<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, 2004

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to t is Form 10-KSB. [ ]

     Issuer's revenues for its most recent fiscal year. $12,012,000

     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, 2005 was $12,607,000.

     The number of shares outstanding of the issuer's Common Stock as of March
28, 2005 was 4,133,348.

                       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.

     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


                                       2
<PAGE>
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.

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, 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.


                                       3
<PAGE>
     The UltraRate Thermal Chamber Assembly

          The UltraRate Thermal Chamber, which houses the OmniAxial Vibration
     Assembly, changes temperature at rates up to 600 degrees Centigrade per
     minute as measured on the product being tested. This high rate of change
     results in highly effective design verification during HALT and extremely
     short production screens during HASS, requiring less equipment and
     personnel to perform a given series of thermal cycles. The Company believes
     that its UltraRate Thermal Chambers, comprised of patented and patent
     pending features, have one of the highest rate of thermal change available
     in the environmental stress screening industry. This capability
     significantly reduces test time, with resulting cost reductions in
     equipment and personnel.

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

TYPHOON TECHNOLOGY:

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

The Typhoon Combined Stress System Product Line

     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"x36x37" (ID). The thermal chamber is capable of up to 600
     degrees Centigrade per minute change on the product under test. Typical
     uses of the


                                       4
<PAGE>
     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 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"x36x37" (ID). The thermal
     chamber is capable of up to 600 degrees Centigrade per minute change on the
     product under test. Typical uses of the 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.


                                       5
<PAGE>
ACCELERATED RELIABILITY TEST CENTERS

     The Company has a network of ARTC test centers at various locations in the
United States and Europe, which provide test services and on-site applications
support services. The Company is uniquely positioned to offer comprehensive
HALT/HASS test services to manufacturers. The QualMark test service business
includes accelerated reliability test services performed in the Company's test
centers and on-site applications support services. These services allow a broad
range of customers convenient access to the Company's technology while also
serving as valuable sales tools for gaining system orders. Each test center is
equipped with 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 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.

MARKETING

     During 2004, the Company placed into action a strategic marketing and sales
program that is designed to leverage QualMark's market knowledge to be
identified as the "Knowledge Leader" in the Accelerated Testing industry. In
2005, the Company will continue to educate customers through Webinars (web based
seminars) and other forums expanding the knowledge base in the overall
reliability process.

The following was achieved during 2004:

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

     2.   The Company continued to streamline marketing support operations and
          redefined the positioning statement as the Knowledge Leader.


                                       6
<PAGE>
     3.   The Company acquired several strategic customers who have adopted a
          QualMark Product as the configuration for corporate and supply vendor
          testing.

     4.   Technology upgrade revenues continued to flourish during 2004.

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.

CUSTOMERS

     The Company continues to market and sell its systems to the leading
corporations of the world in the Consumer Electronics, Avionics, Automotive, and
Defense industries. QualMark is uniquely positioned to support the Reliability
Testing requirements of our Global Customers through our Global Sales and
Service Network. From the Company's inception, more that 500 test systems have
been sold worldwide to more than 400 customers. During 2004, one customer
comprised approximately 22% of the Company's revenue. The Company was not
dependent on any single industry segment for its revenues.

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

<TABLE>
<CAPTION>
AEROSPACE AND DEFENSE          COMPUTER RELATED PRODUCTS                  OTHER
---------------------          -------------------------                  -----
<S>                            <C>                         <C>
Aviation electronics           Circuit boards              Automotive circuitry
Display switches               Disk drives                 Electronic oil and gas flow meters
Flight navigation systems      Modems                      Global positioning systems
Marine navigation systems      Monitors
                               Power supplies
                               Printers
                               Tape backup drives
</TABLE>

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

RESEARCH AND PRODUCT DEVELOPMENT

     Research and product development expenditures for the fiscal years ending
December 31, 2004 and 2003 were $735,000 and $679,000, respectively. 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. During 2003, the
Company completed its complete product overhaul, in which, all HALT/HASS related
products offered by QualMark include the patented "Typhoon" technology. The
technology lowers operating costs by reducing thermal mass of the chamber and
optimizing the efficiency of the air flow system, which consequently reduces
operating costs.

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

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

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


                                       7
<PAGE>
INTELLECTUAL PROPERTY

     The Company has maintained the practice, where possible, to pursue patent
protection on its products. The Company has been issued 12 United States patents
(the "Patents") and numerous foreign patents issued in six countries. These
patents protect certain features of the OmniAxial and LF Vibration Assemblies of
the Company's OVS Combined Stress Systems or certain design features of the
pneumatic, piston-driven actuators (vibrators) that help create random motion of
the vibration table. The Company was issued U.S. Patent No. 5,365,788 on
November 22, 1994, for certain design features of pneumatic, piston driven
actuators that create motion for a vibration table. The Company was issued U.S.
Patent No. 5,412,991 on May 9, 1995, for certain design features of the
Company's vibration table. The Company was issued U.S. Patent No. 5,517,857 on
May 21, 1996, for certain design features related to positioning of a vibration
table within a stress screening chamber. The Company was issued U.S. Patent No.
5,540,109 on July 30, 1996, and U.S. Patent No. 5,675,098 on October 7, 1997,
for certain design features related to use of multiple stress screening
chambers. The Company was issued U.S. Patent No. 5,589,637 on December 31, 1996,
for certain design features of mountings of actuators to a vibration table. The
Company was issued U.S. Patent No. 5,744,724 on April 28, 1998 for certain
design features related to honeycomb vibration table structures. The Company was
issued Patent No. 5,836,202 on November 17, 1998 for claims directed at the
angle of attachment of the actuators to the vibration table. The Company was
issued Patent No. 5,813,541 on September 29, 1998 for the configuration of the
control system attachment to the chamber. The Company was issued Patent No.
6,062,086 on May 16, 2000 relating to interposer devices for adjusting and
controlling the shock response of a shaker table assembly. The Company was
issued Patent No. 6,105,433 on August 22, 2000 for low frequency shaker table
technology. The Company was issued Patent No. 6,112,596 on September 5, 2000 for
shaker table technology combined with the test chamber. Two patent applications
are being processed. One application 10,994,561 for table control in a pneumatic
vibration apparatus and the other application is for reducing sound emitted by a
pneumatic vibration apparatus.

     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 marks with the United States
Patent and Trademark Office: QUALMARK. The Company plans to make additional
trademark, service mark, and certification mark applications as appropriate. The
Company also has 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


                                       8
<PAGE>
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

ARTC and Applications Support Services:

     Throughout 2004 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 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 2004.
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 Company has determined that it will aggressively
focus the ACG customers on the 'Value Added' initiative of QualMark and QualMark
ACG Equipment and Service, becoming the primary provider offering a full range
of 'reliability solutions', and through this approach, immerge as the market
leader in the electrodynamic replacement, repair, and service industry.


