<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, 2003

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

For the Transition period from ______________________ to _______________________

Commission file number 0-28484

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

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

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

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

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

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [X] Yes [ ]
No

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

         Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. [X] 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 13, 2003
is 3,610,092.

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


<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                               FOR THE THREE     FOR THE THREE     FOR THE SIX       FOR THE SIX
                                                                MONTHS ENDED     MONTHS ENDED      MONTHS ENDED     MONTHS ENDED
                                                                  JUNE 30,         JUNE 30,          JUNE 30,         JUNE 30,
                                                                    2003             2002              2003             2002
                                                               -------------     -------------     ------------     ------------
<S>                                                            <C>               <C>               <C>              <C>
Net revenue                                                     $      1,977      $      2,084      $     3,310      $     3,987
Cost of sales                                                          1,154             1,189            2,077            2,306
                                                               -------------     -------------     ------------     ------------
    Gross profit                                                         823               895            1,233            1,681

Selling, general and administrative expenses                             590               664            1,141            1,324
Research and development expenses                                        159               189              329              385
Arbitration associated expenses                                          536               160              536              165
                                                               -------------     -------------     ------------     ------------
   Loss from operations                                                 (462)             (118)            (773)            (193)

Other expense:
    Interest, net                                                        (25)              (49)             (57)             (95)
                                                               -------------     -------------     ------------     ------------

Net loss                                                       ($        487)    ($        167)    ($       830)    ($       288)
                                                               =============     =============     ============     ============

Net loss per share - basic and diluted                         ($       0.16)    ($       0.07)    ($      0.29)    ($      0.25)

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

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

                                       2

<PAGE>


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

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

  Cash                                                           $     510           $    1,288
  Trade accounts receivable, net of allowance for
     doubtful accounts of $53 and $52 at June 30,
      2003 and December 31, 2002, respectively                       1,823                1,468
  Inventories, net                                                     412                  612
  Other current assets                                                 127                   27
                                                                 ------------------------------
    Total current assets                                             2,872                3,395

  Property and equipment, net                                          686                  710
  Restricted cash                                                       90                   90
  Other assets                                                         119                   70
                                                                 ------------------------------

                                                                 $   3,767           $    4,265
                                                                 ==============================

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:

  Accounts payable                                               $     640           $      487
  Accrued arbitration expenses                                         424                   --
  Accrued expenses, other                                              429                  339
  Deferred revenue                                                      28                   40
  Current portion of long-term debt                                  1,280                  720
                                                                 ------------------------------
    Total current liabilities                                        2,801                1,586

  Long-term debt                                                        --                  890
                                                                 ------------------------------
     Total liabilities                                               2,801                2,476
                                                                 ------------------------------

Commitments and contingencies

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

     692,951 designated as Series B, 606,886 shares issued
     and outstanding, liquidation preference of $1,358 (2003);       1,304                1,243

     2,000 designated as Series C, 1,062 shares issued and
     outstanding, liquidation preference of $1,105 (2003);             359                  215

Shareholders' (deficit) equity:

  Common stock; no par value; 15,000,000 shares authorized;
      3,610,092 shares issued and outstanding                        7,631                7,829

  Accumulated deficit                                               (8,328)              (7,498)
                                                                 ------------------------------
    Total shareholders' (deficit) equity                              (697)                 331
                                                                 ------------------------------

                                                                 $   3,767           $    4,265
                                                                 ==============================
</TABLE>

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

                                       3

<PAGE>


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

<TABLE>
<CAPTION>
                                                                  FOR THE SIX       FOR THE SIX
                                                                  MONTHS ENDED      MONTHS ENDED
                                                                 JUNE 30, 2003     JUNE 30, 2002
                                                                 -------------------------------
<S>                                                              <C>               <C>
Cash Flows From Operating Activities:
Net loss                                                           ($    830)        ($     288)
Adjustments to reconcile net loss to net cash used in
(provided by)
 Operating activities:
    Depreciation and amortization                                        183                207
    Gain on disposal of equipment                                         (4)                 1
    Decrease in inventory reserve                                         (8)                --
    Provision for obsolete inventory                                      --                 50
    Provision for bad debts                                                1                 26
    Stock option expense                                                   7                  8
Change in assets and liabilities:
    Trade accounts receivable                                           (356)              (584)
    Inventories                                                          209                890
    Other assets                                                        (164)               (80)
    Accounts payable and accrued expenses                                655               (214)
                                                                   ----------------------------
        Net cash (used in) provided by operating activities             (307)                16

Cash Flows From Investing Activities:
Acquisition of property and equipment                                   (152)               (68)
Sale of property and equipment                                            11                 --
                                                                   ----------------------------
        Net cash used in investing activities                           (141)               (68)

Cash Flows From Financing Activities:
Payments on borrowings                                                  (330)              (245)
Proceeds from issuance of preferred stock and warrants, net               --                976
                                                                   ----------------------------
        Net cash (used in) provided by financing activities             (330)               731

Net (decrease) increase in cash                                         (778)               679
Cash and cash equivalents at beginning of period                       1,288                500
                                                                   ----------------------------
Cash and cash equivalents at end of period                          $    510          $   1,179
                                                                   ============================

Supplemental Disclosure:
Interest paid                                                       $     65          $      65

Non-Cash Investing and Financing Activities:
Deemed preferred stock dividend resulting from conversion
of Series A preferred shares to Series B preferred shares                 --          $     489

Redeemable preferred stock dividends accrued                        $     97          $      71

Accretion of preferred stock                                        $    108          $      61

Transfer of equipment to inventory held for resale                  $      1          $      12
</TABLE>

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

                                       4

<PAGE>


                              QUALMARK CORPORATION
                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

