Edgar Filing: CVD EQUIPMENT CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended Commission File Number 1-16525
December 31, 2003

CVD EQUIPMENT CORPORATION
(Exact name of registrant as specified in its charter)

New York 11-2621692
-------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1860 Smithtown Avenue
Ronkonkoma, New York 11779
(Address of principal executive office)

Registrant's telephone number, including area code (631) 981-7081

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par value $0.01
(Title of class)

Indicated by check mark whether the Registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of
1934 during the preceding 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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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. X

The aggregate market value of the common stock held by non-affiliates as
of March 26, 2004 was $2,578,305

The Registrant's revenues for 2003 were $ 9,787,939

The number of shares outstanding of common stock, as of March 26, 2004 was
3,039,100

PART I

Item 1. Business

Unless otherwise set forth herein, when we use the term 'we' or any
derivation thereof, we mean CVD Equipment Corporation, a New York
corporation.

CVD Equipment Corporation (the "Company") was incorporated under the laws
of New York State in October 1982. CVD is a manufacturer of UHVCVD, MOCVD,
PECVD, LPE, VPE, RTP, Etch, Gas and Chemical Delivery Systems, Belt
Furnaces, Rework Station products and services for the Semiconductor,
Telecommunications, Wireless, Optoelectronics, MEMS, Solar Power and
Surface Mount Technology markets.

We conduct our operations through three divisions, CVD, SDC/ECS and
Conceptronic/RI. Each division operates reasonably autonomously on a day-
to-day basis with its own operating manager and with sales and
administration being handled by corporate managers. Yet there is an
overall corporate coordination in the day-to-day administration of the
business, in setting policy and consistently applying procedures.

Our Company designs, develops, manufactures, markets, installs and
services equipment primarily for the semiconductor industry. Our products
include (1) both batch and single wafer systems used for depositing, rapid
thermal processing, annealing, diffusion and etching of semiconductor
films, (2) gas and liquid flow control systems, (3) ultra high purity gas
and chemical piping delivery systems, (4) standard and custom quartzware
and (5) reflow furnaces and rework stations for surface mounting of
components onto printed circuit boards. We also provide equipment
consulting and refurbishing of semiconductor processing equipment. Our
products are generally manufactured as standard products or customized to
the particular specifications of each of our customers.

Semiconductor components are the fundamental electronic building blocks
used in modern electronic equipment and systems. These components are
classified as either discrete devices (such as transistors) or integrated
circuits (in which a number of transistors and other elements are combined
to form a more complicated electronic circuit). In an integrated circuit,
these elements are formed on a small "chip" of silicon or gallium
arsenide, which is then encapsulated in an epoxy, ceramic or metal package
having lead wires for connection to a circuit board. Our products are used
in the manufacture and mounting of these components.

CVD Division

Our CVD division designs and manufactures both standard and custom
equipment for the semiconductor industry. CVD's equipment, with its
leading edge technology, is utilized for silicon, silicon germanium,
silicon carbide and gallium arsenide processes. These processes are
paramount in the semiconductor, optoelectronic and wireless communications
arena.

SDC/ECS Division

In December 1998, we purchased at public auction, the inventory, tangible
assets, intangible assets and intellectual property of Stainless Design
Corporation, Saugerties, New York for $672,095. We formed a new 100% owned
subsidiary called Stainless Design Concepts, Ltd. ("SDC"). In April, 1999,
SDC was merged into the Company as a wholly owned division.

SDC designs and manufactures in their Class 100 cleanroom, ultra high
purity gas and chemical delivery control systems for the semiconductor
industry.

In November, 1999, we formed another division called Equipment Consulting
Services ("ECS").
ECS complements SDC by providing equipment consulting and the refurbishing
of semiconductor equipment. The field service group provides for contract
maintenance, high purity fab and equipment installations and equipment
removal. During the fourth quarter 2002, the Company combined the
operations of SDC and ECS and they are currently being reported under SDC.
The startup of our SDC/ECS division provided new products for CVD to offer
to the semiconductor industry and also improved the manufacturing of gas
and chemical delivery systems used in most CVD products.

Conceptronic/RI Division

In December 2001, we acquired the assets of the Surface Mount Technology
division of Research Inc., known as Research International ("RI") for
$750,000. Research International is a manufacturer of Surface Mount
Technology (SMT) reflow furnaces.

In June 2002, we purchased substantially all of the assets of Conceptronic
Inc.'s Surface Mount Technology business for $1,239,000. Conceptronic
specializes in solder reflow furnaces and rework stations for the printed
circuit board and chip scale package industries.

The startup of our Research International and Conceptronic divisions
provided a base for CVD to generate new and enhanced standard and custom
furnace products to the semiconductor and Surface Mount Technology markets
based on technology that existed at CVD and was purchased as part of the
acquisition of assets.

Principal Products

Chemical Vapor Deposition (CVD) - is a process which passes a gaseous
compound over a target material surface that is heated to such a degree
that the compound decomposes and deposits a desired layer onto substrate
material. The process is accomplished by combining appropriate gases in a
reaction chamber, of the kind produced by the Company, at elevated
temperatures (typically 300-1,500 degrees Celsius). Our Chemical Vapor
Deposition Systems are complete and include all necessary instrumentation,
subsystems and components. The systems include mass flow controllers,
bellows valves, stainless steel lines and fittings. We provide such
standard systems and also specifically engineered products for particular
customer applications. Some of the standard systems we offer are for
Silicon, Silicon-Germanium, Silicon Dioxide, Silicon Nitride,
Polysillicon, Liquid Phase Epitaxial and Metalorganic Chemical Vapor
Deposition.

Our CVD systems are available in a variety of models that can be used in
production and laboratory research. All models can be offered with total
system automation, a microprocessor control system by which the user can
measure, predict and regulate gas flow, temperature, pressure and chemical
reaction rates, thus controlling the process in order to enhance the
quality of the materials produced. The Company's standard microprocessor
control system is extremely versatile and capable of supporting the
Company's complete product line and most custom system requirements. The
Company's CVD systems range in price from $100,000 to $2,500,000.

Rapid Thermal Processing (RTP) - is used to heat semiconductor materials
to elevated temperatures of 1,000 degrees Celsius at rapid rates of up to
200 degrees Celsius per second. Our RTP systems are offered for implant
activation, oxidation, silicide formation and many other processes. We
offer systems that can operate both at atmospheric or reduced pressures. A
specific model of our RTP system is used for Thermal Desorption
Spectroscopy which allows the semiconductor process

engineer the ability to analyze the deposited films between the many process
steps used in the complex fabrication process. Our RTP systems generally
range in price from $75,000 to $350,000.

Annealing and Diffusion Furnaces - are used for diffusion, oxidation,
implant anneal, solder reflow and other processes. The systems are
normally operated at atmospheric pressure with gaseous atmospheres related
to the process. An optional feature of the system allows for the heating
element to be moved away from the process chamber allowing the wafers to
rapidly cool or be heated in a controlled environment. Our cascade
temperature control system enables more precise control of the wafers. The
systems are equipped with an automatic process controller, permitting
automatic process sequencing and monitoring with safety alarm provisions.
Our Annealing and Diffusion Furnace systems generally range in price from
$75,000 to $650,000.

Gas and Liquid Control Systems - Our standard and custom designed gas and
liquid control systems encompassing (1) gas cylinder storage cabinets, (2)
custom gas and chemical delivery systems, (3) gas and liquid valve
manifold boxes (VMB's) and (4) gas isolation boxes (GIB's) to provide safe
storage and handling of pressurized gases and chemicals. System design
allows for automatic or manual control from both a local and remote
location. The price range for our Gas and Liquid Control Systems are from
$20,000 to $350,000.

Ultra High Purity Gas and Chemical Piping and Delivery Systems - We
provide field installation of ultra high purity piping systems within a
semiconductor plant for the distribution of gases and chemicals to the
assorted process tools. As part of field service, we also offer repair
service on customer equipment.

Quartzware - We provide standard and custom fabricated quartzware used in
the Company's equipment and other customer tools.

Reflow Furnaces and Rework Stations - We provide a standard line of
equipment and parts for the printed circuit board and chip scale package
industries.

Markets and Marketing

During 2003, sales were made by a staff of six employees and twenty five
sales representatives whose activities were supported by a staff of twelve
application engineers. The Company continues to work on expanding our
product offerings.

The Company's web sites continue to see increased traffic. We have focused
our efforts on being in the top listings on many search engines in order
to increase the number of "hits" to our web sites.

The Company's products are used in research and production applications by
the semiconductor industry. We sell our products primarily to
semiconductor manufacturers, institutions involved in electronic research
such as universities, government and industrial laboratories and to
electronic assembly manufacturers. We have both an international and
domestic customer base in excess of 300 customers. For the twelve months
ended December 31, 2003 and December 31, 2002, 26% and 25% of our revenues
respectively were derived from foreign exports. Sales to a single customer
in any one year can exceed 10% of our total sales however, we are not
dependent on any single customer. In 2003 and 2002, one customer
represented 12% and 11% of our total sales respectively. In 2003, one
other customer represented 13.4% of our total sales. In 2002, another
customer represented 12% of our total sales.

Warranties

We warrant our equipment for a period of twelve to twenty four months
after shipment, depending on the product, and pass along any warranties
from original manufacturers of components used in our products. We provide
for our own equipment servicing with in-house field service personnel.
Warrantee costs have been historically insignificant.
Competition

Our business is subject to intense competition. We are aware of other
competitors that offer a substantial number of products comparable to
ours. Many of our competitors (including customers who may elect to
manufacture systems for internal use) have financial, marketing and other
resources greater than ours. To date, we have been able to compete in
markets that include these competitors, primarily on the basis of price,
technical performance, quality and delivery.

Sources of Supply

We do not manufacture many components used in producing our products. They
are purchased from unrelated third-party manufacturers of such equipment.
We do not have any supply contracts covering these components. We are not
dependent on a principal or major supplier and alternate suppliers are
available. We do not use a large amount of raw or difficult to obtain
materials that could cause a problem in production of our equipment.

We have our own fully equipped machine shop to fabricate in house, the
most complex designed parts of our equipment. We recently invested in
additional CNC machines for the machine shop, thus further increasing
efficiencies while significantly reducing costs in production. Similarly,
our own quartz shop is capable of meeting our quartzware needs.

