QUALSTAR CORP - Quarter Report: 2009 March (Form 10-Q)

form10q.htm

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, 2009

	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, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer ¨ Smaller reporting company 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, 2009 is 12,253,117.

QUALSTAR CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009

INDEX

	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	· Condensed Consolidated Balance Sheets — March 31, 2009 and June 30, 2008	1
	· Condensed Consolidated Statements of Operations — Three and Nine Months ended March 31, 2009 and 2008	2
	· Condensed Consolidated Statements of Cash Flows — Nine Months ended March 31, 2009 and 2008	3
	· Condensed Consolidated Statement of Changes in Shareholders’ Equity — Nine Months ended March 31, 2009	4
	· Notes to Interim Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Qualitative and Quantitative Disclosures About Market Risk	19

Item 4T.	Controls and Procedures	19

	PART II — OTHER INFORMATION

Item 1A.	Risk Factors	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 6.	Exhibits	21
	Signatures	22

Index

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QUALSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	March 31, 2009		June 30, 2008
	(Unaudited)			(1	)
ASSETS
Current assets:
Cash and cash equivalents	$	2,340	$	6,744
Marketable securities, short-term		17,224		11,091
Receivables, net of allowances of $112 at March 31, 2009, and $82 at June 30, 2008		2,178		2,962
Inventories, net		6,880		6,109
Prepaid expenses and other current assets		426		467
Total current assets		29,048		27,373
Property and equipment, net		414		526
Marketable securities, long-term		9,245		14,703
Other assets		57		55
Total assets	$	38,764	$	42,657

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	954	$	1,197
Accrued payroll and related liabilities		410		519
Other accrued liabilities		866		1,774
Total current liabilities		2,230		3,490
Other long term liabilities		46		46

Commitments and contingencies

Shareholders’ equity:
Preferred stock, no par value; 5,000 shares authorized; no shares issued		—		—
Common stock, no par value; 50,000 shares authorized, 12,253 shares issued and outstanding as of March 31, 2009 and June 30, 2008		18,773		18,705
Accumulated other comprehensive income		191		108
Retained earnings		17,524		20,308
Total shareholders’ equity		36,488		39,121
Total liabilities and shareholders’ equity	$	38,764	$	42,657

(1) Derived from audited financial statements

See notes to condensed consolidated financial statements.

Index

QUALSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (In thousands, except per share data)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2009			2008			2009			2008
Net Revenues	$	4,098		$	5,171		$	14,123		$	16,552
Cost of goods sold		2,694			3,385			9,362			11,097
Gross profit		1,404			1,786			4,761			5,455
Operating expenses:
Research and development		807			772			2,315			2,270
Sales and marketing		679			810			2,127			2,409
General and administrative		842			904			2,410			2,561
Total operating expenses		2,328			2,486			6,852			7,240
Loss from operations		(924	)		(700	)		(2,091	)		(1,785	)
Investment Income		210			378			781			1,215
Loss before income taxes		(714	)		(322	)		(1,310	)		(570	)
Provision for income taxes		6			-			4			17
Net loss	$	(720	)	$	(322	)	$	(1,314	)	$	(587	)
Loss per common share:
Basic and Diluted	$	(0.06	)	$	(0.03	)	$	(0.11	)	$	(0.05	)
Weighted average common shares outstanding:
Basic and Diluted		12,253			12,253			12,253			12,253
Cash dividends declared per common share	$	0.06		$	0.06		$	0.18		$	0.06

See notes to condensed consolidated financial statements.

