
|                                                                                              | Notes to interim condensed consolidated financial statements                                                    
|                                                                                              |                                                                                                                 
|ITEM. 2 Managements Discussion and Analysis of Financial Condition and Results of Operations | 9                                                                                                               
|                                                                                              |                                                                                                                 
|ITEM 3. Qualitative and Quantitative Disclosures About Market Risk                            | 12                                                                                                              
|                                                                                              |                                                                                                                 
|ITEM 4. Controls and Procedures                                                               | 12                                                                                                              
|                                                                                              |                                                                                                                 
|PART. II OTHER INFORMATION                                                                    |                                                                                                                 
|                                                                                              |                                                                                                                 
|ITEM 1. Legal Proceedings                                                                     | 12                                                                                                              
|                                                                                              |                                                                                                                 
|ITEM 4. Submission of Matters to a Vote of Security Holders                                   | 13                                                                                                              
|                                                                                              |                                                                                                                 
|ITEM 6. Exhibits and Reports on Form 8-K                                                      | 13                                                                                                              
|                                                                                              |                                                                                                                 
|Signatures                                                                                    | 13                                                                                                              
|                                                                                              |                                                                                                                 
|Certification of Principal Executive Officer                                                  | 14                                                                                                              
|                                                                                              |                                                                                                                 
|Certification of Principal Financial Officer                                                  | 15                                                                                                              



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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

QUALSTAR CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND DECEMBER 31, 2002 (in thousands)

|                                     |                                                                                                                                                                | JUNE 30, 2002 |        | DECEMBER 31, 2002 |  
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ------ | ----------------- | -
|                                     |                                                                                                                                                                |               |        |                   |  
|                                     |                                                                                                                                                                |               |        | (Unaudited)       |  
|ASSETS                               |                                                                                                                                                                |               |        |                   |  
|Current assets:                      |                                                                                                                                                                |               |        |                   |  
|                                     | Cash and cash equivalents.                                                                                                                                     |               | $      | 16,363            |  
|                                     | Marketable securities                                                                                                                                          |               |        | 14,482            |  
|                                     | Accounts receivable, net of allowances of $2,100 at June 30 and $1,943 at December 31                                                                          |               |        | 6,695             |  
|                                     | Inventories                                                                                                                                                    |               |        | 9,652             |  
|                                     | Prepaid expenses and other current assets                                                                                                                      |               |        | 355               |  
|                                     | Prepaid income taxes                                                                                                                                           |               |        | 148               |  
|                                     | Deferred income taxes                                                                                                                                          |               |        | 1,501             |  
|                                     |                                                                                                                                                                |               |        |                   |  
|                                     | Total current assets                                                                                                                                           |               |        | 49,196            |  
|                                     |                                                                                                                                                                |               |        |                   |  
|Property and equipment, net          |                                                                                                                                                                |               | 1,324  |                   |  
|Other assets                         |                                                                                                                                                                |               | 238    |                   |  
|                                     |                                                                                                                                                                |               |        |                   |  
|                                     |                                                                                                                                                                | $             | 50,758 |                   | $
|                                     |                                                                                                                                                                |               |        |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                                                |               |        |                   |  
|Current liabilities:                 |                                                                                                                                                                |               |        |                   |  
|                                     | Accounts payable                                                                                                                                               |               | $      | 1,590             |  
|                                     | Accrued payroll and related liabilities                                                                                                                        |               |        | 308               |  
|                                     | Other accrued liabilities                                                                                                                                      |               |        | 693               |  
|                                     | Income taxes payable                                                                                                                                           |               |        | 98                |  
|                                     |                                                                                                                                                                |               |        |                   |  
|                                     | Total current liabilities                                                                                                                                      |               |        | 2,689             |  
|                                     |                                                                                                                                                                |               |        |                   |  
|Deferred income taxes                |                                                                                                                                                                |               | 96     |                   |  
|Shareholders equity:                |                                                                                                                                                                |               |        |                   |  
|                                     | Preferred stock, no par value; 5,000 shares authorized; no shares issued                                                                                       |               |        |                  |  
|                                     | Common stock, no par value; 50,000 shares authorized, 12,656 shares issued and outstanding at June 30, and 12,705 shares
issued and outstanding at December 31 |               |        | 20,751            |  
|                                     | Deferred compensation                                                                                                                                          |               |        | (631              | )
|                                     | Notes from directors                                                                                                                                           |               |        | (387              | )
|                                     | Accumulated other comprehensive income (loss)                                                                                                                  |               |        | (31               | )
|                                     | Retained earnings                                                                                                                                              |               |        | 28,271            |  
|                                     |                                                                                                                                                                |               |        |                   |  
|                                     | Total shareholders equity                                                                                                                                     |               |        | 47,973            |  
|                                     |                                                                                                                                                                |               |        |                   |  
|                                     | Total liabilities and shareholders equity                                                                                                                     |               | $      | 50,758            |  
|                                     |                                                                                                                                                                |               |        |                   |  
|                                     |                                                                                                                                                                |               |        |                   |  