                                       9
<PAGE>
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

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 (ACG)

     ACG's primary manufacturing facility is located in West Haven, Connecticut.
ACG manufactures a variety of products for the vibration test industry: its own
brand of 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. ACG
also sells new amplifiers and controllers to the exciter industry. ACG also
manufactures many replacement components for exciters and vibration systems to
support its global field service business.

     ACG uses a flexible manufacturing cell approach as well as a just-In-time
(JIT) inventory control and vendor supply system. 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. ACG maintains its own inventory of reconditioned
exciters, armatures, field coils, as well as builds exciters and systems to
customer order.


                                       10
<PAGE>
     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 ACG's just-in-time manufacturing strategy. ACG
does both source inspections at key suppliers as well as 100% quality inspection
on all purchased components. ACG requires 100% QC Testing on all finished
products prior to shipment to customers. 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.

     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.

     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 2004 and 2003, 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 OVS system, which
further minimizes OVS 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.
During 2005, the Company will continue to offer a standard, one-year parts and
labor warranty on all new OVS systems.

GOVERNMENT REGULATION

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

EMPLOYEES

     As of December 31, 2004, the Company had forty-nine employees, of which
forty-six are full-time. Twenty-five of the Company's employees are employed at
its principal offices and headquarters in Denver, Colorado, fifteen are employed
in West Haven, CT, two are employed at its facilities in Santa Clara, CA, two in
Huntington Beach, CA, two 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.

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 six-year lease expires April 30, 2005. The leased property
consists of approximately 5,000 square feet. In addition to the lease payments,
The Company is responsible


                                       11
<PAGE>
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, 2004.

                                     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 2004 and 2003:

<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>

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


                                       12
<PAGE>
     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, 2004
was 36 according to our transfer agent. This figure excludes an indeterminate
number of shareholders whose shares are held in "street" or "nominee" name. The
Company has never paid a cash dividend and does not intend to do so in the
future. The Company made a dividend payment on outstanding preferred stock, in
kind, of additional preferred stock in March 2005 (Refer to Note 8 of the
Financial Statements).

     The Company participates in certain equity related compensation plans that
are authorized for securities issuance. The tabular disclosures of such plans
are disclosed in the Company's definitive Proxy Statement. The Company's
definitive Proxy Statement to be filed pursuant to Schedule 14A under the
Securities Exchange Act of 1934 is incorporated herein by reference.

     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.

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, 2004   DECEMBER 31, 2003
                                                  -----------------   -----------------
<S>                                               <C>                 <C>
Statement of Operations Data:
Revenues.......................................         100.0%              100.0%
Cost of revenues...............................          53.4                60.1
                                                        -----               -----
Gross profit...................................          46.6                39.9
Selling, general and administrative expenses...          28.2                30.4
Arbitration and related legal expenses.........           2.8                 8.0
Research and development expenses..............           6.1                 8.6
                                                        -----               -----
Income (loss) from operations..................           9.5                (7.1)
Other expense..................................          (0.8)               (1.6)
                                                        -----               -----
Income (loss) before income taxes..............           8.7                (8.7)
Income tax benefit (expense)...................           3.8                (0.0)
                                                        -----               -----
Net income (loss)..............................          12.5%               (8.7)%
                                                        =====               =====
</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.


                                       13
<PAGE>
RESULTS OF OPERATIONS

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

Comparison of Years Ended December 31, 2004 and 2003

REVENUE

     Revenue increased $4,117,000 or 52.1% to $12,012,000 for the year ended
December 31, 2004 from $7,895,000 for the year ended December 31, 2003.

Equipment Revenue

     Equipment revenue increased $3,811,000 or 56.4% from $6,759,000 for the
year ended December 31, 2003 to $10,570,000 for the year ended December 31,
2004. The number of units sold in 2004 increased 46.7% over 2003. The increase
in sales for the year ended December 31, 2004 is primarily a direct result of
the Company's aggressive pursuit of international sales and an improvement in
the domestic economy during 2004. The Company is continuing its aggressive
pursuit of international and domestic sales in the aerospace/avionics, defense,
automotive, and consumer electronic industries. Of the total units sold,
international system sales increased 79.6% over 2003. The Company continues to
be cautiously optimistic in regards to a slowly domestic recovering economy
throughout 2005, as a result the Company is continuing to cultivate its
international presence by emphasizing its core 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 increased $63,000 or 5.5% from $1,136,000 for the year
ended December 31, 2003 to $1,199,000 for the year ended December 31, 2004. 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, versus four test centers in the
U.S., four domestic strategic agreement test center operations, and five
strategic agreement test center operations in Europe during the same period in
2003. 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 increase in test center revenue to a moderately
improved domestic economic atmosphere in the high technology testing industry.
The Company is 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, 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 revenues, 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. 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.

GROSS MARGIN

     The gross margin for the year ended December 31, 2004 was 46.6%. This
compares to a gross margin of 39.9% for the year ended December 31, 2003. The
increase in gross margin for the year ended 2004 is primarily due to the 46.7%
increase in units sold.


                                       14
<PAGE>
OPERATING EXPENSE

     Total operating expenses increased $746,000 or 20.1% from $3,712,000 for
the year ended December 31, 2003 to $4,458,000 for the year ended December 31,
2004.

     Selling, general and administrative expenses increased $987,000 or 41.1%
from $2,403,000 for the year ended December 31, 2003 to $3,390,000 for the year
ended December 31, 2004. The primary increase of selling, general, and
administrative expenses during 2004 is attributed to the Company's 52.1%
increase in sales and the investment in the Company through its sales and
marketing programs, which is in line with the Company's projected needs.

     Research and development costs increased $56,000 or 8.2% from $679,000 for
the year ended December 31, 2003 to $735,000 for the year ended December 31,
2004. 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 expenses decreased $297,000 or 47.1% from
$630,000 for the year ended December 31, 2003 to $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. On November 17,
2003 the Company received the final arbitration decision and the decision on
interest and fees on claims brought by Gregg K. Hobbs (refer to Note 12 of the
Financial Statements). Arbitration related expenses of $630,000 were accounted
for in the year ended December 31, 2003.

INTEREST EXPENSE

     Interest expense decreased $34,000 or 25.4% from $134,000 for the year
ended December 31, 2003 to $100,000 for the year ended December 31, 2004. The
decrease of $34,000 in expense was due to the pay down of the commercial bank
debt during the year of $1,220,000.

INCOME TAX

     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 net operating loss ("NOL") carryforward of approximately
$5,500,000 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.

NET INCOME (LOSS)

     Net income increased $2,193,000 from a net loss of ($691,000) for the year
ended December 31, 2003 to a net income of $1,502,000 for the year ended
December 31, 2004. The increase is primarily attributed to the 52.1% increase in
revenue and the recognition of $473,000 of the Company's deferred tax asset.

LIQUIDITY AND CAPITAL RESOURCES

     During 2003, the Company experienced a "leveling" out of business, in which
sales and demand remained steady for its capital equipment products. This
activity met the Company's internal projections for capital equipment demand and
financial performance for 2003. During 2004, the Company experienced a 52%
increase in revenue, which was primarily attributed to the continued adoption
and acceptance of HALT and HASS testing techniques and a revised sales process
that included a move toward value selling and the Company wide customer
satisfaction philosophy. 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.