Index

QUALSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

	Nine Months Ended March 31,
	2009			2008
OPERATING ACTIVITIES:
Net loss	$	(1,314	)	$	(587	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Share based compensation		68			83
Gain on sale of marketable securities		(98	)		—
Depreciation and amortization		174			217
Provision for bad debts and returns		55			2
Changes in operating assets and liabilities:
Accounts receivable		729			370
Inventories		(771	)		58
Prepaid expenses and other assets		39			55
Prepaid income taxes		—			137
Accounts payable		(243	)		354
Accrued payroll and accrued liabilities		(109	)		(61	)
Income taxes payable		(7	)		11
Other accrued liabilities		(166	)		(35	)
Net cash (used in) provided by operating activities		(1,643	)		604

INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold improvements		(62	)		(113	)
Proceeds from sale of marketable securities		25,749			21,484
Purchases of marketable securities		(26,243	)		(19,232	)
Net cash (used in) provided by investing activities		(556	)		2,139

FINANCING ACTIVITIES:
Cash dividends on common shares		(2,205	)		(735	)
Net cash used in financing activities		(2,205	)		(735	)
Net change in cash and cash equivalents		(4,404	)		2,008
Cash and cash equivalents, beginning of period		6,744			7,697
Cash and cash equivalents, end of period	$	2,340		$	9,705
Supplemental cash flow disclosure:
Income taxes paid	$	11		$	7

See notes to condensed consolidated financial statements.

Index

QUALSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED MARCH 31, 2009

(Unaudited) (In thousands)

					Accumulated
					Other
	Common Stock				Comprehensive		Retained
	Shares		Amount		Income		Earnings			Total
Balance at July 1, 2008		12,253	$	18,705	$	108	$	20,308		$	39,121
Share-based compensation		—		68		—		—			68
Cash dividend on common shares		—		—		—		(1,470	)		(1,470	)
Comprehensive loss:
Net loss		—		—		—		(1,314	)		(1,314	)
Change in unrealized losses on investments		—		—		83		—			83
Comprehensive Loss		—		—		—		—			(1,231	)
Balance at March 31, 2009		12,253	$	18,773	$	191	$	17,524		$	36,488

See notes to condensed consolidated financial statements

Index

QUALSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation and Consolidation

Basis of Presentation

In the opinion of management, the accompanying consolidated condensed financial statements, including balance sheets and related interim statements of operations, cash flows, and stockholders’ equity, include all adjustments, consisting primarily of normal recurring items, which are necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include estimates of loss contingencies, product life cycles and inventory obsolescence, bad debts, sales returns, share based compensation forfeiture rates, the potential outcome of future tax consequences of events that have been recognized in our financial statements or tax returns, and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from management’s estimates and assumptions.

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and the financial statements and notes thereto included in the Qualstar Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 2008, filed with the Securities and Exchange Commission (“SEC”) on September 24, 2008.

Basis of Consolidation

The consolidated financial statements include the accounts and operations of Qualstar and its wholly owned subsidiary. All significant intercompany accounts have been eliminated.

Note 2 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

On July 1, 2008, we adopted Statement of Financial Accounting Standard (“SFAS”) Statement No. 157, Fair Value Measurements (“SFAS No. 157”) for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. See Note 6 – Financial Instruments.

On July 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115. SFAS No. 159 gives us the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis with the difference between the carrying value before election of the fair value option and the fair value recorded upon election as an adjustment to beginning retained earnings. We chose not to elect the fair value option for all marketable securities outstanding as of March 31, 2009.

On January 1, 2009, we adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. The adoption of SFAS No. 161 did not have a material impact on our financial statements.

Index

QUALSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Recent Accounting Pronouncements Not Yet Adopted

In April 2009, the Financial Accounting Standards Board (“FASB”) issued three Staff Positions (“FSPs”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly, clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured, FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income. FSP FAS 107-1 and Accounting Principles Board Opinion (“APB”) 28-1, Interim Disclosures about Fair Value of Financial Instruments, expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim periods. All of these FSPs are effective for us beginning June 15, 2009. We are assessing the potential impact that the adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 may have on our financial statements. FSP FAS 107-1 and APB 28-1 will result in increased disclosures in our interim periods.

In February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 to July 1, 2009 for us, for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We believe the adoption of the delayed items of SFAS No. 157 will not have a material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning July 1, 2009 and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in net income. SFAS No. 160 is effective for us beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We believe the adoption of SFAS No. 160 will not have a material impact on our financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS 162 will become effective July 1, 2009. We believe the adoption of SFAS 162 will not have a material impact on our financial statements.