3

See the accompanying notes to these condensed consolidated financial statements.



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QUALSTAR CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2002 (in thousands, except per share amounts) (UNAUDITED)

|                                           |                            | THREE MONTHS ENDED DECEMBER 31, |        | SIX MONTHS ENDED DECEMBER 31, |  
|------------------------------------------ | -------------------------- | ------------------------------- | ------ | ----------------------------- | -
|                                           |                            |                                 |        |                               |  
|                                           |                            | 2001                            |        | 2002                          |  
|                                           |                            |                                 |        |                               |  
|Net revenues                               |                            | $                               | 10,031 |                               | $
|Cost of goods sold                         |                            |                                 | 6,233  |                               |  
|                                           |                            |                                 |        |                               |  
|                                           | Gross profit               |                                 |        | 3,798                         |  
|                                           |                            |                                 |        |                               |  
|Operating expenses:                        |                            |                                 |        |                               |  
|                                           | Research and development   |                                 |        | 521                           |  
|                                           | Sales and marketing        |                                 |        | 803                           |  
|                                           | General and administrative |                                 |        | 894                           |  
|                                           |                            |                                 |        |                               |  
|                                           | Total operating expenses   |                                 |        | 2,218                         |  
|                                           |                            |                                 |        |                               |  
|Income from operations                     |                            |                                 | 1,580  |                               |  
|Interest income                            |                            |                                 | 328    |                               |  
|                                           |                            |                                 |        |                               |  
|Income before provision for income taxes   |                            |                                 | 1,908  |                               |  
|Provision for income taxes                 |                            |                                 | 700    |                               |  
|                                           |                            |                                 |        |                               |  
|Net income                                 |                            | $                               | 1,208  |                               | $
|                                           |                            |                                 |        |                               |  
|Basic earnings per share                   |                            | $                               | 0.10   |                               | $
|                                           |                            |                                 |        |                               |  
|Diluted earnings per share                 |                            | $                               | 0.10   |                               | $
|                                           |                            |                                 |        |                               |  
|Shares used to compute earnings per share: |                            |                                 |        |                               |  
|Basic                                      |                            |                                 | 12,439 |                               |  
|                                           |                            |                                 |        |                               |  
|Diluted                                    |                            |                                 | 12,663 |                               |  
|                                           |                            |                                 |        |                               |  

See the accompanying notes to these condensed consolidated financial statements.