                                       15
<PAGE>
     While there is no guarantee that the Company will be able to meet the
operational and financial requirements of its 2005 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 2005.
However, the Company's management believes that the Company's cash and cash
equivalents and working capital, provide adequate capital resources to fund its
operations, 2005 debt and working capital needs through at least the end of
2005, and into the first quarter of 2006. 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 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 $1,220,000 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. During 2003, the Company generated $75,000 of cash from operating
activities, invested $239,000 for equipment, $3,000 for patents, received
$11,000 from the sale of equipment, borrowed and repaid $250,000 from Company
Directors, and repaid $690,000 of commercial bank borrowings. These activities
resulted in a cash decrease of $846,000, for a year-end balance of $442,000 at
December 31, 2003.

     The Company's commercial borrowings consist of a term loan, 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 "new Credit Facility") with Silicon
Valley Bank (the "Commercial Bank"). The new 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 new
Credit Facility are collateralized by substantially all the assets of the
Company (refer to Note 5 of the Financial Statements). Both the revolving credit
line and term loan under the new 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, 2004, there was
$1,500,000 of availability on the line of credit.

     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 new 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 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 (refer to Note 5 of the Financial Statements).

     The Company's average interest rate for the years ended December 31, 2004
and 2003, was 7.5% and 7.13%, respectively.

     As required by the new Credit Facility, the Company will make principal
payments of $20,800 on the term loan during 2005. The Company has also
determined that, during 2005, draws on the revolving line of credit will be made
based on operational cash flow needs or growth based initiatives. At the close
of each quarter, the Company has made arrangements to meet and review results of
the Company with the Commercial Bank and the Convertible Debt holder. The
Company believes its relations with its Commercial Bank and Convertible Debt
holder to be good.


                                       16
<PAGE>
     The following represents future amounts payable at December 31, 2004 (in
thousands).

<TABLE>
<S>                       <C>
Year ended December 31,
        2005              $  250
        2006                 250
        2007                 230
        2008                  --
    2009 (November)        1,000
                          ------
                          $1,730
                          ======
</TABLE>

Contractual Obligations

     For more information on the Company's contractual obligations on operating
leases, refer to Note 6 of Financial Statements. At December 31, 2004, the
Company's commitments under these obligations were as follows (in thousands):

<TABLE>
<CAPTION>
                          OPERATING
                            LEASES
                          ---------
<S>                       <C>
Year ended December 31,
          2005              $  355
          2006                 299
          2007                 246
          2008                 238
          2009                 184
          2010                  77
                            ------
                            $1,399
                            ======
</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


                                       17
<PAGE>
material usage incurred in correcting a product failure. Should actual product
failure rates or material usage costs differ from the Company's estimates,
revisions to the estimated warranty liability would be required (Refer to Note 5
of the Financial Statements).

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

     The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its net 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, 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. If future taxable income is less
than the amount that has been assumed in determining the deferred tax asset, an
increase in the valuation reserve 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 reserve could be reduced
with a corresponding credit to income (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 public companies that file as small
business issuers as of the first interim or annual reporting period that begins
after December 15, 2005.

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


                                       18
<PAGE>
     Pricing
     Quality
     Time-to-market delivery
     Compliance with industry standards

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

     The 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; 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.


                                       19
<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.

Acquisition

     On November 15, 2004, QualMark Corporation completed the asset acquisition
of Connecticut based ACG Dynamics Inc.,(ACG) an electro-dynamic shaker service
company. 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. 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 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 $730,000 new Credit Facility (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, 2004 would be an
annual increase or decrease of approximately $7,300 in interest expense for a
twelve-month period.

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 Operations                           F-2
Consolidated Balance Sheets                                     F-3
Consolidated Statements of Shareholders' Equity (Deficit)       F-4
Consolidated Statements of Cash Flows                           F-5
Notes to Consolidated Financial Statements                      F-6
</TABLE>

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


                                       20
<PAGE>
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. Within the 90 days prior to the
filing of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's President and Chief Executive Officer and its Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon and as of the date of that
evaluation, the President and Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports the
Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required.

(b) Changes in Internal Controls:

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

ITEM 8B. OTHER INFORMATION

     None.


                                       21
<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.

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, 2004.

     On October 20, 2004, QualMark Corporation (the "Company") issued a press
     release announcing its earnings for the third quarter and year to date
     ended September 30, 2004. The Company also held a conference call on
     October 20, 2004 at 11:00am EST to discuss the October 20, 2004 press
     release.

     On November 12, 2004, QualMark ACG Corporation, 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. In order to finance the acquisition of the assets
     of ACG and to provide for future growth, QualMark entered into a Loan and
     Security Agreement on November 11, 2004, with Partners for Growth, L.P.


                                       22
<PAGE>
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.

                                   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, 2005                   QUALMARK CORPORATION


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

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

<TABLE>
<CAPTION>
       SIGNATURE                            TITLE                      DATE
       ---------                            -----                      ----
<S>                          <C>                                  <C>


/s/ Charles D. Johnston      President, Chief Executive Officer   March 30, 2005
--------------------------   and Director
    Charles D. Johnston


/s/ Anthony A. Scalese       Chief Financial Officer              March 30, 2005
--------------------------   and Principal Accounting Officer
    Anthony A. Scalese


/s/ James L.D. Roser         Director                             March 30, 2005
--------------------------
    James L.D. Roser


/s/ William J. Sanko         Director                             March 30, 2005
--------------------------
    William J. Sanko


/s/ Alan T. Valenti          Director                             March 30, 2005
--------------------------
    Alan T. Valenti


/s/ Gerald Laber             Director                             March 30, 2005
--------------------------
    Gerald Laber
</TABLE>


                                       23
<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 subsidiary (the "Company") as of December 31, 2004 and 2003, and
the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the two-year period ended
December 31, 2004. 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 subsidiary as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.


/s/ GHP HORWATH, P.C.

Denver, Colorado
February 25, 2005, except for Notes 8 and 12, as to which the date is March 20,
2005.