Note 3 – Concentration of Credit Risk, Other Concentration Risks and Significant Customers

We are exposed to interest rate risks. 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 shorter duration fixed income securities. We have no outstanding debt nor do we utilize auction rate securities or derivative financial instruments in our investment portfolio.

Index

QUALSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

Our financial results could be affected by 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 dollar could make our products less competitive in foreign markets. Sales outside of North America represented approximately 21.3% of net revenues in the three months ended March 31, 2009, and 30.0% of net revenues in the three months ended March 31, 2008. Sales outside of North America represented approximately 26.0% of net revenues in the nine months ended March 31, 2009, and 27.8% of net revenues in the nine months ended March 31, 2008.

One customer accounted for 11.6% of the Company’s consolidated revenue for the three-month period ended March 31, 2009. The customer’s accounts receivable balance, net of specific allowances, totaled approximately 12.2% of net accounts receivable. No single customer accounted for more than ten percent of the Company’s consolidated revenue for the three-month period ended March 31, 2008.

One customer accounted for 11.2% of the Company’s consolidated revenue for the nine-month period ended March 31, 2009. The customer’s accounts receivable balance, net of specific allowances, totaled approximately 3.0% of net accounts receivable. No single customer accounted for more than ten percent of the Company’s consolidated revenue for the nine-month period ended March 31, 2008.

Sales and costs of goods sold related to tape library products only available from one supplier totaled approximately 15.1% and 20.9% for the three months ended March 31, 2009 and 26.0% and 30.6% for the three months ended March 31, 2008, respectively, of total sales and cost of goods sold. Sales and costs of goods sold totaled approximately 15.5% and 19.8% for the nine months ended March 31, 2009 and 23.3% and 26.1% for the nine months ended March 31, 2008, respectively, of total sales and cost of goods sold.

Note 4 – Loss Per Share

Qualstar calculates loss per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings

per Share. Basic loss 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 periods indicated:

	Three Months Ended March 31,						Nine Months Ended March 31,
In thousands (except per share amounts):	2009			2008			2009			2008
Net loss (a)	$	(720	)	$	(322	)	$	(1,314	)	$	(587	)
Weighted average outstanding shares of common stock (b)		12,253			12,253			12,253			12,253
Dilutive potential common shares from employee stock options		—			—			—			—
Common stock and common stock equivalents (c)		12,253			12,253			12,253			12,253
Loss per share:
Basic net loss per share (a)/(b)	$	(0.06	)	$	(0.03	)	$	(0.11	)	$	(0.05	)
Diluted net loss per share (a)/(c)	$	(0.06	)	$	(0.03	)	$	(0.11	)	$	(0.05	)

Stock options are excluded for the three and nine-month periods ended March 31, 2009 and 2008, respectively, from the computation of diluted loss per share, as the effect would have been anti-dilutive.

Index

QUALSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

Note 5 – Marketable Securities

Marketable securities consist primarily of commercial paper, U.S. government and agency securities, mortgage-backed securities and corporate bonds. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” these securities are classified in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities which Qualstar has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. All of Qualstar’s marketable securities were classified as available-for-sale at March 31, 2009 and June 30, 2008.

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. Gain (loss) on the sale of securities for the three months ended March 31, 2009 and 2008 was $35,000 and $(2,000), respectively. Gain on the sale of securities for the nine months ended March 31, 2009 and 2008 was $98,000 and $0, respectively. The change in net unrealized holding gain on available-for-sale securities that has been included in the other comprehensive income of shareholder’s equity during the nine months ended March 31, 2009 and 2008 was $83,000 and $328,000, respectively.

Note 6 – Financial Instruments

We adopted SFAS No. 157 on July 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

SFAS No. 157 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.

