<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, 2004

[ ]   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 10,
2004 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 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,
                                                  2004           2003           2004           2003
                                               -----------    -----------    -----------    -----------
<S>                                          <C>             <C>            <C>            <C>
Net revenue                                    $     2,717    $     2,044    $     8,777    $     5,354
Cost of sales                                        1,477          1,252          4,609          3,329
                                               -----------    -----------    -----------    -----------
    Gross profit                                     1,240            792          4,168          2,025

Selling, general and administrative expenses           749            543          2,476          1,683
Research and development expenses                      205            169            542            498
Arbitration and associated legal expenses               51             24            264            560
                                               -----------    -----------    -----------    -----------
   Income (loss) from operations                       235             56            886           (716)

Other expense:

    Interest, net                                      (19)           (35)           (69)           (93)
                                               -----------    -----------    -----------    -----------
Income (loss) before income taxes                      216             21            817           (809)

Provision for income taxes                              (4)            --             (9)            --
                                               -----------    -----------    -----------    -----------
Net income (loss)                              $       212    $        21    $       808    $      (809)
                                               ===========    ===========    ===========    ===========

Net income (loss) per share - basic            $      0.03    $     (0.02)   $      0.13    $     (0.31)

Net income (loss) per share - diluted          $      0.02    $     (0.02)   $      0.09    $     (0.31)

Weighted average number of common shares -
  basic                                          3,610,000      3,610,000      3,610,000      3,610,000

Weighted average number of common shares -
  diluted                                        7,341,000      3,610,000      7,199,000      3,610,000
</TABLE>

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

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30, 2004  DECEMBER 31, 2003
                                                                    ------------------  -----------------
                                                                        (UNAUDITED)
<S>                                                                 <C>                 <C>
ASSETS
Current assets:
  Cash                                                                    $   578            $   442
  Trade accounts receivable, net of allowance for
     doubtful accounts of $46 and $28 at September 30,
      2004 and December 31, 2003, respectively                              2,291              2,119
  Inventories, net                                                            593                379
  Other current assets                                                         82                 35
                                                                          -------            -------
    Total current assets                                                    3,544              2,975

  Property and equipment, net                                                 652                622
  Restricted cash                                                              90                 90
  Other assets                                                                103                 94
                                                                          -------            -------
                                                                          $ 4,389            $ 3,781
                                                                          =======            =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Accounts payable                                                        $   872            $   858
  Accrued arbitration settlement                                               36                426
  Accrued expenses, other                                                     866                450
  Current portion of long-term debt                                           680                440
                                                                          -------            -------
    Total current liabilities                                               2,454              2,174
  Long-term debt                                                               --                480
                                                                          -------            -------
     Total liabilities                                                      2,454              2,654
                                                                          -------            -------

Commitments and contingencies

Convertible redeemable preferred stock; 2,000,000 shares authorized
(Note 7):
     692,951 designated as Series B, 683,967 shares (2004) and 631,549
       (2003) shares issued and outstanding, liquidation preference of
       $1,500 (2004)                                                        1,470              1,369
     2,000 designated as Series C, 1,198 shares (2004) and 1,106 shares
       (2003) issued and outstanding, liquidation preference of $1,222
       (2004)                                                                 724                503

Shareholders' deficit:
  Common stock; no par value; 15,000,000 shares authorized;
      3,610,092 shares issued and outstanding                               7,122              7,444
  Accumulated deficit                                                      (7,381)            (8,189)
                                                                          -------            -------
     Total shareholders' deficit                                             (259)              (745)
                                                                          -------            -------
                                                                          $ 4,389            $ 3,781
                                                                          =======            =======
</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 30,            SEPTEMBER 30,
                                                                  2004                     2003
                                                              -------------            -------------
<S>                                                           <C>                      <C>
Cash Flows From Operating Activities:
Net income (loss)                                                $   808                 $  (809)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
    Depreciation and amortization                                    215                     267
    Gain on disposal of equipment                                     --                      (4)
    Decrease in inventory reserve                                     --                     (10)
    Amortization of warrants issued to bank                           --                       5
    Provision for bad debts                                           18                      (7)
    Warrants and stock option expense                                  7                      11
Change in assets and liabilities:
    Trade accounts receivable                                       (190)                   (281)
    Inventories                                                     (214)                    228
    Other assets                                                     (61)                    (97)
    Accounts payable and accrued expenses                            423                     662
    Accrued arbitration settlement                                  (390)                     --
                                                                 -------                 -------
        Net cash provided by (used in) operating activities          616                     (35)