Materials procured from the outside and/or manufactured internally undergo
a rigorous quality control process to ensure that the parts meet or exceed
the most stringent specifications. All equipment, upon final assembly,
undergoes a final series of complete testing to ensure maximum product
performance.

Backlog

As of December 31, 2003 our order backlog was $1,738,269 compared to
$3,816,877 at December 31 2002. The exceptionally high backlog at December
31, 2002 was primarily attributable to the work slowdown in the fourth
quarter of 2002 when the CVD and Conceptronic divisions relocated to its
new facility. Included in the backlog are all accepted purchase orders.
Order backlog is usually a reasonable management tool to indicate expected
revenues and projected profits, however it does not provide an assurance
of future achievement or profits as order cancellations or delays are
possible.

Patents, Copyrights and License Agreements

We believe that while patents are useful and will be used at times in the
future, they are not critical or valuable in many cases on an individual
basis. We believe the collective value of the intangible property of the
Company is comprised of blueprints, specifications, technical processes,
cumulative employee knowledge, experience, copyrights and patents.

Research and Development

We continue to concentrate our efforts on several research and development
projects. We develop and customize equipment for industry and government,
university and industry research laboratories around the world. Our
research, design and development of equipment, which remains proprietary
to us, is used to improve our existing products and develop new products
for customers. The amount spent on research and development was $273,000
and $372,000 for the years ended December 31, 2003 and December 31, 2002
respectively.

Government Regulations
The Company knows of no government requirements for approval of the sale
of their products or services except in some export cases. At that time,
we apply for the appropriate export, license. As of December 31, 2003,
there were no pending government approvals for an export license.

We know of no existing or probable governmental regulations that would have a
serious effect on our business.

We have and will continue to comply with any and all environmental laws that
are applicable to our business.

Insurance

Our products are used in connection with explosive, flammable, corrosive
and toxic gases. There are potential exposures to personal injury as well
as property damage, particularly if operated without regard to the design
limits of the systems and components.

Although, we believe that our insurance coverage is adequate, we did not
renew out product liability insurance on August 11, 2003 due to a
significant increase in premium and in light of our historical experience
of not sustaining product liability claims of any consequence. We will
reinstate product liability insurance when it is determined to be cost
effective to do so. We endeavor to minimize our product liability exposure
by engineering safety devices for our products and carefully monitoring
incidents involving our products to determine where safety improvements
may be made and by conducting training programs in connection with our
products.

Employees

At December 31, 2003, we had 86 employees, 82 of which were full time
personnel and four worked part time. We had 37 people in manufacturing,
18 in engineering (including research and development and efforts related
to product improvement), seven in field service, three in marketing and 21
in general management and administration.

Item 2. Description of Property.

We maintain our headquarters at 1860 Smithtown Avenue, Ronkonkoma, New
York, where we own a 50,000 square foot manufacturing facility which was
purchased in November, 2002. Our CVD and Conceptronic divisions operate
out of this facility. Our SDC division operates out of a 22,000 square
foot manufacturing facility situated on five acres of land which we
purchased in December 1998 and is located at 1117 Kings Highway,
Saugerties, New York.

Item 3. Legal Proceedings.

On September 24, 1999 the Company was named in a lawsuit filed by
Precisionflow Technologies, Inc., in the United States District for the
Northern District of New York. The nature of this legal proceeding focused
on a purported comment made by CVD's President Leonard Rosenbaum
concerning the intellectual property obtained in the purchase of assets of
Stainless Design Corporation. On November 10, 1999, the Company responded
with a counterclaim for unauthorized use of our intellectual property. It
is legal counsel's belief that the lawsuit against CVD is without merit as
comments made by Leonard Rosenbaum were truthful and that our counter-suit
will be successful as CVD has valid copyrights that were utilized without
our authorization. The plaintiff is seeking monetary damages and
injunctive relief, however, the Company considers its potential exposure
to be negligible and covered by insurance. Further, the claim against CVD
does not assert any ownership claim over our intellectual property.
Therefore, we do not anticipate any impact above the levels already being
experienced. The Company is also seeking monetary damages and injunctive
relief in its counter-suit. All pre-trial disclosure has been completed
and the case is currently pending decisions on motions and cross motions
for summary judgement. No trial date has been set.

In May 2002, the Company instituted a new action against Precisionflow
Technologies, Inc., in the United States District for the Northern
District of New York also seeking injunctive relief and monetary damages
based upon additional copyright violations. A motion by Precisionflow
Technologies, Inc. to dismiss this action has been pending since June
2002.

Item 4. Submission of Matters to a Vote of Security Holders.

At our annual meeting of stockholders, which was held on August 5, 2003 our
stockholders:

(1) Elected these four nominees for directors to serve for a term of one (1)
year; Leonard Rosenbaum, Martin Teitelbaum, Alan H. Temple and Conrad
Gunther.

(2) Ratified the appointment of Albrecht, Viggiano, Zureck & Company, P.C.,
as our independent auditors and public accountants for the year ended
December 31, 2003.

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.

The principal market for our common stock which is traded under the symbol
CVV is the American Stock Exchange. The following table sets forth, for
the periods indicated, the high and low sales prices of our common stock
on the American Stock Exchange.

High Low

Year Ended December 31, 2003
1st Quarter............ $1.62 $0.82
2nd Quarter............ 1.35 1.00
3rd Quarter............ 1.95 1.03
4th Quarter............ 1.48 1.10

High Low
Year Ended December 31, 2002:
1st Quarter............. $3.10 $2.30
2nd Quarter............. 2.95 2.10
3rd Quarter............. 2.29 1.54
4th Quarter............. 1.99 0.62

As of March 3, 2004, there were approximately 97 holders of record and
approximately 470 beneficial owners of our common stock. On March 2, 2004,
the closing sales price of our common stock as reported on the American
Stock Exchange was $1.80.

Dividend Policy
We have never paid a dividend on our common stock and we do not anticipate
paying dividends on the common stock at the present time. We currently
intend to retain earnings, if any, for use in our business. There can be
no assurance that we will ever pay dividends on our common stock. Our
dividend policy with respect to the common stock is within the discretion
of the Board of Directors and its policy with respect to dividends in the
future will depend on numerous factors, including earnings, financial
requirements and general business conditions.

Equity Compensation Plan Information

The following table provides information about shares of our common stock
that may be issued upon the exercise of options under all of our existing
compensation plans as of December 31, 2003.

Number of securities
to be issued upon Weighted-average
exercise of exercise price of Number securities
outstanding options, outstanding options, remaining available
warrants and rights warrants and rights for future issuance

Plan Category (a) (b) (c)

Equity compensation
plans approved by
security holders (1) 365,400 $ 1.69 214,250
Equity compensation
plans not approved by
security holders 0 0 0

Total 365,400 $ 1.69 214,250
9

(1) Reflects aggregate options outstanding under our Non-Qualified Stock
Option Plans

On June 3, 1996 we issued options to purchase an aggregate of 84,000
shares of our common stock at an exercise price of $1.25 per share to our
directors.

On April 15, 1998 we issued options to purchase an aggregate of 140,000
shares of our common stock at an exercise price of $1.51 per share to
certain of our employees.

On July 16, 1999 we issued options to purchase an aggregate 52,500 shares
of our common stock at an exercise price of $1.00 per share to certain of
our employees.

On February 2, 2000 we issued options to purchase an aggregate 242,000
shares of our common stock at an exercise price of $1.75 per share to
certain of our employees.

On May 7, 2000 we issued options to purchase an aggregate 40,000 shares of
our common stock at an exercise price of $2.00 per share to certain of our
employees.

On August 1, 2000 we issued options to purchase an aggregate of 40,000
shares of our common stock at an exercise price of $2.00 per share to our
directors.

On October 26, 2000 we issued options to purchase an aggregate of 3,500
shares of our common stock at an exercise price of $3.25 per share to one
of our employees.

On April 1, 2003 we issued options to purchase an aggregate of 12,500
shares of our common stock at an exercise price of $3.88 per share to one
of our employees.

On September 23, 2003 we issued options to purchase an aggregate of 75,000
shares of our common stock at an exercise price of $1.40 per share to our
directors.

Item 6. Management's Discussion and Analysis of Financial
Condition and Results of
Operations.

Except for historical information contained herein, this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward -looking statements within the meaning of the U.S,
Private Securities Litigation Reform Act of 1995, as amended. These
statements involve known and unknown risks and uncertainties that may
cause our actual results or outcomes to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions
and other important factors that could cause actual results to differ
materially from those in the forward-looking statements. Important
assumptions and other factors that could cause actual results to differ
materially from those in the forward-looking statements, include but are
not limited to: competition in the Company's existing and potential future
product lines of business; The Company's ability to obtain financing on
acceptable terms if and when needed; uncertainty as to the Company's
future profitability, uncertainty as to the future profitability of
acquired businesses or product lines, uncertainty as to any future
expansion of the Company. Other factors and assumptions not identified
above were also involved in the derivation of these forward-looking
statements and the failure of such assumptions to be realized as well as
other factors may also cause actual results to differ materially from
those projected. The Company assumes no obligation to update these
forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.

CVD Equipment Corporation designs, develops, manufactures, markets,
installs and services equipment primarily for the semiconductor industry.
The Company's products and services include (1) batch and single wafer
systems used for depositing, rapid thermal processing, annealing,
diffusion and etching of semiconductor films; (2) gas and liquid flow
control systems, (3) ultra high purity gas and chemical piping delivery
systems; (4) standard and custom quartzware, and (5) reflow furnaces and
rework stations for surface mounting of components onto printed circuit
boards. We also provide equipment consulting and refurbishing of
semiconductor processing equipment. The Company's products are generally
manufactured as standard products or customized to the particular
specifications of its customers.

Results of Operations

Revenue for the year ended December 31, 2003 was approximately $9,788,000
compared to approximately $9,242,000 for the year ended December 31, 2002,
representing an increase of $546,000 or 5.9%. This increase can be
attributed to the inclusion of a full year's worth of revenue generated by
the Company's Conceptronic division, which was acquired in the beginning
of the third quarter of 2002. However, due to the overall softness in the
economy, which has caused existing and potential customers to reduce or
delay their capital expenditures, our primary source of revenue, the
manufacture of customized CVD equipment and gas and chemical delivery
systems was negatively impacted.

