<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, 2003

[ ]         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 Identification No.)
   incorporation or organization)

                  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)
                                (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 t is Form 10-KSB. [ ]

         Issuer's revenues for its most recent fiscal year. $7,895,000

         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 25, 2004 was $5,234,633.

         The number of shares outstanding of the issuer's Common Stock as of
March 25, 2004 was 3,610,092.

                       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 II and III of this report.

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

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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

         QualMark Corporation ("QualMark" or "the Company") designs,
manufactures, and markets proprietary equipment 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 equipment supports 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 equipment allows 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
equipment is 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 equipment performed either in the
ARTC test centers or at the customer's site.

         QualMark currently operates four test centers located in the
metropolitan areas of Denver, Colorado, Huntington Beach, California, Santa
Clara, California, and Boston, Massachusetts. The Company also utilizes three
domestic strategic agreements with large testing companies in Detroit, Michigan,
Bellevue, Washington, and Huntsville, Alabama. In addition, the Company has
established strategic agreements with Maser Engineering, IMQ Instituto Del
Marchia Di Qualita, Institutet For Verkstadsteknisk Forskning/The Swedish
Institute of Production Engineering, and Alphatech Ltd. to operate testing
centers in Enschede, Netherlands, Milan, Italy, Molndal, Sweden, and Haverhill,
England. As international demand for its products and services grows, the
Company may further expand its domestic and international presence by expanding
strategic arrangements with other test lab organizations.

         The Company was organized in July 1991 as a Colorado limited liability
company and was later incorporated in March 1992 in Colorado. 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 LF Vibration Assembly, which applies
vibrational stresses, and the UltraRate Thermal Chamber Assembly, which applies
thermal stresses and houses the vibration assembly. During 2000, the Company
released the newest advancement in the OVS Combined Stress System, the Typhoon
("Typhoon"). The Typhoon technology optimizes the operating efficiencies of the
standard OVS test chambers. Lower costs are made possible by a unique design
that significantly reduces both the consumption of liquid nitrogen used to cool
the chambers and the amount of electricity used to heat the chambers.

         The LF Vibration Assembly

         The LF (low frequency) Vibration Assembly is a new generation vibration
system, which the Company introduced in 1999. This system has increased low
frequency compared to the Omniaxial vibration system previously produced and
sold by the Company. The LF system is a multi-axis vibration system comprised of
a table, actuators and unique attachment system 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. The new LF table has significantly
increased low frequency energy available resulting in more effective

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testing and screening for larger sub-systems. It also 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.

The LF Vibration System consists of two major components:

         Vibration Table

                  The patented table is constructed out of a top plate, thermal
         insulation layer and supporting under structure. This new design is
         significantly lighter and stiffer than the previous design, resulting
         in higher low frequency energy and improved energy distribution over
         the active frequency range. This table has proved particularly
         effective in the testing of assemblies with larger components. The
         Company while continuing to supply a range of standard table sizes has
         also produced custom sizes to meet customer requirements. 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 LF2 Actuators

                  Attached to the bottom surface of the under structure are a
         set of pneumatic piston driven actuators. The method of attachment is
         also the subject of a patent application, as the unique method shapes
         the frequency distribution. There are two types of actuator used, the
         patent pending ASX and the licensed LF2. The ASX actuator is an
         evolution of the patented Autosmear actuator. The Company is the sole
         licensee of the LF2 actuator from Storage Technology Corporation. The
         combination of actuators provides excitation in both the low and high
         frequency areas of the energy spectrum. Compressed air is used to drive
         the pistons in the actuators to impact the top of the actuators,
         translating the energy through the attachment system to vibration
         energy in the table.

                  The unique design of these actuators when used in conjunction
         with the new table generates an even distribution of vibratory energy
         in the frequency spectrum. This provides for more effective fault
         detection and screening. The Company has released this technology in
         all the OVS system sizes.

         The UltraRate Thermal Chamber Assembly

                  The UltraRate Thermal Chamber, which houses the OmniAxial
         Vibration Assembly, changes temperature at rates up to 600 degrees
         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 system is extremely quiet, allowing it to be used in
         standard lab and manufacturing environments without the necessity of
         building costly special stress screening rooms.

TYPHOON TECHNOLOGY:

         The Typhoon technology represents the newest development in UltraRate
Thermal technology. The technology lowers operating costs by reducing thermal
mass of the chamber and optimizing the efficiency of the air flow system, which
consequently reduces operating costs.

The OVS Combined Stress System Product Line

         The Company's OVS Combined Stress Systems for HALT and HASS are
presently available in three sizes, including a vibration only tabletop model
(OVTT). 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.
In addition to these standard systems, the Company has also designed and
manufactured custom systems to meet unique customer requirements. 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

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necessary to meet their requirements. The Typhoon system has 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 the smallest 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 of 40 Grms (2Hz-10,000 Hz)
         on the 18"x18" vibration table and up to 600 degrees Centigrade per
         minute change on the product under test within the 18"x17"x13" internal
         dimension (ID) thermal chamber.

         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 equipped with
         four actuators mounted to the vibration table. The OVS-2.5 LF vibration
         system can generate 50 Grms 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 600 degrees 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.)

         OVS-4.0 (Typhoon):

                  The most common application for the OVS 4.0 is large volume
         production screening (HASS) on computers, monitors, communications
         systems, etc. The PC-controlled OVS-4.0 is equipped with a 48"x48"
         vibration table housed within a 55"x54"x54" (ID) (table in lower
         position) thermal chamber capable of producing temperature changes of
         up to 700 degrees Centigrade per minute on the product under test. The
         Typhoon vibration system is equipped with twelve actuators that produce
         up to 50 Grms random vibration force.

         Omni Vibration Table Top (OVTT)

                  On September 25, 2002 the Company formally introduced a major
         new product the OVTT (Omni Vibration Table Top) system that enables
         users to quickly and conveniently perform evaluations for field
         returns, spot audits and pre- and post- release product design
         verifications. The OVTT system uses the Company's patented Six Degrees
         of Freedom vibration technology, which includes the same specification
         as the OVS-1.5 vibration table, and was designed with low air
         requirements and low noise levels, making it efficient and inexpensive
         to use. The OVTT has the flexibility of a table top vibration system,
         which allows companies to mount the OVTT into most environmental
         chambers.

         A one year limited warranty is included with each OVS system sold.
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.

QUALMARK ENGINEERING SERVICES ("QES")

         The Company offers a range of engineering services tailored to help
solve test process problems. The services that are offered under QES are:

                  -        HALT and HASS testing procedure development

                  -        Precision production fixturing solutions

                  -        Automated electronic functional test equipment design
                           and development

                  -        Test and process data warehousing

                  -        Remote viewing and analysis of test data through
                           Internet linking

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The Company reviews each project with experts in the various fields and compiles
a proposal, which typically includes investigation, specification, and
execution. After the system or process is installed, the Company continues to
work with the client's staff to monitor and support the product and process.
This approach gives customers access to experts in varying fields at a time when
internal resources are often overburdened. The result is a better product
delivered to the marketplace, faster.

ACCELERATED RELIABILITY TEST CENTERS

         The Company has a network of ARTC test centers at various locations in
the United States and Europe, 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 OVS-2.5, at least one applications engineer and
ancillary testing equipment.

         The Company's strategic agreements with test centers in the U.S. and
throughout Europe consist of the Company contributing one OVS 2.5 or OVS 1.5
system and the partner providing the lab facility, personnel and sales
management. In return for its contribution of these systems to these agreements,
the Company receives a percentage of the revenues generated by the OVS systems.

         The test center is a valuable tool for the Company's sales organization
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.

         During 2001 and continuing through 2003 the Company reevaluated its
test centers and strategically established agreements with large national
testing labs in Detroit, Michigan, Bellevue, Washington, and Huntsville,
Alabama. These domestic agreements provide lower revenue than the traditional
Company owned test centers, however, with the substantial decrease in test
center operating expenses, higher margins are generally realized. The Company
will continue to examine the potential for similar relationships and the
potential to expand into additional domestic and international markets.

         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
agreements 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.

MARKETING

         In the 4th Quarter 2003, the Company placed into action a strategic
marketing and sales program that is designed to leverage QualMark's market
knowledge to be identified as the "Knowledge Leader" in the Accelerated Testing
industry. In 2004, the Company will continue to educate customers through
Webinars (web based seminars) and other forums expanding the knowledge base in
the overall Reliability process.

The following was achieved during 2003:

         1.       The Company realized strong sales in the OVTT and core market
                  segments.

         2.       The Company streamlined marketing support operations and
                  redefined the positioning statement as the Knowledge Leader
                  for 2004 launch.

         3.       The Company acquired several strategic customers who have
                  adopted a QualMark Product as the configuration for corporate
                  and supply vendor testing.

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         4.       Technology Upgrade revenues were increased significantly
                  during the last half of 2003.

SALES STRATEGY

         QualMark utilizes fifteen independent domestic and international sales
representatives including representatives from the European, Mexican, Middle
Eastern, and Asian sectors to sell and distribute its equipment and test
services. QualMark also employs four sales managers who oversee the independent
sales representatives and are responsible for customer relationships and
business development.

         In the latter half of 2003, the Company implemented plans to educate
and train the sales representative network in order to increase domestic and
international sales. Additionally, internal sales representative roles were
redefined, redirected, and training was provided to increase support of the
external sales representatives and more importantly, the customer.

CUSTOMERS

         The Company continues to market and sell its systems to the leading
corporations of the world in the Consumer Electronics, Avionics, Automotive, and
Defense industries. QualMark is uniquely positioned to support the Reliability
Testing requirements of our Global Customers through our Global Sales and
Service Network. From the Company's inception, more that 500 test systems have
been sold worldwide to more than 300 customers. During 2003, one customer
comprised approximately 12% of the Company's revenue. The Company was not
dependent on any single industry segment for its revenues.

The Company's customer bases continue to be varied and are as follows:

<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
</TABLE>

<TABLE>
<CAPTION>
TELECOMMUNICATIONS               MEDICAL ELECTRONICS                CONSUMER ELECTRONICS
------------------               -------------------                --------------------
<S>                              <C>                                <C>
Automated teller machines        Electronic thermometers            Refrigerators
Air conditioning electronics     Glucose monitors                   Televisions
Cellular telephones              Infusion pumps                     Video Recorders
Fax machines                     IV pumps
</TABLE>

RESEARCH AND PRODUCT DEVELOPMENT

         Research and development expenditures for the fiscal years ending
December 31, 2003 and 2002 were $679,000 and $732,000, respectively. During
2002, the Company released the OVTT (Omni Vibration Table Top) system that
enables users to quickly and conveniently perform evaluations for field returns,
spot audits and pre- and post- release product design verifications. The OVTT
system uses the Company's patented Six Degrees of Freedom vibration technology,
which includes the same specification as the OVS-1.5 vibration table, and was
designed with low air requirements and low noise levels, making it efficient and
inexpensive to use. The OVTT has the flexibility of a table top vibration
system, which allows companies to mount the OVTT into most environmental
chambers. During 2003, the Company completed its complete product overhaul, in
which, all HALT/HASS related products offered by QualMark include the patented
"Typhoon" technology. The technology lowers operating costs by reducing thermal
mass of the chamber and optimizing the efficiency of the air flow system, which
consequently reduces operating costs.

         Research is ongoing into the vibration technology used in the OVS
chamber. Improving low frequency energy and creating the technology to better
serve the changing market place is core to the QualMark mission.

         Other product offerings and options are being aggressively pursued,
such as more auxiliary thermocouples standard on every OVS chamber with the
option of adding more. Also, the control system is being updated to create a
touchscreen environment to improve how the user interfaces to the product being
designed and tested.

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         The Company is maintaining the ability to quickly respond to customer
request for customization. Special OVS chamber features and custom fixturing
designs are strong offerings of QualMark's engineering department.

INTELLECTUAL PROPERTY

         The Company has maintained the practice, where possible, to pursue
patent protection on its products. The Company has been issued 12 United States
patents (the "Patents") and numerous foreign patents issued in six countries.
These patents protect certain features of the OmniAxial and LF Vibration
Assemblies 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
Company was issued U.S. Patent No. 5,744,724 on April 28, 1998 for certain
design features related to honeycomb vibration table structures. The Company was
issued Patent No. 5,836,202 on November 17, 1998 for claims directed at the
angle of attachment of the actuators to the vibration table. The Company was
issued Patent No. 5,813,541 on September 29, 1998 for the configuration of the
control system attachment to the chamber. The Company was issued Patent No.
6,062,086 on May 16, 2000 relating to interposer devices for adjusting and
controlling the shock response of a shaker table assembly. The Company was
issued Patent No. 6,105,433 on August 22, 2000 for low frequency shaker table
technology. The Company was issued Patent No. 6,112,596 on September 5, 2000 for
shaker table technology combined with the test chamber. The Company is currently
in the process of pursuing two additional patents in random vibration
technology.

