<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 JUNE 30, 2006

[ ]  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)

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

<TABLE>
<S>                                                               <C>
    4580 Florence Street, Denver, CO                                80238
(Address of principal executive offices)                          (Zip Code)
</TABLE>

(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 August 10, 2006
is 4,496,862.

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

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                      QUALMARK CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
              (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                               FOR THE THREE   FOR THE THREE    FOR THE SIX    FOR THE SIX
                                                MONTHS ENDED    MONTHS ENDED   MONTHS ENDED   MONTHS ENDED
                                                  JUNE 30,        JUNE 30,       JUNE 30,       JUNE 30,
                                                    2006            2005           2006           2005
                                               -------------------------------------------------------------
<S>                                            <C>             <C>             <C>            <C>
Net revenue                                     $    4,288      $    3,769      $    8,486     $    7,427
Cost of sales                                        2,349           2,079           4,777          4,128
                                                ----------      ----------      ----------     ----------
   Gross profit                                      1,939           1,690           3,709          3,299
Selling, general and administrative expenses         1,364           1,131           2,570          2,190
Research and development expenses                      177             182             336            377
                                                ----------      ----------      ----------     ----------
   Income from operations                              398             377             803            732
Other expense:
   Interest, net                                       (78)            (39)           (151)           (72)
                                                ----------      ----------      ----------     ----------
Income before income taxes                             320             338             652            660
Provision for income taxes                             (59)             (3)           (122)            (7)
                                                ----------      ----------      ----------     ----------
Net income                                      $      261      $      335      $      530     $      653
                                                ==========      ==========      ==========     ==========
Net income per share - basic                    $     0.04      $     0.06      $     0.08     $     0.11
Net income per share - diluted                  $     0.03      $     0.04      $     0.06     $     0.08
Weighted average number of common shares -
   basic                                         4,474,000       4,167,000       4,456,000      4,152,000
Weighted average number of common shares -
   diluted                                       9,354,000       9,094,000       9,288,000      8,983,000
</TABLE>

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


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                JUNE 30, 2006   DECEMBER 31, 2005
                                                                                -------------   -----------------
                                                                                 (UNAUDITED)
<S>                                                                             <C>             <C>
ASSETS
Current assets:
   Cash                                                                            $   807           $   529
   Trade accounts receivable, net of allowance for
      doubtful accounts of $50 and $51 at June 30,
      2006 and December 31, 2005, respectively                                       3,747             3,478
   Inventories, net                                                                  3,077             2,888
   Current deferred tax assets, net                                                    515               515
   Other current assets                                                                295                82
                                                                                   -------           -------
      Total current assets                                                           8,441             7,492

   Property and equipment, net                                                         876               922
   Restricted cash                                                                      90                90
   Goodwill                                                                          1,057             1,057
   Intangible assets                                                                   698               728
   Non-current deferred tax assets, net                                                618               738
   Other assets                                                                        488               513
                                                                                   -------           -------
                                                                                   $12,268           $11,540
                                                                                   =======           =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                $ 1,020           $   684
   Accrued expenses                                                                    725             1,019
   Deferred revenue and customer deposits                                               69                49
   Current portion of long-term debt                                                   917               917
   Revolving line of credit                                                          1,100               700
   Other current liabilities                                                            90                --
                                                                                   -------           -------
      Total current liabilities                                                      3,921             3,369

   Deferred revenue                                                                     29                35
   Long-term debt                                                                    2,083             2,579
   Other liabilities                                                                    10                20
                                                                                   -------           -------
      Total liabilities                                                              6,043             6,003
                                                                                   -------           -------

Commitments and contingencies

Convertible redeemable preferred stock; 2,000,000 shares authorized (Note 7):
   1,000,000 designated as Series B, 770,864 shares (2006) and 740,736
      shares (2005) shares issued and outstanding, liquidation preference
      of $1,725 (2006)                                                               1,694             1,627
                                                                                   -------           -------
   3,000 designated as Series C, 1,350 shares (2006) and 1,297 shares
      (2005) issued and outstanding, liquidation preference of $1,405 (2006)         1,295             1,166
                                                                                   -------           -------
Shareholders' equity:
   Common stock; no par value; 15,000,000 shares authorized;
      4,487,071 shares (2006) and 4,417,706 shares (2005) issued and
      outstanding                                                                    7,305             7,343
Accumulated deficit                                                                 (4,069)           (4,599)
                                                                                   -------           -------
   Total shareholders' equity                                                        3,236             2,744
                                                                                   -------           -------
                                                                                   $12,268           $11,540
                                                                                   =======           =======
</TABLE>

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


                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                               FOR THE SIX     FOR THE SIX
                                                               MONTHS ENDED    MONTHS ENDED
                                                              JUNE 30, 2006   JUNE 30, 2005
                                                              -------------   -------------
<S>                                                           <C>             <C>
Cash Flows From Operating Activities:
Net income                                                        $ 530           $ 653
Adjustments to reconcile net income to net cash provided by
   operating activities:
   Depreciation and amortization                                    201             164
   Recovery of bad debts                                             (1)             (1)
   Recovery of inventory allowance                                  (11)            (10)
   Warrants and stock option expense                                 58              --
   Gain on sale of assets                                            (8)             --
   Paid in kind (common stock) interest expense (Note 8)             42              --
Change in assets and liabilities:
   Trade accounts receivable                                       (268)             97
   Inventories                                                     (138)           (400)
   Other assets                                                    (209)             16
   Accounts payable, accrued expenses and other liabilities         123              33
   Deferred taxes                                                   122              --
   Deferred revenue and customer deposits                            14             (84)
                                                                  -----           -----
      Net cash provided by operating activities                     455             468

Cash Flows From Investing Activities:
Sale of property and equipment                                       27              --
Acquisition of property and equipment                              (167)           (114)
                                                                  -----           -----
   Net cash used in investing activities                           (140)           (114)

Cash Flows From Financing Activities:
Issuance of common stock                                             19              68
Proceeds from line of credit                                        400              --
Payments on borrowings                                             (456)           (116)
                                                                  -----           -----
   Net cash used in financing activities                            (37)            (48)

