<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

     FORM 10-QSB (Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934

For the quarterly period ended September 30, 2003

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the Transition period from _________________ to _______________

Commission file number 0-28484

                              QualMark Corporation
--------------------------------------------------------------------------------
                     (Exact name of small business issuer as
                            specified in its charter)

            Colorado                                     84-1232688
-------------------------------                      -------------------
(State or other jurisdiction of                       (I.R.S. Employer
 incorporation or organization)                      Identification No.)

    4580 Florence Street, Denver, CO                        80238
----------------------------------------                 ----------
(Address of principal executive offices)                 (Zip Code)

(Issuer's telephone number) (303) 254-8800

--------------------------------------------------------------------------------

              (Former name, former address and former fiscal year,
                          if changed since last report)

  Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. [X] Yes [ ] No

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

  Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [ ] Yes [ ] No

                      APPLICABLE ONLY TO CORPORATE ISSUERS

  State the number of shares outstanding of each of the issuer's classes of
common equity, as of latest practicable date:

The number of shares of no par value common stock outstanding at November 13,
2003 is 3,610,092.

  Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                              QUALMARK CORPORATION
                            STATEMENTS OF OPERATIONS
            (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                               FOR THE THREE    FOR THE THREE    FOR THE NINE     FOR THE NINE
                                                               MONTHS ENDED     MONTHS ENDED     MONTHS ENDED     MONTHS ENDED
                                                               SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,
                                                                   2003             2002             2003             2002
                                                               ----------------------------------------------------------------
<S>                                                            <C>              <C>              <C>              <C>
Net revenue                                                     $      2,044    $       1,916    $       5,354    $       5,903
Cost of sales                                                          1,252              989            3,329            3,296
                                                               ----------------------------------------------------------------
    Gross profit                                                         792              927            2,025            2,607

Selling, general and administrative expenses                             543              673            1,683            1,997
Research and development expenses                                        169              178              498              562
Arbitration associated expenses                                           24              129              560              294
                                                               ----------------------------------------------------------------
   Income (loss) from operations                                          56              (53)            (716)            (246)

Other expense:
    Interest, net                                                        (35)             (44)             (93)            (139)
                                                               ----------------------------------------------------------------

Net income (loss)                                               $         21   ($          97)  ($         809)  ($         385)
                                                               ================================================================

Net loss per share - basic and diluted                         ($       0.02)  ($        0.05)  ($        0.31)  ($        0.31)

Weighted average number of common shares - basic and diluted       3,610,000        3,610,000        3,610,000        3,610,000
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       2

<PAGE>

                              QUALMARK CORPORATION
                                 BALANCE SHEETS
            (UNAUDITED AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30, 2003    DECEMBER 31, 2002
                                                                 ---------------------------------------
<S>                                                              <C>                   <C>
ASSETS
Current assets:

  Cash                                                           $              809    $           1,288
  Trade accounts receivable, net of allowance for
     doubtful accounts of $45 and $52 at September 30,
      2003 and December 31, 2002, respectively                                1,756                1,468
  Inventories, net                                                              395                  612
  Other current assets                                                           92                   27
                                                                 ---------------------------------------
    Total current assets                                                      3,052                3,395

  Property and equipment, net                                                   651                  710
  Restricted cash                                                                90                   90
  Other assets                                                                   94                   70
                                                                 ---------------------------------------

                                                                 $            3,887    $           4,265
                                                                 =======================================

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:

  Accounts payable                                               $              677    $             487
  Accrued arbitration expenses                                                  411                   --
  Accrued expenses, other                                                       419                  339
  Deferred revenue                                                               21                   40
  Notes payable, related parties (Note 3)                                       250                   --
  Current portion of long-term debt                                           1,100                  720
                                                                 ---------------------------------------
    Total current liabilities                                                 2,878                1,586

  Long-term debt                                                                 --                  890
                                                                 ---------------------------------------
    Total liabilities                                                         2,878                2,476
                                                                 ---------------------------------------

Commitments and contingencies

Convertible redeemable preferred stock (Note 8)
     no par value; 2,000,000 shares authorized:

     692,951 designated as Series B, 631,549  shares issued
     and outstanding, liquidation preference of $1,385 (2003);                1,336                1,243

     2,000 designated as Series C, 1,106 shares issued
     and outstanding, liquidation preference of $1,128 (2003);                  431                  215

Shareholders' (deficit) equity:
  Common stock; no par value; 15,000,000 shares authorized;
      3,610,092 shares issued and outstanding                                 7,549                7,829

  Accumulated deficit                                                        (8,307)              (7,498)
                                                                 ---------------------------------------
     Total shareholders' (deficit) equity                                      (758)                 331
                                                                 ---------------------------------------

                                                                 $            3,887    $           4,265
                                                                 =======================================
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       3

<PAGE>

                              QUALMARK CORPORATION
                            STATEMENTS OF CASH FLOWS
                        (UNAUDITED, AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        FOR THE NINE   FOR THE NINE
                                                                        MONTHS ENDED   MONTHS ENDED
                                                                         SEPTEMBER      SEPTEMBER
                                                                          30, 2003       30, 2002
                                                                        ---------------------------
<S>                                                                     <C>            <C>
Cash Flows From Operating Activities:
Net loss                                                                ($       809)  ($       385)
Adjustments to reconcile net loss to net cash (used in) provided by
 operating activities:
    Depreciation and amortization                                                267            318
    (Gain) loss  on disposal of equipment                                         (4)             3
    Decrease in inventory reserve                                                (10)            --
    Amortization of warrants issued to bank                                        5             --
    Provision for obsolete inventory                                              --             24
    (Recovery)provision for bad debts                                             (7)            62
    Stock option expense                                                          11             11
Change in assets and liabilities:
    Trade accounts receivable                                                   (281)          (564)
    Inventories                                                                  228            905
    Other assets                                                                 (97)           (51)
    Accounts payable, accrued expenses and deferred revenue                      662           (124)
                                                                        ---------------------------
        Net cash (used in) provided by operating activities                      (35)           199

Cash Flows From Investing Activities:
Acquisition of property and equipment                                           (195)          (200)
Sale of property and equipment                                                    11             --
                                                                        ---------------------------
    Net cash used in investing activities                                       (184)          (200)

Cash Flows From Financing Activities:
Proceeds from borrowings, related parties                                        250             --
Payments on borrowings                                                          (510)          (460)
Proceeds from issuance of preferred stock and warrants, net                       --            967
                                                                        ---------------------------
    Net cash (used in)  provided by financing activities                        (260)           507

Net (decrease) increase in cash                                                 (479)           506
Cash and cash equivalents at beginning of period                               1,288            500
                                                                        ---------------------------
Cash and cash equivalents at end of period                              $        809   $      1,006
                                                                        ===========================

Supplemental Disclosure:
Interest paid                                                           $         87   $        115

Non-Cash Investing and Financing Activities:
Deemed preferred stock dividend resulting from conversion of Series A
   preferred shares to Series B preferred shares                                  --   $        489
Redeemable preferred stock dividends accrued                            $        146   $        116
Accretion of preferred stock                                            $        163   $        116
Transfer of equipment to inventory held for resale                      $          1   $         12
Warrants issued to bank                                                 $         18             --
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       4

<PAGE>

                              QUALMARK CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

QualMark Corporation (the "Company") was founded in 1991 and is a manufacturer
and distributor of physical stress systems, as well as a provider of physical
stress testing services. Physical stress systems rapidly and efficiently expose
product design and manufacturing related failures of customer products and
components, thereby providing manufacturers necessary information to improve
product design, quality and reliability. The Company also provides physical
stress testing services through its network of test centers.

NOTE 1 - Business and Summary of Significant Accounting Policies

Financial Presentation

These financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 2002 and notes thereto as
well as other information and analysis included in the Company's Form 10-KSB for
the year then ended.

The interim financial data as of September 30, 2003 and for the three and nine
months ended September 30, 2003 and 2002 is unaudited; however, in the opinion
of the management of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the interim periods presented. Results for the
three and nine months ended September 30, 2003 are not necessarily indicative of
results for the remainder of 2003. Amounts at December 31, 2002 are derived from
the Company's audited financial statements.

