<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

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

     For the fiscal year ended: DECEMBER 31, 1998

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE 
     ACT OF 1934

         For the transition period from ___________ to _________

         Commission file number:  0-28484

                              QUALMARK CORPORATION
                 (Name of small business issuer in its charter)

          COLORADO                                     84-1232688
(State or other jurisdiction of                       (IRS Employer
incorporation or organization)                      Identification No.)

                 1329 WEST 121ST AVENUE, DENVER, COLORADO 80234
          (Address of principal executive offices, including zip code)

                                 (303) 254-8800
              (Registrant's Telephone Number, including area code)

  SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: None 
    SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

                           COMMON STOCK (NO PAR VALUE)
                                (Title of Class)

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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. 
Yes   X     No 
    -----      -----

         Check if there is no disclosure of delinquent filers in response to 
Item 405 of Regulation S-B contained in this form, and no disclosure will be 
contained, to the best of registrant's knowledge, in definitive proxy or 
information statements incorporated by reference in Part III of this Form 
10-KSB or any amendment to this Form 10-KSB. [ ]

         Issuer's revenues for its most recent fiscal year. $13,742,099

         The aggregate market value of the voting stock held by nonaffiliates 
computed by reference to the average bid and asked prices of such stock as of 
March 9, 1999 was $15,262,002.

         The number of shares outstanding of the issuer's Common Stock as of 
March 9, 1999 was 3,539,015.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Registrant's definitive Proxy Statement to be filed pursuant to 
Regulation 14A under the Securities Exchange Act of 1934 is incorporated by 
reference in Part III of this report.

         Transitional Small Business Disclosure Format (Check One): 
Yes         No  X
    -----     -----

                                       1
<PAGE>

                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

     QualMark Corporation ("QualMark" or "the Company") designs, 
manufactures, and markets proprietary systems that rapidly and efficiently 
expose product design and manufacturing-related defects for the purpose of 
improving product quality and reliability. The Company's high performance 
physical stress systems support significant improvements in the process of 
Design Verification Testing ("DVT") and Environmental Stress Screening 
("ESS"). DVT is the process by which electronic product manufacturers ensure 
their products perform within the previously determined operating ranges 
(commonly known as "specifications"). ESS is the testing process used by 
these same manufacturers to expose production-related defects.

     The Company's systems allow manufacturers to determine the true 
operating limits of their products. This gives manufacturers the necessary 
information to reduce design costs, improve product reliability, shorten time 
to market, reduce warranty costs, and extend warranty periods. The Company's 
systems are used by manufacturers in a wide range of industries to perform 
highly accelerated stress testing on products such as circuit boards, 
personal computers, monitors, flight navigation systems, cellular telephones, 
LAN/WAN equipment and consumer electronics.

     The Company evolved from a business manufacturing and marketing its 
proprietary OVS (Omni-axial Vibration System) equipment to a full service 
organization offering HALT (Highly Accelerated Life Test) and HASS (Highly 
Accelerated Stress Screen) test services as well. The Company operates a 
network of test centers, known as Accelerated Reliability Test Centers 
("ARTC"), which provide comprehensive HALT and HASS test and support services 
to industry. These services include accelerated reliability improvement test 
services (HALT and HASS) using QualMark's OVS physical stress systems 
performed either in the ARTC test centers or at the customer's site.

     QualMark currently has eight test centers located in the metropolitan 
areas of Denver, Colorado, Huntington Beach, California, Santa Clara, 
California, Boston, Massachusetts, Minneapolis-Saint Paul, Minnesota, 
Detroit, Michigan, Raleigh, North Carolina and Orlando, Florida. In addition, 
in 1998, the Company established strategic alliances with TUV Product Service 
Ltd. and Anecto Ltd., to operate testing centers in London, England, Galway, 
Ireland and Mannheim, Germany. In 1999, the Company expects to add additional 
OVS capacity to existing test centers and offer additional accelerated test 
services. In February 1999, the Company announced a strategic alliance with 
Maser Engineering B.V. to operate a testing center in Enshede, The 
Netherlands. As international demand for its products and services grows, the 
Company may further expand its domestic and international presence by 
expanding strategic alliance arrangements with other test lab organizations.

     The Company was organized in July 1991 as a Colorado limited liability 
company and was later incorporated in Colorado in March 1992. The Company 
completed its initial public offering in April 1996.

PRODUCTS AND SERVICES

     THE OVS COMBINED STRESS SYSTEM

     The Company's OVS Combined Stress Systems for HALT and HASS are 
comprised of two main subassemblies: the OmniAxial Vibration Assembly, which 
applies vibrational stresses, and the UltraRate Thermal Chamber Assembly, 
which applies thermal stresses and houses the vibration assembly.

      THE OMNIAXIAL VIBRATION ASSEMBLY

     The OmniAxial Vibration Assembly is a true multi-axis vibration system 
comprised of a table and vibrators and is the heart of the Company's 
technology. The vibration table moves simultaneously in three linear axes and 
three angular rotations. Each axis has broad-band random vibration, with all 
frequencies present, all of the time. While the traditional frequency range 
used for Design Verification Testing (DVT) and Environmental Stress Screening 
(ESS) is from 2Hz to 2,000 Hz, the Company's system creates vibrational 
forces between 2Hz and 10,000 Hz. This provides extremely complex motion 
across a broad frequency range, which is desirable for many current 
electronic technologies. Thus, the system creates virtually any vibration 
that could occur naturally during product use. This is important in testing 
and screening applications to expose most flaws, whether it is design or 
process related, before the product is placed into service.


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<PAGE>


     The OmniAxial Vibration Assembly consists of two major components:

     VIBRATION TABLE

     The patented vibration table is constructed out of solid aluminum that
     contains cored-out voids to enhance uniform distribution of vibration
     energy across the table. The unique properties of this table allow the
     Company to produce it in a number of different dimensions, from a 2.25
     square foot table size to a 16 square foot table size. As market demand
     dictates, the Company will continue to explore opportunities to extend the
     present product line to include vibration tables of different dimensions.
     The Company uses an outside source to produce its vibration tables;
     however, the Company is not dependent on a single source of supply and
     controls all design and documentation.

     ASX AND AUTOSMEAR VIBRATORS

     Attached to the bottom surface of the table are a set of pneumatic, piston
     driven actuators (vibrators) that contain certain patented properties,
     which help to maximize random motion of the vibration table. These
     actuators are mounted to the bottom of the vibration table and are oriented
     in different directions to promote random motion of the table. Compressed
     air is routed to the vibrator housings, forcing the pistons to impact the
     top surface of each vibrator, translating the energy to the vibration
     table.

     The unique design of the Company's AutoSmear Vibrator piston and housing
     allow for a variation in the amount of energy produced by each AutoSmear.
     During 1998, the Company released and began selling the new ASX vibrator,
     which features several improvements to the design of the AutoSmear.
     Improved low frequency energy and vibrator durability are examples of these
     improvements.

     THE ULTRARATE THERMAL CHAMBER ASSEMBLY

     The UltraRate Thermal Chamber, which houses the OmniAxial Vibration 
Assembly, changes temperature at rates up to 60 DEG. Centigrade per minute as 
measured on the product being tested. This high rate of change results in 
highly effective design verification during HALT and extremely short 
production screens during HASS, requiring less equipment and personnel to 
perform a given series of thermal cycles. The Company believes that its 
UltraRate Thermal Chambers, comprised of patented and patent pending 
features, have one of the highest rate of thermal change available in the 
environmental stress screening industry. This capability significantly 
reduces test time, with resulting cost reductions in equipment and personnel.

     In spite of rapid temperature change and complex vibration spectra, the 
UltraRate Thermal Chamber is extremely quiet, allowing it to be used in 
standard lab and manufacturing environments without the necessity of building 
costly special stress screening rooms.

THE OVS COMBINED STRESS SYSTEM PRODUCT LINE

     The Company's OVS Combined Stress Systems for HALT and HASS are 
presently available in four sizes. The number after the "OVS" in the 
Company's product models represents the linear footage of the vibration table 
as explained below. Therefore, an OVS-1.5 contains a one and one half foot by 
one and one half foot table, an OVS-2.5 contains a two and a half foot by two 
and a half foot table, and so on. Through this product spectrum, the Company 
provides systems capable of meeting virtually every accelerated design 
ruggedization and production screening requirement. The variety of chamber 
sizes allows customers to purchase equipment that meets their requirements 
and to consume only the energy necessary to meet their requirements. The 
OVS-3 and OVS-4 systems have a unique patented feature which allows the user 
to raise the shaker table, thus decreasing the internal volume of the 
chambers to the minimum size required. By cooling and heating a smaller 
volume, the customer can save considerably on power and liquid nitrogen 
requirements.

     OVS-1.5:

     The OVS-1.5 is a small, bench top version of the OVS product line. The
     OVS-1.5 is a truly portable, multi-axis vibration and high performance
     thermal chamber. Equipped with all the same operating features of the
     larger OVS systems, including PC controller, the OVS-1.5 is primarily used
     by manufacturers of small products (such as "palm size" circuit boards,
     modem cards for notebook computers, disk drives, etc.) and usually in the
     product development (HALT) area.

     The OVS-1.5 can generate random vibration forces in excess of 90 Grms
     (2Hz-10,000 Hz) on the 18"x18" vibration table and up to 60 DEG. 
     Centigrade per minute change on the product under test within the 
     18"x17"x13" internal dimension (ID) thermal chamber. The domestic price 
     of the OVS-1.5 is approximately $69,000.

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<PAGE>

     OVS-2.5:

     The OVS-2.5 is the most popular system in the OVS product line. A mid-size
     system, the PC-controlled OVS-2.5 is available in two configurations: a
     standard version that is equipped with four large vibrators mounted to the
     vibration table, and a high performance version that comes equipped with
     eight large vibrators, for heavier product applications. The OVS-2.5
     standard vibration system can generate 50 Grms (the high performance system
     generates greater force than the standard version with heavy loads) from
     2Hz to 10,000 Hz. The vibration table is 30"x30", and is enclosed within a
     thermal chamber that is 36"x36x37" (ID). The thermal chamber is capable of
     up to 60 DEG. Centigrade per minute change on the product under test. 
     Typical uses of the OVS-2.5 include mid-size product HALT applications 
     (disk drives, small computers, power supplies, monitors, etc.) and small 
     volume HASS applications (multiple disk drives, multiple modem cards for 
     notebook computers, etc.) The domestic price for a standard OVS-2.5 is 
     approximately $116,500 and the high performance version for heavy load 
     applications is approximately $125,500.

     OVS-3:

     The OVS-3 is commonly used for production screening (HASS) applications, or
     for HALT on system-level products (such as work stations and other large
     computers). The PC- controlled OVS-3 contains a 36"x36" vibration table
     equipped with nine large vibrators that generate at least 60 Grms random
     vibration force (2Hz-10,000 Hz). The thermal chamber is 43"x42"x54" (ID)
     (table in lower position) and can produce temperature changes on the
     product under test of up to 60 DEG. Centigrade per minute. The OVS-3 
     sells for approximately $137,000.