Cash Flows From Investing Activities:
Acquisition of property and equipment                               (240)                   (195)
 Sale of property and equipment                                       --                      11
                                                                 -------                 -------
    Net cash used in investing activities                           (240)                   (184)
Cash Flows From Financing Activities:
Proceeds from borrowings                                              80                     250
Payments on borrowings                                              (320)                   (510)
                                                                 -------                 -------
    Net cash used in financing activities                           (240)                   (260)

Net increase (decrease) in cash                                      136                    (479)
Cash and cash equivalents at beginning of period                     442                   1,288
                                                                 -------                 -------
Cash and cash equivalents at end of period                       $   578                 $   809
                                                                 =======                 =======

Supplemental Disclosure:
Interest paid                                                    $    64                 $    87

Non-Cash Investing and Financing Activities:

Preferred stock dividends                                        $   158                 $   146

Accretion of preferred stock                                     $   164                 $   163

Transfer of equipment to inventory held for resale               $    --                 $     1

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, 2003 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, 2004 and for the three and nine
months ended September 30, 2004 and 2003 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, 2004 are not necessarily indicative of
results for the remainder of 2004. Amounts at December 31, 2003 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 with exercise prices equal to or greater than the quoted market
price. 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          NINE MONTHS ENDED
                                            SEPTEMBER 30,  SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
                                                2004          2003          2004           2003
                                              ---------     ---------     ---------     ---------
<S>                                           <C>           <C>           <C>           <C>
Net income (loss)                             $     212     $      21     $     808     $    (809)

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                                             (78)         (121)         (227)         (355)
                                              ---------     ---------     ---------     ---------
Pro forma net income (loss)                   $     134     $    (100)    $     581     $  (1,164)
                                              =========     =========     =========     =========

Income (loss)  per share:

Basic -  as reported                          $    0.03     $   (0.02)    $    0.13     $   (0.31)
                                              =========     =========     =========     =========
Diluted - as reported                         $    0.02     $   (0.02)    $    0.09     $   (0.31)
                                              =========     =========     =========     =========
Basic - pro forma                             $    0.01     $   (0.06)    $    0.07     $   (0.41)
                                              =========     =========     =========     =========
Diluted - pro forma                                   *     $   (0.06)    $    0.04     $   (0.41)
                                              =========     =========     =========     =========
</TABLE>

* Less than $0.01 per share.

                                       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 Financial Accounting Standards Board (FASB) issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes new standards on how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. The provisions of SFAS No. 150 are generally
effective for all financial instruments entered into or modified after May 31,
2003, except for those provisions relating to mandatorily redeemable
non-controlling interests, which have been deferred. The adoption of SFAS No.
150 did not have a material impact on the financial position or results of
operations of the Company. If the deferred provisions of SFAS No. 150 are
finalized in their current form, management does not expect adoption to have a
material effect on the financial position or results of operation of the
Company.

NOTE 2 - Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                      SEPTEMBER 30,    DECEMBER 31,
                          2004            2003
                          -----           -----
<S>                   <C>              <C>
Raw materials             $ 426           $ 375
Work in process             101              13
Finished goods              113              38
Less: Allowance for
  obsolescence              (47)            (47)
                          -----           -----
                          $ 593           $ 379
                          =====           =====
</TABLE>

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

NOTE 3 - Commercial Bank

The Company's commercial bank borrowings consist of a term loan and a revolving
line of credit, (the "Credit Agreement"). Refer to the 2003 Form 10-KSB,
Financial Statement Note 5.

On February 27, 2004, the Company renegotiated its Credit Agreement. Among other
changes, the monthly principal payments decreased from $60,000 to $50,000 for
February 2004, and then decreased to $30,000 from March 2004 through September
2004, with a final increase to $40,000 from October 2004 through maturity. In
addition, the maturity date was extended to March 15, 2005.

On April 20, 2004, the Company renegotiated its Credit Agreement with the
commercial bank. Among other changes, the revolving line of credit was increased
from $500,000 to $1,000,000.

The average interest rate for the nine-month period ended September 30, 2004 and
2003, for the term loan and revolving credit line was 7.17%. Both the revolving
credit line and term loan under the Credit Agreement are collateralized by
substantially all the assets of the Company. As of September 30, 2004, the
balances of the revolving credit and term loan are $580,000 and $100,000,
respectively. Borrowings under the line of credit are subject to borrowing base
limits. Based on the provisions of the Credit Agreement, as of September 30,
2004 there was $420,000 of additional availability on the line of credit.

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 three
and nine months ended September 30, 2004, the Company was in compliance with its
financial covenants.

                                       6
<PAGE>

The Company had also determined that, during 2004, 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.