Cost of revenue increased for the year ended December 31, 2003 to
approximately $7,484,000 from approximately $6,205,000 for the year ended
December 31, 2002 representing an increase of approximately $1,279,000 or
20.6%. Correspondingly, the gross profit for the current year decreased to
approximately $2,304,000 from $3,037,000. The gross profit margin
decreased from 32.9% in the year ended December 31, 2002 to 23.5% in the
year ended December 31, 2003. This decrease is a result of the greater
contribution of sales made from the Conceptronic line of products which
presently carry a lower gross profit margin percentage than the CVD
division. Additionally, due to the soft economic climate, SDC's sales were
negatively impacted, resulting in less than optimum operating efficiencies
and lower gross profit margins We are currently working on improving the
gross profit margins in the Conceptronic division through the re-
engineering of the product line.

Selling and shipping expenses were approximately $740,000 in the year
ended December 31, 2003 compared to $903,000 in the year ended December
31, 2002 representing a decrease of 18.1%. The decrease is attributable
to a reduction in the sales staff during the current year as well as a
reduction in commissions and royalties. The use of distributors to sell
the products of the Conceptronic division has resulted in a reduction in
selling costs for the Company. Correspondingly, product sales to
distributors are sold at a reduced rate, further explaining the reduction
in gross profit during the current year as compared to the same period one
year ago.

General and administrative expenses were approximately $2,164,000 during
the year ended December 31, 2003. This was a decrease of approximately
$303,000 or 12.3% compared to approximately $2,467,000 during the year
ended December 31, 2002. The decrease is attributable to a reduction in
staff as the Conceptronic division was assimilated into the Company.

Interest income decreased in the year ended December 31, 2003 to $1,243
compared to $25,221 in the year ended December 31, 2002 as a result of
less funds available for investing due to the acquisition of Conceptronic
and the purchase of the new building during 2002.

Interest expense increased to approximately $209,000 in the year ended
December 31, 2003 compared to approximately $139,000 in the year ended
December 31, 2002 due to the increase our average outstanding debt as a
result of the mortgage on the new building purchased in 2002.

Other income decreased to approximately $310,000 during the year ended
December 31, 2003 compared to approximately $543,000 during the year ended
December 31, 2002. This is a result of the reduction in cash received on
the collection of accounts receivable exceeding the $369,000 recorded as
part of the purchase of the assets, which was a nonrecurring event.

Liquidity and Capital Resources

As of December 31, 2003, we had aggregate working capital of approximately
$2,857,000 compared to aggregate working capital of $3,229,000 at
December 31, 2002 and had available cash and cash equivalents of
approximately $321,000 compared to approximately $324,000 in cash and cash
equivalents at December 31, 2002. The cash used for capital expenditures
and for financing activities marginally exceeded the cash provided from
operations.

Accounts receivable, net of allowance for doubtful accounts decreased by
approximately $33,000 or less than 2% in the year ended December 31, 2002
compared to the year ended December 31, 2003.

Inventory as of December 31, 2003 was approximately $1,426,000
representing a decrease of approximately $597,000 or 29.5% compared to the
inventory balance as of December 31, 2002. The decrease in inventory was
comprised of a decrease in raw materials of approximately $445,000, a
decrease in work in process of approximately $159,000 and an increase in
finished goods of approximately $7,000. Accounts payable at December 31,
2003 was approximately $417,000 or 44.4% below the balance at December 31,
2002. This decrease is attributed to the unusually high balance at
December 31, 2002 due to the higher than usual volume of purchases made at
the end of the year. This was required in order to make up for the time
lost during the temporary plant shut down at the beginning of the fourth
quarter due to the relocation of the Conceptronic and CVD divisions.
Additionally, we incurred payables associated with the purchase of the new
building at December 31, 2002.

We have a line of credit with a bank permitting the Company to borrow up
to $1,000,000 until June 1, 2004, at which time it is subject to renewal.
Interest is payable on any unpaid principal balance at the bank's prime
rate plus 3/4 of 1%. As of December 31, 2003 and 2002, there was no balance
outstanding on this facility. However, at December 31, 2002 we had
$350,000 of the credit line utilized to secure a letter of credit.
Borrowings are collateralized by our assets.

We received from General Electric Capital Corporation a $2,700,000
mortgage, secured by the real property, building and improvements, to
finance and improve the new facility in Ronkonkoma, New York. As of
December 31, 2003, we were not in compliance with the debt service ratio
financial covenant of the agreement. General Electric Capital Corporation
has waived this default. The mortgage is payable in equal monthly
installments of $22,285 including interest at 5.67% per annum; pursuant to
an Industrial Development bond purchase agreement with the town of Islip
Industrial Development Agency. The final payment is due March 2017.

A note payable in the amount of $350,000 was issued for the acquisition of
the assets for Surface Mount Technology business. Interest was provided at
5.5% per annum. The note was paid in full in July, 2003.

The Company believes that its cash and cash equivalents, cash flow from
operations and available credit facilities will be sufficient to meet its
working capital and investment requirements for the next twelve months.
However, future growth, including potential acquisitions, may require
additional funding and from time to time we may need to raise capital
through additional equity or debt financing.

Item 7. Financial Statements and Supplementary Data.

The consolidated financial statements and supplementary data required in
this item are set forth on the pages indicated in Item 15(a)(1).

Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.

None

Item 9. Report of the Audit Committee.

We have reviewed and discussed the audited financial statements for the
year ended December 31, 2003 with the Company's management and have
discussed with Albrecht, Viggiano, Zureck & Company, P.C. the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees. In addition, we have received from
Albrecht, Viggiano, Zureck & Company, P.C. the written disclosures and the
letter required by the Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, and we have discussed with
Albrecht, Viggiano, Zureck & Company, P.C. their independence.

Based on these reviews and discussions, we recommended to the Board of
Directors that the audited financial statements be included in our Annual
Report on Form 10-KSB for the year ended December 31, 2003.

THE AUDIT COMMITTEE

Conrad Gunther, Alan H. Temple, Bruce T. Swan and Martin J. Teitelbaum

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. In response to the
requirements of the Sarbanes-Oxley Act of 2002, as of the end of the
period covering this report, the evaluation date, our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of our "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) and15d-15(e)). Based
on that evaluation, these officers concluded that, as of the evaluation
date, our disclosure controls and procedures were adequate and effective
to ensure that material information relating to us and our consolidated
subsidiaries was made known to them by others within those entities,
particularly during the period in which this report was being prepared.

Changes in Internal Controls. There were no changes in our internal
controls over the financial reporting, identified in connection with the
evaluation of such internal controls that occurred during our last fiscal
quarter, that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

PART III

Item 10. Our Directors and Executive Officers

Board of Directors

Our Certificate of Incorporation and Bylaws provide for our business to be
managed by or under the direction of the Board of Directors. Under our
Certificate of Incorporation and Bylaws, the number of directors is fixed
from time to time by the board of Directors. The Board of Directors
currently consists of five members. Directors are elected for a period of
one year and thereafter serve, subject to the bylaws, until the next
annual meeting at which their successors are duly elected by the
stockholders.

Name Age Position(s) with the Company
----------------------- ------ --------------------------------------------

Leonard A. Rosenbaum 58 Director, Chief Executive Officer, President
Alan H. Temple Jr. 70 Director
Martin J. Teitelbaum 54 Director, Assistant Secretary
Conrad Gunther 57 Director
Bruce T. Swan 71 Director
Glen R. Charles 50 Chief Financial Officer, Secretary

Leonard Rosenbaum
-----------------

Leonard Rosenbaum founded the Company in 1982 and has been its President,
Chief Executive Officer and a Director since that date. From 1971 until
the time of his affiliation with the Company in 1982, Mr. Rosenbaum was
President, Director and principal stockholder of Nav-Tec Industries, a
manufacturer of semiconductor processing equipment similar to the type of
equipment presently manufactured by the Company. From 1966 to 1971, Mr.
Rosenbaum was employed by a division of General Instrument, a manufacturer
of semiconductor materials and equipment.

Alan H. Temple
--------------

Alan H. Temple Jr. has been the President of Harrison Homes Inc, a
building and consulting firm located in Pittsford, New York since 1977

Martin J. Teitelbaum
--------------------

Martin Teitelbaum is an attorney, who since 1988, has conducted his own
private practice, the Law Offices of Martin J. Teitelbaum. Prior to
establishing his own firm, from 1977 to 1987, Mr. Teitelbaum was a partner
in the law firm of Guberman and Teitelbaum. Mr. Teitelbaum became a member
of the Board of Directors for the Company in 1985. From September, 1986
until December, 1986, he served as corporate secretary and served again as
corporate secretary from August, 1997 to February 1998. Since January,
1987 he has served as the assistant secretary. Mr. Teitelbaum serves as
general counsel to the Company.

Conrad Gunther
--------------

Conrad Gunther was elected to the Board of Directors at the annual meeting
in 2000. In January 2002, Mr. Gunther formed First City Capital Corp. with
his 50% partner. First City was organized as a financial consulting firm
providing loan and equity placement services. There are no other

employees in the Company and the firm has yet to generate any revenue. In
July 2000, Mr. Gunther formed E-Billsolutions, Inc. to provide credit card
processing to high risk merchants. These merchants are internet, mail order
and telephone order businesses selling products such as prepaid telephone
cards, sunlamps and coffee through "infomercials" or through inbound
telemarketing. They are unable to qualify for traditional credit card
processing. Mr. Gunther is the sole employee of E-Billsolutions, Inc..
From 1995 until December 2000, Mr. Gunther was the managing director at
the Allied Group, an insurance brokerage firm. Prior to that time, he was
Executive Vice President of both North Fork Bank and European American
Bank. Mr. Gunther was also a Director of Reliance Bancorp until its sale
in 2000 to North Fork Bank.

Bruce T. Swan
-------------

Bruce Swan was appointed a member of the Board of Directors on September
23, 2003. Mr. Swan has extensive banking, export and international credit
experience. Mr. Swan has held the positions of Deputy Manager at Brown
Brothers Harriman and Co., Assistant Treasurer at Standard Brands
Incorporated, Assistant Treasurer at Monsanto Corporation, Vice President
and Treasurer at AM International Inc. and President and Founder of Export
Acceptance Company. Mr. Swan has served as an adjunct faculty member of
New York University's Stern School of Business Administration.