         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 to compete, 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.

         The Company has the following registered marks with the United States
Patent and Trademark Office: QUALMARK. The Company plans to make additional
trademark, service mark, and certification mark applications as appropriate. The
Company also has CE approval and markings for many of its products required for
sale in the European Community.

COMPETITION

         Equipment

         As the marketplace has gained more acceptance of Accelerated Test
Techniques, the competitors that have survived the downturn have become
increasingly aggressive in price and "demonstration" programs. The capital
equipment purchasing downturn during 2000-2003 promoted aggressive pricing and
unusual terms among our competitors. The Company has been aggressively
refocusing our customers on the `Value Added" of QualMark Equipment, Service,
and Company. The Company continues to be cautiously optimistic in regards to a
slowly recovering economy throughout 2004, as a result the Company is continuing
to cultivate its international presence by emphasizing its core markets, as well
as pursuing the used/refurbish equipment line of business. The increased demand
for used equipment has enabled the Company to help stimulate its domestic sales.
The Company utilizes two methods to supply its used and refurbished equipment
line. The Company actively purchases used QualMark equipment from the
marketplace, refurbishes and sells the updated equipment, or sells its used "as
is" equipment from its test center labs.

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The following represents a listing of competitors known to the Company within
the served industries:

         1.       Thermotron Industries, Michigan

         2.       Envirotronics, Michigan

         3.       Screening Systems, Inc., California

         ARTC and Applications Support Services:

         Throughout 2003 sales at QualMark Testing Centers activity remained
relatively constant from quarter to quarter. With the recent economic downturn
some companies owning test equipment (OVS) for their own use have been
attempting to leverage the equipment by selling any time not utilized by the
company. This has increased the competition arena for the ARTC test center
market, as well as placed additional pricing pressures. To mitigate this risk,
the Company implemented a new strategic direction during 2003. The strategic
direction for 2003, which will continue into 2004 and beyond will be to increase
sales through streamlined business processes and synergies with the core product
and to leverage the "Knowledge" of the more than 4,000 test performed in the
testing centers. The Company is also continuing to examine the strategic
agreement test center model, in which additional agreements may be entered into
to minimize both variable and fixed test center costs, while benefiting in a
revenue share. The Company has changed its strategic focus on the test center
line of business to maximize volume and utilization in the current operating
environment. These changes include operational consolidations, sales personnel
redeployment, and the expansion of domestic/international strategic agreements.

The following represents a listing of competitors known to the Company within
the served industries:

         1.       Thermotron Industries, Michigan

         2.       Reliant Labs, California

         3.       Screening Systems, Inc., California

MANUFACTURING

         The Company's manufacturing facility is located in Denver, Colorado.
QualMark's assembly of the OVS systems follow a manufacturing line approach, in
which drawings of all subassemblies used by the Company are maintained using
computer aided design (CAD). The assembly 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 has developed
relationships with what it considers critical vendors that manufacture three
components of its OVS system. If a supplier was unable to deliver materials as
required by the Company, it would take as many as 120 days to locate, qualify
and begin taking delivery of these components from new suppliers. The Company is
dependent on the availability of steel as its primary raw materials component.
The Company believes that it will have access to adequate amounts of the raw
material component and that no shortages will exist.

         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, Typhoon, and OVTT systems to build
during the quarter. The Company also produces 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 has implemented 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. 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.

                                       8
<PAGE>

PRODUCT WARRANTIES AND SERVICE

         In 2003 and 2002, the Company offered a limited one-year parts and
labor warranty on all new OVS systems, respectively. 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, most problems can be diagnosed over the phone
and, if necessary, replacement parts are sent to the customer via overnight
mail. The Company occasionally sends its technicians into the field for warranty
repairs. During 2004, the Company will continue to offer a standard, one-year
parts and labor warranty on all new OVS systems.

GOVERNMENT REGULATION

         Periodically, the Company receives inquiries from regulatory agencies
regarding its compliance with laws and regulations. To its knowledge, the
Company believes it complies with all international, federal, state and local
regulations, including environmental regulations. However, there is no assurance
that the Company will continue to remain in compliance with all such
regulations.

EMPLOYEES

         As of December 31, 2003, the Company had thirty employees, of which
twenty-eight are full-time. Twenty-two of the Company's employees are employed
at its principal offices and headquarters in Denver, Colorado, two are employed
at its facilities in Santa Clara, CA, two in Huntington Beach, CA, two in
Marlborough, MA, one in Navarre, FL, and one in Huntsville, AL. No employees are
represented by labor organizations and there are no collective bargaining
agreements. Employee relations are believed to be good.

AVAILABLE INFORMATION

         Our internet website is www.qualmark.com. We make available our annual
reports on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on
Form 8-K, and any amendments to those reports as soon as reasonably practicable
after we electronically file or furnish such materials to the SEC.

ITEM 2. DESCRIPTION OF PROPERTY.

         The Company operates out of leased facilities located at 4580 Florence
Street, Denver, Colorado. The seven-year lease for the property expires on May
31, 2010. The leased property consists of approximately 16,616 square feet. The
lease calls for average monthly payments over the term of the lease of $14,391.
In addition to the lease, 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 98 South Street,
Hopkinton, Massachusetts. The six-year lease expires April 30, 2005. The leased
property consists of approximately 5,000 square feet. The lease calls for
average monthly payments over the term of the lease of $3,252. 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 Silicon Valley ARTC facility is located at 990 Richard Avenue,
Suite 101, Santa Clara, California. The five-year lease expires on June 30,
2006. The leased property consists of approximately 3,389 square feet. The lease
calls for average monthly payments of $7,911. 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 expired on
December 31, 2002. The leased property consists of 3,132 square feet. The
Company has renegotiated a month-to-month lease starting in January 2003 in this
facility. The monthly lease payments will be $3,078, until cancelled. 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.

                                       9
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

         Refer to Note 12 of the Financial Statements.

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, 2003.

                                     PART II

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

         As of May 10, 2002, the common stock of the Company was traded on the
OTCBB (Over The Counter Bulletin Board). The Company was traded on the NASDAQ
(National Association of Securities Dealers Automated Quotations) Small-Cap
Market from April of 1996 until May 9, 2002. The following table sets forth the
range of high and low closing bid prices of the Company's common stock as
reported by the OTCBB (for 2003) and NASDAQ (from January 1, 2002 through May 9,
2002) and OTCBB (from May 10, 2002 through December 31, 2002) during fiscal
years 2003 and 2002:

<TABLE>
<CAPTION>
                               FISCAL YEAR ENDED DECEMBER 31, 2003
                               -----------------------------------
                                HIGH CLOSE             LOW CLOSE
                                ----------             ---------
<S>                             <C>                    <C>
First Fiscal Quarter            $  0.900               $  0.450
Second Fiscal Quarter              1.150                  0.600
Third Fiscal Quarter               1.050                  0.800
Fourth Fiscal Quarter              1.010                  0.850
</TABLE>

<TABLE>
<CAPTION>
                               FISCAL YEAR ENDED DECEMBER 31, 2002
                               -----------------------------------
                                HIGH CLOSE              LOW CLOSE
                                ----------              ---------
<S>                             <C>                    <C>
First Fiscal Quarter            $  1.150               $  0.900
Second Fiscal Quarter              1.730                  0.900
Third Fiscal Quarter               1.100                  0.530
Fourth Fiscal Quarter              0.700                  0.280
</TABLE>

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

         The number of record holders of our common stock as of December 31,
2003 was 36 according to our transfer agent. This figure excludes an
indeterminate number of shareholders whose shares are held in "street" or
"nominee" name. The Company has never paid a cash dividend and does not intend
to do so in the future. The Company made a dividend payment on outstanding
preferred stock, in kind, of additional preferred stock in January 2004 (Refer
to Note 8 of the Financial Statements).

         The Company participates in certain equity related compensation plans
that are authorized for securities issuance. The tabular disclosures of such
plans are disclosed in the Company's definitive Proxy Statement. 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.

Nasdaq Market Listing

         In order for the common stock of the Company to continue to be traded
on Nasdaq, the Company needed to maintain net tangible assets of at least $2.0
million through October of 2002 and $2.5 million of net shareholder equity
thereafter. The Company was not able to maintain these levels of net tangible
assets or net shareholder equity, but developed a plan to increase its
shareholder equity to meet these requirements. On February 21, 2002 the Company
presented the plan to a Nasdaq listings panel.

         On March 20, 2002 the Company received notification from the Nasdaq
Listing Qualification Panel that the Panel was of the opinion that QualMark
Corporation presented a definitive plan that would enable it to comply with all
requirements for continued listing on The Nasdaq SmallCap Market. The Company's
common stock was conditionally listed on The Nasdaq SmallCap Market pursuant to
certain exceptions. These exceptions required the Company to file a proxy
statement with the Securities and Exchange Commission and Nasdaq by March 26,
2002 and to file certain financial statements with its Form 10-QSB for the
quarter ending March 31, 2002. In order to comply with the terms of the
exceptions, QualMark had to demonstrate compliance with all requirements

                                       10
<PAGE>

for continued listing on The Nasdaq SmallCap Market. Satisfaction of these
required the Company's shareholders to approve various matters contained in the
proxy.

         On March 27, 2002 the Company, in reliance upon this notification,
completed a $1 million preferred stock financing transaction with The Roser
Partnership III, SBIC LP (refer to Note 8 of the Financial Statements) which
provided that if shareholder approval was not obtained for the stock issuance,
the preferred stock would convert on a different basis than if shareholder
approval was obtained.

         Although the Company complied with the undertakings established by
Nasdaq, on May 9, 2002 the Nasdaq Stock Market notified the Company that this
transaction, which was initially approved by Nasdaq, did not meet the
requirements of a staff interpretation of the shareholder approval requirements.
According to IM-4350-2, first published March 7, 2002, if the terms of a
transaction can change based upon the outcome of a shareholder vote, no shares
may be issued prior to shareholder approval. As a result, effective May 10,
2002, the Company became actively listed on the OTC Electronic Bulletin Board
under the symbol QMRK.

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, 2003     DECEMBER 31, 2002
                                                   -----------------     -----------------
<S>                                                <C>                   <C>
Statement of Operations Data:
Revenues......................................          100.0%                100.0%
Cost of Revenues..............................           60.1                  56.6
                                                        -----                 -----
Gross Profit..................................           39.9                  43.4
Selling, general and administrative expenses..           30.4                  32.4
Arbitration associated expenses...............            8.0                   4.0
Research and development expenses.............            8.6                   9.1
                                                        -----                 -----
Loss from operations..........................           (7.1)                 (2.1)
Other expense.................................           (1.6)                 (2.2)
                                                        -----                 -----
Loss before income taxes......................           (8.7)                 (4.3)
Income tax benefit (expense)..................           (0.0)                 (0.0)
                                                        -----                 -----
Net loss......................................           (8.7)%                (4.3)%
                                                        =====                 =====
</TABLE>

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 variability in order
flow and operating results, the ability of the Company to find and retain
qualified personnel, and the risk that the demand for the Company's systems will
not continue.

RESULTS OF OPERATIONS

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

Comparison of Years Ended December 31, 2003 and 2002

REVENUE

         Revenue decreased $172,000 or 2.1% to $7,895,000 in the year ended
December 31, 2003 from $8,067,000 in the year ended December 31, 2002.

         OVS system revenue increased $153,000 or 2.3% from $6,606,000 in the
year ended December 31, 2002 to $6,759,000 in the year

                                       11
<PAGE>

ending December 31, 2003. The number of OVS units sold in 2003 increased 7.1%
over 2002. The increase in sales for the year ended December 31, 2003 is
primarily a direct result of the Company's aggressive pursuit of international
sales and a slight improvement in the domestic economy in the last half of 2003.
The Company is continuing its aggressive pursuit of international and domestic
sales in the high technology industry. Of the total units sold, international
system sales increased 27.3% over 2002. The Company continues to be cautiously
optimistic in regards to a slowly recovering economy throughout 2004, as a
result the Company is continuing to cultivate its international presence by
emphasizing its core markets, as well as pursuing the used/refurbish equipment
line of business. The increased demand for used equipment has enabled the
Company to help stimulate its domestic sales. QualMark utilizes fifteen
independent international sales representatives including representatives from
the European, Mexican, Middle Eastern, and Asian sectors. The Company is
encouraged by the steady increase in equipment sales but cannot give any
assurance of the demand of its used/refurbish equipment sales, or the overall
increase in equipment sales.

