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U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: DECEMBER 31, 2007
 o
    
    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 Employerincorporation or organization)
    
    Identification No.)
 4580 Florence Street, Denver, Colorado 80238  (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)
 o
 þ o
 o
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE
 o þ




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TABLE OF CONTENTS  PART IITEM 1. DESCRIPTION OF BUSINESS.ITEM 2. DESCRIPTION OF PROPERTY.ITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.PART IIITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSISITEM 7. FINANCIAL STATEMENTS.ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.ITEM 8A (T). CONTROLS AND PROCEDURESITEM 8B. OTHER INFORMATIONPART IIIITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.ITEM 10. EXECUTIVE COMPENSATION.ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.ITEM 13. EXHIBITSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESINDEX TO EXHIBITSAmended and Restated Loan and Security AgreementExport Import Bank Loan and Security AgreementStock and Warrant Purchase AgreementConsent of GHP Horwath, P.C.CEO Certification of Section 302CFO Certification of Section 302Certification of Section 906    Table of Contents  
 PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS.
  HALT/HASS Business Segment (HALT/HASS):
     Electrodynamic Business Segment (ED):
  About ACG:
  -2-




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About Ling:
  PRODUCTS AND SERVICES
 HALT/HASS SEGMENT:
 THE TYPHOON COMBINED STRESS SYSTEM
  -3-




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TYPHOON TECHNOLOGY
   -4-




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QUALMARK ENGINEERING SERVICES (QES)
  
    
    HALT and HASS testing procedure development
    
    Precision HALT and HASS product fixturing solutions
 -5-




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ACCELERATED RELIABILITY TEST CENTERS (ARTC)
      ED SEGMENT :
 QUALMARK ACG CORPORATION (ACG)
   -6-




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QUALMARK LING CORPORATION (LING)
         MARKETING
    SALES STRATEGY
  CUSTOMERS
  -7-




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AEROSPACE AND DEFENSE
 
 COMPUTER RELATED PRODUCTS
 
 OTHER
 
 TELECOMMUNICATIONS
 
 MEDICAL ELECTRONICS
 
 CONSUMER ELECTRONICS
 
 -8-




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RESEARCH AND PRODUCT DEVELOPMENT
    INTELLECTUAL PROPERTY
        -9-




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COMPETITION
 HALT/HASS SEGMENT:
 Equipment:
  
 ARTC Labs:
  
 ED SEGMENT:
 Qualmark ACG Corporation:
  
 Qualmark Ling Corporation:
  
 MANUFACTURING
 HALT/HASS SEGMENT:
   -10-




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ED SEGMENT:
 Qualmark ACG Corporation and Qualmark Ling Corporation (Ling/ACG)
      -11-




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PRODUCT WARRANTIES AND SERVICE
  GOVERNMENT REGULATION
  EMPLOYEES
  AVAILABLE INFORMATION
  
 ITEM 2. DESCRIPTION OF PROPERTY.
     -12-




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Investment Policies
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
  Fiscal Year Ended December 31, 2007High Close
    
    Low CloseFirst Fiscal Quarter
    
    $
    1.900
    
    
    $
    1.300Second Fiscal Quarter
    
    
    1.950
    
    
    
    1.380Third Fiscal Quarter
    
    
    1.450
    
    
    
    .800Fourth Fiscal Quarter
    
    
    1.000
    
    
    
    .580
 Fiscal Year Ended December 31, 2006High Close
    
    Low CloseFirst Fiscal Quarter
    
    $
    2.200
    
    
    $
    1.730Second Fiscal Quarter
    
    
    2.380
    
    
    
    1.620Third Fiscal Quarter
    
    
    1.930
    
    
    
    1.600Fourth Fiscal Quarter
    
    
    1.700
    
    
    
    1.300
    -13-




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS
  Fiscal Year EndedStatements of Income Date
    
    December 31, 2007
    
    December 31, 2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    64.5
    
    
    
    57.6Gross profit
    
    
    35.5
    
    
    
    42.4Selling, general and administrative expenses
    
    
    32.2
    
    
    
    29.2Research and development expenses
    
    
    5.9
    
    
    
    4.8Goodwill impairment
    
    
    3.1
    
    
    
    (Loss) income from operations
    
    
    (5.7
    )
    
    
    8.4Other expense
    
    
    (2.1
    )
    
    
    (1.9
    )(Loss) income before income taxes
    
    
    (7.8
    )
    
    
    6.5Income tax benefit
    
    
    3.8
    
    
    
    0.5Net (loss) income
    
    
    (4.0
    )%
    
    
    7.0
    %
 FORWARD-LOOKING STATEMENTS
  RESULTS OF OPERATIONS
   REVENUE
  HALT/HASS Revenue:
   -14-




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Electrodynamic Revenue (ED):
   GROSS MARGIN
  OPERATING EXPENSE
    -15-




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GOODWILL
  INTEREST EXPENSE
  INTEREST INCOME
  DEBT EXTINGUISHMENT
  INCOME TAX
   -16-




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NET INCOME
  LIQUIDITY AND CAPITAL RESOURCES
     Revolving Line of Credit:
  -17-




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Convertible Debt:
    -18-




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Debt Covenants
    Year endedDecember 31,2008
    
    $
    5842009
    
    
    376
    *2010
    
    
    $
    960
 
 *
    
    Amount is reported net of debt discount totaling $61,000 as of December 31, 2007 OTHER CONTRACTUAL OBLIGATIONS
  Year ended December 31,2008
    
    $
    2502009
    
    
    2002010
    
    
    77$
    527
     -19-




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Revenue Recognition
   Allowance for Doubtful Accounts
  Warranty Reserve
  Inventory Obsolescence Reserve
  -20-




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Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
 Long-lived Assets
 Accounting for the Impairment or Disposal of Long-lived Assets
 Share-based Compensation
  -21-




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Deferred Tax Assets and Valuation Allowance
  -22-




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RISK FACTORS
 Government Regulation
  Legal Proceedings
  Business Environment
  
    Suppliers
  -23-




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International Operations
  Intellectual Property
     -24-




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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 7. FINANCIAL STATEMENTS.
  Page NumberReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Statements of Operations
    
    F-2Consolidated Balance Sheets
    
    F-3Consolidated Statement of Shareholders Equity
    
    F-4Consolidated Statements of Cash Flows
    
    F-5Notes to Consolidated Financial Statements
    
    F-6
 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 8A (T). CONTROLS AND PROCEDURES
     Internal
Control  Integrated Framework
  -25-




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ITEM 8B. OTHER INFORMATION
  
 PART III
 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
 Board of Directors
  Year FirstBecame aName
    
    Age
    
    Director
    
    PositionAndrew Drenick(C)(G)(N)
    
    
    52
    
    
    
    2007
    
    
    Director, President and Chief Executive OfficerGerald Laber(A)(C)(G)(N)
    
    
    64
    
    
    
    2004
    
    
    Director, Chairman of the Audit CommitteeChristopher Roser(C)(G)(N)
    
    
    49
    
    
    