Glen R. Charles
---------------

Mr. Charles has been the Chief Financial Officer and Secretary of the
Company since January 2004. Prior to Mr. Charles employment with the
Company, he was the Director of Financial Reporting for Jennifer
Convertibles, Inc., a publicly held company traded on the American Stock
Exchange. Jennifer Convertibles, Inc. is the owner and licensor of the
largest group of sofabed specialty retail stores in the United States. From
1994 to 2002, he was the Chief Financial Officer of Trans Global Services,
Inc., a publicly held Nasdaq traded company, which is a provider of
temporary technical services to the aerospace, aircraft, electronics and
telecommunications markets. Mr. Charles also had his own business in the
private practice of accounting.

THE BOARD AND ITS COMMITTEES

Committees and Meetings

Our directors are elected at the Annual Meeting of Stockholders and hold
office until their successors are elected and qualified. Our officers are
appointed by the Board of Directors and serve at the pleasure of the Board
of Directors. [We currently do not have a nominating committee.]

The Board of Directors held 5 meetings during the 2003 fiscal year. None
of the directors attended fewer than 75% of the number of meetings of the
Board of Directors or any committee of which he is a member held during
the period in which he served as a director or committee member, as
applicable.

Compensation and Option Committee. The Board of Directors serves as the
Compensation and Option Committee. Leonard Rosenbaum abstains from any
matters involving his executive compensation.

Audit Committee. The Board of Directors has a separately-designated
standing Audit Committee that consists of Conrad Gunther, Alan H. Temple,
Bruce T. Swan and Martin J. Teitelbaum. During the fiscal year ended
December 31, 2003, the Audit Committee held five meetings. The Audit
Committee is empowered to review the engagement of our independent public
accountants and the independence of the public accounting firm. The Audit
Committee also reviews the audit and non audit fees of the

independent public accountants and the results of their audit. Furthermore,
the committee reviews the adequacy of our internal control procedures, the
structure of our financial organization and the implementation of our
financial and accounting policies. Messrs. Gunther, Temple and Swan are
"independent" as defined in Section 121(B) of the American Stock Exchange
original listing requirements. The Board of Directors has adopted and
amended a written charter for the Audit Committee.

Audit Committee Financial Experts

Under new SEC rules, companies are required to disclose whether their
audit committees have an "audit committee financial expert" as defined in
Item 401(h) of Regulation S-K under the Securities Exchange Act of 1934
and whether that expert is "independent" as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Exchange Act. The Board of Directors
has determined that Conrad Gunther is an"audit committee financial expert"
and is also "independent".

Code of Ethics

A corporate code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions is in the process of being prepared

Item 11. Executive Compensation

Summary Compensation Table
The following table sets forth compensation paid for the years ending
December 31, 2003, 2002 and 2001, or such shorter period as such employees
were employed by us, to those persons who were either (a) the chief
executive officer as of December 31, 2003 or (b) one of our four other
most highly compensated executive officers or executive employees as of
December 31, 2003 whose total annual salary and other compensation
exceeded $100,000 (collectively with the Chief Executive Officer, the
"Named Executive Officers").

Annual Compensation Long -term Compensation
Awards Payouts
Securities
Name and principal Underlying
position Year Salary Bonus options/
----------------------- ------ ---------- ------- ------------- --------

$ $ #
(a) (b) (c) (g)
Leonard A. Rosenbaum 2003 165,645 15,000(1)
President and Chief 2002 165,478 20,000 0
Executive Officer 2001 170,434 0

________________
(1) On September 23, 2003, Mr. Rosenbaum was granted options to purchase
15,000 shares of our common stock at $1.40 per share.

The company is the owner of a life insurance policy on the life of Leonard
Rosenbaum in the amount of $2,000,000. The Company is the sole beneficiary
of said policy.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of March 4, 2004, information regarding
the beneficial ownership of our common stock by (a) each person who is
known to us to be the owner of more than five percent of our common stock,
(b) each of our directors, (c) each of the named executive officers, and
(d) all directors and executive officers and executive employees as a
group.

Amounts and Nature of Percent of Class
Name and Address of Beneficial Owner Beneficial Ownership (1) (%)
---------------------------------------- ------------------------ ----------------

Leonard A. Rosenbaum 1,307,950 (2) 43.0
Alan H. Temple Jr. 203,500 (3) 6.7
Martin J. Teitelbaum 33,500 (4) 1.1
Conrad Gunther 7,500 (5) 0.2
All directors and executive officers and
executive employees as a group (four (4)
persons) 1,552,450 51.1

(1) All of such shares are owned directly with sole voting and investment
power, unless otherwise noted below.

(2) Includes 7,500 shares of our common stock underlying exercisable options
which are currently exercisable options, but does not include 17,500
shares of common stock which are not currently exercisable.

(3) Includes an aggregate of 21,000 shares held by Mr. Temple's wife, as
to which he disclaims beneficial interest and 7,500 shares of our
common stock underlying exercisable options. Does not include 17,500
shares of our common stock which are not currently exercisable.

(4) Includes 2,000 shares held by Mr. Teitelbaum's wife and beneficial
ownership thereof is disclaimed by Mr. Teitelbaum and 7,500 shares of
our common stock underlying exercisable options. Does not include
17,500 shares of our common stock underlying options which are not
currently exercisable.

(5) Includes 7,500 shares of our common stock underlying exercisable
options. Does not include 17,500 shares of our common stock underlying
options which are not currently exercisable.

Section 16(A) Beneficial Ownership Reporting Compliance

The rules of the Securities and Exchange Commission require us to disclose
late filings of reports of stock ownership and changes in stock ownership
by our directors, officers and ten percent stockholders. To our knowledge,
based solely on our review of (a) the copies of such reports and
amendments thereto furnished to us and (b) written representations that no
other reports were required, during our fiscal year ended December 31,
2003, all of the filings for our officers, directors and ten percent
stockholders were made on a timely basis.

Item 13. Certain Relationships and Related Transactions

During 2003, the Company incurred approximately $41,000 in legal fees to
Martin J. Teitelbaum, a director of the Company and principal attorney for
the law offices of Martin J. Teitelbaum.

Item 14. Principal Accounting Fees and Services

The following table presents fees for professional audit services rendered
by Albrecht, Viggiano, Zureck and Company. P.C. for the audit of our
annual financial statements for the years ended December 31, 2003 and
December 31, 2002 and fees billed for other services rendered by Albrecht,
Viggiano, Zureck and Company, P.C. during those periods.

2003 2002
-------- --------

Audit fees: (1) $57,000 $50,350

Audit related fees: (2) 3,675 4,710

Tax fees: (3) 3,000 3,000

Total $63,675 $58,060

(1) Audit fees consisted of audit work performed in the preparation and
review of our annual financial statements and review of financial
statements included in our quarterly reports filed with the Securities
and Exchange Commission.
(2) Audit related fees consisted principally of assistance in connection
with the interpretation of comment letters we received from the SEC
regarding our annual statement for fiscal year 2002 and quarterly
statements for March 31, 2003, June 30, 2003 and September 30, 2003.
(3) Tax fees consisted principally of tax preparation, compliance,
advisory and planning services.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on form 8-K.

(a) (1) Financial Statements
The financial statements required by this item are submitted
in a separate section beginning on Page F-3 of this report.

(2) Financial Statement Schedules
Schedules have been omitted because of the absence of
conditions under which they are required or because the
required information is included in the financial statements
or notes thereto.

(3) Exhibits

3.1 Certificate of Amendment dated October 12, 1982 of Certificate of
Corporation incorporated herein by reference to Exhibit 3.1 to our
Registration No. 2-97210-NY.

3.2 Certificate of Amendment dated April 25, 1985 of Certificate of
Corporation incorporated herein by reference to Exhibit 3.1 to our
Registration No. 2-97210-NY.

3.3 Certificate of Amendment dated August 12, 1985 of Certificate of
Corporation incorporated herein by reference to Exhibit 3.1 to our
Registration No. 2-97210-NY.

10.1 Form of Non-Qualified Stock Option Agreement with certain directors,
officers and employees of CVD Equipment Corporation incorporated herein
by reference to our Registration Statement on Form S-8 No. 33-30501,
filed August 15, 1989.

10.2 Purchase at public auction the inventory, tangible assets, intangible
assets and intellectual property of Stainless Design Corporation
incorporated herein by reference to our Form 8-K filed on December 31,
1998.

10.3 Purchase a 22,000 square foot facility from Kidco Realty incorporated
herein by reference to our Form 8-K filed on December 31, 1998.

10.4 Purchase a 50,000 square foot facility from Arrow Electronics
incorporated herein by reference to our Form 8-K filed on November 12,
2001.

10.5 Purchase substantially all of the assets of Research Inc.'s Surface
Mount Technology business incorporated herein by reference to our Form
8-K filed on November 12, 2001.

10.6 Purchase substantially all of the assets of Conceptronic Inc.'s Surface
Mount Technology business incorporated herein by reference to our Form
8-K filed on July 1, 2002.

23.1 Consent of Albrecht, Viggiano Zureck & Company, P.C. *

31.1 Certification of Chief Executive Officer. *

31.2 Certification of Chief Financial Officer. *

32.1 Certification of Principal Executive Officer pursuant to U.S.C. Section
1350. *

32.2 Certification of Principal Financial Officer pursuant to U.S.C. Section
1350. *
* Filed herewith

(b) Reports on Form 8-K.
(1) On October 2, 2003 we filed a current report on Form 8-K
announcing the appointment of Bruce T. Swan as a member of the
Board of Directors.

(d) Financial Statement Schedules.
See (a) (2) above

19
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

CVD EQUIPMENT CORPORATION

By: /s/ Leonard A. Rosenbaum
-------------------------
Name: Leonard A. Rosenbaum
Title: President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated below.

NAME POSITION DATE
------------------------- ----------------------------------------------- --------------

/s/ Leonard A Rosenbaum President, Chief Executive Officer and Director March 30, 2004
------------------------
Leonard A. Rosenbaum (Principal Executive Officer)

/s/ Alan H. Temple Jr. Director March 30, 2004
------------------------
Alan H. Temple Jr.

