SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  Form
10-Q
  
 
 R
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the Quarterly Period Ended March 31, 2008
 
 OR
 
 £
              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 þ     No 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 o     No þ
 
 Total
shares of common stock without par value outstanding at March 31, 2008 is
12,253,117.
  
 1
  QUALSTARCORPORATION
  FORM
10-Q
  FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2008
  INDEX
 
 
 PART
      I — FINANCIAL INFORMATIONItem
      1.
              Financial Statements· Condensed
      Consolidated Balance Sheets — March 31, 2008 and June 30,
      2007
              3· Condensed
      Consolidated Statements of Operations — Three and Nine Months ended March
      31, 2008and 2007
              4· Condensed
      Consolidated Statements of Cash Flows — Nine Months ended March 31, 2008
      and 2007
              5· Condensed
      Consolidated Statement of Changes in Shareholders’ Equity — Nine months
      ended March 31, 2008
              6·Notes to
      Interim Condensed Consolidated Financial Statements
              7Item
      2.
              Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
              13Item
      3.
              Qualitative and Quantitative Disclosures About Market
      Risk
              19Item
      4.
              Controls and Procedures
              19PART
      II — OTHER INFORMATIONItem
      6.
              Exhibits
              20Signatures
              21
  2
 Index
  PART
I — FINANCIAL INFORMATION
 
 
 ITEM1.FINANCIAL
STATEMENTS
 
 QUALSTAR
CORPORATION
 
 CONDENSEDCONSOLIDATED BALANCE SHEETS
 
 (In
thousands)
 
 
 March
      31,
                2008
              
              
              June
      30,
                2007(Unaudited)
              
              
              (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              9,705
              
              
              $
              7,697Marketable
      securities, short-term
              
              
              9,423
              
              
              
              9,574Receivables,
      net of allowances of $111 and $170 at March 31, 2008, and June 30, 2007,
      respectively
              
              
              3,090
              
              
              
              3,462Inventories,
      net
              
              
              5,870
              
              
              
              5,928Prepaid
      expenses and other current assets
              
              
              521
              
              
              
              576Prepaid
      income taxes
              
              
              —
              
              
              
              137Total
      current assets
              
              
              28,609
              
              
              
              27,374Property
      and equipment, net
              
              
              497
              
              
              
              601Marketable
      securities, long-term
              
              
              14,221
              
              
              
              15,994Other
      assets
              
              
              94
              
              
              
              94Total
      assets
              
              $
              43,421
              
              
              $
              44,063LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              1,008
              
              
              $
              654Accrued
      payroll and related liabilities
              
              
              394
              
              
              
              455Other
      accrued liabilities
              
              
              1,080
              
              
              
              1,113Total
      current liabilities
              
              
              2,482
              
              
              
              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 at March 31, 2008 and June 30, 2007
              
              
              18,676
              
              
              
              18,593Accumulated
      other comprehensive income (loss)
              
              
              273
              
              
              
              (55
              )Retained
      earnings
              
              
              21,945
              
              
              
              23,303Total
      shareholders’ equity
              
              
              40,894
              
              
              
              41,841Total
      liabilities and shareholders’ equity
              
              $
              43,421
              
              
              $
              44,063
  
 See
the accompanying notes to these interim condensed consolidated financial
statements.
  3
 Index
  QUALSTAR
CORPORATION
 
 CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS
 
 (Unaudited)
(In thousands, except per share data)
 
 
 Three
      Months Ended
                March
      31,
              
              
              Nine
      Months Ended
                March
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      revenues
              
              $
              5,171
              
              
              $
              4,884
              
              
              $
              16,552
              
              
              $
              14,826Cost of goods
      sold
              
              
              3,385
              
              
              
              3,546
              
              
              
              11,097
              
              
              
              10,552Gross
      profit
              
              
              1,786
              
              
              
              1,338
              
              
              
              5,455
              
              
              
              4,274Operating
      expenses:Research and
      development
              
              
              772
              
              
              
              846
              
              
              
              2,270
              
              
              
              2,352Sales and
      marketing
              
              
              810
              
              
              
              659
              
              
              