                                       F-1
<PAGE>
QUALMARK CORPORATION AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                      ------------------------
                                                            2004     2003
                                                          -------   ------
<S>                                                   <C>           <C>
Revenues                                                  $12,012   $7,895
Cost of revenues                                            6,416    4,748
                                                          -------   ------
      Gross profit                                          5,596    3,147
                                                          -------   ------
Selling, general and administrative expenses                3,390    2,403
Arbitration and related legal expenses                        333      630
Research and development expenses                             735      679
                                                          -------   ------
      Total operating expenses                              4,458    3,712
                                                          -------   ------
      Income (loss) from operations                         1,138     (565)

Other income (expense):
   Interest expense                                          (100)    (134)
   Interest income and other                                    3        8
                                                          -------   ------
Income (loss) before income taxes                           1,041     (691)

Income tax benefit                                            461       --
                                                          -------   ------
Net income (loss)                                         $ 1,502   $ (691)
                                                          =======   ======
Net income (loss) per basic common share (Note 1)         $  0.29   $(0.31)
                                                          =======   ======
Net income (loss) per diluted common share (Note 1)       $  0.20   $(0.31)
                                                          =======   ======
Weighted average shares outstanding - basic                 3,675    3,610
                                                          =======   ======
Weighted average shares outstanding - diluted               7,367    3,610
                                                          =======   ======
</TABLE>

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


                                       F-2
<PAGE>
QUALMARK CORPORATION AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                               -----------------
                                                                 2004      2003
                                                               -------   -------
<S>                                                            <C>       <C>
ASSETS

Current assets:
   Cash and cash equivalents                                   $   516   $   442
   Trade accounts and note receivable, net of allowance
      for doubtful accounts of $50 and $28, respectively         2,748     2,119
   Inventories, net                                                749       379
   Current deferred tax assets, net                                120        --
   Other current assets                                            183        35
                                                               -------   -------
      Total current assets                                       4,316     2,975
Property and equipment, net                                        592       622
Restricted cash                                                     90        90
Goodwill                                                         1,057        --
Intangible assets                                                  296         7
Non-current deferred tax assets, net                               353        --
Other assets                                                       184        87
                                                               -------   -------
                                                               $ 6,888   $ 3,781
                                                               =======   =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable                                            $   676   $   858
   Accrued expenses                                                953       450
   Deferred revenue and customer deposits                           89        --
   Current portion of long-term debt                               250       440
   Accrued arbitration settlement                                   --       426
                                                               -------   -------
      Total current liabilities                                  1,968     2,174
   Deferred revenue                                                 48        --
   Long-term debt                                                1,480       480
   Other liabilities                                                12        --
                                                               -------   -------
      Total liabilities                                          3,508     2,654
                                                               -------   -------

Commitments and contingencies

Convertible redeemable preferred stock; 2,000,000 shares
   authorized (Note 8):
   1,000,000 designated as Series B, 683,967 shares (2004)
      and 631,549 shares (2003) issued and outstanding,
      liquidation preference of $1,530 (2004)                    1,500     1,369
                                                               -------   -------
   3,000 designated as Series C, 1,198 shares (2004) and
      1,106 shares (2003) issued and outstanding,
      liquidation preference of $1,247 (2004)                      799       503
                                                               -------   -------
Shareholders' equity (deficit):
   Common stock; no par value; 15,000,000 shares authorized;
      4,133,348 shares (2004) and 3,610,092 shares (2003)
      issued and outstanding                                     7,768     7,444
   Accumulated deficit                                          (6,687)   (8,189)
                                                               -------   -------
      Total shareholders' equity (deficit)                       1,081      (745)
                                                               -------   -------
                                                               $ 6,888   $ 3,781
                                                               =======   =======
</TABLE>

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


                                       F-3
<PAGE>
QUALMARK CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDING DECEMBER 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)

<TABLE>
<CAPTION>
                                                 COMMON STOCK
                                              ------------------   ACCUMULATED
                                                SHARES    AMOUNT     DEFICIT    TOTAL
                                              ---------   ------     -------   ------
<S>                                           <C>         <C>        <C>       <C>
Balance January 1, 2003                       3,610,092   $7,829     $(7,498)  $  331
Compensation related to issuance of
   options for services                              --       11          --       11
Warrants issued in connection with
   bank financing                                    --       18          --       18
Preferred stock dividends                            --     (197)         --     (197)
Accretion of redeemable preferred stock              --     (217)         --     (217)
Net loss                                             --       --        (691)    (691)
                                              ---------   ------     -------   ------
Balance December 31, 2003                     3,610,092    7,444      (8,189)    (745)
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
                                              =========   ======     =======   ======
</TABLE>

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


                                       F-4
<PAGE>
QUALMARK CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                                     ------------------------
                                                                           2004     2003
                                                                         -------   ------
<S>                                                                  <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                        $ 1,502   $ (691)

Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
   Increase (decrease) in provision for inventory reserve                      5      (12)
   Provision (recovery) for bad debts                                         22      (24)
   Gain on disposal of equipment                                              --       (4)
   Depreciation and amortization                                             288      343
   Deferred tax benefit                                                     (473)      --
   Other                                                                       7       23
Changes in assets and liabilities, net of business acquisition:
      Trade accounts and note receivable                                    (363)    (627)
      Inventories                                                            (83)     246
      Other assets                                                          (290)     (47)
      Accounts payable                                                      (246)     371
      Accrued expenses                                                       410      111
      Accrued arbitration settlement                                        (426)     426
      Customer deposits and deferred revenue                                  66      (40)
                                                                         -------   ------
         Net cash provided by operating activities                           419       75
                                                                         -------   ------

CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition of ACG Dynamics, Inc.                             (905)      --
Acquisition of property and equipment                                       (230)    (239)
Sale of property and equipment                                                --       11
Investment in patents                                                         (6)      (3)
                                                                         -------   ------
         Net cash used in investing activities                            (1,141)    (231)
                                                                         -------   ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings                                                   2,030      250
Repayments of borrowings                                                  (1,234)    (940)
                                                                         -------   ------
         Net cash provided by (used in) financing activities                 796     (690)
                                                                         -------   ------

Net increase (decrease) in cash and cash equivalents                          74     (846)
Cash and cash equivalents at beginning of year                               442    1,288
                                                                         -------   ------
Cash and cash equivalents at end of year                                 $   516   $  442
                                                                         =======   ======

SUPPLEMENTAL DISCLOSURE
Interest paid                                                            $    91   $  130
                                                                         =======   ======

NON-CASH INVESTING AND FINANCING ACTIVITIES
Transfer of equipment to inventory held for resale                       $    22   $    1
                                                                         =======   ======
Exchange of equipment for other assets                                   $    31   $   --
                                                                         =======   ======
Preferred stock dividends                                                $   212   $  197
                                                                         =======   ======
Accretion of redeemable preferred stock                                  $   214   $  217
                                                                         =======   ======
Capital lease obligations                                                $    34   $   --
                                                                         =======   ======
</TABLE>

                                   (continued)


                                      F-5
<PAGE>
QUALMARK CORPORATION AND SUBSIDIARY

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

Acquisition of ACG Dynamics, Inc.:

<TABLE>
<S>                                                                      <C>
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 SUBSIDIARY

NOTES TO CONSOLDIATED FINANCIAL STATEMENTS

     197. 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.

     LIQUIDITY

          During 2003, the Company experienced a "leveling" out of business, in
     which sales and demand remained steady for its capital equipment products.
     This activity met the Company's internal projections for capital equipment
     demand and financial performance for 2003. During 2004, the Company
     experienced a 52% increase in revenue, which was primarily attributed to
     the continued adoption and acceptance of HALT and HASS testing techniques
     and a revised sales process that included a move toward value selling and
     the Company wide customer satisfaction philosophy. 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


                                      F-7
<PAGE>
     Company paid approximately $439,000 to Dr. Hobbs during 2004. These
     payments are complete and were made primarily from the Company's cash flow
     generated from 2004 operations (Note 12).