/s/ Martin J. Teitelbaum Director and Assistant Secretary March 30, 2004
------------------------
Martin J. Teitelbaum

/s/ Conrad Gunther Director March 30, 2004
------------------------
Conrad Gunther

/s/ Bruce T. Swan Director March 30, 2004
------------------------
Bruce T. Swan

/s/ Glen R. Charles Chief Financial Officer and Secretary March 30, 2004
------------------------
Glen R. Charles (Principal Financial and Accounting Officer)

Exhibit 31.1
Certifications Pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002

I, Leonard A. Rosenbaum, certify that:

1. I have reviewed this annual report on Form 10-KSB of CVD Equipment
Corporation;

2. Based upon my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report.

3. Based upon my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrants' board of directors (or persons performing
the equivalent functions):

a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b. Any Fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Dated: March 30, 2004

/s/ Leonard A. Rosenbaum
----------------------------------------
President, Chief Executive Officer and Director

Exhibit 31.2
Certifications Pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002

I, Glen R. Charles, certify that:

1. I have reviewed this annual report on Form 10-KSB of CVD Equipment
Corporation;

2. Based upon my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.

Dated: March 30, 2004

/s/ Glen R. Charles
----------------------------------------
Chief Financial Officer

Exhibit 32.1

Certification of Principal Executive Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

I, Leonard A. Rosenbaum, President and Chief Executive Officer of CVD
Equipment Corporation, hereby certifies, to my knowledge, that the annual
report on Form 10-KSB for the period ending December 31, 2003 of CVD
Equipment Corporation (the "Form 10-KSB") fully complies with the
requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of
1934 and the information contained in the Form 10-KSB fairly presents, in
all material respects, the financial condition and results of operations
of CVD Equipment Corporation.

Dated: March 30, 2004 /s/ Leonard A. Rosenbaum
--------------------------
Leonard A. Rosenbaum
Chief Executive Officer
(Principal Executive Officer)

Exhibit 32.2

Certification of Principal Financial Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

I, Glen R. Charles, Chief Financial Officer of CVD Equipment Corporation,
hereby certifies, to my knowledge, that the annual report on Form 10-KSB
for the period ending December 31, 2003 of CVD Equipment Corporation (the
"Form 10-KSB") fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities Exchange Act of 1934 and the information
contained in the Form 10-KSB fairly presents, in all material respects,
the financial condition and results of operations of CVD Equipment
Corporation.

Dated: March 30, 2004 /s/ Glen R. Charles
---------------------
Glen R. Charles
Chief Financial Officer
(Principal Financial Officer)

CVD EQUIPMENT CORPORATION, INC AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page No.
----------

INDEPENDENT AUDITORS' REPORT F-3

FINANCIAL STATEMENTS:

Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4

Consolidated Statements of Operations
for the Years Ended December 31, 2003 and 2002 F-5

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2003 and 2002 F-6

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003 and 2002 F-7

Notes to Consolidated Financial Statements F-8

F-3

A L B R E C H T , V I G G I A N O , Z U R E C K
& C O M P A N Y , P . C .
CERTIFIED PUBLIC ACCOUNTANTS
25 SUFFOLK COURT
HAUPPAUGE, NY 11788
(631) 434-9500

INDEPENDENT AUDITORS' REPORT
----------------------------

To the Board of Directors and Stockholders
CVD Equipment Corporation
Ronkonkoma, New York

We have audited the accompanying consolidated balance sheets of CVD
Equipment Corporation and Subsidiary (the "Company") as of December 31,
2003 and 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 CVD
Equipment Corporation and Subsidiary as of December 31, 2003 and 2002 and
their results of operations and its cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United
States of America.

Hauppauge, New York
February 20, 2004

F-4

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002

2003 2002
------------ ------------

ASSETS
Current Assets
Cash and cash equivalents $ 321,490 $ 323,537
Accounts receivable, net 1,819,744 1,852,794
Costs and estimated earnings in excess of billings
on uncompleted contracts 575,734 783,646
Inventories 1,425,851 2,023,487
Other current assets 74,247 194,232
------------ ------------
Total Current Assets 4,217,066 5,177,696

Property, plant and equipment, net 5,400,032 5,630,375

Deferred income taxes 440,362 344,074

Other assets 144,458 138,974

Intangible assets, net 122,977 136,393
------------ ------------
Total Assets $10,324,895 $11,427,512
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 177,381 $ 177,124
Short-term note payable -0- 350,000
Accounts payable 520,525 938,056
Accrued expenses 488,011 336,702
Billings in excess of costs on uncompleted contracts 174,068 146,387
------------ ------------

Total Current Liabilities 1,359,985 1,948,269
Long-term debt, net of current portion 3,336,400 3,513,783
------------ ------------

4,696,385 5,462,052
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Common stock - $0.01 par value - 10,000,000 shares
authorized; 3,039,100 shares issued and outstanding
at December 31, 2003 and 2002. 30,391 30,391
Additional paid-in capital 2,902,149 2,902,149
Retained earnings 2,695,970 3,032,920
------------ ------------
Total Stockholders' Equity 5,628,510 5,965,460
------------ ------------

Total Liabilities and Stockholders' Equity $10,324,895 $11,427,512
============ ============

See notes to consolidated financial statements

27
F-5

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003 and 2002

2003 2002
------------ ------------

Revenue
Revenue on completed contracts $ 9,065,679 $ 7,800,317
Revenue on uncompleted contracts 722,260 1,441,491
------------ ------------

9,787,939 9,241,808
------------ ------------
Costs of revenue
Costs on completed contracts 7,180,226 5,440,484
Costs on uncompleted contracts 303,771 764,799
------------ ------------
7,483,997 6,205,283
------------ ------------

Gross profit 2,303,942 3,036,525
------------ ------------

Operating expenses
Selling and shipping 740,266 903,016
General and administrative 2,164,181 2,467,074
------------ ------------

Total operating expenses 2,904,447 3,370,090
------------ ------------

Operating loss (600,505) (333,565)
------------ ------------

Other Income (expense)
Interest income 1,243 25,221
Interest expense (208,944) (139,343)
Gain on sale of fixed assets -0- 2,500
Other income 310,042 543,527
------------ ------------
Total other income, net 102,341 431,905
------------ ------------

(Loss) income before income tax benefit (498,164) 98,340
Income Tax Benefit 161,214 69,862

Net (loss) income $ (336,950) $ 168,202
============ ============

Basic (loss) income per common share $ (0.11) $ 0.06
Diluted (loss) income per common share $ (0.11) $ 0.05

Weighted average common shares outstanding
basic income per share 3,039,100 3,036,530

Effect of potential common share issuance:
Stock options 0 88,203
------------ ------------
Weighted average common shares outstanding
diluted income per share 3,039,100 3,124,733

See notes to consolidated financial statements

28
F-6

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2003 and 2002

Additional Total
Common Paid-In Retained
Stockholders'
Stock Capital Earnings Equity
------------ ------------ ------------ ------------

Balance as of
December 31, 2001 $ 30,323 $ 2,892,416 $ 2,864,718 $ 5,787,457

Compensatory stock options 68 9,733 9,801

Net income 168,202 168,202
------------ ------------ ------------ ------------

Balance as of
December 31, 2002 30,391 2,902,149 3,032,920 5,965,460

Net loss (336,950) (336,950)
------------ ------------ ------------ ------------

Balance as of
December 31, 2003 $ 30,391 $ 2,902,149 $ 2,695,970 $ 5,628,510
============ ============ ============ ============

See notes to consolidated financial statements

29
F-7

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003 and 2002

2003 2002
------------ ------------

Cash flows from operating activities
Net (loss) income $ (336,950) $ 168,202
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Deferred benefit provision (96,288) (75,451)
Depreciation and amortization 351,579 294,721
Gain on sale of fixed assets -0- (2,500)
Bad debt provision 1,241 (8,447)
Changes in operating assets and liabilities:
Accounts receivable 31,808 (632,110)
Costs and estimated earnings in excess
of billings on uncompleted contracts 207,912 (425,624)
Inventory 597,636 (1,194,447)
Other current assets 119,985 (173,963)
Other assets (45,902) 118,007
Accounts payable (417,529) 784,724
Accrued expenses 151,307 (41,529)
Billings in excess of costs
on uncompleted contracts 27,681 146,387
------------ ------------

Net cash provided by (used in) operating activities 592,480 (1,042,030)
------------ ------------

Cash flows from investing activities
Capital expenditures (67,403) (1,980,912)
Proceeds from sale of fixed assets -0- 2,500
------------ ------------

Net cash used in investing activities (67,403) (1,978,412)
------------ ------------

Cash flows from financing activities
Proceeds from the exercise of options -0- 9,801
Payments of long-term debt (177,124) (133,222)
Payments of short-term debt (1,374,000) -0-
Proceeds of long-term debt 1,024,000 1,106,250
------------ ------------

Net cash (used in) provided by financing activities (527,124) 982,829
------------ ------------

Net decrease in cash and cash equivalents (2,047) (2,037,613)

Cash and cash equivalents at beginning of year 323,537 2,361,150
------------ ------------

Cash and cash equivalents at end of year $ 321,490 $ 323,537
------------ ------------

See notes to consolidated financial statements

30
F-8

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 1 - Business Description

CVD Equipment Corporation and Subsidiary (the "Company"), a New York
corporation, was organized and commenced operations in October 1982. Its
principal business activities include the manufacturing of chemical vapor
deposition equipment, customized gas control systems, and a line of
furnaces, all of which are used primarily to produce semiconductors and
other electronic components. The Company engages in business throughout
the United States and the world.

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of CVD
Equipment Corporation and its wholly-owned subsidiary. In December
1998, a subsidiary, Stainless Design Concepts, Ltd., was formed as a
New York corporation. In April 1999, this subsidiary was merged into
CVD Equipment Corporation. The Company has one inactive subsidiary,
CVD Materials Corporation as of December 31, 2003 and 2002. All
significant intercompany accounts and transactions have been eliminated
in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Estimates are used when
accounting for certain items such as long-term contracts, allowance for
doubtful accounts, depreciation and amortization, taxes and warranties.

Revenue and Income Recognition

In December 1999, the SEC released Staff Accounting Bulletin No. 101
("SAB No. 101"), "Revenue Recognition in Financial Statements", providing
the staff's views in applying accounting principles generally accepted in
the United States to certain revenue recognition issues. The Company
adopted SAB No. 101, as amended in the fourth quarter of 2000 as
required. The adoption of SAB No. 101 did not have a material effect on
the Company's consolidated financial position, results of operations or
cash flows.