    2005
    
    
    Chairman of the Board of Directors
 
 (A)
    
    Member of the Audit Committee.(C)
    
    Member of the Compensation Committee.(G)
    
    Member of the Corporate Governance Committee.(N)
    
    Member of the Nominating Committee. Andrew Drenick.
 Gerald Laber
 -26-




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Christopher Roser
 Executive Officers:
  Name
    
    PositionAndrew Drenick
    
    President and Chief Executive OfficerGary Larson
    
    Vice President of Sales and MarketingAnthony A. Scalese
    
    Chief Financial OfficerRalph Poplawsky
    
    Chief Technical Officer
  Gary Larson 57
 Anthony A. Scalese, 34
 Ralph Poplawsky, 52.
 -27-




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Section 16(a) Beneficial Ownership Reporting Compliance
   Code of Ethics
    Audit Committee
  Security Holder Communication with Board Members
  
    
    the name, mailing address and telephone number of the security holder sending the
communication;
    
    the number and type of our securities owned by such security holder, and
    
    if the security holder is not a record owner of our securities, the name of the
record owner of our securities beneficially owned by the security holder.
  -28-




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ITEM 10. EXECUTIVE COMPENSATION.
 SUMMARY COMPENSATION TABLE FOR 2007 FISCAL YEAR
  All OtherName and
    
    
    
    
    
    Salary
    
    Bonus
    
    Stock Option
    
    Compensation
    
    TotalPrincipal Position
    
    Year
    
    ($)
    
    ($)
    
    Awards($)(3)(12)(14)
    
    ($)
    
    ($)Andrew Drenick, President
    
    
    2007
    
    
    
    200,000
    
    
    
    
    
    
    
    2,800
    
    
    
    
    
    
    
    202,800and Chief Executive
Officer(Hired December
2007)(1)Charles D. Johnston,
    
    
    2007
    
    
    
    250,000
    
    
    
    
    
    
    
    43,900
    
    
    
    86,800
    (4)
    
    
    380,700President and Chief Executive
    
    
    2006
    
    
    
    250,000
    
    
    
    38,300
    
    
    
    46,600
    
    
    
    23,600
    (5)(13)
    
    
    358,500Officer(Retired December 2007)(1)Gary Larson,
    
    
    2007
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    13,400
    (6)
    
    
    138,400Vice President of Sales and Marketing(Hired October 2007)(2)Jeffrey Hale,
    
    
    2007
    
    
    
    150,000
    
    
    
    7,500
    
    
    
    2,100
    
    
    
    12,700
    (7)
    
    
    172,300Vice President of Sales and Marketing
    
    
    2006
    
    
    
    150,000
    
    
    
    
    
    
    
    1,200
    
    
    
    31,000
    (8)
    
    
    182,200(Resigned September
2007)(2)Anthony A. Scalese,
    
    
    2007
    
    
    
    140,000
    
    
    
    16,400
    
    
    
    13,800
    
    
    
    12,400
    (9)
    
    
    182,600Chief Financial Officer
    
    
    2006
    
    
    
    135,000
    
    
    
    14,000
    
    
    
    14,500
    
    
    
    17,700
    (10)
    
    
    181,200Ralph Poplawsky
    
    
    2007
    
    
    
    130,000
    
    
    
    13,400
    
    
    
    3,600
    
    
    
    1,700
    (11)
    
    
    148,700Chief Technical Officer
    
    
    2006
    
    
    
    125,000
    
    
    
    12,500
    
    
    
    3,600
    
    
    
    1,700
    (11)
    
    
    142,800
 
 (1)
    
    On December 10, 2007, the Company hired Andrew Drenick as President and Chief Executive
Officer. On December 31, 2007, Charles Johnston retired from service.(2)
    
    On October 15, 2007, the Company hired Gary Larson as Vice President of Sales and Marketing.
On September 17, 2007, Jeffrey Hale resigned.(3)
    
    Each of the stock options granted vest ratably on an annual basis over a three-year vesting
period, which expire within a ten year period from the grant date for Mr. Johnston and Mr.
Drenick and expire within a seven year period from the grant date for other Named Executive
Officers. Stock options granted were estimated as of the date of grant using a Black-Scholes
option-pricing model. Additional information regarding the assumptions used to estimate the
fair value of all stock option awards is contained within our 2007 Annual Report on Form
10-KSB.(4)
    
    Includes $62,500 for contributions made by the Company, under the terms of a deferred
compensation consulting agreement (refer to footnote 13-below), for services performed in
2007, $15,000 for an automobile and housing allowance, $1,300 for Company 401(k)
contributions, $7,600 for Company paid health insurance, $200 for Company paid short and long
term disability and $200 for Company paid life insurance.(5)
    
    Includes $15,000 for an automobile and housing allowance, $1,300 for Company 401(k)
contributions, $6,900 for Company paid health insurance, $200 for Company paid short and long
term disability and $200 for Company paid life insurance.(6)
    
    Includes $12,500 for sales commission and $900 for Company paid health insurance. -29-




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(7)
    
    Includes $1,300 for Company 401(k) contributions, $11,000 for Company paid health insurance,
$200 for Company paid short and long term disability and $200 for Company paid life insurance.(8)
    
    Includes $26,000 for sales commission, $900 for Company 401(k) contributions, $3,900 for
Company paid health insurance, $100 for Company paid short and long term disability and $100
for Company paid life insurance.(9)
    
    Includes $1,200 for the reimbursement of education related expenses, $900 for Company 401(k)
contributions, $9,900 for Company paid health insurance, $200 for Company paid short and long
term disability and $200 for Company paid life insurance.(10)
    
    Includes $7,200 for the reimbursement of education related expenses, $800 for Company 401(k)
contributions, $9,300 for Company paid health insurance, $200 for Company paid short and long
term disability and $200 for Company paid life insurance.(11)
    
    Includes $1,300 for Company 401(k) contributions, $200 for Company paid short and long term
disability and $200 for Company paid life insurance.(12)
    
    Reflects the 2007 FASB SFAS 123(R) expense recorded in our Financial Statements associated
with awards of stock options.(13)
    
    On December 21, 2007, the Company entered into a Stock and Warrant Purchase Agreement with
The Roser Partnership III, SBIC, LP and Christopher Roser (refer to Note 10 of the Financial
Statements). According to the terms of the Stock and Warrant Purchase Agreement, the Company
shall be obligated to fund a deferred compensation and benefits consulting agreement
(Consulting Agreement) for Charles Johnston, the former President and CEO, for a total of
$300,000. Under the terms of the Consulting Agreement the Company has funded $62,500 during
2007 for services performed in 2007, with the remaining $237,500 payable over a period of two
years commencing January 1, 2008 in quarterly amounts of $29,687 per quarter for each quarter
in which the Company has sufficient cash flow as determined by the Board of Directors, for
services to be performed over the next two years. If a payment is not made in a given
quarter, that amount shall be deferred until a later quarter until the full amount of $237,500
has been paid to the former President and CEO.(14)
    
