<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, 2005

[ ]  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)

<TABLE>
<S>                                                          <C>
            COLORADO                                              84-1232688
(State or other jurisdiction of                                 (IRS Employer
 incorporation or organization)                              Identification No.)
</TABLE>

                  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 is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act [ ]

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

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

     Indicate by check mark whether the registrant is a shell company (as
defined I Rule 12b-2 of the Exchange Act. Yes [ ] No [X]

     Issuer's revenues for its most recent fiscal year. $14,845,000

     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 28, 2006 was $9,507,406.

     The number of shares outstanding of the issuer's Common Stock as of March
28, 2006 was 4,463,571.

                       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]

<PAGE>

                                     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) or Typhoon ("Typhoon") 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,
Hillboro, Oregon, and Huntsville, Alabama. In addition, the Company has
established strategic agreements with IMQ Instituto Del Marchia Di Qualita,
Institutet For Verkstadsteknisk Forskning, and the Swedish Institute of
Production Engineering to operate testing centers in Enschede, Netherlands,
Milan, Italy, and Molndal, Sweden. As domestic or 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.

     QualMark Corporation 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.

     On November 15, 2004, QualMark Corporation completed the asset acquisition
of Connecticut based ACG Dynamics Inc.("ACG") an electro-dynamic shaker service
company. ACG is headquartered in West Haven, Connecticut and is a leader in
supplying electrodynamic systems, components, and service to the worldwide
vibration test equipment market. QualMark formed a separate wholly-owned
C-corporation subsidiary, QualMark ACG Corporation ("QualMark ACG"), to assume
all acquired assets and assumed liabilities of ACG. The newly formed QualMark
ACG provides turn-key vibration testing systems consisting of factory
rebuilt/upgraded electrodynamic systems, new QualMark ACG built solid state
power amplifiers and new digital vibration controllers.

About ACG:

     ACG was founded in June of 1972, as ACG Incorporated, a consultant
engineering firm specializing in electro-mechanical design, development and
prototype buildup. The ongoing need for restoring existing vibration test
systems coupled with the expertise in this field gained by the original founder,
Andrew C. Grimaldi (as a vibration test engineer, electro-mechanical design
engineer, vibration isolator designer and vibration test equipment designer),
caused the company to eventually turn its attention fully toward the rebuilding
and upgrading of vibration test equipment.


                                      -2-

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     Initially, ACG developed a capability to rebuild armatures for vibration
exciters, to supply replacement field coils and to supply replacement parts for
exciters (shakers), amplifiers and controls. Over the years, ACG has built its
expertise in this field, with specialized personnel and facilities dedicated to
the restoration, upgrading, service / maintenance, trouble shooting and
repairing of vibration test equipment. In the past twenty-eight years ACG has
become the largest independent source in the world for armature rebuilding,
replacement field coils and replacement parts for all makes of vibration test
equipment. ACG's factory services complimented by its expert field engineering
services provide customers with prompt, professional assistance to resolve any
vibration test equipment problem in the most cost effective way.

     In the past thirteen years, ACG has expanded it's capability into system
integrations, which includes supplying complete vibration test systems
consisting of pre-owned factory rebuilt and upgraded shakers coupled with new
ACG built solid state power amplifiers and a variety of new computer based
controllers. ACG frequently provides turnkey systems to its clients, consisting
of factory refurbished horizontal slip tables, new combination air-isolated
bases, head plates / head expanders, various instrumentation and field
engineering support to install / demonstrate systems. ACG also provides new
solid state power amplifiers, special switching networks, special field supplies
and matching transformers to mate with any existing shaker, along with shaker
refurbishing and upgrades to a 2" stroke, to achieve
state-of-the-art-performance.

     On December 13, 2005, QualMark Corporation entered into an asset purchase
agreement with SatCon Power Systems, Inc. ("SatCon") of Boston, Massachusetts to
purchase certain of the assets and assume certain of the liabilities of SatCon
related to its Ling Electronics ("Ling") Shaker and Amplifier business
operations. SatCon is a division of SatCon Technology Corporation, which was
founded in 1986. Ling is one of the nation's most experienced manufacturers of
vibration, shock and high intensity sound environmental test systems and
fixtures. QualMark formed a separate wholly-owned C-corporation subsidiary,
QualMark Ling Corporation ("QualMark Ling"), to assume all acquired assets and
assumed liabilities of Ling. Immediately following the acquisition, the Company
moved all purchased assets from Massachusetts to its Connecticut facility and
began operations. The Company intends to combine ACG and Ling into one reporting
business unit and provide a full complement of new and refurbished
electrodynamic systems, parts and service.

About Ling:

     Ling was founded in 1947 by James Ling. Throughout the years, Ling went
through a series of mergers or acquisitions, including a merger in 1959 with
acoustical based Altec (Altec-Lansing). In 1999, SatCon purchased Ling from
Mechanical Technology Inc. Ling is one of the nation's most experienced
manufactures of vibration and shock environmental test systems and fixtures.
Ling offers a full complement of new turnkey vibration systems that include the
shaker, slip table, fixture and amplifier. To date, over 6,000 electrodynamic
shaker systems have been sold and supplied by Ling. Ling has been a leading
manufacturer of vibration and acoustic testing systems for over 50 years and
serves an international cross-section of governmental, industrial and scientific
markets. Through participation in both commercial and government contracts, Ling
has designed and manufactured sophisticated systems to perform complex
vibration, high intensity sound and shock tests on all types of components,
assemblies and aerospace vehicles.

PRODUCTS AND SERVICES

THE TYPHOON COMBINED STRESS SYSTEM

     The Company's Typhoon 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.

     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,


                                      -3-

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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 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.


                                      -4-

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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 Company's Typhoon Combined Stress Systems for HALT and HASS are
presently available in six sizes, including a vibration only tabletop model
(OVTT). The number after the "Typhoon" in the Company's product models
represents the linear footage of the vibration table as explained below.
Therefore, an Typhoon-1.5 contains a one and one half foot by one and one half
foot table, an Typhoon-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 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.

     Typhoon-1.5:

          The Typhoon-1.5 is the smallest version of the Typhoon product line.
     The Typhoon -1.5 is a truly portable, multi-axis vibration and high
     performance thermal chamber. Equipped with all the same operating features
     of the larger Typhoon systems, including a PC controller, the Typhoon -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 Typhoon -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.

     Typhoon-2.0:

          The Typhoon-2.0 is the second smallest version of the Typhoon product
     line. The Typhoon -2.0, like the 1.5, is a truly portable, multi-axis
     vibration and high performance thermal chamber that allows for additional
     testing area for smaller components. Equipped with all the same operating
     features of the larger Typhoon systems, including a PC controller, the
     Typhoon -2.0 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
     Typhoon -2.0 can generate random vibration forces of 40 Grms (2Hz-10,000
     Hz) on the 24"x24" 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.

     Typhoon-2.5:

          The Typhoon-2.5 is, historically, the most popular system in the
     Typhoon product line. A mid-size system, the PC-controlled Typhoon-2.5 is
     equipped with four actuators mounted to the vibration table. The
     Typhoon-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"x36"x37" (ID). The thermal chamber is capable of up to 600
     degrees Centigrade per minute change on the product under test. Typical
     uses of the Typhoon-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.)

     Typhoon-3.0:

        The Typhoon-3.0 has begun to generate the most attention in the Typhoon
    product line. A mid-size system, the PC-controlled Typhoon-3.0 is equipped
    with four actuators mounted to the vibration table. The Typhoon-3.0 contains
    the same capabilities as the Typhoon-2.5, but allows for additional testing
    area. The additional testing


                                      -5-

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     area allows the user to utilize the chamber for either HALT (engineering
     based tests) or HASS (production line tests). The Typhoon-3.0 LF vibration
     system can generate 50 Grms from 2Hz to 10,000 Hz. The vibration table is
     36"x36", and is enclosed within a thermal chamber that is 36"x36"x37" (ID).
     The thermal chamber is capable of up to 600 degrees Centigrade per minute
     change on the product under test. Typical uses of the Typhoon-3.0 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.)

     Typhoon-4.0:

          The most common application for the Typhoon-4.0 is large volume
     production screening (HASS) on computers, monitors, communications systems,
     etc. The PC-controlled Typhoon-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)

          The OVTT (Omni Vibration Table Top) system 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 Typhoon 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

     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


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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 a Typhoon-2.5, Typhoon-3.0, or
Typhoon-4.0, 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 Typhoon-2.5 or
Typhoon-3.0 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
Typhoon 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
provides for more consistent revenues.

     The Company may open additional test centers domestically or
internationally, 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.

     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.

QUALMARK ACG CORPORATION (ACG)

     ACG manufacturing services include complete factory rebuilt vibration test
systems and shakers. ACG offers new solid-state amplifiers to help drive
existing shakers of all models, as well as be utilized in conjunction with older
restored systems. ACG will rebuild all makes and models of exciters (shakers)
and upgrade exciters to produce longer stroke, as well as rebuilding armatures
or the moving elements on all makes and models. Replacement field coils can be
rebuilt for most makes and models of exciters; field-degaussing coils can also
be repaired or reconditioned. ACG has improved the suspension systems for higher
reliability and ease of maintenance. Fully bonded replacement of moving elements
is also provided. ACG has the capabilities to design and fabricate high-tech
low-weight, high frequency armatures as well as custom dynamic testing
equipment. Special transformers and electric coils can also be designed and
built or rebuilt if necessary.

     ACG field engineering services include onsite complete diagnostic testing,
troubleshooting and repair of all makes and models of vibration systems. ACG has
the capability to rebuild or upgrade systems onsite, as well as the replace
solid-state electronics. ACG provides technical expertise on all makes and
models of exciters, amplifiers and vibration controllers. Individual instruction
on system installation, maintenance, calibration and operation of all systems
can also be provided onsite.

QUALMARK LING CORPORATION (LING)

     Ling offers a full complement of new turnkey vibration and shock
environmental test systems that include the shaker, slip table, fixture and
amplifier that range from 5lbs of sine force to over 40,000 lbs of sine force.
These test systems are ideal for modal testing, research and development,
product qualification, vibration screening and testing.

     The Ling product line contains three primary size categories High Force
Vibration Systems, Medium Force Vibration Systems and Low Force Vibration
Systems.

     High Force Vibration Systems (HFVS):

     High Force Vibration Systems consist of shaker models that displace between
18,000 lbs to 45,000 lbs of sine force or 13,000 lbs to 36,000 lbs of random
force. The HFVS can support a static load of up to 3,000 lbs are water cooled
and are powered by a max kVA ranging between 142 and 415.


                                      -7-

<PAGE>

     Medium Force Vibration Systems (MFVS):

     Medium Force Vibration Systems consist of shaker models that displace
between 2,800 lbs to 12,000 lbs of sine force or 2,000 lbs to 10,000 lbs of
random force. The MFVS can support a static load of up to 1,500 lbs are air
cooled and are powered by a max kVA ranging between 28 and 123.

     Low Force Vibration Systems (LFVS):

     Low Force Vibration Systems consist of shaker models that displace between
6 lbs to 600 lbs of sine force. The LFVS can support a static load of up to
50lbs are air cooled and are powered by a max approximate kVA of one.

MARKETING

During 2005, the Company continued its strategic marketing and sales program
that is designed to leverage QualMark's market knowledge to be identified as the
"Knowledge Leader" in the Vibration Testing industry. The Company has achieved
this through education of customers through Webinars (web based seminars) and
other forums that expand the knowledge base in the overall reliability process.
The Ling acquisition further represents continued penetration into the
electrodynamic vibration test market. Entering this portion of the market
expands the Company's total available market to approximately $175 million, up
from approximately $25 million for the accelerated testing (HALT/HASS) market.
Ling Electronics is a highly recognized trade name in the electrodynamic shaker
market. Ling offers a complete line of electrodnamic shakers from 6 lbs of force
to 40,000 lbs of force. These electrodynamic shakers conform to a military
specification, which is a required test for almost all electronic systems used
in military and aerospace applications. The Company has consolidated Ling into
the ACG facility, located in Connecticut, to eliminate a dual infrastructure and
overhead and also to take advantage of the skill sets already in place at ACG.