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QUALSTAR CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2002 (in thousands) (UNAUDITED)

|                                                     |                                                                                   | 2001 |        | 2002   |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ---- | ------ | ------ | -
|                                                     |                                                                                   |      |        |        |  
|OPERATING ACTIVITIES:                                |                                                                                   |      |        |        |  
|                                                     | Net income                                                                        |      | $      | 2,375  |  
|                                                     | Adjustments to reconcile net income to net cash provided by operating activities: |      |        |        |  
|                                                     | Depreciation and amortization                                                     |      |        | 140    |  
|                                                     | Amortization of deferred compensation                                             |      |        | 214    |  
|                                                     | Provision for bad debts and returns                                               |      |        | 87     |  
|                                                     | Accrued interest on directors notes                                              |      |        | (15    | )
|                                                     | Changes in operating assets and liabilities:                                      |      |        |        |  
|                                                     | Accounts receivable                                                               |      |        | (640   | )
|                                                     | Inventories                                                                       |      |        | 1,729  |  
|                                                     | Prepaid expenses and other assets                                                 |      |        | (97    | )
|                                                     | Prepaid income taxes and income taxes payable.....                                |      |        | 1,205  |  
|                                                     | Accounts payable                                                                  |      |        | (1,417 | )
|                                                     | Accrued liabilities                                                               |      |        | (237   | )
|                                                     |                                                                                   |      |        |        |  
|Net cash provided by operating activities            |                                                                                   |      | 3,394  |        |  
|                                                     |                                                                                   |      |        |        |  
|INVESTING ACTIVITIES:                                |                                                                                   |      |        |        |  
|                                                     | Purchases of equipment and leasehold improvements                                 |      |        | (153   | )
|                                                     | Sale (purchases) of marketable securities, net                                    |      |        | (6,593 | )
|                                                     | Purchase of assets of N2Power, Inc                                                |      |        |       |  
|                                                     |                                                                                   |      |        |        |  
|Net cash (used in) provided by investing activities  |                                                                                   |      | (6,746 | )      |  
|                                                     |                                                                                   |      |        |        |  
|FINANCING ACTIVITIES:                                |                                                                                   |      |        |        |  
|                                                     | Proceeds from exercise of stock options                                           |      |        |       |  
|                                                     | Principal and interest payments on directors notes.....                          |      |        | 9      |  
|                                                     |                                                                                   |      |        |        |  
|Net cash provided by financing activities            |                                                                                   |      | 9      |        |  
|                                                     |                                                                                   |      |        |        |  
|Net increase (decrease) in cash and cash equivalents |                                                                                   |      | (3,343 | )      |  
|Cash and cash equivalents at beginning of period     |                                                                                   |      | 20,809 |        |  
|                                                     |                                                                                   |      |        |        |  
|Cash and cash equivalents at end of period           |                                                                                   | $    | 17,466 |        | $
|                                                     |                                                                                   |      |        |        |  
|                                                     | Income taxes paid                                                                 |      | $      | 150    |  
|                                                     |                                                                                   |      |        |        |  
|                                                     |                                                                                   |      |        |        |  

See the accompanying notes to these condensed consolidated financial statements.

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QUALSTAR CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY SIX MONTHS ENDED DECEMBER 31, 2002 (in thousands) (UNAUDITED)

|                                                 |                                        | PREFERRED STOCK |   | COMMON STOCK |   |        |  |        |        |                        |   |                       |   |                                      |     
|------------------------------------------------ | -------------------------------------- | --------------- | - | ------------ | - | ------ |  | ------ | ------ | ---------------------- | - | --------------------- | - | ------------------------------------ | ----
|                                                 |                                        |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     
|                                                 |                                        | SHARES          |   | AMOUNT       |   | SHARES |  | AMOUNT |        | DEFERRED  COMPENSATION |   | NOTES FROM  DIRECTORS |   | ACCUMULATED OTHER COMPREHENSIVE LOSS |     
|                                                 |                                        |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     
|Balance at July 1, 2002                          |                                        |                 |  |              | $ |       |  |        | 12,656 |                        | $ | 20,751                |   | $                                    | (631
|Amortization of deferred compensation            |                                        |                 |  |              |   |       |  |        |       |                        |   |                      |   |                                      | 172 
|Forfeiture of stock options                      |                                        |                 |  |              |   |       |  |        |       |                        |   | (177                  | ) |                                      | 177 
|Exercise of stock options                        |                                        |                 |  |              |   |       |  |        | 49     |                        |   | 135                   |   |                                      |    
|Accrued interest on directorsnotes              |                                        |                 |  |              |   |       |  |        |       |                        |   |                      |   |                                      |    
|Receipt of principal payment on directors notes |                                        |                 |  |              |   |       |  |        |       |                        |   |                      |   |                                      |    
|Comprehensive income:                            |                                        |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     
|                                                 | Change in unrealized gains (losses) on |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     
|investments                                      |                                        |                 |  |              |   |       |  |        |       |                        |   |                      |   |                                      |    
|Net income                                       |                                        |                 |  |              |   |       |  |        |       |                        |   |                      |   |                                      |    
|                                                 |                                        |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     
|Comprehensive income                             |                                        |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     
|                                                 |                                        |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     
|Balance at December 31, 2002                     |                                        |                 |  |              | $ |       |  |        | 12,705 |                        | $ | 20,709                |   | $                                    | (282
|                                                 |                                        |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     
|                                                 |                                        |                 |   |              |   |        |  |        |        |                        |   |                       |   |                                      |     