Net increase in cash                                                278             306
Cash and cash equivalents at beginning of period                    529             516
                                                                  -----           -----
Cash and cash equivalents at end of period                        $ 807           $ 822
                                                                  =====           =====

Supplemental Disclosure:
Interest paid                                                     $  66           $  65
Income tax paid                                                   $  30           $  12

Non-Cash Investing and Financing Activities:
Transfer of equipment to inventory held for resale                $  40

Conversion of convertible debt to common stock                    $  40              --

Preferred stock dividends                                         $ 122           $ 113

Accretion of preferred stock                                      $  74           $ 100
</TABLE>

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


                                        4
<PAGE>

                      QUALMARK CORPORATION AND SUDSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED 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. The Company's
wholly-owned subsidiaries, Qualmark ACG Corporation ("Qualmark ACG") and
QualMark Ling Electronics Corporation ("QualMark Ling") supply electrodynamic
systems, components, and service to the worldwide vibration test equipment
market.

NOTE 1 - Business and Summary of Significant Accounting Policies

Financial Presentation

These financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2005 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 for the three and six months ended June 30, 2006 and
2005 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 six months ended June 30, 2006 are
not necessarily indicative of results for the remainder of 2006. Amounts at
December 31, 2005 are derived from the Company's audited consolidated financial
statements.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which is a revision
of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS
No. 95, "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires all share-based payments to employees, including
grants of employee stock options, to be recognized as additional compensation
expense in the financial statements based on the calculated fair value of the
awards. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation costs to be reported as a financing cash flow. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. We adopted this statement effective for our
fiscal year beginning January 1, 2006. We have described the impact of adopting
SFAS 123R in our condensed consolidated financial statements below.

Stock Based Compensation

The Company has three stock option plans, an incentive stock option plan, the
1993 Stock Option Plan (the "1993 Plan"), the 1996 Stock Option Plan (the "1996
Plan") and the 2005 Stock Option Plan (the "2005 Plan) (collectively, the
"Plans"). The 1993 and 1996 Plan provide employees and officers with an
opportunity to purchase an aggregate of 159,746 and 770,000 shares of the
Company's common stock, respectively. In January 2006, the 1993 and 1996 Plan's
expired, and as such, no additional options may be issued from such Plans. Under
the 2005 Plan, grants of both incentive stock options and non-qualified options
are permitted. Incentive stock options may only be granted to employees of the
Company, including officers and directors who are also employees. Non-qualified
options may be issued to officers, directors, employees or consultants of the
Company. The exercise price of incentive stock options granted under the 2005
Plan must be at least 100% of the fair market value of the Company's stock at
the grant date, while the exercise price of non-qualified options is at the
discretion of the Board of Directors, but is ordinarily priced at 100% of the
fair market value at the grant date. Aggregate common shares of 300,000 are
reserved for issuance under the 2005 Plan. Shares forfeited can be reissued
under the 2005 Plan. Options issued under the 2005 Plan vest at a rate that is
at the discretion of the Board of Directors, but is generally at a rate of 33.3%
per year over three years for employees and immediate to 33.3% per year over
three years for directors and generally expire up to ten years from the date of
grant.


                                       5

<PAGE>


Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), using the modified prospective method. SFAS
123R requires the recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial statements and is
measured based on the grant date fair value of the award. SFAS 123R also
requires the stock option compensation expense to be recognized over the period
during which an employee is required to provide service in exchange for the
award (the vesting period). Prior to our adopting SFAS 123R, we accounted for
our stock-based compensation plans under Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB
25, generally no compensation expense is recorded when the terms of the award
are fixed and the exercise price of the employee stock option equals or exceeds
the fair value of the underlying stock on the date of grant.

In the three months ended June 30, 2006, the Company recorded compensation
expense related to stock options that reduced income from operations by $27,000,
increased the provision for income taxes by $5,000, reduced net income by
$22,000 and basic net income per share by less than $.01. In the six months
ended June 30, 2006, the Company recorded compensation expense related to stock
options that reduced income from operations by $58,000, increased the provision
for income taxes by $11,000, reduced net income by $47,000 and basic net income
per share by $.01. The stock option compensation expense was included primarily
in selling, general and administrative expenses in the accompanying condensed
consolidated statement of income.

The weighted average fair value of stock options at the date of grant during the
six months ended June 30, 2006 and 2005 was $1.36 and $2.17, respectively. For
options granted subsequent to our adoption date of SFAS 123R on January 1, 2006,
the fair value of each stock option grant was estimated on the date of grant
using the Black-Scholes option pricing model. The Company used the following
assumptions to determine the fair value of stock option grants during the six
months ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                           Six Months Ended
                                June 30
                          ------------------
                            2006       2005
                          --------   -------
<S>                       <C>        <C>
Expected life             3 years    3 years
Volatility                128-129%       133%
Risk-free interest rate       4.0%       3.0%
Dividend yield                  0%         0%
</TABLE>

The expected life of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
our common stock. The risk-free interest rate represents the U.S. Treasury bill
rate for the expected life of the related stock options. The dividend yield
represents our anticipated cash dividend over the expected life of the stock
options.


     A summary of stock option activity for the six months ended June 30, 2006
is presented below:

<TABLE>
<CAPTION>
                                                        Weighed
                                           Weighted     Average
                                  Shares    Average    Remaining    Aggregate
                                  Under    Exercise   Contractual   Intrinsic
                                  Option     Price        Life        Value
                                 -------   --------   -----------   ---------
<S>                              <C>       <C>        <C>           <C>
Outstanding at January 1, 2006   752,375     $1.86
   Granted                       208,000      1.81
   Exercised                     (23,500)     0.81
   Forfeited                     (23,500)     2.78
                                 -------
Outstanding at June 30, 2006     913,375     $1.81     4.43 years    $109,000
                                 =======     =====                   ========
Exercisable at June 30, 2006     639,633     $1.86     4.31 years    $ 48,000
                                 =======     =====                   ========
</TABLE>


                                       6

<PAGE>

The total fair value of stock options that vested during the three months ended
June 30, 2006 and 2005 was $28,000 and $74,000, respectively. The total fair
value of stock options that vested during the six months ended June 30, 2006 and
2005 was $37,000 and $93,000, respectively. The weighted average grant date fair
value of options issued during the three months ended June 30, 2006 and 2005 was
$43,000 and $22,000, respectively. The weighted average grant date fair value of
options issued during the six months ended June 30, 2006 and 2005 was $283,000
and $22,000, respectively.