The following was achieved during 2005:

     1.   The Company realized strong vertical and horizontal sales penetration
          in the core market segments.

     2.   The Company realized an even distribution of geographic sales in the
          United States, Europe and Asia Pacific.

     3.   The Company hired a marketing communications manager to support
          operations and redefine the positioning statement as the Knowledge
          Leader and began a branding process of its wholly-owned subsidiaries,
          QualMark ACG and QualMark Ling.

     4.   The Company continued to acquire several strategic customers who have
          adopted a QualMark testing chamber as the configuration for corporate
          and supply vendor testing.

     5.   The Company expanded its HASS presence by converting HALT customers to
          production oriented HASS testing. The average conversion rate from
          HALT to HASS is approximately four to one, which implies that for
          every HALT chamber a customer has in place they would need
          approximately four chambers to commence HASS.

     6.   The Company expanded its presence into over 30 countries.

SALES STRATEGY

     QualMark utilizes twenty-nine independent domestic and international sales
representatives including representatives from the European, Mexican, Middle
Eastern, Australian, 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.


                                      -8-

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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 600 test systems have
been sold worldwide to more than 450 customers. 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:

AEROSPACE AND DEFENSE

Aviation electronics
Display switches
Flight navigation systems
Marine navigation systems

COMPUTER RELATED PRODUCTS

Circuit boards
Disk drives
Modems
Monitors
Power supplies
Printers
Tape backup drives

OTHER

Automotive circuitry
Electronic oil and gas flow meters
Global positioning systems
Power supplies of all types

TELECOMMUNICATIONS

Automated teller machines
Air conditioning electronics
Cellular telephones
Fax machines
Switching systems

MEDICAL ELECTRONICS

Electronic thermometers
Glucose monitors
Infusion pumps
IV pumps

CONSUMER ELECTRONICS

Refrigerators
Televisions
Video Recorders
LED flat screens
Plasma flat screens
Garage door electronics

RESEARCH AND PRODUCT DEVELOPMENT

     Research and product development expenditures for the fiscal years ending
December 31, 2005 and 2004 were $752,000 and $735,000, respectively. During 2005
the Company continued to implement design and testing improvements on its
pneumatic hammers. The Company developed and released 2 new vibration tables to
fit expanded customer needs. The Company also developed and released special
fixture devices that are used to attach product to the Company's Typhoon
chambers. During 2004 the Company completed design and testing of a long life
pneumatic hammer. The Company developed and released 2 new table and chamber
models to fit expanded customer needs, the Typhoon 2.0 and the Typhoon 3.0. New
control system and software with advanced features was released to production.
Features include the ability to run an auto-tuning routine for vibration and
thermal control and allow monitoring of the chamber remotely through the
Internet.

     Research is ongoing into the vibration technology used in the Typhoon
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 Typhoon 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.

     The Company is maintaining the ability to quickly respond to customer
requests for customization. Special Typhoon 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. Two patent applications have been submitted for table
control in a pneumatic vibration apparatus and for reducing sound emitted by a
pneumatic vibration apparatus.


                                      -9-

<PAGE>

     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.

     The Company has received three copyrights (the "Copyrights") from the
Register of Copyrights of the United States of America. The Copyrights include;
all seminar material and related text, graphics, graphs, illustrations, tables,
and slides, QualMark Corporation Omni-Vibration System (OVS) Manager 4.0
software and related object and source code, and QualMark Corporation Q-Link 4.0
software and related object and source code.

     In addition to the Patents and Copyrights, 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 and
Copyrights 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 mark 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 received Certificate Europa (CE) approval on its Typhoon chambers,
which is required for sale in the European Community.

     The Company's Patents, Copyrights, and Trademarks range in duration from
between two and fifteen years.

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 strives to retain its position as the market leader,
and through this, promotes its superior products and testing "knowledge" to
combat any pricing pressures that competitors may demonstrate.

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

     4.   HALT/HASS, Inc., Colorado

     5.   Hanse Industries, Colorado

     6.   ACS, Italy

ARTC and Applications Support Services:

     Throughout 2005 sales at QualMark Testing Centers activity remained
relatively constant from quarter to quarter. With the recent economic downturn,
some companies owning test equipment (Typhoon) for their own use


                                      -10-

<PAGE>

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. The Company
attempts to maintain a dominant presence in the test center market. The test
center facilities are utilized as both a sales and marketing tool and profit
center, therefore, they contribute to the Company's lead generation for
equipment and related sales. In order to mitigate the competitive risks, the
Company implemented a new strategic direction during 2003, which continued
through 2005. The strategic direction included an increase in sales through
streamlined business processes, marketing synergies with the core Typhoon
product, and the leveraging of the "Knowledge" of the more than 4,000 tests
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

     4.   Sypris Test and Measurement, Massachusetts

     5.   Environ Laboratories, Minnesota

     6.   Trace Laboratories, Illinois

QualMark ACG Corporation:

     Initially, ACG developed a capability to rebuild armatures for vibration
exciters, to supply replacement field coils and to supply replacement parts for
exciters (shakers), amplifiers and controls. Over the years, ACG has built its
expertise in this field, with specialized personnel and facilities dedicated to
the restoration, upgrading, service / maintenance, trouble shooting and
repairing of vibration test equipment. In the past twenty-eight years ACG has
become the largest independent source in the world for armature rebuilding,
replacement field coils and replacement parts for all makes of vibration test
equipment. ACG's factory services complimented by its expert field engineering
services provide customers with prompt, professional assistance to resolve any
vibration test equipment problem in the most cost effective way. The competitive
environment for ACG consists of three primary competitors providing similar
products and services to companies requiring replacement, upgrade, or repair
services to existing electrodynamic based systems. ACG distinguishes itself
within the industry as the superior quality provider of electrodynamic related
equipment and service.

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

     1.   Derritron Vibration Products, California

     2.   Dynamic Solutions, California

     3.   CVMS, United Kingdom

QualMark Ling Corporation:

     The competitive environment for Ling consists of four primary competitors
providing similar products and services to companies requiring new
electrodynamic based systems. Ling distinguishes itself within the industry as
the superior quality provider of electrodynamic related systems. The Company has
determined that it will aggressively leverage the "Ling Electronics" name to
market and sell the Ling products, as it was (at one time) the


                                      -11-

<PAGE>

most recognized electrodynamic company in the industry. The Company will also
combine the new products offered by Ling with the parts, service and refurbish
capabilities of ACG to provide customers with a full range of electrodynamic
vibration solutions.

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

     1.   Unholtz Dickie, Connecticut

     2.   LDS, United Kingdom

     3.   TIRA, Germany

     4.   MB Electronics, Ohio

MANUFACTURING

QualMark

     The Company's primary manufacturing facility is located in Denver,
Colorado. QualMark's assembly of the Typhoon 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 Typhoon system. The Company has also established relationships
with alternative suppliers for its three key components. Thus, if a primary
supplier was unable to deliver materials as required by the Company, it would
take as many as 60 days to begin taking delivery of these components from its
secondary 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 Typhoon systems in
finished goods, the Company primarily uses a rolling-quarter sales forecast in
determining the number of Typhoon-1.5, Typhoon-2.0, Typhoon-2.5, Typhoon-3.0,
Typhoon-4.0 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 a
Typhoon system are identified and ordered in a timely manner.

QualMark ACG Corporation and QualMark Ling Corporation (Ling/ACG)

     Ling /ACG's primary manufacturing facility is located in West Haven,
Connecticut. Ling/ACG manufactures a variety of products for the vibration test
industry: new electrodynamic exciters, reconditioned exciters, amplifiers,
controllers, and integrated exciter test systems, reconditioned exciter systems
per customer order and specification, reconditioned exciter armature assemblies,
reconditioned exciter field coils, and other components and assemblies for the
exciter industry. Ling/ACG also sells new amplifiers and controllers to the
exciter industry. Ling/ACG also manufactures many replacement components for
exciters and vibration systems to support its global field service business.


                                      -12-
<PAGE>

     Ling/ACG uses a flexible manufacturing cell approach as well as a
just-in-time (JIT) inventory control and vendor supply system. Ling/ACG's major
manufacturing capabilities include: primary and secondary machine shop
operations, welding and metal fabrication, armature winding and reconditioning,
coil winding and reconditioning, electro-mechanical assembly, electronics
testing, and system integration and testing. Ling/ACG maintains its own
inventory of reconditioned exciters, armatures, field coils, as well as builds
exciters and systems to customer order.

     Ling/ACG has an excellent base of local vendors and suppliers to
subcontract non-essential manufacturing and to off-load production during peak
demands. This vendor base is integrated into Ling/ACG's just-in-time
manufacturing strategy. Ling/ACG does both source inspections at key suppliers
as well as 100% quality inspection on all purchased components. Ling/ACG has
developed relationships with what it considers critical vendors that manufacture
key components of its rebuilt shaker systems. The Company has also established
relationships with alternative suppliers for its key components. Thus, if a
primary supplier was unable to deliver materials as required by the Company, it
would take as many as 90 days to begin taking delivery of these components from
its secondary suppliers. The Company is dependent on the availability of steel
and amplifiers as its primary raw material components. The Company believes that
it will have access to adequate amounts of the raw material component and that
no shortages will exist.

     Ling/ACG uses proprietary manufacturing processes to produce armatures and
field coils which are recognized by the industry as being superior to its
competition, as well as being superior to many exciter original equipment
manufacturer (OEM) specifications.

     Ling/ACG is in the process of integrating a material requirements planning
(MRP), a computer software driven inventory management process, to maximize the
effectiveness in which an order can be filled while minimizing required
inventory.

PRODUCT WARRANTIES AND SERVICE

     In 2005 and 2004, the Company offered a limited one-year parts and labor
warranty on all new Typhoon and electrodynamic factory rebuilt systems,
respectively. Typhoon customers can purchase extended warranties on their
Typhoon systems, which may include up to 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 Typhoon system, which
further minimizes Typhoon system down time. Because of the efficient design of
Typhoon 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.
Based on the purchase agreement between QualMark and SatCon, QualMark assumed
existing outstanding warranties for Ling electrodynamic systems. These
warranties contain a duration of one to eighteen months, in which the Company
will provide parts and labor (if required). During 2006, the Company will
continue to offer a standard, one-year parts and 90 days labor warranty on all
new Typhoon, Ling electrodynamic systems and ACG refurbished 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, 2005, the Company had fifty employees, of which
forty-eight are full-time. Twenty-eight of the Company's employees are employed
at its principal offices and headquarters in Denver, Colorado, sixteen are
employed in West Haven, CT, two are employed at testing facilities in Huntington
Beach, CA, one in Marlborough, MA, one in Navarre, FL, one in Annapolis, MD, 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.


                                      -13-

<PAGE>

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. In
addition to the lease payments, 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 two-year lease expires April 30, 2007. The leased property
consists of approximately 5,000 square feet. In addition to the lease payments,
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. In addition to the
lease payments, 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 leased property consists of 3,132
square feet. The Company has a month-to-month lease which started in January
2003. In addition to the lease payments, 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.

     QualMark ACG operates out of leased facilities located at 232 Front Avenue,
West Haven, Connecticut. The four-year lease expires on November 13, 2008. The
leased property consists of approximately 20,000 square feet. In addition to the
lease payments, the Company is responsible for certain expenses, including
property taxes, insurance and maintenance. The Company's QualMark ACG
manufacturing and service operations are 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 in good condition, are neat in their appearance and are located in
business complexes with businesses of similar quality.

Investment Policies

The Company does not invest in real estate, real estate mortgages or securities.

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, 2005.