The Company recognizes revenues and income using the percentage-of-
completion method for complex major products while revenues from other
products are recorded when such products are accepted and shipped.
Profits on contracts for complex major products are recorded on the basis
of the Company's estimates of the percentage-of-completion of individual
contracts, commencing when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Under
this method, revenues are recognized based on costs incurred to date
compared with total estimated costs.

31
F-9

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 2 - Summary of Significant Accounting Policies (continued)

Revenue and Income Recognition (continued)
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of
amounts billed.

The liability, "Billings in excess of costs on uncompleted contracts,"
represents amounts billed in excess of revenues earned.

Inventories

Inventories are valued at the lower of cost or market. The Company uses
a cost system which approximates the first-in, first-out method.

Reclassifications

Certain items have been reclassified in the 2002 financial statements
to conform to the 2003 presentation. These reclassifications have no
effect on the net income previously reported.

Income Taxes

Deferred tax assets and liabilities are determined based on the
estimated future tax effects of temporary differences between the
financial statements and tax bases of assets and liabilities, as
measured by the current enacted tax rates. Deferred tax expense
(benefit) is the result of changes in the deferred tax assets and
liabilities. A valuation allowance is not considered necessary by
management since it is more likely than not that the deferred tax asset
will be realized. An allowance may be necessary in the future based on
changes in economic conditions.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, net of accumulated
depreciation and amortization. Expenditures for maintenance and repairs
are charged against operations as incurred. The cost of certain labor
and overhead which is expected to benefit future periods, has been
capitalized and amortized. Depreciation and amortization are computed by
the straight-line method for financial purposes over the following
estimated useful lives:

Estimated
Useful Life
------------

Buildings 39 years
Building improvements 39 years
Machinery and equipment 8 years
Capitalized labor and overhead 3 years
Furniture and fixtures 8 years
Computer equipment 5 years
Transportation equipment 3 years

32
F-10

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 2 - Summary of Significant Accounting Policies (continued)

Impairment losses on long-lived assets, such as equipment and
improvements, are recognized when events or changes in circumstances
indicate that the undiscounted cash flows estimated to be generated by
such assets are less than their carrying value and, accordingly, all or a
portion of such carrying value may not be recoverable. Impairment losses
are then measured by comparing the fair value of assets to their carrying
amounts.

Software Capitalization

The Company follows Statement of Position 98-1, Accounting for Costs of
Computer Software Developed or Obtained for Internal Use. This
standard requires certain direct development costs associated with
internal-use software to be capitalized including external direct costs
of material and services and payroll costs for employees devoting time
to the software projects. These costs totaled $55,408 and $57,931 for
the years ended December 31, 2003 and 2002, respectively, and are
included in Other Assets. All software is amortized straight-line over
its useful life of three years. Amortization expense related to
software totaled $31,111 and $19,014 for the years ended December 31,
2003 and 2002, respectively.

Intangible Assets

The cost of intangible assets is being amortized on a straight-line basis
over their useful lives ranging from 5 to 15 years. Amortization expense
recorded by the Company in 2003 and 2002 totaled $13,416 and $8,948,
respectively.

Bad Debts

Accounts receivables are presented net of an allowance for doubtful
accounts of $19,258 and $18,057 as of December 31, 2003 and 2002,
respectively. The allowance is based on prior experience and
management's evaluation of the collectibility of accounts receivable.
Management believes the allowance is adequate. However, further
additions may be necessary based on changes in economic conditions.

Product Warranty

The Company records warranty costs as incurred and does not provide for
possible future costs. Management estimates such costs not to be
material based on prior experience. However, it is reasonably possible
that this estimate may change in the future.

Advertising Costs

The Company expenses advertising costs which are not expected to benefit
future periods. Advertising expenses included in selling and shipping
expenses were $16,143 and $21,139 in 2003 and 2002, respectively. The
Company capitalizes certain advertising costs included in Other Assets,
totaling $63,849, to develop a web site and to print brochures expected
to be used in the future. Capitalized advertising costs are amortized
straight-line over three years. Amortization expense related to
advertising costs totaled $1,428 and $11,729 in 2003 and 2002,
respectively.

F-11

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 2 - Summary of Significant Accounting Policies (continued)

Interest Capitalization

The Company follows the policy of capitalizing interest as a component of
the cost of property, plant and equipment constructed for its own use.
This amount is included in building improvements. During the years ended
December 31, 2003 and 2002, the Company capitalized interest of
approximately $-0- and $77,000, respectively.

Income Per Share

Basic net (loss) income per common share is computed by dividing the net
(loss) income by the weighted average number of share of common stock
outstanding during each period. Diluted income per share for 2002
reflects the dilutive effect of the assumed exercise of options.
Potentially dilutive share (12,620) related to the exercise of stock
options were excluded from the diluted loss per share calculation for the
year ended December 31, 2003, because their effects would have been
antidilutive.

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments purchased
with an original maturity of three months or less at the date of
purchase to be cash equivalents.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents, and accounts receivable. The Company places its cash
equivalents with high credit-quality financial institutions and invests
its excess cash primarily in money market instruments. The Company has
established guidelines relative to credit ratings and maturities that
seek to maintain safety and liquidity. The Company sells products and
services to various companies across several industries in the ordinary
course of business. The Company routinely assesses the financial strength
of its customers and maintains allowances for anticipated losses. See Note
15 for concentration details.

F-12

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 2 - Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, other assets, accounts payable and
accrued expenses, approximate fair value due to the relatively short
maturity of these instruments. The fair value of securities available-
for-sale is estimated based on quoted market prices. The carrying value
of long-term debt approximates fair value based on borrowing rates
currently available for loans with similar terms and maturities.

Stock-Based Compensation

The Company accounts for stock-based employee compensation under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. The Company has
adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure", which was released in December 2002 as an
amendment of SFAS No. 123. No stock-based employee compensation cost is
reflected in net income (loss), as all options granted under the plans
had an exercise price at least equal to the market value of the
underlying common stock on the date of grant.

Shipping and Handling

It is the Company's policy to include freight in total sales. The amount
included in sales was $48,288 and $18,784 for the years ended December
31, 2003 and 2002, respectively. Included in selling and shipping is
$91,516 and $49,708 for shipping and handling costs for 2003 and 2002,
respectively.

Recently Issued Accounting Standards

In June 2001, the FASB issued SFAS No. 143. Accounting for Asset
Retirement Obligations. SFAS No. 143 applies to the accounting and
reporting obligation associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. This Statement
applies to legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction,
development and/or the normal operation of long-lived assets, except
for certain obligations of lessees. The adoption of the Statement is
required for fiscal years beginning after June 15, 2002. The adoption
of SFAS No. 143 is not expected to have a material impact on the
Company's consolidated financial statements.

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, "Business Combinations" ("SFAS 141") and No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS No. 141
provides new guidance on the accounting for a business combination at
the date a business combination is completed. Specifically, it
requires use of the purchase method of accounting for all business
combinations initiated after June 30, 2001,

F-13

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 2 - Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Standards (continued)

thereby eliminating use of the pooling-of-interest method. SFAS No.
142 establishes new
guidance on how to account for goodwill and intangible assets after a
business combination is completed. Among other things, it requires
that goodwill and certain other intangible assets will no longer be
amortized and will be tested for impairment at least annually and
written down only when impaired. This statement applies to existing
goodwill and intangible assets, beginning with
fiscal years starting after December 15, 2001. The Company has adopted
SFAS No.141 and No.142 effective January 1, 2002 but it does not have a
material impact on the Company's financial position, results of
operations, or cash flows.

In August 2002, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets", ("SFAS 144"). This standard supersedes SFAS 121,
"Accounting for the Impairment or Long- Lived Assets to Be Disposed
Of," and provides a single accounting model for long-lived assets to be
disposed of. This standard significantly changes the criteria that
would have to be met to classify an asset as held-for-sale. This
distinction is important because assets to be disposed of are stated at
the lower of their fair values or carrying amounts and depreciation is
no longer recognized. The new rules will also supersede the provisions
of APB Opinion 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, " ("APB
30") with regard to reporting the effects of a disposal of a segment of
a business and will require expected future operating losses from
discontinued operations to be displayed in discontinued operations in
the period in which the losses are incurred, rather than as of the
measurement date as presently required by APB 30. This statement is
effective for fiscal years beginning after December 15, 2001. The
Company does not expect that the adoption of SFAS 144 will have a
material impact on its operations or financial position.

In April 2002, the FASB issued Statement No. 145 ("SFAS 145")
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," which supersedes FASB
issued Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," FASB issued Statement No. 44," Accounting for Intangible
Assets of Motor Carriers," and FASB issued Statement No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements."

This statement also amends FASB issued Statement No. 13, "Accounting
for Leases," to eliminate as inconsistency between the required
accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This statement also amends
other existing pronouncements to make various technical corrections,
clarify meanings or describe the applicability under changed
conditions. SFAS 145 requires gains and losses from the extinguishment
of debt to be classified as extraordinary items only if they meet the
criteria in Accounting Principal Board Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of
a Business and extraordinary, unusual and infrequently occurring events
and transactions." This statement also requires lease modifications
that have economic effects similar to sale-leaseback transactions to be
accounted for in the same manner as sale-leaseback transactions. The
provisions in SFAS 145 relating to sale-leaseback transactions are
effective as of May 15, 2002.

F-14

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 2 - Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Standards (continued)

The remaining provisions in SFAS 145 will be effective for the Company
beginning in fiscal 2003. The Company does not expect the provisions of
SFAS 145 to have a material impact, if any, on the Company's consolidated
financial statements.

In July 2002, the FASB issued Statement No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 nullifies the guidance in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Under EITF No. 94-3, an entity recognized a liability
for an exit cost on the date that the entity committed itself to an
exit plan. In SFAS No. 146, the FASB acknowledges that an entity's
commitment to a plan does not, by itself, create a present obligation
to the other parties that meets the definition of a liability and
requires that a liability for a cost that is associated with an exit or
disposal activity be recognized when the liability is incurred. It
also establishes that fair value is the objective for the initial
measurement of the liability. SFAS No. 146 will be effective for exit
or disposal activities that are initiated after December 31, 2002. The
adoption of this standard is not expected to have a material effect on
the financial position or results of operations of the Company.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN 45 requires the accounting for and disclosure of guarantees and
clarifies the requirements of SFAS No. 5, "Accounting for
Contingencies." The disclosure requirements of this interpretation are
effective for periods ending after December 15, 2002 and for accounting
for guarantees for periods beginning after December 15, 2002. The
adoption of the disclosure requirements of this standard as of December
31, 2002 had no impact on the Company's financial position or results
of operations.