          While there is no guarantee that the Company will be able to meet the
     operational and financial requirements of its 2005 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 2005. However, the Company's management believes that
     the Company's cash and cash equivalents and working capital, provide
     adequate capital resources to fund its operations, 2005 debt and working
     capital needs through at least the end of 2005, and into the first quarter
     of 2006. 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 2004 and 2003, one customer comprised
     approximately 22% and 12%, 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 overheads.

     PROPERTY AND EQUIPMENT

          Property and equipment are recorded at cost. Depreciation is recorded
     using the straight-line method over estimated useful lives of three to ten
     years. Amortization of leasehold improvements and equipment under capital
     leases is provided over the shorter of the asset's useful life or the lease
     term and is included in depreciation expense. Maintenance and repairs are
     expensed as incurred and improvements are capitalized. Upon sale or
     retirement of assets, the cost and related accumulated depreciation or
     amortization are eliminated from the respective accounts and any resulting
     gains or losses are reflected in operations.

     LONG-LIVED ASSETS

          The Company reviews its long-lived assets for impairment whenever
     events or changes in circumstances indicate that the carrying amount of an
     asset may not be recoverable. Recoverability of long-lived assets is
     measured by comparison of their carrying amounts to future net cash flows
     expected to be generated from the operation and sale of the long-lived
     assets. If such assets are considered to be impaired, the impairment to be
     recognized is measured by the amount in which the carrying amount of the
     long-lived assets exceeds their fair values. At December 31, 2004 and 2003,
     management believes that no impairment has occurred.


                                      F-8
<PAGE>
     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 2004 and 2003 was not significant.

     PREOPENING COSTS

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

     INCOME TAXES

          The current provision for income taxes represents actual or estimated
     amounts payable on tax return filings each year. Deferred tax assets and
     liabilities are recorded for the estimated future tax effects of temporary
     differences between the tax basis of assets and liabilities and amounts
     reported in the accompanying balance sheets, and for operating loss and tax
     credit carry forwards. The change in deferred tax assets and liabilities
     for the period measures the deferred tax provision or benefit for the
     period. Effects of changes in enacted tax laws on deferred tax assets and
     liabilities are reflected as adjustments to the tax provision or benefit in
     the period of enactment. 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 budgeted financial results for 2005. If
     future taxable income is less than the amount that has been assumed in
     determining the deferred tax asset, an increase in the valuation reserve
     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 reserve 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 2004 and 2003, 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.


                                      F-9
<PAGE>
     EARNINGS (LOSS) PER SHARE

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

          Earnings (loss) per basic share of common stock is based on the
     weighted average number of shares of common stock outstanding during each
     respective period. Earnings (loss) per diluted share of common stock adds
     to basic weighted shares the weighted average number of shares issuable
     under convertible securities, stock options and warrants outstanding during
     each respective period, using the 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 (loss) per share is as
     follows (in thousands, except per-share amounts):

<TABLE>
<CAPTION>
                                                                 YEARS ENDED
                                                                DECEMBER 31,
                                                              ----------------
                                                               2004      2003
                                                              ------   -------
<S>                                                           <C>      <C>
Net income (loss)                                             $1,502   $  (691)

Accretion of redeemable preferred stock                         (214)     (217)
Preferred stock dividends                                       (212)     (197)
                                                              ------   -------

Net income (loss) applicable to common shareholders-basic     $1,076   $(1,105)
                                                              ======   =======
Weighted  average  shares  outstanding - basic                 3,675     3,610
                                                              ======   =======
Net income (loss) per share - basic                           $ 0.29   $ (0.31)
                                                              ======   =======

Net income (loss) applicable to common shareholders-diluted   $1,502   $(1,105)
                                                              ======   =======
Weighted  average  shares  outstanding - basic                 3,675     3,610
Dilutive securities                                            3,692        --
                                                              ------   -------
Weighted  average  shares  outstanding - diluted               7,367     3,610
                                                              ======   =======
Net income (loss) per share  - diluted                        $ 0.20   $ (0.31)
                                                              ======   =======
</TABLE>

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

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

     USE OF ESTIMATES

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

     SHIPPING AND HANDLING FEES AND COSTS

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


                                      F-10
<PAGE>
     COMPREHENSIVE INCOME

          For the years ended December 31, 2004 and 2003, comprehensive income
     (loss) equaled net income (loss).

     STOCK-BASED COMPENSATION

          SFAS No. 123, Accounting for Stock- Based Compensation, allows
     companies to choose whether to account for employee stock-based
     compensation on a fair value method, or to continue accounting for such
     compensation under the intrinsic value method prescribed in Accounting
     Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
     (APB 25). The Company has chosen to continue to account for employee
     stock-based compensation using APB 25. Accordingly, no compensation expense
     has been recognized for options granted at fair market value. Had
     compensation cost for the Company's stock option plans been determined
     based on the fair values at the grant dates for awards under the plans
     consistent with the fair-value based method of accounting prescribed by
     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,
                                                            ------------------------
                                                                 2004      2003
                                                                ------   -------
<S>                                                         <C>          <C>
Net income (loss) applicable to common shareholders             $1,076   $(1,105)

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                                                        (201)     (465)
                                                                ------   -------
Pro forma net income (loss)                                     $  875   $(1,570)
                                                                ======   =======
Income (loss)  per share:

Basic - as reported                                             $ 0.29   $ (0.31)
                                                                ======   =======
Diluted - as reported                                           $ 0.20   $ (0.31)
                                                                ======   =======

Basic - pro forma                                               $ 0.24   $ (0.44)
                                                                ======   =======
Diluted - pro forma                                             $ 0.18   $ (0.44)
                                                                ======   =======
</TABLE>

          The fair value of options granted in 2004 and 2003 were $171,000 and
     $57,000 respectively. The fair value of each option and grant is estimated
     on the date of grant using the Black-Scholes option-pricing model with the
     following weighted-average assumptions used for grants in the years ended
     December 31, 2004 and 2003: dividend yield of zero; expected volatility
     ranging from 100% to 139% ; risk-free interest rates ranging from 2.5% to
     5.21%; and an expected term of three to ten years.

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

          In 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 in 2006. Depending


                                      F-11
<PAGE>
     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 financial position and results of operations.