See the accompanying notes to these condensed consolidated financial statements.

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QUALSTAR CORPORATIONNOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 (in thousands, except per share amounts) (UNAUDITED)

NOTE 1. BASIS OF
PRESENTATION

The accompanying condensed consolidated financial statements are unaudited, except for the balance sheet at June 30, 2002 which is
derived from our audited financial statements, and should be read in conjunction with the consolidated financial statements and related notes included in Qualstar Corporations (Qualstar, us, we, or
our) Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on September 30, 2002.  In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments,
consisting primarily of normal recurring items, which are necessary for the fair presentation of Qualstars consolidated financial position as of December 31, 2002, consolidated results of operations for the three months and six months ended
December 31, 2001 and 2002, and consolidated cash flows for the six months ended December 31, 2002.  Operating results for the three month and six month periods ended December 31, 2002 are not necessarily indicative of results to be expected
for a full year.

NOTE 2. EARNINGS PER SHARE

The following table sets forth the computation of basic
and diluted net income per share for the three months and six months ended December 31, 2001 and 2002:

|                             |                                                                                                          | THREE MONTHS DECEMBER 31, |      | SIX MONTHS ENDED DECEMBER 31, |  
|---------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------- | ---- | ----------------------------- | -
|                             |                                                                                                          |                           |      |                               |  
|                             |                                                                                                          | 2001                      |      | 2002                          |  
|                             |                                                                                                          |                           |      |                               |  
|Numerator:                   |                                                                                                          |                           |      |                               |  
|                             | Net income                                                                                               |                           | $    | 1,208                         |  
|Denominator:                 |                                                                                                          |                           |      |                               |  
|                             | Denominator for basic net income per share -- weighted average shares                                    |                           |      | 12,439                        |  
|                             | Dilutive potential common shares from employee stock options, and restricted stock                       |                           |      | 224                           |  
|                             |                                                                                                          |                           |      |                               |  
|                             | Denominator for diluted net income per share -- adjusted weighted average shares and assumed
conversions |                           |      | 12,663                        |  
|                             |                                                                                                          |                           |      |                               |  
|Basic net income per share   |                                                                                                          | $                         | 0.10 |                               | $
|                             |                                                                                                          |                           |      |                               |  
|Diluted net income per share |                                                                                                          | $                         | 0.10 |                               | $
|                             |                                                                                                          |                           |      |                               |  
|                             |                                                                                                          |                           |      |                               |  

NOTE 3. MARKETABLE SECURITIES

Marketable securities consist primarily of
high-quality corporate, federal and state government 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 the Company 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 the Companys marketable securities were classified as available-for-sale at June 30, 2002 and December 31, 2002.