In December 2002, the FASB issued Statement No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation-Transition and Disclosure."
SFAS No. 148 is effective for fiscal years ending after December 15,
2002 and amends SFAS No. 123 to provide for alternative methods of
transition to a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company has
accounted for stock-based employee compensation using the intrinsic
value method under APB No. 25.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The Company is required to adopt the provision of FIN 46 for
variable interest entities created after January 31, 2003. The
adoption of FIN 46 is not expected to have a material impact on the
Company's consolidated financial statements.

F-15

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 2 - Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Standards (continued)

In April 2003, the FASB issued Statement No. 149 (SFAS No.149),
"Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No.
133 and is effective for contracts entered into or modified after June
30, 2003. The adoption of SFAS No. 149 is not expected to have a
material impact on its consolidated financial statements.

In May 2003, the FASB issued Statement No. 150 (SFAS No. 150) "Accounting
for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 established standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This statement requires
that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is
effective for financial statements entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 is
not expected to have a material impact on its consolidated financial
statements.

In December 2003, the FASB amended Statement No. 132 (SFAS No. 132)
"Employers' Disclosures about Pensions and Other Postretirement
Benefits", and amendment of FASB Statements No. 87, 88 and 106. SFAS 132
improves financial statement disclosure for defined benefit plans and
requires that companies provide more details about their plan assets,
benefit obligations, cash flows, benefit costs and other relevant
information. SFAS No. 132 is effective for fiscal years ending after
December 15, 2003, and for quarters beginning after December 15, 2003.
The adoption of SFAS No. 132 is not expected to have a material impact on
its consolidated financial statements.

Note 3- Supplemental Cash Flow Information

2003 2002
------------ ------------

Cash paid during the year for:
Income taxes, net of refunds $ (61,621) $ 268,422
Interest 208,944 194,412

Non-cash operating and financing:
Acquisition of property and equipment $ -0- $ 3,818,900
Less: loan proceeds -0- (1,837,988)
------------ ------------

Net cash outlay $ -0- $ 1,980,912
============ ============

F-16

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 4 - Uncompleted Contracts

Costs, estimated earnings, and billings on uncompleted contracts are
summarized as follows:

2003 2002
------------ ------------

Costs incurred on uncompleted contracts $ 303,772 $ 764,799
Estimated earnings 951,894 676,692
------------ ------------
1,255,666 1,441,491
Billings to date (854,000) (804,232)
------------ ------------
$ 401,666 $ 637,259
============ ============

Included in accompanying balance sheets
under the following captions:

Costs and estimated earnings in excess
of billings on uncompleted contracts $ 575,734 $ 783,646
Billings in excess of costs and estimated
earnings on uncompleted contracts (174,068) (146,387)
------------ ------------
$ 401,666 $ 637,259
============ ============

Note 5 - Inventory

Inventories consist of the following:

2003 2002
------------ ------------

Raw materials $ 777,893 $ 1,223,019
Work-in-process 108,350 267,679
Finished goods 539,608 532,789
------------ ------------
$ 1,425,851 $ 2,023,487
============ ============

Note 6 - Property, Plant and Equipment
Major classes of property, plant and equipment consist of the following:

2003 2002
------------ ------------

Land $ 760,000 $ 760,000
Buildings 2,815,839 2,815,839
Building Improvements 1,372,505 1,373,624
Machinery and equipment 1,222,587 1,181,851
Capitalized labor and overhead 216,602 216,602
Furniture and fixtures 214,903 214,921
Computer equipment 193,063 180,991
Transportation equipment 74,709 74,709
------------ ------------
6,870,208 6,818,537
Accumulated depreciation and amortization (1,470,176) (1,188,162)
------------ ------------
$ 5,400,032 $ 5,630,375
Depreciation and amortization expense $ 297,747 $ 249,030
============ ============

39
F-17

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 7 - Intangible Assets

Intangible assets consist of the following:

2003 2002
------------ ------------

Licensing Agreement $ 10,000 $ 10,000
Patents and Copyrights 32,019 32,019
Intellectual Property 100,000 100,000
Other 21,492 21,492
------------ ------------

163,511 163,511

Accumulated Amortization (40,534) (27,118)
------------ ------------

$ 122,977 $ 136,393
============ ============

Amortization Expense $ 13,416 $ 8,948
============ ============

Note 8 - Acquisition of Assets

On June 17, 2002, the Company purchased additional assets for the Surface
Mount Technology (SMT) business. The allocation of the purchase price was
as follows: $820,000 of inventory, $369,000 of accounts receivable, $25,000
of intangible assets and $25,000 of fixed assets. This acquisition was
recorded as a purchase business combination in accordance with SFAS No. 141,
"Business Combinations". Intangible assets recorded associated with this
acquisition are being amortized over their estimated useful life of 15
years.

Note 9 - Financing Arrangements

The Company has a line of credit with a bank which allows the Company to
borrow up to $1,000,000 until June 1, 2004 Interest is payable on any
unpaid principal balance at the bank's prime rate plus 3/4 of 1%. As of
December 31, 2003 and 2002, $-0- was outstanding on this facility.

F-18

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 10- Long-term Debt

Long-term debt consists of the following:

2003 2002
------------ ------------

KIDCO REALTY CORP.
$900,000 purchase money mortgage secured
by real property, building and
improvements in Saugerties, New York;
payable in equal monthly installments of
$5,988, including interest at 7% per
annum; entire principal comes due in May
2009. $ 851,308 $ 863,116

GENERAL ELECTRIC CAPITAL CORPORATION
$2,700,000 mortgage payable secured by real
property, building and improvements in Ronkonkoma,
New York; payable in equal monthly installments of
$22,285, including interest at 5.67% per annum;
pursuant to an installment sale agreement with the
Town of Islip Industrial Development Agency; final
payment due March 2017. 2,476,851 2,600,015

NORTH FORK BANK
Sixty month installment note; payable in monthly
installments of $4,922, including interest at 7.74%
per annum; final payment due October 2007;
collateralized by equipment costing $244,239. 185,622 227,776
------------ ------------

3,513,781 3,690,907
Less: Current maturities 177,381 177,124
------------ ------------

$ 3,336,400 $ 3,513,783
============ ============

Future maturities of long-term debt as follows:

Year ended December 31, 2004 $ 177,382
2005 200,031
2006 212,946
2007 207,088
2008 179,394
thereafter 2,536,940
------------

$ 3,513,781
============

F-19

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 11 - Short-term Note Payable

A note payable in the amount of $350,000 was issued for the acquisition of
assets for the Company's Surface Mount Technology business. Interest
provided at 5.5% per annum. This note was paid in full in July 2003.

Note 12 - Income Taxes

The provision (benefit) for income taxes include the following:

2003 2002
------------ ------------

Current:
Federal $ (65,761) $ -0-
State 835 5,589
------------ ------------

Total Current (Benefit) Provision (64,926) 5,589
------------ ------------
Deferred:
Federal (77,849) 30,008
State (18,439) (105,459)
------------ ------------

Total Deferred (Benefit) (96,288) (75,451)
------------ ------------

$ (161,214) $ (69,862)
============ ============

The Company has New York State investment tax credit carryforwards of
$321,185 that may be offset against future state tax liabilities through the
year 2016 and other state tax credits totaling $119,828 which may be carried
forward indefinitely.

The difference between the provision for income taxes at the Company's
effective income tax rate and the federal statutory rate of 34% is as
follows:

2003 2002
------------ ------------

Statutory rate 34% 34%
State taxes, net of Federal Benefits 7% 7%
Investment tax credits and other (73%) (112%)
------------ ------------

Totals (32%) (71%)
============ ============

F-20

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

The tax effects of temporary differences giving rise to significant
portions of deferred taxes are as follows:

2003 2002
------------ ------------

Allowance for doubtful accounts $ 7,472 $ 6,992
Inventory capitalization 39,618 73,503
Deferred revenue (368,573) (262,015)
Net operating loss 289,570 64,122
Depreciation and amortization (157,462) (126,144)
Investment tax credit 615,133 575,953
Other 14,604 11,663
------------ ------------

Net Deferred Tax Asset $ 440,362 $ 344,074
============ ============

Note 13 - Stock Option Plans

On June 15, 1989, the Company instituted a non-qualified stock option plan
(the "Plan"). In connection therewith, 700,000 shares of the Company's
common stock are reserved for issuance pursuant to options that may be
granted under the Plan through June 30, 2004. On June 3, 1996, the
Company issued 84,000 options which expire ten years from the date of
grant. None of these options were exercisable until June 3, 1999. The
option price was less than the fair market value per share on the date the
1996 options were granted. On April 15, 1998, 140,000 options were
granted to employees under this plan. Options granted in 1998 vest
straight-line over a four-year period following the date of grant and
expire five years after the date of grant. On July 16, 1999, 52,500
options were granted to employees under this Plan. Options granted in 1999
vest incrementally over a four-year period following the date of grant and
expire seven years after the date of grant. On February 2, 2000, 242,000
options were granted to employees under this plan. On May 7, 2000 and
August 8, 2000, a total of 80,000 options were granted to employees. On
October 26, 2000, 3,500 options were granted to employees. All options
vest over a four-year period. All options granted in 2000 expire seven
years after the date of grant. The option price for options granted in
1999 and 2000 is an amount per share of not less than the fair market
value per share on the date the option is granted. On April 1, 2003, the
Company granted 12,500 options to employees under this plan which expire
April 1, 2008, and on September 23, 2003 granted 75,000 options to
Directors which expire on September 23, 2010.

In July 2001, the shareholders approved a non-qualified stock option plan
covering key employees, officers, directors and other persons that may be
considered as service providers to the Company. Options will be awarded
by the Board of Directors or by a committee appointed by the board. Under
the plan, an aggregate of 300,000 shares of common stock, $.01 par value
of Company are reserved for issuance or transfer upon the exercise of
options which are granted. Unless otherwise provided in the option
agreement options granted under the plan shall become exercisable in 25%
installments commencing one year from the anniversary date of the grant.