         Test center revenue decreased $325,000 or 22.2% from $1,461,000 in the
year ended December 31, 2002 to $1,136,000 in the year ending December 31, 2003.
The Company operated four test centers in the U.S., maintained four domestic
strategic agreement test center operations, and five strategic agreement test
center operations in Europe 2003, versus four test centers in the U.S., one
strategic domestic agreement test center, and four strategic agreement test
centers in Europe during the same period in 2002. Under the domestic and
international strategic agreement test centers, the Company does not have any
continuing obligation under any of the agreements. The Company primarily
attributes the decrease in test center revenue to a conservative economic
atmosphere in the high technology testing industry, as well as an increase in
competition. The Company is also continuing to examine the strategic agreement
test center model, in which additional agreements may be entered into to
minimize both variable and fixed test center costs, while benefiting in a
revenue share. The Company has changed its strategic focus on the test center
line of business to maximize volume and utilization in the current operating
environment. These changes include operational consolidations, sales personnel
redeployment, and the expansion of domestic/international strategic agreements.
The Company feels confident that these changes will result in increased
revenues, expand the Company's customer network, and increase product awareness,
however the Company cannot give any assurances on the ultimate success.

GROSS MARGIN

         The gross margin for the year ended December 31, 2003 was 39.9%. This
compares to a gross margin of 43.4% for the year ended December 31, 2002. The
decrease in gross margin for the year ended 2003 is primarily due to competitive
pricing pressures, lower volume on our test center line of business, increased
equipment costs for Certification Europa (CE) licensing (which enables
manufactured products to be sold in Europe), and a decreased number of
used/refurbished chambers sold.

OPERATING EXPENSE

         Total operating expenses increased $40,000 or 1.1% from $3,672,000 in
the year ended December 31, 2002 to $3,712,000 for the year ended December 31,
2003.

         Selling, general and administrative expenses decreased $216,000 or 8.2%
from $2,619,000 for the year ended December 31, 2002 to $2,403,000 for the year
ended December 31, 2003. The primary decrease of selling, general, and
administrative expenses during 2003 is attributed to the Company's corporate
facility move in April 2003. The corporate facility move enabled the Company to
capitalize on a significantly lower lease rate in a new facility. A large
component of selling, general, and administrative expenses are sales and
marketing expenses, which increased 10.2% for the year ended December 31, 2003
as compared to the year ended December 31, 2002. The increase in sales and
marketing expenses is attributed to the Company's investment in the Company
through its sales and marketing programs, which is in line with the Company's
projected needs. QualMark continues to monitor and identify ways to reduce
operating expenditures. Currently, the Company's infrastructure and systems have
been set up and redesigned to prepare for an increase in sales demand with a
minimal increase in selling, general, and administrative costs.

         Research and development costs decreased $53,000 or 7.2% from $732,000
for the year ended December 31, 2002 to $679,000 for the year ended December 31,
2003. The decrease is primarily attributed to a reduction of research and
development staff. The Company continually strives to sustain its commitment to
product improvements and research and development. As a result, research and
development expenditures fluctuate from quarter to quarter, and may increase in
future quarters. During the first quarter 2003, the Company's research and
development department completed and overall "vibration core" product redesign.
The design changes will improve reliability, increase the ease of manufacturing,
and increase usability for our customers.

         Arbitration associated expenses increased $309,000 or 96.3% from
$321,000 for the year ended December 31, 2002 to $630,000 for the year ended
December 31, 2003. On November 17, 2003 the Company received the final
arbitration decision and the decision

                                       12
<PAGE>

on interest and fees on claims brought by Gregg K. Hobbs (refer to Note 12 Legal
Matters, of the Financial Statements). The arbitrator awarded damages totaling
$411,000, including interest and fees, in favor of Dr. Hobbs for the breach of
certain provisions of the September 30, 1995 separation agreement. For the year
ended December 31, 2003, costs of $411,000 related to and including the
arbitration damages, fees, and interest expense, and costs of $219,000 for
Company incurred legal fees and interest expense accruing subsequent to the
award date are included in the financial statements, for a total arbitration
associated expense of $630,000. Previously incurred arbitration related expenses
of $321,000 were accounted for in the twelve months end December 31, 2002.
Subsequently on February 13, 2004, the Company and Hobbs reached a settlement
agreement, in which among other things, Hobbs accepted payment according to a
schedule. The schedule called for one lump sum payment of $264,109 on February
17, 2004 and monthly payments of approximately $19,000 from March through
November of 2004

INTEREST EXPENSE

         Interest expense decreased $44,000 or 24.7% from $178,000 for the year
ended December 31, 2002 to $134,000 for the year ended December 31, 2003. The
decrease of $44,000 in expense was due to the pay down of the commercial bank
debt during the year of $690,000.

NET LOSS

         Net loss increased $348,000 from $343,000 for the year ended December
31, 2002 to $691,000 for the year ended December 31, 2003. The increase is
primarily attributed to the $630,000 of arbitration and legal related expenses
brought by Gregg K. Hobbs (refer to Note 12 Legal Matters, of the Financial
Statements).

NET LOSS PER SHARE

         Net loss per basic and diluted common share decreased $0.01 per share
from $0.32 per share for the year ended December 31, 2002 to $0.31 per share for
the year ended December 31, 2003. The decrease is explained primarily by the
increase in net loss of $348,000 for the year ended December 31, 2003, the
exchange of the Series A preferred stock for Series B preferred stock which
resulted in a beneficial conversion feature of $489,000 recorded in 2002, and
the related calculation of net loss per share, which includes accretion of
redeemable preferred stock, preferred stock dividends, and other beneficial
conversion features recorded on the Company's preferred stock (Refer to Note 1
of the Financial Statements).

LIQUIDITY AND CAPITAL RESOURCES

         During 2001, the Company experienced significant operating losses due
to the sudden and dramatic decrease in orders for its products, primarily
attributed to general economic uncertainty and significant reductions in the
orders for capital equipment and related products in technology-related
industries, such as those served by the Company. The Company took certain
actions in 2001 to address this, including cost reductions and changes to its
marketing and distribution strategy. Subsequently, on March 27, 2002, the
Company closed on a transaction whereby it received $1 million of proceeds from
the sale of preferred stock (refer to Note 8 of the Financial Statements).
During 2002 and continuing through 2003, the Company experienced a "leveling"
out of business, in which sales and demand remained steady for its capital
equipment products. This activity met the Company's internal projections for
capital equipment demand and financial performance for 2002 and 2003. If the
economic uncertainty continues during 2004, the Company will continue to take
action as appropriate to address this; including cost reduction and changes to
its marketing and distribution strategy, however, the Company cannot give any
assurance on the continued demand for its products and/or services. On February
27, 2004, the Company renegotiated its Credit Agreement with the commercial
bank. Among other changes, the monthly principal payments will decrease from
$60,000 to $50,000 on February 1, 2004, and then decrease to $30,000 from March
1, 2004 through September 30, 2004, with a final increase to $40,000 from
October 1, 2004 through maturity, which will fully satisfy the balance of the
term loan. The due date for this credit facility was extended to March 15, 2005.
Also, on February 13, 2004 the Company executed a definitive settlement
agreement with Dr. Hobbs regarding the existing arbitration award, in which the
Company will pay approximately $439,000 to Dr. Hobbs during 2004 (refer to Note
12 Legal Matters, of the Financial Statements). This payment will be made mostly
from the Company's cash on hand at year-end, and partially from expected cash
flow from 2004 operations.

         While there is no guarantee that the Company will be able to meet the
operational and financial requirements of its 2004 budget and limit the use of
cash and cash equivalents, the Company's operating plan and execution thereof is
focused on growing revenue, controlling costs and conserving cash. The Company
can not predict with certainty the expected revenues, gross profit margin, net
profit or loss and provision or usage of cash and cash equivalents for 2004.
However, the Company's management believes that the Company's cash and cash
equivalents and working capital, provide adequate capital resources to fund its
operations, 2004 debt and

                                       13
<PAGE>

legal repayments and working capital needs through at least the end of 2004, and
into the first quarter of 2005. The Company's inability to modify or replace its
debt when it comes due on March 15, 2005, or to obtain required capital when
needed could have a material adverse effect on its business, results of
operations and financial condition, and the Company could be required to reduce
its level of operations, delay product development or take other actions to
diminish the amount of cash used in its business. While there can be no
guarantee, the Company's management believes that it will be able to extend the
due date of its credit facility with the bank, or replace such facility with
other borrowings.

         During 2003, the Company generated $75,000 of cash from operating
activities, invested $239,000 for equipment, $3,000 for patents, received
$11,000 from the sale of equipment, borrowed and repaid $250,000 from Company
Directors, and repaid $690,000 of commercial bank borrowings. These activities
resulted in a cash decrease of $846,000, for a year-end balance of $442,000 at
December 31, 2003. During 2002, the Company generated $809,000 of cash from
operating activities (primarily due to sale of inventories), invested $273,000
for equipment and $90,000 for restricted cash for leasehold improvements, repaid
$625,000 of commercial bank borrowings, and issued 1,000 shares of preferred
stock for net proceeds of $967,000. These activities resulted in a cash increase
of $788,000, for a year-end balance of $1,288,000 at December 31, 2002.

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

         On January 23, 2003, the Company renegotiated its Credit Agreement with
the commercial bank. Among other changes, the principal amount of the revolving
line of credit was reduced to $500,000 and the principal amount of the term loan
was increased to $1,110,000, the monthly principal payments increased on July 1,
2003 from $55,000 to $65,000, and the maturity date was extended to March 15,
2004.

         On February 27, 2004, the Company renegotiated its Credit Agreement
with the commercial bank. Among other changes, the monthly principal payments
decreased from $60,000 to $50,000 on February 1, 2004, and then decrease to
$30,000 from March 1, 2004 through September 30, 2004, with a final increase to
$40,000 from October 1, 2004 through maturity, which will fully satisfy the
balance of the term loan. In addition, the maturity date was extended to March
15, 2005.

         The average interest rate for the twelve-month period ending December
31, 2003 for the term loan and revolving credit line was 7.13%. Both the
revolving credit line and term loan under the Credit Agreement are
collateralized by substantially all the assets of the Company. Borrowings under
the line of credit are subject to borrowing base limits. As of December 31,
2003, there was no additional availability on the line of credit.

         The Company must maintain certain financial and other covenants at the
end of each calendar quarter in order to draw amounts available under the line
of credit. As of December 31, 2003, the Company was in default of certain
financial covenants contained in the Credit Agreement. The Company has, however,
received a waiver from its lender regarding such noncompliance.

         As required by the renegotiated Credit Agreement, the Company will make
principal payments of $440,000 on the term loan during 2004. The Company had
also determined that, during 2004, quarterly payments to the revolving line of
credit would be made based on cash flows generated from operations. At the close
of each quarter, the Company has made arrangements to meet and review results of
the Company with the commercial bank and the Company believes its relations with
its commercial bank to be good. At the end of 2004, the Company expects to
negotiate with the commercial bank for an extension to the Credit Agreement,
although there can be no assurance that such renegotiations will be successful.

         The following represents future amounts payable at December 31, 2003
(in thousands).

<TABLE>
<CAPTION>
Year ended December 31,
<S>                           <C>
        2004                  $     440
        2005                        480
                              ---------
                              $     920
                              =========
</TABLE>

                                       14
<PAGE>

Contractual Obligations

         For more information on the Company's contractual obligations on
operating leases, refer to Note 6 of Financial Statements. At December 31, 2003,
the Company's commitments under these obligations were as follows (in
thousands):

<TABLE>
<CAPTION>
                                  OPERATING
Year ended December 31,            LEASES
-----------------------            ------
<S>                               <C>
          2004                    $    304
          2005                         283
          2006                         227
          2007                         174
          2008                         175
          2009-2010                    261
                                  --------
                                  $  1,424
                                  ========
</TABLE>

Recently Issued Accounting Pronouncements

         Refer to Note 1 of the Financial Statements.

Critical Accounting Policies and Estimates

         The Company's discussion and analysis of its financial condition and
results of operations are based upon its financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to bad debts, inventories, long-lived assets,
income taxes, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

         The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
financial statements.