          In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"),
     a revision to SFAS Interpretation No. 46, Consolidation of Variable
     Interest Entities. FIN 46R clarifies some of the provisions of FIN 46 and
     exempts certain entities from its requirements. FIN 46R requires a variable
     interest entity to be consolidated by a company if that company is subject
     to a majority of the risk of loss from the variable interest entity's
     activities or entitled to receive a majority of the entity's residual
     returns or both. FIN 46R also requires disclosures about variable interest
     entities that a company is not required to consolidate but in which it has
     a significant variable interest. FIN 46R became effective for variable
     interest entities or potential variable interest entities for periods
     ending after December 15, 2003 for public companies (other than small
     business issuers), and became effective by the end of the first annual
     reporting period ending after December 15, 2004 for companies that are
     small business issuers. FIN 46R did not have an impact on the Company's
     financial position or 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,
                                   ------------
                                   2004   2003
                                   ----   ----
<S>                                <C>    <C>
Raw materials                      $620   $375
Work in process                      57     13
Finished goods                      124     38
Less: Allowance for obsolescence    (52)   (47)
                                   ----   ----
                                   $749   $379
                                   ====   ====
</TABLE>

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

3. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                      DECEMBER 31,
                                   -----------------
                                     2004      2003
                                   -------   -------
<S>                                <C>       <C>
Machinery and equipment            $ 2,229   $ 2,139
Furniture and fixtures                 139       141
Leasehold improvements                 408       375
Software                               302       259
                                   -------   -------
                                     3,078     2,914
Less: Accumulated depreciation
   and amortization                 (2,486)   (2,292)
                                   -------   -------
                                   $   592   $  622
                                   =======   =======
</TABLE>

     Depreciation expense was approximately $273,000 and $320,000 for the years
ended December 31, 2004 and 2003, respectively.


                                      F-12
<PAGE>
4. ACCRUED EXPENSES

     Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                   DECEMBER 31,
                                   ------------
                                    2004   2003
                                    ----   ----
<S>                                <C>    <C>
Accrued warranty                    $172   $123
Accrued employee related             420    238
Accrued bonus                        191     --
Other                                170     89
                                    ----   ----
                                    $953   $450
                                    ====   ====
</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 "new Credit Facility") with Silicon
Valley Bank (the "Commercial Bank"). The new 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 new
Credit Facility are collateralized by substantially all the assets of the
Company. Both the revolving credit line and term loan under the new 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, 2004, there was $1,500,000 of availability on the line of credit.

     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 new 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 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.

     The Company's average interest rate for the years ended December 31, 2004
and 2003, was 7.5% and 7.13%, respectively.

     As required by the new Credit Facility, the Company will make principal
payments of $20,800 on the term loan during 2005. The Company has also
determined that, during 2005, draws on the revolving line of credit are expected
to be made based on operational cash flow needs or growth based initiatives. At
the close of each quarter, the Company has made arrangements to meet and review
results of the Company with the Commercial Bank and the Convertible Debt holder.
The Company believes its relations with its Commercial Bank and Convertible Debt
holder to be good.


                                      F-13
<PAGE>
     The following represents future amounts payable at December 31, 2004 (in
thousands).

<TABLE>
<S>                       <C>
Year ended December 31,
          2005            $  250
          2006               250
          2007               230
          2008                --
    2009 (November)        1,000
                          ------
                          $1,730
                          ======
</TABLE>

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, 2004 (in thousands):

<TABLE>
<CAPTION>
                          OPERATING
                            LEASES
                          ---------
<S>                       <C>
Year ended December 31,
          2005              $  355
          2006                 299
          2007                 246
          2008                 238
          2009                 184
          2010                  77
                            ------
                            $1,399
                            ======
</TABLE>

     Rent expense for the years ended December 31, 2004 and 2003 was
approximately $412,000 and $430,000, respectively.

     The future minimum lease payments above include a seven year lease entered
into by the Company on December 31, 2002 with a third party for a new corporate
facility in Denver, Colorado. The lease commenced on April 1, 2003. In
connection with this lease the Company has $90,000 in restricted cash used to
secure an irrevocable standby letter of credit in the amount of $90,000 (the
"LOC") with the lessor. The LOC is to be used as collateral for the completion
of certain tenant improvements to this facility. The LOC had an expiration date
of July 31, 2004, but was extended through July 31, 2005. 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, 2004 and 2003 (in
thousands):

<TABLE>
<CAPTION>
                               YEARS ENDED DECEMBER 31,
                               ------------------------
                                      2004   2003
                                     -----   ----
<S>                            <C>           <C>
Balance, January 1                   $ 123   $ 96
Warranty expenditures                 (146)   (99)
Provision for warranty costs           195    126
                                     -----   ----
Balance, December 31                 $ 172   $123
                                     =====   ====
</TABLE>


                                      F-14
<PAGE>
7. INCOME TAXES

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

<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,
                                             ------------------------
                                                   2004    2003
                                                  -----   -----
<S>                                          <C>          <C>
Current tax expense (benefit)
   Federal                                        $  12   $  --
   State                                             --      --
                                                  -----   -----
                                                     12

Deferred tax expense (benefit)
   Federal                                          364    (221)
   State                                             54     (32)
                                                  -----   -----
                                                    418    (253)
                                                  -----   -----
(Decrease) increase in valuation allowance         (891)    253
                                                  -----   -----
                                                  $(461)  $  --
                                                  =====   =====
</TABLE>

For 2004, income tax expense (benefit) includes approximately $441,000 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,
                                             ------------------------------
                                                  2004             2003
                                             -------------    -------------
                                             AMOUNT    %      AMOUNT    %
                                             ------  -----    ------  -----
<S>                                          <C>     <C>      <C>     <C>
Computed "expected" tax                      $ 354    34.0%   $(235)  (34.0)%
State income taxes, net of Federal
   income tax effect                            52     5.0%     (34)   (5.0)%
(Decrease) increase in valuation
   allowance                                  (891)  (85.7)%    253    30.9%
Nondeductible expenses and other                12     1.2%      16     8.1%
AMT tax                                         12     1.2%      --      --
                                             -----   -----    -----   -----
                                             $(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,
                                             -----------------
                                               2004      2003
                                             -------   -------
<S>                                          <C>       <C>
Deferred tax assets:
   Net operating loss carry forwards         $ 2,153   $ 2,593
   Accrued liabilities                           111        91
   Allowance for doubtful accounts                20        11
   Inventory reserves                              7        21
   Depreciation and amortization                 182       167
   Deferred compensation                          14        17
   Valuation allowance                        (1,948)   (2,839)
                                             -------   -------
Total deferred tax assets                        539        61
                                             -------   -------
Deferred tax liabilities:
   Goodwill                                       (4)       --
   Amortization of patents                       (62)      (61)
                                             -------   -------
Total deferred tax liabilities                   (66)      (61)
                                             -------   -------
Net deferred tax asset                       $   473   $    --
                                             =======   =======
</TABLE>

     As of December 31, 2004, the Company had a net operating loss ("NOL")
carryforward of approximately $5,500,000 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.


                                      F-15
<PAGE>
8. PREFERRED STOCK

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 accretion recorded under the mandatory redemption feature
for the years ended December 31, 2004 and 2003 was $14,000 and $17,000,
respectively, for each period.

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 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.