A summary of the status of the Company's nonvested shares as of June 30, 2006,
and changes during the period ended June 30, 2006 is presented below.

<TABLE>
<CAPTION>
                               Nonvested    Weighted
                                 Shares      Average
                                 Under     Grant Date
                                 Option    Fair Value
                               ---------   ----------
<S>                            <C>         <C>
Nonvested at January 1, 2006    100,213       $1.49
   Granted                      208,000        1.81
   Vested                       (23,824)       1.54
   Forfeited                    (10,647)       2.75
                                -------       -----
Nonvested at June 30, 2006      273,742       $1.71
                                =======       =====
</TABLE>

As of June 30, 2006, we had $48,000 of unrecognized compensation cost related to
stock options that will be recognized over a weighted average period of
approximately 3 years.

Prior to January 1, 2006, we accounted for stock-based compensation plans under
APB 25. We adopted the disclosure-only provision of SFAS 123. Had compensation
expense for stock option grants been determined based on the fair value at the
grant dates consistent with the method prescribed by SFAS 123, our net income
and net income per share would have been adjusted to the pro forma amounts for
the three and six months ended June 30, 2005, as indicated below:

<TABLE>
<CAPTION>
                                                         THREE MONTHS     SIX MONTHS
                                                            ENDED           ENDED
                                                        JUNE 30, 2005   JUNE 30, 2005
                                                        -------------   -------------
<S>                                                     <C>             <C>
Net income                                                  $335            $ 653
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                       (16)             (32)
                                                            ----            -----
Pro forma net income                                        $319            $ 621
                                                            ====            =====
Income per share:

Basic - as reported                                         $.06            $0.11
                                                            ====            =====
Diluted - as reported                                       $.04            $0.08
                                                            ====            =====
Basic - pro forma                                           $.05            $0.10
                                                            ====            =====
Diluted - pro forma                                         $.04            $0.07
                                                            ====            =====
</TABLE>


                                       7

<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.

NOTE 2 - Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                   JUNE 30,   DECEMBER 31,
                                     2006         2005
                                   --------   ------------
<S>                                <C>        <C>
Raw materials                       $2,434       $2,368
Work in process                        533          496
Finished goods                         351          276
Less: Allowance for obsolescence      (241)        (252)
                                    ------       ------
                                    $3,077       $2,888
                                    ======       ======
</TABLE>

The Company monitors inventory for turnover and obsolescence, and records
reserves for excess and obsolete inventory as appropriate. During the three
months ended June 30, 2006, the Company discarded $11,000 of obsolete inventory.

NOTE 3 - Borrowings

The Company's commercial borrowings consist of two term loans, a revolving line
of credit, (the "Credit Agreement") and a convertible debt agreement (the
"Convertible Debt"), refer to the 2005 Form 10-KSB, Financial Statement Note 5.

The average interest rate for the six month periods ended June 30, 2006 and 2005
was 8.05% and 7.50%, respectively.

Both the revolving credit line and term loans 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. As of June 30, 2006,
there was $1,100,000 outstanding in borrowings and zero availability on the line
of credit. As of June 30, 2006, the principal balances of the term loans were
$2,040,000.

The Company's Convertible Debt agreement is a five-year, interest only agreement
with provisions for interest rate resets and conversion into the Company's
common stock. The Convertible Debt agreement was entered into with an affiliate
of the commercial bank that issued the Company's Credit Agreement. The
Convertible Debt agreement is collateralized by substantially all the assets of
the Company, subject to subordination to the Credit Agreement. As of June 30,
2006, the principal balance of the convertible debt was $960,000. During the
three month period ended March 31, 2006, the Convertible Debt holder converted
$40,000 of the outstanding Convertible Debt into 24,096 shares of the Company's
common stock. During the six months period ended June 30, 2006, the Convertible
Debt holder received 21,769 shares of the Company's common stock totaling
$42,535, for payment of interest (which was based on the Company's common stock
market price at the issuance date), of which $20,584 was for the three months
ended June 30, 2006. On July 10, 2006, the Company issued 9,791 common shares to
the Convertible Debt holder, valued at $18,603, for payment of interest for the
calendar third quarter of 2006.

The Company must maintain certain financial and other covenants to be in
compliance with the Credit Agreement and Convertible Debt. The Company is not
now, nor has it ever been in arrears on any payment pursuant to the Credit
Agreement or the Convertible Debt. As of June 30, 2006, the Company was in non
compliance with certain financial covenants, for which the Company has received
forbearance waivers.


                                       8
<PAGE>

As required by the Credit Agreement, the Company is making total monthly
principal payments of $76,800 on both term loans during 2006. The Company has
also determined that, during 2006, draws and payments on the revolving line of
credit are expected to be made based on operational cash flows.

NOTE 4 -Income Per Share

Basic income per share is computed by dividing net income available to common
shareholders by the weighted average number of shares outstanding during the
period. Diluted income 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,
using the if-converted or treasury-stock methods.