                                      -14-

<PAGE>

                                     PART II

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

     The following table sets forth the range of high and low closing bid prices
of the Company's common stock as reported by the over the counter bulletin board
(OTCBB) during fiscal years 2005 and 2004:

<TABLE>
<CAPTION>
                        FISCAL YEAR ENDED DECEMBER 31, 2005
                        -----------------------------------
                               HIGH CLOSE   LOW CLOSE
                               ----------   ---------
<S>                     <C>                 <C>
First Fiscal Quarter             $3.100       $1.950
Second Fiscal Quarter             3.250        2.400
Third Fiscal Quarter              3.050        1.950
Fourth Fiscal Quarter             2.480        1.720
</TABLE>

<TABLE>
<CAPTION>
                        FISCAL YEAR ENDED DECEMBER 31, 2004
                        -----------------------------------
                               HIGH CLOSE   LOW CLOSE
                               ----------   ---------
<S>                     <C>                 <C>
First Fiscal Quarter             $1.680       $0.850
Second Fiscal Quarter             1.650        1.400
Third Fiscal Quarter              1.520        1.250
Fourth Fiscal Quarter             2.040        1.300
</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, 2005
was 50 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 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.

     On November 12, 2004, QualMark ACG Corporation (the "Purchaser"), a wholly
owned subsidiary of QualMark Corporation entered into an asset purchase
agreement with ACG Dynamics, Inc. ("ACG") of West Haven, Connecticut to purchase
substantially all of the assets of ACG, subject to certain liabilities ("ACG
Agreement"). On November 15, 2004, the Company closed the acquisition of ACG.
The ACG Agreement provided that on November 15, 2004, ACG deliver to the
Purchaser all of ACG's assets used in its business, subject to certain
liabilities, in exchange for cash in the total amount of $905,000 and restricted
common stock of QualMark equal to $750,000, for a total purchase price of
$1,655,000. The securities were valued at $1.433 per share, the average closing
price of QualMark's common stock over the thirty days of trading immediately
preceding November 10, 2004, resulting in 523,256 shares being issued to the
following owners of ACG; Andrew Grimaldi (209,302), Kenneth Keys (209,302), and
Kevin Tierney (104,652) (Refer to Note 13 of the Financial Statements). The
Company has relied on the exemption from registration available under SEC rule
506 of the Securities Act of 1933 in connection with the issuance of these
securities. The Company has relied on the facts that there are no more than 35
purchasers of the securities of the Company in connection with this offering and
that each purchaser has such knowledge and experience in financial and business
matters that each of them are capable of evaluating the merits and risks of the
investment.


                                      -15-

<PAGE>

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, 2005   DECEMBER 31, 2004
                                                   -----------------   -----------------
<S>                                                <C>                 <C>
Statements of Income Date:
Revenues .......................................         100.0%              100.0%
Cost of revenues ...............................          54.9                53.4
                                                         -----               -----
Gross profit ...................................          45.1                46.6
Selling, general and administrative expenses ...          30.1                28.2
Research and development expenses ..............           5.1                 6.1
Arbitration and related legal expenses .........            --                 2.8
                                                         -----               -----
Income from operations .........................           9.9                 9.5
Other expense ..................................          (0.9)               (0.8)
                                                         -----               -----
Income before income taxes .....................           9.0                 8.7
Income tax benefit .............................           5.1                 3.8
                                                         -----               -----
Net income .....................................          14.1%               12.5%
                                                         =====               =====
</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, 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, 2005 and 2004

REVENUE

     Revenue increased $2,833,000 or 23.6% to $14,845,000 for the year ended
December 31, 2005 from $12,012,000 for the year ended December 31, 2004.

Equipment Revenue

     Equipment revenue increased $897,000 or 8.5% to $11,467,000 for the year
ended December 31, 2005 from $10,570,000 for the year ended December 31, 2004.
The number of units sold in 2005 increased 16.0% over 2004. The increase in
sales for the year ended December 31, 2005 is primarily a direct result of the
Company's aggressive pursuit of international sales, a recovering domestic
economy and the transition of customers from HALT to HASS (HALT is a research
and development based test that requires limited QualMark equipment and HASS is
an integrated quality manufacturing test that requires additional QualMark
testing equipment). As a result of the transition from HALT to HASS, the Company
is generating a higher volume of testing equipment sales per customer. The
Company is continuing its aggressive pursuit of international and domestic sales
in the aerospace/avionics, defense, automotive, medical and consumer/commercial
electronic industries. Current year


                                      -16-

<PAGE>

international system sales remained consistent with the prior year. However, the
geographic distribution of equipment units sold represented an approximately
equal amount for the United States, Europe and Asia Pacific versus a high
concentration in Asia Pacific. The Company attributes the even distribution of
geographic sales to a recovering domestic and European economy and a strong
manufacturing presence in Asia Pacific. The Company continues to be cautiously
optimistic in regards to the recovering domestic and European economy, as a
result the Company is continuing to explore and cultivate its presence in
existing and new markets. QualMark utilizes twenty-nine 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 international sales, or the overall increase in equipment sales.

Test Center (ARTC) Revenue

     Test center revenue decreased $53,000 or 4.4% from $1,199,000 for the year
ended December 31, 2004 to $1,146,000 for the year ended December 31, 2005. In
2005, the Company operated three test centers in the U.S., maintained three
domestic strategic agreement test center operations, and four strategic
agreement test center operations in Europe. In 2004, the Company operated four
test centers in the U.S., maintained three domestic strategic agreement test
center operations, and three strategic agreement test center operations in
Europe. 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 shift
in test center strategy. The Company is continuing to implement the strategic
agreement test center model, in which additional agreements are 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, while obtaining a
continuous flow of sales leads, 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 implemented changes will continue to contribute to
increased margins, expand the Company's customer network, and increase product
awareness; however the Company cannot give any assurances on the ultimate
success.

QualMark ACG Revenue

     Qualmark ACG Corporation generated $243,000 of revenue for six-weeks of
operations in 2004 compared with $2,232,000 generated for the year ended
December 31, 2005. The revenue generated by QualMark ACG included complete
factory rebuilt vibration test systems and shakers, replacement field coils,
replacement armatures, as well as field service support.

The Company did not generate any sales from its QualMark Ling Corporation
subsidiary during 2005.

GROSS MARGIN

     The gross margin for the year ended December 31, 2005 was 45.1%. This
compares to a gross margin of 46.6% for the year ended December 31, 2004. The
decrease in gross margin for the year ended 2005 is primarily due to lower
margins realized through QualMark ACG sales as compared to QualMark sales.

OPERATING EXPENSE

     Total operating expenses increased $766,000 or 17.2% from $4,458,000 for
the year ended December 31, 2004 to $5,224,000 for the year ended December 31,
2005.

Selling, General and Administrative Expense

     Selling, general and administrative expenses increased $1,082,000 or 31.9%
from $3,390,000 for the year ended December 31, 2004 to $4,472,000 for the year
ended December 31, 2005. The primary increase of selling, general, and
administrative expenses during 2005 is attributed to $551,000 of expenses
related to QualMark ACG, which represent 12.3% of total selling, general and
administrative expenses. The Company also incurred additional sales commissions
due to an increase in sales and invested in sales and marketing programs to
expand its total vibration market.


                                      -17-
<PAGE>

Research and Development Expense

     Research and development costs increased $17,000 or 2.3% from $735,000 for
the year ended December 31, 2004 to $752,000 for the year ended December 31,
2005. The increase is primarily attributed to an increase in research and
development staff, including contract labor. 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.

Arbitration and Related Legal Expense

     The Company incurred arbitration and related legal expenses of $333,000 for
the year ended December 31, 2004. On June 19, 2004, the Company was granted
summary judgment for a complaint of copyright infringement brought by Dr. Hobbs,
which was affirmed on March 11, 2005 by the United States Court of Appeals,
Tenth Circuit (refer to Note 12 of the Financial Statements). For the year ended
December 31, 2004, legal costs of $333,000, attributed to defending the
copyright infringement action were included in the financial statements.

INTEREST EXPENSE

     Interest expense increased $51,000 or 51.0% from $100,000 for the year
ended December 31, 2004 to $151,000 for the year ended December 31, 2005. The
increase in expense was due to the addition of Convertible Debt at the end of
2004 (refer to Note 5 of the Financial Statements) used to acquire the assets of
ACG (refer to Note 13 of the Financial Statements), as well as the commercial
bank debt of $2,700,000 (refer to Note 5 of the Financial Statements) obtained
at the end of 2005 to acquire the assets of Ling Electronics (refer to Note 13
of the Financial Statements) at the end of 2005.

INCOME TAX

     For the year ended December 31, 2005, the Company incurred current income
tax expense of $29,000 from estimates made for alternative minimum taxes and
recognized a deferred income tax benefit of $780,000. During the fourth quarter
of 2005, management assessed the realization of its deferred tax assets. Based
on this assessment it was determined to be more likely than not that at least a
portion of the Company's deferred tax asset will be realizable in future
periods. The Company's recognition of a portion of the deferred tax asset
resulted from having a net operating loss ("NOL") carryforward of approximately
$3,000,000 which is available to offset future taxable income, if any through
2024. 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, in which no
assurance can be given.

     For the year ended December 31, 2004, the Company incurred current income
tax expense of $12,000 from estimates made for alternative minimum taxes and
recognized a deferred income tax benefit of $473,000. During the fourth quarter
of 2004, management assessed the realization of its deferred tax assets. Based
on this assessment it was determined to be more likely than not that at least a
portion of the Company's deferred tax asset will be realizable in future
periods. The Company's recognition of a portion of the deferred tax asset
resulted from having a NOL carryforward of approximately $5,500,000. 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, in which no assurance
can be given.

NET INCOME

     Net income increased $586,000 or 39% from $1,502,000 for the year ended
December 31, 2004 to $2,088,000 for the year ended December 31, 2005. The
increase is primarily attributed to the 23.6% increase in revenue and the
recognition of $780,000 of the Company's deferred tax asset in 2005 as compared
to the recognition of the Company's deferred tax asset of $473,000 in 2004.


                                      -18-

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     During 2004, the Company experienced a 52% increase in revenue, which was
primarily attributed to the continued adoption and acceptance of accelerated
testing techniques and a revised sales process that included a move toward value
selling and the Company wide customer satisfaction philosophy. During 2005, the
Company experienced a 24% increase in revenue, which was primarily attributed to
the customer transition from HALT to HASS, which is an integrated quality
manufacturing approach, and the contribution from QualMark ACG, the Company's
wholly owned electrodynamic business unit subsidiary. The Company cannot give
any assurance on the continued demand for its products and/or services. On
February 13, 2004, the Company executed a definitive settlement agreement with
Dr. Hobbs regarding the existing arbitration award, in which the Company paid
approximately $439,000 to Dr. Hobbs during 2004 (refer to Note 12 of the
Financial Statements). These payments are complete and were made primarily from
the Company's cash flow generated from 2004 operations.

     While there is no guarantee that the Company will be able to meet the
operational and financial requirements of its 2006 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
cannot predict with certainty the expected revenues, gross profit margin, net
profit or loss and provision or usage of cash and cash equivalents for 2006.
However, the Company's management believes that the Company's cash and cash
equivalents, working capital, and access to approximately $800,000 of cash that
is available on its commercial bank revolving line of credit provide adequate
capital resources to fund its operations, 2006 scheduled debt payments and
working capital needs through at least the end of 2006, and into the first
quarter of 2007. The Company's inability to modify or replace its debt when it
comes due, 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 2005, the Company generated $91,000 of cash from operating
activities, invested $2,325,000 for the purchase of substantially all of the
assets of Ling Electronics and $288,000 for equipment, borrowed $2,700,000 from
a commercial bank, repaid $234,000 of commercial bank borrowings and received
$69,000 from the issuance of common stock. These activities resulted in a cash
increase of $13,000, for a year-end balance of $529,000 at December 31, 2005.
During 2004, the Company generated $419,000 of cash from operating activities,
invested $905,000 for the purchase of substantially all of the assets of ACG
Dynamics, Inc., $264,000 for equipment, and $6,000 for patents, borrowed
$2,030,000 from commercial banks and commercial bank affiliates, and repaid
$1,234,000 of commercial bank borrowings. These activities resulted in a cash
increase of $74,000, for a year-end balance of $516,000 at December 31, 2004.
The decrease in cash generated from operating activities from $419,000 in 2004
to $91,000 in 2005 primarily resulted in the increase in net working capital and
the increase in other assets, which was the result of a $350,000 additional
deposit required by the Convertible Debt holder (refer to Note 5 of the
Financial Statements) to complete the asset acquisition of Ling Electronics
(refer to Note 13 of the Financial Statements).