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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:

|               |  | JUNE 30, 2002 |       | DECEMBER 31, 2002 |  
|-------------- |  | ------------- | ----- | ----------------- | -
|               |  |               |       |                   |  
|Raw materials  |  | $             | 7,980 |                   | $
|Finished goods |  |               | 1,672 |                   |  
|               |  |               |       |                   |  
|               |  | $             | 9,652 |                   | $
|               |  |               |       |                   |  

NOTE 5. COMPREHENSIVE INCOME

For the six months ended December 31, 2001 and 2002, comprehensive income amounted to approximately $2.2 million and $0.6 million, respectively.  The difference between net
income and comprehensive income relates to the changes in the unrealized losses or gains the Company recorded for its available-for-sale securities.

NOTE 6. BUSINESS ACQUISITIONS

On July 11, 2002, the Company acquired the assets and intellectual properties of N2Power, Incorporated (N2Power), a privately held company which designs and
produces small and efficient open-frame switching power supplies.  The consideration for this acquisition was $250,000 plus acquisition expenses of $38,000.  The purchase price was primarily allocated to a patent which will be amortized
over 5 years. The accompanying consolidated financial statements include the operations of N2Power from the date of acquisition.

NOTE 7. SUBSEQUENT EVENT

On February 12, 2003, the Company announced that the Board of Directors authorized a stock repurchase program of up to 500,000 shares of the Companys common stock. 
The stock repurchase will be funded by available working capital.  There is no time limit for the completion of the stock repurchase program and it may be discontinued at any time.

NOTE 8.
SUBSEQUENT EVENT

On January 10, 2003, Raytheon Company filed a complaint in the United States District Court for the Eastern District of Texas alleging
that Qualstar and seven other named defendants infringe a patent owned by Raytheon entitled Mass Data Storage Library.  Raytheon filed an amended complaint on or about February 6, 2003, which includes an allegation that
Qualstars tape libraries infringe Raytheons patent.  The complaint seeks an injunction against all defendants and an unspecified amount of damages.  Qualstars response to the complaint is due March 7, 2003.  Qualstar
and its legal counsel are currently analyzing Raytheons patent and available defenses to the claims of infringement.  Based on our preliminary analysis, we believe that Raytheons claims against Qualstar are without merit and we
intend to vigorously defend against this complaint.

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q
contains 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, 2002 in ITEM 1 Business, including the section therein entitled 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.  We disclaim any obligation to update or revise these
forward-looking statements to reflect the occurrence of events or circumstances in the future.

RESULTS OF OPERATIONS

Three months ended
December 31, 2002 Compared to three months ended December 31, 2001.

NET REVENUES. Revenues are recognized upon shipment of the product to the
customer, less estimated returns, for which provision is made at the time of sale.

Net revenues for the three months ended December 31, 2002 were $8.4
million, compared with net revenues of $10.0 million for the three months ended December 31, 2001.  The primary reason for this decrease is that we sold fewer libraries in the current quarter. Sales of tape media, which we purchase from the
manufacturers and resell, also declined as these products became more available to our customers through distribution channels.  The selling prices of our tape libraries have remained relatively stable during the quarter ended December 31, 2002
compared to the prior year quarter.  The selling prices of tape media have decreased slightly since the second quarter of fiscal 2002, whereas the selling prices of tape drives have had an overall increase.  The decrease in selling prices
of tape media is primarily due to decreases in our cost to purchase media, which we pass through to our customers.  The increase in selling prices of tape drives is primarily due to the introduction of new releases of existing tape drive
technology, such as AIT-3 and SDLT 320, which were not yet available during the second quarter of fiscal 2002.  We do not anticipate significant changes in the selling prices of our tape libraries during the third quarter of fiscal
2003.

GROSS PROFIT. Gross profit was $3.1 million or 37.4% of net revenues for the three months ended December 31, 2002 compared to $3.8 million or
37.9% for the three months ended December 31, 2001, representing a decrease of 17.1%.  Our gross margin is partially a function of the mix of products sold.  Generally, larger tape libraries and newer tape drive technologies have higher
gross margins than do smaller tape libraries and older tape drive technologies.  Furthermore, tape libraries and drives have higher gross profit margins as a percentage of sales than do tape media.  The minor decrease in our gross profit
margin as a percentage of net revenues is primarily due to product mix.