     OVS-4:

     The OVS-4 is the largest system in the OVS product line and is available in
     a standard and high performance version. By far, the most common
     application for the OVS-4 is for large volume production screening (HASS)
     on computers, monitors, communications systems, etc. The PC-controlled
     OVS-4 is equipped with a 48"x48" vibration table housed within a
     55"x54"x54" (internal dimension) (table in lower position) thermal chamber
     capable of producing temperature changes of up to 60 DEG. Centigrade per 
     minute on the product under test. The OVS-4 standard vibration system is 
     equipped with eight large vibrators that produce up to 50 Grms random 
     vibration force, while the high performance version is equipped with 
     sixteen large vibrators for heavy load applications. The standard OVS-4 
     sells for approximately $169,500; the high performance version for heavy 
     load applications is approximately $178,500.

     A two year limited warranty is included with each OVS system. Various 
options and accessories are available for each OVS model, including oxygen 
monitors, vacuum hold down apparatus (for product fixturing requirements), 
extended warranties, and on-site applications assistance.

ACCELERATED RELIABILITY TEST CENTERS

     The Company has a network of ARTC test centers throughout the United 
States, which provide test services and on-site applications support 
services. The Company is uniquely positioned to offer comprehensive HALT/HASS 
test services to manufacturers. The QualMark test service business includes 
accelerated reliability test services performed in the Company's test centers 
and on-site applications support services. These services allow a broad range 
of customers convenient access to the Company's technology while also serving 
as valuable sales tools for gaining system orders. Each test center is 
equipped with the high performance version of the Company's mid-range system, 
the OVS-2.5, at least one applications engineer and ancillary testing 
equipment. Offering these services as an ISO-registered accelerated test lab 
significantly differentiates the Company from its equipment and lab 
competition.

     The Company opened its first ARTC facility in Denver in October 1993 and 
subsequently opened additional facilities in Marlborough (Boston), 
Massachusetts and Santa Clara, California in July 1994 and May 1995, 
respectively. Since opening these facilities, many test service clients have 
placed orders to purchase systems as a result of the data gathered and 
analyzed at the Company. The test center is a valuable tool for the Company 
sales people to stimulate system sales from those clients who are not willing 
to commit capital without being able to experience a demonstration of the 
benefits using their own product. Of strategic importance to the Company, the 
testing service business should help insulate the Company from external 
economic factors that affect capital spending and provide for more consistent 
revenues.

                                       4
<PAGE>

     In addition to its Boston, Denver and Santa Clara test centers, during 
1996 the Company opened test centers in the metropolitan areas of 
Minneapolis-Saint Paul, Minnesota, Detroit, Michigan, and Raleigh, North 
Carolina. In 1997 the Company opened its seventh and eighth test centers in 
Huntington Beach, California and Orlando, Florida. The Company established 
its first test center presence outside the U.S. via a strategic alliance with 
TUV Product Service Ltd. near London, England. This lab began operations in 
February 1998. The second international alliance was established in Galway, 
Ireland with Anecto, Ltd. This lab commenced operations in August 1998. The 
Company established a third international alliance in Mannheim, Germany with 
TUV Product Service Ltd. as the partner. The Mannheim lab commenced 
operations in November 1998. Under these alliances, the Company contributed 
one OVS 2.5 system and the strategic partner provided the lab facility, 
personnel and sales management. In return, the Company receives a percentage 
of the revenues generated by the OVS systems.

     The Company may open additional test centers principally in metropolitan 
areas with a heavy concentration of potential client companies and in which 
the Company has a factory sales representative responsible for the target 
metro area. Management believes demand for its test services will continue to 
grow, allowing for controlled expansion into additional metro areas. Finally, 
the Company may expand its international presence via strategic alliance 
arrangements with other test lab organizations.

     Based on client demand, the Company offers on-site applications support 
services, principally through its ARTC network, to its clients as well as 
competitors' customers. Specifically, the Company advises customers how to 
apply HALT and HASS techniques to their products. The Company also 
incorporates applications support services into equipment quotations.

MARKETING

     The Company increased its market exposure in 1998 by continuing to 
conduct a number of "open houses" at each of its nationwide ARTC's. Prospects 
for these open houses are usually found in various electronic manufacturers 
databases. In-house and field sales personnel use these tools to identify and 
invite key engineering and reliability decision makers to find out how they 
can dramatically increase their product reliability. Attendees are qualified 
to determine which companies are high probability prospects to use the ARTC 
and/or to begin in-house accelerated testing. Through the open houses, the 
Company identifies many new customers for its products and services, while 
rapidly expanding the market acceptance of HALT and HASS as premier 
accelerated testing techniques.

     In addition, the Company's marketing plan for the next twelve months 
includes the following:

1)       The Company will continue to encourage individuals and companies in 
         the electronic and reliability engineering market segments to publish
         articles concerning accelerated reliability techniques and their
         successes associated with using the techniques.

2)       The Company will selectively advertise in periodicals that have
         significant exposure with design engineers and reliability/ESS
         engineers.

3)       The Company intends to attend approximately fifteen trade shows in 1999
         in the U.S. and internationally.

4)       Management intends to have its marketing staff continue to effectively
         orchestrate activities in the areas of public relations, advertising,
         trade show attendance, point of sale materials development and
         telemarketing.

5)       The Company may make additions to its existing field sales staff in the
         U.S. and abroad.

     SALES STRATEGY

     The Company's sales strategy combines telemarketing with regional vice 
presidents who are primarily responsible for OVS system sales and regional 
account executives who are responsible for ARTC service sales. At year end 
1998, the Company had three regional vice presidents and eleven regional 
account executives. In addition, the Company uses independent sales/service 
agents in Europe, the Middle East and the Far East. During the next twelve 
months, the Company intends to add to its international sales/service agent 
network and may add additional regional account representatives in the United 
States.

     The regional vice presidents, each of whom have multiple ARTC facilities 
within their geographic areas of responsibility, direct the efforts of the 
regional account executives in selling ARTC services. When customers express 
interest to the regional account executive in buying an OVS system rather 
than using an ARTC, the regional vice president assumes responsibility for 

                                       5
<PAGE>

the customer to close the OVS sale.

     Telemarketing resources are located at corporate headquarters to provide 
follow-up phone calls on local mailings, advertisement inquiries and other 
leads that are generated within each sales region. Telemarketing also handles 
geographical areas not covered by regional offices, international areas and 
any corporate campaigns that are developed by the Chief Operating Officer. 
The telemarketing staff also encourages prospective customers to attend local 
ARTC open houses and to follow up on leads from geographical areas around the 
world that have no Company representation.

CUSTOMERS

     The Company's systems are used by manufacturers in a wide variety of 
industries. As of December 31, 1998, the Company had sold 254 systems to135 
different customers, in the following industries: Telecommunications and 
Computer, 57; Defense and Aerospace, 22; Medical Electronics, 14; and Other, 
42. The QualMark customer list includes major corporations such as Allied 
Signal, AT&T, Cessna, Dupont, Cummins Engine, Hewlett-Packard, Honeywell, 
Hughes, Intel, Lucent Technologies, Johnson & Johnson, Medtronic, Motorola, 
National Semiconductor, Magnavox, Nortel (formerly Northern Telecom), Sequent 
Computers, Tektronix, 3-COM and United Technologies. During 1998, there were 
no customers that comprised 10% or more of the Company's revenue.

     The following table sets forth some of the major industries and a number 
of products that have undergone HALT or HASS testing protocol using the 
Company's systems as part of the manufacturer's testing procedures.

<TABLE>
<CAPTION>
Aerospace and Defense            Computer Related Products      Other
---------------------            -------------------------      -----
<S>                              <C>                            <C>
Aviation electronics             Circuit boards                 Automotive circuitry
Display switches                 Disk drives                    Electronic oil and gas flow meters
Flight navigation systems        Modems                         Global positioning systems
Marine navigation systems        Monitors
                                 Power supplies
                                 Printers
                                 Tape backup drives

<CAPTION>
Telecommunications               Medical Electronics
------------------               -------------------
<S>                              <C>
Automated teller machines        Electronic thermometers
Air conditioning electronics     Glucose monitors
Cordless telephones              Infusion pumps
Fax machines                     IV pumps
                                 Laboratory centrifuges
                                 Medical imaging systems
                                 Patient monitors
</TABLE>

RESEARCH AND PRODUCT DEVELOPMENT

     Research and development expenditures for the fiscal years ending 
December 31, 1998 and 1997 were $684,000 and $236,000, respectively. During 
the fourth quarter of 1998, the announced the Company availability of its new 
OVS PC-based controller, which features a number of improvements over the 
previous controller and is also CE (Certified for Europe) compliant. In 1999, 
the Company intends to devote considerable efforts in the development of the 
specifications for its next generation OVS product line and expects its 
research and development expenditures to increase to over $1,000,000 in 1999. 
This research and development effort is expected to be funded by cash flows 
from operations. In 1997, the Company refined the OVS product line by 
discontinuing the OVS-1 and OVS-2 and adding the OVS-1.5. However, the OVS-1 
may be reintroduced in an abbreviated version to accommodate that part of the 
market that desires a lower cost version of the OVS combined stress 
technology.

     Of great benefit to the Company is that its technology is extremely 
flexible in regard to the physical size of its OVS systems; consequently, 
product line extension opportunities normally do not require sizable 
expenditures on product development.

     The Company intends to continue taking advantage of design refinement 
opportunities specific to its OVS combined stress technology. As discussed in 
the following "Intellectual Property" section, the Company currently holds 
domestic and foreign patents on its products and continues to seek patent 
protection of current and new products. The Company is optimistic that the 
flexibility and scalability of its fundamental OVS combined stress technology 
will allow the Company to add to its product line as new opportunities 
develop.

                                       6
<PAGE>

     Through its association with the University of Maryland's CALCE EPRC 
(Computer Aided Life Cycle Enhancement, Electronic Packaging Research Center) 
research program, the Company has aligned itself with one of the premier 
electronic packaging research centers in the world. As a CALCE EPRC 
affiliate, the Company has ongoing access to leading-edge technology 
development in the areas of highly accelerated test methods and virtual 
verification. As the demand and viability of these new test methods and 
technologies are verified, the Company intends to add them to its ARTC 
service offering.

     The association with the University of Maryland allows the Company to 
better manage its investment in research and development, while enjoying the 
benefit of having an OVS system on site at CALCE EPRC for visiting 
prospective client representatives to observe its operation.

INTELLECTUAL PROPERTY

     The Company has maintained the practice, where possible, to pursue 
patent protection on its products. The Company has been issued ten United 
States patents (the "Patents") and one foreign patent issued in six 
countries. These patents protect certain features of the OmniAxial Vibration 
Assembly of the Company's OVS Combined Stress Systems or certain design 
features of the pneumatic, piston-driven actuators (vibrators) that help 
create random motion of the vibration table. The Company was issued U.S. 
Patent No. 5,365,788 on November 22, 1994, for certain design features of 
pneumatic, piston driven actuators that create motion for a vibration table. 
The Company was issued U.S. Patent No. 5,412,991 on May 9, 1995, for certain 
design features of the Company's vibration table. The Company was issued U.S. 
Patent No. 5,517,857 on May 21, 1996, for certain design features related to 
positioning of a vibration table within a stress screening chamber. The 
Company was issued U.S. Patent No. 5,540,109 on July 30, 1996, and U.S. 
Patent No. 5,675,098 on October 7, 1997, for certain design features related 
to use of multiple stress screening chambers. The Company was issued U.S. 
Patent No. 5,589,637 on December 31, 1996, for certain design features of 
mountings of actuators to a vibration table. The remaining duration of each 
of the Patents is between twelve and seventeen years.