     The Company's commercial borrowings consist of two term loans, a revolving
line of credit, and a convertible debt agreement (Refer to Note 5 of the
Financial Statements).

     On November 9, 2004 the Company refinanced its existing Credit Agreement
and entered into a new credit facility (the "Credit Facility") with Silicon
Valley Bank (the "Commercial Bank"). The Credit Facility consists of a $750,000,
three-year term loan payable with monthly payments of $20,800 and a $1,500,000,
one-year revolving line of credit. The interest rate for the revolving line of
credit is set at a per annum rate of 1% over the Prime Rate ("Prime") with a
minimum interest rate of 5.5%. The interest rate for the term loan is set at a
per annum rate of interest equal to the sum of (a) the U.S. treasury note yield
to maturity for a 36 month term as quoted in the Wall Street Journal, plus (b)
375 basis points, or 3.75%, with a minimum interest rate of 6.5% per annum. Both
the revolving credit line and term loan under the Credit Facility are
collateralized by substantially all the assets of the Company (refer to Note 5
of the Financial Statements). Borrowings under the line of credit are subject to
borrowing base limits. As of December 31, 2005, there was $800,000 of
availability on the line of credit. The amount outstanding under the term loan
at December 31, 2005 was $496,000.


                                      -19-

<PAGE>

     On, November 11, 2004, the Company entered into a $1,000,000, five-year,
interest only subordinated, Convertible Debt agreement ("Convertible Debt") with
an affiliate of the Commercial Bank. The Convertible Debt initially bears
interest at a rate of 8% per annum and is subordinate to the Credit Facility
with the Commercial Bank. As long as the Company remains in compliance with the
Convertible Debt agreement, on the first day of the month following each
anniversary date, this interest rate will be reduced 2.083 basis points for each
penny that the average closing price of the Company's common stock over the
preceding 20 trading day period exceeds $1.66. The interest rate at December 31,
2005 was 6.63%. The Convertible Debt conversion provision allows for the initial
$1,000,000 advance to be converted, at the Debt Holder's option, into common
stock of the Company at a price of $1.66 per share (the "Conversion Price")
(which was the market price per share at the date of the Convertible Debt
transaction) at any time during the five-year period. The Company can initiate
conversion of the Convertible Debt into common stock at the Conversion Price any
time after November 11, 2007, provided that the Company has given the
Convertible Debt holder 30 days notice, is in compliance with the financial
covenants, and the Company's common stock has traded at $4.98 for 20 consecutive
days.

     On December 8, 2005, the Company entered into an additional Loan Agreement
(the "Loan Agreement"), with the Commercial Bank in order to finance the
acquisition of the assets acquired from SatCon. The Loan Agreement provides for
a term loan in the amount of $2 million to be in addition to the Company's
existing term loan under the Credit Facility originally in the amount of
$750,000. The term of the additional Loan Agreement is 36 months, with monthly
principal payments of $56,000. The loan initially bears interest at a rate of
3.5% per annum plus the 36 month U.S. Treasury rate fixed at the time of each
advance, which yields a current rate of 8.0%. The Loan Agreement provides for a
termination fee of 3% at one to 12 months, 2% in months 13 to 24 and 1% in
months 25 to 36. A one time pre-payment of up to $500,000 is allowed with no
early termination fee. The amount outstanding under the Loan Agreement at
December 31, 2005 was $2,000,000.

     On December 12, 2005, the Company entered into a Loan Modification
Agreement (the "Loan Modification Agreement") with the Convertible Debt holder,
to modify certain existing loan documents. The Loan Modification Agreement
provided that the $2,000,000 proceeds received from the Loan Agreement on
December 8, 2005 be used exclusively to acquire the assets of Ling Electronics
from SatCon. The Loan Modification Agreement further provided that a cash
deposit of $350,000 was made with the Convertible Debt holders as additional
security for the obligations under the pre-existing loan agreement. The deposit
does not bear interest and at the maturity date of the loan, shall be applied to
the outstanding obligations or shall be returned to the Company if the
Convertible Debt is converted. The Loan Modification Agreement finally provides
that monthly interest payments will be paid quarterly in common stock of the
Company rather than cash as long as the preferred stock investor receives
dividends payable in preferred stock (refer to Note 8 of the Financial
Statements). Subsequently, on March 1, 2006, the Convertible Debt holder
converted $40,000 of the outstanding Convertible Debt into 24,096 shares of the
Company's common stock.

     The Company's average interest rate for the years ended December 31, 2005
and 2004, was 7.01% and 7.50%, respectively.

     As required by the Credit Facility and the Loan Agreement, the Company will
make total principal payments of $76,800 on both term loans during 2006. The
Company has also determined that, during 2006, draws on the revolving line of
credit will be made based on operational cash flow needs or growth based
initiatives.

     The following represents future amounts payable at December 31, 2005 (in
thousands).

<TABLE>
<CAPTION>
  Year ended
  December 31,
---------------
<S>               <C>
     2006         $1,617
     2007            917
     2008            662
     2008             --
2009 (November)    1,000
                  ------
                  $4,196
                  ======
</TABLE>


                                      -20-

<PAGE>

Other Contractual Obligations

     For more information on the Company's contractual obligations on operating
leases, refer to Note 6 of Financial Statements. At December 31, 2005, the
Company's commitments under these obligations were as follows (in thousands):

<TABLE>
<CAPTION>
 Year ended    OPERATING
December 31,     LEASES
------------   ---------
<S>            <C>
    2006         $  351
    2007            268
    2008            238
    2009            184
    2010             77
                 ------
                 $1,118
                 ======
</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 consolidated 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
consolidated 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).


                                      -21-
<PAGE>

     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 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, 2005, the Company reversed a portion of
its deferred tax asset valuation allowance by $780,000. The Company's decision
was based on the financial results of 2005 and the estimated budget financial
results for 2006. If future taxable income is less than the amount that has been
assumed in determining the deferred tax asset, an increase in the valuation
allowance will be required with a corresponding charge against income. If future
taxable income exceeds the level that has been assumed in calculating the
deferred tax asset, the valuation allowance could be reduced with a
corresponding credit to income. At December 31, 2004, the Company reversed a
portion of its deferred tax asset allowance to record a deferred tax asset of
$473,000. The recognition of this asset was based on the financial results of
2004 and the estimated budget financial results for 2005 (Refer to Note 7 of the
Financial Statements).

     The Company accounts for employee stock-based compensation using Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). Accordingly, no compensation expense has been recognized for options
granted to employees at fair market value. In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123(R), Share-Based Payment,
which addresses the accounting for share-based compensation transactions. SFAS
No. 123(R) eliminates the ability to account for share-based compensation
transactions using APB 25, and generally requires instead that such transactions
be accounted and recognized in the statement of operations based on their fair
value. SFAS No. 123(R) will be effective for the Company beginning January 1,
2006. The Company is currently evaluating the methods of adoption available
under SFAS 123(R). The implementation of this standard could have a material
impact on the Company's financial position and results of operations.

Risk Factors:

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 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.


                                      -22-

<PAGE>

     The Company believes its strategy to actively purchase, refurbish and sell
a surplus of used QualMark Typhoon 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 Typhoon equipment from the domestic market or
successfully compete in the changing test center market could result in a
decrease in demand for its new Typhoon 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.

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
(which are not material for the Company, as they have not had any impact on the
Financial Statements); 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.


                                      -23-

<PAGE>

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.

Acquisitions

     On December 13, 2005, QualMark Corporation completed the asset acquisition
of Massachusetts based Ling Electronics (Ling), an electrodynamic shaker
manufacturing company, from SatCon Power Systems Inc., a subsidiary of SatCon
Technology. On November 15, 2004, QualMark Corporation completed the asset
acquisition of Connecticut based ACG Dynamics Inc.(ACG), an electrodynamic
shaker service company. Ling and ACG's results may fluctuate due to a number of
factors, including: successful integration with QualMark, 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. Ling and ACG's 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
results of operations. We cannot guarantee that Ling or ACG's results of
operations will not be adversely affected in the future.

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 Credit Facility and Loan Agreement which
total $3,196,000 at December 31, 2005 (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, 2005 would be an annual increase or decrease of
approximately $32,000 in interest expense for a twelve-month period.


                                      -24-

<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

     Index to Financial Statements:

<TABLE>
<CAPTION>
                                                                     PAGE NUMBER
                                                                     -----------
<S>                                                                  <C>
Report of Independent Registered Public Accounting Firm                  F-1
Consolidated Statements of Income                                        F-2
Consolidated Balance Sheets                                              F-3
Consolidated Statements of Shareholders' Equity                          F-4
Consolidated Statements of Cash Flows                                    F-5
Notes to Consolidated Financial Statements                               F-7
</TABLE>

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

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

     None.

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. As of the end of the period
covered by the 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.

(b) Internal Control Over Financial Reporting:

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.

ITEM 8B. OTHER INFORMATION

     None.


                                      -25-

<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

     All reports required under section 16(a) beneficial ownership reporting
were filed in a timely manner.

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 the 2003 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.

ITEM 13. EXHIBITS

(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, 2005.

     On October 25, 2005, the Company issued a press release announcing its
     earnings for the third quarter and year to date ended September 30, 2005.
     The Company also held a conference call on October 25, 2005 at 11:00am EST
     to discuss the October 25, 2005 press release.

     On November 16, 2005, Alan T. Valenti, a member of the Company's Board of
     Directors submitted a letter of resignation to the Company indicating his
     need to further focus on his other professional responsibilities. On
     November 17, 2005, Christopher Roser was unanimously appointed to the
     Company's Board of Directors.

     On December 8, 2005, QualMark Ling Corporation, a wholly owned subsidiary
     of QualMark Corporation entered into an asset purchase agreement with
     SatCon Power Systems, Inc., of Massachusetts, to purchase substantially all
     of the assets and assume certain liabilities of Ling Electronics. In order
     to finance the acquisition of the assets of Ling Electronics, QualMark
     entered into a Loan and Security Agreement on December 8, 2005


                                      -26-

<PAGE>

     with Silicon Valley Bank and modified the terms of its existing convertible
     debt with Partners for Growth, L.P on December 12, 2005.

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.


                                      -27-
<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 30, 2006                   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      March 30, 2006
-------------------------------------   Officer and Director
Charles D. Johnston


/s/ Anthony A. Scalese                  Chief Financial Officer and     March 30, 2006
-------------------------------------   Principal Accounting Officer
Anthony A. Scalese


/s/ James L.D. Roser                    Director                        March 30, 2006
-------------------------------------
James L.D. Roser


/s/ William J. Sanko                    Director                        March 30, 2006
-------------------------------------
William J. Sanko


/s/ Christopher Roser                   Director                        March 30, 2006
-------------------------------------
Christopher Roser


/s/ Gerald Laber                        Director                        March 30, 2006
-------------------------------------
Gerald Laber
</TABLE>


                                      -28-

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
QualMark Corporation
Denver, Colorado

We have audited the accompanying consolidated balance sheets of QualMark
Corporation and subsidiaries (the "Company") as of December 31, 2005 and 2004,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the two-year period ended December 31, 2005.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QualMark Corporation
and subsidiaries as of December 31, 2005 and 2004, and the results of their
income and their cash flows for each of the years in the two-year period ended
December 31, 2005 in conformity with accounting principles generally accepted in
the United States of America.

/s/ GHP HORWATH, P.C.