Stock Based Compensation

The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option plans. Accordingly, no compensation expense has been recognized for
options granted at fair market value. Had compensation cost for the Company's
stock option plans been determined based on the fair values at the grant dates
for awards under the plans consistent with the fair-value based method of
accounting prescribed by Statement of Financial Accounting Standard ("SFAS") No.
123 "Accounting for Stock-Based Compensation", the Company's results would have
been changed to the pro forma amounts indicated below (in thousands):

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED

                                                              SEPTEMBER 30, 2003   SEPTEMBER 30, 2002
                                                              ----------------------------------------
<S>                                                           <C>                  <C>
Net income (loss)                                                          $  21               ($  97)

ADD:  Stock-based  employee  compensation  expense included
in reported net income, net of related tax effects                            --                   --

DEDUCT:  Total stock-based  employee  compensation  expense
determined  under fair value  based  method for all awards,
net of related tax effects                                                    --                  (40)
                                                              ---------------------------------------
Pro forma net income (loss)                                                $  21               ($ 137)
                                                              =======================================

Loss  per share:

Basic and diluted - as reported                                           ($0.02)              ($0.05)
                                                              =======================================
Basic and diluted - pro forma                                             ($0.02)              ($0.07)
                                                              =======================================
<CAPTION>
                                                                         NINE MONTHS ENDED

                                                              SEPTEMBER 30, 2003   SEPTEMBER 30, 2002
                                                              ---------------------------------------
<S>                                                           <C>                  <C>
Net income (loss)                                                         ($ 809)              ($ 385)

ADD:  Stock-based  employee  compensation  expense included
in reported net income, net of related tax effects                            --                   --

DEDUCT:  Total stock-based  employee  compensation  expense
determined  under fair value  based  method for all awards,
net of related tax effects                                                   (39)                (142)
                                                              ---------------------------------------
Pro forma net loss                                                        ($ 848)              ($ 527)
                                                              =======================================

Loss  per share:

Basic and diluted - as reported                                           ($0.31)              ($0.31)
                                                              =======================================
Basic and diluted - pro forma                                             ($0.32)              ($0.35)
                                                              =======================================
</TABLE>

                                       5

<PAGE>

Revenue Recognition

Revenues from product sales are recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is probable. Generally, the criteria are met
upon shipment of products on an F.O.B shipping point basis and transfer of title
to customers. In certain instances, the Company will recognize revenue prior to
shipment when the customer requests in writing that the transaction be on a bill
and hold basis, the risk of ownership has passed to the customer, the
manufactured equipment is segregated, complete and ready for shipment, and there
is a fixed schedule for delivery of the equipment and no specific performance
obligations exist. Revenue from services are recognized when the services are
performed and billable. Revenue from equipment service contracts is recognized
ratably over the term of the contract.

Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity," ("SFAS 150") which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). Mandatorily redeemable instruments (i.e.,
instruments issued in the form of shares that unconditionally obligate the
issuer to redeem the shares for cash or by transferring other assets) are
required to be reported as liabilities by their issuers. This statement does not
affect the classification or measurement of convertible bonds, puttable stock,
or other outstanding shares that are conditionally redeemable. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003 for public companies. The Company currently has no
financial instruments that embody an unconditional obligation of the Company.
Therefore, the adoption of SFAS 150 did not impact the Company's financial
statements.

NOTE 2 - Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                   SEPTEMBER 30,    DECEMBER 31,
                                       2003             2002
                                   ------------------------------
<S>                                <C>              <C>
Raw materials                      $         379    $         501
Work in process                                1              107
Finished goods                                64               63
Less: Allowance for obsolescence             (49)             (59)
                                   -------------    -------------
                                   $         395    $         612
                                   =============    =============
</TABLE>

The Company monitors inventory for turnover and obsolescence, and records
reserves for excess and obsolete inventory as appropriate.

NOTE 3 - Commercial Bank and Related Party Borrowings

The Company's commercial bank borrowings consist of a term loan and a revolving
line of credit, (the "Credit Agreement"). Refer to the 2002 Form 10-KSB,
Financial Statement Note 5.

During 2002, there were various renegotiations of the Credit Agreement. Among
other changes, the interest rate was increased to Prime Rate plus 3.0%, with
required monthly payments of $55,000, and the maturity date was extended to
March 15, 2003. On January 23, 2003, the Company renegotiated its Credit
Agreement with the commercial bank. Among other changes, the principal amount of
the revolving line of credit was reduced to $500,000 and the principal amount of
the term loan was increased to $1,110,000, the monthly principal payments
increased on July 1, 2003 from $55,000 to $65,000, and the maturity date was
extended to March 15, 2004. On July 25, 2003, the Company renegotiated its
Credit Agreement with the commercial bank. Among other changes, the monthly
principal payments decreased from $65,000 to $60,000 beginning July 31, 2003.

On July 25, 2003, the Company issued 25,000 warrants to its commercial bank for
consideration of the renegotiated Credit Agreement. The exercise price of the
warrants is $1.155, and the warrants have a term of two years during which they
can be exercised. The warrants issued represent debt issue costs and the value
was estimated to be approximately $18,000, using the Black-Scholes
option-pricing model with the following weighted-average assumptions: dividend
yield of zero, expected volatility of 141%, risk free interest rate of 2%, and
an expected term of two years. The debt issue costs are being amortized on the
straight line method to interest expense over the term of the Credit Agreement
(through March 15, 2004). Through September 30, 2003 the Company has

                                       6

<PAGE>
\
amortized $5,000 to interest expense.


The average interest rate for the nine-month periods ending September 30, 2003
and 2002, for the term loan and revolving credit line was 5.54% (7.43% effective
interest) and 6.03% (7.20% effective interest), respectively. Both the revolving
credit line and term loan under the Credit Agreement are collateralized by
substantially all the assets of the Company. Borrowings under the line of credit
are subject to borrowing base limits. Based on the provisions of the Credit
Agreement, as of September 30, 2003, there was no additional availability on the
line of credit.


As of September 30, 2003, the balances of the revolving credit and term loan are
$500,000 and $600,000, respectively.

The Company must maintain certain financial and other covenants to be in
compliance with the Credit Agreement. The Company is not now, nor has it ever
been in arrears on any payment pursuant to the Credit Agreement. For the nine
months ended September 30, 2003, the Company was not in compliance with certain
financial covenants. However, the Company does meet the covenants for the three
months ended September 30, 2003. The commercial bank has confirmed to management
that they would not take any actions related to such non-compliance for the nine
months ended September 30, 2003 based on the Company meeting the covenants for
the three months ended September 30, 2003.

The Company had also determined that, during 2003, quarterly payments to the
revolving line of credit would be made, based on cash flows generated from
operations. At the close of each quarter, the Company has made arrangements to
meet and review results of the Company with the commercial bank and the Company
believes its relations with its commercial bank to be good. At the end of 2003,
the Company expects to negotiate with the commercial bank for an extension to
the Credit Agreement, although there can be no guarantee that such
renegotiations will be successful.

As described in Note 8, in July 2003, a judgement of $261,650 was assessed
against the Company related to an arbitration proceeding with Greg K. Hobbs
("Hobbs"). During the three months ended September 30, 2003, the Company had
$264,000 of funds garnished by Hobbs. The Company has not paid over these funds
to Hobbs because of an outstanding legal challenge of the arbitration judgement.
In order to address liquidity concerns in connection with the arbitration
proceedings and garnishment, on September 26, 2003, three members of the
Company's Board of Directors (the "Directors") loaned the Company $250,000. The
short-term notes were unsecured and were to bear interest at 8% per annum, with
$30,000 principal payments to commence on October 31, 2003 and continue through
June 30, 2004. On October 6, 2003, the Company received a favorable ruling on
its motion for relief from judgment and acknowledged that the Company will have
an opportunity to challenge confirmation of the award when the arbitrator issues
a final award. The Company has moved for release of the funds that were
garnished but as of the date of the filing the funds have not been released. On
October 16, 2003, the Company repaid the $250,000 notes to the Directors in
full. However, the Company believes it will be able to raise the short-term
funds needed to satisfy the outstanding judgment when it is finalized, although
no assurances can be given.