              2,409
              
              
              
              2,310General and
      administrative
              
              
              904
              
              
              
              764
              
              
              
              2,561
              
              
              
              2,320Total operating
      expenses
              
              
              2,486
              
              
              
              2,269
              
              
              
              7,240
              
              
              
              6,982Loss from
      operations
              
              
              (700
              )
              
              
              (931
              )
              
              
              (1,785
              )
              
              
              (2,708
              )Investment
      income
              
              
              378
              
              
              
              312
              
              
              
              1,215
              
              
              
              1,064Loss before income
      taxes
              
              
              (322
              )
              
              
              (619
              )
              
              
              (570
              )
              
              
              (1,644
              )Provision for income
      taxes
              
              
              —
              
              
              
              48
              
              
              
              17
              
              
              
              48Net
    loss
              
              $
              (322
              )
              
              $
              (667
              )
              
              $
              (587
              )
              
              $
              (1,692
              )Loss
      per share:Basic and
      Diluted
              
              $
              (0.03
              )
              
              $
              (0.05
              )
              
              $
              (0.05
              )
              
              $
              (0.14
              )Shares
      used to compute loss per share:Basic and
      Diluted
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253Cash dividends declared per
      common share
              
              $
              0.06
              
              
              $
              0.00
              
              
              $
              0.06
              
              
              $
              0.00
 
 
 See
the accompanying notes to these interim condensed consolidated financial
statements.
  4
 Index
  QUALSTAR
CORPORATION
 
 CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS
 
 (Unaudited)
(In thousands)
 
 
 Nine
      Months Ended
                March
      31,2008
              
              
              2007OPERATING
      ACTIVITIES:Net
      loss
              
              $
              (587
              )
              
              $
              (1,692
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Share
      based compensation
              
              
              83
              
              
              
              53Loss
      on marketable securities
              
              
              —
              
              
              
              50Depreciation
      and amortization
              
              
              217
              
              
              
              324Provision
      for bad debts and returns, net of recoveries
              
              
              2
              
              
              
              36Changes
      in operating assets and liabilities:Receivables,
      net
              
              
              370
              
              
              
              (386
              )Inventories,
      net
              
              
              58
              
              
              
              971Prepaid
      and other assets
              
              
              55
              
              
              
              (97
              )Prepaid
      income taxes
              
              
              137
              
              
              
              40Accounts
      payable
              
              
              354
              
              
              
              367Accrued
      payroll and related liabilities
              
              
              (61
              )
              
              
              (124
              )Other
      accrued liabilities
              
              
              (24
              )
              
              
              (273
              )Net
      cash provided by (used in) operating activities
              
              
              604
              
              
              
              (731
              )INVESTING
      ACTIVITIES:Purchases
      of property, equipment and leasehold improvements
              
              
              (113
              )
              
              
              (18
              )Proceeds
      from sale of marketable securities
              
              
              21,484
              
              
              
              12,660Purchases
      of marketable securities
              
              
              (19,232
              )
              
              
              (9,006
              )Net
      cash provided by investing activities
              
              
              2,139
              
              
              
              3,636FINANCING
      ACTIVITIES:Cash
      dividends on common shares
              
              
              (735
              )
              
              
              —Net
      cash used in financing activities
              
              
              (735
              )
              
              
              —Net
      change in cash and cash equivalents
              
              
              2,008
              
              
              
              2,905Cash
      and cash equivalents, beginning of period
              
              
              7,697
              
              
              
              6,845Cash
      and cash equivalents, end of period
              
              $
              9,705
              
              
              $
              9,750Supplemental
      cash flow disclosure:Income
      taxes paid
              
              $
              7
              
              
              $
              7
 
 
 See
the accompanying notes to these interim condensed consolidated financial
statements.
  5
 Index
  QUALSTAR
CORPORATION
 
 CONDENSEDCONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’
EQUITY
 
 NINE
MONTHS ENDED MARCH 31, 2008
 
 (Unaudited)
(In thousands)
 AccumulatedOtherCommon
      Stock
                
                
                Comprehensive
                
                
                RetainedShares
                
                
                Amount
                
                
                Loss
                
                
                Earnings
                
                
                TotalBalance
      at July 1, 2007
                
                
                12,253
                
                
                $
                18,593
                
                
                $
                (55
                )
                