RESEARCH AND DEVELOPMENT. Research and development expenses consist of
engineering salaries, benefits, purchased parts and supplies used in development activities.  Research and development expenses for the three months ended December 31, 2002 were $0.9 million or 11.1% of revenues as compared to $0.5 million or
5.2% of revenues for the three months ended December 31, 2001.  Our higher research and development spending reflects our establishment of an Advanced Development Group in Boulder, Colorado.  This Group has been established to broaden our
overall product line with new and innovative tape libraries.  We expect research and development expenses to remain steady or slightly increase during the next quarter.

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SALES AND MARKETING. Sales and marketing expenses consist primarily of employee salaries and benefits, sales commissions, trade
show costs, advertising, technical support and travel related expenses.  Sales and marketing expenses for the three months ended December 31, 2002 were $1.0 million, an increase of $0.2 million compared to the three months ended December 31,
2001.  Sales and marketing expenses as a percentage of net revenues were 12.5% for the three months ended December 31, 2002 as compared with 8.0% for the three months ended December 31, 2001.  The increase in sales and marketing expenses
is attributable primarily to an overall reduction of marketing development funds and rebates from our key suppliers, increased level of advertising to help launch our new RLS product line, and a reseller meeting held during November 2002. 
Expenditures on salaries, commissions, and trade shows have remained stable.  We anticipate sales and marketing expenses will remain stable for the third quarter of fiscal year 2003.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of employee salaries and benefits, deferred compensation related to equity incentives, provisions for
doubtful accounts and returns and professional service fees. General and administrative expenses for the three months ended December 31, 2002 were $1.0 million, or 12.4% of net revenues, compared with $0.9 million, or 8.9% of net revenues, for the
three months ended December 31, 2001.  The increase in general and administrative expenses is due to increased insurance costs, professional service fees, and employee benefit costs.  We do not anticipate that general and administrative
expenses will significantly increase in the third quarter of fiscal 2003.

PROVISION FOR INCOME TAXES. The provision for income taxes was $0.1 million
or 64.7% of pre-tax income, for the three months ended December 31, 2002, compared to $0.7 million, or 36.7% of pretax income, for the three months ended December 31, 2001.  The increase in the provision for income taxes as a percentage of
pretax income is primarily due to an additional provision in the current quarter of $60 thousand, net of certain items, related to prior fiscal years.  This amount was not material to those years and had a greater impact on the current
quarters effective tax rate due to the low pretax book income amount.

Six months ended December 31, 2002 Compared to six months ended December 31, 2001.

NET REVENUES. Net revenues for the six months ended December 31, 2002 were $17.2 million, compared with net revenues of $18.8 million for the six months ended December 31,
2001.  The primary reason for this decrease is that we sold fewer libraries in the current quarter. Sales of tape media, which we purchase from the manufacturers and resell, also declined as these products became more available to our customers
through distribution channels.  The selling prices of our tape libraries have remained relatively stable during the six month period ended December 31, 2002 compared to the prior quarter.  The selling prices of tape media have decreased
slightly since the first half of fiscal 2002 whereas the selling prices of tape drives have had an overall increase.  The decrease in selling prices of tape media is primarily due to decreases in our cost to purchase media, which we pass
through to our customers.  The increase in selling prices of tape drives is primarily due to the introduction of new releases of existing tape drive technology, such as AIT-3 and SDLT 320, which were not yet available during the first half of
fiscal 2002.

GROSS PROFIT. Gross profit was $6.3 million or 36.8% of net revenues for the six months ended December 31, 2002 compared to $7.1
million or 37.9% for the six months ended December 31, 2001, representing a decrease of 11.3%.  Our gross margin is partially a function of the mix of products sold.  Generally, larger tape libraries and newer tape drive technologies have
higher gross margins than do smaller tape libraries and older tape drive technologies.  Furthermore, tape libraries and drives have higher gross profit margins as a percentage of sales than do tape media.  The minor decrease in our gross
profit margin as a percentage of net revenues is primarily due to product mix.