     The Company has three United States patent applications and two foreign 
patent applications pending relating to its OVS Combined Stress Systems. The 
Company plans to make additional patent applications as appropriate.

     There are six foreign patents issued for certain design features of the 
pneumatic, piston-driven actuators (vibrators) that help create random motion 
of the vibration table. The countries in which these patents have been issued 
are France, Germany, Italy, Luxembourg, Sweden, and the United Kingdom.

     The Patents provide barriers to competition in the equipment sales 
portion of its business. The loss of some or all of the protection of the 
Patents would make it easier for other companies to enter the Company's 
market and compete against the Company by eroding the Company's ability to 
differentiate itself on the basis of technical superiority.

     In addition to the Patents, the Company tries to protect its proprietary 
technology and know-how through established security practices and 
confidentiality agreements with each of its employees, consultants, suppliers 
and technical advisors. There can be no assurance, however, that these 
agreements or procedures will provide meaningful protection for the Company's 
trade secrets in the event of unauthorized use or disclosure of such 
information.

     While the Company believes the protection afforded by the Patents is 
strong, there can be no assurance that other companies will not be able to 
design and build competing vibration tables in a manner that does not 
infringe the Patents. On March 22, 1996, Screening Systems, Inc. filed a 
patent infringement action against the Company alleging that the Company 
infringed U.S. Patent No. 4,181,026. See "Item 3. Litigation."

     The Company has the following registered marks with the United States 
Patent and Trademark Office: QUALMARK, ACCELERATE THE FUTURE, ACCELERATED 
RELIABILITY TEST CENTER, ARTC, and AUTOSMEAR. The Company has one U.S. 
trademark pending for OVS, one U.S. certification mark application for QHT 
and one foreign mark application pending for OVS and QualMark. The Company 
plans to make additional trademark, service mark, and certification mark 
applications as appropriate.

COMPETITION

     EQUIPMENT

     There are many companies that could be considered competitors of 
QualMark. These companies provide either electrodynamic shaker tables or 
temperature/humidity chambers. Companies will occasionally team to provide a 
shaker table within a separate temperature/humidity chamber. However, the 
Company believes that there are only three companies that can 

                                       7
<PAGE>

be considered major direct equipment competitors that offer a six-axis 
vibration table integrated into a thermal chamber which can be used for 
HALT/HASS applications.

     Screening Systems, Inc. ("SSI") (Laguna Hills, California) has been in 
the ESS and DVT business since the early 1980's. They operated for many of 
those years with technology licensed from Hughes Electronic ("Hughes"). On 
March 22, 1996, Screening Systems, Inc. filed a patent infringement suit 
against the Company in federal district court in Santa Ana, CA. See "Business 
-- Litigation," and see "Risk Factors - Patent Litigation."

     MV/Hanse Environmental, Inc. (Allegan, MI) is a company that began 
assembly and sales in 1993 of combined stress systems essentially equivalent 
to the Company's technology. The president of Hanse Environmental is a former 
employee of the Company.

     Thermotron Industries (Holland, MI) announced their offering of a 
competitive product to the Company's OVS system in the first quarter of 1998. 
Thermotron is a broad line environmental chamber manufacturer and has also 
begun manufacturing and selling a chamber with an integrated vibration system 
that directly competes with QualMark's OVS product offering.

     Several traditional ESS equipment manufacturing companies, such as Tobai 
Espec and Weiss, enjoy annual revenues in excess of $50 million dollars, 
according to the Thomas Register, which is an industrial products directory. 
These firms manufacture thermal chambers and single/multiple axes vibration 
systems that support traditional screening methods.

     The equipment manufactured by traditional ESS equipment manufacturers is 
well accepted in the market, since ESS supports traditional "pass-fail" 
specification test protocols that have been in use for several decades. The 
Company's technology supports new accelerated test protocols that relate to 
improving product design and manufacturing processes rather than the 
"pass-fail" test processes. As such, the Company is attempting to expand a 
new market segment and plans to allocate considerable resources to an effort 
to convince prospective customers to adopt accelerated test protocols in 
addition to, or in replacement of, traditional methods.

     ARTC AND APPLICATIONS SUPPORT SERVICES

     As emerging test methods, HALT and HASS acceptance in industry remains 
at the introduction stage. The Company is unaware of any multi-site national 
commercial testing laboratory similar to its ARTC's offering of HALT/HASS 
accelerated testing services using the Company's or Screening Systems Inc. 
equipment or providing on-site applications support services. However, the 
Company knows of at least three independent environmental test labs using SSI 
equipment. The terms of these arrangements are not known by the Company. 
Since several hundred commercial testing laboratories exist in the U.S., the 
Company anticipates that new competitors will aggressively enter the 
accelerated testing market.

MANUFACTURING

     The Company's manufacturing facility is located in Denver, Colorado. 
QualMark's assembly of the OVS systems evolved from a "job shop" approach 
into a manufacturing line approach in which drawings of all subassemblies 
used by the Company are maintained using computer aided design (CAD). The 
manufacture of the Company's products is organized around three major 
elements that include vibration systems, chamber systems and control systems.

     To ensure that all subassemblies meet specifications when received, key 
suppliers remain actively involved throughout product design. Key suppliers 
perform source inspection at the point of manufacture. Most key suppliers are 
local companies. The Company intends to further develop local suppliers, with 
back-up suppliers as required. To date, the components and assemblies from 
these suppliers have met or exceeded all specifications. The Company is not 
dependent on any one or a few major suppliers for any of the key parts or 
components of its systems. However, the Company has developed relationships 
with what it considers critical vendors that manufacture three components of 
its OVS system. While the Company is not dependent on these suppliers, it 
would take as much as 60 days to locate, qualify and begin taking delivery of 
these components from new suppliers.

     While the Company maintains a small inventory of OVS systems in finished 
goods, the Company primarily uses a rolling-quarter sales forecast in 
determining the number of OVS-1.5, OVS 2.5, OVS-3, OVS-4 systems to build 
during the quarter. Special order systems are still treated as 
non-recurring-engineering ("NRE") orders. Because of increased sales volume, 
the Company is producing certain common subassemblies that are integrated 
into the final systems when orders are booked. This helps provide a more even 
manufacturing flow and minimizes the "peaks and valleys" associated with 
small volume manufacturing.

     The Company is in the process of implementing Material Requirements 
Planning, a computer software driven inventory management process, to 
maximize the effectiveness in which an order can be filled while minimizing 
required inventory. 

                                       8
<PAGE>

Management uses fully-costed Bills of Materials (BOM) which ensure that all 
parts of an OVS system are identified and ordered in a timely manner.

PRODUCT WARRANTIES AND SERVICE

     The Company offers a limited, two-year parts and labor warranty on all 
new OVS systems. OVS customers can purchase extended warranties on their OVS 
systems, which may include two preventive maintenance visits during the year 
by a qualified Company representative. In addition, the Company offers for 
sale a comprehensive spare parts kit for each OVS system, which further 
minimizes OVS system down time. Because of the efficient design of OVS 
systems, the Company rarely sends its technicians into the field for warranty 
repairs. Most problems can be diagnosed over the phone and, if necessary, 
replacement parts are sent to the customer via overnight mail.

GOVERNMENT REGULATION

     To its knowledge, the Company complies with all international, federal, 
state, and local regulations, including environmental regulations, governing 
the conduct of its business and the costs of such compliance are minimal. The 
Company has no significant environmental issues or impact in its 
manufacturing or service delivery and there are no significant costs or 
compliance issues with any government agencies or laws in this area.

EMPLOYEES

     As of December 31, 1998, the Company had 70 employees, all of which are 
full-time. Forty seven of the Company's employees are employed at its 
principal offices and headquarters in Denver, Colorado, four are employed at 
its facilities in Santa Clara, CA, three in Huntington Beach, CA , two in New 
Brighton, MN, three in Farmington Hills, MI, four in Marlborough, MA, two in 
Morrisville, NC , two in Winter Park, FL, one in Baltimore, MD, one in 
Chicago, IL and one in Dallas TX. No employees are represented by labor 
organizations and there are no collective bargaining agreements. Employee 
relations are believed to be good.

ITEM 2.  DESCRIPTION OF PROPERTY.

     The Company operates out of leased facilities located at 1321, 1329, 
1331, 1343 and 1351 West 121st Avenue, Denver, Colorado. The three-year lease 
for the properties expires on May 31, 2000. The leased properties consists of 
approximately 18,093 square feet. The lease calls for monthly payments over 
the term of the lease of $14,007. The Company also leases 2,400 square feet 
in a space in the same building, 1313 West 121st Avenue. This space has a 
separate lease agreement that expires on November 30, 2001. The lease calls 
for monthly payments over the term of the lease of $2,018. In addition to 
both of these leases, the Company is responsible for certain expenses, 
including property taxes, insurance and maintenance. The Company's 
manufacturing, sales, administrative operations and regional ARTC services 
are conducted at this facility.

     The suburban Boston ARTC facility is located at 41 Brigham Street, Unit 
11, Marlborough, Massachusetts. The five-year lease expires June 31, 1999. 
The leased property consists of approximately 2,250 square feet. The lease 
calls for average monthly payments over the term of the lease of $1,734. In 
addition, The Company is responsible for certain expenses, including property 
taxes, insurance and maintenance. The Company's regional ARTC service 
business is conducted at this facility. The Company is in negotiations to 
move the facility to a larger location at the conclusion of the current lease.

     The Silicon Valley ARTC facility is located at 2225 Martin Avenue, Suite 
K, Santa Clara, California. The three-year lease expires on February 28, 
2001. The leased property consists of approximately 4,660 square feet. The 
lease calls for average monthly payments of $7,222. In addition, the Company 
is responsible for certain expenses, including property taxes, insurance and 
maintenance. The Company's regional ARTC service business is conducted at 
this facility.

     The suburban Minneapolis ARTC facility is located at Rush Lake Business 
Park, 1775 Old Highway 8, Suite 110, New Brighton, Minnesota. The five-year 
lease expires in February 2001. The leased property consists of 2,783 square 
feet. The lease calls for average monthly payments of $2,748. In addition, 
the Company is responsible for certain expenses, including property taxes, 
insurance and maintenance. The Company's regional ARTC service business is 
conducted at this facility.

     The suburban Raleigh ARTC facility is located at 215 Southport Drive, 
Suite 300, Morrisville, North Carolina. The five-year lease expires in July 
2001. The leased property consists of approximately 4,692 square feet. The 
lease calls for average monthly payments of $3,175. In addition, The Company 
is responsible for certain expenses, including property taxes, insurance and 
maintenance. The Company's regional ARTC service business is conducted at 
this facility.

     The suburban Detroit ARTC facility is located at 39255 Country Club 
Drive, Suite B-8, Farmington Hills, Michigan. The five-year lease expires in 
September 2001. The leased property consists of approximately 4,491 square 
feet. The lease calls 

                                       9
<PAGE>

for average monthly payments of $5,427. In addition, the Company is 
responsible for certain expenses, including property taxes, insurance and 
maintenance. The Company's regional ARTC service business is conducted at 
this facility.