Denver, Colorado
March 1, 2006


                                      F-1

<PAGE>

QUALMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                   YEARS ENDED
                                                   DECEMBER 31,
                                                -----------------
                                                  2005      2004
                                                -------   -------
<S>                                             <C>       <C>
Revenues                                        $14,845   $12,012
Cost of revenues                                  8,144     6,416
                                                -------   -------
   Gross profit                                   6,701     5,596
                                                -------   -------
Selling, general and administrative expenses      4,472     3,390
Research and development expenses                   752       735
Arbitration and related legal expenses               --       333
                                                -------   -------
   Total operating expenses                       5,224     4,458
                                                -------   -------
   Income from operations                         1,477     1,138
Other income (expense):
   Interest expense                                (151)     (100)
   Interest income and other                         11         3
                                                -------   -------
Income before income taxes                        1,337     1,041
Income tax benefit                                  751       461
                                                -------   -------
Net income                                      $ 2,088   $ 1,502
                                                =======   =======
Net income per basic common share (Note 1)      $  0.37   $  0.29
                                                =======   =======
Net income per diluted common share (Note 1)    $  0.25   $  0.20
                                                =======   =======
Weighted average shares outstanding - basic       4,266     3,675
                                                =======   =======
Weighted average shares outstanding - diluted     8,851     7,367
                                                =======   =======
</TABLE>

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


                                      F-2

<PAGE>

QUALMARK CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                             -----------------
                                                               2005      2004
                                                             -------   -------
<S>                                                          <C>       <C>
ASSETS
Current assets:
   Cash and cash equivalents                                 $   529   $   516
   Trade accounts and note receivable, net of allowance
      of $51 and $50, respectively, for doubtful accounts      3,478     2,748
   Inventories, net                                            2,888       749
   Current deferred tax assets, net                              515       120
   Other current assets                                           82       183
                                                             -------   -------
      Total current assets                                     7,492     4,316
Property and equipment, net                                      922       592
Restricted cash                                                   90        90
Goodwill                                                       1,057     1,057
Intangible assets                                                728       296
Non-current deferred tax assets, net                             738       353
Other assets                                                     513       184
                                                             -------   -------
                                                             $11,540   $ 6,888
                                                             =======   =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                          $   684   $   676
   Accrued expenses                                            1,019       953
   Deferred revenue                                               49        89
   Current portion of long-term debt                             917       250
   Revolving line of credit                                      700        --
                                                             -------   -------
      Total current liabilities                                3,369     1,968
   Deferred revenue                                               35        48
   Long-term debt                                              2,579     1,480
   Other liabilities                                              20        12
                                                             -------   -------
      Total liabilities                                        6,003     3,508
                                                             -------   -------
Commitments and contingencies
Convertible redeemable preferred stock; 2,000,000 shares
   authorized (Note 8):
   1,000,000 designated as Series B, 740,736 shares (2005)
      and 683,967 shares (2004) issued and outstanding,
      liquidation preference of $1,657 (2005)                  1,627     1,500
                                                             -------   -------
   3,000 designated as Series C, 1,297 shares (2005) and
      1,198 shares (2004) issued and outstanding,
      liquidation preference of $1,350 (2005)                  1,166       799
                                                             -------   -------
Shareholders' equity:
   Common stock; no par value; 15,000,000 shares
      authorized; 4,417,706 shares (2005) and 4,133,348
      shares (2004) issued and outstanding                     7,343     7,768
   Accumulated deficit                                        (4,599)   (6,687)
                                                             -------   -------
      Total shareholders' equity                               2,744     1,081
                                                             -------   -------
                                                             $11,540   $ 6,888
                                                             =======   =======
</TABLE>

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


                                      F-3
<PAGE>

QUALMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDING DECEMBER 31, 2005 AND 2004
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)

<TABLE>
<CAPTION>
                                                                  COMMON STOCK         ACCUMULATED
                                                              -------------------   ----------------
                                                                SHARES     AMOUNT   DEFICIT    TOTAL
                                                              ---------   -------   -------   ------
<S>                                                           <C>         <C>       <C>       <C>
Balance January 1, 2004                                       3,610,092   $7,444    $(8,189)  $ (745)
Issuance of common stock in connection with the acquisition     523,256      750         --      750
Preferred stock dividends                                            --     (212)        --     (212)
Accretion of redeemable preferred stock                              --     (214)        --     (214)
Net income                                                           --       --      1,502    1,502
                                                              ---------   ------    -------   ------
Balance December 31, 2004                                     4,133,348   $7,768    $(6,687)  $1,081
                                                              ---------   ------    -------   ------
Options and warrants exercised                                  284,358       69         --       69
Preferred stock dividends                                            --     (230)        --     (230)
Accretion of redeemable preferred stock                              --     (264)        --     (264)
Net income                                                           --       --      2,088    2,088
                                                              ---------   ------    -------   ------
Balance December 31, 2005                                     4,417,706   $7,343    $(4,599)  $2,744
                                                              =========   ======    =======   ======
</TABLE>

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


                                      F-4
<PAGE>

QUALMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                                   ------------------------
                                                                        2005      2004
                                                                      -------   -------
<S>                                                                <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                            $ 2,088   $ 1,502
Adjustments to reconcile net income to net cash provided by
   operating activities:
   Increase in provision for inventory reserve                              1         5
   Provision for bad debts                                                  1        22
   Depreciation and amortization                                          337       288
   Deferred tax benefit                                                  (780)     (473)
   Other                                                                   --         7
Changes in assets and liabilities, net of business acquisitions:
   Trade accounts and note receivable                                    (731)     (363)
   Inventories                                                           (480)      (83)
   Other assets                                                          (263)     (290)
   Accounts payable                                                         4      (246)
   Accrued expenses                                                       (40)      410
   Accrued arbitration settlement                                          --      (426)
   Customer deposits and deferred revenue                                 (53)       66
   Other liabilities                                                        7        --
                                                                      -------   -------
      Net cash provided by operating activities                            91       419
                                                                      -------   -------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition of Ling Electronics                          (2,325)       --
Cash paid for acquisition of ACG Dynamics, Inc.                            --      (905)
Acquisition of property and equipment                                    (288)     (230)
Investment in patents                                                      --        (6)
                                                                      -------   -------
      Net cash used in investing activities                            (2,613)   (1,141)
                                                                      -------   -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock                                                   69        --
Proceeds from borrowings                                                2,700     2,030
Repayments of borrowings                                                 (234)   (1,234)
                                                                      -------   -------
      Net cash provided by financing activities                         2,535       796
                                                                      -------   -------
Net increase in cash and cash equivalents                                  13        74
Cash and cash equivalents at beginning of year                            516       442
                                                                      -------   -------
Cash and cash equivalents at end of year                              $   529   $   516
                                                                      =======   =======
SUPPLEMENTAL DISCLOSURE
Interest paid                                                         $   131   $    91
                                                                      =======   =======
Income tax paid                                                       $    28   $    --
                                                                      =======   =======
NON-CASH INVESTING AND FINANCING ACTIVITIES
Transfer of equipment to inventory held for resale                    $    20   $    22
                                                                      =======   =======
Exchange of equipment for other assets                                $    --   $    31
                                                                      =======   =======
Preferred stock dividends                                             $   230   $   212
                                                                      =======   =======
Accretion of redeemable preferred stock                               $   264   $   214
                                                                      =======   =======
Capital lease obligations                                             $    20   $    34
                                                                      =======   =======
</TABLE>

                                   (continued)


                                      F-5

<PAGE>


QUALMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)

<TABLE>
<S>                                         <C>
Acquisition of Ling Electronics (2005):
Assets acquired:
   Inventory                                $1,639
   Property and equipment                       68
   Vendor tooling                              240
   Trade name and symbol                       488
Liabilities assumed:
   Warranty                                   (106)
   Closing costs                                (4)
                                            ------
Net assets acquired - cash paid             $2,325
                                            ======
Acquisition of ACG Dynamics, Inc (2004).:
Assets acquired:
   Accounts receivable                      $  288
   Inventory                                   270
   Property and equipment                       33
   Other assets                                 45
   Customer list                               152
   Non-compete agreements                       74
   Goodwill                                  1,057
Liabilities assumed:
   Accounts payable                            (41)
   Accrued expenses                           (108)
   Customer deposits                           (99)
   Closing costs                               (16)
                                            ------
Net assets acquired                          1,655
Less: QualMark common stock issued            (750)
                                            ------
Net cash paid                               $  905
                                            ======
</TABLE>

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


                                      F-6
<PAGE>

QUALMARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLDIATED 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 or (Typhoon Systems) 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,
Hillboro, Oregon, and Huntsville, Alabama. In addition, the Company has
established strategic agreements with IMQ Instituto Del Marchia Di Qualita,
Institutet For Verkstadsteknisk Forskning, and the Swedish Institute of
Production Engineering to operate testing centers in Enschede, Netherlands,
Milan, Italy, and Molndal, Sweden. As domestic or 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.

     On November 15, 2004, QualMark completed the asset acquisition of
Connecticut based ACG Dynamics Inc. ("ACG") an electrodynamic shaker service
company. ACG is headquartered in West Haven, Connecticut and is a leader in
supplying electrodynamic systems, components, and service to the worldwide
vibration test equipment market. QualMark formed a separate wholly-owned
subsidiary, QualMark ACG Corporation ("QualMark ACG"), to acquire substantially
all assets subject to certain liabilities of ACG. The newly formed QualMark ACG
provides turn-key vibration testing systems consisting of factory
rebuilt/upgraded electrodynamic systems, new QualMark ACG solid state power
amplifiers and digital vibration controllers.

     On December 13, 2005, QualMark entered into an asset purchase agreement
with SatCon Power Systems, Inc. ("SatCon") of Boston, Massachusetts to purchase
certain of the assets and assume certain of the liabilities of SatCon related to
its Ling Electronics ("Ling") Shaker and Amplifier business operations. SatCon
is a division of SatCon Technology Corporation, which was founded in 1986. Ling
is a manufacturer of vibration, shock and high intensity sound environmental
test systems and fixtures. QualMark formed a separate wholly-owned C-corporation
subsidiary, QualMark Ling Corporation ("QualMark Ling"), to assume all acquired
assets subject to certain liabilities of Ling. Immediately following the
acquisition, the Company moved all purchased assets from Massachusetts to its
Connecticut facility and began operations. The Company intends to combine ACG


                                      F-7

<PAGE>

and Ling into one reporting business unit and provide a full complement of new
and refurbished electrodynamic systems, parts and service.

LIQUIDITY

     During 2004, the Company experienced a 52% increase in revenue, which was
primarily attributed to the continued adoption and acceptance of accelerated
testing techniques and a revised sales process that included a move toward value
selling and the Company wide customer satisfaction philosophy. During 2005, the
Company experienced a 24% increase in revenue, which was primarily attributed to
the customer transition from HALT to HASS, which is an integrated quality
manufacturing approach, and the contribution from QualMark ACG, the Company's
wholly owned electrodynamic business unit subsidiary. The Company cannot give
any assurance on the continued demand for its products and/or services. On
February 13, 2004, the Company executed a definitive settlement agreement with
Dr. Hobbs regarding the existing arbitration award, in which the Company paid
approximately $439,000 to Dr. Hobbs during 2004 (Note 12). These payments are
complete and were made primarily from the Company's cash flow generated from
2004 operations.

     While there is no guarantee that the Company will be able to meet the
operational and financial requirements of its 2006 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 2006.
However, the Company's management believes that the Company's cash and cash
equivalents, working capital, and access to approximately $800,000 of cash that
is available on its commercial bank revolving line of credit provide adequate
capital resources to fund its operations, 2006 debt and working capital needs
through at least the end of 2006, and into the first quarter of 2007. The
Company's inability to modify or replace its debt when it comes due, 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 2005 and 2004, one customer comprised approximately
13% and 22%, respectively, of the Company's revenue. 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 overhead.


                                      F-8

<PAGE>

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, 2005 and 2004, management believes that no impairment has occurred.

REVENUE RECOGNITION

     Revenues from product sales are recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is probable. Generally, the criteria are met
upon shipment of products on an F.O.B shipping point basis and transfer of title
to customers. In certain instances, the Company will recognize revenue prior to
shipment when the customer requests in writing that the transaction be on a bill
and hold basis, the risk of ownership has passed to the customer, the
manufactured equipment is segregated, complete and ready for shipment, and there
is a fixed schedule for delivery of the equipment and no specific performance
obligations exist. Revenue from services 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 2005 and 2004
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 or benefit for income taxes includes amounts that
represent 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. At December 31, 2005, the Company has a deferred tax asset of
$1,253,000. The recognition of this asset was based on the financial results of
2004 and 2005 and the estimated


                                      F-9

<PAGE>

budgeted financial results for 2006. If future taxable income is less than the
amount that has been assumed in determining the deferred tax asset, an increase
in the valuation allowance may be required with a corresponding charge against
income. If future taxable income exceeds the level that has been assumed in
calculating the deferred tax asset, the valuation allowance could be reduced
with a corresponding credit to income. (Note 7).