NOTE 4 -Loss Per Share

Basic loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of shares outstanding during the
period. Diluted loss per share is computed using the weighted average number of
shares determined for the basic computations plus the number of shares of common
stock that would be issued assuming all contingently issuable shares having a
dilutive effect on earnings per share were outstanding for the period.

The calculation of basic and diluted loss per share is as follows (in thousands,
except per-share amounts):

Basic and diluted loss per share computation:

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED                 NINE MONTHS ENDED

                                              SEPTEMBER 30,    SEPTEMBER 30,     SEPTEMBER 30,    SEPTEMBER 30,
                                                 2003             2002              2003             2002
                                              -----------------------------------------------------------------
<S>                                           <C>              <C>               <C>              <C>
Net income (loss)                                  $ 21              ($97)             ($809)           ($385)

Accretion of redeemable preferred
stock,  preferred stock dividends, and
beneficial conversion feature                      (104)             (100)              (309)            (232)
</TABLE>

                                       7

<PAGE>

<TABLE>
<S>                                                          <C>       <C>       <C>        <C>
Deemed  preferred stock dividend  resulting from conversion
of Series A preferred shares to Series B preferred hares          --       --         --       (489)
                                                              ------   ------    -------    -------

Net loss available to common shareholders                    ($   83)  ($ 197)   ($1,118)   ($1,106)
                                                             =======   ======    =======    =======

Weighted average shares outstanding - basic                    3,610    3,610      3,610      3,610
                                                             =======   ======    =======    =======

Net loss per share - basic                                   ($ 0.02)  ($0.05)   ($ 0.31)   ($ 0.31)
                                                             =======   ======    =======    =======

Weighted average shares outstanding - basic                    3,610    3,610      3,610      3,610

Dilutive stock options and warrants                               --       --         --         --
                                                              ------   ------    -------    -------

Weighted average shares outstanding - diluted                  3,610    3,610      3,610      3,610
                                                             =======   ======    =======    =======

Net loss per share - diluted                                 ($ 0.02)  ($0.05)   ($ 0.31)   ($ 0.31)
                                                             =======   ======    =======    =======
</TABLE>

Options and warrants to purchase 1,888,063 and 1,863,517 shares of common stock
and 645,393 (3,385,020 if converted to common shares, refer to Note 8) and
595,931 (3,125,597 if converted to common shares, refer to Note 8) preferred
shares were excluded from dilutive stock option calculations for the three and
nine month periods ended September 30, 2003 and 2002, respectively, as their
inclusion would be antidilutive.

NOTE 5 - Segment Information

The Company operates in two business segments, testing equipment ("Equipment")
and Accelerated Reliability Test Centers ("ARTC"). The Equipment segment is
engaged in the manufacture and sale of vibration and thermal chambers for
quality control testing of various electronic devices and components. The ARTC
segment operates service centers where vibration and thermal chambers are
available to customers for daily rental.

The accounting policies for these segments are the same as those described in
Note 1 of the Company's Form 10-KSB for the fiscal year ended 2002 and there are
no inter-segment transactions. The Company evaluates the performance of its
segments and allocates resources to them based primarily on revenue or gross
profit. All operating revenues and expenses are allocated to business segments
in determining their gross profit. All other expenses are not utilized in
determining the allocation of resources on a segment basis.

The table below summarizes information about reported segments (in thousands) as
of and for the three and nine months ended September 30, 2003 and 2002:

<TABLE>
<CAPTION>
                                        EQUIPMENT     ARTC         TOTAL
                                        ----------------------------------
<S>                                     <C>         <C>          <C>
THREE MONTHS ENDED SEPTEMBER 30, 2003
Net revenue                             $   1,743   $     301    $   2,044
Gross profit                                  759          33          792
Property and equipment, net                   150         501          651

THREE MONTHS ENDED SEPTEMBER 30, 2002
Net revenue                             $   1,665   $     251    $   1,916
Gross profit                                  974         (47)         927
Property and equipment, net                   148         586          734
</TABLE>

<TABLE>
<CAPTION>
                                       EQUIPMENT      ARTC       TOTAL
                                       ---------------------------------
<S>                                    <C>         <C>         <C>
NINE MONTHS ENDED SEPTEMBER 30, 2003
Net revenue                            $   4,522   $     832   $   5,354
Gross profit                               1,997          28       2,025
Property and equipment, net                  150         501         651

NINE MONTHS ENDED SEPTEMBER 30, 2002
Net revenue                            $   4,763   $   1,140   $   5,903
Gross profit                               2,425         182       2,607
</TABLE>

                                       8

<PAGE>

<TABLE>
<S>                                    <C>         <C>         <C>
Property and equipment, net                  148         586         734
</TABLE>

The following information is by geographic area (in thousands) as of and for the
three and nine months ended September 30, 2003 and 2002:

<TABLE>
<CAPTION>
                                        UNITED                         ASIA
                                        STATES    MEXICO    EUROPE    PACIFIC    TOTAL
                                        -------   -------   -------   -------   -------
<S>                                     <C>       <C>       <C>       <C>       <C>
THREE MONTHS ENDED SEPTEMBER 30, 2003
Sales                                   $   904   $   186   $   204   $   750   $ 2,044
Property and equipment, net                 567        --        84        --       651

THREE MONTHS ENDED SEPTEMBER 30, 2002
Sales                                   $ 1,281        --   $    60   $   575   $ 1,916
Property and equipment, net                 650        --        84        --       734
</TABLE>

<TABLE>
<CAPTION>
                                       UNITED                         ASIA
                                       STATES    MEXICO    EUROPE    PACIFIC    TOTAL
                                       -------   -------   -------   -------   -------
<S>                                    <C>       <C>       <C>       <C>       <C>
NINE MONTHS ENDED SEPTEMBER 30, 2003
Sales                                  $ 2,721   $   186   $   793   $ 1,654   $ 5,354
Property and equipment, net                567        --        84        --       651

NINE MONTHS ENDED SEPTEMBER 30, 2002
Sales                                  $ 3,775             $    64   $ 2,064   $ 5,903
Property and equipment, net                650        --        84        --       734
</TABLE>

International sales are based on where the products were shipped and where ARTC
services were rendered.

NOTE 6 - Income Taxes

Refer to the Company's 2002 Form 10-KSB, Financial Statement Note 7.

NOTE 7 - Preferred Stock

Preferred Stock - Series A and Series B

On March 27, 2002 an existing common stock investor (the "Investor") exchanged
its 571,013 outstanding shares of Series A preferred stock, for an equal number
of shares of Series B preferred stock of the Company. The Series B preferred
stock has the same preferences, limitations and relative rights as the Series A
preferred stock, except that the conversion rate will be $0.922 per share
instead of $2.15 per share. These rights include voting rights equal to the
number of shares of common stock into which each share of preferred stock would
be convertible, dividends at the rate of 8.0% per annum paid quarterly either in
cash or in kind, priority over common stock to distributions upon liquidation or
dissolution and redemption rights on any date after September 1, 2004. The
preferred stock exchange resulted in a beneficial conversion feature of
$489,000. This beneficial conversion feature would normally have resulted in a
credit to common stock and a charge to retained earnings. As the Company has an
accumulated deficit, both the credit and charge are reflected in common stock.
This beneficial conversion feature was recorded as a charge to loss applicable
to common shareholders for the quarter ended March 31, 2002. In addition, the
accretion recorded under the mandatory redemption feature, including the impact
of the beneficial stock discount, were $4,000 and $13,000 for both the three and
nine month periods ended September 30, 2003 and 2002, respectively.

The reason for the exchange of the Series A shares for the Series B shares was
to provide the Investor with a conversion rate that reflected current market
price at the time of the exchange.

     The holder of the Series B preferred stock has various rights and
     preferences as follows:

                                       9

<PAGE>

         Conversion -- The Series B preferred stock may, at the option of the
         holder, be converted at any time into shares of common stock at $0.922
         per share.

         Anti-Dilution Protection -- The Series B preferred stock conversion
         ratio is subject to adjustment, calculated in accordance with the
         Company's articles of incorporation, if the Company issues securities
         at a price per share that is less than the current conversion ratio of
         the Series B preferred stock.