    Aggregate grant date fair value for awards of stock options, as computed in accordance with
FASB SFAS 123(R) are as follows: Named Executive Officer
    
    Stock Option Award Date
    
    Aggregate Fair ValueAndrew Drenick
    
    
    2007
    
    
    $
    99,000Charles Johnston
    
    
    2006
    
    
    $
    132,000Gary Larson
    
    
    2007
    
    
    $
    1,900Jeffrey Hale
    
    
    2006
    
    
    $
    4,000Anthony Scalese
    
    
    2006
    
    
    $
    26,000Ralph Poplawsky
    
    Award prior to 2006
    
    
    
  -30-




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OUTSTANDING EQUITY AWARDS AT 2007 FISCAL YEAR END
  Number of
    
    Number ofSecurities
    
    SecuritiesUnderlying
    
    Underlying
    
    Options
    
    OptionsName and Principal
    
    Unexercised Options
    
    Unexercised Options
    
    Exercise
    
    ExpirationPosition
    
    Exercisable(#)(1)
    
    Unexercisable(#)
    
    Price($)
    
    DateAndrew Drenick
    
    
    
    
    
    
    49,000
    (2)
    
    
    0.80
    
    
    
    12/10/17President and Chief
    
    
    
    
    
    
    201,000
    (3)
    
    
    0.80
    
    
    
    12/10/17Executive Officer(Hired December
2007)Charles D. Johnston
    
    
    7,000
    
    
    
    
    
    
    
    1.50
    
    
    
    4/20/11President and Chief
    
    
    50,000
    
    
    
    
    
    
    
    1.08
    
    
    
    8/30/11Executive Officer
    
    
    7,000
    
    
    
    
    
    
    
    2.55
    
    
    
    8/18/12(Retired December 2007)
    
    
    10,000
    
    
    
    
    
    
    
    0.70
    
    
    
    3/24/137,000
    
    
    
    
    
    
    
    0.60
    
    
    
    3/24/137,000
    
    
    
    
    
    
    
    1.40
    
    
    
    4/15/1449,500
    
    
    
    100,500
    (4)
    
    
    1.77
    
    
    
    1/27/167,000
    
    
    
    
    
    
    
    1.50
    
    
    
    4/19/12Gary Larson
    
    
    
    
    
    
    5,000
    (5)
    
    
    0.81
    
    
    
    10/19/14Vice President of
Sales and Marketing
(Hired October 2007)Jeffrey C. Hale
    
    
    
    
    
    
    2,600
    (6)
    
    
    1.85
    
    
    
    7/21/13Vice President of
Sales and Marketing
(Resigned September
2007)Anthony A. Scalese
    
    
    2,000
    
    
    
    
    
    
    
    2.55
    
    
    
    8/18/12Chief Financial
    
    
    9,900
    
    
    
    20,100
    (7)
    
    
    1.77
    
    
    
    1/27/13Officer
    
    
    680
    
    
    
    
    
    
    
    1.50
    
    
    
    4/20/082,000
    
    
    
    
    
    
    
    1.50
    
    
    
    4/19/091,340
    
    
    
    
    
    
    
    0.60
    
    
    
    3/24/102,000
    
    
    
    
    
    
    
    1.40
    
    
    
    4/15/1112,000
    
    
    
    
    
    
    
    1.40
    
    
    
    7/16/11Ralph Poplawsky
    
    
    10,000
    
    
    
    
    
    
    
    1.44
    
    
    
    11/2/11Chief Technical Officer
    
    
    2,000
    
    
    
    
    
    
    
    2.55
    
    
    
    8/18/12
 
 (1)
    
    All options are currently underwater.(2)
    
    Stock options vest at a rate of 33% per year, beginning December 2008.(3)
    
    Stock options vest at a rate of 33% per year, beginning December 2008. 201,000 options
were granted to Mr. Drenick under the Companys 2007 Incentive Stock Plan that has been
approved by the Companys Board of Directors, but not yet ratified by shareholders. -31-




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(4)
    
    Stock options vest at a rate of 33% per year, which began January 2007.(5)
    
    Stock options vest at a rate of 33% per year, beginning October 2008.(6)
    
    Stock options vest at a rate of 33% per year, which began July 2007. These options
expired and were forfeited during March 2008.(7)
    
    Stock options vest at a rate of 33% per year, which began January 2007. Director Compensation
   Fees Earned and
    
    Stock OptionName
    
    Paid in Cash
    
    Awards (1)(4)
    
    Total ($)William Sanko
Chairman of the Board of Directors
Compensation Committee Chairman(Resigned December 21, 2007)
    
    $
    13,600
    
    
    $
    2,400
    (2)
    
    $
    16,000Christopher Roser
Chairman of the Board of Directors
(Effective December 21, 2007)
    
    $
    7,000
    
    
    $
    2,400
    (2)
    
    $
    9,400Gerald Laber 
Audit Committee Chairman
    
    $
    21,100
    
    
    $
    2,400
    (2)
    
    $
    23,500James Roser(3)
    
    $
    7,000
    
    
    $
    2,400
    (2)
    
    $
    9,400
 
 (1)
    
    Each of the stock options granted vest ratably on an annual basis over a three-year
vesting period, which expire within a ten year period from the grant date. Stock options
granted were estimated as of the date of grant using a Black-Scholes option-pricing model.
Additional information regarding the assumptions used to estimate the fair value of all
stock option awards is contained within the Companys 2007 Annual Report on Form 10-KSB.(2)
    
    Reflects the 2007 FASB SFAS 123(R) expense recorded in our Financial Statements
associated with awards of stock options.(3)
    
    In January 2008, Mr. James Roser (a former director) passed away; the Company is
actively seeking a replacement.(4)
    
    Aggregate grant date fair value for awards of stock options, as computed in accordance
with FASB SFAS 123(R), for each named director was $7,100 for stock options granted in
2006. -32-




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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
 EQUITY COMPENSATION PLAN INFORMATION AT 2007 FISCAL YEAR END
 Number ofNumber of
    
    
    
    
    
    SecuritiesSecurities To be
    
    
    
    
    
    Remaining AvailableIssued upon
    
    Weighted Average
    
    for Future IssuanceExercise of
    
    Exercise Price of
    
    Under EquityPlan Category
    
    Outstanding Options
    
    Outstanding Options
    
    Compensation PlansEquity compensation plans
approved by security holders
    
    
    755,750
    (1)
    
    
    1.62
    
    
    
    860Equity compensation plans
not approved by security
holders
    
    
    201,000
    (2)
    
    
    0.80
    
    
    
    449,000
 
 (1)
    
    Issued pursuant to the Companys 1996 and 2005 Qualmark Stock Option Plan.(2)
    
    Issued pursuant to the Companys 2007 Incentive Stock Plan -33-




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Name and Address
    
    Amount and Nature ofof Beneficial Owner
    
    Beneficial Ownership
    
    Percent of ClassChristopher Roser
    
    
    5,632,005
    (1)
    
    
    49.0
    %(9)4580 Florence Street
Denver, CO 80238The Roser Partnership III, SBIC, LP
    