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

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED               SIX MONTHS ENDED
                                         -----------------------------   -----------------------------
                                         JUNE 30, 2006   JUNE 30, 2005   JUNE 30, 2006   JUNE 30, 2005
                                         -------------   -------------   -------------   -------------
<S>                                      <C>             <C>             <C>             <C>
BASIC:
Net income                                  $  261          $  335          $  530          $  653
Accretion of redeemable preferred
   stock and preferred stock dividends         (99)           (107)           (196)           (213)
                                            ------          ------          ------          ------
Net income available to common
   shareholders - basic                     $  162          $  228          $  334          $  440
                                            ======          ======          ======          ======
Weighted average shares outstanding -
   basic                                     4,474           4,167           4,456           4,152
                                            ======          ======          ======          ======
Net income per share - basic                $ 0.04          $ 0.06          $ 0.08          $ 0.11
                                            ======          ======          ======          ======

DILUTED:
Net income                                  $  261          $  335          $  530          $  653
Interest expense from convertible debt          21              20              36              40
                                            ------          ------          ------          ------
Net income available to common
   shareholders - diluted                   $  282          $  355          $  566          $  693
                                            ======          ======          ======          ======
Weighted average shares outstanding -
   basic                                     4,474           4,167           4,456           4,152
Dilutive stock options and warrants            170             510             180             489
   Convertible securities                    4,710           4,417           4,652           4,342
                                            ------          ------          ------          ------
Weighted average shares outstanding -
   diluted                                   9,354           9,094           9,288           8,983
                                            ======          ======          ======          ======
Net income per share - diluted              $ 0.03          $ 0.04          $ 0.06          $ 0.08
                                            ======          ======          ======          ======
</TABLE>

Options and warrants to purchase 170,234 shares of common stock, 4,131,729
shares of common stock underlying convertible preferred stock, and 578,314
shares of common stock underlying convertible debt were included in the dilutive
calculation for the three months ended June 30, 2006. Options and warrants to
purchase 180,034 shares of common stock, 4,050,184 shares of common stock
underlying convertible preferred stock, and 602,410 shares of common stock
underlying convertible debt were included in the dilutive calculation for the
six months ended June 30, 2006.

Options and warrants to purchase 509,656 shares of common stock, 3,815,080
shares of common stock underlying convertible preferred stock, and 602,410
shares of common stock underlying convertible debt were included in the dilutive
calculation for the three month period ended June 30, 2005. Options and warrants
to purchase 489,306 shares of common stock, 3,739,784 shares of common stock
underlying convertible preferred stock, and 602,410 shares of common stock
underlying convertible debt were included in the dilutive calculation for the
six month period ended June 30, 2005.


                                        9

<PAGE>

NOTE 5 - Segment Information

During 2005, the Company operated in three business segments; testing equipment
manufacturing, Accelerated Reliability Test Centers ("ARTC"), and Electrodynamic
Vibration ("ED") manufacturing, refer to the 2005 Form 10-KSB Note 11. Beginning
in 2006, the Company has consolidated its testing equipment manufacturing and
ARTC business segments into one reportable segment, HALT/HASS ("HALT/HASS"), due
to ARTC's non-material stand alone revenues (which are less than 10% of total
consolidated revenues). The HALT/HASS segment is engaged in the manufacture and
sale of vibration and thermal chambers for quality control testing of various
electronic devices and operates service centers where vibration and thermal
chambers are available to customers for daily rental. The ED segment is engaged
in the manufacture, repair and service of electrodynamic vibration shaker
systems.

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 2005 and
inter-segment transactions are eliminated. The Company evaluates the performance
of its segments and allocates resources to them based primarily on 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 six months ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                   HALT/HASS    ED     TOTAL
                                   ---------   ----   ------
<S>                                <C>         <C>    <C>
THREE MONTHS ENDED JUNE 30, 2006
Net revenue                          $3,545    $743   $4,288
Gross profit                          1,769     170    1,939

THREE MONTHS ENDED JUNE 30, 2005
Net revenue                          $3,222    $547   $3,769
Gross profit                          1,546     144    1,690
</TABLE>

<TABLE>
<CAPTION>
                                   HALT/HASS     ED      TOTAL
                                   ---------   ------   ------
<S>                                <C>         <C>      <C>
SIX MONTHS ENDED JUNE 30, 2006
Net revenue                          $6,953    $1,533   $8,486
Gross profit                          3,273       436    3,709

SIX MONTHS ENDED JUNE 30, 2005
Net revenue                          $6,178    $1,249   $7,427
Gross profit                          2,939       360    3,299
</TABLE>

The following information is by geographic area (in thousands) as of and for the
three and six months ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                               AUSTRALIA/
                                   UNITED              ASIA        NEW
                                   STATES   EUROPE   PACIFIC     ZEALAND     TOTAL
                                   ------   ------   -------   ----------   ------
<S>                                <C>      <C>      <C>       <C>          <C>
THREE MONTHS ENDED JUNE 30, 2006
Sales                              $2,307    $740     $1,241       --       $4,288
Long lived assets, net              3,119      --         --       --        3,119

THREE MONTHS ENDED JUNE 30, 2005
Sales                              $1,652    $615     $1,502       --       $3,769
Long lived assets, net              2,090      --         --       --        2,090
</TABLE>

<TABLE>
<CAPTION>
                                                              AUSTRALIA/
                                  UNITED              ASIA        NEW
                                  STATES   EUROPE   PACIFIC     ZEALAND     TOTAL
                                  ------   ------   -------   ----------   ------
<S>                               <C>      <C>      <C>       <C>          <C>
SIX MONTHS ENDED JUNE 30, 2006
Sales                             $4,674   $  795    $2,845      $172      $8,486
Long lived assets, net             3,119      --         --        --       3,119

SIX MONTHS ENDED JUNE 30, 2005
Sales                             $4,127   $1,629    $1,671        --      $7,427
Long lived assets, net             2,090      --         --        --       2,090
</TABLE>

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


                                       10

<PAGE>

NOTE 6 - Income Taxes

During the three months ended June 30, 2006 and 2005 the Company recorded a
$59,000 and $3,000, respectively, provision for income taxes. During the six
months ended June 30, 2006 and 2005 the Company recorded a $122,000 and $7,000,
respectively, provision for income taxes. The provision for income taxes was
recorded based on the Company's estimate of its effective income tax rate for
the year. The effective income tax rate is reevaluated each reporting period.
The Company has determined its effective tax rate for provision calculation
purposes for the year is 18.4%, which is the statutory rate reduced by the tax
benefit of net operating loss carryforwards, which are expected to be realized
in 2006. The Company anticipates net operating profits for the year ending
December 31, 2006, although no assurance can be given. The Company will utilize
its net operating loss carryforwards to offset any ordinary taxable income for
the year ending December 31, 2006.