                $
                23,303
                
                
                $
                41,841Share
      based compensation
                
                
                —
                
                
                
                83
                
                
                
                —
                
                
                
                —
                
                
                
                83Cash
      dividends on common shares
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (735
                )
                
                
                (735
                )Cumulative
      effect of a change in accounting principle (FIN48)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (36
                )
                
                
                (36
                )Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (587
                )
      )
                
                
                (587
                )Change
      in unrealized losses on investments
                
                
                —
                
                
                
                —
                
                
                
                328
                
                
                
                —
                
                
                
                328Comprehensive
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (259
                )Balance
      at March 31, 2008
                
                
                12,253
                
                
                $
                18,676
                
                
                $
                273
                
                
                $
                21,945
                
                
                $
                40,894
 
 See
the accompanying notes to these condensed consolidated financial
statements.
  6
 Index
  QUALSTAR
CORPORATION
 
 NOTESTO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
 
 (Unaudited)
 
 
 Note
1 - Basis of Presentation and Consolidation
 
 Basis
of Presentation
  In the
opinion of management, the accompanying condensed consolidated 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.
  Basis of
Consolidation
 The
consolidated financial statements include the accounts and operations of
Qualstar and its wholly owned subsidiary, Qualstar Sales and Service
Corporation. All significant intercompany accounts have been
eliminated.
 
 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.
 
 The
following table sets forth the computation of basic and diluted net loss per
share for the three and Nine months ended March 31, 2008 and 2007:
 In
      Thousands
                (Except
      per share amounts)Three
      Months Ended
                March
      31,
              
              
              Nine
      Months Ended
                March
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007Net loss
      (a)
              
              $
              (322
              )
              
              $
              (667
              )
              
              $
              (587
              )
              
              $
              (1,692
              )Weighted average outstanding
      shares of common stock (b)
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253Dilutive potential common shares
      from employee stock options
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Common stock and common stock
      equivalents (c)
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253
              
              
              
              12,253Loss
      per share:Basic net loss per share
      (a)/(b)
              
              $
              (0.03
              )
              
              $
              (0.05
              )
              
              $
              (0.05
              )
              
              $
              (0.14
              )Diluted net loss per share
      (a)/(c)
              
              $
              (0.03
              )
              
              $
              (0.05
              )
              
              $
              (0.05
              )
              
              $
              (0.14
              )
  7
 Index
  QUALSTAR
CORPORATION
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
 
 (Unaudited)
 
 
 Stock
options are excluded for the three months and nine months ended March 31, 2008
and 2007 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
securities that 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 March 31, 2008 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 (in thousands):
 
 March
      31,
                2008
              
              
              June
      30,
                2007Raw
      materials, net
              
              $
              5,228
              
              
              $
              5,234Finished
      goods
              
              
              642
              
              
              
              694$
              5,870
              
              
              $
              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 for disclosures 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.
 
 Activity
in the liability for product warranty for the periods presented were as follows
(in thousands):
 
 Three
      Months Ended March 31, 2008
              
              
              Nine
      Months Ended
                March
      31, 2008Beginning
      balance
              
              $
              184
              
              
              $
              174Cost
      of warranty claims
              
              
              (20
              )
              
              
              (55
              )Accruals
      for product warranties
              
              
              19
              
              
              
              64Ending
      balance
              
              $
              183
              
              
              $
              183
 
 
 Note
6 - Comprehensive Loss
  For the nine months ended March 31, 2008 and 2007, comprehensive loss amounted
to approximately $259,000 and $1,351,000, 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.
  8
 Index
  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.
  9
 Index
  QUALSTAR
CORPORATION
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
 
 (Unaudited))
 
 
 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 March 31,
2008.  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.
 
