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SIMI VALLEY, Calif.--(BUSINESS WIRE)--Jan. 30, 2003--Qualstar(R) Corporation (Nasdaq:QBAK), a leading manufacturer of automated tape storage solutions, today reported financial results for the second quarter of fiscal 2003 ended December 31, 2002.

Revenues for the quarter were $8.4 million, a 16.2 percent decrease from revenues of $10.0 million reported for the same quarter of the prior year. Gross margin for the quarter was 37.4 percent, a slight decrease compared with 37.9 percent reported in the year-ago quarter.

As expected and due to the Company's increased focus on new product development, research and development costs for the second quarter grew to $934,000, or 11.1 percent of revenues, from fiscal 2002 second quarter's $521,000, or 5.2 percent of revenues. Sales and marketing expenses in the second fiscal quarter were $1.0 million, or 12.5 percent of revenues, compared with $803,000, or 8.0 percent of revenues, in the same quarter last year. General and administrative expenses for the quarter were $1.0 million, or 12.4 percent of revenues, compared with $894,000, or 8.9 percent of revenues, for the second quarter of fiscal 2002.

Net income for the second quarter was $79,000, or $0.01 per diluted share, compared with $1.2 million, or $0.10 per diluted share, for last year's quarter.

Cash, cash equivalents and marketable securities increased to $35.9 million at the end of the second quarter from $30.8 million at June 30, 2002 and $33.6 million at September 30, 2002. The Company continued to generate positive cash flow from operations in the amount of $2.3 million during the quarter ended December 31, 2002, driven primarily by reductions in accounts receivable and inventory levels. The Company also decreased its days sales outstanding to 42 days as of December 31, 2002, compared with 60 days as of June 30, 2002 and 50 days as of September 30, 2002.

Commenting on the second quarter results, Bill Gervais, president and chief executive officer of Qualstar Corporation, stated, "We are disappointed that our top-line performance was near the low-end of our expectations as challenging economic conditions continue to delay IT spending. Despite the fact that demand continues to be weak, we remained profitable and generated cash from operations for the quarter, providing us additional resources to invest in the development of new products that will drive the long-term growth of Qualstar.

"We are seeing strong, positive customer response for our new rack mount products. Shipments of the first three models of our RLS Series are already in full swing. We are on track with our product introduction schedule and anticipate shipment of the fourth model in the family to occur at the end of this quarter with the fifth and final model shipping late next quarter," stated Mr. Gervais.

Providing an update on research and development efforts, Mr. Gervais added, "The Advanced Development Group is making excellent progress in the development of an enterprise-class library system. Our N2Power division is working on a new product line and we have hired additional salespeople in preparation for the launch."

Mr. Gervais concluded, "We continue to build on the sales momentum achieved during the second quarter for our RLS family of products. As customers evaluate data storage products currently available, we believe that they will increasingly turn to Qualstar's highly flexible, yet cost-effective solutions based on our long-standing reputation as a quality leader in the market."

Guidance

The Company expects that its fiscal third quarter revenues will be in the range of $8.0 million to $8.5 million. As a result of limited visibility, the Company will provide guidance for one quarter only. Investment in research and development is expected to increase as Qualstar focuses on developing next-generation products.

Qualstar Corporation Conference Call

Company management will hold a conference call to discuss its second quarter results today at 2:00 p.m. Pacific and 5:00 p.m. Eastern. Investors are invited to listen to the call live via the Internet under Investors at www.qualstar.com. Please go to the Web site at least 15 minutes early to register, download, and install any necessary audio software. A replay of the Webcast will be available for 30 days. Additionally, participants can dial into the conference call at 800-240-2134 or 303-262-2130. An audio replay will be available through February 6, 2003, by calling 800-405-2236 (303-590-3000 for international callers) and entering the passcode 523408.

About Qualstar Corporation

Founded in 1984, Qualstar Corporation is a leading manufacturer of automated tape libraries used for backup, archival storage, data protection and storage management applications. Its TLS-Series libraries are well known throughout the world for rugged, Simply Reliable designs yielding years of trouble-free operation. Qualstar Tape Libraries are sold, installed, and supported worldwide by selected Original Equipment Manufacturers, Value Added Resellers, and Systems Integrators. Qualstar Corporation is publicly traded on the NASDAQ Stock Market under the symbol QBAK. More information is available from Qualstar's web site (www.qualstar.com), or by phone at 805-583-7744.