    
    5,155,011
    (2)
    
    
    44.8
    %(9)1105 Spruce Street
Boulder, CO 80302The Roser Partnership II, LTD
    
    
    162,635
    (3)
    
    
    1.4
    %1105 Spruce Street
Boulder, CO 80302Anthony A. Scalese
    
    
    25,840
    (4)
    
    
    *4580 Florence Street
Denver, CO 80238Gerald Laber
    
    
    19,310
    (5)
    
    
    *4580 Florence Street
Denver, CO 80238Ralph Poplawsky
    
    
    12,000
    (6)
    
    
    *4580 Florence Street
Denver, CO 80238Partners for Growth
    
    
    623,611
    (7)
    
    
    5.4
    %San Francisco, CA 94105All Directors and Executive
    
    
    5,689,155
    (8)
    
    
    49.5
    %Officers as a group (5 persons)
 
 *
    
    Less than one percent.(1)
    
    Includes 4,504,069 shares of Common Stock owned by The Roser Partnership III, SBIC, LP, 162,535
shares of Common Stock owned by The Roser Partnership II, LTD, 29,433 shares of Common Stock
directly and indirectly owned by James Roser and affiliates, 152,408 shares of Common Stock
directly and indirectly owned by Christopher Roser, warrants to purchase 651,042 shares of Common
Stock directly owned by The Roser Partnership III, SBIC, LP, warrants to purchase 130,208 shares of
Common Stock directly owned by Christopher Roser, options to purchase 2,310 shares of Common Stock,
which are currently exercisable or become exercisable within 60 days, directly owned by Christopher
Roser. Mr. Christopher Roser manages The Roser Partnership II Ltd. and III, SBIC, LP investment
funds, which are shareholders of the Company. Mr. Christopher Roser is also a director and chairman
of the board.(2)
    
    Includes 4,504,069 shares of Common Stock and warrants to purchase 651,042 shares of Common
Stock. -34-




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##### Table of Contents



(3)
    
    Includes 162,535 shares of Common Stock.(4)
    
    Includes options to purchase 25,840 shares of the Common Stock, which are currently exercisable
or become exercisable within 60 days.(5)
    
    Includes options to purchase 19,310 shares of the Common Stock, which are currently exercisable
or become exercisable within 60 days.(6)
    
    Includes options to purchase 12,000 shares of the Common Stock, which are currently exercisable
or become exercisable within 60 days.(7)
    
    Includes 511,483 shares of as-converted (within 60 days) Common Stock from a convertible debt
instrument, 8,745 shares of stock that will be issued within 60 days and 103,383 shares of Common
Stock.(8)
    
    Includes options to purchase 59,460 shares of Common Stock which are currently exercisable or
become exercisable within 60 days, warrants to purchase 781,250 shares of Common Stock and
4,848,445 shares of Common Stock.(9)
    
    Pursuant to the terms associated with the Stock and Warrant Purchase Agreement dated December
21, 2007 with The Roser Partnership III, SBIC, LP and Christopher Roser (refer to Note 10 of the
Financial Statements and Item 12-Certain Relationships and Related Transactions) and at the request
of the Companys board of directors, the Roser Partnership and its affiliates agreed to give an
irrevocable proxy to an independent third party for the number of shares by which their ownership
interest exceeds 49.9%. This proxy will remain in effect until the number of shares covered by the
proxy is reduced to zero or the second anniversary date of the closing of the Purchase Agreement,
or December 21, 2009. Although the proxy states that it is irrevocable it is not coupled with an
interest. Therefore, under Section 7-107-203 of the Colorado Revised Statutes, the irrevocable
nature of this proxy may not be enforceable. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 Related Transactions
    -35-




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##### Table of Contents



Director Independence
  
 ITEM 13. EXHIBITS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 AUDIT FEES
  AUDIT-RELATED FEES
  TAX FEES
  ALL OTHER FEES
  -36-




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##### Table of Contents



SIGNATURES
  Dated: March 28, 2008
    QUALMARK CORPORATIONBy:
    /s/ ANDREW DRENICKAndrew Drenick,President and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Andrew Drenick

Andrew Drenick
    
    President, Chief Executive
Officer and Director
    
    March 28, 2008/s/ Anthony A. Scalese

Anthony A. Scalese
    
    Chief Financial Officer and
Principal Accounting Officer
    
    March 28, 2008/s/ Christopher Roser

Christopher Roser
    
    Director and
Chairman of the Board
    
    March 28, 2008/s/ Gerald Laber
Gerald Laber
    
    Director
    
    March 28, 2008
 -37-




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/ GHP HORWATH, P.C.Denver, ColoradoMarch 28, 2008 F-1




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##### Table of Contents



QUALMARK CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 Years EndedDecember 31,2007
    
    
    2006Revenues
    
    $
    14,477
    
    
    $
    16,427Cost of revenues
    
    
    9,341
    
    
    
    9,469Gross profit
    
    
    5,136
    
    
    
    6,958Selling, general and administrative expenses
    
    
    4,669
    
    
    
    4,795Research and development expenses
    
    
    849
    
    
    
    784Goodwill impairment (Note 1)
    
    
    447Total operating expenses
    
    
    5,965
    
    
    
    5,579(Loss ) income from operations
    
    
    (829
    )
    
    
    1,379Other income (expense):Interest expense
    
    
    (341
    )
    
    
    (341
    )Interest income
    
    
    49
    
    
    
    22Loss on extinguishment of debt (Note 6)
    
    
    (18
    )
    
    
    (Loss) income before income taxes
    
    
    (1,139
    )
    
    
    1,060Income tax benefit (Note 8)
    
    
    556
    
    
    
    91Net (loss) income
    
    $
    (583
    )
    
    $
    1,151Net (loss) income per basic common share (Note 1)
    
    $
    (0.07
    )
    
    $
    0.14Net (loss) income per diluted common share (Note 1)
    
    $
    (0.07
    )
    
    $
    0.11Weighted average shares outstanding  basic
    
    
    8,846
    
    
    
    5,981Weighted average shares outstanding  diluted
    
    
    8,846
    
    
    
    10,758
  F-2




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##### Table of Contents



QUALMARK CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
 December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,428
    
    
    $
    1,179Available for sale securities
    
    
    61
    
    
    
    Trade accounts and note receivable, net
of allowance of $55 and $50,
respectively, for doubtful accounts
    
    
    3,598
    
    
    
    3,420Inventories, net
    
    
    2,038
    
    
    
    2,524Current deferred tax assets, net
    
    
    454
    
    
    
    943Other current assets
    
    
    338
    
    
    
    143Total current assets
    
    
    7,917
    
    
    
    8,209Property and equipment, net
    
    
    667
    
    
    
    787Restricted cash
    
    
    90
    
    
    
    90Goodwill
    
    
    610
    
    
    
    1,057Intangible assets
    
    
    963
    
    
    
    1,012Non-current deferred tax assets, net
    
    
    1,488
    
    
    
    430Other assets
    
    
    543
    
    
    