On November 9, 2004 the Company refinanced its existing Credit Agreement and
entered into a new credit facility with Silicon Valley Bank (the "new Credit
Facility"). The new Credit Facility consists of a $750,000, three-year term loan
payable with monthly payments of $18,000 and a $1,500,000, one-year revolving
line of credit. The interest rate for the revolving line of credit is set at a
per annum rate of 1% over the Prime Rate ("Prime") with a minimum interest rate
of 5.5%. The interest rate for the term loan is set at a per annum rate of
interest equal to the sum of (a) the U.S. treasury note yield to maturity for a
36 month term as quoted in the Wall Street Journal, plus (b) 375 basis points,
or 3.75%, with a minimum interest rate of 6.5% per annum. Both the revolving
credit line and term loan under the new Credit Facility are collateralized by
substantially all the assets of the Company.

NOTE 4 - Income (Loss) Per Share

Basic income (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of shares
outstanding during the period. Diluted income (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,
                                               2004             2003           2004             2003
                                              -------         --------        -------         -------
<S>                                        <C>              <C>            <C>             <C>
Net income (loss)                             $   212          $   21         $   808         $  (809)

Accretion of redeemable preferred
stock and preferred stock dividends              (108)           (104)           (322)           (309)
                                              -------         --------        -------         -------
Net income (loss) available to common
shareholders                                  $   104         $   (83)        $   486         $(1,118)
                                              =======         =======         =======         =======

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

Net income (loss) per share - basic           $  0.03         $ (0.02)        $  0.13         $ (0.31)
                                              =======         =======         =======         =======

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

Dilutive stock options and warrants               137              --             136              --
Convertible preferred stock                     3,594              --           3,453              --
                                              -------         -------         -------         -------

Weighted average shares outstanding -
 diluted                                        7,341           3,610           7,199           3,610
                                              =======         =======         =======         =======

Net income (loss) per share  - diluted        $  0.02         $ (0.02)        $  0.09         $ (0.31)
                                              =======         =======         =======         =======
</TABLE>

Options and warrants to purchase 1,157,603 shares of common stock were included
in the dilutive stock option calculation for the three and nine month period
ended September 30, 2004 using the treasury stock method, which resulted in a
net share increase of 137,000 shares and 136,000 shares, respectively. The
effect of conversions for the three and nine month period ended September 30,
2004 of preferred stock to common stock was 3,593,622 and 3,453,173,
respectively, using the if converted method. Dividends applicable to convertible
preferred stock of $54,000 and $158,000 for the three and nine months ended
September 30, 2004 were added back to net income to determine diluted net income
per share. (refer to Note 7).

Options and warrants to purchase 1,888,063 shares of common stock and 645,393
(3,385,020 if converted to common shares, refer to Note 7) preferred shares were
excluded from dilutive stock option calculations for the three and nine month
periods ended September 30, 2003, as their inclusion would be antidilutive.

                                       7
<PAGE>

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 2003 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 tables below summarize information about reported segments (in thousands) as
of and for the three and nine months ended September 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                                                     EQUIPMENT   ARTC    TOTAL
                                                                     ---------   ----    -----
<S>                                                                  <C>        <C>      <C>
THREE MONTHS ENDED SEPTEMBER 30, 2004
Net revenue                                                            $2,422   $  295   $2,717
Gross profit                                                            1,192       48    1,240
Property and equipment, net                                               232      420      652

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
</TABLE>

<TABLE>
<CAPTION>
                                                                     EQUIPMENT   ARTC    TOTAL
                                                                     ---------   ----    -----
<S>                                                                  <C>        <C>      <C>
NINE MONTHS ENDED SEPTEMBER 30, 2004
Net revenue                                                            $7,841   $  936   $8,777
Gross profit                                                            3,974      194    4,168
Property and equipment, net                                               232      420      652

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
</TABLE>

The following information is by geographic area (in thousands) as of and for the
three and nine months ended September 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                                UNITED                               ASIA      MIDDLE
                                                STATES       MEXICO   EUROPE        PACIFIC     EAST      TOTAL
                                                ------       ------   ------        -------     ----      -----
<S>                                             <C>          <C>      <C>           <C>        <C>        <C>
THREE MONTHS ENDED SEPTEMBER 30, 2004
Sales                                           $1,226           --   $   27        $1,464       --       $2,717
Property and equipment, net                        648           --        4            --       --          652

THREE MONTHS ENDED SEPTEMBER 30, 2003
Sales                                           $  904       $  186   $  204        $  750       --       $2,044
Property and equipment, net                        567           --       84            --       --          651
</TABLE>

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                UNITED                               ASIA      MIDDLE
                                                STATES       MEXICO   EUROPE       PACIFIC      EAST       TOTAL
                                                ------       ------   ------       --------     ----       -----
<S>                                             <C>          <C>      <C>          <C>         <C>         <C>
NINE MONTHS ENDED SEPTEMBER 30, 2004
Sales                                           $3,685       $  174   $  847        $4,004      $67        $8,777
Property and equipment, net                        648           --        4            --       --           652

NINE MONTHS ENDED SEPTEMBER 30, 2003
Sales                                           $2,721       $  186   $  793        $1,654       --        $5,354
Property and equipment, net                        567           --       84            --       --           651
</TABLE>

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

NOTE 6 - Income Taxes

During the three months ended September 30, 2004 the Company recorded a $4,000
provision for estimated Alternative Minimum Tax (AMT). The Company anticipates
net operating profits for the year ended December 31, 2004, although no
assurance can be given. The Company expects to utilize its net operating loss
carryforwards to offset any ordinary taxable income for the year ended December
31, 2004.