Refer to the Company's 2005 Form 10-KSB, Financial Statement Note 7.

NOTE 7 - Preferred Stock

Refer to the Company's 2005 Form 10-KSB, Financial Statement Note 8 for full
preferred stock (B & C) disclosure.

<TABLE>
<CAPTION>
                                           SERIES B               SERIES C
                                     --------------------   -------------------
                                      SHARES     AMOUNT     SHARES     AMOUNT
                                     -------   ----------   ------   ----------
<S>                                  <C>       <C>          <C>      <C>
Balance, January 1, 2005             683,967   $1,500,000    1,198   $  799,000
Earned and issued dividends           56,769      127,000       99      103,000
Accretion of redemption feature on
   preferred stock and warrants           --           --       --      264,000
Balance, January 1, 2006             740,736    1,627,000    1,297    1,166,000
Earned and issued dividends           30,128       67,000       53       55,000
Accretion of redemption feature on
   preferred stock and warrants           --           --       --       74,000
Balance, June 30, 2006               770,864   $1,694,000    1,350   $1,295,000
</TABLE>

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

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

     Designation -- 1,000,000 Series B preferred shares have been designated for
     issuance.

     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 conversion ratio for the Series B preferred stock is 2.33 to
     1.0. 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.


                                       11
<PAGE>

     Anti-Dilution Protection -- The Series B preferred stock conversion ratio
     is subject to adjustment for standard antidilution provisions that result
     in adjustments to the conversion ratio in the event of an equity
     restructuring transaction. This feature could result in additional charges
     being recorded against net income (loss) applicable to common shareholders.

     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 June 30, 2006 and 2005, $34,000 and $31,000
     of dividends were accrued, respectively. During the six months ended June
     30, 2006 and 2005, $67,000 and $62,000 of dividends were accrued,
     respectively. As of June 30, 2006, the Series B preferred shares had
     $67,000 of accumulated dividends in arrears. Of the dividends in arrears at
     June 30, 2006, the Company made a dividend payment (in kind) of 31,353
     Series B preferred shares at the liquidation price of $2.15 per share of
     $67,000 on July 12, 2006.

     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 $1,725,000 at June 30, 2006.

     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 has various rights and
     preferences as follows:

     Designation -3,000 Series C preferred shares have been designated for
     issuance.

     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
     holder elects to convert, the conversion price per share of the Series C
     preferred stock will be $0.5993 per share. The conversion ratio for the
     Series C preferred stock is 1,668.61 to 1.0. 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 months ended June 30, 2006 and 2005 was $37,000, for each period.
     The accretion recorded for the six months ended June 30, 2006 and 2005 was
     $74,000, for each period.

     Anti-Dilution Protection -- The Series C preferred stock conversion ratio
     is subject to adjustment for standard antidilution provisions that result
     in adjustments to the conversion ratio in the event of an equity
     restructuring transaction. This feature could result in additional charges
     being recorded against net income (loss) applicable to common shareholders.


                                       12

<PAGE>

     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 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 June 30, 2006 and 2005, $28,000 and
     $26,000 of dividends were accrued, respectively. During the six months
     ended June 30, 2006 and 2005, $55,000 and $51,000 of dividends were
     accrued, respectively. As of June 30, 2006, the Series C preferred shares
     had accumulated dividends in arrears of $55,000. Of the dividends in
     arrears at June 30, 2006 the Company made a payment (in kind) of 55 Series
     C preferred shares at the liquidation price of $1,000 per share of $55,000
     on July 12, 2006.

     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 $1,405,000 at June 30, 2006.

     Conditional Redemption -- The Series C preferred stock is redeemable at any
     time after April 1, 2007 at the option of the holder 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 holder 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 holder of
     the Series C preferred stock.

     Warrants

     In connection with the Series C preferred stock transaction, the 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 fair value the warrant grant was
     estimated using the Black-Scholes option-pricing model with the following
     weighted-average assumptions: dividend yield of zero; expected volatility
     of 100%; risk-free interest rate of 3.00%; and an expected term of five
     years.

     The warrants have been recorded as an increase to common stock, and were
     being accreted to the earliest date the Series C preferred stockholder
     could elect the option to redeem the Series C preferred stock. On July 29,
     2005, the warrant holder elected a cashless exercise of its 417,153
     warrants, which resulted in a net share issuance of 220,983 to the warrant
     holder. As a result of the exercise of all of the warrants, the remaining
     unamortized value allocated to the warrants was fully accreted as a
     reduction to net income available to common shareholders during the twelve
     months ended December 31, 2005. The accretion recorded for the three months
     ended June 30, 2006 and 2005 was zero and $13,000, respectively. The
     accretion recorded for the six months ended June 30, 2006 and 2005 was zero
     and $26,000, respectively.

NOTE 8 - Common Stock

During the three months ended June 30, 2006, the Company issued 23,500 shares of
common stock for the exercise of employee stock options totaling $19,000 at an
average exercise price of $0.81. During the six months ended June 30, 2006, the
Company issued 21,769 shares of common stock for a payment in kind of interest
expense totaling $42,535 to the Convertible Debt Holder at an average exercise
price of $1.95 and issued 24,096 shares of common stock upon the conversion of
$40,000 of the Convertible Debt instrument at an exercise price of $1.66.