         The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
Customer account balances with invoices dated over 90 days are considered
delinquent. The Company maintains reserves for potential credit losses based
upon its loss history and its aging analysis. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Such losses have been within management's expectations. If the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

         The Company provides for the estimated cost of product warranties at
the time revenue is recognized. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating the
quality of its component suppliers, the Company's warranty obligation is based
upon historical experience and is also affected by product failure rates and
material usage incurred in correcting a product failure. Should actual product
failure rates or material usage costs differ from the Company's estimates,
revisions to the estimated warranty liability would be required (Refer to Note 5
of the Financial Statements).

         The Company reduces inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required (Refer to Note 2
of the Financial Statements).

         The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its net

                                       15
<PAGE>

deferred tax asset in the future, an adjustment to the deferred tax asset could
be charged to income in the period such determination was made. At December 31,
2003, all deferred tax assets are fully reserved for. (Refer to Note 7 of the
Financial Statements).

Government Regulation

         Periodically, the Company receives inquiries from regulatory agencies
regarding its compliance with laws and regulations. To its knowledge, the
Company believes it complies with all international, federal, state and local
regulations, including environmental regulations. However, there is no assurance
that the Company will continue to remain in compliance with all such
regulations.

Legal Proceedings

         Refer to Note 12, Legal Matters of the Financial Statements.

Business Environment

         If we are unable to compete effectively, our business would be harmed.
Our products compete on the basis of the following key characteristics:

         Performance
         Functionality
         Reliability
         Pricing
         Quality
         Time-to-market delivery
         Compliance with industry standards

         If we fail to address our competitive challenges, there could be a
material adverse effect on our business, financial conditions and results of
operations.

         The prevalent conservative economic business environment has
unfavorably effected both the equipment and ARTC (test center) lines of
business. Because of the economic trends, a surplus of used OVS equipment has
become available on the domestic equipment market, thus limiting the demand for
new OVS equipment and lowering the barrier to entry into the test center market.
The Company believes its polices to actively purchase, refurbish and sell the
surplus of used QualMark OVS equipment from the domestic equipment market, and
enter into revenue share test center partnerships will assist in providing a
competitive edge. However, the inability to favorably purchase and resell a
majority of used QualMark OVS equipment from the domestic market or successfully
compete in the changing test center market could result in a decrease in demand
for its new OVS equipment, an excess of inventory held, and a continual loss of
test center market share. These situations could have a material adverse effect
on our business, financial conditions and results of operations.

         We have experienced, and may continue to experience, fluctuations in
sales and operating results from quarter to quarter. Our quarterly results
fluctuate due to a number of factors, including: variations in the timing,
cancellation, or rescheduling of customer orders and shipments; variations in
manufacturing costs, capacities and efficiencies; capacity and production
constraints, including constraints associated with single-source part suppliers;
product failures; competitive factors, including pricing, availability and
demand for competing products; cancellations or reductions of customer orders
and shipments due to economic slowdowns in the customers' operating regions;
cancellations or rescheduling of customer orders and shipments due to changes in
demand; warranty expenses; the availability and cost of parts; the timing,
availability and sale of new products by us or our competitors; changes in the
mix of products having differing gross margins; changes in average sales prices;
long sales cycles associated with our products; variations in product
development and other operating expenses; discounts given to certain customers
for large volume purchases; and high fixed expenses that increase operating
expenses, especially during a quarter with test center sales shortfalls. Our
sales to customers are usually made under purchase orders with short delivery
requirements. Order deferrals and cancellations by our customers, declining
average sales prices, changes in the mix of products sold, delays in the
introduction of new products and longer than anticipated sales cycles for our
products have, in the past, adversely affected our quarterly results of
operations. We cannot guarantee that our quarterly results of operations will
not be similarly adversely affected in the future.

                                       16
<PAGE>

Suppliers

         A limited number of critical parts used in our products are available
from only one or a limited number of outside suppliers due to unique part
designs as well as certain quality and performance requirements. Because of the
nature of our business we are not able to purchase with any significant volume
for individual parts or volume discounts. We have experienced, and may continue
to experience, shortages of single-sourced parts. Shortages could compel us to
adjust our product designs and production schedules. If single-sourced parts
become unavailable in sufficient quantities, are discontinued or are available
only on unsatisfactory terms, we would be required to purchase comparable parts
from other sources and "retune" our products to function with the replacement
parts, or we may be required to redesign our products to use other parts, either
of which could delay production and delivery of our products. In addition, our
reliance on certain single-sourced parts exposes us to quality control issues if
such suppliers experience a failure in their production process. A failure in a
single-sourced part could force us to repair or replace a product utilizing
replacement parts. Such a requirement could have a material adverse effect on
our business, results of operations and financial condition. In addition, if we
cannot obtain comparable replacements or effectively retune or redesign our
products, there could be a material adverse effect on our business, results of
operations and financial condition.

International Operations

         There are many risks associated with international operations,
including the following: compliance with multiple and potentially conflicting
regulations, including export requirements, tariffs, import duties and other
barriers, as well as health and safety requirements; differences in intellectual
property protections; longer accounts receivable collection cycles; currency
fluctuations; terrorists attacks on American companies; economic instability,
including inflation and interest rate fluctuations; competition from foreign
competitors; and political or civil turmoil. The results of these factors may
have a material adverse effect on our business, financial condition and results
of operations.

Intellectual Property

         We rely upon trade secrets and patents to protect our intellectual
property. We execute confidentiality and non-disclosure agreements with our
employees and suppliers and limit access to and distribution of our proprietary
information. We have a program to identify and file applications for both U.S.
and international patents for various aspects of our technology. All of these
efforts, along with the knowledge and experience of our management and technical
personnel, strengthen our ability to market our existing products and to develop
new products. The departure of any of our management and technical personnel,
the breach of their confidentiality and non-disclosure obligations to us, or the
failure to achieve our intellectual property objectives may have a material
adverse effect on our business, financial condition and results of operations.
We do not have non-compete agreements with our employees who are employed on an
"at-will" basis. Therefore, employees may leave us and go to work for a
competitor. While we believe that we have adequately protected our proprietary
technology, and we believe that we have taken all legal measures to protect it,
we may not be successful in prohibiting the unauthorized use of our proprietary
technology or the use of our processes by a competitor. Any such unauthorized
use of our proprietary technology could have a material adverse effect on our
business, financial condition and results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's exposure to interest rate changes are primarily related
to its variable rate debt issued under its $920,000 Credit Agreement (Refer to
Note 5 of the Financial Statements). Because the interest rates on these
facilities are variable, based upon the bank's prime rate, the Company's
interest expense and net income are affected by interest rate fluctuations. If
interest rates were to increase or decrease by 100 basis points, the result,
based upon the existing outstanding debt as of December 31, 2003 would be an
annual increase or decrease of approximately $9,200 in interest expense for a
twelve-month period.

                                       17
<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

         Index to Financial Statements:

<TABLE>
<CAPTION>
                                                                    PAGE NUMBER
                                                                    -----------
<S>                                                                 <C>
Independent Auditors' Report                                           F-1
Statements of Operations                                               F-2
Balance Sheets                                                         F-3
Statements of Shareholders' Equity                                     F-4
Statements 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.

         On July 9, 2002, the Company dismissed Arthur Andersen LLP and engaged
Gelfond Hochstadt Pangburn, P.C. to serve as its new independent accountants.
The Company's audit committee and Board of Directors approved the decision to
change independent accountants. The report of Arthur Andersen LLP on the
financial statements for the year ended December 31, 2001 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle. There were no disagreements
with Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of Arthur Andersen LLP would have caused them to
make reference thereto in their report.

ITEM 8A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures:

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

(b) Changes in Internal Controls:

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

                                       18
<PAGE>

                                    PART III

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

Section 16(a) Beneficial Ownership Reporting Compliance

         During 2003 the Company had the following individuals who failed to
file or file on a timely basis reports required by section 16(a) of the Exchange
Act:

                  Joseph Ruth, (prior) Vice President of Sales and Marketing-

                  Mr. Ruth had one late Form 4 report (July 10, 2003-Form 4)
                  filed with one transaction (2,000 shares of common stock sold
                  at $1.01) not reported on a timely basis during 2003.

Audit Committee Matters

         Our Board of Directors has a separately-designated standing Audit
Committee established in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, (the Exchange Act). The Audit Committee is
comprised of the following directors: Robert Gill, William Sanko and Alan
Valenti. Our Board of Directors has determined that for year ended December 31,
2003, Robert Gill, Chair of the Audit Committee, was an audit committee
financial expert as defined by Item 401(e) of Regulation S-B of the Exchange Act
and is independent, as that term is used in Item 7(d)(e)(iv) of Schedule 14A
under the Exchange Act. Subsequently on December 31, 2003, Mr. Gill resigned his
position as Director to retire from service (refer to ITEM 13, Exhibits and
Reports on Form 8-K). Currently, the Company does not have an independent
financial expert, however, the Company's Board of Directors is in the process of
examining its options on appointing an independent audit committee financial
expert.

Code of Ethics

         We have adopted a code of business ethics and conduct, and a policy
providing for the reporting of potential violations of the code, for directors,
officers (including our principal executive officer, principal financial officer
and controller) and employees (the "Code of Ethics"). The Code of Ethics is
attached as Exhibit 14 to this Form 10-KSB report.

         Stockholders may also request a free copy of the Code of Ethics from:

QualMark Corporation
Attn: Investor Relations
4580 Florence Street
Denver, CO  80238

         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.

                                       19
<PAGE>

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, 2003.

                  On October 21, 2003, QualMark Corporation issued a press
                  release announcing its earnings for the third quarter ended
                  September 30, 2003. The Company also held a conference call on
                  October 21, 2003 at 11:00am EST to discuss the October 21,
                  2003 press release.

                  On December 31, 2003, Mr. Robert Gill, a member of the
                  Registrant's Board of Directors, resigned his position as
                  Director. Mr. Gill has served the Company for many years and
                  is retiring from service.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         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.

                                       20
<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, 2004                    QUALMARK CORPORATION

                                         By: /s/ CHARLES D. JOHNSTON
                                             -----------------------------------
                                             Charles D. Johnston, 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/Charles D. Johnston           President, Chief Executive Officer        March 26, 2004
------------------------------
       Charles D. Johnston           and Director

    /s/Anthony A. Scalese            Chief Financial Officer                   March 26, 2004
------------------------------
       Anthony A. Scalese            and Principal Accounting Officer

    /s/James L.D. Roser              Director                                  March 26, 2004
------------------------------
       James L.D. Roser

    /s/William J. Sanko              Director                                  March 26, 2004
------------------------------
       William J. Sanko

    /s/Alan T. Valenti               Director                                  March 26, 2004
------------------------------
       Alan T. Valenti
</TABLE>

                                       21
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Board of Directors
QualMark Corporation
Denver, Colorado

We have audited the accompanying balance sheets of QualMark Corporation (the
"Company") as of December 31, 2003 and 2002, and the related statements of
operations, shareholders' (deficit) equity and cash flows for each of the years
in the two-year period ended December 31, 2003. 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 in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of QualMark Corporation as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.

/s/ GELFOND HOCHSTADT PANGBURN, P.C.