Refer to the Company's 2003 Form 10-KSB, Financial Statement Note 7.

NOTE 7 - Preferred Stock

Refer to the Company's 2003 Form 10-KSB, Financial Statement Note 8 for full
preferred stock (B & C) disclosure.

Preferred Stock - Series B ("Series B preferred stock")

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

      Designation - On November 2, 2004, the Company's Board of Directors
      approved an increase in the number of Series B preferred shares designated
      to 1,000,000. This increase in the Series B designation allows the Company
      to continue to issue preferred stock to the holder, as payment for
      dividends earned.

      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. The applicable conversion terms resulted in a beneficial conversion
      feature, which has been accreted in full as of September 1, 2004, which is
      the earliest date the Series B preferred stockholder could elect the
      option to redeem the Series B preferred stock. The accretion recorded for
      the three and nine months ended September 30, 2004 and 2003 was $4,000 and
      $12,000, respectively, for each period

      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, 2004 and 2003,
      $30,000 and $28,000 of dividends were accrued, respectively. During the
      nine months ended September 30, 2004 and 2003, $87,000 and $80,000 of
      dividends were accrued, respectively. As of September 30, 2004, the Series
      B preferred shares have $30,000 of accumulated dividends in arrears. Of
      the dividends in arrears at September 30, 2004, the Company anticipates a
      dividend payment (in kind) of 13,771 Series B

                                       9
<PAGE>

      preferred shares at the liquidation price of $2.15 per share on or before
      December 31, 2004.

      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 $1,500,000 at September 30, 2004.

      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 ("Series C preferred stock")

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

      Designation - On November 2, 2004, the Company's Board of Directors
      approved an increase in the number of Series C preferred shares designated
      to 3,000. This increase in the Series C designation allows the Company to
      continue to issue preferred stock to the holder, as payment for dividends
      earned.

      Conversion - The Series C preferred stock may, at the option of the
      holder, be converted at any time into shares of common stock. 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 resulted in a beneficial conversion feature which is
      being accreted to the earliest date the Series C preferred stockholder can
      elect the option to redeem the Series C preferred stock. The accretion
      recorded for the three and nine months ended September 30, 2004 and 2003
      was $37,000 and $113,000, respectively, for each period.

      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, 2004 and 2003,
      $24,000 and $22,000 of dividends were accrued, respectively. During the
      nine months ended September 30, 2004 and 2003, $71,000 and $65,000 of
      dividends were accrued, respectively. As of September 30, 2004, the Series
      C preferred shares accumulated dividends in arrears of $24,000. Of the
      dividends in arrears at September 30, 2004, the Company anticipates a
      dividend payment (in kind) of

                                       10
<PAGE>

      24 Series C preferred shares at the liquidation price of $1,000 per share
      on or before December 31, 2004.

      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 total $1,222,000 at September 30, 2004.

      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 Series C
      holder 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. The accretion recorded
      during the three and nine months ended September 30, 2004 and 2003 was
      $13,000 and $39,000, respectively, for each period.

NOTE 8 - Legal Matters

On May 30, 2001, the Company was served with an arbitration demand from Gregg K.
Hobbs ("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 that Hobbs
suffered damages in excess of $7,000,000. The parties selected a single
arbitrator with the Judicial Arbiter Group ("JAG") in Denver, Colorado and after
several delays a hearing was held before the arbitrator beginning on April 21,
2003. At the conclusion of the arbitration hearing, Hobbs asserted damages of
$10,000,000. The arbitrator issued a "Decision and Award" on June 20, 2003, in
which the arbitrator found the Company had breached certain provisions of the
September 30, 1995 agreement and awarded Hobbs damages in the amount of
$261,650. On July 11, 2003, as instructed by the arbitrator, the parties
submitted requests for attorney fees and costs and interest. Subsequently, both
parties 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.