         Voting -- The Series B preferred stock shares are voted equally with
         the shares of common stock of the Company, on an as-if converted to
         common stock basis.

         Dividends -- The Series B preferred stock accrues dividends at 8% per
         annum. Dividends may be paid in cash or additional preferred shares, in
         kind, at the option of the Company. In addition, in the event the
         Company declares, pays or sets apart a common stockholder dividend,
         each holder of shares of the Series B preferred stock shall be entitled
         to receive a per share dividend equal to the number of shares of common
         equity on which such common dividend is declared into which each share
         of Series B preferred stock is convertible on the record date,
         multiplied by the amount of cash or property paid, or by the number of
         shares of capital stock issued. During the three months ended September
         30, 2003 and 2002, $27,000 and $25,000 of dividends were accrued,
         respectively. During the nine months ended September 30, 2003 and 2002,
         $80,000 and $51,000 of dividends were accrued, respectively. As of
         September 30, 2003, the Series B preferred shares have $27,000 of
         accumulated dividends in arrears. Of the dividends in arrears at
         September 2003, the Company anticipates a dividend payment (in kind) of
         12,715 Series B preferred shares at the liquidation price of $2.15 per
         share on or before December 31, 2003.

         Liquidation -- The Series B preferred stock ranks senior to common
         stock and has a liquidation preference of $2.15 per share plus all
         declared and unpaid dividends, which totals $1,385,000 at September 30,
         2003.

         Conditional Redemption -- The Series B preferred stock is redeemable at
         any time after September 1, 2004 at the option of the holders of the
         Series B preferred stock. The redemption price is equal to $2.15 per
         share to the extent the Company has funds legally available for such
         payment. If the Company does not have funds available, at the option of
         the holders of the Series B preferred stock, the Series B preferred
         stock can be converted into a debt obligation of the Company in a form
         acceptable to the holders of the Series B preferred stock.

         Optional Redemption -- The Company maintains a one-time option to
         repurchase the Series B preferred stock or require the holder to
         convert their preferred stock, under the following terms. At any time
         following a 45-day consecutive trading period during which the average
         closing price per share of the Company's common stock is at least $5.00
         per share, the Company may give notice of its intention to repurchase
         all of the outstanding Series B preferred shares. The holder of the
         Series B preferred stock shall have 30 days from receipt of the
         Company's repurchase notice to elect to convert their Series B
         preferred shares to common stock. In the event that the holder of the
         Series B preferred stock does not elect to convert all of their Series
         B preferred stock, the Company may repurchase all, but not less than
         all, of the remaining Series B preferred stock at the price of $4.00
         per share, or 90% of the fair market value of the common stock,
         whichever is greater, plus any accumulated dividends, by notice to the
         holder of the Series B preferred stock and tendering of funds within
         five business days of the expiration of the Series B preferred
         stockholder's conversion option. The fair market value of the common
         stock shall be determined by the average closing price of the common
         stock for the five trading days prior to the date on which the Series B
         preferred stockholder's option to convert expires.

Preferred Stock - Series C

On March 27, 2002, the Company authorized the issuance of 1,000 shares of Series
C, convertible, redeemable, cumulative, participating, no par preferred stock
("Series C preferred stock").

On March 27, 2002, the Investor purchased 1,000 shares of Series C preferred
stock and warrants to purchase shares of common stock, in exchange for
$1,000,000. The net proceeds to the Company were $967,000. The warrants were
valued and recorded at $259,000. Due to the conversion feature of the Series C
preferred stock transaction, a beneficial conversion feature of $741,000 existed
at the execution of the agreement. The Company is accreting the warrants and the
beneficial conversion feature of the Series C preferred stock to the earliest
date the Series C preferred stockholders can elect the option to redeem the
Series C preferred stock. The accretion recorded for both the three and nine
month periods ending September 30, 2003 and 2002 was $50,000 and $150,000,
respectively. The beneficial conversion feature was recorded as an increase to
common stock and a decrease to Series C preferred stock.

                                       10

<PAGE>

The holder of the Series C preferred stock have various rights and preferences
as follows:

         Conversion --The Investor may now convert its Series C preferred stock
         into shares of the Company's common stock at any time. In the event
         that the Investor elects to convert, the conversion price per share of
         the Series C preferred stock will be $0.5993 per share. The applicable
         conversion terms result in a beneficial conversion feature of
         approximately $741,000, which was recorded in the first quarter of
         2002, and is being accreted to the earliest date the Series C preferred
         stockholder can elect the option to redeem the Series C preferred
         stock.

         Anti-Dilution Protection -- The Series C preferred stock conversion
         ratio is subject to adjustment, calculated in accordance with the
         Company's articles of incorporation, if the Company issues securities
         at a price per share that is less than the current conversion ratio of
         the Series C preferred stock. This feature could result in additional
         charges being recorded against net income (loss) applicable to common
         shareholders.

         Voting -- The Series C preferred stock shares are voted equally with
         the shares of common stock of the Company, on an as-if converted to
         common stock basis.

         Dividends -- The Series C preferred stock accrues dividends at 8% per
         annum. Dividends may be paid in cash or additional preferred shares, in
         kind, at the option of the Company. In the event that the Company pays
         dividends in kind, the Company will record additional charges against
         net income (loss) applicable to common shareholders. In addition, in
         the event the Company declares, pays or sets apart a common stockholder
         dividend, each holder of shares of the Series C preferred stock shall
         be entitled to receive a per share dividend equal to the number of
         shares of common equity on which such common dividend is declared into
         which each share of Series C preferred stock is convertible on the
         record date, multiplied by the amount of cash or property paid, or by
         the number of shares of capital stock issued. During the three months
         ended September 30, 2003 and 2002, $22,000 and $21,000 of dividends
         were accrued, respectively. During the nine months ended September 30,
         2003 and 2002, $65,000 and $42,000 of dividends were accrued,
         respectively. As of September 30, 2003, the Series C preferred shares
         accumulated dividends in arrears of $22,000. Of the dividends in
         arrears at September 30, 2003, the Company anticipates a dividend
         payment (in kind) of 22 Series C preferred shares at the liquidation
         price of $1,000 per share on or before December 31, 2003.

         Liquidation -- The Series C preferred stock ranks senior to common
         stock and has a liquidation preference of $1,000 per share plus all
         declared and unpaid dividends which totals $1,128,000 at September 30,
         2003.

         Conditional Redemption -- The Series C preferred stock is redeemable at
         any time after April 1, 2007 at the option of the holders of the Series
         C preferred stock. The redemption price is equal to $1,000 per share to
         the extent the Company has funds legally available for such payment. If
         the Company does not have funds available, at the option of the holders
         of the Series C preferred stock, the Series C preferred stock can be
         converted into a debt obligation of the Company in a form acceptable to
         the holders of the Series C preferred stock.

         Warrants

         In connection with the Series C preferred stock transaction, the
         Investor received warrants to purchase 417,153 shares of the Company's
         common stock. The exercise price of the warrants is $1.265, and the
         warrants have a term of five years during which they can be exercised.
         The value of the warrants issued was estimated to be $259,000. The
         warrants have been recorded as an increase to common stock, and are
         being accreted to the earliest date the Series C preferred stockholder
         can elect the option to redeem the Series C preferred stock.