    464$
    12,278
    
    
    $
    12,049LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,257
    
    
    $
    719Accrued expenses
    
    
    615
    
    
    
    682Deferred revenue and other
    
    
    350
    
    
    
    18Advance billings on contracts
    
    
    77
    
    
    
    Current portion of long-term debt
    
    
    584
    
    
    
    913Revolving line of credit
    
    
    1,601
    
    
    
    1,100Total current liabilities
    
    
    4,484
    
    
    
    3,432Deferred revenue and other
    
    
    191
    
    
    
    29Long-term debt
    
    
    376
    
    
    
    1,627Total liabilities
    
    
    5,051
    
    
    
    5,088Shareholders equity:Preferred stock, no par value; 2,000,000
shares authorized; zero issued and
outstanding at December 31, 2007 and
2006
    
    
    
    
    
    
    Common stock; no par value; 15,000,000
shares authorized; 8,841,894 shares
(2007) and 8,779,362 shares (2006)
issued and outstanding
    
    
    11,259
    
    
    
    10,409Accumulated deficit
    
    
    (4,031
    )
    
    
    (3,448
    )Accumulated comprehensive loss
    
    
    (1
    )
    
    
    Total shareholders equity
    
    
    7,227
    
    
    
    6,961$
    12,278
    
    
    $
    12,049
  F-3




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##### Table of Contents



QUALMARK CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
 Accumulated OtherCommon Stock
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Deficit
    
    
    Income
    
    
    TotalBalances January 1, 2006
    
    
    4,417,706
    
    
    $
    7,343
    
    
    $
    (4,599
    )
    
    $
    
    
    
    $
    2,744Conversion of convertible, redeemable preferred stock to
common stock
    
    
    4,262,044
    
    
    
    3,132
    
    
    
    
    
    
    
    
    
    
    
    3,132Common stock issued for interest on convertible debt
    
    
    41,351
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75Options exercised
    
    
    34,165
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Conversion of convertible debt to common debt
    
    
    24,096
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40Preferred stock dividends
    
    
    
    
    
    
    (156
    )
    
    
    
    
    
    
    
    
    
    
    (156
    )Accretion of redeemable preferred stock
    
    
    
    
    
    
    (183
    )
    
    
    
    
    
    
    
    
    
    
    (183
    )Stock-based compensation expense
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    114Excess tax benefits from share-based payment arrangements
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Components of comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,151
    
    
    
    
    
    
    
    1,151Balances December 31, 2006
    
    
    8,779,362
    
    
    $
    10,409
    
    
    $
    (3,448
    )
    
    $
    
    
    
    $
    6,961Common stock issued for interest on convertible debt
    
    
    62,032
    
    
    
    83
    
    
    
    
    
    
    
    
    
    
    
    83Options exercised
    
    
    500
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Beneficial conversion feature on convertible debt and interest
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    107Stock-based compensation expense
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    86Common stock issued (net of offering costs of $27,000)
    
    
    *
    
    
    
    573
    
    
    
    
    
    
    
    
    
    
    
    573Components of comprehensive income:Unrealized holding loss arising from available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (583
    )
    
    
    
    
    
    
    (583
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (584
    )Balances December 31, 2007
    
    
    8,841,894
    
    
    $
    11,259
    
    
    $
    (4,031
    )
    
    $
    (1
    )
    
    $
    7,227
 
 *
    
    781,250 shares of common stock were issued on January 3, 2008.  F-4




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##### Table of Contents



QUALMARK CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 Years Ended December 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet (loss) income
    
    $
    (583
    )
    
    $
    1,151Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Change in provision for inventory allowance
    
    
    15
    
    
    
    (58
    )Inventory obsolescence write off (Note 2)
    
    
    537
    
    
    
    Change in provision for accounts receivable allowance
    
    
    5
    
    
    
    (1
    )Depreciation and amortization
    
    
    334
    
    
    
    360Goodwill impairment (Note 1)
    
    
    447
    
    
    
    Stock-based compensation expense
    
    
    86
    
    
    
    114Loss (gain) on sale of assets
    
    
    1
    
    
    
    (1
    )Amortization on debt discount
    
    
    45
    
    
    
    Deferred tax benefit
    
    
    (569
    )
    
    
    (106
    )Excess tax benefits from share-based payment arrangements
    
    
    
    
    
    
    (14
    )Paid in kind (common stock) interest expense
    
    
    83
    
    
    
    75Changes in assets and liabilities:Trade accounts receivable
    
    
    (183
    )
    
    
    59Inventories
    
    
    (18
    )
    
    
    110Other assets
    
    
    (290
    )
    
    
    (26
    )Accounts payable
    
    
    538
    
    
    
    35Accrued expenses
    
    
    (67
    )
    
    
    (337
    )Deferred revenue and other
    
    
    494
    
    
    
    (57
    )Advance billings on contracts
    
    
    77
    
    
    
    Net cash provided by operating activities
    
    
    952
    
    
    
    1,304CASH FLOWS FROM INVESTING ACTIVITIESCash paid for investment
    
    
    (62
    )
    
    
    Sale of property and equipment
    
    
    
    
    
    
    27Purchase of Derritron , Inc. assets
    
    
    (69
    )
    
    
    Acquisition of property and equipment
    
    
    (129
    )
    
    
    (206
    )Investment in patents, copyrights, and trademarks
    
    
    
    
    
    
    (3
    )Net cash used in investing activities
    
    
    (260
    )
    
    
    (182
    )CASH FLOWS FROM FINANCING ACTIVITIESIssuance of common stock upon exercise of stock options
    
    
    1
    
    
    
    30Issuance of common stock, net
    
    
    573
    
    
    
    Proceeds from borrowings
    
    
    750
    
    
    
    400Repayments of borrowings
    
    
    (1,767
    )
    
    
    (916
    )Excess tax benefits from share-based payment arrangements
    
    
    
    
    
    
    14Net cash used in financing activities
    
    
    (443
    )
    
    
    (472
    )Net increase in cash and cash equivalents
    
    
    249
    
    
    
    650Cash and cash equivalents at beginning of year
    
    
    1,179
    
    
    
    529Cash and cash equivalents at end of year
    
    $
    1,428
    
    
    $
    1,179SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    284
    
    
    $
    285Income tax paid
    
    $
    13
    
    
    $
    30NON-CASH INVESTING AND FINANCING ACTIVITIESConversion of convertible redeemable preferred stock to common stock
    
    $
    
    
    
    $
    3,132Beneficial conversion feature on convertible debt
    
    $
    107
    
    
    $
    Transfer of equipment to inventory held for resale
    
    $
    48
    
    
    $
    49Preferred stock dividends
    
    $
    
    
    
    $
    156Accretion of redeemable preferred stock
    
    $
    
    
    
    $
    183Conversion of convertible debt to common stock
    
    $
    
    
    
    $
    40Capital lease obligations
    
    $
    
    
    
    $
    6Purchase price reallocation from inventory to trade name
    
    $
    
    
    