On November 17, 2003, the arbitrator made a final award in favor of Hobbs in the
amount of $410,729, which includes the net amount of fees and costs awarded to
Hobbs as well as interest at 8% from June 20, 2003. In response to efforts by
Hobbs to confirm the June 20, 2003 award, the Company filed pleadings contesting
confirmation based on irregularities in the arbitration decision and award.
Following briefings and two judicial hearings, the Company and Hobbs reached a
settlement on February 13, 2004, in which the Company agreed to withdraw its
objections to confirmation and Hobbs agreed to accept payment according to a
schedule. The schedule called for one lump sum payment of $264,109 on February
17, 2004, which was paid by the Company, and monthly payments, due on the last
day of the month, of approximately $19,000 from March through November of 2004,
plus interest at 8%. The payment schedule and terms call for additional
penalties of up to $30,000 against the Company in the event a payment is not
timely received by Hobbs. As of September 30, 2004, the Company had been timely
with its payments, and had an outstanding liability to Hobbs of $36,000, which
includes the arbitration award and accrued interest through September 30, 2004.

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 all allegations of the complaint
and on June 23, 2003 the Company asserted a counter-claim against Hobbs seeking
damages for copyright infringement, alleging that Hobbs had sold all of his HALT
and HASS related intellectual property to the Company in 1994 for valuable
consideration. On November 3, 2003 the Company filed a motion for partial
summary judgment, and on May 21, 2004, the Company filed a motion for leave to
supplement its motion for summary judgment. On June 19, 2004, the Judge granted
the Company's motion for summary judgment, finding that Hobbs had sold the
copyrighted material to the Company for valuable consideration in 1994 and the
Court issued an order that Hobbs must pay QualMark's legal fees and costs based
on a finding that Hobbs' case was frivolous and his legal positions were not
reasonable. The Company submitted an application for fees and costs

                                       11
<PAGE>

totaling $243,000. Hobbs has opposed the application for fees, which the Judge
has not yet ruled on. Hobbs has also appealed the grant of summary judgment in
favor of the Company to the United States Court of Appeals for the 10th Circuit.

The Company's counterclaim against Hobbs alleging copyright infringement was
dismissed without prejudice based on the Company's having not registered its
copyrights prior to initiating the counterclaim. The Company had registered its
copyrights in seminar materials with the Register of Copyrights after it filed
its counterclaim and the Company has re-filed its infringement action in the
U.S. District Court for Colorado and has also sought a preliminary injunction to
prevent Hobbs from using the Company's copyrighted materials without permission.
A hearing on the preliminary injunction was held on July 27, 2004. On September
16, 2004, the U.S. District Court denied the Company's motion for a preliminary
injunction and ruled that the matter of Hobbs' alleged infringement of the
Company's copyrights and any remedy for such infringement must go to trial.
There is no assurance that the Company will be awarded by the Court all of the
fees and costs applied for or that Hobbs will voluntarily pay the Company
amounts awarded by the Court. The Company will vigorously pursue its claim for
fees and costs and seek to collect any award in full and will take all legal
steps necessary to protect its favorable ruling on appeal.

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, 2004 Compared With Three Months Ended September
30, 2003

Revenue

Net revenue increased $673,000 or 32.9% from $2,044,000 in the three months
ended September 30, 2003 to $2,717,000 for the three months ended September 30,
2004.

      Equipment Revenue

Equipment revenue increased $679,000 or 39.0% from $1,743,000 in the three-month
period ended September 30, 2003 to $2,422,000 in the three months ended
September 30, 2004. The number of OVS units sold in the third quarter 2004
increased 36.4% over the third quarter 2003. The increase in sales for the
quarter ended September 30, 2004 is primarily a result of the Company's
aggressive pursuit of international sales and a slight improvement in the
domestic economy in the last half of 2003, continuing through the third quarter
2004. Of the total units sold, international system sales increased 31% over the
same period in 2003. The Company continues to be cautiously optimistic in
regards to a slowly recovering economy through the remainder of 2004, as a
result, the Company is continuing to cultivate its international presence by
emphasizing its core markets. QualMark utilizes fifteen international
distributors including distributors from the European, Mexican, Middle Eastern,
and Asian sectors. The Company is encouraged by

                                       12
<PAGE>

the steady increase in equipment sales but cannot give any assurance of the
demand of its international sales, or the overall increase in equipment sales.

      Test Center (ARTC) Revenue

Test center revenue decreased $6,000 or 2.0% to $295,000 in the three-month
period ended September 30, 2003 from $301,000 in the three months ended
September 30, 2004. The Company operated four test centers in the U.S.,
maintained three domestic strategic agreement test center operations, and three
strategic agreement test center operations in Europe during the three months
ended September 30, 2004, versus four test centers operations in the U.S., one
strategic domestic agreement test center operation, and four strategic agreement
test centers in Europe during the same period in 2003. The Company does not have
a continuing obligation under any of the domestic or international strategic
test center agreements. The Company also continues to examine the strategic
agreement test center model, in which additional agreements 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 agreements.
The Company feels confident that these changes will 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, 2004 was 45.6%. This
compares to a gross margin of 38.7% for the three months ended September 30,
2003. The increase in gross margin for the three-month period is primarily due
to the 36.4% increase in OVS units sold.