     The southern California ARTC facility is located at 15661 Producer Lane, 
Unit H, Huntington Beach, California. The five-year lease expires in December 
2002. The leased property consists of 3,420 square feet. The lease calls for 
average monthly payments of $2,154. In addition, the Company is responsible 
for certain expenses, including property taxes, insurance and maintenance. 
The Company's regional ARTC service business is conducted at this facility.

     The suburban Orlando facility is located at Crossroads Business Center, 
Suite 212, 931 Semoran Boulevard, Winter Park, Florida. The five-year lease 
expires April 30, 2002. The lease calls for average monthly payments of 
$2,969. In addition, the Company is responsible for certain expenses, 
including property taxes, insurance and maintenance. The Company's regional 
ARTC service business is conducted at this facility.

       The Company believes that its facilities are adequate for its current 
needs and that suitable additional space can be acquired if needed. All of 
the premises are of recent construction, are in good condition, are neat in 
their appearance and are located in business complexes with business of 
similar quality.

ITEM 3.  LEGAL PROCEEDINGS

     On March 22, 1996, the Company was served with a summons and complaint 
in the U.S. District Court in the Central District of California from 
Screening Systems, Inc. ("SSI"), a competitor. The complaint, as amended, 
alleges that the Company's vibration system infringes three patents owned by 
Hughes Electronics ("Hughes") and licensed to SSI, and seeks injunctive 
relief, monetary damages and costs of litigation. Because Hughes would not 
voluntarily join the action as a plaintiff, SSI has named Hughes as a 
defendant in the action.

     The Company has been aware of the patents in question since the Company 
commenced its operations and, with advice from patent counsel, designed its 
vibration system, components of which are also patented, so as to not 
infringe the patents. The Company's vibration system has been used 
continuously in its products since 1991. On two prior occasions, Hughes put 
the Company on notice that the Company's vibration system might infringe its 
patents, although no litigation was commenced. On both occasions, the Company 
concluded, after consultation with patent counsel, that infringement did not 
exist and has seen nothing since to change that conclusion.

     Discovery in the action has been completed; however, the trial date has 
been vacated. In April 1997, the court conducted a "Markman hearing" to 
determine the scope and meaning of the relevant claims and terms of the 
patents-in-suit. In October 1997, the court issued its Order re: Construction 
of Patent Claims. The court has not yet set a trial date.

     In response to the current litigation, the Company consulted with its 
current legal and patent counsel, who agreed with prior patent counsels' 
opinions that the Company's vibration system does not infringe the SSI 
patents. Consequently, management intends to vigorously defend this 
litigation. However, no assurances can be given that the Company will be 
successful in its defense. The Company believes that the suit may have a 
material adverse effect on the results of operations and financial condition 
of the Company in terms of legal fees and costs for defending the claim, the 
possibility of an unfavorable outcome and an award of damages, and of the 
loss of management time needed to deal with the suit. At December 31, 1997, 
the Company accrued an estimate provided by its legal counsel as to the costs 
related to cover the legal fees associated with defending this suit. No 
additional accrual was warranted during 1998.

     The Company believes that the legal action by the plaintiff is without 
merit and will continue to vigorously defend itself in these matters.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     There were no matters submitted to a vote of shareholders during the 
last quarter of the fiscal year ended December 31, 1998.

                                    PART II

ITEM  5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The common stock of the Company is traded on the NASDAQ (National 
Association of Securities Dealers Automated Quotations) Small-Cap Market. The 
following table sets forth the range of high and low closing bid prices of 
the Company's 

                                       10
<PAGE>

common stock as reported by NASDAQ during fiscal years 1998 and 1997:

<TABLE>
<CAPTION>
                                              Fiscal Year Ended December 31, 1998

                                             High Close                   Low Close
<S>                                        <C>                          <C>
First Fiscal Quarter                          $7.750                       $6.250
Second Fiscal Quarter                          8.500                        6.875
Third Fiscal Quarter                           7.875                        3.500
Fourth Fiscal Quarter                          6.250                        3.625

<CAPTION>
                                              Fiscal Year Ended December 31, 1997

                                             High Close                   Low Close
<S>                                        <C>                          <C>

First Fiscal Quarter                          $3.500                        $2.750
Second Fiscal Quarter                          5.000                         3.000
Third Fiscal Quarter                           5.250                         3.625
Fourth Fiscal Quarter                          6.500                         4.625
</TABLE>

     The foregoing quotations represent quotations between dealers without 
adjustment for retail markups, markdowns or commissions and may not represent 
actual transactions.

     At December 31, 1998, the Company had approximately 1,065 beneficial 
shareholders and 46 shareholders of record. The Company has never paid a 
dividend, and does not anticipate the payment of dividends in the foreseeable 
future.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS 

     The following table sets forth for the fiscal periods indicated the 
percentage of total revenues, unless otherwise indicated, represented by 
certain items reflected in the Company's consolidated statement of operations:

<TABLE>
<CAPTION>
                                                             Fiscal Year Ended
                                                             -----------------
                                               December 31, 1998    December 31, 1997
<S>                                          <C>                    <C>
Statement of Operations Data:

Revenues................................              100.0%               100.0%
Cost of Revenues........................               55.7                 57.9
                                             ----------------------------------------------
Gross Profit............................               44.3                 42.1
Selling, general and administrative 
Expenses................................               32.5                 48.5
Research and development 
Expenses................................                5.0                  2.2
                                             ----------------------------------------------
Income (loss) from operations...........                6.8                 (8.6)
Other income (expense)..................                (.4)                  .1
                                             ----------------------------------------------
Income (loss) before income taxes.......                6.4                 (8.5)
Income tax benefit......................                6.1
                                             ----------------------------------------------
Net income (loss).......................               12.5%                (8.5)%
                                             ----------------------------------------------
                                             ----------------------------------------------
</TABLE>

RESULTS OF OPERATIONS

     The Company's annual and quarterly operating results could be 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.

                                       11
<PAGE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUE

     Total revenue in the year ended December 31, 1998 increased $3,103,000 
(29.2%) as compared with the year ended December 31, 1997.

     System revenue increased $2,468,000 (32.1%) in 1998 from $7,683,000 to 
$10,151,000 as compared to 1997. Unit shipments increased from 58 to 70 for 
1997 and 1998, respectively. The Company experienced a greater concentration 
of larger, more expensive systems in 1998 compared to 1997, which was a 
significant factor in system revenue growth of 32.1% on systems unit sales 
growth of 20.7% over such period.

     Test center revenue for 1998 increased $635,000 (21.5%) from $2,956,000 
to $3,591,000 over 1997. At December 31, 1998 and 1997, the Company operated 
eight test centers containing ten systems. During 1998, the Company initiated 
its international ARTC expansion program by creating strategic alliances with 
two companies operating test labs in three different countries: TUV Product 
Service in the U.K. and Germany and Anecto, ltd. in Ireland. Under the 
strategic alliance agreements, QualMark provides an OVS 2.5 to each lab 
location and the strategic partner provides the facility, labor, and sales 
management. QualMark receives a percentage of the revenue that the OVS system 
generates. During 1998, the revenue from these strategic alliances totaled 
$137,000.

GROSS MARGIN

     The gross margin in 1998 was 44.3% compared to 42.1% for 1997. The 
increase in gross margin is mostly attributable to efficiencies gained from 
increased throughput in both the OVS and ARTC businesses. Pursuant to a 
royalty agreement with the Company's founder a royalty expense of 3% on all 
revenue continued to be charged to cost of sales in 1998. The Company's 
royalty expense was $412,000 in 1998 and $324,000 in 1997 under this 
agreement. The agreement expires at the end of 1999.

OPERATING EXPENSE

     General and administrative expenses decreased in 1998 to $2,113,000 from 
$3,450,000 in 1997. The decrease reflects a substantial reduction in legal 
costs incurred from the Company's involvement in the patent litigation matter 
with SSI described in "Item 3. Legal Proceedings" above. The Company incurred 
$131,000 in legal fees in 1998 compared to $1,608,000 in 1997. Although still 
pending, the Company established a reserve in 1997 to cover expected legal 
expenses associated with the litigation. At December 31, 1998, management 
felt the remaining reserve was adequate to complete the case.

     Sales and Marketing expenses increased $651,000, from $1,704,000 in 1997 
to $2,355,000 in 1998. This increase was primarily due to increases in the 
number of sales and marketing personnel and increased sales and marketing 
efforts over the comparable period in 1997.

     Research and development costs increased from $236,000 in 1997, to 
$684,000 in 1998. This increase is due to increased efforts and personnel in 
the Company's research and development department. It is the intent of the 
Company in 1999 to devote considerable effort to the development of new 
technologies and product offerings and expects its research and development 
expenditures to increase to over $1,000,000 in the next year.

     Net interest expense in 1998 was $73,000 compared with a net interest 
income of $22,000 in 1997. The decrease in interest income and increase in 
interest expense was due to a decrease in interest-earning cash and 
short-term investment balances and an increase in borrowings.

INCOME TAX BENEFIT

     During the fourth quarter, management considered a variety of factors, 
such as 1997 profitability excluding litigation expenses, 1998 profitability 
and projected future taxable income, in evaluating the need for a valuation 
allowance against deferred tax assets. Based on that evaluation, management 
concluded that it was more likely than not that all recorded deferred tax 
assets would be realized. Accordingly, the Company recognized an income tax 
benefit of $842,000 in 1998 primarily as a result of releasing a previously 
recorded valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

     During 1998, the Company devoted $551,000 of cash to operating 
activities, invested $567,000 for equipment, received $112,000 as proceeds 
from disposal of property and equipment, paid $11,000 in capital lease 
payments, borrowed $2,836,000 

                                       12
<PAGE>

from banks and repaid $1,609,000 of those borrowings. The Company also loaned 
it president and CEO $104,000 and employees and investors exercised options 
and warrants to purchase 97,881 shares of common stock for proceeds of 
$103,000. Together, these activities resulted in a cash increase of $209,000 
to a balance of $668,000 at December 31, 1998. These numbers compare to 1997, 
when the Company devoted $1,365,000 to operating activities, invested 
$846,000 for equipment, received $81,000 as proceeds form disposal of 
property and equipment, paid $33,000 in capital lease payments, purchased 
short term investments of $200,000 and redeemed short-term investments of 
$2,111,000. The Company borrowed $200,000 from its bank and repaid $16,000 of 
those borrowings in 1997. Also in 1997, former employees exercised options to 
purchase 55,000 shares of common stock for proceeds of $116,000. Together, 
these 1997 activities resulted in a cash increase of $48,000 to a balance of 
$459,000 at December 31, 1997.

     In December 1998, the Company established a line of credit arrangement 
with a new bank, replacing a credit facility it had with another bank. The 
new credit line provides for draws up to $5,000,000, including term loan and 
revolving credit line portions.

     The term loan portion may not exceed $2,000,000 and bears interest at a 
variable rate equal to either the LIBOR rate plus applicable margin or the 
prime rate plus applicable margin. Under the LIBOR option, the applicable 
margin ranges between 2.25% and 3.75%, depending on the financial condition 
of the Company. Under the prime rate option, the applicable margin ranges 
between 0% and 1.25%, depending on the financial condition of the Company. As 
of December 31, 1998, the Company had utilized $1,411,000 of the available 
term loan amount and had chosen the LIBOR option.