Denver, Colorado
February 27, 2004

                                      F-1
<PAGE>

QUALMARK CORPORATION

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                                 ------------------------
                                                                  2003            2002
                                                                  ----            ----
<S>                                                             <C>             <C>
Revenues                                                        $  7,895        $  8,067
Cost of revenues                                                   4,748           4,562
                                                                --------        --------
        Gross profit                                               3,147           3,505
                                                                --------        --------

Selling, general and administrative expenses                       2,403           2,619
Arbitration associated expenses                                      630             321
Research and development expenses                                    679             732
                                                                --------        --------

        Total operating expenses                                   3,712           3,672
                                                                --------        --------

        Loss from operations                                        (565)           (167)
                                                                ---------       ---------

Other income (expense):
   Interest expense                                                 (134)           (178)
   Interest income                                                     5               5
   Other income, net                                                   3              (3)
                                                                --------        --------

Net loss                                                        $   (691)       $   (343)
                                                                ========        ========

Net loss per basic and diluted common share (Note 1)            $  (0.31)       $  (0.32)
                                                                ========        ========

Weighted average shares outstanding                                3,610           3,610
                                                                ========        ========
</TABLE>

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

                                      F-2
<PAGE>

QUALMARK CORPORATION

BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                             -----------------------------
                                                                                2003               2002
                                                                             ----------         ----------
<S>                                                                          <C>                <C>
ASSETS

Current assets:
   Cash and cash equivalents                                                 $      442         $    1,288
   Trade accounts and note receivable, net of allowance for doubtful
    accounts of $28 and $52, respectively                                         2,119              1,468
   Inventories, net                                                                 379                612
   Other current assets                                                              35                 27
                                                                             ----------         ----------
        Total current assets                                                      2,975              3,395
Property and equipment, net                                                         622                710
Restricted cash                                                                      90                 90
Other assets                                                                         94                 70
                                                                             ----------         ----------
                                                                             $    3,781         $    4,265
                                                                             ==========         ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
   Accounts payable                                                          $      858         $      487
   Accrued expenses                                                                 450                339
   Accrued arbitration settlement                                                   426                 --
   Deferred revenue                                                                  --                 40
   Current portion of long-term debt                                                440                720
                                                                             ----------         ----------
        Total current liabilities                                                 2,174              1,586
   Long-term debt                                                                   480                890
                                                                             ----------         ----------
        Total liabilities                                                         2,654              2,476
                                                                             ----------         ----------

Commitments and contingencies

Convertible redeemable preferred stock; 2,000,000 shares
   authorized (Note 8):
   692,951 designated as Series B, 631,549 shares (2003) and 606,868 (2002)
   shares issued and outstanding, liquidation preference of $1,468 (2003)         1,369              1,243

   2,000 designated as Series C, 1,106 shares (2003) and 1,062 shares
   (2002)  issued and outstanding, liquidation preference of $1,151 (2003)          503                215

Shareholders' (deficit) equity:
   Common stock; no par value; 15,000,000 shares authorized;
   3,610,092 shares issued and outstanding                                        7,444              7,829
   Accumulated deficit                                                           (8,189)            (7,498)
                                                                             ----------         ----------
               Total shareholders' (deficit) equity                                (745)               331
                                                                             ----------         ----------
                                                                             $    3,781         $    4,265
                                                                             ==========         ==========
</TABLE>

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

                                      F-3
<PAGE>

QUALMARK CORPORATION

STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDING DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)

<TABLE>
<CAPTION>
                                             COMMON STOCK              TREASURY STOCK
                                             ------------              --------------        ACCUMULATED
                                          SHARES        AMOUNT       SHARES       AMOUNT       DEFICIT        TOTAL
                                          ------        ------       ------       ------       -------        -----
<S>                                      <C>           <C>           <C>         <C>          <C>           <C>
Balance January 1, 2002                  3,645,638     $ 7,303       35,546      $  (123)     $(7,155)      $    25
Compensation related to issuance of
 options for services                           --          15           --           --           --            15
Accretion of redeemable preferred stock         --        (170)          --           --           --          (170)
Preferred stock dividends                       --        (163)          --           --           --          (163)
Beneficial conversion feature on
 issuance of redeemable preferred stock         --         741           --           --           --           741
Warrants issued in connection with
 redeemable preferred stock                     --         259           --           --           --           259
Offering costs in connection with
 redeemable preferred stock                     --         (33)          --           --           --           (33)
Retirement of treasury stock               (35,546)       (123)     (35,546)         123           --            --
Net loss                                        --          --           --           --         (343)         (343)
                                         ---------     -------      -------      -------      -------       -------
Balance December 31, 2002                3,610,092       7,829           --           --       (7,498)          331
Compensation related to issuance of
 options for services                           --          11           --           --           --            11
Warrants issued in connection with
 bank financing                                 --          18           --           --           --            18
Preferred stock dividends                       --        (197)          --           --           --          (197)
Accretion of redeemable preferred stock         --        (217)          --           --           --          (217)
Net loss                                        --          --           --           --         (691)         (691)
                                         ---------     -------      -------      -------      -------       -------
Balance December 31, 2003                3,610,092     $ 7,444           --      $    --      $(8,189)      $  (745)
                                         =========     =======      =======      =======      =======       =======
</TABLE>

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

                                      F-4
<PAGE>

QUALMARK CORPORATION

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                                      ------------------------
                                                                       2003            2002
                                                                       ----            ----
<S>                                                                  <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                             $   (691)       $   (343)

Adjustments to reconcile net loss to net cash provided
 by operating activities:
   (Decrease) increase in provision for inventory reserve                 (12)              9
   (Recovery) provision for bad debts                                     (24)              6
   (Gain) loss on disposal of equipment                                    (4)              3
   Depreciation and amortization                                          343             420
   Warrant and stock option expense                                        23              15
Changes in assets and liabilities:
      Trade accounts and note receivable                                 (627)            (68)
      Inventories                                                         246             852
      Other assets                                                        (47)              3
      Accounts payable                                                    371            (222)
      Accrued expenses                                                    111              94
      Accrued arbitration settlement                                      426              --
      Deferred revenue                                                    (40)             40
                                                                     --------        --------
        Net cash provided by operating activities                          75             809
                                                                     --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment                                    (239)           (273)
Restricted cash - leasehold improvements                                   --             (90)
Sale of property and equipment                                             11              --
Investment in patents                                                      (3)             --
                                                                     --------        --------
        Net cash used in investing activities                            (231)           (363)
                                                                     --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings                                                  250              --
Repayments of borrowings                                                 (940)           (625)
Proceeds from issuance of preferred stock and warrants, net                --             967
                                                                     --------        --------
        Net cash (used in) provided by financing activities              (690)            342
                                                                     --------        --------
Net (decrease) increase in cash and cash equivalents                     (846)            788
Cash and cash equivalents at beginning of year                          1,288             500
                                                                     --------        --------
Cash and cash equivalents at end of year                             $    442        $  1,288
                                                                     ========        ========

SUPPLEMENTAL DISCLOSURE
Interest paid                                                        $    130        $    178
                                                                     ========        ========

NON-CASH INVESTING AND FINANCING ACTIVITIES
Transfer of equipment to inventory held for resale                   $      1        $     15
                                                                     ========        ========
Deemed preferred stock dividend resulting from conversion
   of Series A preferred shares to Series B preferred shares         $     --        $    489
                                                                     ========        ========
Preferred stock dividends                                            $    197        $    163
                                                                     ========        ========
Accretion of redeemable preferred stock                              $    217        $    170
                                                                     ========        ========
</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 ("QualMark" or "the Company") designs,
         manufactures, and markets proprietary equipment 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 equipment supports 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 equipment allows 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 equipment is 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 equipment
         performed either in the ARTC test centers or at the customer's site.

                  QualMark currently operates four test centers located in the
         metropolitan areas of Denver, Colorado, Huntington Beach, California,
         Santa Clara, California, and Boston, Massachusetts. The Company also
         utilizes domestic strategic alliances with large testing companies in
         Detroit, Michigan, Bellevue, Washington, and Huntsville, Alabama. In
         addition, the Company has established strategic alliances with Maser
         Engineering, IMQ Instituto del marchia di Qualita, Institutet For
         Verkstadsteknisk Forskning/The Swedish Institute of Production
         Engineering, and Alphatech Ltd., to operate testing centers in
         Enschede, the Netherlands, Milan, Italy, Molndal, Sweden, and
         Haverhill, England. 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.

         LIQUIDITY

                  During 2001, the Company experienced significant operating
         losses due to the sudden and dramatic decrease in orders for its
         products, primarily attributed to general economic uncertainty and
         significant reductions in the orders for capital equipment and related
         products in technology-related industries, such as those served by the
         Company. The Company took certain actions in 2001 to address this,
         including cost reductions and changes to its marketing and distribution
         strategy. Subsequently, on March 27, 2002, the Company closed on a
         transaction whereby it received $1 million of proceeds from the sale of
         preferred stock (refer to Note 8 of the Financial Statements). During
         2002 and continuing through 2003, the Company experienced a "leveling"
         out of business, in which sales and demand remained steady for its
         capital equipment products. This activity met the Company's internal
         projections for capital equipment demand and financial performance for
         2002 and 2003. If the economic uncertainty continues during 2004, the
         Company will continue to take action to address this; including cost
         reduction and changes to its marketing and distribution strategy,
         however, the Company cannot give any assurance on the continued demand
         for its products and/or services.

                  While there is no guarantee that the Company will be able to
         meet the operational and financial requirements of its 2004 budget and
         limit the use of cash and cash equivalents, the Company's operating
         plan and execution thereof is focused on growing revenue, controlling
         costs and conserving cash. The Company can not predict with certainty
         the expected revenues, gross profit margin, net loss and usage of cash
         and cash equivalents for 2004. However, the Company's management
         believes that the Company's cash and cash equivalents and working
         capital, provide adequate capital resources to fund its operations,
         2004 debt

                                      F-6
<PAGE>

         repayments and working capital needs through at least the end of 2004,
         and into the first quarter of 2005. The Company's inability to modify
         or replace its debt when it comes due on March 15, 2005, or to obtain
         required capital when needed could have a material adverse effect on
         its business, results of operations and financial condition, and the
         Company could be required to reduce its level of operations, delay
         product development or take other actions to diminish the amount of
         cash used in its business. While there can be no guarantee, the
         Company's management believes that it will be able to extend the due
         date of its credit facility with the bank, or replace such facility
         with other borrowings.

         CASH AND CASH EQUIVALENTS

                  Cash on hand and in banks, together with 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 that 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.
         Customer account balances with invoices dated over 90 days are
         considered delinquent. The Company maintains reserves for potential
         credit losses based upon its loss history and its aging analysis. After
         all attempts to collect a receivable have failed, the receivable is
         written off against the allowance. Such losses have been within
         management's expectations. The Company is not exposed to a
         concentration of credit risk as it relates to specific industries, as
         its customers are not heavily concentrated in any specific industry.
         During 2003 and 2002, one customer comprised approximately 12% and 15%
         of the Company's revenue, respectively. The revenue was all recorded in
         the Company's equipment sales segment. The Company was not dependent on
         any single industry segment for its revenues.

         INVENTORIES

                  Inventories are stated at the lower of cost or market with
         cost being determined using the first-in, first-out method. The cost of
         inventories includes materials, direct labor and manufacturing
         overheads.

         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
         asset's useful life or the lease term and is included in depreciation
         expense. Maintenance and repairs are expensed as incurred and
         improvements are capitalized. Upon sale or retirement of assets, the
         cost and related accumulated depreciation or amortization are
         eliminated from the respective accounts and any resulting gains or
         losses are reflected in operations.

         LONG-LIVED ASSETS

                  The Company reviews its long-lived assets for impairment
         whenever events or changes in circumstances indicate that the carrying
         amount of an asset may not be recoverable. Recoverability of long-lived
         assets is measured by comparison of their carrying amounts to future
         net cash flows expected to be generated from the operation and sale of
         the long-lived assets. If such assets are considered to be impaired,
         the impairment to be recognized is measured by the amount in which the
         carrying amount of the long-lived assets exceeds their fair values. At
         December 31, 2003 and 2002, management believes that no impairment has
         occurred.

         PATENTS

                  Included in other assets are costs related to patents, which
         are capitalized and amortized over their estimated useful life of five
         years, using the straight-line method. Amortization cost for 2003 and
         2002 was not significant.

         REVENUE RECOGNITION

                  Revenues from product sales are recognized when persuasive
         evidence of an arrangement exists, delivery has occurred, the sales
         price is fixed or determinable and collectibility is probable.
         Generally, the criteria are met upon shipment of products on an F.O.B
         shipping point basis and transfer of title to customers. In certain
         instances, the Company will recognize revenue prior to

                                      F-7
<PAGE>

         shipment when the customer requests in writing that the transaction be
         on a bill and hold basis, the risk of ownership has passed to the
         customer, the manufactured equipment is segregated, complete and ready
         for shipment, and there is a fixed schedule for delivery of the
         equipment and no specific performance obligations exist. Revenue from
         services is recognized when the services are performed and billable.
         Revenue from equipment service contracts is recognized ratably over the
         term of the contract.

         RESEARCH AND DEVELOPMENT

         The Company expenses costs for research and development as incurred.

         ADVERTISING EXPENSE

                  The Company charges advertising, including production costs,
         to expense on the first date of the advertising period. Advertising
         expense for 2003 and 2002 was not significant.