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

NOTE 1 - Financial Presentation

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

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

NOTE 2 - Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                   JUNE 30,      DECEMBER 31,
                                     2003           2002
                                   --------------------------
<S>                                <C>           <C>
Raw materials                      $  352          $   501
Work in process                        13              107
Finished goods                         98               63
Less: Allowance for obsolescence      (51)             (59)
                                   ------          -------
                                   $  412          $   612
                                   ======          =======
</TABLE>

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

NOTE 3 - Commercial Bank Borrowings

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

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

The average interest rate for the six-month periods ending June 30, 2003 and
2002, for the term loan and revolving credit line was 7.25% and 7.42%,
respectively. Both the revolving credit line and term loan under the Credit
Agreement are collateralized by substantially all the assets of the Company.
Borrowings under the line of credit are subject to borrowing base limits. Based
on the provisions of the Credit Agreement, as of June 30, 2003, there was no
additional availability on the line of credit.

As of June 30, 2003, the balances of the revolving credit and term loan are
$500,000 and $780,000, respectively.

                                       5

<PAGE>


The Company must maintain certain financial and other covenants to be in
compliance with the Credit Agreement. Although the Company is not now, nor has
it ever been in arrears on any payment pursuant to the Credit Agreement, as of
June 30, 2003, the Company was not in compliance with certain financial
covenants contained in the Credit Agreement. The Company has, however, received
waivers from its lender regarding such noncompliance for the quarter ending June
30, 2003.

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

NOTE 4 - 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 5 -Loss Per Share

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

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

Basic and diluted loss per share computation:

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED                     SIX MONTHS ENDED
                                                   JUNE 30, 2003       JUNE 30, 2002     JUNE 30, 2003      JUNE 30, 2002
                                                   ----------------------------------------------------------------------
<S>                                                <C>                 <C>               <C>                <C>
Net loss                                             ($    487)          ($    167)        ($    830)         ($    288)

Accretion of redeemable preferred stock,
preferred stock dividends, and beneficial
conversion feature                                        (103)               (100)             (205)              (132)

Deemed preferred stock dividend resulting
from conversion of Series A preferred
shares to Series B preferred hares                          --                  --                --               (489)
                                                     ------------------------------------------------------------------

Net loss applicable to common shareholders                (590)               (267)           (1,035)              (909)
                                                     ==================================================================

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

Net loss per share - basic                           ($   0.16)          ($   0.07)        ($   0.29)         ($   0.25)
                                                     ==================================================================

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

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

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

Net loss per share -diluted                          ($   0.16)          ($   0.07)        ($   0.29)         ($   0.25)
                                                     ==================================================================
</TABLE>

Options and warrants to purchase 1,873,563 and 1,823,767 shares of common stock
and 632,655 (3,318,212 if converted to common shares, refer to Note 8) and
584,169 (3,063,909 if converted to common shares, refer to Note 8) preferred
shares were excluded from dilutive stock option calculations for the three and
six month periods ended June 30, 2003 and 2002, respectively, as their inclusion
would be antidilutive.

                                       6

<PAGE>


NOTE 6 - Segment Information

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

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

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

<TABLE>
<CAPTION>
                                                        EQUIPMENT     ARTC         TOTAL
                                                        ----------------------------------
<S>                                                     <C>         <C>          <C>
THREE MONTHS ENDED JUNE 30, 2003
Net revenue                                              $  1,701   $     276    $   1,977
Gross profit                                                  805          18          823
Property and equipment, net                                   148         538          686

THREE MONTHS ENDED JUNE 30, 2002
Net revenue                                              $  1,786   $     298    $   2,084
Gross profit                                                  899          (4)         895
Property and equipment, net                                   170         530          710
</TABLE>

<TABLE>
<CAPTION>
                                                        EQUIPMENT     ARTC         TOTAL
                                                        ----------------------------------
<S>                                                     <C>         <C>          <C>
SIX MONTHS ENDED JUNE 30, 2003
Net revenue                                              $  2,779   $     531    $   3,310
Gross profit                                                1,238          (5)       1,233
Property and equipment, net                                   148         538          686

SIX MONTHS ENDED JUNE 30, 2002
Net revenue                                              $  3,098   $     889    $   3,987
Gross profit                                                1,452         229        1,681
Property and equipment, net                                   170         530          710
</TABLE>

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

<TABLE>
<CAPTION>
                                                        UNITED                        ASIA
                                                        STATES       EUROPE          PACIFIC       TOTAL
                                                       --------      ------          -------     ----------
<S>                                                    <C>           <C>             <C>         <C>
THREE MONTHS ENDED JUNE 30, 2003
Net revenue                                            $   861       $  212          $   904     $    1,977
Property and equipment, net                                590           96               --            686

THREE MONTHS ENDED JUNE 30, 2002
Net revenue                                            $ 1,139       $   --          $   945     $    2,084
Property and equipment, net                                603           97               --            710
</TABLE>

<TABLE>
<CAPTION>
                                                        UNITED                        ASIA
                                                        STATES       EUROPE          PACIFIC       TOTAL
                                                       --------      ------          -------     ----------
<S>                                                    <C>           <C>             <C>         <C>
SIX MONTHS ENDED JUNE 30, 2003
Net revenue                                            $ 1,818       $  588          $   904     $    3,310
Property and equipment, net                                590           96               --            686

SIX MONTHS ENDED JUNE 30, 2002
Net revenue                                            $ 2,493       $    4          $ 1,490     $    3,987
Property and equipment, net                                603           97               --            710
</TABLE>