NOTE 8 - Legal Matters

On May 30, 2001, the Company was served with an arbitration demand from Hobbs, a
former employee, officer and director. The arbitration demand alleged that the
Company breached provisions in the original September 30, 1995 separation
agreement, executed between Hobbs and the Company and Hobbs claimed damages of
at least $7,000,000. The parties selected a single arbitrator with the Judicial
Arbiter Group ("JAG") in Denver, Colorado and a hearing in the arbitration was
set for April 29, 2002, but was rescheduled to August 19, 2002, and subsequently
rescheduled to April 21, 2003. On April 26, 2003, the Company completed the
arbitration in

                                       11

<PAGE>


front of the single arbitrator with JAG during which Hobbs requested damages of
$10,000,000. The arbitrator issued a "Decision and Award" on June 20, 2003, in
which the arbitrator found the Company breached certain provisions of the
September 30, 1995 agreement. The arbitrator's "Decision and Award" stated that
Hobbs "is awarded damages against Defendant [the Company] in the total amount,
including interest, of $261,650." The parties were instructed to file their
respective requests for attorney fees, costs for the claims on which each was
the prevailing party, as well as interest on the award. The parties did so on
July 11, 2003. The Company also filed with the arbitrator on July 8, 2003 a
"Motion for Clarification, Correction and Reconsideration" of the arbitrator's
Decision and Award, and a supplement to this motion in which certain specific
errors and omissions were identified, in which the arbitrator was asked to
correct or otherwise address these errors, including an indisputable
computational error that overstated the amount of damages by $9,000. Both Hobbs
and the Company filed pleadings opposing all or part of the other party's
request for fees and costs and the Company filed an opposition to Hobbs' request
for interest. The arbitrator has not, as of the filing date, made a final ruling
on Hobbs' claim or forruled on either party's request for attorney fees, costs
and interest, however the Company expects that the ruling on damages, pre-award
interest; costs and attorney's fees will not exceed $411,000. Included in the
Company's financial statements for the nine months ended September 30, 2003, is
$411,000 for costs related to and including the arbitration damages, fees, and
interest expense, and $149,000 for Company incurred legal fees, for a total
arbitration related expense of $560,000. The $411,000 estimate is subject to
final clarification and it is reasonably possible to assume that this estimate
will change in the near term. The effect of this change in estimate could be
material to the financial statements. Hobbs filed an action in the District
Court, City and County of Denver, in Denver, Colorado on June 23, 2003 in which
Hobbs sought confirmation of the arbitral award. Judge Herbert Stern III issued
an order on July 10, 2003 confirming the award and entered a judgment for
$261,650. The Company immediately filed a motion for relief from the judgment
arbitral award confirmation on grounds that the award was not final because the
arbitrator had not, at that time, received requests for fees and costs and
because the Company is entitled by statute to have thirty days to challenge
confirmation. Judge Stern ruled on the confirmation before the end of the thirty
day period's Motion for Correction, Clarification and Reconsideration. In July
and August 2003 Hobbs took steps to garnish QualMark funds based on the
judgment. Although Company funds of approximately $264,000 were garnished, these
funds have not been paid over to Hobbs because of a legal challenge. On October
6, 2003 Judge Stern ruled in favor of the Company on the motion for relief from
judgment and acknowledged that the Company will have an opportunity to challenge
confirmation of the award when a final award is issued by the arbitrator. The
Company has moved for release of the funds that were garnished, but as of the
date of the filing the funds have not been released. The Company also filed an
action in the District Court, City and County of Denver, to vacate the arbitral
award based on the arbitrator's reliance on hearsay and other improper evidence.

In December 2002, the Company was served with a complaint from Hobbs Engineering
Corporation ("HEC"), a company controlled by Hobbs, seeking injunctive relief
and an unspecified amount of damages against the Company and five current and
former employees of or consultants of the Company. In this action in District
Court in Boulder, Colorado, HEC alleges that the Company and the current and
former employees and consultants, acting as "agents" for the Company, violated
the Colorado Unfair Trade Practices Act (Colorado Revised Statutes, Sec.
6-2-105(1)(a)) by offering potential customers seminars on the use of HALT and
HASS in competition with HEC at less than the cost to the Company to produce the
seminars. The Company offers these seminars at no cost as a means to promote
sales of chambers. HEC further alleges that it has been damaged by the Company's
free seminars to potential customers and that HEC is entitled to recover
damages. The Company filed its response to the HEC Complaint on January 7, 2003,
denying that its actions are in violation of Colorado law. On October 6, 2003
the Court dismissed the case because HEC had not taken actions required by
Colorado rules of procedure. The Company asserts that it is entitled to offer
seminars for free or at reduced prices to potential customers, that its seminars
do not compete with seminars offered by HEC, that the Company's activities are
not in violation of the Colorado Unfair Trade Practices Act, and that HEC is not
entitled to the relief it seeks.

On March 10, 2003, the Company, a former employee, and ASQ Quality Press were
served with a complaint in U.S. District Court in Denver, Colorado from Hobbs
alleging (i) infringement of copyrights purportedly owned by Hobbs, in violation
of the Copyright Act, 17 U.S.C. Sec. 101, (ii) false designation of origin and
false or misleading representation in commerce under Sec. 43(a) of the Lanham
Act, 15 U.S.C. Sec 1125(a), and (iii) common law unfair competition. The Company
filed an answer on March 31, 2003, which denied allegations of the complaint
with respect to the infringement of any copyrights held by Hobbs. On May 8,
2003, a scheduling conference was held before a United States Magistrate. The
parties have engaged in discovery and the Company has initiated a counter-claim
seeking an amount of damages from Hobbs to be determined after completion of
discovery. A mandatory settlement conference was held before a U.S. Magistrate
on September 22, 2003 but no settlement was reached. On November 3, 2003 the
Company filed a motion for partial summary judgment. The Company intends to
contest the case vigorously; however, no guarantee can be given as to the
ultimate outcome or the ultimate amount of the damages, if any.

                                       12

<PAGE>

Item 2.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The statements contained in this report, which are not historical in nature, are
forward-looking statements subject to risks and uncertainties that are difficult
or impossible to predict with accuracy. Actual results could differ materially
from those set forth or implied by forward-looking statements. Such risks and
uncertainties include, but are not limited to, variability in order flow and
operating results, availability of capital to support operations, the ability of
the Company to find and retain qualified personnel to staff its manufacturing
and marketing operations and existing and anticipated test centers, and the risk
that the demand for the Company's systems will not continue to grow.

Results of Operations

The Company's annual and quarterly operating results are subject to fluctuations
for a variety of reasons. The Company operates with a small backlog relative to
its revenue; thus most of its sales in each quarter result from orders received
in the current or prior quarter. In addition, because prices for the Company's
products are relatively substantial, a significant portion of net sales for each
quarter is attributable to a relatively small number of units. Further, the fact
of shipping or not shipping a product in a quarter can result in the difference
between a profitable quarter or an unprofitable one, given the significant sales
price of the Company's product and the related margin.

Three Months Ended September 30, 2002 Compared With Three Months Ended September
30, 2003

Revenue

Net revenue increased $128,000 or 6.7% from $1,916,000 in the three months ended
September 30, 2002 to $2,044,000 for the three months ended September 30, 2003.

Equipment Revenue

Equipment revenue increased $78,000 or 4.7% from $1,665,000 in the three-month
period ended September 30, 2002 to $1,743,000 in the three months ended
September 30, 2003. Eleven OVS units were sold in the third quarter of 2003, of
which one was a used/refurbished unit, compared to ten OVS units sold in the
third quarter of 2002, of which two were used/refurbished units. The increase in
sales for the quarter ended September 30, 2003 primarily occurred due to the
marginal improvement of the capital goods market, the international political
environment, and product mix. The Company is continuing its aggressive pursuit
of international and domestic sales in the high technology industry in
preparation for the eventual economic improvement. Of the units sold in the
quarter ended September 30, 2003, eight represented international sales versus
five international sales for the quarter ended September 30, 2002. The
percentage of international sales increased for the three months ended September
30, 2003 providing 65.2% of the Company's equipment revenue versus 38.1% for the
three months ended September 30, 2002. The Company continues to expect a slow
recovery in domestic equipment sales throughout 2003 as the equipment line of
business trends capital spending. The Company is cautiously optimistic in
regards to a slowly recovering domestic economy. As a result, the Company is
continuing to cultivate its international presence by emphasizing its core
markets, as well focus on the used/refurbished equipment line of business. The
Company is encouraged with its recently released product, the OVTT (refer to the
2002 Form 10KSB, Item 1, Research and Product Development) of which the Company
sold 3 units in the third quarter of 2003 which assists in stimulating the
domestic equipment market. The Company cannot give any assurance of the demand
of its used/refurbished equipment sales, success of the OVTT, or the overall
increase in equipment sales.