    $
    361
  F-5




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##### Table of Contents



QUALMARK CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 ORGANIZATION
  HALT/HASS Business Segment (HALT/HASS):
     Electrodynamic Business Segment (ED):
    F-6




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##### Table of Contents



MANAGEMENTS PLANS
   BASIS OF PRESENTATION
  REVENUE RECOGNITION
  Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
  F-7




---



##### Table of Contents



CASH AND CASH EQUIVALENTS
  CONCENTRATION OF CREDIT RISK
  INVENTORIES
  PROPERTY AND EQUIPMENT
  GOODWILL AND OTHER INTANGIBLE ASSETS
   F-8




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##### Table of Contents



LONG-LIVED ASSETS
  RESEARCH AND DEVELOPMENT
  ADVERTISING EXPENSE
  INCOME TAXES
  Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109
  PRODUCT WARRANTIES
   F-9




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##### Table of Contents



FINANCIAL INSTRUMENTS
   EARNINGS OR LOSS PER SHARE
 Earnings Per Share
   Years EndedDecember 31,2007
    
    
    2006BASIC:Net (loss) income
    
    $
    (583
    )
    
    $
    1,151Accretion of redeemable preferred stock
    
    
    
    
    
    
    (156
    )Preferred stock dividends
    
    
    
    
    
    
    (183
    )Net (loss) income applicable to common shareholders-basic
    
    $
    (583
    )
    
    $
    812Weighted average shares outstanding  basic
    
    
    8,846
    (a)
    
    
    5,981Net (loss) income per share  basic
    
    $
    (0.07
    )
    
    $
    0.14DILUTED:Net (loss) income
    
    $
    (583
    )
    
    $
    1,151Interest expense from convertible debt
    
    
    
    
    
    
    75Net (loss) income applicable to common shareholders-diluted
    
    $
    (583
    )
    
    $
    1,226Weighted average shares outstanding  basic
    
    
    8,846
    
    
    
    5,981Dilutive securities
    
    
    
    
    
    
    4,777Weighted average shares outstanding  diluted
    
    
    8,846
    (a)
    
    
    10,758Net (loss) income per share  diluted
    
    $
    (0.07
    )
    
    $
    0.11
 
 (a)
    
    Included in the basic and diluted weighted average shares outstanding
calculation are 781,250 common stock shares granted to The Roser Partnership III, SBIC,
LP on December 21, 2007. The common stock shares were not issued until January 3, 2008. USE OF ESTIMATES
   F-10




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##### Table of Contents



SHIPPING AND HANDLING FEES AND COSTS
  COMPREHENSIVE INCOME
 Reporting Comprehensive Income
 AVAILABLE FOR SALE SECURITIES
  STOCK-BASED COMPENSATION
 Share-Based Payment Accounting for Stock
Issued to Employees
 RECLASSIFICATIONS
  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Business Combinations
  F-11




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##### Table of Contents



Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB 51
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment to FASB Statement No. 115 .
 Fair Value Measurement
 2. INVENTORIES
  December 31,2007
    
    
    2006Raw materials
    
    $
    1,820
    
    
    $
    2,098Work in process
    
    
    123
    
    
    
    250Finished goods
    
    
    304
    
    
    
    370Less: Reserve for obsolescence
    
    
    (209
    )
    
    
    (194
    )$
    2,038
    
    
    $
    2,524
    F-12




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##### Table of Contents



3. PROPERTY AND EQUIPMENT
  December 31,2007
    
    
    2006Machinery and equipment
    
    $
    1,963
    
    
    $
    2,076Furniture and fixtures
    
    
    120
    
    
    
    107Leasehold improvements
    
    
    217
    
    
    
    216Software
    
    
    172
    
    
    
    1642,472
    
    
    
    2,563Less: Accumulated depreciation and amortization
    
    
    (1,805
    )
    
    
    (1,776
    )$
    667
    
    
    $
    787
  4. INTANGIBLE ASSETS
  December 31,2007
    
    
    2006Ling Electronics trade name / trademark (18 year life)
    
    
    849
    
    
    
    849ACG customer list (5 year life)
    
    
    152
    
    
    
    152ACG non compete (2 year life)
    
    
    74
    
    
    
    74Derritron Inc. intangible assets (10 year life)
    
    
    20
    
    
    
    Copyright, patents, and trademarks (2 to 20 year life)
    
    
    402
    
    
    
    402CE Certification (4 year life)
    
    
    64
    
    
    
    64Other intangibles (3 to 5 year life)
    
    
    57
    
    
    
    611,618
    
    
    
    1,602Less: Accumulated amortization
    
    
    (655
    )
    
    
    (590
    )$
    963
    
    
    $
    1,012
  Years endingDecember 31,2008
    
    $
    1452009
    
    
    822010
    
    
    502011
    
    
    502012
    
    
    50Thereafter
    
    
    586$
    963
  F-13




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##### Table of Contents



5. ACCRUED EXPENSES
  December 31,2007
    
    
    2006Accrued warranty (Note 7)
    
    $
    197
    
    
    $
    187Accrued employee related
    
    
    221
    
    
    
    322Accrued bonus
    
    
    55
    
    
    
    66Other
    
    
    142
    
    
    
    107$
    615
    
    
    $
    682
 6. INDEBTEDNESS
  Revolving Line of Credit:
  Convertible Debt:
   F-14




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##### Table of Contents



Debt Covenants
    Years endingDecember 31,2008
    
    $
    5842009
    
    
    376
    *2010
    
    
    $
    960
 
 *
    
    Amount is reported net of debt discount totaling $61,000 as of December 31, 2007.  F-15




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##### Table of Contents



7. COMMITMENTS AND CONTINGENCIES
   Year ended December 31,2008
    
    $
    2502009
    
    
    2002010
    
    
    77$
    527
     Years EndedDecember 31,2007
    
    
    2006Balance, January 1
    
    $
    187
    
    
    $
    294Warranty expenditures
    
    
    (140
    )
    
    
    (138
    )Provision for warranty costs
    
    
    150
    
    
    
    31Balance, December 31
    
    $
    197
    
    
    $
    187
    F-16




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##### Table of Contents



8. INCOME TAXES
  Years EndedDecember 31,2007
    
    2006Current tax (benefit) expenseFederal
    
    $
    5
    
    
    $
    44State
    
    
    8
    
    
    
    13
    
    
    
    44Deferred tax (benefit) expenseFederal
    
    
    (512
    )
    
    
    337State
    
    
    (57
    )
    
    
    53(569
    )
    
    
    390Decrease in valuation allowance
    
    
    
    
    
    
    (525
    )$
    (556
    )
    
    $
    (91
    )
  Years Ended December 31,2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %Computed expected tax
    
    $
    (387
    )
    
    
    (34.0
    )%
    
    $
    360
    
    
    
    34.0
    %State income taxes, net of Federal income tax effect
    
    
    (57
    )
    
    
    (5.0
    )%
    
    
    53
    
    
    
    5.0
    %Decrease in valuation allowance
    
    
    
    
    
    
    0
    %
    
    
    (525
    )
    