                                        7

<PAGE>


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

NOTE 7 - Income Taxes

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

NOTE 8 - Preferred Stock

Preferred Stock - Series A and Series B

On March 27, 2002 an existing common stock investor (the "Investor") exchanged
its 571,013 outstanding shares of Series A preferred stock, for an equal number
of shares of Series B preferred stock of the Company. The Series B preferred
stock has the same preferences, limitations and relative rights as the Series A
preferred stock, except that the conversion rate will be $0.922 per share
instead of $2.15 per share. These rights include voting rights equal to the
number of shares of common stock into which each share of preferred stock would
be convertible, dividends at the rate of 8.0% per annum paid quarterly either in
cash or in kind, priority over common stock to distributions upon liquidation or
dissolution and redemption rights on any date after September 1, 2004. The
preferred stock exchange resulted in a beneficial conversion feature of
$489,000. This beneficial conversion feature would normally have resulted in a
credit to common stock and a charge to retained earnings. As the Company has an
accumulated deficit, both the credit and charge are reflected in common stock.
This beneficial conversion feature was recorded as a charge to loss applicable
to common shareholders for the quarter ended March 31, 2002. In addition, the
accretion recorded under the mandatory redemption feature, including the impact
of the beneficial stock discount, were $4,000 and $8,000 for both the three and
six month periods ended June 30, 2003 and 2002, respectively.

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

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

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

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

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

         Dividends -- The Series B preferred stock accrues dividends at 8% per
         annum. Dividends may be paid in cash or additional preferred shares, in
         kind, at the option of the Company. In addition, in the event the
         Company declares, pays or sets apart a common stockholder dividend,
         each holder of shares of the Series B preferred stock shall be entitled
         to receive a per share dividend equal to the number of shares of common
         equity on which such common dividend is declared into which each share
         of Series B preferred stock is convertible on the record date,
         multiplied by the amount of cash or property paid, or by the number of
         shares of capital stock issued. During the three months ended June 30,
         2003 and 2002, $27,000 and $26,000 of dividends were accrued,
         respectively. During the six months ended June 30, 2003 and 2002,
         $53,000 and $26,000 of dividends were accrued, respectively. As of June
         30, 2003, the Series B preferred shares have $53,000 of accumulated
         dividends in arrears. Of the dividends in arrears at June 30, 2003, the
         Company anticipates a dividend payment (in kind) of 24,683 Series B
         preferred shares at the liquidation price of $2.15 per share on or
         before December 31, 2003.

         Liquidation -- The Series B preferred stock ranks senior to common
         stock and has a liquidation preference of $2.15 per share plus all
         declared and unpaid dividends, which totals $1,358,000 at June 30,
         2003.

         Mandatory 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

                                       8

<PAGE>


         preferred stock, the Series B preferred stock can be converted into a
         debt obligation of the Company in a form acceptable to the holders of
         the Series B preferred stock.

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

Preferred Stock - Series C

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

On March 27, 2002, the Investor purchased 1,000 shares of Series C preferred
stock and warrants to purchase shares of common stock, in exchange for
$1,000,000. The net proceeds to the Company were $967,000. The warrants were
valued and recorded at $259,000. Due to the conversion feature of the Series C
preferred stock transaction, a beneficial conversion feature of $741,000 existed
at the execution of the agreement. The Company is accreting the warrants and the
beneficial conversion feature of the Series C preferred stock to the earliest
date the Series C preferred stockholders can elect the option to redeem the
Series C preferred stock. The accretion recorded for both the three and six
month periods ending June 30, 2003 and 2002 was $50,000 and $100,000,
respectively. The beneficial conversion feature was recorded as an increase to
common stock and a decrease to Series C preferred stock.

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

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

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

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

         Dividends -- The Series C preferred stock accrues dividends at 8% per
         annum. Dividends may be paid in cash or additional preferred shares, in
         kind, at the option of the Company. In the event that the Company pays
         dividends in kind, the Company will record additional charges against
         net income (loss) applicable to common shareholders. In addition, in
         the event the Company declares, pays or sets apart a common stockholder
         dividend, each holder of shares of the Series C preferred stock shall
         be entitled to receive a per share dividend equal to the number of
         shares of common equity on which such common dividend is declared into
         which each share of Series C preferred stock is convertible on the
         record date, multiplied by the amount of cash or property paid, or by
         the number of shares of capital stock issued. During the three months
         ended June 30, 2003 and 2002, $22,000 and $21,000 of dividends were
         accrued, respectively. During the six months ended June 30, 2003 and
         2002, $44,000 and $21,000 of dividends were accrued, respectively. As
         of June 30, 2003, the Series C preferred shares accumulated dividends
         in arrears of $44,000. Of the dividends in arrears at June 30, 2003,
         the Company anticipates a dividend payment (in kind) of 44 Series C
         preferred shares at the liquidation price of $1,000 per share on or
         before December 31, 2003.

                                       9

<PAGE>


         Liquidation -- The Series C preferred stock ranks senior to common
         stock and has a liquidation preference of $1,000 per share plus all
         declared and unpaid dividends which totals $1,105,000 at June 30, 2003.

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

         Warrants

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

NOTE 9 - Stock Based Compensation

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

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                     JUNE 30, 2003      JUNE 30, 2002    JUNE 30, 2003       JUNE 30, 2002
                                                     ---------------------------------------------------------------------
<S>                                                  <C>                <C>              <C>                 <C>
Net loss                                                ($ 487)            ($ 167)           ($ 830)            ($ 288)

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

DEDUCT: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects                                        (39)               (91)              (39)              (102)
                                                        --------------------------------------------------------------

Pro forma net loss                                        (526)              (258)             (869)              (390)
                                                        ==============================================================

Net loss per share:

Basic and diluted - as reported                         ($0.16)            ($0.07)           ($0.29)            ($0.25)
                                                        ==============================================================

Basic and diluted - pro forma                           ($0.17)            ($0.10)           ($0.30)            ($0.28)
                                                        ==============================================================
</TABLE>