F-21

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 13 - Stock Option Plans (continued)

The purchase price of the common stock under each option shall be no lower
than the average bid price per share, calculated on a monthly basis, that
the Common Stock (as reported by AMEX) traded during the calendar year
immediately preceding the year in which the option is granted. The stock
options generally expire five years after the date of grant. The stock
option plan shall terminate on July 22, 2011. No options have been
granted under the July 2001 plan.

A summary of stock option activity related to the Company's Plan is as
follows:

Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Period Period Period Outstanding Exercisable
------------ ------------ ------------ ------------ ------------ ------------

Year ended December 31, 2002
Number of shares 478,425 -0- 6,775 75,000 396,650 208,300
Weighted average exercise price
per share $ 1.67 $ -0- $ 1.45 $ 1.80 $ 1.65 $ 1.57
Year ended December 31, 2003
Number of shares 396,650 87,500 -0- 118,750 365,400 196,290
Weighted average exercise price
per share $ 1.65 $ 1.75 $ -0- $ 1.59 $ 1.69 $ 1.66

The following table summarizes information about the options at December 31,
2003.

Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Remaining Exercisable Number Exercisable
Price Outstanding Life Price Exercisable Price
---------------- ------------ ------------ ------------ ------------ ------------

$0.13 - $1.00 49,500 2.55 years $ 1.00 49,500 $ 1.00
$1.25 - $1.50 75,000 6.74 years $ 1.40 -0- $ -0-
$1.51 - $1.75 179,900 3.09 years $ 1.75 107,940 $ 1.75
$2.00 - $2.75 45,000 3.56 years $ 2.00 33,000 $ 2.00
$3.00 - $3.25 3,500 3.50 years $ 3.25 2,100 $ 3.25
$3.75 - $4.00 12,500 4.25 years $ 3.88 3,750 $ 3.88

The Company accounts for the stock option plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees, and related interpretations. The following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation", to its stock-based
employee compensation:

F-22

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

2003 2002
------------ ------------

Net (loss) income, as reported $ (336,950) $ 168,202

Add: Stock-based employee compensation
expense included in reported net income (loss),
net of related tax effects -0- 5,685

Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (57,985) (65,506)
------------ ------------

Pro-forma net income (loss) $ (394,935) $ 108,381
============ ============

Income (loss) per share:

Basic-as reported $ (.11) $ .06
------------ ------------
Basic-pro forma $ (.13) $ .04
------------ ------------

Diluted -as reported $ (.11) $ .05
------------ ------------
Diluted -pro forma $ (.13) $ .03
------------ ------------

Note 14 - Defined Contribution Plan

On August 1, 1998, the Company adopted a 401(k) Plan for the benefit of all
eligible employees. All employees as of the effective date of the 401(k)
Plan became eligible. An employee who became employed after August 1,
1998, would become a participant after three months of continuous service.

Participants may elect to contribute from their compensation any amount up
to the maximum deferral allowed by the Internal Revenue Code. Employer
contributions are optional. During the years ended December 31, 2003 and
2002, the Company incurred 401(k) administrative costs totaling $2,869 and
$3,471 respectively. No employer contribution has been made for 2003 and
2002.

Note 15 - Concentration of Credit Risk

Cash

The Company places most of its temporary cash investments with one
financial institution. Balances normally exceed the Federal Deposit
Insurance Corporation limit. The Company has not experienced any loss to
date as a result of this policy.

F-23

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Significant Customers

The Company's sales encompass markets wherein the demands of any one
customer may vary greatly due to changes in technology. In 2003, the
Company had two customers, which represented approximately 25% of sales.
These customers represented less than 1% of total billed and unbilled
receivables at December 31, 2003. In 2002, the Company had two customers,
which represented approximately 23% of sales. These customers represented
19% of total billed and unbilled receivables at December 31, 2002.

Export Sales

Export sales to unaffiliated customers represented approximately 26% and
25% of sales for the years ended December 31, 2003 and 2002, respectively.
Export sales in 2003 and 2002 were primarily to customers in Asia. All
contracts are denominated in U.S. dollars. The Company does not enter into
any foreign exchange contracts.

Note 16 - Related Party Transactions

The general counsel for the Company is also a director. The Company
incurred legal fees for his professional services of approximately $41,000
and $75,000 for the years ended December 31, 2003 and 2002, respectively.
As of December 31, 2003 and 2002, the Company owed the general counsel
approximately $41,000 and $75,000, respectively.

Note 17 - Other Income

Other income for the years ended December 31, 2003 and 2002 consists of
approximately $140,000 and $512,000, respectively in cash received on the
collection of accounts receivable exceeding the $369,000 booked as part of
the purchase of assets as discussed more fully in Note 8.

Note 18 - Segment Reporting

The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." As a result, Stainless Design Concepts ("SDC"),
which was a subsidiary of the Company as of December 31, 1998, operated as
a segment of the Company as of December 31, 1999. SDC is the Company's
ultra-high purity manufacturing division in Saugerties, New York. In
November 1999, a division called Equipment Consulting Services ("ECS") was
formed. Operations commenced in January 2000. ECS is the Company's
equipment refurbishing division located in Saugerties, New York. During
2001, the Company created a division, Research International ("RI"); the
new division is located at 1860 Smithtown Avenue, Ronkonkoma New York. RI
is a manufacturer of Surface Mount Technology equipment. During the year
2002, the Company created Conceptronic. During the fourth quarter 2002,
the Company combined the operations of SDC and ECS, and Conceptronic and RI
and now these divisions are being reported under SDC and Conceptronic,
respectively. The accounting policies of SDC and Conceptronic are the same
as those described in the summary of significant accounting policies (see
Note 2). The Company evaluates performance based on several factors, of
which the primary financial measure is earnings before taxes.

F-24

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

The following table presents certain information regarding the Company's
segments at December 31, 2003 and for the year then ended:

CVD SDC Conceptronic Eliminations Consolidated
------------ ------------ ------------ ------------ ------------

Assets $ 9,227,303 $ 2,245,712 $ 2,361,457 $(3,509,577) $10,324,895
============ ============ ============ ============ ============
Revenue $ 3,779,878 $ 2,360,711 $ 4,106,780 $ (459,430) $ 9,787,939
Cost of Sales 2,624,428 1,967,713 3,351,286 (459,430) 7,483,997
Gross Profit 1,155,450 392,998 755,494 -0- 2,303,942
Interest Income 586 657 -0- 1,243
Interest Expense 170,735 60,044 (21,835) 208,944
Depreciation and
amortization 188,788 140,229 22,562 351,579
Capital
expenditures 47,168 17,413 2,822 67,403
Pretax earnings (loss) 87,950 (205,884) (380,230) (498,164)

The following table presents certain information regarding the Company's
segments at December 31, 2002 and for the year then ended:

CVD SDC Conceptronic Eliminations Consolidated
------------ ------------ ------------ ------------ ------------

Assets $ 9,104,444 $ 2,633,539 $ 3,219,312 $(3,529,783) $11,427,512
============ ============ ============ ============ ============
Revenue $ 3,522,634 $ 3,347,722 $ 3,027,232 $ (655,780) $ 9,241,808
Cost of Sales 2,484,118 2,498,377 1,878,568 (655,780) 6,205,283
Gross Profit 1,038,516 849,345 1,148,664 -0- 3,036,525
Interest Income 24,681 540 -0- 25,221
Interest Expense 56,420 60,840 22,083 139,343
Depreciation and
amortization 134,283 147,560 12,878 294,721
Capital
expenditures 3,775,438 10,123 33,339 3,818,900
Pretax earnings (loss) (86,315) (322,519) 507,174 98,340

F-25

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002

Note 19 - Commitments and Contingencies

Leases

The Company rented its former headquarters and operations in Ronkonkoma, New
York under a lease expiring on July 31, 2006. Rental expense under the
above operating lease totaled $108,720 and $144,000 for 2003 and 2002,
respectively. The Company was able to cancel the lease on October 1, 2003
for payments of $60,000. This amount is included in rent expense for the
year ended December 31, 2003.

Legal Proceedings

On September 24, 1999 the Company was named in a lawsuit. The nature of
this legal proceeding focused on the intellectual property obtained during
the purchase of assets of Stainless Design Corporation. On November 10,
1999, the Company responded with a counterclaim. It is legal counsels'
belief that the lawsuit against the Company is without merit. The Company
considers its potential exposure to be negligible and/or covered by
insurance. Presently, cross-motions for summary judgment are pending before
the court.

In May 2002, the Company instituted a new action against Precisionflow
Technologies, Inc., in the United States District for the Northern District
of New York also seeking injunctive relief and monetary damages based upon
additional copyright violations. A motion by Precisionflow Technologies,
Inc. to dismiss this action has been pending since June 2002.

INDEX TO SUPPLEMENTARY FINANCIAL SCHEDULES

Page No.
----------

Independent Auditors' Report on Supplementary Information.... S-2

Supplementary Financial Schedules:

II. Valuation and qualifying accounts................... S-3

S-2

A L B R E C H T , V I G G I A N O , Z U R E C K
& C O M P A N Y , P . C .
CERTIFIED PUBLIC ACCOUNTANTS
25 SUFFOLK COURT
HAUPPAUGE, NY 11788
(631) 434-9500

INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
---------------------------------------------------------

To the Board of Directors and Stockholders
CVD Equipment Corporation
Ronkonkoma, New York

We have audited and reported separately herein on the consolidated financial
statements of CVD Equipment Corporation and subsidiary (the "Company") as of
and for the years ended December 31, 2003 and 2002.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements of the Company taken as a whole. The
supplementary information included in Form 10-KSB, Schedule II is presented
for purposes of additional analysis and is not a required part of the basic
consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as
a whole.

Hauppauge, New York
February 20, 2004

S-3

CVD EQUIPMENT CORPORATION AND SUBSIDIARY
FORM 10-KSB, SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2003 and 2002

Additions
---------------------------
Balance at (1) Charged (2) Charged Balance
Beginning to Costs and to Other at End
Deducted from Assets of Period Expenses Accounts Deductions of Period
----------------------------------- ------------ ------------ ------------ ------------ ------------

Allowance for net unrealized gains
(losses) on securities:
Year ended December 31, 2003 $ -0- $ -0-

Year ended December 31, 2002 -0- -0-

Allowance for doubtful accounts:
Year ended December 31, 2003 18,057 1,241 19,298

Year ended December 31, 2002 $ 26,504 (8,447) $ 18,057