Inspectors praised academic work, but criticised the accommodation and equipment at Belfast Institute of FHE.
"In the majority of vocational areas, there are significant deficiencies in equipment which prevent the students from achieving consistently high standards of performance across all dimension of their courses," the inspectors said.
High standards were achieved against the odds by staff and students, they said, strengthening the case for further investment in the college. Belfast Institute is likely to use this to argue for Government cash to be siphoned from the University of Ulster.
The university plans a new campus at Springvale to promote the regeneration of West Belfast and counter the shortage of higher education places in Northern Ireland.
But the report, which follows a recent Government statement that HE expansion in the Province is most likely to happen in colleges, fuels its argument for more cash.
The institute has now submitted proposals for extensive new buildings at Millfield, in the west of the city.
Six weeks ago, the Department for Education and Employment advocated closer collaboration between universities and colleges, such as franchising, access courses and the spread of modules of university programmes. BIFHE has more than 1,300 full-time higher education students - almost twice as many as four years ago - and 2,300 part-time enrolments.
The report said: "The standard of teaching varies between excellent and adequate; it is generally good. Just over 60 per cent of the lessons inspected were good or excellent, around 30 per cent were satisfactory and 10 per cent were dull but adequate. Relationships between the staff and the students are good.
"The standard of the work produced by most students in their specialist areas of work is satisfactory or good. They can work on their own or with others and have the ability to solve problems. Their communications skills are satisfactory or good."
But it added: "Many students work in cramped, bleak, untidy and noisy conditions."
Many of the workshops are poorly furnished, drab, uninviting and not up to the standards necessary for higher education provision. Fashion and beauty courses take place in an unventilated room with no natural light. One journalism room is in an appalling state of cleanliness and maintenance, the report added.