<PAGE>   1

                                      1997
================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

( Mark One)
[X]      Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 [No Fee Required] For the fiscal year ended
         December 31, 1997.
                                       or
[  ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities 
         Exchange Act of 1934
         [No Fee Required] For the transition period from _________to___________


Commission file number:  0-12742

                               SPIRE CORPORATION
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                 (Name of Small Business Issuer in Its Charter)

<TABLE>
<CAPTION>
<S>                                                                                                                      <C>   
MASSACHUSETTS                                                                                                            04-2457335
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(State or Other Jurisdiction of Incorporation or Organization                                   (I.R.S. Employer Identification No.)

 ONE PATRIOTS PARK, BEDFORD, MASSACHUSETTS                   01730-2396                          781-275-6000
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(Address of Principal Executive Offices)                      (Zip Code)            (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:
            TITLE OF EACH CLASS                                                           NAME OF EACH EXCHANGE ON WHICH  REGISTERED
            -------------------                                                           ------------------------------------------
                Not applicable                                                                           Not applicable

Securities registered under Section 12(g) of the Exchange Act:                       Common Stock, $.01 Par Value, Nasdaq
                                                               ---------------------------------------------------------------------
</TABLE>

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

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

State issuer's revenues for its most recent fiscal year:  $23,014,000.

Based on the closing average price for the registrant's voting stock on February
27, 1998, the aggregate market value of such voting stock held by non-affiliates
of the registrant was $22,824,000 on February 27, 1998.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. There were 3,221,716 shares of the
issuer's only class of common equity, Common Stock, $.01 par value, on February
27, 1998.

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

DOCUMENTS INCORPORATED  BY REFERENCE
Portions of the definitive proxy statement for the Special Meeting of
Stockholders in Lieu of 1998 Annual Meeting to be held on May 21, 1998 are
incorporated by reference into Part III of this Report.


<PAGE>   2



                                     PART I
ITEM 1.  DESCRIPTION OF BUSINESS

     This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and the timing of certain events may
differ materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and in "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

BUSINESS DEVELOPMENT

     Spire Corporation ("Spire" or the "Company"), a Massachusetts corporation
incorporated in 1969, is organized into three business areas all of which have
developed out of the Company's expertise in semiconductor technologies:
Photovoltaics, Optoelectronics and Biomedical. The Company's revenues over the
past three years have been between $17 and $23 million, but the sources of those
revenues have varied among the Company's three primary business areas.

BUSINESS OF ISSUER

     Spire develops, manufactures and markets highly-engineered photovoltaic
module manufacturing equipment and optoelectronic products and provides
biomedical processing services. Spire is the world's leader in the design and
manufacture of specialized equipment for the production of terrestrial
photovoltaic modules from solar cells, with its equipment installed in 138
factories and in 38 countries. The Company also offers certain optoelectronic
products and is continuing to develop additional advanced optoelectronic
products for telecommunications, biomedical and electronics applications,
including solar cells used to power satellites. Spire's value-added biomedical
processing services offer surface treatments to enhance the durability or
antimicrobial characteristics of orthopedic and other medical devices.

PHOTOVOLTAICS

     Photovoltaics, the technology of using solar cells to convert sunlight
directly into electricity, is a growing alternative energy production method and
an increasingly important component of world energy production, particularly in
the wireless telecommunications sector. With this technology, electricity is
produced by using photovoltaic modules, which consist of a number of solar cells
connected to each other and laminated in reliable and durable support
structures. The Company believes that it is the only company that manufactures
each piece of equipment necessary for a complete production line that fabricates
photovoltaic solar cells into modules. The Company's module manufacturing
equipment and production line configurations offer its customers a range of
manufacturing processes, from relatively labor intensive to fully automated
systems. Spire's products include solar cell testers, cell tabbing and stringing
assemblers, laminators and sun simulator module testers, as well as turnkey
module production lines complete with comprehensive technology, training and
service support.

     Spire's market leadership and international reputation for quality
manufacturing and process technology position the Company to capitalize further
on the expanding global photovoltaic market. In the past five years, global
usage of terrestrial photovoltaic power has increased substantially, due to such
factors as rural electrification in the developing world, the accelerated growth
of wireless telecommunications, with its need for wireless power, and increased
environmental concerns encouraging the use of renewable energy sources.
Awareness and acceptance of photovoltaics as an energy source are growing as a
result of receiving significant support from initiatives such as the PV Rooftop
Program in Japan, the Building Integration Program in Germany and the Clinton
Administration's recently announced "Million Solar Roofs Initiative." See "Risk
Factors - Dependence on Market Growth," " - Competition" and " - Dependence on
Export Sales."

OPTOELECTRONICS

     Optoelectronics involves the conversion of light to electricity, like
photovoltaics, and/or the conversion of electricity to light. Optoelectronics
uses thin film technology, such as metalorganic chemical vapor deposition
(MOCVD), to create semiconductor devices for telecommunications, biomedical and
electronics applications. In an MOCVD reactor,





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specialized semiconductor materials are deposited onto substrate wafers as
single-crystal thin films. These wafers are then further processed into various
semiconductor devices.