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

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

     Dividends -- The Series B preferred stock accrues dividends at 8% per
     annum. Dividends may be paid in cash or additional preferred shares, in
     kind, at the option of the Company. In addition, in the event the Company
     declares, pays or sets apart a common stockholder dividend, each holder of
     shares of the Series B preferred stock shall be entitled to receive a per
     share dividend equal to the number of shares of common equity on which such
     common dividend is declared into which each share of Series B preferred
     stock is convertible on the record date, multiplied by the amount of cash
     or property paid, or by the number of shares of capital stock issued.
     Preferred stock dividends were approximately $117,000 and $109,000 during
     2004 and 2003, respectively. As of December 31, 2004, the Series B
     preferred shares have $60,000 accumulated dividends in arrears. On March
     20, 2005, the accumulated dividends in arrears were satisfied through the
     issuance of 27,819 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 $1,530,000 at December 31, 2004.

     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


                                      F-16
<PAGE>
     of the Series B preferred stock, the Series B preferred stock can be
     converted into a debt obligation of the Company in a form acceptable to the
     holders of the Series B preferred stock.

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

Preferred Stock - Series C

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

     On March 27, 2002, the Investor purchased 1,000 shares of Series C
preferred stock and warrants to purchase shares of common stock, in exchange for
$1,000,000. The net proceeds to the Company were $967,000. The warrants were
valued and recorded at $259,000. Due to the conversion feature of the Series C
preferred stock transaction, a beneficial conversion feature of $741,000 existed
at the execution of the agreement. The Company is accreting the warrants and the
beneficial conversion feature of the Series C preferred stock to the earliest
date the Series C preferred stockholders can elect the option to redeem the
Series C preferred stock. The accretion recorded for each of the years ended
December 31, 2004 and 2003 was $148,000. 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 preferred stock will be $0.5993 per share. The applicable
     conversion terms result in a beneficial conversion feature of approximately
     $741,000, which was recorded in the first quarter of 2002, and is being
     accreted to the earliest date the Series C preferred stockholder can elect
     the option to redeem the Series C preferred stock.

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

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

     Dividends -- The Series C preferred stock accrues dividends at 8% per
     annum. Dividends may be paid in cash or additional preferred shares, in
     kind, at the option of the Company. In the event that the Company pays
     dividends in kind, the Company will record additional charges against net
     income (loss) applicable to common shareholders. In addition, in the event
     the Company declares, pays or sets apart a common stockholder dividend,
     each holder of shares of the Series C preferred stock shall be entitled to
     receive a per share dividend equal to the number of shares of common equity
     on which


                                      F-17
<PAGE>
     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 $95,000 and $88,000
     during 2004 and 2003, respectively. As of December 31, 2004, the Series C
     preferred shares have accumulated dividends in arrears of $49,000. On March
     20, 2005, the accumulated dividends in arrears were satisfied through the
     issuance of 49 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 $1,247,000 at December 31, 2004.

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

9. STOCK WARRANTS AND OPTIONS

     WARRANTS

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

     The warrants have been recorded as an increase to common stock, and are
being accreted to the earliest date the Series C preferred stockholder can elect
the option to redeem the Series C preferred stock. Warrant accretion was
approximately $52,000 during 2004 and 2003.

     On July 25, 2003, the Company issued 25,000 warrants to its commercial bank
for consideration of the renegotiated Credit Agreement. The exercise price of
the warrants is $1.155, and the warrants have a term of two years during which
they can be exercised. The warrants issued represent debt issue costs and the
value was estimated to be approximately $18,000, using the Black-Scholes
option-pricing model with the following weighted-average assumptions: dividend
yield of zero, expected volatility of 141%, risk free interest rate of 2%, and
an expected term of two years. The debt issue costs were amortized on the
straight line method to interest expense over the term of the Credit Agreement
(through March 15, 2004). For the years ended December 31, 2004 and 2003 the
Company amortized $7,000 and $11,000, respectively, to interest expense.

     Stock warrant transactions during 2004 and 2003 are summarized below:

<TABLE>
<CAPTION>
                                               WEIGHTED
                                                AVERAGE
                                               EXERCISE
                                     SHARES      PRICE
                                   ---------   --------
<S>                                <C>         <C>
Outstanding at January 1, 2003     1,176,688     $3.30
Granted                               25,000      1.16
Exercised                                 --        --
Forfeited                                 --        --
                                   ---------     -----
Outstanding at December 31, 2003   1,201,688      3.26
Granted                                   --        --
Exercised                                 --        --
Forfeited                           (759,535)     4.42
                                   ---------     -----
Outstanding at December 31, 2004     442,153     $1.26
                                   =========     =====
</TABLE>


                                      F-18
<PAGE>
     STOCK OPTIONS

     The Company has two stock option plans, an incentive stock option plan (the
"1993 Plan") and the 1996 Stock Option Plan (the "1996 Plan") (collectively, the
"Plans"). The 1993 Plan provides employees and officers with an opportunity to
purchase an aggregate of 159,746 shares of the Company's common stock. The 1993
Plan requires that incentive stock options be issued at exercise prices which
are at least 100% of the fair value of the stock at the date of the grant.
Options issued under the 1993 Plan vest at a rate of 25% per year over four
years and generally expire up to ten years from the date of grant. Under the
1996 Plan, grants of both incentive stock options and non-qualified options are
permitted. Incentive stock options may only be granted to employees of the
Company, including officers and directors who are also employees. Non-qualified
options may be issued to officers, directors, employees or consultants of the
Company. The exercise price of incentive stock options granted under the 1996
Plan must be at least 100% of the fair market value of the Company's stock at
the grant date, while the exercise price of non-qualified options is at the
discretion of the Board of Directors, but is ordinarily priced at 100% of the
fair market value at the grant date. Aggregate common shares of 722,000 are
reserved for issuance under the 1996 Plan, as amended. Shares forfeited can be
reissued under the 1996 Plan. Options issued under the 1996 Plan vest at a rate
that is at the discretion of the Board of Directors, but is generally at a rate
of 33% per year over three years for employees and immediate to 33% per year
over three years for directors and generally expire up to ten years from the
date of grant.

     Stock option transactions of the Plans during 2004 and 2003 are summarized
below:

<TABLE>
<CAPTION>
                                               WEIGHTED
                                               AVERAGE
                                               EXERCISE
                                    SHARES      PRICE
                                   --------   ---------
<S>                                <C>        <C>
Outstanding at January 1, 2003      701,375     $2.25
Granted                              94,000      0.63
Exercised                                --        --
Forfeited                          (146,000)     2.95
                                   --------     -----
Outstanding at December 31, 2003    649,375      1.87
Granted                             155,000      1.43
Exercised                                --        --
Forfeited                           (63,925)     2.23
                                   --------     -----
Outstanding at December 31, 2004    740,450     $1.75
                                   ========     =====
</TABLE>

     At December 31, 2004 and 2003, options were exercisable with respect to
605,800 and 541,653 shares, respectively, with exercise prices ranging from
$0.60 to $6.44 and a weighted average exercise price of $1.84 and $2.01,
respectively. As of December 31, 2004 the weighted average contractual life was
4.59 years.