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 2005
and 2004, 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 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 per basic share of common stock is based on the weighted average
number of shares of common stock outstanding during each respective period.
Earnings 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
if-converted or treasury-stock methods. In a period in which a loss is incurred,
only the weighted average number of common shares is used to compute the diluted
loss per share as the inclusion of potential common shares would be
antidilutive, 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>
                                                         YEARS ENDED
                                                         DECEMBER 31,
                                                       ---------------
                                                        2005     2004
                                                       ------   ------
<S>                                                    <C>      <C>
BASIC:
Net income                                             $2,088   $1,502
Accretion of redeemable preferred stock                  (264)    (214)
Preferred stock dividends                                (230)    (212)
                                                       ------   ------
Net income applicable to common shareholders-basic     $1,594   $1,076
                                                       ======   ======
Weighted average shares outstanding - basic             4,266    3,675
                                                       ======   ======
Net income per share - basic                           $ 0.37   $ 0.29
                                                       ======   ======

DILUTED:
Net income                                             $2,088   $1,502
Interest expense from convertible debt                     80       10
                                                       ------   ------
Net income applicable to common shareholders-diluted   $2,168   $1,512
                                                       ======   ======
Weighted average shares outstanding - basic             4,266    3,675
Dilutive securities                                     4,585    3,692
                                                       ------   ------
Weighted average shares outstanding - diluted           8,851    7,367
                                                       ======   ======
Net income per share - diluted                         $ 0.25   $ 0.20
                                                       ======   ======
</TABLE>


                                      F-10
<PAGE>

          Options and warrants to purchase 242,088 shares of common stock
     (calculated using the treasury stock method), 713,032 (3,739,784 if
     converted to common shares, refer to Note 8) preferred shares, and 602,410
     shares underlying convertible debt, (Note 5) were included in the dilutive
     calculation for the year ended December 31, 2005.

          Options and warrants to purchase 163,390 shares of common stock
     (calculated using the treasury stock method), 658,387 (3,453,173 if
     converted to common shares, refer to Note 8) preferred shares, and 75,301
     shares underlying convertible debt, (Note 5) were included in the dilutive
     calculation for the year ended December 31, 2004.

     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, 2005 and 2004, comprehensive income
     equaled net income.

     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
     SFAS No. 123, the Company's results would have been changed to the pro
     forma amounts indicated below (in thousands, except in per share amounts):

<TABLE>
<CAPTION>
                                                        YEARS ENDED
                                                        DECEMBER 31,
                                                      ---------------
                                                       2005     2004
                                                      ------   ------
<S>                                                   <C>      <C>
Net income applicable to common shareholders          $1,594   $1,076
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                               (186)    (201)
                                                      ------   ------
Pro forma net income                                  $1,408   $  875
                                                      ======   ======
Income per share:
Basic - as reported                                   $ 0.37   $ 0.29
                                                      ======   ======
Diluted - as reported                                 $ 0.25   $ 0.20
                                                      ======   ======
Basic - pro forma                                     $ 0.33   $ 0.24
                                                      ======   ======
Diluted - pro forma                                   $ 0.22   $ 0.18
                                                      ======   ======
</TABLE>

          The fair value of options granted in 2005 and 2004 are $142,000 and
     $171,000 respectively. The fair value of each option and grant was
     estimated on the date of grant using the Black-Scholes option-pricing model
     with the


                                      F-11

<PAGE>

     following weighted-average assumptions used for grants in the years ended
     December 31, 2005 and 2004: dividend yield of zero; expected volatility
     ranging from 100% to 139% ; risk-free interest rates ranging from 2.5% to
     3.5%; and an expected term of three to ten years.

    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

          In December 2004, the Financial Accounting Standards Board ("FASB")
     issued SFAS No. 123(R), Share-Based Payment, which addresses the accounting
     for share-based compensation transactions. SFAS No. 123(R) eliminates the
     ability to account for share-based compensation transactions using APB 25,
     and generally requires instead that such transactions be accounted and
     recognized in the statement of operations based on their fair value. SFAS
     No. 123(R) will be effective for public companies that file as small
     business issuers as of the first interim or annual reporting period that
     begins after December 15, 2005. The Company is evaluating the provisions
     and will apply this standard beginning the first quarter of 2006. Depending
     upon the number and terms of options that may be granted in future periods,
     the implementation of this standard could have a material impact on the
     Company's results of operations.

          In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
     Financial Instruments with Characteristics of both Liabilities and Equity,
     which establishes standards for how an issuer classifies and measures
     certain financial instruments with characteristics of both liabilities and
     equity. SFAS No. 150 requires that an issuer classify a financial
     instrument that is within its scope, which may have previously been
     reported as equity, as a liability (or an asset is some circumstances).
     Mandatorily redeemable instruments (i.e. instruments issued in the form of
     shares that unconditionally obligate the issuer to redeem the shares for
     cash or by transferring other assets) are to be reported as liabilities by
     their issuers. This statement does not affect the classification or
     measurement of convertible bonds, puttable stock, or other outstanding
     shares that are conditionally redeemable. 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 of 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 Company's
     financial position or results of operations.

2.   INVENTORIES

     Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                  DECEMBER 31,
                                 -------------
                                  2005    2004
                                 ------   ----
<S>                              <C>      <C>
Raw materials                    $2,368   $620
Work in process                     496     57
Finished goods                      276    124
Less: Reserve for obsolescence     (252)   (52)
                                 ------   ----
                                 $2,888   $749
                                 ======   ====
</TABLE>

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


                                      F-12

<PAGE>

3.   PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                     -----------------
                                       2005      2004
                                     -------   -------
<S>                                  <C>       <C>
Machinery and equipment              $ 2,237   $ 2,229
Furniture and fixtures                   118       139
Leasehold improvements                   387       408
Software                                 153       302
                                     -------   -------
                                       2,895     3,078
Less: Accumulated depreciation and
   amortization                       (1,973)   (2,486)
                                     -------   -------
                                     $   922   $   592
                                     =======   =======
</TABLE>

     Depreciation expense was approximately $231,000 and $273,000 for the years
ended December 31, 2005 and 2004, respectively.

4.   ACCRUED EXPENSES

     Accrued expenses consist of the following (in thousands):

<TABLE>
                             DECEMBER 31,
                            -------------
                             2005    2004
                            ------   ----
<S>                         <C>      <C>
Accrued warranty (Note 6)   $  294   $172
Accrued employee related       373    420
Accrued bonus                  156    191
Other                          196    170
                            ------   ----
                            $1,019   $953
                            ======   ====
</TABLE>

5.   INDEBTEDNESS

     The Company's commercial borrowings consist of a term loan, a revolving
line of credit, (the "Credit Agreement") and a convertible debt agreement (the
"Convertible Debt").

     On November 9, 2004 the Company refinanced its existing Credit Agreement
and entered into a new credit facility (the "Credit Facility") with Silicon
Valley Bank (the "Commercial Bank"). The Credit Facility consists of a $750,000,
three-year term loan payable with monthly payments of $20,800 and a $1,500,000,
one-year revolving line of credit. The interest rate for the revolving line of
credit is set at a per annum rate of 1% over the Prime Rate ("Prime") with a
minimum interest rate of 5.5%. The interest rate for the term loan is set at a
per annum rate of interest equal to the sum of (a) the U.S. treasury note yield
to maturity for a 36 month term as quoted in the Wall Street Journal, plus (b)
375 basis points, or 3.75%, with a minimum interest rate of 6.5% per annum. As
of December 31, 2005 the interest rate was 7.25%.Both the revolving credit line
and term loan under the Credit Facility 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, 2005, there was $800,000 of
availability on the line of credit. The amount outstanding under the term loan
at December 31, 2005 was $496,000.

     On, November 11, 2004, the Company entered into a $1,000,000, five-year,
interest only subordinated, Convertible Debt agreement with an affiliate of the
Commercial Bank. The Convertible Debt initially bears interest at a rate of 8%
per annum and is subordinate to the Credit Facility with the Commercial Bank. As
long as the Company remains in compliance with the Convertible Debt agreement,
on the first day of the month following each anniversary date, this interest
rate will be reduced 2.083 basis points for each penny that the average closing
price of the Company's common stock over the preceding 20 trading day period
exceeds $1.66. The interest rate at December 31, 2005 was 6.63%. The Convertible
Debt conversion provision allows for the initial $1,000,000 advance to be
converted, at the debt holder's option, into common stock of the Company at a
price of $1.66 per share (the "Conversion Price") (which was the market price
per share at the date of the Convertible Debt transaction) at any time during
the five-year period. The Company can initiate conversion of the Convertible
Debt into common stock at the Conversion Price any time after November 11, 2007,
provided that the Company has given the Convertible Debt holder 30 days notice,
is in compliance with the financial covenants, and the Company's common stock
has traded at $4.98 for 20 consecutive days.


                                      F-13

<PAGE>

     On December 8, 2005, the Company entered into an additional Loan Agreement
(the "Loan Agreement"), with the Commercial Bank in order to finance the
acquisition of the assets acquired from SatCon (Note 13). The Loan Agreement
provides for a term loan in the amount of $2 million to be in addition to the
Company's existing term loan under the Credit Facility originally in the amount
of $750,000. The term of the additional Loan Agreement is 36 months, with
monthly principal payments of $56,000. The loan initially bears interest at a
rate of 3.5% per annum plus the 36 month U.S. Treasury rate fixed at the time of
each advance, which yields a current rate of 8.0%. The Loan Agreement provides
for a termination fee of 3% at one to 12 months, 2% in months 13 to 24 and 1% in
months 25 to 36. A one time pre-payment of up to $500,000 is allowed with no
early termination fee. The amount outstanding under the Loan Agreement at
December 31, 2005 was $2,000,000.

     On December 12, 2005, the Company entered into a Loan Modification
Agreement (the "Loan Modification Agreement") with the Convertible Debt holder,
to modify certain existing loan documents. The Loan Modification Agreement
provided that the $2,000,000 proceeds received from the Loan Agreement on
December 8, 2005 be used exclusively to acquire the assets of Ling Electronics
from SatCon. The Loan Modification Agreement further provided that a cash
deposit of $350,000 was made with the Convertible Debt holders as additional
security for the obligations under the pre-existing loan agreement. This
additional cash security deposit was recorded as an other long-term asset. The
deposit shall not bear interest and at the maturity date of the loan, shall be
applied to the outstanding obligations or shall be returned to the Company if
the Convertible Debt is converted. The Loan Modification Agreement finally
provides that monthly interest payments will be paid quarterly in common stock
of the Company rather than cash as long as the preferred stock investor receives
dividends payable in preferred stock (Note 8). Through  March 1, 2006, the
Convertible Debt holder converted $40,000 of the outstanding Convertible Debt
into 24,096 shares of the Company's common stock. The Convertible Debt holder
also received 12,195 shares of the Company's common stock, which total $21,195,
for payment of interest.

     The Company's average interest rate for the years ended December 31, 2005
and 2004, was 7.01% and 7.50%, respectively.

     As required by the Credit Facility and the additional Loan Agreement, the
Company will make total monthly principal payments of $76,800 on both term loans
during 2006. The Company has also determined that, during 2006, draws on the
revolving line of credit will be made based on operational cash flow needs or
growth based initiatives.

     The following represents future amounts payable at December 31, 2005 (in
thousands).