 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 manage and monitor performance. 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. As the power
supply segment grew in the last two years to represent greater than 10% of
combined revenues, a framework for internal resource allocations has been
implemented for the three months and nine months ended March 31, 2008 and March
31, 2007. 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.
  10
 Index
  QUALSTAR
CORPORATION
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
 
 (Unaudited)
 
 
 Segment
revenue, loss before taxes and total assets were as follows (in
thousands):
 
 Three
      Months Ended
                March
      31
              
              Nine
      Months Ended
                March
      31,2008
              
              2007
              
              2008
              
              2007RevenueTape
      Libraries:Product
              
              $
              3,457
              
              
              $
              3,502
              
              
              $
              11,788
              
              
              $
              10,253Service
              
              
              641
              
              
              
              588
              
              
              
              1,921
              
              
              
              2,126Total Tape
      Libraries
              
              
              4,098
              
              
              
              4,090
              
              
              
              13,709
              
              
              
              12,379Power
      Supplies
              
              
              1,073
              
              
              
              794
              
              
              
              2,843
              
              
              
              2,447Consolidated
      Revenue
              
              $
              5,171
              
              
              $
              4,884
              
              
              $
              16,552
              
              
              $
              14,826
 
 
 Three
      Months Ended
                March
      31
              
              Nine
      Months Ended
                March
      31,2008
              
              2007
              
              2008
              
              2007Income
      (Loss) before TaxesTape
      Libraries
              
              $
              (440
              )
              
              $
              (637
              )
              
              $
              (748
              )
              
              $
              (1,726
              )Power
      Supplies
              
              
              118
              
              
              
              18
              
              
              
              178
              
              
              
              82Consolidated
      Loss before Taxes
              
              $
              (322
              )
              
              $
              (619
              )
              
              $
              (570
              )
              
              $
              (1,644
              )
 
 
 March
      31
              
              June
      302008
              
              2007Total
      AssetsTape
      Libraries
              
              $
              42,408
              
              
              $
              43,228Power
      Supplies
              
              
              1,013
              
              
              
              835Consolidated
      Assets
              
              $
              43,421
              
              
              $
              44,063
 
 
 Note
10 - Recent Accounting Pronouncements
  11
 Index
  QUALSTAR
CORPORATION
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
 
 (Unaudited)
 
 
 SFAS 157, Fair Value
Measurements, issued by the Financial Accounting Standards Board (“FASB”)
in September 2006, 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.
  12
 Index
  ITEM2.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 currently offer tape libraries for two popular tape drive
technologies including LTO (Linear Tape-Open tape format) and AIT (Advanced
Intelligent Tape).  We have discontinued sales of libraries with SAIT
(Super Advanced Intelligent Tape), and DLT (Digital Linear Tape) tape drives due
to declining demand for those tape drive technologies.
 
 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.
  13
 Index
  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.
 
 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.
  14
 Index
  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 condensed
consolidated 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 sets forth certain financial data, as a percentage of net
revenues, for the periods indicated:
 
 Three
      Months Ended
                March
      31,
              
              
              Nine
      Months Ended
                March
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost of goods
      sold
              
              
              65.5
              
              
              
              72.6
              
              
              
              67.0
              
              
              
              71.2Gross
      profit
              
              
              34.5
              
              
              
              27.4
              
              
              
              33.0
              
              
              
              28.8Operating
      expenses:Research and
      development
              
              
              14.9
              
              
              
              17.3
              
              
              
              13.7
              
              
              
              15.9Sales and
      marketing
              
              
              15.7
              
              
              
              13.5
              
              
              
              14.6
              
              
              
              15.6General and
      administrative
              
              
              17.5
              
              
              
              15.6
              
              
              
              15.5
              
              
              
              15.6Total operating
      expenses
              
              
              48.1
              
              
              
              46.4
              
              
              
              43.8
              
              
              
              47.1Loss from
      operations
              
              
              (13.6
              )
              
              
              (19.0
              )
              
              
              (10.8
              )
              
              
              (18.3
              )Investment
      income
              
              
              7.3
              
              
              
              6.4
              
              
              
              7.3
              
              
              
              7.2Loss before income
      taxes
              
              
              (6.3
              )
              
              
              (12.6
              )
              
              
              (3.5
              )
              