Operating Expenses

Total operating expenses increased $269,000 or 36.5% to $1,005,000 for the three
months ended September 30, 2004 from $736,000 for the three months ended
September 30, 2003.

Selling, general and administrative expenses increased $206,000 or 37.9% to
$749,000 in the three months ended September 30, 2004 from $543,000 for the
three months ended September 30, 2003. The increase is attributed to the
Company's 32.9% increase in sales and the investment in the Company through its
sales and marketing programs, which is in line with the Company's projected
needs.

Research and development costs increased $36,000 or 21.3% to $205,000 for the
three months ended September 30, 2004 from $169,000 for the three months ended
September 30, 2003. The increase is primarily attributed to an increase in
research and development staff, including contract labor. 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.

Arbitration and legal associated expenses increased $27,000 or 112.5% to $51,000
for the three months ended September 30, 2004 from $24,000 for the three months
ended September 30, 2003. On June 19, 2004, the Company was granted summary
judgment for a complaint of copyright infringement brought by Dr. Hobbs (refer
to Note 8 Legal Matters). For the three months ended September 30, 2004, legal
costs of $51,000, attributed to defending the copyright infringement action were
included in the financial statements. On November 17, 2003 the Company received
the final arbitration decision and the decision on interest and fees on claims
brought by Gregg K. Hobbs (refer to Note 8 Legal Matters). Arbitration related
expenses of $24,000 were accounted for in the three months ended September 30,
2003.

Income Tax

During the three months ended September 30, 2004 the Company recorded a $4,000
provision for estimated Alternative Minimum Tax (AMT), as the Company
anticipates net operating profits for the year ended December 31, 2004, although
no assurance can be given. The Company expects to utilize its net operating loss
carryforwards to offset any ordinary taxable income for the year ended December
31, 2004.

Interest Expense

                                       13
<PAGE>

Interest expense decreased $16,000 or 45.7% to $19,000 for the three months
ended September 30, 2004 from $35,000 for the three months ended September 30,
2003. The decrease is primarily attributed to the continued payment of the
outstanding commercial bank debt, which decreased approximately $420,000 from
September 30, 2003 to September 30, 2004.

Nine Months Ended September 30, 2004 Compared With Nine Months Ended September
30, 2003

Revenue

Net revenue increased $3,423,000 or 63.9% from $5,354,000 in the nine months
ended September 30, 2003 to $8,777,000 for the nine months ended September 30,
2004.

      Equipment Revenue

Equipment revenue increased $3,319,000 or 73.4% from $4,522,000 in the
nine-month period ended September 30, 2003 to $7,841,000 in the nine months
ended September 30, 2004. The number of OVS units sold in the first nine months
2004 increased 60.0% over the first nine months 2003. The increase in sales for
the nine months ended September 30, 2004 is primarily a result of the Company's
aggressive pursuit of international sales and a slight improvement in the global
economy in the last half of 2003, continuing through the nine months of 2004. Of
the total units sold, international system sales increased 93.4% over the same
period in 2003. The Company continues to be cautiously optimistic in regards to
a slowly recovering economy through the remainder of 2004, as a result, the
Company is continuing to cultivate its international presence by emphasizing its
core markets. QualMark utilizes fifteen international distributors including
distributors from the European, Mexican, Middle Eastern, and Asian sectors. The
Company is encouraged by the steady increase in equipment sales but cannot give
any assurance of the demand of its used/refurbish equipment sales, international
sales, or the overall increase in equipment sales.

      Test Center (ARTC) Revenue

Test center revenue increased $104,000 or 12.5% from $832,000 in the nine-month
period ended September 30, 2003 to $936,000 in the nine months ended September
30, 2004. The Company operated four test centers in the U.S., maintained three
domestic strategic agreement test center operations, and three strategic
agreement test center operations in Europe during the nine months ended
September 30, 2004, versus four test centers operations in the U.S., one
strategic domestic agreement test center operation, and four strategic agreement
test centers in Europe during the same period in 2003. The Company primarily
attributes the increase in test center revenue to an improved domestic test
center economy and an increase in testing volume in the strategic domestic test
centers. The Company does not have a continuing obligation under any of the
domestic and international strategic agreement test center agreements. The
Company also continues to examine the strategic agreement test center model, in
which additional agreements 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 agreements. The Company feels
confident that these changes will 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, 2004 was 47.5%. This
compares to a gross margin of 37.8% for the nine months ended September 30,
2003. The increase in gross margin for the nine-month period is primarily due to
the 60.0% increase in OVS units sold and an increase in volume of 12.5% for the
Company's test center line of business.