<TABLE>
<S>                       <C>
Year ended December 31,
         2006             $1,617
         2007                917
         2008                662
         2008                 --
    2009 (November)        1,000
                          ------
                          $4,196
                          ======
</TABLE>


                                      F-14
<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, 2005 (in thousands):

<TABLE>
<CAPTION>
                          OPERATING
                            LEASES
                          ---------
<S>                       <C>
Year ended December 31,
2006                        $  351
2007                           268
2008                           238
2009                           184
2010                            77
                            ------
                            $1,118
                            ======
</TABLE>

     Rent expense for the years ended December 31, 2005 and 2004 was
approximately $489,000 and $412,000, 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 used as collateral for certain initial tenant
improvements to this facility. The LOC had an initial expiration date of July
31, 2004, but has been extended through July 31, 2006. 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, 2005 and 2004 (in
thousands):

<TABLE>
<CAPTION>
                                 YEARS ENDED
                                 DECEMBER 31,
                                -------------
                                 2005    2004
                                -----   -----
<S>                             <C>     <C>
Balance, January 1              $ 172   $ 123
Warranty expenditures            (144)   (146)
Ling warranty costs (Note 13)     106
Provision for warranty costs      160     195
                                -----   -----
Balance, December 31            $ 294   $ 172
                                =====   =====
</TABLE>

7. INCOME TAXES

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

<TABLE>
<CAPTION>
                                    YEARS ENDED
                                    DECEMBER 31,
                                  ---------------
                                    2005     2004
                                  -------   -----
<S>                               <C>       <C>
Current tax expense (benefit)
   Federal                        $    29   $  12
   State                               --      --
                                  -------   -----
                                       29      12
Deferred tax expense (benefit)
   Federal                            465     364
   State                               66      54
                                  -------   -----
                                      531     418
                                  -------   -----
Decrease in valuation allowance    (1,311)   (891)
                                  -------   -----
                                  $  (751)  $(461)
                                  =======   =====
</TABLE>


                                      F-15

<PAGE>

For 2005, income tax expense (benefit) includes approximately $587,000 resulting
from the utilization of NOL carryforwards. A reconciliation of the statutory
Federal income tax rate to the income tax benefit is as follows (in thousands):

<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                                             --------------------------------
                                                   2005             2004
                                             ---------------   --------------
                                              AMOUNT     %     AMOUNT     %
                                             -------   -----   ------   -----
<S>                                          <C>       <C>     <C>      <C>
Computed "expected" tax                      $   455    34.0%  $ 354     34.0%
State income taxes, net of Federal income
   tax effect                                     67     5.0%     52      5.0%
Decrease in valuation allowance               (1,311)  (98.1)%  (891)   (85.7)%
Nondeductible expenses and other                   9     0.7%     12      1.2%
AMT tax                                           29     2.2%     12      1.2%
                                             -------   -----   -----    -----
                                             $  (751)  (56.2)% $(461)   (44.3)%
                                             =======   =====   =====    =====
</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,
                                       ----------------
                                        2005      2004
                                       ------   -------
<S>                                    <C>      <C>
Deferred tax assets:
   Net operating loss carry forwards   $1,566   $ 2,153
   Accrued liabilities                    169       111
   Allowance for doubtful accounts         20        20
   Inventory reserves                      14         7
   Amortization of intangibles             25         3
   Deferred compensation                   14        14
                                       ------   -------
Total deferred tax assets               1,808     2,308
   Valuation allowance                   (388)   (1,699)
                                       ------   -------
Net deferred tax assets                 1,420       609
                                       ------   -------
Deferred tax liabilities:
   Goodwill                               (31)       (4)
   Depreciation and amortization         (136)     (132)
                                       ------   -------
Total deferred tax liabilities           (167)     (136)
                                       ------   -------
Net deferred tax asset                 $1,253   $   473
                                       ======   =======
</TABLE>

     As of December 31, 2005, the Company had a net operating loss ("NOL")
carryforward of approximately $4,016,000 which is available to offset future
taxable income, if any through 2025. 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.


                                      F-16
<PAGE>

8. PREFERRED STOCK

<TABLE>
<CAPTION>
                                           SERIES B               SERIES C
                                     --------------------   -------------------
                                      SHARES     AMOUNT     SHARES     AMOUNT
                                     -------   ----------   ------   ----------
<S>                                  <C>       <C>          <C>      <C>
Balance, January 1, 2004             657,235   $1,369,000    1,151   $  503,000
Earned and issued dividends           26,732      117,000       47       96,000
Accretion of redemption feature
on preferred stock and warrants           --       14,000       --      200,000
                                     -------   ----------    -----   ----------
Balance, January 1, 2005             683,967    1,500,000    1,198      799,000
Earned and issued dividends           56,769      127,000       99      103,000
Accretion of redemption feature
on preferred stock and warrants           --           --       --      264,000
                                     -------   ----------    -----   ----------
Balance, December 31, 2005           740,736   $1,627,000    1,297   $1,166,000
                                     =======   ==========    =====   ==========
</TABLE>

Preferred Stock - 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.

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:

     Designation - On November 2, 2004, the Company's Board of Directors
     approved an increase in the number of Series B preferred shares designated
     to 1,000,000. This increase in the Series B designation allows the Company
     to continue to issue preferred stock to the holder, as payment for
     dividends earned.

     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. The conversion ratio for the Series B preferred stock is 2.33. The
     applicable conversion terms resulted in a beneficial conversion feature,
     which has been accreted in full as of September 1, 2004, which is the
     earliest date the Series B preferred stockholder could elect the option to
     redeem the Series B preferred stock. The accretion recorded for the twelve
     months ended December 31, 2005 and 2004 was zero and $14,000, respectively
     for each period.

     Anti-Dilution Protection -- The Series B preferred stock conversion ratio
     is subject to adjustment for standard antidilution provisions that result
     in adjustments to the conversion ratio in the event of an equity
     restructuring transaction. This feature could result in additional charges
     being recorded against net income (loss) applicable to common shareholders.

     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.


                                      F-17

<PAGE>

     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 $127,000 and $117,000 during
     2005 and 2004, respectively. As of December 31, 2005, the Series B
     preferred shares have $65,000 accumulated dividends in arrears. On January
     6, 2006, the accumulated dividends in arrears were satisfied through the
     issuance of 30,128 Series B preferred shares.

     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 $1,657,000 at December 31, 2005.

     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 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:

     Designation - On November 2, 2004, the Company's Board of Directors
     approved an increase in the number of designated Series C preferred shares
     to 3,000. This increase in the Series C designation allows the Company to
     continue to issue preferred stock to the holder, as payment for dividends
     earned.

     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


                                      F-18

<PAGE>

     preferred stock will be $0.5993 per share. The conversion ratio for the
     Series C preferred stock is 1,668.61. 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, which is April 1, 2007. The accretion
     recorded for the twelve months ended December 31, 2005 and 2004 was
     $148,000 for each period.

     Anti-Dilution Protection -- The Series C preferred stock conversion ratio
     is subject to adjustment for standard antidilution provisions that result
     in adjustments to the conversion ratio in the event of an equity
     restructuring transaction. 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 $103,000 and $96,000
     during 2005 and 2004, respectively. As of December 31, 2005, the Series C
     preferred shares have accumulated dividends in arrears of $53,000. On
     January 6, 2006, the accumulated dividends in arrears were satisfied
     through the issuance of 53 Series C preferred shares.

     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 $1,350,000 at December 31, 2005.

     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. On July 29, 2005, the warrant
holder elected a cashless exercise of its 417,153 warrants, which resulted in a
net share issuance of 220,983 to the warrant holder. As a result of the exercise
of all of the warrants, the remaining unamortized value allocated to the
warrants was fully accreted as a reduction to net income available to common
shareholders during the twelve months ended December 31, 2005. Warrant accretion
was approximately $116,000 and $52,000 during 2005 and 2004, respectively.


                                      F-19

<PAGE>

     Stock warrant transactions during 2005 and 2004 are summarized below:

<TABLE>
<CAPTION>
                                               WEIGHTED
                                                AVERAGE
                                               EXERCISE
                                     SHARES      PRICE
                                   ---------   --------
<S>                                <C>         <C>
Outstanding at January 1, 2004     1,201,688     $3.26
Granted                                   --        --
Exercised                                 --        --
Forfeited                           (759,535)     4.42
                                   ---------     -----
Outstanding at December 31, 2004     442,153      1.26
Granted                                   --        --
Exercised                           (442,153)     1.26
Forfeited                                 --        --
                                   ---------     -----
Outstanding at December 31, 2005          --     $  --
                                   ---------     -----
</TABLE>

     STOCK OPTIONS

     The Company has three stock option plans, an incentive stock option plan
(the "1993 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 2005
Stock Option Plan (the "2005 Plan) (collectively, the "Plans"). The 1993 and
1996 Plan provide employees and officers with an opportunity to purchase an
aggregate of 159,746 and 770,000 shares of the Company's common stock,
respectively. Subsequently, in January 2006, the 1993 and 1996 Plan's expired,
and as such, no additional options may be issued from such Plans. Under the 2005
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 2005
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 300,000 are
reserved for issuance under the 2005 Plan. Shares forfeited can be reissued
under the 2005 Plan. Options issued under the 2005 Plan vest at a rate that is
at the discretion of the Board of Directors, but is generally at a rate of 33.3%
per year over three years for employees and immediate to 33.3% 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 2005 and 2004 are summarized
below:

<TABLE>
<CAPTION>
                                               WEIGHTED
                                                AVERAGE
                                               EXERCISE
                                     SHARES      PRICE
                                   ---------   --------
<S>                                <C>         <C>
Outstanding at January 1, 2004      649,375      $1.87
Granted                             155,000       1.43
Exercised                                --         --
Forfeited                           (63,925)      2.23
                                    -------      -----
Outstanding at December 31, 2004    740,450       1.84
Granted                              62,000       2.37
Exercised                           (38,375)      0.95
Forfeited                           (11,700)      4.04
                                    -------      -----
Outstanding at December 31, 2005    752,375      $1.86
                                    =======      =====
</TABLE>

     At December 31, 2005 and 2004, options were exercisable with respect to
652,162 and 605,800 shares, respectively, with exercise prices ranging from
$0.60 to $5.69 and $0.60 and $6.44, respectively, and a weighted average
exercise price of $1.86 and $1.84, respectively. As of December 31, 2005 and
2004 the weighted average contractual life was 4.53 and 4.59 years,
respectively.


                                      F-20
<PAGE>

     The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
options as of December 31, 2005:

<TABLE>
<CAPTION>
                                                                WEIGHTED AVERAGE
                       NUMBER OF SHARES   WEIGHTED AVERAGE   REMAINING CONTRACTUAL
EXERCISE PRICE RANGE      OUTSTANDING      EXERCISE PRICE            LIFE
--------------------   ----------------   ----------------   ---------------------
<S>                    <C>                <C>                <C>
   $0.60 - $1.35            205,190            $0.88                  4.86
   $1.40 - $1.61            247,435            $1.47                  4.44
   $3.25 - $5.69            299,750            $2.74                  4.42
                            -------            -----                  ----
                            752,375            $1.86                  4.53
                            =======            =====                  ====
</TABLE>

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. Participants vest in employer
contributions at a rate of 20% per year over five years. Effective July 1, 2004,
the plan allowed for company matching contributions of $0.13 for every $1.00
invested by the employee in the program, limited to the first $10,000
contributed by the employee. Employer contributions are made quarterly. For the
twelve months ended December 31, 2005 and 2004, the Company made contributions
of $21,000 and $7,200, respectively.

11. SEGMENT INFORMATION

     Prior to November 2004, the Company operated in two business segments,
testing equipment and Accelerated Reliability Test Centers ("ARTC"). The testing
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. On November 15, 2004, the Company
acquired the assets of ACG and on December 13, 2005, the Company acquired the
assets of Ling (Note 13). For the period ended December 31, 2005, the assets and
operation of ACG and Ling represent the Company's third business segment,
Electrodynamic Vibration "ED". For the year ended December 31, 2004 the ED
segment represented only the assets and operations of ACG. The ED segment is
engaged in the manufacture, repair and service of electrodynamic vibration
shaker systems.

     The accounting policies for these segments are the same as those described
in Note 1 and inter-segment transactions are eliminated. 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 the
equipment and ARTC business segments in determining their gross profit, and
actual revenue and expenses are utilized in determining the ED gross profit. All
other expenses are not utilized in determining the allocation of resources on a
segment basis.