              
              (11.1
              )Provision for income
      taxes
              
              
              0.0
              
              
              
              1.0
              
              
              
              0.1
              
              
              
              0.3Net
    loss
              
              
              (6.3
              )
      %
              
              
              (13.6
              )
      %
              
              
              (3.6
              )
      %
              
              
              (11.4
              )
      %
  15
 Index
  We have
two operating segments for financial reporting purposes:  tape
libraries and power supplies, as discussed in Note 9 of the Notes to Condensed
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
                March
      31
              
              
              Nine
      Months Ended
                March
      312008
              
              
              2007
              
              
              2008
              
              
              2007Tape
      Library revenues:TLS
              
              
              31.4
              %
              
              
              41.5
              %
              
              
              32.4
              %
              
              
              37.0
              %RLS
              
              
              7.6
              
              
              
              7.7
              
              
              
              9.8
              
              
              
              8.2XLS
              
              
              4.4
              
              
              
              5.1
              
              
              
              6.7
              
              
              
              5.343.4
              
              
              
              54.3
              
              
              
              48.9
              
              
              
              50.5Other
      revenues:Power
      Supplies
              
              
              20.8
              
              
              
              16.3
              
              
              
              17.2
              
              
              
              16.5Service
              
              
              12.4
              
              
              
              12.0
              
              
              
              11.6
              
              
              
              14.4Media
              
              
              17.7
              
              
              
              12.6
              
              
              
              16.6
              
              
              
              13.2Miscellaneous
              
              
              5.7
              
              
              
              4.8
              
              
              
              5.7
              
              
              
              5.4100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
 
 
 Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
  Net Revenue. Net revenues increased to
$5.2 million for the three months ended March 31, 2008 from $4.9 million for the
three months ended March 31, 2007, an increase of $0.3 million, or 5.9%. No
single customer accounted for more than ten percent of the Company’s
consolidated revenue for the three-month periods ended March 31, 2008 and March
31, 2007.
 
 Segment Revenue. Revenues
reported for the segments shown below are presented on a basis consistent with
U.S. GAAP. Revenues reported in Note 9 - Segment Information, in Notes to
Consolidated Condensed Financial Statements included in Item 1 of this report,
are presented in accordance with SFAS 131, Disclosures about Segments of an
Enterprise and Related Information.
  Tape Libraries - Net
revenues were comparable at $4.1 million for the three months ended March 31,
2008 and March 31, 2007. No single customer accounted for more than ten percent
of tape library revenues for the three-month periods ended March 31, 2008 and
March 31, 2007.
 
 Power Supplies - Net
revenues increased to $1,073,000 for the three months ended March 31, 2008 from
$794,000 for the three months ended March 31, 2007, an increase of $279,000, or
35.1%. The increase in revenues is attributed to growth in both sales to
contract manufacturers and distribution sales. Two customers on a standalone
basis accounted for 21.6% and 16.2%, respectively, or 37.8% in the aggregate, of
power supply revenue for the three months ended March 31, 2008. One customer on
a standalone basis accounted for 36.0% of power supply revenue for the three
months ended March 31, 2007.
 
 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 $1.8 million for the three months
ended March 31, 2008 from $1.3 million for the three months ended March 31,
2007. The increase of $0.5 million, or 33.5%, is primarily due to increased
revenue, a change in product mix and efficiencies achieved in material and labor
management.
  16
 Index
  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 $772,000 for the three months ended March 31,
2008 from $846,000 for the three months ended March 31, 2007. The decrease of
$74,000, or 8.7% was primarily attributed to lower consulting, independent
software vendor and miscellaneous engineering 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 increased to $810,000 for the three months ended March 31, 2008 from
$659,000 for the three months ended March 31, 2007. The increase of $151,000, or
22.9% is primarily attributed to an increase in commissions, advertising and
promotion and travel expenses.
 
 General and
Administrative.
General and administrative expenses include employee salaries and benefits and
professional service fees. General and administrative expenses increased to
$904,000 for the three months ended March 31, 2008 from $764,000 for the three
months ended March 31, 2007. The increase of $140,000, or 18.3% is primarily
attributed to Sarbanes Oxley compliance efforts.
 