         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

                  The current provision for income taxes represents actual or
         estimated amounts payable on tax return filings each year. Deferred tax
         assets and liabilities are recorded for the estimated future tax
         effects of temporary differences between the tax basis of assets and
         liabilities and amounts reported in the accompanying balance sheets,
         and for operating loss and tax credit carry forwards. The change in
         deferred tax assets and liabilities for the period measures the
         deferred tax provision or benefit for the period. Effects of changes in
         enacted tax laws on deferred tax assets and liabilities are reflected
         as adjustments to the tax provision or benefit in the period of
         enactment. The Company's deferred tax assets have been reduced to zero
         by a valuation allowance because management does not believe
         realization of the deferred tax assets is sufficiently assured at the
         balance sheet date.

         PRODUCT WARRANTIES

                  Provision for anticipated warranty costs is recorded at the
         time the sale is recognized. The provision is based on historical
         warranty experience. In 2003 and 2002, the Company offered a one-year
         parts and limited labor warranty on all new chambers, and sells an
         equipment service contract for an additional one-year extended service
         warranty (Note 6).

         FINANCIAL INSTRUMENTS

                  The carrying amounts of cash and cash equivalents, trade
         accounts and notes receivable, accounts payable, and customer deposits
         approximate their fair values. The carrying amount of long-term debt
         approximates its fair value due to variable rates.

                  The fair value of a letter of credit issued in conjunction
         with the new lease agreement (Note 6) approximates the fees paid to
         obtain it.

         EARNINGS (LOSS) PER SHARE

                  Statement of Financial Accounting Standards ("SFAS") No. 128,
         Earnings Per Share, requires dual presentation of basic and diluted
         earnings or loss per share ("EPS") with a reconciliation of the
         numerator and denominator of the basic EPS computation to the numerator
         and denominator of the diluted EPS computation. Basic EPS excludes
         dilution. Diluted EPS reflects the potential dilution that could occur
         if securities or other contracts to issue common stock were exercised
         or converted into common stock or resulted in the issuance of common
         stock that then shared in the earnings of the entity.

                  Earnings (loss) per basic share of common stock is based on
         the weighted average number of shares of common stock outstanding
         during each respective period. Using the treasury-stock method,
         earnings (loss) per diluted share of common stock adds to basic
         weighted shares the weighted average number of shares issuable under
         convertible securities stock options and warrants outstanding during
         each respective period, using the treasury-stock method. In a period in
         which a loss is incurred, only

                                      F-8
<PAGE>

         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, and therefore, basic and diluted earnings per
         share are the same.

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                           ---------------------------
                                                              2003            2002
                                                           -----------     -----------
<S>                                                        <C>             <C>
Net loss                                                   $     (691)     $     (343)
Accretion of redeemable preferred stock
   beneficial conversion features                                (165)           (132)
Preferred stock dividends                                        (197)           (163)
Accretion of Series C warrants                                    (52)            (38)
Deemed preferred stock dividend resulting from
   conversion of Series A preferred shares to Series
   B preferred shares                                              --            (489)
                                                           ----------      ----------
Net loss applicable to common shareholders                     (1,105)         (1,165)
                                                           ==========      ==========
Weighted  average  shares  outstanding - basic                  3,610           3,610
                                                           ==========      ==========
Net loss per share - basic                                 $    (0.31)     $   (0.32)
                                                           ==========      ==========
Weighted  average  shares  outstanding - basic                  3,610           3,610
Dilutive stock options and warrants                                --              --
                                                           ----------      ----------
Weighted  average  shares  outstanding - diluted                3,610           3,610
                                                           ==========      ==========
Net loss per share  - diluted                              $    (0.31)     $    (0.32)
                                                           ==========      ==========
</TABLE>

         Options and warrants to purchase 1,851,063 and 1,878,063 shares of
common stock and 658,387 (3,453,173 if converted to common shares, refer to Note
8) and 607,929 (3,188,526 if converted to common shares, refer to Note 8)
preferred shares were excluded from dilutive stock option calculations for the
year ended December 31, 2003 and 2002, respectively, as their inclusion would be
antidilutive.

USE OF ESTIMATES

         The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States 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.

SHIPPING AND HANDLING FEES AND COSTS

         The Company records shipping and handling fees billed to customers as
revenue, and shipping and handling costs incurred as cost of sales.

COMPREHENSIVE INCOME

         For the years ended December 31, 2003 and 2002, comprehensive loss
equaled net loss.

STOCK-BASED COMPENSATION

         SFAS No. 123, Accounting for Stock- Based Compensation, allows
companies to choose whether to account for employee stock-based compensation on
a fair value method, or to continue accounting for such compensation under the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company has chosen to
continue to account for employee stock-based compensation using APB 25.
Accordingly, no compensation expense has been recognized for options granted at
fair market value. Had compensation cost for the Company's stock option plans
been determined based on the fair values at the grant dates for awards under the
plans consistent with the fair-value based method of accounting prescribed by
Statement of Financial Accounting Standard No. 123, the Company's results would
have been changed to the pro forma amounts indicated below (in thousands):

                                      F-9
<PAGE>

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                                ------------------------
                                                                 2003             2002
                                                                 ----             ----
<S>                                                             <C>             <C>
Net loss                                                        $(1,105)        $(1,165)
ADD:  Stock-based employee compensation expense
included in reported net loss, net of related tax effects            --              --
DEDUCT: Total stock-based employee compensation
expense determined under fair value based method for
all awards, including awards issued in prior periods which
vested in the current periods, net of related tax effects          (465)           (513)
                                                                -------         -------
Pro forma net income (loss)                                     $(1,570)        $(1,678)
                                                                =======         =======
Loss  per share:

Basic and diluted - as reported                                 $ (0.31)        $ (0.32)
                                                                =======         =======

Basic and diluted - pro forma                                   $ (0.44)        $ (0.46)
                                                                =======         =======
</TABLE>

         The fair value of options granted in 2003 and 2002 were $57,000 and
$139,000 respectively. The fair value of each option and 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, 2003 and 2002: dividend yield of zero; expected volatility ranging
from 106% to 139% ; risk-free interest rates ranging from 2.5% to 5.21%; and an
expected term of three to ten years.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In May 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. SFAS No. 150 establishes new standards on how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The provisions of SFAS No. 150
are generally effective for all financial instruments entered into or modified
after May 31, 2003, except for those provisions relating to mandatorily
redeemable non-controlling interests, which have been deferred. The adoption of
SFAS No. 150 did not have a material impact on the financial position or results
operation of the Company. If the deferred provisions of SFAS No. 150 are
finalized in their current form, management does not expect adoption to have a
material effect on the financial position or results of operation of the
Company.

         In January 2003, the FASB issued SFAS Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"), which changes the
criteria by which one company includes another entity in its consolidated
financial statements. FIN 46 requires a variable interest entity ("VIE") to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. In December 2003, the FASB
approved a partial deferral of FIN 46 along with various other amendments. The
effective date for this interpretation has been extended until the first fiscal
period ending after December 15, 2004. However, prior to the required
application of this interpretation, a public entity that is a small business
issuer shall apply this interpretation to those entities that are considered to
be special purpose entities no later than as of the end of the first reporting
period after December 15, 2003. As the Company does not currently have an
interest in a VIE or special purpose entity, management does not expect that the
adoption of FIN 46 will have a material effect on the financial condition or
results of operations of the Company.

         In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure. This statement amends SFAS
No. 123, Accounting for Stock-Based Compensation, and establishes two
alternative methods of transition from the intrinsic value method to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 requires prominent disclosure about the effects on reported net
income (loss) and requires disclosure for these effects in interim financial
information. The provisions for the alternative transition methods are effective
for fiscal years ending after December 15, 2002, and the amended disclosure
requirements are effective for interim periods beginning after December 15,
2002. The Company adopted the disclosure only provisions of SFAS No. 148 in 2003
and plans to continue accounting for stock-based compensation under APB 25.

                                      F-10
<PAGE>

         In November 2002, the FASB issued SFAS Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others. FIN 45 elaborates on
the disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, while the provisions of the disclosure
requirements are effective for financial statements of interim or annual reports
ending after December 15, 2002. The Company adopted the disclosure only
provisions of FIN 45 in 2003 for product warranty costs. The adoption of FIN 45
did not have a significant immediate impact on the financial condition or
results of operations of the Company, as the Company currently has made no
guarantees.

2. INVENTORIES

         Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                         DECEMBER 31,
                                      -----------------
                                       2003       2002
                                      ------     ------
<S>                                   <C>        <C>
Raw materials                         $  375     $  501
Work in process                           13        107
Finished goods                            38         63
Less: Allowance for obsolescence         (47)       (59)
                                      ------     ------
                                      $  379     $  612
                                      ======     ======
</TABLE>

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

3. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                      -------------------------
                                                         2003           2002
                                                      ----------     ----------
<S>                                                   <C>            <C>
Machinery and equipment                               $    2,139     $    2,633
Furniture and fixtures                                       141            194
Leasehold improvements                                       375            542
Software                                                     259            265
                                                      ----------     ----------
                                                           2,914          3,634
Less: Accumulated depreciation and amortization           (2,292)        (2,924)
                                                      ----------     ----------
                                                      $      622     $      710
                                                      ==========     ==========
</TABLE>

         Depreciation expense was approximately $320,000 and $390,000 for the
years ended December 31, 2003 and 2002, respectively.

4. ACCRUED EXPENSES

         Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                  DECEMBER 31,
                              -------------------
                               2003         2002
                              ------       ------
<S>                           <C>          <C>
Accrued warranty              $  123       $   96
Accrued employee related         238          122
Accrued bonus                     --           55
Other                             93           66
                              ------       ------
                              $  454       $  339
                              ======       ======
</TABLE>

5. INDEBTEDNESS

         The Company's commercial bank borrowings consist of a term loan and a
revolving line of credit (the "Credit Agreement").

         During 2002, there were various renegotiations of the Credit Agreement.
Among other changes, the interest rate was increased to Prime Rate plus 3.0%,
with required monthly payments of $55,000, and the maturity date was extended to
March 15, 2003. On

                                      F-11
<PAGE>

January 23, 2003, the Company renegotiated its Credit Agreement with the
commercial bank. Among other changes, the principal amount of the revolving line
of credit was reduced to $500,000 and the principal amount of the term loan was
increased to $1,110,000, the monthly principal payments increased on July 1,
2003 from $55,000 to $65,000, and the maturity date was extended to March 15,
2004. On July 25, 2003, the Company renegotiated its Credit Agreement with the
commercial bank. Among other changes, the monthly principal payments decreased
from $65,000 to $60,000 beginning July 31, 2003.

         On February 27, 2004, the Company renegotiated its Credit Agreement
with the commercial bank. Among other changes, the monthly principal payments
decreased from $60,000 to $50,000 for February 2004, and then decrease to
$30,000 from March 2004 through September 2004, with a final increase to $40,000
from October 2004 through maturity, which will fully satisfy the balance of the
term loan. In addition, the maturity date was extended to March 15, 2005.

         The average interest rate for the term loan and revolving credit line
for the twelve-month periods ending December 31, 2003 and 2002 was 7.13% and
7.5%, respectively. Both the revolving credit line and term loan under the
Credit Agreement are collateralized by substantially all the assets of the
Company. Borrowings under the line of credit are subject to borrowing base
limits. Based on the provisions of the Credit Agreement as of December 31, 2003,
there was no additional availability on the line of credit.

         As of December 31, 2003, the balances of the revolving credit and term
loan are $500,000 and $420,000, respectively.

         The Company must maintain certain financial and other covenants at the
end of each calendar quarter in order to draw amounts available under the
revolving line of credit. As of December 31, 2003, the Company was in default of
certain financial covenants contained in the Credit Agreement. The Company has,
however, received a waiver from its lender regarding such noncompliance.

         As required by the renegotiated Credit Agreement, the Company will make
principal payments of $440,000 on the term loan during 2004. The Company had
also determined that, during 2004, quarterly payments to the revolving line of
credit would be made based on cash flows generated from operations. At the close
of each quarter, the Company has made arrangements to meet and review results of
the Company with the commercial bank and the Company believes its relations with
its commercial bank to be good. At the end of 2004, the Company expects to
negotiate with the commercial bank for an extension to the Credit Agreement,
although there can be no assurance that such renegotiations will be successful.

         The following represents future amounts payable at December 31, 2003
(in thousands).