Operating Expenses

Total operating expenses increased $541,000 or 19.7% to $3,282,000 for the nine
months ended September 30, 2004 from $2,741,000 for the nine months ended
September 30, 2003.

Selling, general and administrative expenses increased $793,000 or 47.1% to
$2,476,000 in the nine months ended Sept 30, 2004 from $1,683,000 for the nine
months ended September 30, 2003. The increase is attributed to the Company's
63.9% increase in sales and the investment in the Company through its sales and
marketing programs, which is in line with the Company's projected needs.

                                       14
<PAGE>

Research and development costs increased $44,000 or 8.8% to $542,000 for the
nine months ended Sept' 30, 2004 from $498,000 for the nine months ended
September 30, 2003. The increase is primarily attributed to an increase of
research and development staff, including contract labor. 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.

Arbitration and legal associated expenses decreased $296,000 or 52.9% from
$560,000 for the nine months ended September 30, 2003 to $264,000 for the nine
months ended September 30, 2004. On June 19, 2004, the Company was granted
summary judgment for a complaint of copyright infringement brought by Dr. Hobbs
(refer to Note 8 Legal Matters). For the nine months ended September 30, 2004,
legal costs of $264,000, attributed to defending the copyright infringement
action were included in the financial statements. On November 17, 2003 the
Company received the final arbitration decision and the decision on interest and
fees on claims brought by Gregg K. Hobbs (refer to Note 8 Legal Matters).
Arbitration related expenses of $560,000 were accounted for in the nine months
ended September 30, 2003.

Income Tax

During the nine months ended September 30, 2004 the Company recorded a $9,000
provision for estimated Alternative Minimum Tax (AMT), as the Company
anticipates net operating profits for the year ended December 31, 2004, although
no assurance can be given. The Company expects to utilize its net operating loss
carryforwards to offset any ordinary taxable income for the year ended December
31, 2004.

Interest Expense

Interest expense decreased $24,000 or 25.8% to $69,000 for the nine months ended
September 30, 2004 from $93,000 for the six months ended September 30, 2003. The
decrease is primarily attributed to the continued payment of the outstanding
commercial bank debt, which decreased approximately $420,000 from September 30,
2003 to September 30, 2004.

Liquidity and Capital Resources

During the nine months ended September 30, 2004, the Company generated $616,000
of cash from operating activities, invested $240,000 for equipment, borrowed
$80,000 from its commercial bank and repaid $320,000 of commercial bank
borrowings. Together, these activities resulted in a cash increase of $136,000,
for an ending cash balance of $578,000 at September 30, 2004. During the nine
months ended September 30, 2003, the Company used $35,000 of cash from operating
activities, invested $195,000 for equipment and received $11,000 from 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.

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

On February 27, 2004, the Company renegotiated its Credit Agreement, among other
changes; the monthly principal payments decreased from $60,000 to $50,000 for
February 2004, and then decreased to $30,000 from March 2004 through September
2004, with a final increase to $40,000 from October 2004 through maturity. In
addition, the maturity date was extended to March 15, 2005.

On April 20, 2004, the Company renegotiated its Credit Agreement with the
commercial bank. Among other changes, the revolving line of credit was increased
from $500,000 to $1,000,000.

The average interest rate for the nine-month periods ended September 30, 2004
and 2003, for the term loan and revolving credit line was 7.17%. Both the
revolving credit line and term loan under the Credit Agreement are
collateralized by substantially all the assets of the Company. As of September
30, 2004, the balances of the revolving credit and term loan are $580,000 and
$100,000, respectively. Borrowings under the line of credit are subject to
borrowing base limits. Based on the provisions of the Credit Agreement, as of
September 30, 2004 there was $420,000 of additional availability on the line of
credit.

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 three
and nine months ended September 30, 2004, the Company was in compliance with its
financial covenants. The Company cannot give any assurance on future

                                       15
<PAGE>

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 $30,000 on the term loan. For the three months ended
September 30, 2004, the Company drew $80,000 from the revolving line of credit
for working capital related needs. 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.

On November 9, 2004 the Company refinanced its existing Credit Agreement and
entered into a new Credit Facility (refer to Note 3). The new Credit Facility
consists of a $750,000, three-year term loan payable with monthly payments of
$18,000 and a $1,500,000, one-year revolving line of credit. The interest rate
for the revolving line of credit is set at a per annum rate of 1% over the Prime
Rate with a minimum interest rate of 5.5%. The interest rate for the term loan
is set at a per annum rate of interest equal to the sum of (a) the U.S. treasury
note yield to maturity for a 36 month term as quoted in the Wall Street Journal,
plus (b) 375 basis points, or 3.75%, with a minimum interest rate of 6.5% per
annum. Both the revolving credit line and term loan under the new Credit
Facility are collateralized by substantially all the assets of the Company. The
Company determined that the new Credit Facility would provide sufficient capital
resources to execute its business plan for the next fiscal year.