Test Center (ARTC) Revenue

Test center revenue increased $50,000 or 19.9% from $251,000 in the three months
ended September 30, 2002 to $301,000 in the three months ended September 30,
2003. The Company operated four test centers in the U.S., maintained four
strategic domestic partnership operations, and five strategic partnership test
center operations in Europe during 2003,

                                       13

<PAGE>

versus five test centers in the U.S. and five strategic partnership operations
in Europe during the same period in 2002. The Company primarily attributes the
increase in test center revenue to its expansion of test center partnerships.
The Company is also continuing to examine the strategic partnership test center
model, in which additional partnerships may be entered into to minimize both
variable and fixed test center costs, while benefiting in a revenue share. The
Company has changed its strategic focus on the test center line of business to
maximize volume and utilization in the current operating environment. These
changes include operational consolidations, sales personnel redeployment, and
the expansion of domestic/international strategic partnerships. The Company
feels confident that these changes will result in increased revenues, expand the
Company's customer network, and increase product awareness, however the Company
cannot give any assurances on the ultimate success.

Gross Profit

Total gross margin for the three months ended September 30, 2003 was 38.7%. This
compares to a gross margin of 48.4% for the three months ended September 30,
2002. The decrease in gross margin for the three-month period is primarily due
to product mix and a greater number of used/refurbished units being sold during
the third quarter ended 2002.

Operating Expenses

Total operating expenses decreased $244,000 or 24.9% to $736,000 for the three
months ended September 30, 2003 from $980,000 for the three months ended
September 30, 2002.

Selling, general and administrative expenses decreased $130,000 or 19.3% to
$543,000 in the three months ended September 30, 2003 from $673,000 for the
three months ended September 30, 2002. The decrease is primarily due to the
reduction of overhead expenses due to the Company's relocation in the beginning
of the second quarter of 2003. The Company continues to monitor and identify
ways to reduce operating expenditures. Sales and marketing expenses decreased
11.0% in the three months ended September 30, 2003 from three months ended
September 30, 2002. The decrease is primarily due to the change in sales staff
and associated expenses. The Company believes that its investment in sales and
marketing, at its current level, is in line with future needs as the economy
recovers. Currently, the Company's infrastructure and systems have been set up
and redesigned to prepare for an increase in sales demand with a minimal
increase in selling, general, and administrative costs.

Research and development costs decreased $9,000 or 5.1% to $169,000 for the
three months ended September 30, 2003 from $178,000 for the three months ended
September 30, 2002. The decrease is primarily attributed to a reduction of
research and development staff. The Company continually strives to sustain its
commitment to product improvements and research and development. As a result,
research and development expenditures fluctuate from quarter to quarter, and may
increase in future quarters. During the first quarter 2003, the Company's
research and development department completed an overall "vibration core"
product redesign. The design changes will improve reliability, increase the ease
of manufacturing, and increase usability for our customers.

On June 20, 2003, the Company received the arbitration decision on claims
brought by Gregg K. Hobbs, (refer to Note 8 Legal Matters, of the Financial
Statements). The arbitrator found damages totaling $261,650 in favor of Dr.
Hobbs for the breach of certain provisions of the September 30, 1995 separation
agreement. During the quarter ended September 30, 2003, the Company incurred
$24,000 for costs related to and including the arbitration damages and legal
fees. Previously incurred arbitration related expenses of $129,000 were
accounted for in the three months end September 30, 2002.

Nine Months Ended September 30, 2002 Compared With Nine Months Ended September
30, 2003

Revenue

Net revenue decreased $549,000 or 9.3% from $5,903,000 in the nine months ended
September 30, 2002 to $5,354,000 for the nine months ended September 30, 2003.

Equipment revenue decreased $241,000 or 5.1% from $4,763,000 in the nine-month
period ended September 30, 2002 to $4,522,000 in the nine months ended September
30, 2003. Thirty OVS units were sold in the first nine months of 2003 compared
to the same number of OVS units sold in the first nine months of 2002. Of the
units sold in first nine months of 2003, six were used/refurbished units,
compared to five used/refurbished units sold in the first nine months of 2002.
The decrease in sales for the period ended September 30, 2003

                                       14

<PAGE>
 primarily occurred due to the continued slowdown in the first nine months of
2003 of the capital goods market, the international political environment, and
product mix. The Company experienced some signs of economic improvement in the
third quarter of 2003 and is continuing its aggressive pursuit of international
and domestic sales in the high technology industry in preparation for a
continuation of economic improvement. Of the units sold in the nine months ended
September 30, 2003, nineteen represented international sales versus sixteen
international sales for the nine months ended September 30, 2002. The
international market remains stable for the first nine months of 2003 providing
56.4% of the Company's equipment revenue versus 44.6% for the first nine months
of 2002. The Company continues to expect a slow recovery in domestic equipment
sales throughout 2003 as the equipment line of business trends capital spending.
Because of the lagging economy, the Company is continuing to cultivate its
international presence by emphasizing its core markets, as well as to focus on
the used/refurbished equipment line of business. The Company is encouraged with
its recently released product, the OVTT (refer to the 2002 Form 10KSB, Item 1,
Research and Product Development) to also assist in stimulating the domestic
equipment market. The Company cannot give any assurance of the demand of its
used/refurbished equipment sales, success of the OVTT, or the overall increase
in equipment sales.

Test center revenue decreased $308,000 or 27.0% from $1,140,000 in the nine
month period ended September 30, 2002 to $832,000 in the nine month period ended
September 30, 2003. The Company operated four test centers in the U.S.,
maintained four strategic domestic partnership operations, and five strategic
partnership test center operations in Europe during 2003, versus four test
centers in the U.S., no strategic domestic partnership operations, and three
strategic partnership operations in Europe during the same period in 2002. The
Company primarily attributes the decrease in test center revenue to a
conservative economic atmosphere in the high technology industry, as well as an
increase in competition. The Company is also continuing to examine the strategic
partnership test center model, in which additional partnerships may be entered
into to minimize both variable and fixed test center costs, while benefiting in
a revenue share. The Company has changed its strategic focus on the test center
line of business to maximize volume and utilization in the current operating
environment. These changes include operational consolidations, sales personnel
redeployment, and the expansion of domestic/international strategic
partnerships. The Company feels confident that these changes will result in
increased revenues, expand the Company's customer network, and increase product
awareness, however the Company cannot give any assurances on the ultimate
success.

Gross Profit

Total gross margin for the nine months ended September 30, 2002 was 44.2%. This
compares to a gross margin of 37.8% for the nine months ended September 30,
2003. The decrease in gross margin for the nine-month period is primarily due to
competitive pricing pressures, lower volume on our test center line of business,
and increased equipment costs for Certification Europa (CE) licensing, which
enables manufactured products to be sold in Europe. The Company is cautiously
optimistic in observing an increase in interest from potential European buyers
during the remainder of 2003, and feels the aforementioned strategic test center
plan is on schedule and is being implemented as intended.

Operating Expenses

Total operating expenses decreased $112,000 or 3.9% to $2,741,000 for the nine
months ended September 30, 2003 from $2,853,000 for the nine months ended
September 30, 2002.

Selling, general and administrative expenses decreased $314,000 or 15.7% to
$1,683,000 in the nine months ended September 30, 2003 from $1,997,000 for the
nine months ended September 30, 2002. The decrease in the third quarter of 2003
is primarily due to the reduction of overhead expenses due to the Company's
relocation in the beginning of the third quarter of 2003. The Company continues
to monitor and identify ways to reduce operating expenditures. Sales and
marketing expenses decreased 4.0% for the nine months ended September 30, 2003.
The decrease is primarily due to the change in sales staff and associated
expenses. The Company believes that its investment in sales and marketing, at
its current level, is in line with future needs as the economy recovers.
Currently, the Company's infrastructure and systems have been set up and
redesigned to prepare for an increase in sales demand with a minimal increase in
selling, general, and administrative costs.

Research and development costs decreased $64,000 or 11.4% to $498,000 for the
nine months ended September 30, 2003 from $562,000 for the nine months ended
September 30, 2002. The decrease is primarily attributed to a reduction of
research and development staff. The Company continually strives to sustain its
commitment to product improvements and research and development. As a result,
research and development expenditures fluctuate from quarter to quarter, and may
increase in future quarters. During the first quarter 2003, the Company's
research and development department completed an overall "vibration core"
product redesign. The design changes will improve reliability, increase the ease
of manufacturing, and increase usability for our

                                       15
<PAGE>

customers.