<TABLE>
<CAPTION>
Year ended December 31,
<S>                             <C>
       2004                     $    440
       2005                          480
                                --------
                                $    920
                                ========
</TABLE>

         As described in Note 13, a final judgment was assessed against the
Company related to an arbitration proceeding with Hobbs. During the three months
ended September 30, 2003, the Company had $264,000 of funds garnished by Hobbs.
The Company had not paid over these funds to Hobbs because of an outstanding
legal challenge of the arbitration judgment. In order to address liquidity
concerns in connection with the arbitration proceedings and garnishment, on
September 26, 2003, three members of the Company's Board of Directors (the
"Directors") loaned the Company $250,000. The short-term notes were unsecured
and were to bear interest at 8% per annum, with $30,000 principal payments to
commence on October 31, 2003 and continue through June 30, 2004. On October 6,
2003, the Company received a favorable ruling on its motion for relief from
judgment which allowed the Company to negotiate a timetable for payment of the
arbitration award to Hobbs. Therefore, on October 16, 2003, the Company repaid
the $250,000 notes to the Directors in full.

                                      F-12
<PAGE>

6. COMMITMENTS AND CONTINGENCIES

         Leases:

         The Company leases office space, and operating facilities under
operating lease arrangements. Future minimum lease payments consist of the
following at December 31, 2003 (in thousands):

<TABLE>
<CAPTION>
                                OPERATING
Year ended December 31,           LEASES
                                ---------
<S>                             <C>
          2004                  $     304
          2005                        283
          2006                        227
          2007                        174
          2008                        175
          2009-2010                   261
                                ---------
                                $   1,424
                                =========
</TABLE>

         Rent expense for the years ended December 31, 2003 and 2002 was
approximately $430,000 and $450,000, respectively.

         The future minimum lease payments above include a seven year lease
entered into by the Company on December 31, 2002 with a third party for a new
corporate facility in Denver, Colorado. The lease commenced on April 1, 2003. In
connection with this lease the Company has $90,000 in restricted cash used to
secure an irrevocable standby letter of credit in the amount of $90,000 (the
"LOC") with the lessor. The LOC is to be used as collateral for the completion
of certain tenant improvements to this facility. The LOC had an initial
expiration date of July 31, 2003, but was extended through July 31, 2004. The
LOC can be extended on a yearly basis through July 31, 2009.

         Product warranty costs:

         The following is a reconciliation of the changes in the Company's
product warranty liability during the years ended December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                         ---------------------------
                                                           2003               2002
                                                         --------           --------
<S>                                                      <C>                <C>
Balance January 1                                        $     96           $     88
Warranty expenditures                                         (99)              (117)
Provision for warranty costs                                  126                125
                                                         --------           --------
Balance December 31                                      $    123           $     96
                                                         ========           ========
</TABLE>

7. INCOME TAXES

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

<TABLE>
<CAPTION>
                                        YEARS ENDED DECEMBER 31,
                                        ------------------------
                                          2003            2002
                                        -------         --------
<S>                                     <C>             <C>
Current tax expense (benefit)
   Federal                              $    --         $    --
   State                                     --              --
                                        -------         -------
Deferred tax expense (benefit)
   Federal                                 (221)            (93)
   State                                    (32)            (13)
                                        -------         -------
                                           (253)           (106)
                                        -------         -------
Increase in valuation allowance             253             106
                                        -------         -------
                                        $    --         $    --
                                        =======         =======
</TABLE>

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

                                      F-13
<PAGE>

<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                                  ------------------------
                                                 2003                    2002
                                                 ----                    ----
                                          AMOUNT       %         AMOUNT        %
                                          ------       -         ------        -
<S>                                      <C>         <C>        <C>         <C>
Computed "expected" tax                  $  (235)    (34.0)%    $  (117)    (34.0)%
State income taxes, net of Federal
  income tax effect                          (34)     (5.0)%        (17)     (5.0)%
Increase in valuation allowance              253      36.6%         106      30.9%
Nondeductible expenses and other              16       2.4%          28       8.1%
                                         -------    ------      -------    ------
                                         $    --        --%     $    --        --%
                                         =======    ======      =======    ======
</TABLE>

         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,
                                                  ------------
                                             2003            2002
                                             ----            ----
<S>                                       <C>             <C>
Deferred tax assets:
   Net operating loss carry forwards      $    2,593      $    2,399
   Accrued liabilities                            91              73
   Allowance for doubtful accounts                11              18
   Inventory reserves                             21              23
   Depreciation and amortization                 167             124
   Deferred compensation                          17               8
   Valuation allowance                        (2,839)         (2,586)
                                          ----------      ----------
Total deferred tax assets                         61              59
                                          ----------      ----------
Deferred tax liabilities:
   Amortization of patents                        61              59
                                          ----------      ----------
Total deferred tax liabilities                    61              59
                                          ----------      ----------
Net deferred tax                          $       --      $       --
                                          ==========      ==========
</TABLE>

         As of December 31, 2003, the Company had a net operating loss ("NOL")
carryforward of approximately $6,650,000 which is available to offset future
taxable income, if any through 2023. The ultimate realizations 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.

8. PREFERRED STOCK

Preferred Stock - Series A and Series B

         On March 27, 2002 an existing common stock investor (the "Investor")
exchanged its 571,013 outstanding shares of Series A preferred stock (which
represented all of the Company's designated and issued shares of Series A
preferred stock), for an equal number of shares of Series B preferred stock of
the Company. The Series B preferred stock has the same preferences, limitations
and relative rights as the Series A preferred stock, except that the conversion
rate will be $0.922 per share instead of $2.15 per share. These rights include
voting rights equal to the number of shares of common stock into which each
share of preferred stock would be convertible, dividends at the rate of 8.0% per
annum paid quarterly either in cash or in kind, priority over common stock to
distributions upon liquidation or dissolution and redemption rights on any date
after September 1, 2004. The preferred stock exchange resulted in a beneficial
conversion feature of $489,000. This beneficial conversion feature would
normally have resulted in a credit to common stock and a charge to retained
earnings. As the Company has an accumulated deficit, both the credit and charge
are reflected in common stock. This beneficial conversion feature was recorded
as a charge to loss applicable to common shareholders for the quarter ended
March 31, 2002. In addition, the accretion recorded under the mandatory
redemption feature, including the impact of the beneficial stock discount, was
$17,000 for each of the years ended December 31, 2003 and 2002.

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

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

                                      F-14
<PAGE>

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

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

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

         Dividends -- The Series B preferred stock accrues dividends at 8% per
         annum. Dividends may be paid in cash or additional preferred shares, in
         kind, at the option of the Company. In addition, in the event the
         Company declares, pays or sets apart a common stockholder dividend,
         each holder of shares of the Series B preferred stock shall be entitled
         to receive a per share dividend equal to the number of shares of common
         equity on which such common dividend is declared into which each share
         of Series B preferred stock is convertible on the record date,
         multiplied by the amount of cash or property paid, or by the number of
         shares of capital stock issued. Preferred stock dividends were
         approximately $109,000 and $100,000 during 2003 and 2002, respectively.
         As of December 31, 2003, the Series B preferred shares have $55,000
         accumulated dividends in arrears. Of the dividends in arrears at
         December 31, 2003, the Company issued a dividend payment (in kind) of
         25,687 Series B preferred shares at the liquidation price of $2.15 per
         share in January 2004.

         Liquidation -- The Series B preferred stock ranks senior to common
         stock and has a liquidation preference of $2.15 per share plus all
         declared and unpaid dividends, which totals $1,468,000 at December 31,
         2003.

         Conditional Redemption -- The Series B preferred stock is redeemable at
         any time after September 1, 2004 at the option of the holders of the
         Series B preferred stock. The redemption price is equal to $2.15 per
         share to the extent the Company has funds legally available for such
         payment. If the Company does not have funds available, at the option of
         the holders of the Series B preferred stock, the Series B preferred
         stock can be converted into a debt obligation of the Company in a form
         acceptable to the holders of the Series B preferred stock.

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

Preferred Stock - Series C

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

         On March 27, 2002, the Investor purchased 1,000 shares of Series C
preferred stock and warrants to purchase shares of common stock, in exchange for
$1,000,000. The net proceeds to the Company were $967,000. The warrants were
valued and recorded at $259,000. Due to the conversion feature of the Series C
preferred stock transaction, a beneficial conversion feature of $741,000 existed
at the execution of the agreement. The Company is accreting the warrants and the
beneficial conversion feature of the Series C preferred stock to the earliest
date the Series C preferred stockholders can elect the option to redeem the
Series C preferred stock. The accretion recorded for the years ending December
31, 2003 and 2002 was $148,000 and $115,000, respectively. The beneficial
conversion feature was recorded as an increase to common stock and a decrease to
Series C preferred stock.

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

                                      F-15
<PAGE>

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

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

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

         Dividends -- The Series C preferred stock accrues dividends at 8% per
         annum. Dividends may be paid in cash or additional preferred shares, in
         kind, at the option of the Company. In the event that the Company pays
         dividends in kind, the Company will record additional charges against
         net income (loss) applicable to common shareholders. In addition, in
         the event the Company declares, pays or sets apart a common stockholder
         dividend, each holder of shares of the Series C preferred stock shall
         be entitled to receive a per share dividend equal to the number of
         shares of common equity on which such common dividend is declared into
         which each share of Series C preferred stock is convertible on the
         record date, multiplied by the amount of cash or property paid, or by
         the number of shares of capital stock issued. Preferred stock dividends
         were approximately $88,000 and $63,000 during 2003 and 2002,
         respectively. As of December 31, 2003, the Series C preferred shares
         have accumulated dividends in arrears of $45,000. Of the dividends in
         arrears at December 31, 2003, the Company issued a dividend payment (in
         kind) of 45 Series C preferred shares at the liquidation price of
         $1,000 per share in January 2004.

         Liquidation -- The Series C preferred stock ranks senior to common
         stock and has a liquidation preference of $1,000 per share plus all
         declared and unpaid dividends which totals $1,151,000 at December 31,
         2003.

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

9. STOCK WARRANTS AND OPTIONS

         WARRANTS

         In connection with the Series C preferred stock transaction on March
27, 2002, the Investor received warrants to purchase 417,153 shares of the
Company's common stock. The exercise price of the warrants is $1.265, and the
warrants have a term of five years during which they can be exercised. The value
of the warrants issued was estimated to be $259,000. The fair value the warrant
grant was estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions: dividend yield of zero; expected
volatility of 100%; risk-free interest rate of 3.00%; and an expected term of
five years.

         The warrants have been recorded as an increase to common stock, and are
being accreted to the earliest date the Series C preferred stockholder can elect
the option to redeem the Series C preferred stock. Warrant accretion was
approximately $52,000 and $38,000 during 2003 and 2002, respectively.

         On July 25, 2003, the Company issued 25,000 warrants to its commercial
bank for consideration of the renegotiated Credit Agreement. The exercise price
of the warrants is $1.155, and the warrants have a term of two years during
which they can be exercised. The warrants issued represent debt issue costs and
the value was estimated to be approximately $18,000, using the Black-Scholes
option-pricing model with the following weighted-average assumptions: dividend
yield of zero, expected volatility of 141%, risk free interest rate of 2%, and
an expected term of two years. The debt issue costs are being amortized on the
straight line method to interest expense over the term of the Credit Agreement
(through March 15, 2004). Through December 31, 2003 the Company has amortized
$11,000 to interest expense.

                                      F-16
<PAGE>

         Stock warrant transactions during 2003 and 2002 are summarized below:

<TABLE>
<CAPTION>
                                                       WEIGHTED AVERAGE
                                          SHARES        EXERCISE PRICE
                                          ------        --------------
<S>                                      <C>           <C>
Outstanding at December 31, 2001           759,535           4.42
Granted                                    417,153           1.27
Exercised                                       --             --
Forfeited                                       --             --
                                         ---------
Outstanding at December 31, 2002         1,176,688           3.30
                                         =========
Granted                                     25,000           1.16
Exercised                                       --             --
Forfeited                                       --             --
                                         ---------
Outstanding at December 31, 2002         1,201,688           3.26
                                         =========
</TABLE>

STOCK OPTIONS

The Company has two stock option plans, an incentive stock option plan (the
"1993 Plan") and the 1996 Stock Option Plan (the "1996 Plan") (collectively, the
"Plans"). The 1993 Plan 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 generally expire up to ten years from the date of grant. 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% of the fair market value of the Company's stock at
the grant date, while the exercise price of non-qualified options is at the
discretion of the Board of Directors, but is ordinarily priced at 100% of the
fair market value at the grant date. Aggregate common shares of 722,000 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
that is at the discretion of the Board of Directors, but is generally at a rate
of 25% per year over four years for employees and 33% per year over three years
for directors and generally expire up to ten years from the date of grant.