In addition to defining fair value, SFAS No. 157 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

In general, and where applicable, we use quoted prices in active markets for identical assets to determine fair value. This pricing methodology applies to our Level 1 investments such as U.S. treasuries and agency securities and exchange-traded mutual funds. If quoted prices in active markets for identical assets are not available to determine fair value, then we use quoted prices for similar assets or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2 and consist primarily of corporate bonds, mortgage-backed securities, and certain agency securities. While we own certain mortgage-backed fixed income securities, our portfolio as of March 31, 2009 does not contain direct exposure to subprime mortgages or structured vehicles that derive their value from subprime collateral. Our mortgage-backed securities are collateralized by prime residential mortgages and carry a 100% principal and interest guarantee, primarily from Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.

Index

QUALSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis at March 31, 2009 (in thousands):


	Level 1		Level 2		Net balance

Assets
Cash	$	625			$	625
Money Market Mutual fund		1,715				1,715
Commercial paper		–			$
U.S. government and agency securities		11,862		9,438		21,300
Mortgage-backed securities		–		3,050		3,050
Corporate bonds		–		1,619		1,619
Municipal securities		–		500		500
Total	$	14,202	$	14,607	$	28,809

Note 7 - Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or market. Inventories are comprised as follows (in thousands):

	March 31, 2009			June 30, 2008
Raw materials	$	6,770		$	6,053
Finished goods		732			785
Subtotal		7,502			6,838
Less: Inventory reserve		(622	)		(729	)
	$	6,880		$	6,109

Note 8 – 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.

Index

QUALSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

Activity in the liability for product warranty for the periods presented were as follows (in thousands):


	Three Months Ended March 31, 2009			Nine Months Ended March 31, 2009
Beginning balance	$	179		$	180
Cost of warranty claims		(16	)		(47	)
Accruals for product warranties		8			38
Ending balance	$	171		$	171

Note 9 – Comprehensive Loss

For the nine months ended March 31, 2009 and 2008, comprehensive loss amounted to approximately $1,231,000 and $259,000, 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 marketable securities.

Note 10 – Legal Proceedings

We are from time to time involved in various lawsuits and legal proceedings that arise in the ordinary course of business. At this time, we are not aware of any pending or threatened litigation against us that we expect will have a material adverse effect on our business, financial condition, liquidity or operating results. Legal claims are inherently uncertain, however, and it is possible that the Company’s business, financial condition, liquidity and/or operating results could be adversely affected in the future by legal proceedings.

Note 11 – Income Taxes

We recorded a provision for income taxes of $4,000 for the nine months ended March 31, 2009. 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 quarter and interest expense accrued as part of our liability resulting from our adoption on July 1, 2007 of FIN 48, Accounting for Uncertainties in Income Taxes – an Interpretation of FASB Statement No. 109.

The Company has recorded a full valuation allowance against its net deferred tax assets based on the Company’s assessment regarding the realizability of these net deferred tax assets in future periods.

Note 12 – Segment Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. This standard requires segmentation based on our internal organization and reporting of revenue and operating income based upon internal accounting methods. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. Our two segments are Tape Libraries and Power Supplies. The two segments discussed in this analysis are presented in the way we internally managed and monitored performance for the nine months ended March 31, 2009 and 2008. Our financial reporting systems present various data for management to operate the business, including internal profit and loss statements prepared on a basis consistent with U.S. GAAP. The tape library business has dominated our operations, thus, our operations and reporting have been set up to accommodate a single segment and attribute all revenues and expenses to the tape library side, with the power supply business being an ancillary part of overall operations. Allocations for internal resources were made for the nine months ended March 31, 2009 and 2008.

Index

QUALSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

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, or DC Voltages to other DC voltages for use in a wide variety of electronic equipment such as telecommunications equipment, machine tools, routers, switches, wireless systems and gaming devices.