 Investment Income. Investment income increased
to $378,000 for the three months ended March 31, 2008 from $312,000 for the
three months ended March 31, 2007. The increase of $66,000, or 21.2% is
primarily attributed to interest income received from a franchise tax refund
during the quarter ended March 31, 2008.In addition, we did not
realize any losses on the sale of securities during the quarter ended March 31,
2008, as compared to a $50K realized loss on the sale of securities during the
quarter ended March 31, 2007.
 
 Provision (Benefit)
for Income Taxes. We did not
record a provision or benefit for income taxes for the three months ended March
31, 2008.  We expensed various state income tax payments totalling
$7,000 and recorded an additional $41,000 reserve for the three months ended
March 31, 2007 relating to the franchise tax audit of fiscal years 2001 through
2003.
 
 
 Nine
Months Ended March 31, 2008 Compared to Nine Months Ended March 31,
2007
  Net Revenue. Net revenues increased to
$16.6 million for the nine months ended March 31, 2008 from $14.8 million for
the nine months ended March 31, 2007, an increase of $1.7 million, or 11.6%. No
single customer accounted for more than ten percent of the Company’s
consolidated revenue for the nine-month periods ended March 31, 2008 and March
31, 2007.
 
 Segment Revenue.Revenues
reported for the segments shown below are presented on a basis consistent with
U.S. GAAP. Revenues reported in Note 9 - Segment Information, in Notes to
Consolidated Condensed Financial Statements included in Item 1 of this report,
are presented in accordance with SFAS 131, Disclosures about Segments of an
Enterprise and Related Information.
  Tape Libraries - Net
revenues increased to $13.7 million for the nine months ended March 31, 2008
from $12.4 million for the nine months ended March 31, 2007, an increase of $1.3
million, or 10.7%. The increase in revenues is attributed to higher revenues
from our XLS and RLS tape libraries, and media and miscellaneous revenues,
partially offset by lower revenues from our TLS tape libraries and service
revenues. No single customer accounted for more than ten percent of tape library
revenues for the nine-month periods ended March 31, 2008 and March 31,
2007.
 
 Power Supplies - Net
revenues increased to $2.8 million for the nine months ended March 31, 2008 from
$2.4 million for the nine months ended March 31, 2007, an increase of $0.4
million, or 16.2%. The increase in revenues is attributed to growth in both
sales to contract manufacturers and distribution sales. Two customers on a
standalone basis accounted for 21.2% and 15.0%, respectively, or 36.2% in the
aggregate,  of power supply revenue for the nine months ended March
31, 2008.  Two customers on a standalone basis accounted for 31.4% and
11.9%, respectively, or 43.3% in the aggregate, of power supply revenue for the
nine months ended March 31, 2007.
 
 Gross Profit. Gross profit increased to
$5.5 million for the nine months ended March 31, 2008 from $4.3 million for the
nine months ended March 31, 2007. The increase of $1.2 million, or 27.6%, is
primarily due to increased revenue, a change in product mix and efficiencies
achieved in material and labor management.
  17
 Index
  Research and Development. Research and development
expenses remained comparable at $2.3 million for the nine months ended March 31,
2008 and March 31, 2007.
 
 Sales and Marketing. Sales and marketing
expenses increased to $2.4 million for the nine months ended March 31, 2008 from
$2.3 million for the nine months ended March 31, 2007. The increase of $0.1
million, or 4.3% is primarily due to increased commissions and travel expenses,
partially offset by the closure of our United Kingdom office.
 
 General and
Administrative.
General and administrative expenses increased to $2.6 million for the nine
months ended March 31, 2008 from $2.3 million for the nine months ended March
31, 2007. The increase of $0.3 million, or 10.4% is primarily due to increased
accounting consulting expenses attributed to Sarbanes Oxley compliance
efforts and compensation expense partially offset by lower depreciation and
amortization and bad debts expense.
 