NOTE 10 - Legal Matters

On May 30, 2001, the Company was served with an arbitration demand from Gregg K.
Hobbs ("Hobbs"), a former employee, officer and director. The arbitration demand
alleged that the Company breached provisions in the original September 30, 1995
separation agreement, executed between Hobbs and the Company and Hobbs claimed
damages of at least $7,000,000. The parties selected a single arbitrator with
the Judicial Arbiter Group ("JAG") in Denver, Colorado and a hearing in the
arbitration was set for April 29, 2002, but was rescheduled to August 19, 2002,
and subsequently rescheduled to April 21, 2003. On April 26, 2003, the Company
completed the arbitration in front of the single arbitrator with JAG during
which Hobbs requested damages of $10,000,000. The

                                       10

<PAGE>


arbitrator issued a "Decision and Award" on June 20, 2003, in which the
arbitrator found the Company breached certain provisions of the September 30,
1995 agreement.. The arbitrator's "Decision and Award" stated that Hobbs "is
awarded damages against Defendant [the Company] in the total amount, including
interest, of $261,650." The parties were instructed to file their respective
requests for attorney fees and costs for the claims on which each was the
prevailing party and the parties did so on July 11, 2003. Included in the
Company's financial statements for the quarter ended June 30, 2003, is an
estimated amount of $536,000, which includes the awarded damages, legal and
other arbitration related costs. This estimate is subject to final clarification
and it is reasonably possible to assume that this estimate will change in the
near term. The effect of this change in estimate could be material to the
financial statements. The Company also filed with the Arbitrator on July 8, 2003
a "Motion for Clarification, Correction and Reconsideration" of the arbitrator's
Decision and Award, and a supplement to this motion in which certain specific
errors and omissions were identified and the arbitrator was asked to correct or
otherwise address these errors, including an indisputable computational error
that overstated the amount of damages by $9,000. Both Hobbs and the Company
filed pleadings opposing all or part of the other party's request for fees and
costs and the Company filed an opposition to Hobbs' request for interest. The
arbitrator has not, as of the filing date, ruled on either party's request for
attorney fees, costs and interest. Hobbs filed an action in the District Court,
City and County of Denver, in Denver, Colorado in which Hobbs sought
confirmation of the arbitral award. Judge Herbert Stern III issued an order on
July 10, 2003 confirming the award. The Company has filed a motion for relief
from the arbitral award confirmation on grounds that the award was not final
because the arbitrator had not at that time received and acted on the parties'
requests for fees and costs and because the Company's Motion for Correction,
Clarification and Reconsideration was pending with the arbitrator. The Company
also filed an action in the District Court, City and County of Denver, to vacate
the arbitral award based on the arbitrator's reliance on hearsay and other
improper evidence.

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

On March 10, 2003, the Company, a former employee, and ASQ Quality Press were
served with a complaint in U.S. District Court in Denver, Colorado from Hobbs
alleging (i) infringement of copyrights purportedly owned by Hobbs, in violation
of the Copyright Act, 17 U.S.C. Sec. 101, (ii) false designation of origin and
false or misleading representation in commerce under Sec. 43(a) of the Lanham
Act, 15 U.S.C. Sec 1125(a), and (iii) common law unfair competition. The Company
filed an answer on March 31, 2003, which denied allegations of the complaint
with respect to the infringement of any copyrights held by Hobbs. On May 8,
2003, a scheduling conference was held before a United States Magistrate. The
parties have engaged in discovery and the Company has initiated a counter-claim
seeking damages from Hobbs for his unauthorized use of copyrighted seminar
materials which Hobbs sold to the Company in 1994. A mandatory settlement
conference is set for September 22, 2003. The Company intends to contest the
case vigorously; however, no guarantee can be given to the ultimate outcome or
the ultimate amount of the damages, if any.

NOTE 11 - Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity," ("SFAS 150") which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). Mandatorily redeemable instruments (i.e.,
instruments issued in the form of shares that unconditionally obligate the
issuer to redeem the shares for cash or by transferring other assets) are
required to be reported as liabilities by their issuers. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003 for public companies. The Company is currently
evaluating the impact of SFAS 150 on its financial statements.

                                       11

<PAGE>


Item 2.

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

Forward-Looking Statements

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

Results of Operations

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

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

Revenue

Net revenue decreased $107,000 or 5.1% from $2,084,000 in the three months ended
June 30, 2002 to $1,977,000 for the three months ended June 30, 2003.

Equipment Revenue

Equipment revenue decreased $85,000 or 4.8% from $1,786,000 in the three-month
period ended June 30, 2002 to $1,701,000 in the three months ended June 30,
2003. Twelve OVS units were sold in the second quarter of 2003, of which four
were used/refurbished units, compared to eleven OVS units sold in the second
quarter of 2002, of which two were used/refurbished units. The decrease in sales
for the quarter ended June 30, 2003 primarily occurred due to the continued
slowdown of the capital goods market, the international political environment,
and product mix. The Company is continuing its aggressive pursuit of
international and domestic sales in the high technology industry in preparation
for the eventual economic improvement. Of the units sold in the quarter ended
June 30, 2003, eight represented international sales versus seven international
sales for the quarter ended June 30, 2002. The percentage of international sales
increased for the three months ended June 30, 2003 providing 62.4% of the
Company's equipment revenue versus 52.9% for the three months ended June 30,
2002. The Company continues to expect a slow recovery in domestic equipment
sales throughout 2003 as the equipment line of business trends capital spending.
Because of the lagging economy, the Company is continuing to cultivate its
international presence by emphasizing its core markets, as well focus on the
used/refurbished equipment line of business. The Company is encouraged with its
recently released product, the OVTT (refer to the 2002 form 10KSB, Item 1,
Research and Product Development) to also assist in stimulating the domestic
equipment market. The Company cannot give any assurance of the demand of its
used/refurbish equipment sales, success of the OVTT, or the overall increase in
equipment sales.