     The revolving credit portion may not exceed $3,000,000 and bears 
interest at a variable rate equal to either the LIBOR rate plus applicable 
margin or the prime rate plus applicable margin. Under the LIBOR option, the 
applicable margin ranges between 2.00% and 3.55%, depending on the financial 
condition of the Company. Under the prime rate option, the applicable margin 
ranges between -0.25% and 1%, depending on the financial condition of the 
Company. As of December 31, 1998, the Company had not borrowed any available 
amounts under the revolving credit line agreement.

     Both portions of the credit facility are secured by substantially all of 
the assets of the Company. The Company must maintain certain financial and 
other covenants in order to draw amounts available under the line of credit. 
The total amounts of funds available to the Company under both of the 
agreements is limited to the sum of 85% of the Company's eligible accounts 
receivable, 30% of eligible inventory and 50% of equipment located in the 
United States. As of December 31, 1998, the eligible amount available under 
both portions of the credit facility was approximately $3,495,000.

     The Company expects to meet long term liquidity requirements through 
cash flows generated by operations, existing cash balances and its line of 
credit. The Company is dependent, however, on its ability to maintain and 
grow its systems and test center businesses in order to generate adequate 
operating cash flows.

YEAR 2000 ISSUE

     During the year ended December 31, 1998, management initiated a program 
to prepare the Company's financial, manufacturing, service and other critical 
systems and applications for the Year 2000. The program involves the 
Company's upper management as well as project leaders from each department. 
The focus of the program is to identify affected software and hardware, 
develop a plan to correct that software or hardware in the most effective 
manner and implement and monitor that plan. The program will also include 
communications with the Company's significant suppliers and customers to 
determine the extent to which the Company is vulnerable to any of their Year 
2000 issues. Although the Company's Year 2000 program is in various stages of 
completion in each department, the Company anticipates it will have all 
modifications and replacements in place by June 30, 1999.

     OVS SYSTEMS

     The Company's OVS products include embedded controllers that have been 
tested and have been determined to be Year 2000 compliant. The Company 
expects that there will be no Year 2000 issues in regards to its products.

     The Company's proprietary OVS operating system software that controls 
all of the products in the OVS product line has been upgraded this year as 
part of an overall product improvement program. Part of that program ensured 
that the software control system be made Year 2000 compliant. Management 
believes that this has been achieved. There were no material added costs for 
this compliance. Previous versions of the control system have been 
investigated for compliance issues. The findings do not indicate compliance 
problems for operating system version 5.0 and later. Upgrade packages for 
versions prior to 5.0 are now available.

                                       13
<PAGE>

     INTERNAL HARDWARE AND SOFTWARE

     Each department is currently reviewing all of the software and hardware 
that could affect its operations. With the exception of the OVS operating 
system software, all software products in use were purchased from Microsoft 
or other major software publishing companies. Anticipated costs for Year 2000 
compliance for these software package upgrades are considered to be part of 
the Company's normal ongoing business plan and are not expected to add 
materially to the plan. Management has included approximately $23,000 for 
software upgrades in its 1999 plan.

     A vast majority of the employees of the Company utilize personal 
computers in their work. One of the risks identified is that these personal 
computers may not function or function properly due to the internal embedded 
controllers not being Year 2000 compliant. The same problem may exist in the 
Company's local network server, wide-area network server equipment and the 
Company's internal telephone system. Management believes the potential for 
problems primarily involves older equipment. Most of the personal computers 
and network server equipment have been purchased within the last two- years 
and are believed to be at lower risk than the smaller population of older 
computer equipment in use around the Company. The internal telephone system 
was purchased from and is supported by a leading manufacturer of that type of 
equipment. Software to diagnose Year 2000 compliance for the personal 
computers and network servers has been identified and procurement is 
underway. The cost for this software is less than $1,000. It is unknown at 
this time how much of this equipment is subject to the Year 2000 problem, 
however a worst case scenario assumes the cost of replacing non-compliant 
equipment to be $105,000. The most likely scenario of replacing affected 
computer and telephone equipment has not been determined at this time. 
However, management has included approximately $60,000 in computer and 
telephone system upgrades into its 1999 operating plan.

     The Company expects to incur internal staff costs as well as consulting 
fees and other expenses related to the Year 2000 project. The Company has 
already purchased and installed new accounting and manufacturing control 
software that is Year 2000 compliant. The cost to do this was less than 
$10,000. This upgrade was done in response to the Year 2000 issue, however 
this and many other upgrades are part of the Company's normal business plan.

     EXTERNAL FACTORS

     The Company uses outside service providers for all of its human resource 
administration functions. This includes payroll and employee benefits 
management. It has been confirmed that the service provider is Year 2000 
compliant in regard to the services it provides the Company.

     An area that has been identified as bringing potential problems in Year 
2000 compliance involves key suppliers of inventory materials. The Company 
utilizes three key vendors as suppliers in the manufacture of its OVS 
systems. The Company cannot guarantee that the systems of these suppliers, or 
other companies on which the Company relies, will be Year 2000 compliant. 
Other than those three vendors, the Company's inventory suppliers are 
commodity or off-the-shelf parts distributors that can be replaced with 
little or no notice. It is believed that the three critical key-component 
suppliers could be replaced in the event that one or all were determined to 
be subject to critical shipment delays due to Year 2000 issues. Due to the 
lead times associated with bringing new suppliers on-line, early 
determination of vendor Year 2000 compliance is necessary. It is not known at 
this time which, if any, vendors are Year 2000 compliant. Management has set 
a compliance deadline of March 31, 1999 for its key vendors. If one or more 
of these vendors has not satisfied this requirement, management is developing 
a contingency plan to identify new vendors and prepare them to provide the 
key components to the Company by the end of 1999. The cost of this could 
include significant amounts of management time but is not expected to add 
materially to the cost of the Company's products. Every attempt will be made 
to ensure that a continuous supply of the key components is maintained.

FORWARD-LOOKING STATEMENTS

     The statements contained in this report which are not historical facts 
are forward-looking statements that are subject to risks and uncertainties 
that could cause actual results to differ materially from those set forth or 
implied by forward-looking statements, including but not limited to the risk 
of an unfavorable outcome in the SSI litigation, problems resulting from the 
Year 2000 issue, variability in order flow and operating results, 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.

ITEM 7.  FINANCIAL STATEMENTS.

                                       14
<PAGE>

     Index to Financial Statements and Schedules:

<TABLE>
<CAPTION>
                                                                  Page Number
                                                                  -----------
<S>                                                               <C>
Report of Independent Public Accountants                          F-1
Balance Sheet                                                     F-2
Statement of Operations                                           F-3
Statement of Changes in Shareholders' Equity                      F-4
Statement of Cash Flows                                           F-5
Notes to Financial Statements                                     F-6
</TABLE>

     All schedules for which provision is made in the applicable accounting 
regulations of the Securities and Exchange Commission are not required under 
the related instructions or are inapplicable, and therefore have been omitted.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
          FINANCIAL DISCLOSURE.

     None.

                                   PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

     The Company's definitive Proxy Statement to be filed pursuant to 
Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein 
by reference.

ITEM 10.  EXECUTIVE COMPENSATION.

     The Company's definitive Proxy Statement to be filed pursuant to 
Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein 
by reference.

ITEM  11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The Company's definitive Proxy Statement to be filed pursuant to 
Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein 
by reference.

ITEM   12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The Company's definitive Proxy Statement to be filed pursuant to 
Schedule 14A under the Securities Exchange Act of 1934 is incorporated herein 
by reference.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      Exhibits - See Index to Exhibits

(b)      Reports on Form 8-K during the last quarter of the Company's fiscal
         year ended December 31, 1997 - None



                                       15
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
 Shareholders of QualMark Corporation

In our opinion, the accompanying balance sheet and the related statements of 
operations, of changes in shareholders' equity and of cash flows present 
fairly, in all material respects, the financial position of QualMark 
Corporation at December 31, 1998 and 1997, and the results of its operations 
and its cash flows for the years then ended in conformity with generally 
accepted accounting principles. These financial statements are the 
responsibility of the Company's management; our responsibility is to express 
an opinion on these financial statements based on our audits. We conducted 
our audits of these statements in accordance with generally accepted auditing 
standards which require that we plan and perform the audits to obtain 
reasonable assurance about whether the financial statements are free of 
material misstatement. An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the financial statements, assessing 
the accounting principles used and significant estimates made by management, 
and evaluating the overall financial statement presentation. We believe that 
our audits provide a reasonable basis for the opinion expressed above.


PricewaterhouseCoopers LLP

Denver, Colorado
February 16, 1999




                                       F-1
<PAGE>

QUALMARK CORPORATION

BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                  1998                1997
<S>                                                         <C>                 <C>
ASSETS
Current assets:
   Cash and cash equivalents                                 $           668    $           459
   Trade accounts receivable, net of
    allowance for doubtful accounts 
    of $164 and $21, respectively                                      3,916              3,100
   Inventories                                                         1,363                608
   Deferred income taxes                                                 861
   Other current assets                                                  132                 52
                                                             ---------------    ---------------
        Total current assets                                           6,940              4,219
Property and equipment, net                                            1,315              1,428
Note receivable from officer                                             104
Other assets                                                             141                 51
                                                             ---------------    ---------------
                                                             $         8,500    $         5,698
                                                             ---------------    ---------------
                                                             ---------------    ---------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                          $           869    $           646
   Accrued expenses                                                    1,411              1,893
   Customer deposits and deferred revenue                                 63                 59
   Current portion of long-term debt                                     436                 62
   Current portion of capital lease
    obligations                                                            5                 11
                                                             ---------------    ---------------
        Total current liabilities                                      2,784              2,671
Noncurrent portion of long-term debt                                     975                122
Noncurrent portion of capital lease
 obligations                                                                                  5
                                                             ---------------    ---------------
        Total liabilities                                              3,759              2,798
                                                             ---------------    ---------------
Commitments and contingencies (Notes 6 and 12)
Shareholders' equity:
   Convertible preferred stock; no par
    value; 2,000,000 shares authorized;
    490,929 designated as Series A, none
    outstanding; 99,619 designated as 
    Series B, none outstanding
   Common stock; no par value; 15,000,000
    shares authorized; 3,485,015 and
    3,387,134 shares issued and outstanding, 
    respectively                                                       6,396              6,270
   Accumulated deficit                                                (1,655)            (3,370)
                                                             ---------------    ---------------
        Total shareholders' equity                                     4,741              2,900
                                                             ---------------    ---------------
                                                             $         8,500    $         5,698
                                                             ---------------    ---------------
                                                             ---------------    ---------------
</TABLE>

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

                                       F-2
<PAGE>

QUALMARK CORPORATION

STATEMENT OF OPERATIONS
(IN THOUSANDS)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                               1998                1997
<S>                                                       <C>                <C>
Revenues                                                  $        13,742    $        10,639
Cost of revenues                                                    7,659              6,164
                                                          ---------------    ---------------

        Gross profit                                                6,083              4,475

Selling, general and administrative
 expenses                                                           4,467              5,154
Research and development expenses                                     684                236
                                                          ---------------    ---------------
        Total operating expenses                                    5,151              5,390

        Income (loss) from operations                                 932               (915)