NOTE 9 - Legal Matters

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


                                       13

<PAGE>

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 totaling
$243,000. Hobbs has opposed the application for fees, which the U.S. District
Court Judge has not yet ruled on. Hobbs also appealed the grant of summary
judgment in favor of the Company to the United States Court of Appeals for the
10th Circuit. The appeal was fully briefed by all parties and oral argument was
held on January 13, 2005 before a three judge panel of the Court of Appeals. In
an Order and Judgment dated March 11, 2005, the Court of Appeals panel
unanimously affirmed the decision of the District Court, stating that it agreed
with the District Court that summary judgment was appropriate with respect to
ownership of the copyrights, that the Copyright Act preempts Hobbs' claims under
the Lanham Act and state unfair competition law and that the District Court did
not abuse its discretion in awarding attorneys' fees to QualMark. The Court of
Appeals also denied Hobbs' motion for permission to file a short rebuttal to
supplement oral argument. There is no assurance that Hobbs will not request
reconsideration of the three Judge panel's decision by the full Court of Appeals
or seek review by the United States Supreme Court. However, were he to do so,
the Company believes his prospects for success would be minimal. The Company
does expect that the U.S. District Court Judge will now rule on the pending
application for fees and costs.

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 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 U.S. District
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.


                                       14

<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.

Three Months Ended June 30, 2006 Compared With Three Months Ended June 30, 2005

Revenue

Net revenue increased $519,000 or 13.8% from $3,769,000 in the three months
ended June 30, 2005 to $4,288,000 for the three months ended June 30, 2006.

HALT/HASS Revenue

HALT/HASS revenue increased $323,000 or 10.0% from $3,222,000 in the three
months ended June 30, 2005 to $3,545,000 in the three months ended June 30,
2006. The increase in sales for the three months ended June 30, 2006 is
primarily a direct result of the Company's transition of customers from HALT to
HASS (HALT is a research and development based test that requires limited
QualMark equipment and HASS is an integrated quality manufacturing test that
requires additional QualMark testing equipment). As a result of the transition
from HALT to HASS, the Company is generating a higher volume of testing
equipment sales per customer. The Company is continuing its aggressive pursuit
of international and domestic sales in the aerospace/avionics, defense,
automotive, medical and consumer/commercial electronic industries. The number of
units sold remains consistent for the three months ended June 30, 2006 and June
30, 2005. Of the total units sold, international system sales decreased 6.9% for
the three months ended June 30, 2006. In addition, the Company's test centers
experienced an increase in revenue of 12% from the prior quarter, due to
increased demand. In the three month period ended June 30, 2006, the Company
operated three test centers in the U.S., maintained three domestic strategic
agreement test center operations, and four strategic agreement test center
operations in Europe, versus four test centers in the U.S., three domestic
strategic agreement test center operations, and three strategic agreement test
center operations in Europe during the same period in 2005. Effective June 30,
2006, the Company sold all of the assets in its Santa Clara, CA test lab to an
existing test lab business affiliate. The Company is continually evaluating the
performance of its various test lab locations, and as such assets of other
locations may be liquidated consistent with their performance goals. Under the
domestic and international strategic agreement test centers, the Company does
not have any continuing obligation under any of the agreements. The Company is
continuing to implement 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, while obtaining a continuous flow of sales leads, 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 implemented changes will
continue to contribute to increased total revenues, expand the Company's
customer network, and increase product awareness; however the Company cannot
give any assurances on the ultimate success. QualMark utilizes twenty-nine
independent international sales representatives including representatives 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 international sales, or the overall increase in
HALT/HASS sales.


                                       15

<PAGE>

Electrodynamic Revenue (ED)

ED revenue increased $196,000 or 35.8% from $547,000 in the three months ended
June 30, 2005 to $743,000 in the three months ended June 30, 2006. ED revenue
generated included new and refurbished electrodynamic systems, replacement field
coils, replacement armatures, as well as field service support. The increase in
sales for the three month period ended June 30, 2006 is a direct result of the
Company's asset acquisition of Ling Electronics in the fourth quarter of 2005,
refer to the Company's 2005 Form 10-KSB, Note 13.

Gross Profit

Total gross margin for the three months ended June 30, 2006 was 45.2%. This
compares to a gross margin of 44.8% for the three months ended June 30, 2005.
The increase in gross margin for the three month period is primarily due to the
product mix of the HALT/HASS segment.

Operating Expenses

Total operating expenses increased $228,000 or 17.4% to $1,541,000 for the three
months ended June 30, 2006 from $1,313,000 for the three months ended June 30,
2005.

Selling, general and administrative expenses increased $233,000 or 20.6% to
$1,364,000 in the three months ended June 30, 2006 from $1,131,000 for the three
months ended June 30, 2005. The primary increase of selling, general, and
administrative expenses during 2006 is attributed to $283,000 of expenses
related to the ED business segment, which represent 20.7% of total selling,
general and administrative expenses. The Company also invested in sales and
marketing programs to expand its total vibration market.

Research and development costs decreased $5,000 or 2.7% to $177,000 for the
three months ended June 30, 2006 from $182,000 for the three months ended June
30, 2005. The decrease is primarily attributed to a decrease in 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.

Interest Expense

Interest expense increased $39,000 or 100.0% to $78,000 for the three months
ended June 30, 2006 from $39,000 for the three months ended June 30, 2005. The
increase is primarily attributed to the increase in the outstanding commercial
borrowings with the purchase of ACG Dynamics and Ling Electronics, refer to the
Company's 2005 Form 10-KSB, Note 13, which increased $2,486,000 from June 30,
2005 to June 30, 2006.

Income Tax

Income tax expense increased $56,000 to $59,000 for the three months ended June
30, 2006 from $3,000 for the three months ended June 30, 2005. The increase is a
result of an increase in the Company's estimate of its effective income tax rate
for 2006 compared to 2005. The Company has determined its effective tax rate for
provision calculation purposes for the year is 18.4%, which is the statutory
rate reduced by the tax benefit of net operating loss carryforwards, which are
expected to be realized in 2006. The Company anticipates net operating profits
for the year ending December 31, 2006, although no assurance can be given. The
Company will utilize its net operating loss carryforwards to offset any ordinary
taxable income for the year ending December 31, 2006.

Six Months Ended June 30, 2006 Compared With Six Months Ended June 30, 2005

Revenue

Net revenue increased $1,059,000 or 14.3% from $7,427,000 in the six months
ended June 30, 2005 to $8,486,000 for the six months ended June 30, 2006.