Test Center (ARTC) Revenue

Test center revenue decreased $22,000 or 7.4% from $298,000 in the three months
ended June 30, 2002 to $276,000 in the three months ended June 30, 2003. The
Company operated four test centers in the U.S., maintained two strategic
domestic partnership

                                       12

<PAGE>


operations, and five strategic partnership test center operations in Europe
during 2003, versus five test centers in the U.S. and five strategic partnership
operations in Europe during the same period in 2002. The Company primarily
attributes the decrease in test center revenue to a conservative economic
atmosphere in the high technology industry, as well as an increase in
competition. The Company is also continuing to examine the strategic partnership
test center model, in which additional partnerships may be entered into to
minimize both variable and fixed test center costs, while benefiting in a
revenue share. In April 2003 the Company expanded its test center network with a
new domestic partner in the Southern United States, which will follow the
strategic partnership test center model. The Company has changed its strategic
focus on the test center line of business to maximize volume and utilization in
the current operating environment. These changes include operational
consolidations, sales personnel redeployment, and the expansion of
domestic/international strategic partnerships. The Company feels confident that
these changes will result in increased revenues, expand the Company's customer
network, and increase product awareness, however the Company cannot give any
assurances on the ultimate success.

Gross Profit

Total gross margin for the three months ended June 30, 2003 was 41.6%. This
compares to a gross margin of 42.9% for the three months ended June 30, 2002.
The decrease in gross margin for the three-month period is primarily due to
competitive pricing pressures and lower volume on our test center line of
business.

Operating Expenses

Total operating expenses increased $272,000 or 26.9% to $1,285,000 for the three
months ended June 30, 2003 from $1,013,000 for the three months ended June 30,
2002.

Selling, general and administrative expenses decreased $74,000 or 11.1% to
$590,000 in the three months ended June 30, 2003 from $664,000 for the three
months ended June 30, 2002. The decrease is primarily due to the reduction of
overhead expenses due to the Company's relocation in the beginning of the second
quarter of 2003. The Company continues to monitor and identify ways to reduce
operating expenditures. Sales and marketing expenses remained consistent from
the three month period ending June 30, 2003 compared to the three month period
ending June 30, 2002. The Company believes that its investment in sales and
marketing, at its current level, is in line with future needs as the economy
recovers. Currently, the Company's infrastructure and systems have been set up
and redesigned to prepare for an increase in sales demand with a minimal
increase in selling, general, and administrative costs.

Research and development costs decreased $30,000 or 15.9% to $159,000 for the
three months ended June 30, 2003 from $189,000 for the three months ended June
30, 2002. The decrease is primarily attributed to a reduction of research and
development staff. The Company continually strives to sustain its commitment to
product improvements and research and development. As a result, research and
development expenditures fluctuate from quarter to quarter, and may increase in
future quarters. During the first quarter 2003, the Company's research and
development department completed an overall "vibration core" product redesign.
The design changes will improve reliability, increase the ease of manufacturing,
and increase usability for our customers.

On June 27, 2003 the Company received the arbitration decision on claims brought
by Gregg K. Hobbs (refer to Note 10 Legal Matters, of the Financial Statements).
The arbitrator found damages totaling $261,650, including interest, in favor of
Dr. Hobbs for the breach of certain provisions of the September 30, 1995
separation agreement. The Company included in the quarter ended June 30, 2003,
financial statements estimates of $536,000 for costs related to and including
the arbitration damages, legal fees, interest expense, and related costs.
Previously incurred arbitration expenses of $160,000 were accounted for in the
three months end June 30, 2002.

Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2003

Revenue

Net revenue decreased $677,000 or 17.0% from $3,987,000 in the six months ended
June 30, 2002 to $3,310,000 for the six months ended June 30, 2003.

                                       13

<PAGE>


Equipment revenue decreased $319,000 or 10.3% from $3,098,000 in the six-month
period ended June 30, 2002 to $2,779,000 in the six months ended June 30, 2003.
Nineteen OVS units were sold in the first six months of 2003 compared to twenty
OVS units sold in the first six months of 2002. Of the units sold in first six
months of 2003, five were used/refurbished units, compared to three
used/refurbished units sold in the first six months of 2002. The decrease in
sales for the period ended June 30, 2003 primarily occurred due to the continued
slowdown of the capital goods market, the international political environment,
and product mix. The Company is continuing its aggressive pursuit of
international and domestic sales in the high technology industry in preparation
for the eventual economic improvement. Of the units sold in the six months ended
June 30, 2003 and 2002, eleven represented international sales. The
international market remains stable for the first six months of 2003 providing
50.9% of the Company's equipment revenue versus 48.1% for the first six months
of 2002. The Company continues to expect a slow recovery in domestic equipment
sales throughout 2003 as the equipment line of business trends capital spending.
Because of the lagging economy, the Company is continuing to cultivate its
international presence by emphasizing its core markets, as well as to focus on
the used/refurbish equipment line of business. The Company is encouraged with
its recently released product, the OVTT (refer to the 2002 form 10KSB, Item 1,
Research and Product Development) to also assist in stimulating the domestic
equipment market. The Company cannot give any assurance of the demand of its
used/refurbish equipment sales, success of the OVTT, or the overall increase in
equipment sales.