Other income (expense):
   Interest expense                                                   (73)               (15)
   Interest income                                                      2                 37
   Other income (expense), net                                         12                 (8)
                                                          ---------------    ----------------

Income (loss) before income taxes                                     873               (901)

Income tax benefit                                                    842
                                                          ---------------    ----------------

Net income (loss)                                         $         1,715    $           (901)
                                                          ---------------    ----------------
                                                          ---------------    ----------------

Net income (loss) per basic share of
 common stock                                             $          0.50    $         (0.27)
                                                          ---------------    ----------------
                                                          ---------------    ----------------

Net income (loss) per diluted share of
 common stock                                             $          0.45    $          (0.27)
                                                          ---------------    ----------------
                                                          ---------------    ----------------

Weighted average shares outstanding - basic                         3,450              3,363 
                                                          ---------------    ----------------
                                                          ---------------    ----------------

Weighted average shares outstanding -
 diluted                                                            3,806             3,363 
                                                          ---------------    ----------------
                                                          ---------------    ----------------
</TABLE>

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

                                       F-3
<PAGE>

QUALMARK CORPORATION

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                      COMMON STOCK         ACCUMULATED
                                                  SHARES        AMOUNT       DEFICIT     TOTAL
<S>                                            <C>            <C>        <C>            <C>
Balance December 31, 1996                         3,330,484   $   6,131   $   (2,469)   $  3,662

Exercise of options for common stock                 55,000         116                      116

Exercise of warrants for common stock                 1,650                                    -

Amortization of deferred compensation
 related to issuance of warrants and
 options                                                             23                       23

Net loss                                                                        (901)       (901)
                                                -----------   ---------   ----------   ---------

Balance December 31, 1997                         3,387,134       6,270       (3,370)      2,900

Exercise of options for common stock                 63,824          51                       51

Exercise of warrants for common stock                34,057          52                       52

Amortization of deferred compensation
 related to issuance of warrants and
 options                                                             23                       23

Net income                                                                     1,715       1,715
                                                -----------   ---------   ----------   ---------

Balance December 31, 1998                         3,485,015   $   6,396   $   (1,655)  $   4,741
                                                -----------   ---------   ----------   ---------
                                                -----------   ---------   ----------   ---------
</TABLE>

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

                                       F-4
<PAGE>

QUALMARK CORPORATION

STATEMENT OF CASH FLOWS
(IN THOUSANDS)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                                 1998                1997
<S>                                                      <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                        $        1,715    $          (901)
Adjustments to reconcile net income (loss)
 to net cash from operating activities:
   Gain on disposal of equipment                                    (45)               (35)
   Depreciation and amortization                                    652                483
   Deferred income tax benefit                                     (861)
Changes in assets and liabilities:
   Decrease (increase) in:
      Accounts receivable, net                                     (816)            (1,854)
      Inventories                                                  (755)               (72)
      Other assets and patents                                     (186)               146
   Increase (decrease) in:
      Accounts payable and accrued expenses                        (259)               856
      Customer deposits and deferred revenue                          4                 12
                                                         --------------    ---------------

        Net cash used in operating activities                      (551)            (1,365)
                                                         --------------    ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment                              (567)              (846)
Proceeds on disposal of property and
 equipment                                                          112                 81
Purchase of short-term investments                                                    (200)
Proceeds on sale/redemption of short-term
 investments                                                                         2,111
Note receivable from officer                                       (104)
                                                         --------------    ---------------

        Net cash (used in) provided by
         investing activities                                      (559)             1,146
                                                         --------------    ---------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings                                          2,836                200
Repayments of borrowings                                         (1,609)               (16)
Proceeds from issuance of common stock                              103                116
Principal payments on capital lease
 obligations                                                       (11)                (33)
                                                         --------------    ---------------

        Net cash provided by financing
         activities                                               1,319                267
                                                         --------------    ---------------

Net increase in cash and cash equivalents                           209                 48
Cash and cash equivalents at beginning of
 year                                                               459                411
                                                         --------------    ---------------

Cash and cash equivalents at end of year                 $          668    $           459
                                                         --------------    ---------------
                                                         --------------    ---------------

SUPPLEMENTAL DISCLOSURE
Interest paid                                            $           73    $            14
                                                         --------------    ---------------
                                                         --------------    ---------------

Taxes paid                                               $           25    $
                                                         --------------    ---------------
                                                         --------------    ---------------
</TABLE>

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

                                       F-5
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      ORGANIZATION

        QualMark Corporation (the "Company") was incorporated on March 11, 1992
      in the State of Colorado. Its principal business activity is the
      manufacture and sale of vibration and thermal chambers for quality control
      testing of various electronic devices. The Company's sole manufacturing
      facility is located in Denver, Colorado. The Company also operates service
      centers, called Accelerated Reliability Test Centers ("ARTC"), where
      vibration and thermal chambers are available to customers for daily rental
      which are located at the Company's Denver, Colorado facility, in
      Marlborough, Massachusetts, Santa Clara, California, Huntington Beach,
      California, Minneapolis, Minnesota, Detroit, Michigan, Orlando, Florida
      and Raleigh, North Carolina. During 1998, the Company formed international
      alliances for service centers in Germany, the United Kingdom and Ireland.

      CASH AND CASH EQUIVALENTS

        Cash on hand and in banks, together with repurchase agreements and 
      marketable securities having original maturities of three months or 
      less, are classified as cash and cash equivalents by the Company.

      CONCENTRATION OF CREDIT RISK

        Financial instruments which potentially subject the Company to
      concentrations of credit risk consist primarily of trade accounts
      receivable. Receivables arising from sales to customers are not
      collateralized and, as a result, management continually monitors the
      financial condition of its customers to reduce the risk of loss.

      INVENTORIES

        Inventories are stated at the lower of cost or market with cost
      determined by the first-in, first-out (FIFO) method.

      PROPERTY AND EQUIPMENT

        Property and equipment are recorded at cost. Depreciation is recorded 
      using the straight-line method over estimated useful lives of three to 
      ten years. Amortization of leasehold improvements and equipment under 
      capital leases is provided over the shorter of the assets useful lives 
      or the lives of the leases and is included in depreciation expense.

      ACCRUED LEGAL EXPENSE

        Legal fees relating to litigation in which the Company is a defendant 
      are accrued when the liability is probable and the amount is reasonably 
      estimable.

      REVENUE RECOGNITION

        Revenues are recognized upon the shipment of product or the 
      performance of services.  Prepayments and progress billings are 
      deferred until shipment occurs or services rendered.

      ADVERTISING EXPENSE

        The Company charges advertising, including production costs, to 
      expense on the first date of the advertising period. Advertising and 
      marketing expense for 1998 and 1997 was $135,000 and $148,000, 
      respectively.

      PREOPENING COSTS

        The Company charges to selling, general and administrative expense 
      the preopening costs of new service centers as incurred. These costs 
      are primarily labor, supplies, preopening marketing and advertising and 
      other expendable items.

      INCOME TAXES

        Deferred tax liabilities and assets are recognized for the expected
      future tax consequences of temporary differences between the carrying
      amounts for financial reporting purposes and the tax basis of individual
      assets and liabilities.

      FINANCIAL INSTRUMENTS

        The carrying amounts of cash and cash equivalents, accounts 
      receivable, accounts payable, accrued expenses, customer deposits and 
      long term debt approximate fair value.

                                       F-6
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

      NET INCOME (LOSS) PER SHARE

        Net income (loss) per basic share of common stock is based on the 
      weighted average number of shares of common stock outstanding during 
      each respective period. Net income (loss) per diluted share of common 
      stock adds to basic weighted shares the weighted average number of 
      shares of potential common shares (diluted stock options and warrants) 
      outstanding during each respective period. Proceeds from the exercise 
      of the potential common shares are assumed to be used to repurchase 
      outstanding shares of the Company's common stock at the average fair 
      market value during the period. In a period in which a loss is 
      incurred, only the weighted average number of common shares is used to 
      compute the diluted loss per share as the inclusion of potential common 
      shares would be antidilutive. The calculation of basic and diluted 
      earnings per share is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                     1998                1997
<S>                                                            <C>                  <C>
        Basic earnings per share computation
           Net income (loss)                                    $         1,715     $         (901)
                                                                ---------------    ---------------
                                                                ---------------    ---------------

           Weighted average shares outstanding - basic                    3,450              3,363
                                                                ---------------    ---------------
                                                                ---------------    ---------------

           Basic earnings (loss) per share                      $          0.50     $        (0.27)
                                                                ---------------    ---------------
                                                                ---------------    ---------------

        Diluted earnings per share computation
           Net income (loss)                                    $         1,715     $         (901)
                                                                ---------------    ---------------
                                                                ---------------    ---------------

           Weighted average shares outstanding - basic                    3,450              3,363
           Dilutive stock options and warrants                              356 
                                                                ---------------    ---------------
                                                                          3,806              3,363
                                                                ---------------    ---------------
                                                                ---------------    ---------------

           Diluted earnings (loss) per share                    $          0.45     $       (0.27)
                                                                ---------------    ---------------
                                                                ---------------    ---------------
</TABLE>

        Options to purchase 55,500 shares of common stock were excluded from
      dilutive stock option calculations for 1998, because their exercise prices
      were greater than the average fair market value of the Company's stock for
      the period, and as such they would be antidilutive.

        Options and warrants to purchase 617,293 shares were not included in the
      computation of earnings per share assuming dilution at December 31, 1997,
      because including the options would result in an antidilutive effect on
      earnings per share.

      USE OF ESTIMATES AND ASSUMPTIONS

        The preparation of the financial statements in conformity with 
      generally accepted accounting principles requires management to make 
      estimates and assumptions that affect the reported amounts of assets 
      and liabilities and disclosure of contingent assets and liabilities at 
      the date of the financial statements and the reported amounts of 
      revenues and expenses during the reporting period. Actual results could 
      differ from those estimates.

      RECLASSIFICATIONS

        Certain prior year amounts have been reclassified to conform to the 
      current year's presentation.

      NEW ACCOUNTING PRONOUNCEMENTS

        In 1998, the Company adopted Statement of Financial Accounting Standards
      ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
      establishes standards for reporting and display of comprehensive income
      and its components in a full set of general-purpose financial statements.
      The Company does not have any items that are required to be recognized as
      components of comprehensive income.

        In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of
      an Enterprise and Related Information." This statement establishes
      standards for the way public business enterprises report information about
      operating segments. It also establishes standards for related disclosures
      about products and services, 

                                       F-7
<PAGE>

      geographical areas, and major customers. The adoption of SFAS No. 131 
      did not affect results of operations or financial position but did 
      affect the disclosure of segment information. (See Note 10.)

        SFAS No. 133, "Accounting for Derivative Instruments and Hedging
      Activities," was issued June 1998. This statement establishes accounting
      and reporting standards for derivative instruments and for hedging
      activities. It requires the recognition of all derivatives as either
      assets or liabilities in the statement of financial position at fair
      value. This statement is effective for the Company's financial statements
      for the year ending December 31, 2000. Currently, the Company does not
      engage in such activities and the adoption of this standard is not
      expected to have an effect on the Company's financial position.