     The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
options as of December 31, 2004:

<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           236,000             $0.88                 5.80
    $1.40 - $1.61           255,500             $1.46                 5.03
    $3.25 - $6.44           248,950             $2.87                 1.83
                            -------             -----                 ----
                            740,450             $1.75                 4.59
                            =======             =====                 ====
</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


                                      F-19
<PAGE>
employee in the program, limited to the first $10,000 contributed by the
employee. Employer contributions are made quarterly. In 2004, the Company
contributed a total of $7,200. During 2003, no contributions were made to the
Plan.

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 added
a third segment, QualMark ACG (ACG) (refer to Note 13). The ACG segment is
engaged in the manufacture and repair of 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 ACG gross profit.
All other expenses are not utilized in determining the allocation of resources
on a segment basis.

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

<TABLE>
<CAPTION>
                                          EQUIPMENT    ARTC      ACG    CORPORATE    TOTAL
                                          ---------   ------   ------   ---------   -------
<S>                                       <C>         <C>      <C>      <C>         <C>
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
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                                     --        --       --       212         212
Accretion of redeemable preferred stock         --        --       --       214         214
YEAR ENDED DECEMBER 31, 2003
Sales                                      $ 6,759    $1,136       --      $ --     $ 7,895
Gross profit                                 3,075        72       --        --       3,147
Capital expenditures                           123       116       --        --         239
Total assets                                 3,291       490       --        --       3,781
Depreciation and amortization                   72       271       --        --         343
Interest expense                                --        --       --       134         134
Interest income                                 --        --       --         5           5
OTHER SIGNIFICANT NON-CASH ITEMS:
Redeemable preferred stock dividends
   declared                                     --        --       --       197         197
Accretion of redeemable preferred stock         --        --       --       217         217
</TABLE>

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

<TABLE>
<CAPTION>
                               UNITED STATES   MEXICO   EUROPE   ASIA PACIFIC   MIDDLE EAST   OTHER    TOTAL
                               -------------   ------   ------   ------------   -----------   -----   -------
<S>                            <C>             <C>      <C>      <C>            <C>           <C>     <C>
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
YEAR ENDED DECEMBER 31, 2003
Sales                              $4,287       $186    $  798      $2,552          $ 72         --   $ 7,895
Long-lived assets, net                632         --        84          --            --         --       716
</TABLE>

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


                                      F-20
<PAGE>
12. LEGAL MATTERS

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

     On November 17, 2003, the arbitrator made a final award in favor of Hobbs
in the amount of $410,729, which includes the net amount of fees and costs
awarded to Hobbs as well as interest at 8% from June 20, 2003. In response to
efforts by Hobbs to confirm the June 20, 2003 award, the Company filed pleadings
contesting confirmation based on irregularities in the arbitration decision and
award. Following briefings and two judicial hearings, the Company and Hobbs
reached a settlement on February 13, 2004, in which the Company agreed to
withdraw its objections to confirmation and Hobbs agreed to accept payment
according to a schedule. The schedule called for one lump sum payment of
$264,109 on February 17, 2004, which was paid by the Company, and monthly
payments, due on the last day of the month, of approximately $19,000 from March
through November of 2004, plus interest at 8%. 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


                                      F-21
<PAGE>
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.

13. ASSET ACQUISITION OF ACG DYNAMICS INC. (ACG)

     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 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.

     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).

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

     The following unaudited pro forma financial information for the years ended
December 31, 2004 and 2003, 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 2004 and 2003 include interest expense under the
Convertible Debt agreement, rent expense, a reduction of depreciation expense
for the building owned by ACG (pre-acquisition), and amortization of
identifiable intangible assets, but does not include amortization of goodwill,
pursuant to recently issued accounting standards (in thousands).


                                      F-22
<PAGE>
<TABLE>
<CAPTION>
                                                       YEARS ENDED
                                               ---------------------------
                                               DECEMBER 31,   DECEMBER 31,
                                                   2004           2003
                                                (UNAUDITED)    (UNAUDITED)
                                               ------------   ------------
<S>                                            <C>            <C>
Revenue                                           $13,555       $10,014
Net income (loss)                                 $ 1,590       $  (415)
Basic net income (loss) per common share          $  0.28       $ (0.20)
Diluted net income (loss) per common share        $  0 17       $ (0.20)
Basic shares used in per share calculation          4,297         4,133
Diluted shares used in per share calculation        8,352         4,133
</TABLE>


                                      F-23
<PAGE>
                                INDEX TO EXHIBITS

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

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

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

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

   3.5     Statement of Change of Registered Agent.(5)

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

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

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

  10.2     QualMark Corporation 1996 Stock Option Plan.(3)

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

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

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

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

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

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

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

  10.14    Second Amendment to Loan Agreement dated August 23, 1999 by and
           between QualMark and U.S. Bank National Association.(5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                 DESCRIPTION
--------                                -----------
<S>        <C>
  10.15    Settlement Agreement dated August 30, 1999 by and among QualMark
           Corporation and Screening Systems, Inc.(5)

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

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

  10.18    Employment Agreement dated July 17, 2000 by and between the Company
           and Charles D. Johnston.(7)

  10.19    Second Amendment to Promissory Notes and Fifth Amendment to Loan
           Agreement dated February 1, 2001 by and between QualMark and U.S.
           Bank National Association.(8)

  10.20    Third Amendment to Promissory Notes and Sixth Amendment to Loan
           Agreement dated June 29, 2001 by and between QualMark and U.S. Bank
           National Association.(9)

  10.21    Fourth Amendment to Promissory Notes and Seventh Amendment to Loan
           Agreement dated January 31, 2002 by and between QualMark and U.S.
           Bank National Association. (10)

  10.22    Series C Preferred Stock Purchase Agreement dated March 27, 2002 (11)

  10.23    Series C Preferred Stock Certificate of Designations (11)

  10.24    Series B Preferred Stock Certificate of Designations (11)

  10.25    Fifth Amendment to Promissory Notes and Eighth Amendment to Loan
           Agreement dated January 23, 2003 by and between QualMark and U.S.
           Bank National Association.(12)

10.25(b)   Sixth Amendment to Promissory Notes and Ninth Amendment to Loan
           Agreement dated July 25, 2003 by and between QualMark and U.S. Bank
           National Association(13)

  10.26    Irrevocable Letter of Credit issued to Catellus Development
           Corporation (12)

10.26(b)   Warrant agreement to purchase 25,000 shares of Common Stock dated
           July 25, 2003 (13)

  10.27    Seventh Amendment to Promissory Notes and Tenth Amendment to Loan
           Agreement dated February 27, 2004 by and between QualMark and U.S.
           Bank National Association. (14)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                 DESCRIPTION
--------                                -----------
<S>        <C>
  10.28    Settlement Agreement and Payment Schedule dated February 13, 2004, by
           and between QualMark Corporation and Gregg K. Hobbs. (14)

  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

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

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

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

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

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

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

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