Segment revenue, loss before taxes and total assets were as follows (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2009		2008		2009		2008
Revenue
Tape Libraries:
Product	$	2,325	$	3,457	$	7,922	$	11,788
Service		742		641		2,079		1,921
Total Tape Libraries		3,067		4,098		10,001		13,709
Power Supplies		1,031		1,073		4,122		2,843
Consolidated Revenue	$	4,098	$	5,171	$	14,123	$	16,552

	Three Months Ended March 31,						Nine Months Ended March 31,
	2009			2008			2009			2008
Income (Loss) before Taxes
Tape Libraries	$	(638	)	$	(440	)	$	(1,424	)	$	(748	)
Power Supplies		(76	)		118			114			178
Consolidated Loss before Taxes	$	(714	)	$	(322	)	$	(1,310	)	$	(570	)

	March 31, 2009			June 30, 2008
Total Assets
Tape Libraries	$	39,356		$	41,257
Power Supplies		(592	)		1,400
Consolidated Assets	$	38,764		$	42,657

Index

QUALSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

Note 13 – Subsequent Event

On May 7, 2009, the Company announced that it’s Board of Directors declared a cash dividend of $0.06 per share on its common stock. The cash dividend will be paid on June 3, 2009 to shareholders of record at the close of business on May 26, 2009. The dividend payment will be approximately $735,000.

Index

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

Statements in this Quarterly Report on Form 10-Q concerning the future business, operating results and financial condition of Qualstar including estimates, projections, statements relating to our business plans, objectives and operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements inherently are subject to risks and uncertainties, some of which we cannot predict or quantify. Our actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 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, LTO (Linear Tape-Open tape format) and AIT (Advanced Intelligent Tape).

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 into theirs, which they sell as part of a system or solution. We assist our customers with marketing and technical support.

We also design, develop and sell high-efficiency switching power supplies used in telecommunications equipment, servers, routers, switches, RAIDs, and similar applications. Our power supplies are sold under the N2Power brand name through independent sales representatives and distributors. The primary customers are original equipment manufacturers and contract manufacturers. We also utilize these power supplies in some of our tape libraries.

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.

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 the contract 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.

Financial Instruments

We measure fair value on all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) in accordance with SFAS No. 157, “Fair Value Measurements.” See “Note 6 – Financial Instruments.”

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.

Index

Share-Based Compensation

Share-based compensation is accounted for in accordance with SFAS 123R, Share-Based Payment. We use the Black-Scholes option pricing model to determine fair value of the award at the date of grant and recognize compensation expense over the vesting period. The inputs we use for the model require the use of judgment, estimates and assumptions regarding the expected volatility of the stock, the expected term the average employee will hold the option prior to the date of exercise, and the amount of share-based awards that are expected to be forfeited. Changes in these inputs and assumptions could occur and actual results could differ from these estimates, and our results of operations could be materially impacted.

Accounting for Income Taxes

We adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48) in the first quarter of fiscal year 2008. See Note 11 – Income Taxes to the consolidated condensed financial statements included in this Form 10-Q for further discussion.

We estimate our tax liability based on current tax laws in the statutory jurisdictions in which we operate. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets.

We maintain a valuation allowance to reduce our deferred tax assets due to the uncertainty surrounding the timing of realizing the benefits of net deferred tax assets in future years. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. In the event we were to determine that we would be able to realize all or part of our net deferred tax asset in the future, the valuation allowance would be decreased accordingly.

We may periodically undergo examinations by the federal and state regulatory authorities and the Internal Revenue Service. We may be assessed additional taxes and/or penalties contingent on the outcome of these examinations. Our previous examinations have not resulted in any unfavorable or significant assessments.

RESULTS OF OPERATIONS

The following table reflects, as a percentage of net revenues, statements of operations data for the periods indicated:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2009			2008			2009			2008
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		65.7			65.5			66.3			67.0
Gross profit		34.3			34.5			33.7			33.0
Operating expenses:
Research and development		19.7			14.9			16.4			13.7
Sales and marketing		16.6			15.7			15.1			14.6
General and administrative		20.5			17.5			17.1			15.5
Total operating expenses		56.8			48.1			48.6			43.8
Loss from operations		(22.5	)		(13.6	)		(14.9	)		(10.8	)
Investment income		5.1			7.3			5.5			7.3
Loss before income taxes		(17.4	)		(6.3	)		(9.4	)		(3.5	)
Provision for income taxes		0.1			0.0			0.0			0.1
Net loss		(17.5	)%		(6.3	)%		(9.4	)%		(3.6	)%