                                       16

<PAGE>

HALT/HASS Revenue

HALT/HASS revenue increased $775,000 or 12.5% from $6,178,000 in the six months
ended June 30, 2005 to $6,953,000 in the six months ended June 30, 2006. The
increase in sales for the six months ended June 30, 2006 is primarily a direct
result of the Company's aggressive pursuit of international sales and the
transition of customers from HALT to HASS (HALT is a research and development
based test that requires limited QualMark equipment and HASS is an integrated
quality manufacturing test that requires additional QualMark testing equipment).
As a result of the transition from HALT to HASS, the Company is generating a
higher volume of testing equipment sales per customer. The Company is continuing
its aggressive pursuit of international and domestic sales in the
aerospace/avionics, defense, automotive, medical and consumer/commercial
electronic industries. The number of units sold in the six months ended June 30,
2006 increased 11.6% over the six months ended June 30, 2005. Of the total units
sold, international system sales increased 15.3% for the six months ended June
30, 2006. The Company attributes its continued strength in sales in the
international market to a strong manufacturing presence in Asia Pacific. In the
six month period ended June 30, 2006, the Company operated three test centers in
the U.S., maintained three domestic strategic agreement test center operations,
and four strategic agreement test center operations in Europe, versus four test
centers in the U.S., three domestic strategic agreement test center operations,
and three strategic agreement test center operations in Europe during the same
period in 2005. Effective June 30, 2006 the Company sold all of the assets in
its Santa Clara, CA test lab operation to an existing test lab business
affiliate. The Company is continually evaluating the performance of its various
test lab locations, and as such assets of other locations may be liquidated
consistent with their performance goals. Under the domestic and international
strategic agreement test centers, the Company does not have any continuing
obligation under any of the agreements. The Company is continuing to implement
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, while
obtaining a continuous flow of sales leads, 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 implemented changes will continue to
contribute to increased total revenues, expand the Company's customer network,
and increase product awareness; however the Company cannot give any assurances
on the ultimate success. QualMark utilizes twenty-nine independent international
sales representatives including representatives 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
international sales, or the overall increase in HALT/HASS sales.

Electrodynamic Revenue (ED)

ED revenue increased $284,000 or 22.7% from $1,249,000 in the six months ended
June 30, 2005 to $1,533,000 in the six months ended June 30, 2006. ED revenue
generated included new and refurbished electrodynamic systems, replacement field
coils, replacement armatures, as well as field service support. The increase in
sales for the six month period ended June 30, 2006 is a direct result of the
Company's asset acquisition of Ling Electronics in the fourth quarter of 2005,
refer to the Company's 2005 Form 10-KSB, Note 13.

Gross Profit

Total gross margin for the six months ended June 30, 2006 was 43.7%. This
compares to a gross margin of 44.4.% for the six months ended June 30, 2005. The
decrease in gross margin for the six month period ended June 30, 2006 is
primarily due to the lower margins realized through ED business segment sales as
compared to HALT/HASS business segment sales.

Operating Expenses

Total operating expenses increased $339,000 or 13.2% to $2,906,000 for the six
months ended June 30, 2006 from $2,567,000 for the six months ended June 30,
2005.

Selling, general and administrative expenses increased $380,000 or 17.4% to
$2,570,000 in the six months ended June 30, 2006 from $2,190,000 for the six
months ended June 30, 2005. The primary increase of selling, general, and
administrative expenses during 2006 is attributed to $519,000 of expenses
related to the ED business segment, which represent 20.2% of total selling,
general and administrative expenses.

Research and development costs decreased $41,000 or 10.9% to $336,000 for the
six months ended June 30, 2006 from $377,000 for the six months ended June 30,
2005. The decrease is primarily attributed to a decrease in 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.


                                       17

<PAGE>

Interest Expense

Interest expense increased $79,000 or 109.7% to $151,000 for the six months
ended June 30, 2006 from $72,000 for the six months ended June 30, 2005. The
increase is primarily attributed to the increase in the outstanding commercial
borrowings with the purchase of ACG Dynamics and Ling Electronics, refer to the
Company's 2005 Form 10-KSB, Note 13, which increased $2,486,000 from June 30,
2005 to June 30, 2006.

Income Tax

Income tax expense increased $115,000 to $122,000 for the six months ended June
30, 2006 from $7,000 for the six months ended June 30, 2005. The increase is a
result of an increase in the Company's estimate of its effective income tax rate
for 2006 compared to 2005. The Company has determined its effective tax rate for
provision calculation purposes for the year is 18.4%, which is the statutory
rate reduced by the tax benefit of net operating loss carryforwards, which are
expected to be realized in 2006.The Company anticipates net operating profits
for the year ending December 31, 2006, although no assurance can be given. The
Company will utilize its net operating loss carryforwards to offset any ordinary
taxable income for the year ending December 31, 2006.

Liquidity and Capital Resources

During the six months ended June 30, 2006, the Company generated $455,000 of
cash from operating activities, invested $167,000 for property and equipment,
received $27,000 from the sale of equipment, repaid $456,000 of commercial bank
borrowings, borrowed $400,000 from the existing revolving line of credit and
received $19,000 from the issuance of common stock through the exercise of
employee stock options. Together, these activities resulted in a cash increase
of $278,000, for an ending balance of $807,000 at June 30, 2006. During the six
months ended June 30, 2005, the Company generated $468,000 of cash from
operating activities, invested $114,000 for equipment, repaid $116,000 of
commercial bank borrowings and generated $68,000 from the issuance of common
stock. Together, these activities resulted in a cash increase of $306,000, for
an ending balance of $822,000 at June 30, 2005.

The Company's commercial borrowings consist of two term loans, a revolving line
of credit, and a convertible debt agreement, refer to the 2005 Form 10-KSB,
Financial Statement Note 5.

The average interest rate for the six month periods ended June 30, 2006 and 2005
was 8.05% and 7.50%, respectively.