Test center revenue decreased $358,000 or 40.3% from $889,000 in the six months
ended June 30, 2002 to $531,000 in the six months ended June 30, 2003. The
Company operated four test centers in the U.S., maintained two strategic
domestic partnership operations, and five strategic partnership test center
operations in Europe during 2003, versus five test centers in the U.S. and five
strategic partnership operations in Europe during the same period in 2002. The
Company primarily attributes the decrease in test center revenue to a
conservative economic atmosphere in the high technology industry, as well as an
increase in competition. The Company is also continuing to examine the strategic
partnership test center model, in which additional partnerships may be entered
into to minimize both variable and fixed test center costs, while benefiting in
a revenue share. In April 2003 the Company expanded its test center network with
a new domestic partner in the Southern United States, which will follow the
strategic test center model. The Company has changed its strategic focus on the
test center line of business to maximize volume and utilization in the current
operating environment. These changes include operational consolidations, sales
personnel redeployment, and the expansion of domestic/international strategic
partnerships. The Company feels confident that these changes will result in
increased revenues, expand the Company's customer network, and increase product
awareness, however the Company cannot give any assurances on the ultimate
success.

Gross Profit

Total gross margin for the six months ended June 30, 2002 was 42.2%. This
compares to a gross margin of 37.3% for the six months ended June 30, 2003. The
decrease in gross margin for the six-month period is primarily due to
competitive pricing pressures, lower volume on our test center line of business,
and increased equipment costs for Certification Europa (CE) licensing, which
enables manufactured products to be sold in Europe. The Company is cautiously
optimistic in observing an increase in interest from potential European buyers
during the remainder of 2003, and feels the aforementioned strategic test center
plan is on schedule and is being implemented as intended.

Operating Expenses

Total operating expenses increased $132,000 or 7.0% to $2,006,000 for the six
months ended June 30, 2003 from $1,874,000 for the six months ended June 30,
2002.

Selling, general and administrative expenses decreased $183,000 or 13.8% to
$1,141,000 in the six months ended June 30, 2003 from $1,324,000 for the six
months ended June 30, 2002. The decrease in the second quarter of 2003 is
primarily due to the reduction of overhead expenses due to the Company's
relocation in beginning of the second quarter of 2003. The Company continues to
monitor and identify ways to reduce operating expenditures. Sales and marketing
expenses remained consistent from the six month period ending June 30, 2003
compared to the six month period ending June 30, 2002. The Company believes that
its investment in sales and marketing, at its current level, is in line with
future needs as the economy recovers. Currently, the Company's infrastructure
and systems have been set up and redesigned to prepare for an increase in sales
demand with a minimal increase in selling, general, and administrative costs.

Research and development costs decreased $56,000 or 14.5% to $329,000 for the
six months ended June 30, 2003 from $385,000 for the six months ended June 30,
2002. The decrease is primarily attributed to a reduction of research and
development staff. The Company continually strives to sustain its commitment to
product improvements and research and development. As a result, research

                                       14

<PAGE>


and development expenditures fluctuate from quarter to quarter, and may increase
in future quarters. During the first quarter 2003, the Company's research and
development department completed an overall "vibration core" product redesign.
The design changes will improve reliability, increase the ease of manufacturing,
and increase usability for our customers.

On June 27, 2003 the Company received the arbitration decision on claims brought
by Gregg K. Hobbs (refer to Note 10 Legal Matters, of the Financial Statements).
The arbitrator found damages totaling $261,650, including interest, in favor of
Dr. Hobbs for the breach of certain provisions of the September 30, 1995
separation agreement. The Company included in the quarter ended June 30, 2003,
financial statements estimates of $536,000 for costs related to and including
the arbitration damages, legal fees, interest expense, and related costs.
Previously incurred arbitration expenses of $165,000 were accounted for in the
six months end June 30, 2002.

Liquidity and Capital Resources

During the six months ended June 30, 2003, the Company used $307,000 of cash
from operating activities, invested $152,000 for equipment and received $11,000
from sale of equipment, and repaid $330,000 of commercial bank borrowings.
Together, these activities resulted in a cash decrease of $778,000, for an
ending balance of $510,000 at June 30, 2003. During the six months ended June
30, 2002, the Company generated $16,000 of cash from operating activities,
invested $68,000 for equipment, and repaid $245,000 of commercial bank
borrowings. The Company also received net proceeds of $976,000 for the issuance
of preferred stock, (refer to Note 8, Preferred Stock, of the Financial
Statements). Together, these activities resulted in a cash increase of $679,000,
for an ending balance of $1,179,000 at June 30, 2002.

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

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

The average interest rate for the six-month periods ending June 30, 2003 and
2002, for the term loan and revolving credit line was 7.25% and 7.42%,
respectively. Both the revolving credit line and term loan under the Credit
Agreement are collateralized by substantially all the assets of the Company.
Borrowings under the line of credit are subject to borrowing base limits. Based
on the provisions of the Credit Agreement, as of March 31, 2003, there was no
additional availability on the line of credit.

As of June 30, 2003, the balances of the revolving credit and term loan are
$500,000 and $780,000, respectively.

The Company must maintain certain financial and other covenants to be in
compliance with the Credit Agreement. Although the Company is not now, nor has
it ever been in arrears on any payment pursuant to the Credit Agreement, as of
June 30, 2003, the Company was not in compliance with certain financial
covenants contained in the Credit Agreement. The Company has, however, received
waivers from its lender regarding such noncompliance for the quarter ending June
30, 2003. The Company cannot give any assurance on future compliance with the
financial and other covenants set forth in the Credit Agreement. Such
non-compliance may have a material adverse affect on the Company's liquidity and
its ability to generate the funds necessary to satisfy the existing Credit
Agreement.