    
    (49.5
    )%Adjustment to prior years taxes
    
    
    (95
    )
    
    
    (8.3
    )%
    
    
    
    
    
    
    Nondeductible expenses and other
    
    
    (30
    )
    
    
    (2.6
    )%
    
    
    (23
    )
    
    
    (2.2
    )%AMT tax
    
    
    13
    
    
    
    1.0
    %
    
    
    44
    
    
    
    4.1
    %$
    (556
    )
    
    
    (48.9
    )%
    
    $
    (91
    )
    
    
    (8.6
    )%
  December 31,2007
    
    
    2006Deferred tax assets:Net operating loss carry forwards ($95 and $590 current)
    
    $
    1,420
    
    
    $
    995Accrued liabilities
    
    
    150
    
    
    
    144Allowance for doubtful accounts
    
    
    21
    
    
    
    20Inventory reserves
    
    
    82
    
    
    
    76Amortization of intangibles
    
    
    52
    
    
    
    60263A adjustment
    
    
    106
    
    
    
    113Stock-based compensation
    
    
    78
    
    
    
    58Goodwill
    
    
    89
    
    
    
    Net deferred tax assets
    
    $
    1,998
    
    
    $
    1,466Deferred tax liabilities:Goodwill
    
    
    
    
    
    
    (58
    )Depreciation and amortization of property and equipment
    
    
    (56
    )
    
    
    (35
    )Total deferred tax liabilities
    
    
    (56
    )
    
    
    (93
    )Net deferred tax asset
    
    $
    1,942
    
    
    $
    1,373
   F-17




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##### Table of Contents



9. EQUITY INCENTIVE PLANS
 1996 AND 2005 STOCK OPTION PLANS
  2007 INCENTIVE STOCK PLAN
  Stock Options
  Stock Awards and Restricted Stock Purchase Offers
    F-18




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##### Table of Contents



Accounting for
Stock-Based Compensation
 Years EndedDecember 312007
    
    
    2006Expected life
    
    5 years
    
    
    5 yearsVolatility
    
    
    124  127
    %
    
    
    125  129
    %Risk-free interest rate
    
    
    3.54  3.85
    %
    
    
    4.45  4.99
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
   WeighedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    AggregateUnder
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOption
    
    
    Price
    
    
    Life
    
    
    ValueOutstanding at January 1, 2006
    
    
    752,375
    
    
    $
    1.86Granted
    
    
    222,500
    
    
    
    1.80Exercised
    
    
    (34,165
    )
    
    
    0.89Forfeited
    
    
    (79,350
    )
    
    
    1.90Outstanding at December 31, 2006
    
    
    861,360
    
    
    
    1.84Granted
    
    
    255,000
    
    
    
    0.80Exercised
    
    
    (500
    )
    
    
    0.60Forfeited
    
    
    (159,110
    )
    
    
    2.50Outstanding at December 31, 2007
    
    
    956,750
    
    
    $
    1.45
    
    
    3.45 years
    
    $
    Exercisable at December 31, 2007
    
    
    556,266
    
    
    $
    1.66
    
    
    3.31 years
    
    $
    
    F-19




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##### Table of Contents



Weighted AverageNumber of Shares
    
    
    Weighted Average
    
    
    Remaining ContractualExercise Price Range
    
    Outstanding
    
    
    Exercise Price
    
    
    Life$0.60  $1.44
    
    
    495,180
    
    
    $
    0.92
    
    
    
    3.83$1.50  $1.85
    
    
    290,570
    
    
    
    1.67
    
    
    
    2.09$2.00  $5.69
    
    
    171,000
    
    
    
    2.61
    
    
    
    4.80956,750
    
    
    $
    1.45
    
    
    
    3.45
  Nonvested
    
    
    WeightedShares
    
    
    AverageUnder
    
    
    Grant DateOption
    
    
    Fair ValueNonvested at January 1, 2007
    
    
    251,570
    
    
    $
    1.76Granted
    
    
    255,000
    
    
    
    0.80Vested
    
    
    (88,656
    )
    
    
    0.72Forfeited
    
    
    (17,430
    )
    
    
    1.62Nonvested at December 31, 2007
    
    
    400,484
    
    
    $
    1.16
  10. COMMON STOCK AND WARRANTS
   11. PROFIT SHARING PLAN
   F-20




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##### Table of Contents



12. SEGMENT INFORMATION
    HALT/HASS
    
    ED
    
    Corporate
    
    TotalYEAR ENDED DECEMBER 31, 2007Sales
    
    $
    10,734
    
    
    $
    3,743
    
    
    $
    
    
    
    $
    14,477Gross profit
    
    
    4,897
    
    
    
    239
    
    
    
    
    
    
    
    5,136Capital expenditures
    
    
    131
    
    
    
    67
    
    
    
    
    
    
    
    198Goodwill
    
    
    
    
    
    
    610
    
    
    
    
    
    
    
    610Total assets
    
    
    8,134
    
    
    
    4,144
    
    
    
    
    
    
    
    12,278Depreciation and amortization
    
    
    195
    
    
    
    139
    
    
    
    
    
    
    
    334Income tax benefit
    
    
    
    
    
    
    
    
    
    
    556
    
    
    
    556Interest expense
    
    
    
    
    
    
    123
    
    
    
    218
    
    
    
    341Debt extinguishment
    
    
    
    
    
    
    7
    
    
    
    11
    
    
    
    18Interest income
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    49YEAR ENDED DECEMBER 31, 2006Sales
    
    $
    13,366
    
    
    $
    3,061
    
    
    $
    
    
    
    $
    16,427Gross profit
    
    
    6,227
    
    
    
    731
    
    
    
    
    
    
    
    6,958Capital expenditures
    
    
    147
    
    
    
    59
    
    
    
    
    
    
    
    206Goodwill
    
    
    
    
    
    
    1,057
    
    
    
    
    
    
    
    1,057Total assets
    
    
    7,913
    
    
    
    4,136
    
    
    
    
    
    
    
    12,049Depreciation and amortization
    
    
    207
    
    
    
    153
    
    
    
    
    
    
    
    360Income tax benefit
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    91Interest expense
    
    
    
    
    
    
    5
    
    
    
    336
    
    
    
    341Interest income
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    22OTHER SIGNIFICANT NON-CASH ITEMSRedeemable preferred stock dividends declared
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    156Accretion of redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    183
  United
    
    
    
    
    
    
    
    
    
    Asia
    
    MiddleStates
    
    Mexico
    
    Europe
    
    Pacific
    
    East
    
    Other
    
    TotalYEAR ENDED DECEMBER 31, 2007Sales
    
    $
    9,227
    
    
    
    
    
    
    $
    2,430
    
    
    $
    2,735
    
    
    $
    85
    
    
    
    
    
    
    $
    14,477Long-lived assets, net
    
    
    1,113
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,163YEAR ENDED DECEMBER 31, 2006Sales
    
    $
    10,000
    
    
    
    
    