On June 20, 2003, the Company received the arbitration decision on claims
brought by Gregg K. Hobbs (refer to Note 8 Legal Matters, of the Financial
Statements). The arbitrator found damages totaling $261,650 in favor of Dr.
Hobbs for the breach of certain provisions of the September 30, 1995 separation
agreement. The Company included in the nine months ended September 30, 2003,
financial statements estimates of $411,000 for costs related to and including
the arbitration damages, fees, and interest expense, and $149,000 for Company
incurred legal fees, for a total arbitration related expense of $560,000.
Previously incurred arbitration related expenses of $294,000 were accounted for
in the nine months end September 30, 2002.

Liquidity and Capital Resources

During the nine months ended September 30, 2003, the Company used $35,000 of
cash in operating activities, invested $195,000 for equipment and received
$11,000 from the sale of equipment, and borrowed $250,000 through related party
short term notes and repaid $510,000 of commercial bank borrowings. Together,
these activities resulted in a cash decrease of $479,000, for an ending balance
of $809,000 at September 30, 2003. During the nine months ended September 30,
2002, the Company generated $199,000 of cash from operating activities, invested
$200,000 for equipment, and repaid $460,000 of commercial bank borrowings. The
Company also received net proceeds of $967,000 from the issuance of preferred
stock. Together, these activities resulted in a cash increase of $506,000, for
an ending balance of $1,006,000 at September 30, 2002.

The Company's commercial bank borrowings consist of a term loan and a revolving
line of credit.

During 2002, there were various renegotiations of the Credit Agreement. Among
other changes, the interest rate was increased to Prime Rate plus 3.0%, with
required monthly payments of $55,000, and the maturity date was extended to
March 15, 2003. On January 23, 2003, the Company renegotiated its Credit
Agreement with the commercial bank. Among other changes, the principal amount of
the revolving line of credit was reduced to $500,000 and the principal amount of
the term loan was increased to $1,110,000, the monthly principal payments
increased on July 1, 2003 from $55,000 to $65,000, and the maturity date was
extended to March 15, 2004. On July 25, 2003, the Company renegotiated its
Credit Agreement with the commercial bank. Among other changes, the monthly
principal payments decreased from $65,000 to $60,000 beginning July 31, 2003.

The average interest rate for the nine-month periods ending September 30, 2003
and 2002, for the term loan and revolving credit line was 5.54% (7.43% effective
interest) and 6.03% (7.20% effective interest), respectively. Both the revolving
credit line and term loan under the Credit Agreement are collateralized by
substantially all the assets of the Company. Borrowings under the line of credit
are subject to borrowing base limits. Based on the provisions of the Credit
Agreement, as of September 30, 2003, there was no additional availability on the
line of credit.

As of September 30, 2003, the balances of the revolving credit and term loan are
$500,000 and $600,000, respectively.

The Company must maintain certain financial and other covenants to be in
compliance with the Credit Agreement. The Company is not now, nor has it ever
been in arrears on any payment pursuant to the Credit Agreement. For the nine
months ended September 30, 2003, the Company was not in compliance with certain
financial covenants, however, the Company does meet the covenants for the three
months ended September 30, 2003. The commercial bank has confirmed to management
that they would not take any actions related to such non-compliance for the nine
months ended September 30, 2003 based on the Company meeting the covenants for
the three months ended September 30, 2003. The Company cannot give any assurance
on future compliance with the financial and other covenants set forth in the
Credit Agreement. Such non-compliance may have a material adverse affect on the
Company's liquidity and its ability to generate the funds necessary to satisfy
the existing Credit Agreement.

As required by the renegotiated Credit Agreement the Company is making monthly
principal payments of $60,000 on the term loan. The Company had also determined
that, during 2003, quarterly payments to the revolving line of credit would be
made based on cash flows generated from operations. For the nine months ended
September 30, 2003, the Company has been unable to make any additional payments
to relieve the revolving line of credit. The Company can not give any guarantee
on its ability to make additional payments to the revolving line of credit for
the remainder of 2003. At the close of each quarter, the Company has made
arrangements to meet and review results of the Company with the commercial bank
and the Company believes its relations with its commercial bank to be good. At
the end of 2003, the Company expects to negotiate with the commercial bank for
an extension to the Credit Agreement, although there can be no guarantee that
such renegotiations will be successful.

                                       16

<PAGE>


On June 20, 2003, the Company received the arbitration decision on claims
brought by Gregg K. Hobbs (refer to Note 8 Legal Matters, of the Financial
Statements). The arbitrator found damages totaling $261,650 in favor of Dr.
Hobbs for the breach of certain provisions of the September 30, 1995 separation
agreement. The arbitrator also confirmed that certain claims for breaches
originally alleged by Dr. Hobbs were dismissed. Based on the decision, both
parties made respective requests for attorneys' fees and costs for the claims on
which each party prevailed. Included in the Company's financial statements for
the nine months ended September 30, 2003, is $411,000 for costs related to and
including the arbitration damages, fees, and interest expense, and $149,000 for
Company incurred legal fees, for a total arbitration related expense of
$560,000. The $411,000 estimate is subject to final clarification and its is
reasonably possible to assume that this estimate will change in the near term.
The effect of this change in estimate could be material to the financial
statements. QualMark and its counsel are evaluating the arbitration ruling, as
well as the impact it will have on the other pending litigation with Dr. Hobbs.
QualMark is also evaluating the impact of the damages, legal fees, and payment
timing on its financial position, which could be material depending on the
outcome of these matters. The Company believes it will be able to raise the
short-term funds needed to satisfy the outstanding judgement when it is
finalized, although no assurances can be given. In July and August 2003, the
Company had $264,000 of funds garnished by Hobbs (Refer to Note 8, of the
Financial Statements). The Company has not paid over these funds to Hobbs
because of a legal challenge. On October 6, 2003 Judge Stern, of the District
Courts, ruled in favor of the Company on the motion for relief from judgment and
acknowledged that the Company will have an opportunity to challenge confirmation
of the award when the arbitrator issues a final award. The Company has moved for
release of the funds that were garnished but as of the date of the filing the
funds have not been released. If the Company is unable to raise the short-term
funds needed to satisfy the outstanding judgement, including the successful
release the $264,000 garnished funds, or negotiate a satisfactory payment
arrangement with Hobbs when the arbitration is finalized, then a material
adverse effect on the Company's liquidity could occur. The Company would address
this issue, should it arise, by implementing plans to reduce operating expenses,
including reductions in the Company's work force and other operating costs, and
through raising additional funds through the sale of additional capital stock or
issuance of debt, or, if necessary, a possible Chapter 11 bankruptcy
reorganization.

While there is no guarantee that the Company will be able to meet the
operational and financial requirements of its 2003 budget and limit the use of
cash and cash equivalents, the Company's operating plan and execution thereof is
focused on growing revenue, controlling costs and conserving cash. The Company
can not predict with certainty the expected revenues, gross profit margin, net
loss and usage of cash and cash equivalents for 2003. However, the Company's
management believes that the Company's cash and cash equivalents and working
capital provide adequate capital resources to fund its operations, 2003 debt
repayments, and working capital needs, through at least the end of the third
quarter of 2004. The Company's inability to modify or replace its debt when it
comes due on March 15, 2004, or to obtain required capital when needed could
have a material adverse effect on its business, results of operations and
financial condition, and the Company could be required to reduce its level of
operations, delay product development or take other actions to diminish the
amount of cash used in its business. While there can be no guarantee, the
Company's management believes that it will be able to extend the due date of its
credit facility with the bank, or replace such facility with other borrowings.

Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity," ("SFAS 150") which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). Mandatorily redeemable instruments (i.e.,
instruments issued in the form of shares that unconditionally obligate the
issuer to redeem the shares for cash or by transferring other assets) are
required to be reported as liabilities by their issuers. This statement does not
affect the classification or measurement of convertible bonds, puttable stock,
or other outstanding shares that are conditionally redeemable. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003 for public companies. The Company currently has no
financial instruments that embody an unconditional obligation of the Company.
Therefore, the adoption of SFAS 150 did not impact the Company's financial
statements.