Index

We have two operating segments for financial reporting purposes: tape libraries and power supplies, as discussed in Note 12 of the Notes to Consolidated Financial Statements in Item 1 of this report. The following table summarizes our revenue by major product line and by operating segment:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2009			2008			2009			2008
Tape Library revenues:
TLS		20.9	%		31.4	%		23.5	%		32.4	%
RLS		6.1			7.6			7.0			9.8
XLS		7.5			4.4			6.9			6.7
		34.5			43.4			37.4			48.9
Other library revenues:
Service		18.1			12.4			14.7			11.6
Media		16.4			17.7			13.8			16.6
Upgrades, spares		5.8			5.7			4.9			5.7
		40.3			35.8			33.4			33.9

Total Library revenues		74.8			79.2			70.8			82.8

Power Supply revenues		25.2			20.8			29.2			17.2

		100.0	%		100.0	%		100.0	%		100.0	%

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net Revenue. Net revenues decreased to $4.1 million for the three months ended March 31, 2009 from $5.2 million for the three months ended March 31, 2008, a decrease of $1.1 million, or 20.8%. One customer accounted for 11.6% of the Company’s consolidated revenue for the three-month period ended March 31, 2009. The customer’s accounts receivable balance, net of specific allowances, totaled approximately 12.2% of net accounts receivable. No single customer accounted for more than ten percent of the Company’s consolidated revenue for the three-month period ended March 31, 2008.

Segment Revenue

Tape Libraries – Net tape library revenues decreased to $3.1 million for the three months ended March 31, 2009 from $4.1 million for the three months ended March 31, 2008, a decrease of $1.0 million, or 25.2%. The decrease in revenues is attributed primarily to a $0.8 million decline in revenues from our TLS and RLS tape library product lines and a $0.2 million decline in revenues from sales of tape media. One customer accounted for 15.5% of tape library revenues for the three-month period ended March 31, 2009. The customer’s accounts receivable balance, net of specific allowances, totaled approximately 17.3% of net accounts receivable. One customer accounted for 12.0% of tape library revenues for the three-month period ended March 31, 2008. The customer’s accounts receivable balance, net of specific allowances, totaled approximately 10.4% of net accounts receivable.

Power Supplies – Net revenues from power supplies decreased to $1.0 million for the three months ended March 31, 2009 from $1.1 million for the three months ended March 31, 2008, a decrease of $42,000, or 3.9%. The decrease in revenues is attributed to lower sales to original equipment manufacturer customers. Two customers accounted for 28.2% and 18.5%, respectively, or 56.7% in the aggregate, of power supply sales for the three months ended March 31, 2009. The customers’ accounts receivable balances, net of specific allowances, totaled approximately 10.4% and 31.9%, respectively, of net accounts receivable. Two customers accounted for 21.6% and 16.2%, respectively, or 37.8% in the aggregate, of power supply sales for the three months ended March 31, 2008. The customers’ accounts receivable balances, net of specific allowances, totaled approximately 23.6% and 15.3%, respectively, of net accounts receivable.

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 decreased to $1.4 million, or 34.3% of net revenues, for the three months ended March 31, 2009 from $1.8 million, or 34.5% of net revenues, for the three months ended March 31, 2008. The decrease in gross profit correlates to the decrease in revenues, partially offset by a change in product mix.

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 remained comparable at $0.8 million for the three months ended March 31, 2009 and $0.8 million for the three months ended March 31, 2008.

Sales and Marketing. Sales and marketing expenses consist primarily of employee salaries and benefits, sales commissions, trade show costs, advertising and travel related expenses. Sales and marketing expenses decreased to $0.7 million for the three months ended March 31, 2009 from $0.8 million for the three months ended March 31, 2008. The decrease of $0.1 million, or 16.2%, is primarily due to a decrease in commission expense correlated to lower revenues and lower advertising and promotion expenses.