    
    $
    1,516
    
    
    $
    4,658
    
    
    $
    81
    
    
    $
    172
    
    
    $
    16,427Long-lived assets, net
    
    
    1,242
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,297
   F-21




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##### Table of Contents



13. LEGAL MATTERS
 Hobbs Litigation
 th
   Data Physics Litigation
    F-22




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##### Table of Contents



F-23




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Amended and Restated Articles of Incorporation of the Company.(1)3.2
    
    Amended and Restated Bylaws of the Company.(1)3.3
    
    Certificate of Designation for Series A Preferred Stock.(5)3.4
    
    Amended Certificate of Designation for Series A Preferred Stock.(5)3.5
    
    Statement of Change of Registered Agent.(5)4.1
    
    Form of Certificate for Shares of Common Stock.(1)4.6
    
    Form of Warrant issued to holders of 10% secured promissory notes.(1)10.1
    
    Qualmark Corporation 1993 Incentive Stock Option Plan.(1)10.2
    
    Qualmark Corporation 1996 Stock Option Plan.(3)10.3
    
    Employment Agreement dated March 1, 1993 by and between the Company and W. Preston Wilson.(1)10.4
    
    Employment Agreement dated August 15, 1994 by and between the Company and J. Wayne Farlow.(1)10.5
    
    Agreement dated September 30, 1995 by and between the Company and Gregg K. Hobbs.(1)10.8
    
    Addendum to Agreement dated as of December 21, 1995 by and between the Company and Gregg K. Hobbs.(1)10.11
    
    Loan and Security Agreement dated April 30, 1996, by and between Qualmark Corporation and Silicon Valley Bank,
as amended by Amendment to Loan and Security Agreement dated August 18, 1997.(2)10.12
    
    Loan and Security Agreement dated December 22, 1998, by and between Qualmark Corporation and U.S. Bank National Association.(4)10.13
    
    Waiver and Amendment to Loan Agreement dated March 15, 1999 by and between Qualmark and U.S. Bank National Association.(4)10.14
    
    Second Amendment to Loan Agreement dated August 23, 1999 by and between Qualmark and U.S. Bank National Association.(5)10.15
    
    Settlement Agreement dated August 30, 1999 by and among Qualmark Corporation and Screening Systems, Inc.(5)10.16
    
    Preferred Stock Purchase Agreement dated September 1, 1999, including Warrant to Purchase 139,535 Shares of Common Stock.(5)10.17
    
    Third Amendment to Loan Agreement dated March 31, 2000 by and between Qualmark and U.S. Bank National Association.(6)10.18
    
    Employment Agreement dated July 17, 2000 by and between the Company and Charles D. Johnston.(7)10.19
    
    Second Amendment to Promissory Notes and Fifth Amendment to Loan Agreement dated February 1, 2001 by and between Qualmark and U.S. Bank National Association.(8)10.20
    
    Third Amendment to Promissory Notes and Sixth Amendment to Loan Agreement dated June 29, 2001 by and between Qualmark and U.S. Bank National Association.(9)10.21
    
    Fourth Amendment to Promissory Notes and Seventh Amendment to Loan Agreement dated January 31, 2002 by and between Qualmark and U.S. Bank National Association. (10)10.22
    
    Series C Preferred Stock Purchase Agreement dated March 27, 2002 (11)10.23
    
    Series C Preferred Stock Certificate of Designations (11)10.24
    
    Series B Preferred Stock Certificate of Designations (11)10.25
    
    Fifth Amendment to Promissory Notes and Eighth Amendment to Loan Agreement dated January 23, 2003 by and between Qualmark and U.S. Bank National Association.(12)10.25(b)
    
    Sixth Amendment to Promissory Notes and Ninth Amendment to Loan Agreement dated July 25, 2003 by and between Qualmark and U.S. Bank National Association(13)10.26
    
    Irrevocable Letter of Credit issued to Catellus Development Corporation (12)10.26(b)
    
    Warrant agreement to purchase 25,000 shares of Common Stock dated July 25, 2003 (13)10.27
    
    Seventh Amendment to Promissory Notes and Tenth Amendment to Loan Agreement dated February 27, 2004 by andbetween Qualmark and U.S. Bank National Association. (14)10.28
    
    Settlement Agreement and Payment Schedule dated February 13, 2004, by and between Qualmark Corporation and Gregg K. Hobbs. (14)




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.29
    
    Eighth Amendment to Promissory Notes and Eleventh Amendment to Loan Agreement dated April 20, 2004 by and between Qualmark and U.S. Bank National Association.(15)10.30
    
    Loan and Security Agreement dated November 9, 2004 by and between Qualmark and Silicon Valley Bank (16)10.31
    
    Loan and Security Agreement dated November 11, 2004 by and between Qualmark and Partners for Growth (17)10.32
    
    Asset Purchase Agreement dated November 12, 2004 by and between Qualmark and ACG Dynamics, Inc. (17)10.33
    
    Loan and Security Agreement dated December 8, 2005 by and between Qualmark and Silicon Valley Bank (18)10.34
    
    Amendment to Loan and Security Agreement dated December 12, 2005 by and between Qualmark and Partners for Growth (18)10.35
    
    Asset Purchase Agreement dated December 13, 2005 by and between Qualmark and SatCon Technology.(18)10.36
    
    Loan and Security Agreement dated February 20, 2007 by and between Qualmark and Partners for Growth (19)10.37
    
    Fifth Amendment to Loan and Security Agreement dated March 13, 2006 by and between Qualmark and Silicon Valley Bank (19)10.38
    
    Sixth Amendment to Loan and Security Agreement dated April 2, 2007 by and between Qualmark and Silicon Valley Bank (20)10.39
    
    Loan Modification and Limited Waiver dated May 7, 2007 by and between Qualmark and Partners for Growth, L.P. (20)10.40
    
    Amended and Restated Loan and Security Agreement dated December 7, 2007 by and between Qualmark and Silicon Valley Bank10.41
    
    Export Import Bank Loan and Security Agreement dated December 7, 2007 by and between Qualmark and Silicon Valley Bank10.42
    
    Stock and Warrant Purchase Agreement dated December 21. 2007 by and between Qualmark and Investors14
    
    Director and Officer Code of Ethics (14)23.1
    
    Consent of GHP Horwath, P.C.31.1
    
    CEO Certification of Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    CFO Certification of Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certifications of Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference from the Companys Registration Statement No. 333-1454-D on Form
SB-2.(2)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended September 30, 1997.(3)
    
    Incorporated by reference from the Companys Proxy Statement for the 1996 Annual Meeting of
Shareholders.(4)
    
    Incorporated by reference from the Companys Annual Report of Form 10-KSB for the year ended
December 31, 1998.(5)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended September 30, 1999.(6)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended June 30, 2000.(7)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended September 30, 2000.(8)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2000.(9)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended June 30, 2001.




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##### Table of Contents



(10)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2001.(11)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2002.(12)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2002.(13)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2003.(14)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2003.(15)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2004.(16)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2004.(17)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2004.(18)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2005.(19)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2006.(20)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2007