                                      F-21

<PAGE>

The table below summarizes information about reported segments (in thousands):

<TABLE>
<CAPTION>
                                                EQUIPMENT    ARTC      ED     CORPORATE    TOTAL
                                                ---------   ------   ------   ---------   -------
<S>                                             <C>         <C>      <C>      <C>         <C>
YEAR ENDED DECEMBER 31, 2005
Sales                                            $11,467    $1,146   $2,232      $ --     $14,845
Gross profit                                       5,726       423      552        --       6,701
Capital expenditures                                  75       165       48        --         288
Goodwill                                              --        --    1,057        --       1,057
Total assets                                       7,221       354    3,965        --      11,540
Depreciation and amortization                         90       162       85        --         337
Income tax benefit                                    --        --       --       751         751
Interest expense                                      --        --       96        55         151
Interest income                                       --        --       --        11          11
OTHER SIGNIFICANT NON-CASH ITEMS:
Redeemable preferred stock dividends declared         --        --       --       230         230
Accretion of redeemable preferred stock               --        --       --       264         264
YEAR ENDED DECEMBER 31, 2004
Sales                                            $10,570    $1,199   $  243      $ --     $12,012
Gross profit                                       5,309       217       70        --       5,596
Capital expenditures                                 149        81       --        --         230
Goodwill                                              --        --    1,057       --        1,057
Total assets                                       5,431       354    1,103        --       6,888
Depreciation and amortization                        103       176        9        --         288
Income tax benefit                                    --        --       --       461         461
Interest expense                                      --        --       11        89         100
Interest income                                       --        --       --         2           2
OTHER SIGNIFICANT NON-CASH ITEMS:
Redeemable preferred stock dividends declared         --        --       --       213         213
Accretion of redeemable preferred stock               --        --       --       214         214
</TABLE>

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

<TABLE>
<CAPTION>
                               UNITED                       ASIA    MIDDLE
                               STATES   MEXICO   EUROPE   PACIFIC    EAST    OTHER    TOTAL
                               ------   ------   ------   -------   ------   -----   -------
<S>                            <C>      <C>      <C>      <C>       <C>      <C>     <C>
YEAR ENDED DECEMBER 31, 2005
Sales                          $8,324      --    $2,722    $3,799      --       --   $14,845
Long-lived assets, net          3,163      --        57        --      --       --     3,220
YEAR ENDED DECEMBER 31, 2004
Sales                          $5,668    $174    $1,094    $4,680    $230     $166   $12,012
Long-lived assets, net          2,129      --        --        --      --       --     2,129
</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


                                      F-22

<PAGE>

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 included 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%. As of December 31, 2004, the
Company had completed all payments to Hobbs related to the arbitration award and
accrued interest.

     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 all allegations of
the complaint and on June 23, 2003 the Company asserted a counter-claim against
Hobbs seeking damages for copyright infringement, alleging that Hobbs had sold
all of his HALT and HASS related intellectual property to the Company in 1994
for valuable consideration. On November 3, 2003 the Company filed a motion for
partial summary judgment, and on May 21, 2004, the Company filed a motion for
leave to supplement its motion for summary judgment. On June 19, 2004, the Judge
granted the Company's motion for summary judgment, finding that Hobbs had sold
the copyrighted material to the Company for valuable consideration in 1994 and
the Court issued an order that Hobbs must pay QualMark's legal fees and costs
based on a finding that Hobbs' case was frivolous and his legal positions were
not reasonable. The Company submitted an application for fees and costs totaling
$243,000. Hobbs has opposed the application for fees, which the U.S. District
Court Judge has not yet ruled on. Hobbs also appealed the grant of summary
judgment in favor of the Company to the United States Court of Appeals for the
10th Circuit. The appeal was fully briefed by all parties and oral argument was
held on January 13, 2005 before a three judge panel of the Court of Appeals. In
an Order and Judgment dated March 11, 2005, the Court of Appeals panel
unanimously affirmed the decision of the District Court, stating that it agreed
with the District Court that summary judgment was appropriate with respect to
ownership of the copyrights, that the Copyright Act preempts Hobbs' claims under
the Lanham Act and state unfair competition law and that the District Court did
not abuse its discretion in awarding attorneys' fees to QualMark. The Court of
Appeals also denied Hobbs' motion for permission to file a short rebuttal to
supplement oral argument. There is no assurance that Hobbs will not request
reconsideration of the three Judge panel's decision by the full Court of Appeals
or seek review by the United States Supreme Court. However, were he to do so,
the Company believes his prospects for success would be minimal. The Company
does expect that the U.S. District Court Judge will now rule on the pending
application for fees and costs.

     The Company's counterclaim against Hobbs alleging copyright infringement
was dismissed without prejudice based on the Company's having not registered its
copyrights prior to initiating the counterclaim. The Company had registered its
copyrights in seminar materials with the Register of Copyrights after it filed
its counterclaim and the Company has re-filed its infringement action in the
U.S. District Court for Colorado and also sought a preliminary injunction to
prevent Hobbs from using the Company's copyrighted materials without permission.
A hearing on the preliminary injunction was held on July 27, 2004. On September
16, 2004, the U.S. District Court denied the Company's motion for a preliminary
injunction and ruled that the matter of Hobbs' alleged infringement of the
Company's copyrights and any remedy for such infringement must go to trial.

     There is no assurance that the Company will be awarded by the U.S. District
Court all of the fees and costs applied for or that Hobbs will voluntarily pay
the Company amounts awarded by the Court. The Company will vigorously pursue its
claim for fees and costs and seek to collect any award in full and will take all
legal steps necessary to protect its favorable ruling on appeal. Any amount
awarded will be recorded when received in cash.


                                      F-23
<PAGE>

13.  ASSET ACQUISITIONS

LING ELECTRONICS (LING)

     On December 13, 2005, QualMark Ling entered into an asset purchase
agreement with SatCon to purchase substantially all of the assets, subject to
certain liabilities, of SatCon related to its Ling Shaker and Amplifier business
operations ("Ling Agreement"). The results of Ling's operations have been
included in the consolidated financial statements since that date. Ling is a
manufacturer of vibration, shock and high intensity sound environmental test
systems and fixtures. The acquisition allows the Company to expand its
electrodynamic vibration manufacturing capabilities and offer a full compliment
of electrodynamic systems, parts and service.

     The Ling Agreement provided that on December 13, 2005, SatCon deliver to
the QualMark all of the assets used in its Ling Shaker and Amplifier business,
subject to certain liabilities, in exchange for cash in the total amount of
$2,325,000

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (in thousands).

<TABLE>
<S>                           <C>
Inventory                     $1,639
Property and equipment            68
Vendor tooling                   240
Intangible assets                488
                              ------
   Total assets acquired       2,435
Current liabilities assumed     (110)
                              ------
Net assets acquired           $2,325
                              ======
</TABLE>

     The acquired intangible assets have an indefinite useful life, and consist
of the trade name and trade mark of Ling Electronics of $488,000.

     The following unaudited pro forma financial information for the years ended
December 31, 2005 and 2004, give effect to the above acquisition as if it had
occurred at the beginning of each respective period. The unaudited pro forma
results of operations for 2005 and 2004 include interest expense under the
additional Loan Agreement and $700,000 drawn under the Company's revolving line
of credit, and depreciation of property and equipment (in thousands).

<TABLE>
<CAPTION>
                                                        YEARS ENDED
                                               ----------------------------
                                               DECEMBER 31,    DECEMBER 31,
                                                   2005            2004
                                                (UNAUDITED)    (UNAUDITED)
                                               ------------   -------------
<S>                                            <C>            <C>
Revenue                                           $17,221        $14,722
Net income                                        $ 2,732        $ 2,148
Basic net income per common share                 $  0.52        $  0.47
Diluted net income per common share               $  0.32        $  0.29
Basic shares used in per share calculation          4,266          3,675
Diluted shares used in per share calculation        8,851          7,367
</TABLE>

ACG DYNAMICS INC. (ACG)

     On November 12, 2004, QualMark ACG (the "Purchaser"), entered into an asset
purchase agreement with ACG Dynamics, Inc. ("ACG") of West Haven, Connecticut to
purchase substantially all of the assets of ACG, subject to certain liabilities
("ACG Agreement"). On November 15, 2004, the Company closed the acquisition of
ACG. The results of ACG's operations have been included in the consolidated
financial statements since that date. ACG, founded in 1972, is an
electro-dynamic shaker service company supplying the vibration test equipment
market. There is no material relationship between QualMark or any of its
affiliates and any of the parties to this transaction.

     The acquisition allows the Company to expand its service organization and
provide customers with complete vibration solutions.


                                      F-24

<PAGE>

     The ACG Agreement provided that on November 15, 2004, ACG deliver to the
Purchaser all of ACG's assets used in its business, subject to certain
liabilities, in exchange for cash in the total amount of $905,000 and restricted
common stock of QualMark equal to $750,000, for a total purchase price of
$1,655,000. The securities were valued at $1.433 per share, the average closing
price of QualMark's common stock over the thirty days of trading immediately
preceding November 10, 2004, resulting in 523,256 shares being issued.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (in thousands).

<TABLE>
<S>                           <C>
Current assets                $  603
Property and equipment            33
Intangible assets                226
Goodwill                       1,057
                              ------
   Total assets acquired       1,919
Current liabilities assumed     (264)
                              ------
Net assets acquired           $1,655
                              ======
</TABLE>

     The acquired intangible assets have a weighted average useful life of
approximately 3.5 years. The intangible assets that make up that amount include
non-compete agreements of $74,000 (2- year useful life) and a customer list
$152,000 (5-year useful life).

     Total amortization expense was $67,400 and $8,400 for the years ended
December 31, 2005 and 2004.

     Estimated amortization expense for the next five years is as follows:

<TABLE>
                   <S>        <C>
                   2006       $ 62,775
                   2007         30,400
                   2008         30,400
                   2009         26,600
                              --------
                              $150,175
                              ========
</TABLE>

The $1,057,000 of goodwill was assigned to the ACG segment and this amount is
expected to be fully deductible for tax purposes.


                                      F-25

<PAGE>

                                INDEX TO EXHIBITS

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

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

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

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

 3.5       Statement of Change of Registered Agent.(5)

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

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

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

10.2       QualMark Corporation 1996 Stock Option Plan.(3)

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

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

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

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

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

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

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

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

10.15      Settlement Agreement dated August 30, 1999 by and among QualMark
           Corporation and Screening Systems, Inc.(5)

10.16      Preferred Stock Purchase Agreement dated September 1, 1999, including
           Warrant to Purchase 139,535 Shares of Common Stock.(5)

10.17      Third Amendment to Loan Agreement dated March 31, 2000 by and between
           QualMark and U.S. Bank National Association.(6)

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
</TABLE>


                                       29

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                 DESCRIPTION
-------                                 -----------
<S>        <C>
           and between QualMark and U.S. Bank National Association.(14)

10.28      Settlement Agreement and Payment Schedule dated February 13, 2004, by
           and between QualMark Corporation and Gregg K. Hobbs.(14)

10.29      Eighth Amendment to Promissory Notes and Eleventh Amendment to Loan
           Agreement dated April 20, 2004 by and between QualMark and U.S. Bank
           National Association.(15)

10.30      Loan and Security Agreement dated November 9, 2004 by and between
           QualMark and Silicon Valley Bank(16)

10.31      Loan and Security Agreement dated November 11, 2004 by and between
           QualMark and Partners for Growth(17)

10.32      Asset Purchase Agreement dated November 12, 2004 by and between
           QualMark and ACG Dynamics, Inc.(17)

10.33      Loan and Security Agreement dated December 8, 2005 by and between
           QualMark and Silicon Valley Bank

10.34      Amendment to Loan and Security Agreement dated December 12, 2005 by
           and between QualMark and Partners for Growth

10.35      Asset Purchase Agreement dated December 13, 2005 by and between
           QualMark and SatCon Technology.

14         Director and Officer Code of Ethics(14)

23.1       Consent of GHP Horwath, P.C.

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


                                       30

<PAGE>

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

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

(14) Incorporated by reference from the Company's Annual Report on Form 10-KSB
     for the year ended December 31, 2003.

(15) Incorporated by reference from the Company's Quarterly Report on Form
     10-QSB for the quarter ended March 31, 2004.

(16) Incorporated by reference from the Company's Quarterly Report on Form
     10-QSB for the quarter ended September 30, 2004.

(17) Incorporated by reference from the Company's Annual Report on Form 10-KSB
     for the year ended December 31, 2004.


                                       31