 Investment Income. Investment income increased
to $1.2 million for the nine months ended March 31, 2008 from $1.1 million for
the nine months ended March 31, 2007. The increase of $0.1 million, or 14.2% is
primarily due tomaturities of older
securities reinvested into higher yielding short-term securities and interest
income received from a franchise tax refund during the quarter ended March 31,
2008.  In addition, we did not realize any losses on the sale of
securities during the quarter ended March 31, 2008, as compared to a $50K
realized loss on the sale of securities during the quarter ended March 31,
2007.
 
 Provision (Benefit) for Income
Taxes. We
recorded a provision for income taxes of $17,000 for the nine months ended March
31, 2008 relating to state income taxes paid during the three months ended
September 30, 2007 and interest expense accrued as part of our liability
resulting from our adoption on July 1, 2007 of FIN48, Accounting for Uncertainties in
Income Taxes – an Interpretation of FASB Statement No.
109.  See Note 8 of Notes to Condensed Consolidated Financial
Statements in Item 1 of this report for a further discussion of
FIN48.  We expensed various state income tax payments totalling $7,000
for the nine months ended March 31, 2007 and recorded an additional $41,000
reserve for the nine months ended March 31, 2007 relating to franchise tax
audits of fiscal years 2001 through 2003.
 
 LIQUIDITY
AND CAPITAL RESOURCES
  Cash
provided by operating activities was $604,000 in the nine months ended March 31,
2008, primarily attributed to a decrease in receivables and prepaid income
taxes, and an increase in accounts payable, partially offset by the year to date
net loss. Cash used in operating activities was $781,000 in the nine months
ended March 31, 2007, primarily attributed to the net loss for the quarter and
an increase in receivables, a decrease in accrued payroll and related
liabilities, and a decrease in other accrued liabilities, partially offset by a
decrease in inventories and an increase in accounts payable.
 
 Cash
provided by investing activities was $2.1 million in the nine months ended March
31, 2008, primarily attributed to proceeds from the sale of marketable
securities, partially offset by purchases of marketable securities and the
purchase of property and equipment. Cash provided by investing activities was
$3.7 million in the nine months ended March 31, 2007, primarily attributed to
proceeds from the sale of marketable securities, partially offset by purchases
of marketable securities.
 
 Cash used
in financing activities was $735,000 attributed to cash dividends paid on common
shares.  Cash was not used in or provided by financing activities
during the nine months ended March 31, 2007.
 
 As of
March 31, 2008, we had $9.7 million in cash and cash equivalents and $23.6
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.
  18
 Index
  ITEM3. 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.
 
 
 ITEM4.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 March 31, 2008, 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 March 31, 2008 that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
 
 
 PART
II — OTHER INFORMATION
  ITEM
1A.   Risk
Factors
 
 There
have been no significant changes to the risk factors disclosed in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2007.
 
 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 March 25, 2008:
 
 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 2009 or until their successors
are elected and qualified:
 
 Number of Votes CastName
              
              For
              
              
              AuthorityWithheldWilliam
      J. Gervais
              
              
              8,909,996
              
              
              
              1,700,479Richard
      A. Nelson
              
              
              8,909,996
              
              
              
              1,700,479Stanley
      W. Corker
              
              
              10,502,819
              
              
              
              107,656Carl
      W. Gromada
              
              
              10,524,924
              
              
              
              85,551Robert
      A. Meyer
              
              
              10,502,819
              
              
              
              107,656Robert
      E. Rich
              
              
              8,909,996
              
              
              
              1,700,479
 
 2. To
approve the appointment of Ernst & Young LLP as independent registered
public accounting firm to audit our financial statements for the fiscal year
ending June 30, 2008.Votes for
were 10,521,012; votes against were 39,612; and votes abstained were
49,851.
  19
 Index
  ITEM6. EXHIBITS
 
 Exhibit
      No.
              
              Exhibit
      Index31.1
              
              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.
  20
 Index
  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
      CORPORATIONDated:
      May 14, 2008
              
              By: /s/WILLIAMJ.GERVAISWilliam J. GervaisChief
      Executive Officer,President
      and Director(Principal
      Executive Officer)By: /s/ANDREWA.FARINAAndrew A. FarinaChief
      Financial Officer(Principal
      Financial Officer)




21