Business Environment

Refer to the 2002 Form 10KSB, Management Discussion and Analysis, Item 6.

Suppliers

Refer to the 2002 Form 10KSB, Management Discussion and Analysis, Item 6.

International Operations

                                       17

<PAGE>

Refer to the 2002 Form 10KSB, Management Discussion and Analysis, Item 6.

Intellectual Property

Refer to the 2002 Form 10KSB, Management Discussion and Analysis, Item 6.

Legal Proceedings

Refer to Note 8 of the Financial Statements


                                       18

<PAGE>


Government Regulation

Refer to the 2002 Form 10KSB, Management Discussion and Analysis, Item 6.

Nasdaq Market Listing

Refer to the 2002 Form 10KSB, Market for Common Equity and Related Stockholder
Matters, Item 5.

Critical Accounting Policies and Estimates

Refer to the 2002 Form 10KSB, Management Discussion and Analysis, Item 6.

Contractual Obligations

Refer to the 2002 Form 10KSB, Management Discussion and Analysis, Item 6.

Item 3.

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to interest rate changes are primarily related to its
variable rate debt issued under its $1,100,000 Credit Agreement (refer to Note 3
Commercial Bank Borrowings, of the Financial Statements). Because the interest
rates on these facilities are variable, based upon the bank's prime rate, the
Company's interest expense and net income are affected by interest rate
fluctuations. If interest rates were to increase or decrease by 100 basis
points, the result, based upon the existing outstanding debt as of September 30,
2003 would be an annual increase or decrease of approximately $11,000 in
interest expense for a twelve-month period.

During 2003, revenue generated from foreign sales are primarily payable in
United States dollars. Certain foreign sales are denominated in Euros, however
the foreign exchange rate risk is not material.

Item 4.

                             CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures:

Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated and communicated to management, including the President and Chief
Executive Officer and the Chief Financial Officer, as appropriate, to allow
timely decisions regarding required

                                       19

<PAGE>

disclosure. As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's President and Chief Executive
Officer and its Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based upon and as
of the date of that evaluation, the President and Chief Executive Officer and
the Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.

(b) Changes in Internal Controls:

There were no changes in the Company's internal controls or in other factors
that could have significantly affected those controls subsequent to the date of
the Company's most recent evaluation.

                            PART II OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 8 of the Financial Statements


                                       20

<PAGE>


Item 2. Changes in Securities

     None

Item 3. Defaults upon Senior Securities

     None

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

     None

Item 5. Other Information

     None

Item 6. Exhibits and Reports on Form 8-K.

     (a) Exhibits - See Index to Exhibits

     (b) Reports on Form 8-K during the quarter ended September 30, 2003:

         On July 30, 2003, the Company issued a press release announcing its
         earnings for the second quarter ended June 30, 2003.

                                       21

<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                              QualMark Corporation

Date: November 13, 2003                       By: /s/ CHARLES D. JOHNSTON
                                                  ------------------------------
                                                  Charles D. Johnston President,
                                                  Chief Executive Officer

Date: November 13, 2003                       By: /s/ ANTHONY A. SCALESE
                                                  ------------------------------
                                                  Anthony A. Scalese
                                                  Chief Financial Officer
                                                  & Principal Accounting Officer

                                       22

<PAGE>

                                INDEX TO EXHIBITS

                EXHIBIT
                 NUMBER                     DESCRIPTION
                -------    -----------------------------------------------------
                  3.1      Amended and Restated Articles of Incorporation of the
                           Company.(1)

                  3.2      Amended and Restated Bylaws of the Company.(1)

                  3.3      Certificate of Designation for Series A Preferred
                           Stock.(5)

                  3.4      Amended Certificate of Designation for Series A
                           Preferred Stock.(5)

                  3.5      Statement of Change of Registered Agent.(5)

                  4.1      Form of Certificate for Shares of Common Stock.(1)

                  4.6      Form of Warrant issued to holders of 10% secured
                           promissory notes.(1)

                  10.1     QualMark Corporation 1993 Incentive Stock Option
                           Plan.(1)

                  10.2     QualMark Corporation 1996 Stock Option Plan.(3)

                  10.3     Employment Agreement dated March 1, 1993 by and
                           between the Company and W. Preston Wilson.(1)

                  10.4     Employment Agreement dated August 15, 1994 by and
                           between the Company and J. Wayne Farlow.(1)

                  10.5     Agreement dated September 30, 1995 by and between the
                           Company and Gregg K. Hobbs.(1)

                  10.8     Addendum to Agreement dated as of December 21, 1995
                           by and between the Company and Gregg K. Hobbs.(1)

                  10.11    Loan and Security Agreement dated April 30, 1996, by
                           and between QualMark Corporation and Silicon Valley
                           Bank, as amended by Amendment to Loan and Security
                           Agreement dated August 18, 1997.(2)

                  10.12    Loan and Security Agreement dated December 22, 1998,
                           by and between QualMark Corporation and U.S. Bank
                           National Association.(4)

                  10.13    Waiver and Amendment to Loan Agreement dated March
                           15, 1999 by and between QualMark and U.S. Bank
                           National Association.(4)

                  10.14    Second Amendment to Loan Agreement dated August 23,
                           1999 by and between QualMark and U.S. Bank National
                           Association.(5)

                  10.15    Settlement Agreement dated August 30, 1999 by and
                           among QualMark Corporation and Screening Systems,
                           Inc.(5)

                  10.16    Preferred Stock Purchase Agreement dated September 1,
                           1999, including Warrant to Purchase 139,535 Shares of
                           Common Stock.(5)

                  10.17    Third Amendment to Loan Agreement dated March 31,
                           2000 by and between QualMark and U.S. Bank National
                           Association.(6)

                  10.18    Employment Agreement dated July 17, 2000 by and
                           between the Company and Charles D. Johnston.(7)

                                       23

<PAGE>

                EXHIBIT
                 NUMBER                     DESCRIPTION
                -------    -----------------------------------------------------
                  10.19    Second Amendment to Promissory Notes and Fifth
                           Amendment to Loan Agreement dated February 1, 2001 by
                           and between QualMark and U.S. Bank National
                           Association.(8)

                  10.20    Third Amendment to Promissory Notes and Sixth
                           Amendment to Loan Agreement dated June 29, 2001 by
                           and between QualMark and U.S. Bank National
                           Association.(9)

                  10.21    Fourth Amendment to Promissory Notes and Seventh
                           Amendment to Loan Agreement dated January 31, 2002 by
                           and between QualMark and U.S. Bank National
                           Association. (10)

                  10.22    Series C Preferred Stock Purchase Agreement dated
                           March 27, 2002 (11)

                  10.23    Series C Preferred Stock Certificate of Designations
                           (11)

                  10.24    Series B Preferred Stock Certificate of Designations
                           (11)

                  10.25    Fifth Amendment to Promissory Notes and Ninth
                           Amendment to Loan Agreement dated July 25, 2003 by
                           and between QualMark and U.S. Bank National
                           Association. (12)

                  10.26    Warrant agreement to purchase 25,000 shares of Common
                           Stock dated July 25, 2003. (12)

                  31.1     CEO Certification of Section 302 of the
                           Sarbanes-Oxley Act of 2002

                  31.2     CFO Certification of Section 302 of the
                           Sarbanes-Oxley Act of 2002

                  32       Certifications of Section 906 of the Sarbanes-Oxley
                           Act of 2002

(1) Incorporated by reference from the Company's Registration Statement No.
333-1454-D on Form SB-2.

(2) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997.

(3) Incorporated by reference from the Company's Proxy Statement for the 1996
Annual Meeting of Shareholders.

(4) Incorporated by reference from the Company's Annual Report of Form 10-KSB
for the year ended December 31, 1998.

(5) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1999.

(6) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2000.

(7) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2000.

(8) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2000.

(9) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2001.

(10) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2001.

(11) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2002.

(12) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2003

                                       24