758938--9/28/2006--QUALSTAR

related topics

{product, market, service}

{customer, product, revenue}

{system, service, information}

{loss, insurance, financial}

{stock, price, share}

{property, intellectual, protect}

{cost, regulation, environmental}

{provision, law, control}

{operation, international, foreign}

{stock, price, operating}

{interest, director, officer}

{cost, contract, operation}

{gas, price, oil}

Our customers have the right to return our products in certain circumstances. An excessive number of returns may reduce our revenues. We may spend money pursuing sales that do not occur when anticipated or at all. We sell a significant portion of our products to customers located outside the United States. Currency fluctuations and increased costs associated with international sales could make our products unaffordable in foreign markets, which would reduce our revenue or profitability. A failure to develop and maintain proprietary technology may negatively affect our business. Intellectual property infringement claims brought against us could be time consuming and expensive to defend. Our warranty reserves may not adequately cover our warranty obligations. Our revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may cause our stock price to decline. Our officers and directors could implement corporate actions that are not in the best interests of our shareholders as a whole. Some provisions of our charter documents may make takeover attempts difficult, which could depress the price of our stock and inhibit your ability to receive a premium price for your shares. We do not currently intend to pay dividends and therefore you will only be able to recover your investment in our common stock, if at all, by selling the shares of the stock that you own. Trading in our stock has been limited and our stock price has been volatile. Consequently, it may be difficult to sell your shares. RISKS RELATED TO OUR TAPE LIBRARY BUSINESS Our principal competitors devote greater financial resources to developing, marketing and selling automated tape libraries. Consequently, we may be unable to maintain or increase our market share. Our suppliers could reduce shipments of tape drives and tape media. If this occurs, we would be forced to curtail production, our revenues could fall and our market share could decline. Our revenues could decline if we fail to execute our distribution strategy successfully. We rely on tape technology for a substantial part of our revenues. Our business will be harmed if demand for storage solutions using tape technology declines or fails to develop as we expect. If we fail to develop and introduce new products on a timely and cost-effective basis, or if our products do not contain the features required by the marketplace, we will eventually lose market share and sales to more innovative competitors. We depend upon independent software vendors to provide management software that makes our tape libraries functional. We may have to expend significant amounts of time and money defending or settling product liability claims arising from failures of our tape libraries. Undetected flaws could increase our costs, reduce our revenues and divert resources from our core business needs. RISKS RELATED TO OUR POWER SUPPLY BUSINESS We depend on a single contract manufacturer for the majority of our power supplies. Loss of this supplier could harm our business. Environmental health and safety laws may restrict our operations. Price erosion may have a material adverse effect on our margins and profitability.

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758938--9/28/2006--QUALSTAR_CORP