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RESEARCH AND DEVELOPMENT. Research and development expenses consist of engineering salaries, benefits, purchased parts and
supplies used in development activities.  Research and development expenses for the six months ended December 31, 2002 were $1.8 million or 10.3% of revenues as compared to $1.0 million and 5.3% of revenues for the six months ended December 31,
2001.  Our higher research and development spending reflects our establishment of an Advanced Development Group in Boulder, Colorado.  This Group has been established to broaden our overall product line with new and innovative tape
libraries.

SALES AND MARKETING. Sales and marketing expenses consist primarily of employee salaries and
benefits, sales commissions, trade show costs, advertising, technical support and travel related expenses.  Sales and marketing expenses for the six months ended December 31, 2002 were $1.9 million, an increase of $0.6 million compared to the
six months ended December 31, 2001.  Sales and marketing expenses as a percentage of net revenues were 11.1% for the six months ended December 31, 2002 as compared with 6.9% for the six months ended December 31, 2001.  The increase in
sales and marketing expenses is attributable primarily to an overall reduction of marketing development funds and rebates from our key suppliers and an increased level of advertising to help launch our new RLS product line.  Expenditures on
salaries, commissions, and trade shows have remained stable.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of employee
salaries and benefits, deferred compensation related to equity incentives, provisions for doubtful accounts and returns and professional service fees. General and administrative expenses for the six months ended December 31, 2002 were $1.9 million,
or 11.3% of net revenues, compared with $1.7 million, or 9.2% of net revenues, for the six months ended December 31, 2001.  The increase in general and administrative expenses is due to increased insurance costs, professional service fees, and
employee benefit costs

PROVISION FOR INCOME TAXES. The provision for income taxes was $0.5 million or 47.2% of pre-tax income, for the six months
ended December 31, 2002, compared to $1.4 million, or 36.3% of pre-tax income, for the six months ended December 31, 2001.  The increase in the provision for income taxes as a percentage of pre-tax income is primarily due to an additional
provision in the current quarter, net of certain items, related to prior fiscal years.  This amount was not material to those years and had a greater impact on the current years effective tax rate due to the low pre-tax book income
amount.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have funded our capital requirements with
cash flows from operations.  Cash flows provided by operating activities were $5.5 million and $3.4 million for the first six months of fiscal 2003 and 2002, respectively. For the six months ended December 31, 2002, operating cash was primarily
provided by collection of accounts receivables and reductions in inventory levels.  For the six months ended December 31, 2001, operating cash was primarily provided by net income.

Cash provided by investing activities was $5.6 million during the first six months of fiscal year 2003.  The sale of marketable securities, offset partially by purchases of
fixed assets and the assets of N2Power, Inc., was the primary reason for the increase in cash from investing activities.  During the first six months of fiscal year 2002, the Company used $6.7 million of cash in investing activities.  This
use was attributable to the purchase of marketable securities and fixed assets.

There was no significant cash used or provided by financing activities
during the six month period ended December 31, 2002 or the six month period ended December 31, 2001.

On February 12, 2003, we announced that our Board
of Directors authorized a program to repurchase up to 500,000 shares of our common stock in open market transactions, block purchases or private transactions.  On February 11, 2003, the last sale price of our common stock on the Nasdaq Stock
Market was $4.85 per share.  The stock repurchase will be funded by available working capital and is not expected

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to negatively impact our liquidity.  There is no time limit for the completion of the stock repurchase program and it may be discontinued at any time.

We believe our existing cash and cash equivalents, plus anticipated cash flows from operating activities, 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 we believe are strategic.  We regularly evaluate other companies and technologies for possible investment by
us.  In addition, we have made and expect to 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.