Forward-Looking Statements

Statements in this press release concerning the future business, operating results and financial condition of the Company are "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and are subject to a number of uncertainties that could cause actual performance and results to differ materially from the results discussed in the forward-looking statements. Factors that could affect the Company's actual results include unexpected shortages of critical components, unexpected product design or quality problems, and adverse changes in market demand for tape libraries or Qualstar's products. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Further information on these and other potential factors that could affect the Company's financial results or condition are included in Qualstar's filings with the Securities and Exchange Commission.

                         QUALSTAR CORPORATION
             CONDENSED CONSOLIDATED STATEMENTS OF INCOME
               (in thousands, except per share amounts)
                             (UNAUDITED)

                                Three Months Ended   Six Months Ended
                                    December 31,       December 31,
                                    2001    2002       2001     2002

Net revenues                      $10,031  $8,408    $18,828  $17,200

Cost of goods sold                  6,233   5,260     11,700   10,874

Gross profit                        3,798   3,148      7,128    6,326

Operating expenses:
  Research and development            521     934        990    1,767
  Sales and marketing                 803   1,049      1,308    1,905
  General and administrative          894   1,043      1,726    1,940
       Total operating expenses     2,218   3,026      4,024    5,612

Income from operations              1,580     122      3,104      714

Interest income                       328     102        626      386

Income before income taxes          1,908     224      3,730    1,100

Provision for income taxes            700     145      1,355      519

Net income                         $1,208     $79     $2,375     $581

Earnings per share:
  Basic                             $0.10   $0.01      $0.19    $0.05
  Diluted                           $0.10   $0.01      $0.19    $0.05

Shares used to compute earnings
 per share:
  Basic                            12,439  12,576     12,439   12,562
  Diluted                          12,643  12,688     12,643   12,626


                         QUALSTAR CORPORATION
                CONDENSED CONSOLIDATED BALANCE SHEETS
                            (in thousands)

                                                June 30,  December 31,
     ASSETS                                        2002       2002
                                                          (Unaudited)
Current assets:
  Cash and cash equivalents                      $16,363      $27,681
  Marketable securities                           14,482        8,244
  Receivables, less allowances of $2,100 as of
   June 30 and  $1,943 as of December 31           6,695        3,819
  Inventories                                      9,652        7,088
  Prepaid expenses and other current assets          355          432
  Prepaid income taxes                               148           78
  Deferred income taxes                            1,501        1,501

       Total current assets                       49,196       48,843

Property and equipment, net                        1,324        1,516
Other assets                                         238          407
       Total assets                              $50,758      $50,766

     LIABILITIES AND SHAREHOLDERS'  EQUITY

Current liabilities:
  Accounts payable                                $1,590         $871
  Accrued payroll and related liabilities            308          353
  Other accrued liabilities                          693          519
  Income taxes payable                                98            -

       Total current liabilities                   2,689        1,743

Deferred income taxes                                 96           96

Shareholders' equity:
  Preferred stock, no par value; 5,000
   authorized, no shares issued                        -            -
  Common stock, no par value; 50,000 shares
   authorized, 12,656 shares issued and 
   outstanding as of June 30 and 12,705 as
   of December 31                                 20,751       20,709
  Deferred compensation                             (631)        (282)
  Notes from directors                              (387)        (360)
  Accumulated other comprehensive income (loss)      (31)           8
  Retained earnings                               28,271       28,852
       Total shareholders' equity                 47,973       48,927

       Total liabilities and shareholders'
        equity                                   $50,758      $50,766

CONTACT:
Qualstar Corporation
Frederic T. Boyer, 805/583-7744
fboyer@qualstar.com
or
FRB/Weber Shandwick
Scott Malchow, 310/407-6505 (Investor/Analyst
Information)
smalchow@webershandwick.com
Linda Chien, 310/407-6547 (General Information)
lchien@webershandwick.com