General and Administrative. General and administrative expenses include employee salaries and benefits and professional service fees. General and administrative expenses decreased to $0.8 million for the three months ended March 31, 2009 from $0.9 million for the three months ended March 31, 2008. The decrease of $0.1 million, or 6.9%, is primarily due to a decrease in accounting and audit related expenses including fees associated with the Sarbanes Oxley compliance efforts that were completed in fiscal 2008, partially offset by an increase in compensation related expenses, bad debt and legal expenses.

Investment Income. Investment income decreased to $0.2 million for the three months ended March 31, 2009 from $0.4 million for the three months ended March 31, 2008. The decrease of $0.2 million, or 44.4% is primarily due to the lower interest rate environment in the recent quarter and partially due to having approximately $4.5 million less cash, cash equivalents and marketable securities in the quarter ended March 31, 2008 compared to the prior year quarter.

Provision for Income Taxes. We recorded a provision for income taxes of $6,000 for the three months ended March 31, 2009. We did not record a provision or benefit for income taxes for the three months ended March 31, 2008.

Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31, 2008

Net Revenue. Net revenues decreased to $14.1 million for the nine months ended March 31, 2009 from $16.5 million for the nine months ended March 31, 2008, a decrease of $2.4 million, or 14.7%. One customer accounted for 11.2% of the Company’s consolidated revenue for the nine-month period ended March 31, 2009. The customer’s accounts receivable balance, net of specific allowances, totaled approximately 3.0% of net accounts receivable. No single customer accounted for more than ten percent of the Company’s consolidated revenue for the nine-month period ended March 31, 2008.

Segment Revenue

Tape Libraries – Net tape library revenues decreased to $10.0 million for the nine months ended March 31, 2009 from $13.7 million for the nine months ended March 31, 2008, a decrease of $3.7 million, or 27.1%. The decrease in revenues is attributed to a $2.8 million decline in revenues from our TLS, RLS and XLS tape library product lines, a $0.8 million decline in revenues from sales of tape media, and a $0.3 million decline in sales of upgrades and spares, partially offset by a $0.2 million increase in service revenues. Two customers accounted for 12.1% and 10.7%, respectively, or 22.8% in the aggregate, of tape library revenues for the nine-month period ended March 31, 2009. The customers’ accounts receivable balances, net of specific allowances, totaled approximately 17.3% and 9.4%, respectively, of net accounts receivable. No single customer accounted for more than ten percent of tape library revenues for the nine-month period ended March 31, 2008.

Power Supplies – Net revenues from power supplies increased to $4.1 million for the nine months ended March 31, 2009 from $2.8 million for the nine months ended March 31, 2008, an increase of $1.3 million, or 45.0%. The increase in revenues is attributed to the launch of a new power supply model and sales to a new original equipment manufacturer customer under a nine-month contract. Two customers accounted for 38.5% and 10.4%, respectively, or 48.9% in the aggregate, of power supply sales for the nine months ended March 31, 2009. The customers’ accounts receivable balances, net of specific allowances, totaled approximately 10.4% and 31.9%, respectively, of net accounts receivable. Two customers accounted for 21.2% and 15.0%, respectively, or 36.2% in the aggregate, of power supply sales for the nine months ended March 31, 2008. The customers’ accounts receivable balances, net of specific allowances, totaled approximately 23.6% and 15.3%, respectively, of net accounts receivable.

Index

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 decreased to $4.8 million for the nine months ended March 31, 2009 from $5.5 million for the nine months ended March 31, 2008. The decrease of $0.7 million or 12.7% correlates to the decrease in revenues and lower labor and overhead absorption partially offset by efficiencies achieved in material management.

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 remained comparable at $2.3 million for the nine months ended March 31, 2009 and March 31, 2008.

Sales and Marketing. Sales and marketing expenses consist primarily of employee salaries and benefits, sales commissions, trade show costs, advertising and travel related expenses. Sales and marketing expenses decreased to $2.1 million for the nine months ended March 31, 2009 from $2.4 million for the nine months ended March 31, 2008. The decrease of $0.3 million, or 11.7%, is primarily due to a decrease in commission expense correlating to lower revenues, lower advertising and promotion expenses and lower travel and entertainment expenses.