2.    INVENTORIES

        Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                           1998                1997
<S>                                                   <C>                <C>
        Raw materials                                 $           708    $           457
        Work in process                                           198                121
        Finished goods                                            457                 30
                                                      ---------------    ---------------
                                                      $         1,363    $           608
                                                      ---------------    ---------------
                                                      ---------------    ---------------
</TABLE>

3.    PROPERTY AND EQUIPMENT

        Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                           1998                1997
<S>                                                   <C>                <C>
        Machinery and equipment                       $         2,130    $         1,679
        Furniture and fixtures                                    167                165
        Leasehold improvements                                    421                400
        Less: Accumulated depreciation and 
         amortization                                          (1,403)              (816)
                                                      ---------------    ---------------
                                                      $         1,315    $         1,428
                                                      ---------------    ---------------
                                                      ---------------    ---------------
</TABLE>

        Depreciation expense was $613,000 and $445,000 for the years ended
      December 31, 1998 and 1997, respectively.

        The Company leases certain office and service center equipment under
      capital leases. Property and equipment above include the following amounts
      for leases that have been capitalized (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                           1998                1997
<S>                                                   <C>                <C>
        Machinery and equipment                       $            76    $            76
        Less: Accumulated amortization                            (52)               (38)
                                                      ---------------    ---------------
                                                      $            24    $           38
                                                      ---------------    ---------------
                                                      ---------------    ---------------
</TABLE>

                                       F-8
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

4.    ACCRUED EXPENSES

        Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                           1998                1997
<S>                                                   <C>                <C>

        Accrued warranty                              $           444    $           190
        Accrued legal expense                                     390              1,152
        Accrued employee related                                  231                359
        Accrued royalties payable                                 207                109
        Other                                                     139                 83
                                                      ---------------    ---------------

                                                      $         1,411    $         1,893
                                                      ---------------    ---------------
                                                      ---------------    ---------------
</TABLE>

5.       INDEBTEDNESS

        In May 1996, the Company entered into a line of credit arrangement with
      a bank. The credit line, as amended August 1997, provided for draws up to
      $1,300,000, bore interest at prime plus 1.5%, matured August 2000 and was
      secured by substantially all the assets of the Company. The Company
      maintained certain financial and other covenants in order to draw amounts
      available under the line of credit. Through December 31, 1997, the Company
      had not drawn any amounts under the line of credit.

        During September 1997, the Company borrowed $200,000 from a bank to
      purchase equipment. Interest on the loan accrued at a rate equal to the
      prime rate plus 1.75%, which was 10.25% at December 31, 1997. The loan was
      secured by substantially all equipment of the Company and was payable in
      equal installments over three years.

        During September 1998, the Company drew $750,000 from the above line of
      credit. Additionally, during September 1998, the Company borrowed
      additional amounts from a bank to purchase equipment, for a total
      equipment loan outstanding of $675,000. Interest on the loan accrued at a
      rate equal to the prime rate plus 1.5%. The loan was secured by
      substantially all equipment of the Company and was payable in equal
      installments over three years.

        During December 1998, the Company terminated the above equipment loan
      and line of credit and entered into a new line of credit arrangement and
      term loan agreement with a bank. The credit line provides for draws up to
      $3,000,000, bears interest at the reserve adjusted LIBOR rate plus the
      applicable margin (as defined), matures December 2001 and is secured by
      substantially all the assets of the Company. The Company must maintain
      certain financial and other covenants in order to draw amounts available
      under the line of credit. Through December 31, 1998, the Company had not
      drawn any amounts under the line of credit.

        The term loan agreement provides for draws up to $2,000,000, bears
      interest at the reserve adjusted LIBOR rate plus the applicable margin (as
      defined), which was 7.41% at December 31, 1998. The term loan matures
      December 2001 and is secured by substantially all the assets of the
      Company. The Company must maintain certain financial and other covenants
      in order to draw amounts available under the line of credit, with which
      the Company was in compliance at December 31, 1998. Through December 31,
      1998, the Company had drawn $1,411,000 under the term loan agreement. The
      following represents future amounts payable at December 31, 1998 (in
      thousands).

<TABLE>
<CAPTION>
        Year ended December 31,
<S>                                                      <C>
           1999                                           $           436
           2000                                                       470
           2001                                                       505
                                                          ---------------
                                                          $         1,411
                                                          ---------------
                                                          ---------------
</TABLE>

                                       F-9
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

6.    LEASE COMMITMENTS

        The Company leases equipment, office space, and operating facilities
      under capital and operating lease arrangements. Future minimum lease
      payments consist of the following at December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                               CAPITAL           OPERATING
                                                               LEASES             LEASES              TOTAL
<S>                                                       <C>                 <C>               <C>
        Year ended December 31,
                    1999                                  $              3    $           472   $            475
                    2000                                                 3                381                384
                    2001                                               -                  178                178
                    2002                                               -                   41                 41
                    2003                                               -
                                                           ---------------    ---------------   ----------------
                                                                         6    $         1,072   $          1,078
                                                                              ---------------    ---------------
                                                                              ---------------    ---------------
        Less:  Interest                                                 (1)
                                                           ---------------
                                                                         5
        Current portion                                                 (5)
                                                           ---------------
        Long-term portion                                  $             0
                                                           ---------------
                                                           ---------------
</TABLE>

        Rent expense for the years ended December 31, 1998 and 1997 was $489,000
      and $389,000, respectively. The Company sublet some of the office space
      under a cancelable agreement in 1997. Sublease income for the years ended
      December 31, 1998 and 1997 was $23,000 and $13,000, respectively.

7.    INCOME TAXES

        Income tax expense (benefit) consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                           1998                1997
<S>                                                   <C>               <C>
        Current tax expense (benefit)
           Federal                                    $            14   $          -
           State                                                    5              - 
                                                      ---------------    ---------------
                                                                   19
        Deferred tax expense (benefit)
           Federal                                               (743)             -
           State                                                 (118)             - 
                                                      ----------------   ---------------
                                                                 (861)             - 
                                                      ----------------   ---------------
                                                      $          (842)   $         - 
                                                      ----------------   ---------------
                                                      ----------------   ---------------
</TABLE>

        A reconciliation of the statutory Federal income tax rate to the income
      tax provision (benefit) is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                                1998                 1997
                                                      ----------------------   --------------------
                                                          AMOUNT       %       AMOUNT       %
<S>                                                   <C>           <C>        <C>       <C>
        Computed "expected" tax                       $       297     34.0%    $  (306)    (34.0)%
        State income taxes, net of Federal
         income tax effect                                     54      6.1         (30)     (3.3)
        Utilization of NOL                                   (323)   (37.0)
        Recording (release) of valuation
         allowance                                           (914)  (104.7)        339      37.6
        Other                                                  44      5.1          (3)     (0.3)
                                                      -----------   ------     -------     -----
                                                      $      (842)   (96.5)%   $     -       -   %
                                                      -----------   ------     -------     -----
                                                      -----------   ------     -------     -----
</TABLE>

                                       F-10
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

        Deferred tax assets and liabilities represent the future impact of
      temporary differences between the financial statement and tax bases of
      assets and liabilities and are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                           1998                1997
<S>                                                   <C>                <C>
        Deferred tax liabilities:
           Depreciation                               $           (26)   $          -
                                                      ---------------    ---------------
        Gross deferred tax liabilities                            (26)              - 
                                                      ---------------    ---------------
        Deferred tax assets:
           NOL carryforwards                                      419                718
           Accrued liabilities                                    208                402
           Accrued warranty payable                               175                 76
           Amortization                                             5                 33
           Allowance for doubtful accounts                         65                  8
           Other                                                   15
                                                      ---------------    ---------------
        Gross deferred tax assets                                 887              1,237

        Valuation allowance                                      -                (1,237)
                                                      ---------------    ---------------
        Net deferred tax assets                                   887              - 
                                                      ---------------    ---------------
        Net deferred tax asset (liability)            $           861    $         - 
                                                      ---------------    ---------------
                                                      ---------------    ---------------
</TABLE>

        As of December 31, 1998 and 1997, the Company had net operating loss
      ("NOL") carryforwards of approximately $1,063,000 and $1,820,000,
      respectively, which are available to offset future taxable income. The
      ultimate realization of these assets are dependent upon the generation of
      future taxable income sufficient to offset the related deductions and loss
      carryforwards within the applicable carryforward period. The release of
      the valuation allowance in 1998 is based on management's conclusion that
      sufficient positive evidence regarding realization of certain tax
      carryforward items does now exist.

8.    CAPITAL STOCK, STOCK OPTIONS AND WARRANTS

      STOCK WARRANTS

        In 1995, warrants to purchase 72,000 shares of common stock at an 
      exercise price of $2.13 per share were issued to a principal shareholder,
      in connection with the Company's sale of Hobbs Engineering Corporation to
      the shareholder (Note 11). The warrants vest and are exercisable in 25%
      increments on December 31, 1996, 1997, 1998 and 1999. All warrants expire
      five years from the grant date. Compensation expense relative to these
      warrants of $62,000 will be charged to expense over the four-year vesting
      period which began January 1, 1996.

        Also in 1995, warrants to purchase 50,009 shares of common stock at an
      exercise price of $3.375 per share were issued in connection with the
      issuance of $500,000 of 10% secured notes. During 1998 and 1997, 15,002
      and 5,001 of these warrants were exercised to purchase 15,002 and 1,650
      shares of common stock, respectively.

        During 1996, the Company offered its stock for sale to the public. In
      connection therewith, the Company issued to the underwriter a five-year
      warrant to purchase up to 132,170 shares of common stock at $4.50 per
      share. During 1998, 44,277 of these warrants were used to purchase 19,055
      shares of common stock.

                                       F-11
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

      STOCK OPTIONS

        In 1993, the Company adopted an incentive stock option plan (the "1993
      Plan") which provides employees and officers with an opportunity to
      purchase an aggregate of 159,746 shares of the Company's common stock. The
      1993 Plan requires that incentive stock options be issued at exercise
      prices which are at least 100% of the fair value of the stock at the date
      of the grant. Options issued under the 1993 Plan vest at a rate of 25% per
      year over four years and expire up to ten years from the date of grant at
      the discretion of the Board of Directors.

        Stock option transactions of the 1993 Plan are summarized below:

<TABLE>
<CAPTION>
                                                                      WEIGHTED AVERAGE
                                                           SHARES      EXERCISE PRICE
<S>                                                       <C>         <C>
        Outstanding at December 31, 1996                   159,746         $  2.10

        Exercised                                          (54,750)           2.12
        Forfeited                                           (2,250)           2.04 
                                                          --------         -------
        Outstanding at December 31, 1997                   102,746            2.10

        Exercised                                           (1,874)           2.13
        Forfeited                                             (375)           2.13
                                                          ---------        -------
        Outstanding at December 31, 1998                   100,497         $  2.10
                                                          --------         -------
                                                          --------         -------
</TABLE>

        At December 31, 1998 and 1997, options were exercisable with respect to
      86,709 and 64,774 shares, respectively, with exercise prices ranging from 
      $2.00 to $2.13 and a weighted average exercise price of $2.09 for both 
      year ends.

        During 1998 and 1997, compensation expense of $7,000 was recorded in
      connection with a November 1995 grant of 31,895 options to three employees
      of the Company. There is no unamortized deferred compensation at December
      31, 1998 as 1998 was the final year of the vesting period.