Both the revolving credit line and term loans 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. As of June 30, 2006,
there was $1,100,000 outstanding in borrowings and zero availability on the line
of credit. As of June 30, 2006, the principal balances of the term loans were
$2,040,000.

The Company's Convertible Debt agreement is a five-year, interest only agreement
with provisions for interest rate resets and conversion into the Company's
common stock. The Convertible Debt agreement was entered into with an affiliate
of the commercial bank that issued the Company's Credit Agreement. The
Convertible Debt agreement is collateralized by substantially all the assets of
the Company, subject to subordination to the Credit Agreement. As of June 30,
2006, the principal balance of the convertible debt was $960,000. During the
three month period ended March 31, 2006, the Convertible Debt holder converted
$40,000 of the outstanding Convertible Debt into 24,096 shares of the Company's
common stock. During the six months period ended June 30, 2006, the Convertible
Debt holder received 21,769 shares of the Company's common stock totaling
$42,535, for payment of interest (which is based on the Company's common stock
market price at the issuance date), of which $20,584 was for the three months
ended June 30, 2006. On July 10, 2006, the Company issued 9,791 common shares to
the Convertible Debt holder, valued at $18,603, for payment of interest for the
calendar third quarter of 2006.

The Company must maintain certain financial and other covenants to be in
compliance with the Credit Agreement and Convertible Debt. The Company is not
now, nor has it ever been in arrears on any payment pursuant to the Credit
Agreement or the Convertible Debt. As of June 30, 2006, the Company was in non
compliance with certain financial covenants, for which the Company has received
forbearance waivers.


                                       18

<PAGE>

As required by the Credit Agreement, the Company is making total monthly
principal payments of $76,800 on both term loans during 2006. The Company has
also determined that, during 2006, draws and payments on the revolving line of
credit are expected to be made based on operational cash flows.

While there is no guarantee that the Company will be able to meet the
operational and financial requirements of its 2006 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
income and usage of cash and cash equivalents for 2006. However, the Company's
management believes that the Company's cash and cash equivalents, working
capital, and availability on its revolving credit line provide adequate capital
resources to fund its operations, 2006 debt repayments, and working capital
needs, through at least the end of the second quarter of 2007.

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 $3,140,000 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 June 30, 2006 would be an annual increase or
decrease of approximately $31,000 in interest expense for a twelve-month period.

Business Environment

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.

Suppliers

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.

International Operations

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.

Intellectual Property

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.

Acquisition

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.

Legal Proceedings

Refer to the 2005 Form 10KSB, Note 12 of the Financial Statements.

Government Regulation

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.

Critical Accounting Policies and Estimates

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.

Contractual Obligations

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.

Recently Issued Accounting Pronouncements

Refer to the 2005 Form 10KSB, Management Discussion and Analysis, Item 6.


                                       19

<PAGE>

Item 3.

                             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. As of the end of the period
covered by the 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.

(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.


                                       20
<PAGE>

                            PART II OTHER INFORMATION

Item 1. Legal Proceedings

     Refer to Note 9 of the Financial Statements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     None

Item 3. Defaults upon Senior Securities

     Refer to Note 3 of the Financial Statements

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

          The following matters were submitted to a vote of shareholders of the
     Company at the Annual meeting of Shareholders held May 31, 2006:

     (a)  The following members were elected to the Board of Directors to hold
          office until the next annual meeting.

<TABLE>
<CAPTION>
NOMINEE                  FOR      WITHHELD
-------               ---------   --------
<S>                   <C>         <C>
Charles D. Johnston   7,510,396    254,245
James LD Roser        7,635,201    129,440
Christopher Roser     7,700,393     64,248
William Sanko         7,655,799    108,842
Gerald Laber          7,655,799    108,842
</TABLE>

     (b)  GHP Horwath, P.C., independent registered public accounting firm, were
          selected as the auditors of the Company for the fiscal year ending
          December 31, 2006, by a vote of 7,624,293 shares in favor, 400 shares
          against, and 139,948 shares abstained.

Item 5. Other Information

     None

Item 6. Exhibits

     (a)  Exhibits - See Index to Exhibits

     (b)  Reports on Form 8-K during the quarter ended June 30, 2006:

          On April 25, 2006, the Company issued a press release announcing its
          earnings for the quarter ended March 31, 2006.

          On June 30, 2006, the Company filed a report on Form 8-K announcing
          the resignation of Mr. Alan Perkins (former Vice President of Sales
          and Marketing) and the immediate appointment of Mr. Jeffrey Hale as
          Vice President of Sales and Marketing.


                                       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: August 11, 2006                   By: /s/ CHARLES D. JOHNSTON
                                            ------------------------------------
                                            Charles D. Johnston President,
                                            Chief Executive Officer


Date: August 11, 2006                   By: /s/ ANTHONY A. SCALESE
                                            ------------------------------------
                                            Anthony A. Scalese
                                            Chief Financial Officer
                                            & Principal Accounting Officer


                                       22

<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)
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)
</TABLE>




<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                  DESCRIPTION
-------                                 -----------
<S>        <C>
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)
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 (16)
10.31      Loan and Security Agreement dated November 11, 2004 by and between
           QualMark and Partners for Growth (17)
10.32      Asset Purchase Agreement dated November 12, 2004 by and between
           QualMark and ACG Dynamics, Inc. (17)
10.33      Loan and Security Agreement dated December 8, 2005 by and between
           QualMark and Silicon Valley Bank (18)
10.34      Amendment to Loan and Security Agreement dated December 12, 2005 by
           and between QualMark and Partners for Growth (18)
10.35      Asset Purchase Agreement dated December 13, 2005 by and between
           QualMark and SatCon Technology.(18)
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.

(16) Incorporated by reference from the Company's Quarterly Report on Form
     10-QSB for the quarter ended September 30, 2004.

(17) Incorporated by reference from the Company's Annual Report on Form 10-KSB
     for the year ended December 31, 2004.

(18) Incorporated by reference from the Company's Annual Report on Form 10-KSB
     for the year ended December 31, 2005.