Stock option transactions of the Plans during 2003 and 2002 are summarized
below:

<TABLE>
<CAPTION>
                                                      WEIGHTED AVERAGE
                                         SHARES        EXERCISE PRICE
                                         ------        --------------
<S>                                      <C>          <C>
Outstanding at December 31, 2001          627,000           2.53
Granted                                   138,000           1.11
Exercised                                      --             --
Forfeited                                 (63,625)          2.44
                                         --------
Outstanding at December 31, 2002          701,375           2.25
                                         ========
Granted                                    94,000           0.69
Exercised                                      --             --
Forfeited                                (146,000)          2.95
                                         --------
Outstanding at December 31, 2003          649,375           1.87
                                         ========
</TABLE>

         At December 31, 2003 and 2002, options were exercisable with respect to
541,653 and 493,975 shares, respectively, with exercise prices ranging from
$0.60 to $6.44 and a weighted average exercise price of $2.01 and $2.49,
respectively. As of December 31, 2003 the weighted average contractual life was
4.57 years.

         The following table sets forth the exercise price range, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of options:

<TABLE>
<CAPTION>
                                                                           WEIGHTED AVERAGE
                              NUMBER OF SHARES                           REMAINING CONTRACTUAL
EXERCISE PRICE RANGE            OUTSTANDING          EXERCISE PRICE              LIFE
--------------------          ----------------       --------------      ---------------------
<S>                           <C>                    <C>                 <C>
    $0.60 - $1.50                  372,500              $  1.08                  5.62
    $2.03 - $2.94                  220,000              $  2.63                  2.96
    $3.25 - $6.44                   56,875              $  4.12                  1.54
                                    ------              -------                  ----
                                   649,375              $  1.87                  4.57
                                  ========              =======                  ====
</TABLE>

                                      F-17
<PAGE>

         In October 2001, 30,000 options were granted to a non-employee
consultant of the Company for services provided. These options vested over a
two-year period, and are currently exercisable. Compensation expense of $11,000
and $15,000 was recorded during 2003 and 2002, respectively.

10. 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. During 2001 the Company
implemented a formal contribution plan. Beginning on April 1, 2001 the Company's
contribution plan allowed for company matching contributions of $0.25 for every
$1.00 invested by the employee in the program, limited to the first 50% of the
employee's maximum contribution (capped at $5,250.00 per year). Participants
vest in employer contributions at a rate of 20% per year over five years. During
2003 and 2002, no contributions were made to the Plan. Effective January 1,
2002, the Company's board of directors temporarily discontinued Company
contributions to the Plan.

11. SEGMENT INFORMATION

         The Company operates in two business segments, testing equipment and
Accelerated Reliability Test Centers ("ARTC"). The equipment segment is engaged
in the manufacture and sale of vibration and thermal chambers for quality
control testing of various electronic devices. 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 performance 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          CORPORATE         TOTAL
                                                       ---------        ----          ---------         -----
<S>                                                    <C>           <C>              <C>            <C>
YEAR ENDED DECEMBER 31, 2003
Sales                                                  $  6,759      $   1,136        $    --        $  7,895
Gross profit                                              3,075             72             --           3,147
Property and equipment, net                                 132            490             --             622
Capital expenditures                                        123            116             --             239
Depreciation and amortization                                72            271             --             343
Interest expense                                             --             --            134             134
Interest income                                              --             --              5               5
OTHER SIGNIFICANT NON-CASH ITEMS:
Redeemable preferred stock dividends
   declared                                                  --             --            197             197
Accretion of preferred stock                                 --             --            217             217
YEAR ENDED DECEMBER 31, 2002
Sales                                                  $  6,606      $   1,461        $    --        $  8,067
Gross profit                                              3,286            219             --           3,505
Property and equipment, net                                 174            536             --             710
Capital expenditures                                         77            196             --             273
Depreciation and amortization                               105            315             --             420
Interest expense                                             --             --            178             178
Interest income                                              --             --              5               5
OTHER SIGNIFICANT NON-CASH ITEMS:
Transfer of equipment to inventory held
   for resale                                                15             --             --              15
Deemed preferred stock dividend
   resulting from conversion of Series A
   preferred shares to Series B preferred
   shares                                                    --             --            489             489
Redeemable preferred stock dividends
   declared                                                  --             --            163             163
Accretion of preferred stock                                 --             --            170             170
</TABLE>

                                      F-18
<PAGE>

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

<TABLE>
<CAPTION>
                                    UNITED STATES   MEXICO      EUROPE    ASIA PACIFIC    MIDDLE EAST    TOTAL
                                    -------------   ------      ------    ------------    -----------    -----
<S>                                 <C>             <C>         <C>       <C>             <C>          <C>
YEAR ENDED DECEMBER 31, 2003
Sales                                   $ 4,287       $ 186     $  798      $ 2,552         $   72     $ 7,895
Property and equipment, net                 538          --         84           --             --         622
YEAR ENDED DECEMBER 31, 2002
Sales                                   $ 5,212       $  --     $   64      $ 2,721         $   70     $ 8,067
Property and equipment, net                 582          --        128           --             --         710
</TABLE>

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

12. LEGAL MATTERS

         On May 30, 2001, the Company was served with an arbitration demand from
Gregg K. Hobbs ("Hobbs"), a former employee, officer and director. The
arbitration demand alleged that the Company breached provisions in the original
September 30, 1995 separation agreement, executed between Hobbs and the Company,
and that Hobbs suffered damages in excess of $7,000,000. The parties selected a
single arbitrator with the Judicial Arbiter Group ("JAG") in Denver, Colorado
and after several delays a hearing was held before the arbitrator beginning on
April 21, 2003. At the conclusion of the arbitration hearing, Hobbs asserted
damages of $10,000,000. The arbitrator issued a "Decision and Award" on June 20,
2003, in which the arbitrator found the Company had breached certain provisions
of the September 30, 1995 agreement and awarded Hobbs damages in the amount of
$261,650. On July 11, 2003, as instructed by the arbitrator, the parties
submitted requests for attorney fees and costs and interest. Subsequently, both
parties filed pleadings opposing all or part of the other party's request for
fees and costs and the Company filed an opposition to Hobbs request for
interest.

         On November 17, 2003, the arbitrator made a final award in favor of
Hobbs in the amount of $410,729, which includes the net amount of fees and costs
awarded to Hobbs as well as interest at 8% from June 20, 2003. In response to
efforts by Hobbs to confirm the June 20, 2003 award, the Company filed pleadings
contesting confirmation based on irregularities in the arbitration decision and
award. Following briefings and two judicial hearings, the Company and Hobbs
reached a settlement on February 13, 2004, in which the Company agreed to
withdraw its objections to confirmation and Hobbs agreed to accept payment
according to a schedule. The schedule called for one lump sum payment of
$264,109 on February 17, 2004, which was paid by the Company, and monthly
payments, due on the last day of the month, of approximately $19,000 from March
through November of 2004, plus interest at 8%. The payment schedule and terms
call for additional penalties of up to $30,000 against the Company in the event
a payment is not timely received by Hobbs. As of December 31, 2003, the Company
had an outstanding liability to Hobbs of $426,000, which includes the
arbitration award and accrued interest through December 31, 2003.

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

         On March 10, 2003, the Company, a former employee, and ASQ Quality
Press were served with a complaint in U.S. District Court in Denver, Colorado
from Hobbs alleging (i) infringement of copyrights purportedly owned by Hobbs,
in violation of the Copyright Act, 17 U.S.C. Sec. 101, (ii) false designation of
origin and false or misleading representation in commerce under Sec. 43(a) of
the Lanham Act, 15 U.S.C. Sec 1125(a), and (iii) common law unfair competition.
The Company filed an answer on March 31, 2003, which denied allegations of the
complaint with respect to the infringement of any copyrights held by Hobbs and
on June 23, 2003 the Company asserted a counter-claim against Hobbs for
copyright infringement, alleging that Hobbs had sold his HALT and HASS

                                      F-19
<PAGE>

related intellectual property to the Company for valuable consideration. On
November 3, 2003 the Company filed a motion for partial summary judgment, which
the court has not yet ruled on. The Company and Hobbs have engaged in discovery;
however, Hobbs has sought to avoid or postpone his deposition by the Company's
attorneys on three separate occasions, most recently by stating that Hobbs'
medical condition precludes him from giving an accurate or useful deposition at
this time. The case has been set to go to trial in June 2004. The Company
intends to contest the case vigorously; however, no guarantee can be given to
the ultimate outcome or the ultimate amount of the damages, if any.

                                      F-20
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                    DESCRIPTION
------                                    -----------
<S>         <C>
   3.1      Amended and Restated Articles of Incorporation of the Company.(1)

   3.2      Amended and Restated Bylaws of the Company.(1)

   3.3      Certificate of Designation for Series A Preferred Stock.(5)

   3.4      Amended Certificate of Designation for Series A Preferred Stock.(5)

   3.5      Statement of Change of Registered Agent.(5)

   4.1      Form of Certificate for Shares of Common Stock.(1)

   4.6      Form of Warrant issued to holders of 10% secured promissory
            notes.(1)

  10.1      QualMark Corporation 1993 Incentive Stock Option Plan.(1)

  10.2      QualMark Corporation 1996 Stock Option Plan.(3)

  10.3      Employment Agreement dated March 1, 1993 by and between the Company
            and W. Preston Wilson.(1)

  10.4      Employment Agreement dated August 15, 1994 by and between the
            Company and J. Wayne Farlow.(1)

  10.5      Agreement dated September 30, 1995 by and between the Company and
            Gregg K. Hobbs.(1)

  10.8      Addendum to Agreement dated as of December 21, 1995 by and between
            the Company and Gregg K. Hobbs.(1)

  10.11     Loan and Security Agreement dated April 30, 1996, by and between
            QualMark Corporation and Silicon Valley Bank, as amended by
            Amendment to Loan and Security Agreement dated August 18, 1997.(2)

  10.12     Loan and Security Agreement dated December 22, 1998, by and between
            QualMark Corporation and U.S. Bank National Association.(4)

  10.13     Waiver and Amendment to Loan Agreement dated March 15, 1999 by and
            between QualMark and U.S. Bank National Association.(4)

  10.14     Second Amendment to Loan Agreement dated August 23, 1999 by and
             between QualMark and U.S. Bank National Association.(5)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                    DESCRIPTION
 ------                                    -----------
<S>          <C>
   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 and between QualMark and U.S.
             Bank National Association.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                    DESCRIPTION
 ------                                    -----------
<S>          <C>
   10.28     Settlement Agreement and Payment Schedule dated February 13, 2004,
             by and between QualMark Corporation and Gregg K. Hobbs.

   14        Director and Officer Code of Ethics

   23.1      Consent of Gelfond Hochstadt Pangburn, P.C.

   31.1      CEO Certification of Section 302 of the Sarbanes-Oxley Act of 2002

   31.2      CFO Certification of Section 302 of the Sarbanes-Oxley Act of 2002

   32        Certifications of Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

----------

(1)  Incorporated by reference from the Company's Registration Statement No.
     333-1454-D on Form SB-2.

(2)  Incorporated by reference from the Company's Quarterly Report on Form 10-
     QSB for the quarter ended September 30, 1997.

(3)  Incorporated by reference from the Company's Proxy Statement for the 1996
     Annual Meeting of Shareholders.

(4)  Incorporated by reference from the Company's Annual Report of Form 10-KSB
     for the year ended December 31, 1998.

(5)  Incorporated by reference from the Company's Quarterly Report on Form 10-
     QSB for the quarter ended September 30, 1999.

(6)  Incorporated by reference from the Company's Quarterly Report on Form 10-
     QSB for the quarter ended June 30, 2000.

(7)  Incorporated by reference from the Company's Quarterly Report on Form 10-
     QSB for the quarter ended September 30, 2000.

(8)  Incorporated by reference from the Company's Annual Report on Form 10-KSB
     for the year ended December 31, 2000.

(9)  Incorporated by reference from the Company's Quarterly Report on Form 10-
     QSB for the quarter ended June 30, 2001.

(10) Incorporated by reference from the Company's Annual Report on Form 10-KSB
     for the year ended December 31, 2001.

(11) Incorporated by reference from the Company's Quarterly Report on Form
     10-QSB for the quarter ended March 31, 2002.

(12) Incorporated by reference from the Company's Annual Report on Form 10-KSB
     for the year ended December 31, 2002.

(13) Incorporated by reference from the Company's Quarterly Report on Form
     10-QSB for the quarter ended June 30, 2003.