While there is no guarantee that the Company will be able to meet the
operational and financial requirements of its 2004 and 2005 budgets 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 2004 or 2005.
However, the Company's management believes that the Company's cash and cash
equivalents, working capital, and $1,500,000 revolving credit line provide
adequate capital resources to fund its operations, 2004 debt repayments, and
working capital needs, through at least the end of the third quarter of 2005.
The Company's inability 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 other actions to diminish the amount of cash used
in its business. While their can be no guarantee, the Company's management
believes that it will be able to comply with the covenants set forth in the new
Credit Facility with the commercial bank.

Recently Issued Accounting Pronouncements

Refer to Note 1 of the Financial Statements.

Business Environment

Refer to the 2003 Form 10KSB, Management Discussion and Analysis, Item 6.

Suppliers

Refer to the 2003 Form 10KSB, Management Discussion and Analysis, Item 6.

International Operations

Refer to the 2003 Form 10KSB, Management Discussion and Analysis, Item 6.

Intellectual Property

Refer to the 2003 Form 10KSB, Management Discussion and Analysis, Item 6.

Legal Proceedings

Refer to Note 8 of the Financial Statements.

Government Regulation

Refer to the 2003 Form 10KSB, Management Discussion and Analysis, Item 6.

                                       16
<PAGE>

Nasdaq Market Listing

Refer to the 2003 Form 10KSB, Market for Common Equity and Related Stockholder
Matters, Item 5.

Critical Accounting Policies and Estimates

Refer to the 2003 Form 10KSB, Management Discussion and Analysis, Item 6.

Contractual Obligations

Refer to the 2003 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 Credit Agreement (refer to Note 3, 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, 2004 would be an annual increase or
decrease of approximately $6,800 in interest expense for a twelve-month period.

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 disclosure. Within 90 days prior to the
filing of 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.

Item 2. Changes in Securities

                                       17
<PAGE>

      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, 2004:

            On July 20, 2004, the Company issued a press release announcing its
            earnings for the three and six months ended June 30, 2004.

            On July 29, 2004, the Registrant (QualMark Corporation) announced
            the appointment of Gerald Laber to the Registrant's Board of
            Directors and Audit Committee.

                                   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 11, 2004                         By: /s/ CHARLES D. JOHNSTON
                                                    ---------------------------
                                                Charles D. Johnston,
                                                President
                                                & Chief Executive Officer

Date: November 11, 2004                         By: /s/ ANTHONY A. SCALESE
                                                    ---------------------------
                                                Anthony A. Scalese,
                                                Chief Financial Officer
                                                & Principal Accounting Officer

                                       18
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                DESCRIPTION
------                                -----------
<S>             <C>
  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)
</TABLE>

                                       19
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                DESCRIPTION
------                                -----------
<S>             <C>
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)

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 Eighth Amendment to Loan
                Agreement dated January 23, 2003 by and between QualMark and
                U.S. Bank National Association.(12)

10.25(b)        Sixth Amendment to Promissory Notes and Ninth Amendment to Loan
                Agreement dated July 25, 2003 by and between QualMark and U.S.
                Bank National Association(13)

10.26           Irrevocable Letter of Credit issued to Catellus Development
                Corporation (12)

10.26(b)        Warrant agreement to purchase 25,000 shares of Common Stock
                dated July 25, 2003 (13)

10.27           Seventh Amendment to Promissory Notes and Tenth Amendment to
                Loan Agreement dated February 27, 2004 by and between QualMark
                and U.S. Bank National Association. (14)
</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                DESCRIPTION
------                                -----------
<S>             <C>
10.28           Settlement Agreement and Payment Schedule dated February 13,
                2004, by and between QualMark Corporation and Gregg K. Hobbs.
                (14)

10.29           Eighth Amendment to Promissory Notes and Eleventh Amendment to
                Loan Agreement dated April 20, 2004 by and between QualMark and
                U.S. Bank National Association.(15)

10.30           Loan and Security Agreement dated November 9, 2004 by and
                between QualMark and Silicon Valley Bank

   14           Director and Officer Code of Ethics (14)

 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
</TABLE>

----------

(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 Annual Report on Form 10-KSB
      for the year ended December 31, 2002.

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

(14)  Incorporated by reference from the Company's Annual Report on Form 10-KSB
      for the year ended December 31, 2003.

(15)  Incorporated by reference from the Company's Quarterly Report on Form
      10-QSB for the quarter ended March 31, 2004.

                                       21