As required by the renegotiated Credit Agreement the Company is making monthly
principal payments of $55,000 on the term loan. These payments will increase to
$60,000 beginning July 31, 2003. The Company had also determined that, during
2003, quarterly payments to the revolving line of credit would be made based on
cash flows generated from operations. For the six months ended June 30, 2003,
the Company has been unable to make any additional payments to relieve the
revolving line of credit. The Company can not give any guarantee on its ability
to make additional payments to the revolving line of credit for the remainder of
2003. At the close of each quarter, the Company has made arrangements to meet
and review results of the Company with the commercial bank and the Company
believes its relations with its commercial bank to be good. At the end of 2003,
the Company expects to negotiate with the commercial bank for an extension to
the Credit Agreement, although there can be no guarantee that such
renegotiations will be successful.

                                       15

<PAGE>


On June 27, 2003, the Company received the arbitration decision on claims
brought by Gregg K. Hobbs (refer to Note 10 Legal Matters, of the Financial
Statements). The arbitrator found damages totaling $261,650, including interest,
in favor of Dr. Hobbs for the breach of certain provisions of the September 30,
1995 separation agreement. The arbitrator also confirmed that certain claims for
breaches originally alleged by Dr. Hobbs were dismissed. Based on the decision,
both parties made respective requests for attorneys' fees and costs for the
claims on which each party prevailed. The Company included in the quarter ended
June 30, 2003 financial statements estimates of $536,000 for costs related to
and including the arbitration damages, legal fees, interest expense, and related
costs. This estimate is subject to final clarification and its is reasonably
possible to assume that this estimate will change in the near term. The effect
of this change in estimate could be material to the financial statements. The
Company and its counsel are evaluating the arbitration ruling, as well as the
impact it will have on the other pending litigation with Dr. Hobbs. The Company
is also evaluating the impact of the damages, legal fees, and payment timing on
its financial position, which could be material depending on the outcome of
these matters.

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

Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity," ("SFAS 150") which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). Mandatorily redeemable instruments (i.e.,
instruments issued in the form of shares that unconditionally obligate the
issuer to redeem the shares for cash or by transferring other assets) are
required to be reported as liabilities by their issuers. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003 for public companies. The Company is currently
evaluating the impact of SFAS 150 on its financial statements.

Business Environment

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

Suppliers

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

International Operations

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

Intellectual Property

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

                                       16

<PAGE>


Legal Proceedings

On May 30, 2001, the Company was served with an arbitration demand from Gregg K.
Hobbs ("Hobbs"), a former employee, officer and director. The arbitration demand
alleged that the Company breached provisions in the original September 30, 1995
separation agreement, executed between Hobbs and the Company and Hobbs claimed
damages of at least $7,000,000. The parties selected a single arbitrator with
the Judicial Arbiter Group ("JAG") in Denver, Colorado and a hearing in the
arbitration was set for April 29, 2002, but was rescheduled to August 19, 2002,
and subsequently rescheduled to April 21, 2003. On April 26, 2003, the Company
completed the arbitration in front of the single arbitrator with JAG during
which Hobbs requested damages of $10,000,000. The arbitrator issued a "Decision
and Award" on June 20, 2003, in which the arbitrator found the Company breached
certain provisions of the September 30, 1995 agreement.. The arbitrator's
"Decision and Award" stated that Hobbs "is awarded damages against Defendant
[the Company] in the total amount, including interest, of $261,650." The parties
were instructed to file their respective requests for attorney fees and costs
for the claims on which each was the prevailing party and the parties did so on
July 11, 2003. Included in the Company's financial statements for the quarter
ended June 30, 2003, is an estimated amount of $536,000, which includes the
awarded damages, legal and other arbitration related costs. This estimate is
subject to final clarification and it is reasonably possible to assume that this
estimate will change in the near term. The effect of this change in estimate
could be material to the financial statements. The Company also filed with the
Arbitrator on July 8, 2003 a "Motion for Clarification, Correction and
Reconsideration" of the arbitrator's Decision and Award, and a supplement to
this motion in which certain specific errors and omissions were identified and
the arbitrator was asked to correct or otherwise address these errors, including
an indisputable computational error that overstated the amount of damages by
$9,000. Both Hobbs and the Company filed pleadings opposing all or part of the
other party's request for fees and costs and the Company filed an opposition to
Hobbs' request for interest. The arbitrator has not, as of the filing date,
ruled on either party's request for attorney fees, costs and interest. Hobbs
filed an action in the District Court, City and County of Denver, in Denver,
Colorado in which Hobbs sought confirmation of the arbitral award. Judge Herbert
Stern III issued an order on July 10, 2003 confirming the award. The Company has
filed a motion for relief from the arbitral award confirmation on grounds that
the award was not final because the arbitrator had not at that time received and
acted on the parties' requests for fees and costs and because the Company's
Motion for Correction, Clarification and Reconsideration was pending with the
arbitrator. The Company also filed an action in the District Court, City and
County of Denver, to vacate the arbitral award based on the arbitrator's
reliance on hearsay and other improper evidence.

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

On March 10, 2003, the Company, a former employee, and ASQ Quality Press were
served with a complaint in U.S. District Court in Denver, Colorado from Hobbs
alleging (i) infringement of copyrights purportedly owned by Hobbs, in violation
of the Copyright Act, 17 U.S.C. Sec. 101, (ii) false designation of origin and
false or misleading representation in commerce under Sec. 43(a) of the Lanham
Act, 15 U.S.C. Sec 1125(a), and (iii) common law unfair competition. The Company
filed an answer on March 31, 2003, which denied allegations of the complaint
with respect to the infringement of any copyrights held by Hobbs. On May 8,
2003, a scheduling conference was held before a United States Magistrate. The
parties have engaged in discovery and the Company has initiated a counter-claim
seeking damages from Hobbs for his unauthorized use of copyrighted seminar
materials which Hobbs sold to the Company in 1994. A mandatory settlement
conference is set for September 22, 2003. The Company intends to contest the
case vigorously; however, no guarantee can be given to the ultimate outcome or
the ultimate amount of the damages, if any.