ITEM 3.  Quantitative and Qualitative 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.  Since all sales are currently made in U.S. dollars, a
strengthening of the US dollar could make our products less competitive in foreign markets.  Our interest income is sensitive to changes in the general level of US 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 4.  Controls and Procedures

The Companys principal executive officer and
its principal financial officer have concluded that the Companys disclosure controls and procedures are adequate and effective for the purposes set forth in Exchange Act Rule 13a-14(c).  This conclusion was based on an evaluation of the
Companys disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days prior to the filing of this Quarterly Report on Form 10-Q.

There were no significant changes in the Companys internal controls or in other factors since the date of this evaluation that could significantly affect the Companys
internal controls.

PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings

On January 10, 2003, Raytheon Company filed a complaint in
the United States District Court for the Eastern District of Texas alleging that Qualstar and seven other named defendants infringe a patent owned by Raytheon entitled Mass Data Storage Library.  Raytheon filed an amended complaint
on or about February 6, 2003, which includes an allegation that Qualstars tape libraries infringe Raytheons patent.  The complaint seeks an injunction against all defendants and an unspecified amount of damages. 
Qualstars response to the complaint is due March 7, 2003.  Qualstar and its legal counsel are currently analyzing Raytheons patent and available defenses to the claims of infringement.  Based on our preliminary analysis, we
believe that Raytheons claims against Qualstar are without merit and we intend to vigorously defend against this complaint.

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ITEM 4.  Submission of Matters to a Vote of Security Holders

The following matters
were voted upon at the Annual Meeting of Stockholders of the Company held on February 6, 2003:

|                   | 1.                                | The following persons were elected as directors to serve a one year term expiring at the Annual Meeting of Stockholders to be held in 2004 or until their successors
are elected and qualified:
|------------------ | --------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                   |                                   |                                                                                                                                                                                                
|                   |                                   | Number of Votes Cast                                                                                                                                                                           
|                   |                                   |                                                                                                                                                                                                
|Name               |                                   | For                                                                                                                                                                                            
|                   |                                   |                                                                                                                                                                                                
|                   |                                   |                                                                                                                                                                                                
|William J. Gervais |                                   |                                                                                                                                                                                                
|Richard A. Nelson  |                                   |                                                                                                                                                                                                
|Bruce E. Gladstone |                                   |                                                                                                                                                                                                
|Robert E. Rich     |                                   |                                                                                                                                                                                                
|Trude C. Taylor    |                                   |                                                                                                                                                                                                
|Robert T. Webber   |                                   |                                                                                                                                                                                                
|                   |                                   |                                                                                                                                                                                                
|ITEM 6.            | Exhibits and Reports on Form 8-K.
|                   |                                   |                                                                                                                                                                                                
|                   | (a)                               | Exhibits:                                                                                                                                                                                      
|                   |                                   |                                                                                                                                                                                                
|                   |                                   | 99.1                                                                                                                                                                                           
|                   |                                   |                                                                                                                                                                                                
|                   |                                   | 99.2                                                                                                                                                                                           
|                   |                                   |                                                                                                                                                                                                
|                   |                                   | 99.3                                                                                                                                                                                           
|                   |                                   |                                                                                                                                                                                                
|                   | (b)                               | No Reports on Form 8-K were filed during the fiscal quarter ended December 31, 2002.                                                                                                           
|                   |                                   |                                                                                                                                                                                                

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:  February 13, 2003 | /s/  W ILLIAM J. G ERVAIS     
|                          |                               
|                          | William J. Gervais, President,
|                          | Chief Executive Officer       

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Certification of Principal Executive Officer

|I, William J. Gervais, certify that:
|------------------------------------
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|Date:  February 13, 2003            
|                                    
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Certification of Principal Financial Officer

|I, Frederic T. Boyer, certify that:
|-----------------------------------
|                                   
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|Date:  February 13, 2003           
|                                   
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|                                   

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EXHIBIT INDEX

|Exhibit No. |  | Description                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------
|            |  |                                                                                                        
|99.1        |  | Certification by Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            |  |                                                                                                        
|99.2        |  | Certification by Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            |  |                                                                                                        
|99.3        |  | Press release issued February 12, 2003.