General and Administrative. General and administrative expenses include employee salaries and benefits and professional service fees. General and administrative expenses decreased to $2.4 million for the nine months ended March 31, 2009 from $2.6 million for the nine months ended March 31, 2008. The decrease of $0.2 million, or 5.9%, is primarily due to a decrease in accounting and audit related expenses including fees associated with the Sarbanes Oxley compliance efforts that were completed in fiscal 2008, partially offset by an increase in compensation related expenses and bad debt expenses.

Investment Income. Investment income decreased to $0.8 million for the nine months ended March 31, 2009 from $1.2 million for the nine months ended March 31, 2008. The decrease of $0.4 million, or 33.3% is primarily due to the lower interest rate environment during the fiscal year to date and partially due to having approximately $4.5 million less cash, cash equivalents and marketable securities in the nine month period ended March 31, 2009 compared to the prior year nine month period.

Provision for Income Taxes. We recorded a provision for income taxes of $4,000 for the nine months ended March 31, 2009. We recorded a provision for income taxes of $17,000 for the nine months ended March 31, 2008 relating to state income taxes paid and interest expense accrued as part of our liability resulting from our adoption on July 1, 2007 of FIN 48, Accounting for Uncertainties in Income Taxes – an Interpretation of FASB Statement No. 109.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used by operating activities was $1.6 million in the nine months ended March 31, 2009, primarily attributed to the net loss for the period, an increase in inventories and a decrease in accounts payable, other accrued liabilities and accrued payroll and related liabilities, partially offset by a decrease in receivables. Net 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 net loss from operations.

Cash used by investing activities was $556,000 in the nine months ended March 31, 2009, primarily attributed to the purchase of marketable securities and the purchase of property and equipment, partially offset by proceeds from the sale of marketable securities. 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 the purchase of marketable securities and the purchase of property and equipment.

Cash used in financing activities was $2.2 million in the nine months ended March 31, 2009, attributed to the payment of cash dividends of $0.06 per share that we declared on June 23, 2008, November 11, 2008 and February 20, 2009 and paid on September 5, 2008, December 4, 2008 and March 25, 2009, respectively, on shares of our common stock. Cash used in financing activities was $0.7 million during the nine months ended March 31, 2008 for the payment of a cash dividend of $0.06 per share that we declared February 12, 2008 and paid March 11, 2008.

As of March 31, 2009, we had $2.3 million in cash and cash equivalents and $26.5 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.

Index

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. We have no outstanding debt nor do we utilize derivative financial instruments. Therefore, no quantitative tabular disclosures are required.

ITEM 4T. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Qualstar’s disclosure controls and procedures as of March 31, 2009, 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, 2009 of Qualstar’s fiscal year ending June 30, 2009, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Index

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, 2008.

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, 2009:

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 2010 or until their successors are elected and qualified:

	Number of Votes Cast
Name	For		Authority
			Withheld
William J. Gervais		8,351,920		1,688,524
Richard A. Nelson		8,351,920		1,688,524
Stanley W. Corker		10,020,051		20,393
Carl W. Gromada		10,020,051		20,393
Robert A. Meyer		10,019,551		20,893
Robert E. Rich		8,345,378		1,695,066

2. To approve the Qualstar Corporation 2008 Stock Incentive Plan. Votes for were 8,530,324; votes against were 302,337; and votes abstained were 9,100, and broker non-votes were 1,198,683.

3. To approve the appointment of SingerLewak LLP as the independent registered public accounting firm to audit our financial statements for the fiscal year ending June 30, 2009. Votes for were 9,954,026; votes against were 3,738; and votes abstained were 82,680.

Index

ITEM 6. EXHIBITS

Exhibit No.		Exhibit Index
10.1		2008 Stock Incentive Plan
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 CORPORATION

Dated: May 12, 2009	By:	/s/ WILLIAM J. GERVAIS
		William J. Gervais
		Chief Executive Officer and President
		(Principal Executive Officer)