Government Regulation

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

Nasdaq Market Listing

                                       17

<PAGE>


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

Critical Accounting Policies and Estimates

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

Contractual Obligations

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

Item 3.

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to interest rate changes are primarily related to its
variable rate debt issued under its $1,280,000 Credit Agreement (refer to Note 3
Commercial Bank Borrowings, of the Financial Statements). Because the interest
rates on these facilities are variable, based upon the bank's prime rate, the
Company's interest expense and net income are affected by interest rate
fluctuations. If interest rates were to increase or decrease by 100 basis
points, the result, based upon the existing outstanding debt as of June 30, 2003
would be an annual increase or decrease of approximately $13,000 in interest
expense for a twelve-month period.

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

Item 4.

                            CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures:

Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated and communicated to management, including the President and Chief
Executive Officer and the Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Within the 90 days prior to the
filing of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's President and Chief Executive Officer and its Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon and as of the date of that
evaluation, the President and Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports the
Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required.

(b) Changes in Internal Controls:

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

                                       18

<PAGE>


                            PART II OTHER INFORMATION

Item 1   Legal Proceedings

On May 30, 2001, the Company was served with an arbitration demand from Gregg K.
Hobbs ("Hobbs"), a former employee, officer and director. The arbitration demand
alleged that the Company breached provisions in the original September 30, 1995
separation agreement, executed between Hobbs and the Company and Hobbs claimed
damages of at least $7,000,000. The parties selected a single arbitrator with
the Judicial Arbiter Group ("JAG") in Denver, Colorado and a hearing in the
arbitration was set for April 29, 2002, but was rescheduled to August 19, 2002,
and subsequently rescheduled to April 21, 2003. On April 26, 2003, the Company
completed the arbitration in front of the single arbitrator with JAG during
which Hobbs requested damages of $10,000,000. The arbitrator issued a "Decision
and Award" on June 20, 2003, in which the arbitrator found the Company breached
certain provisions of the September 30, 1995 agreement. The arbitrator's
"Decision and Award" stated that Hobbs "is awarded damages against Defendant
[the Company] in the total amount, including interest, of $261,650." The parties
were instructed to file their respective requests for attorney fees and costs
for the claims on which each was the prevailing party and the parties did so on
July 11, 2003. Included in the Company's financial statements for the quarter
ended June 30, 2003, is an estimated amount of $536,000, which includes the
awarded damages, legal and other arbitration related costs. This estimate is
subject to final clarification and it is reasonably possible to assume that this
estimate will change in the near term. The effect of this change in estimate
could be material to the financial statements. The Company also filed with the
Arbitrator on July 8, 2003 a "Motion for Clarification, Correction and
Reconsideration" of the arbitrator's Decision and Award, and a supplement to
this motion in which certain specific errors and omissions were identified and
the arbitrator was asked to correct or otherwise address these errors, including
an indisputable computational error that overstated the amount of damages by
$9,000. Both Hobbs and the Company filed pleadings opposing all or part of the
other party's request for fees and costs and the Company filed an opposition to
Hobbs' request for interest. The arbitrator has not, as of the filing date,
ruled on either party's request for attorney fees, costs and interest. Hobbs
filed an action in the District Court, City and County of Denver, in Denver,
Colorado in which Hobbs sought confirmation of the arbitral award. Judge Herbert
Stern III issued an order on July 10, 2003 confirming the award. The Company has
filed a motion for relief from the arbitral award confirmation on grounds that
the award was not final because the arbitrator had not at that time received and
acted on the parties' requests for fees and costs and because the Company's
Motion for Correction, Clarification and Reconsideration was pending with the
arbitrator. The Company also filed an action in the District Court, City and
County of Denver, to vacate the arbitral award based on the arbitrator's
reliance on hearsay and other improper evidence.

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

On March 10, 2003, the Company, a former employee, and ASQ Quality Press were
served with a complaint in U.S. District Court in Denver, Colorado from Hobbs
alleging (i) infringement of copyrights purportedly owned by Hobbs, in violation
of the Copyright Act, 17 U.S.C. Sec. 101, (ii) false designation of origin and
false or misleading representation in commerce under Sec. 43(a) of the Lanham
Act, 15 U.S.C. Sec 1125(a), and (iii) common law unfair competition. The Company
filed an answer on March 31, 2003, which denied allegations of the complaint
with respect to the infringement of any copyrights held by Hobbs. On May 8,
2003, a scheduling conference was held before a United States Magistrate. The
parties have engaged in discovery and the Company has initiated a counter-claim
seeking damages from Hobbs for his unauthorized use of copyrighted seminar
materials which Hobbs sold to the Company in 1994. A mandatory settlement
conference is set for September 22, 2003. The Company intends to contest the
case vigorously; however, no guarantee can be given to the ultimate outcome or
the ultimate amount of the damages, if any.Item 2 Changes in Securities

                                       19

<PAGE>


         None

Item 3   Defaults upon Senior Securities

         None

Item 4   Submission of Matters to a Vote of Security Holders

         None

Item 5   Other Information

         None

Item 6 Exhibits and Reports on Form 8-K.

         (a) Exhibits - See Index to Exhibits

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

            On April 25, the Company issued a press release announcing its
            operating results for the first quarter ended March 31, 2003.

            On June 20, 2003, the Company reported the arbitration decision
            regarding claims brought by Gregg K. Hobbs.

                                       20

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

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

                                       21

<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)
</TABLE>

                                       22


<PAGE>


<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                               DESCRIPTION
-------    -------------------------------------------------------------------------
<S>        <C>
  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 Ninth Amendment to Loan
           Agreement dated July 25, 2003 by and between QualMark and U.S. Bank
           National Association.

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

  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.

                                       23