        An additional 175,788 nonqualified stock options have been issued to the
      Company's president outside of the plan described above. During 1998,
      nonqualified options of 59,700 shares of common stock were exercised at an
      exercise price of $.67 per share. At December 31, 1998, nonqualified
      options to purchase 116,088 shares at a price of $2.00 per share are
      exercisable. At December 31, 1997, nonqualified options to purchase 59,700
      shares of common stock at an exercise price of $.67 per share and 116,088
      shares of common stock at an exercise price of $2.00 per share were
      exercisable.

        In 1995, the Company adopted the 1996 Stock Option Plan (the "1996
      Plan"). Under the 1996 Plan, grants of both incentive stock options and
      non-qualified options are permitted. Incentive stock options may only be
      granted to employees of the Company, including officers and directors who
      are also employees. Non-qualified options may be issued to officers,
      directors, employees or consultants of the Company. The exercise price of
      incentive stock options granted under the 1996 Plan must be at least 100%
      (or 110% in the case of a holder of 10% or more of the voting power of all
      classes of stock of the Company) of the fair market value of the Company's
      stock at the grant date, while the exercise price of non-qualified options
      is at the discretion of the Board of Directors. Aggregate common shares of
      472,000 are reserved for issuance under the 1996 Plan, as amended. Shares
      forfeited can be reissued under the 1996 Plan. Options issued under the
      1996 Plan vest at a rate of 25% per year over four years and expire up to
      ten years from the date of grant at the discretion of the Board of
      Directors.

                                       F-12
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

        Stock option transactions of the 1996 Plan are summarized below:

<TABLE>
<CAPTION>
                                                                      WEIGHTED AVERAGE
                                                           SHARES      EXERCISE PRICE
<S>                                                       <C>         <C>
        Outstanding at December 31, 1996                   162,250         $  3.59

        Granted                                            236,750            4.67
        Exercised                                             (250)           3.25
        Forfeited                                          (10,750)           3.76 
                                                          --------         -------
        Outstanding at December 31, 1997                   388,000            4.25

        Granted                                             76,250            6.56
        Exercised                                           (2,250)           3.41
        Forfeited                                          (31,000)           4.38 
                                                          ---------        -------
        Outstanding at December 31, 1998                   431,000         $  4.63
                                                          --------         -------
                                                          --------         -------
</TABLE>

        At December 31, 1998 and 1997, options were exercisable with respect to
      123,375 and 35,688 shares, respectively, with exercise prices ranging from
      $3.25 to $7.00 and a weighted average exercise price of $4.06 and $3.56,
      respectively.

      FAIR 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 method of accounting prescribed by SFAS No.
      123, the Company's results would have been changed to the pro forma
      amounts indicated below (in thousands):

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                           1998                1997
<S>                                                     <C>               <C>
        Net income (loss):
           As reported                                  $     1,715         $    (901)
           Pro forma                                    $     1,596         $  (1,001)

        Basic income (loss) per share:
           As reported                                  $      0.50         $   (0.27)
           Pro forma                                    $      0.46         $   (0.30)

        Fully diluted income (loss) per share:
           As reported                                  $      0.45         $   (0.27)
           Pro forma                                    $      0.42         $   (0.30)
</TABLE>

        The fair value of each option and warrant grant is estimated on the date
      of grant using the Black-Scholes option-pricing model with the following
      weighted-average assumptions used for grants in the years ended December
      31, 1998 and 1997: dividend yield of zero; expected volatility of 46% and
      42%, respectively; risk-free interest rates of 4.54% and 5.80%,
      respectively, and an expected term of six years. The risk-free interest
      rate used in the calculation is the yield on the grant date of a U.S.
      Treasury Strip with a maturity equal to the expected term of the option.
      The pro forma effect on net income for 1998 and 1997 is not representative
      of the pro forma effect on operations in future years because it does not
      take into consideration pro forma compensation expense related to grants
      made prior to 1995.


                                       F-13
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

9.    PROFIT SHARING PLAN

        The Company maintains an employee profit sharing plan under Section
      401(k) of the Internal Revenue Code (the "Plan") covering personnel who
      have been employed at least three months. Employees may contribute up to
      the federal limit of their compensation to the Plan each year. The Company
      may make discretionary contributions, as determined by the Board of
      Directors each year, to employee participants who have more than one year
      of service. Participants vest in employer contributions at a rate of 20%
      per year over five years. During 1998, the Company contributed $20,000 to
      the Plan. No employer contributions were made during 1997.

10.   SEGMENT INFORMATION

        In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of
      an Enterprise and Related Information." The Company operates in two
      business segments, equipment and Accelerated Reliability Test Centers
      ("ARTC"). The equipment segment ("Equipment") is engaged in the
      manufacture and sale of vibration and thermal chambers for quality control
      testing of various electronic devices. 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 and there are no intersegment transactions. The
      Company evaluates the performances of its segments and allocates resources
      to them based primarily on 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):

<TABLE>
<CAPTION>
                                                              EQUIPMENT            ARTC               TOTAL
                    YEAR ENDED DECEMBER 31, 1998
<S>                                                           <C>                 <C>               <C>
                    Sales                                     $     10,151            $ 3,591       $    13,742
                    Gross profit                                     4,609              1,474             6,083
                    Property and equipment, net                        303              1,012             1,315

<CAPTION>
                    YEAR ENDED DECEMBER 31, 1997
<S>                                                           <C>                 <C>               <C>
                    Sales                                      $     7,683           $  2,956       $    10,639
                    Gross profit                                     3,343              1,132             4,475
                    Property and equipment, net                        304              1,124             1,428
</TABLE>

        The following is sales by geographic area (in thousands):

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                           1998               1997
<S>                                                   <C>               <C>

                    United States                     $       12,820    $      10,294
                    International                                922              345
                                                      ---------------   -------------

                    Total                             $       13,742    $      10,639
                                                      ---------------   -------------
                                                      ---------------   -------------
</TABLE>

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

                                       F-14
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

11.   RELATED PARTY TRANSACTIONS

        In 1995, the Company sold the assets of Hobbs Engineering Corporation
      (HEC), excluding any patents or other intellectual property, to Dr. Hobbs,
      a principal shareholder of the Company. In connection with the sale, the
      Company agreed to make quarterly royalty payments to Dr. Hobbs equal to
      two percent of the Company's total revenues, increasing to a maximum of
      three percent if certain revenue levels are achieved, for the period
      January 1, 1996 through December 31, 1999, in exchange for Dr. Hobbs being
      available to actively promote the Company's products and services.
      Royalties in excess of the 2% base royalty are calculated as .5% and 1% of
      total revenues if the following revenue levels are achieved:

<TABLE>
<CAPTION>
                             ADDITIONAL 0.5% ROYALTY            ADDITIONAL 1.0% ROYALTY
              YEAR             IF REVENUES EXCEED:                IF REVENUES EXCEED:
<S>                          <C>                                <C>
              1998               $   11,000,000                     $   12,000,000
              1999                   13,000,000                         14,000,000
</TABLE>

        During 1998 and 1997, royalties of $412,000 and $324,000, respectively,
      were expensed relating to this agreement.

        During 1998, the Company lent $104,000 to the Company's president
      pursuant to a note secured by his primary residence, with interest
      accruing at a rate equal to the 10% annually. The note is payable over
      five years, with 5% of the principal due at each anniversary date and the
      remaining balance due to the end of the term.

      12.  LEGAL MATTERS

        On March 22, 1996, the Company was served with a summons and complaint
      from Screening Systems, Inc. ("SSI"), a competitor. The complaint, as
      amended, alleges the Company's vibration system infringes three patents
      owned by Hughes Electronics ("Hughes") and licensed to SSI, and seeks
      injunctive relief, monetary damages and costs of litigation. Because
      Hughes would not voluntarily join the action as plaintiff, SSI has named
      Hughes as a defendant in the action.

        The Company has been aware of the patent in question since the Company
      commenced its operations and, with advice from patent counsel, designed
      its vibration system, components of which are also patented, so as to not
      infringe the patents. The Company's vibration system has been used
      continuously in its products since 1991. On two prior occasions, Hughes
      put the Company on notice that the Company's vibration system might
      infringe its patent, although no litigation was commenced. On both
      occasions, the Company concluded, after consultation with patent counsel,
      that infringement did not exist and has seen nothing since to change that
      conclusion.

        Discovery in the action has been completed; however, the trial date has
      been vacated. In April 1997, the court conducted a "Markman hearing" to
      determine the scope and meaning of the relevant claims and terms of the
      patents-in-suit. In October 1997, the court issued its Order re
      Construction of Patent Claims. Based on that Order, in November 1997, the
      Company moved for summary judgment of non-infringement with respect to
      each of the patents in issue. SSI has moved for summary judgment of
      infringement with respect to one of the patents in issue and filed a
      summary judgment motion on several of the Company's defenses. The court
      has not yet ruled on any of these motions and has not yet set a trial
      date.


                                       F-15
<PAGE>

QUALMARK CORPORATION

NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

        In response to the current litigation, the Company consulted with its
      current legal and patent counsel, who agreed with prior patent counsels'
      opinions that the Company's vibration system does not infringe the SSI
      patent. Consequently, management intends to vigorously defend this
      litigation. However, no assurances can be given that the Company will be
      successful in its defense. The Company believes that the suit may have a
      material adverse effect on the results of operations and financial
      condition of the Company in terms of legal fees and costs for defending
      the claim, the possibility of an unfavorable outcome and an award of
      damages, and of the loss of management time needed to deal with the suit.
      At December 31, 1998, the Company has an accrual of $390,000 to cover the
      estimated remaining legal fees associated with defending this suit.






                                       F-16
<PAGE>

                                    SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant 
caused this Report to be signed on its behalf by the undersigned, thereunto 
duly authorized.

Dated:  March 26, 1999                    QUALMARK CORPORATION


                                          By:  /s/ W. PRESTON WILSON
                                              --------------------------------
                                              W. Preston Wilson, President and 
                                              Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
Signature                        Title                                               Date
---------                        -----                                               ----
<S>                              <C>                                                 <C>

/s/ W. Preston Wilson            President, Chief Executive Officer                  March 26, 1999
---------------------------      and Director
W. Preston Wilson          

/s/ Vernon W. Settle             Vice President, Finance and Administration          March 26, 1999
--------------------             Principal Accounting Officer
Vernon W. Settle    

/s/ H. Robert Gill               Director                                            March 26, 1999
------------------
H. Robert Gill

/s/ Philip A. Gordon             Director                                            March 26, 1999
--------------------
Philip A. Gordon

/s/ Charles A. French            Director                                            March 26, 1999
---------------------
Charles A. French

/s/ William B. Phillips          Director                                            March 26, 1999
------------------------
William B. Phillips

/s/ William J. Sanko             Director                                            March 26, 1999
--------------------
William J. Sanko
</TABLE>

<PAGE>

                                        INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit Number          Description                                                                      Sequential Page No.
--------------          -----------                                                                      -------------------
<S>                     <C>                                                                              <C>
3.1                     Amended and Restated Articles of Incorporation of the Company. (1)
3.2                     Amended and Restated Bylaws of the Company. (1)
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.
10.13                   Waiver and Amendment to Loan Agreement dated March 15, 1999 by and between
                        QualMark and U.S. Bank National Association.
27.1                    Financial Data Schedule
</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)    Filed as an Exhibit to the Company's Proxy Statement for the 1996 Annual
       Meeting of Shareholders.