     Optoelectronics technology is used, among other things, to create
specialized types of solar cells to power space satellites; to create components
for biomedical instruments, such as semiconductor diode lasers, flat panel
displays and digital radiography; and to produce semiconductor wafers necessary
for electronic instruments such as cellular telephones. The Company believes
that the market for MOCVD deposited films and other optoelectronics technology
is expanding rapidly, driven in part by the growth in the telecommunications
industry (which will require additional satellites powered by solar cells) and
the medical industry. Spire's processing facilities now include seven MOCVD
reactors, housed in a Class 100 Cleanroom.

     The Company currently produces several products based on its
optoelectronics technology, including diode lasers and compound semiconductor
wafers. The Company also has certain products under development using its
proprietary technologies. The Company believes that its current products, as
well as those under development, may have significant commercial potential. See
"Risk Factors - Technological Advances; Dependence of Future Product Development
and Market Acceptance" and " - Expansion into New Markets."

BIOMEDICAL

     The Company uses its ion beam technology to provide processing services to
the medical industry by treating the surfaces of products, such as orthopedic
devices and catheters, that are used in the human body. The Company's surface
treatment technologies include ion implantation and the Company's proprietary
ion beam assisted deposition (IBAD). The Company uses its ion implantation
technology, such as its IONGUARD(R) service, to bombard the surface of certain
titanium and cobalt-chromium alloy medical devices with ions to enhance their
mechanical and chemical surface properties. This process reduces friction and
improves wear, fatigue and corrosion resistance of the devices. The Company's
proprietary IBAD technology is used in its family of IONCIDE(TM)
infection-resistant treatments applied to metal, polymers and ceramics for
medical applications.

     The Company believes that the two main factors leading to the growth of the
orthopedic implant segment of the medical device industry are the aging of the
U.S. population and the trend toward more active lifestyles later in life. These
factors have led to the need for a greater number of artificial joints, such as
knees and hips, as well as the need for these devices to last longer and resist
wear. Currently, only a small percentage of orthopedic devices are treated with
the Company's proprietary processing technologies. However, the Company believes
that there will be a growing demand for its orthopedic device processing
services.

     The Company targets its IONGUARD service to the orthopedic market and its
IONCIDE processes to manufacturers of devices such as catheters. The Company's
strategy is to be a value-added vendor to the manufacturer, thereby offering an
improved product to the medical industry. See "Risk Factors - Dependence on
Market Growth," " - Expansion into New Markets" and " - Government Regulation."

                               GENERAL INFORMATION

RESEARCH AND DEVELOPMENT

     The Company's policy is to support as much of its research and development
as possible through government contract funding, which it recognizes as revenue.
Revenues from the Company's research and development contracts funded by the
U.S. government were $7,972,000 in 1997, $6,706,000 in 1996 and $8,232,000 in
1995, accounting for 35%, 39% and 48%, respectively, of the Company's net sales
and revenues for these periods. As of December 31, 1997, the Company was
performing 40 contracts for the U.S. government. All contracts with U.S.
government agencies have been audited and settled through December 1995. The
audit for the year ended December 31, 1996 has not yet been performed.

 





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     The Company's contracts with the U.S. government grant to the Company
proprietary rights in any technology developed pursuant to such contracts and
grant to the U.S. government a non-exclusive license to utilize the technology
for its benefit. The U.S. government retains the right to obtain the patent on
any inventions made under these contracts as to which patent protection is not
sought and obtained by the Company. The Company's rights to technology developed
under contracts with private companies vary, depending upon negotiated terms.
See "Risk Factors - Dependence on Outside Funding for Research and Development,"
"Protection of Proprietary Technology" and " - Government Regulation."

     The Company's internally funded research and development expenditures were
$133,000 in 1997, $84,000 in 1996 and $59,000 in 1995.

SALES AND MARKETING

     The Company builds its photovoltaic module manufacturing equipment only to
order, and generally requires 35% of the total purchase price on order, 55% on
shipment and the final 10% upon acceptance of the equipment by the customer. The
Company receives progress payments under its research and development contracts
on a cost reimbursement or per deliverable basis. Biomedical processing services
and optoelectronic devices generally are sold on a net 30 day basis.

     The Company markets its products and services through a network of
non-exclusive commissioned sales representatives, as well as through its
internal staff. The Company had 19 sales representatives as of December 31,
1997. These outside sales representatives are responsible for making initial
contacts with potential customers, after which the representatives work in
conjunction with the Company's internal staff to consummate sales. The Company
believes that use of outside sales representatives is particularly important in
facilitating access into certain foreign countries. Most of the Company's sales
representatives have had long term relationships with the Company, and work with
the Company without written agency agreements. Sales initiated through the
Company's internal staff arise from a number of sources, including trade shows,
printed advertisements and telephone campaigns.

     The Company recently entered into two agreements with Marubeni Corporation
of Nagoya, Japan, relating to the manufacture and distribution of certain Spire
photovoltaic module manufacturing equipment in Japan. Under the agreements,
Marubeni will distribute, and in some cases manufacture under a technology
license, certain of Spire's photovoltaic module manufacturing equipment under
the Company's name in Japan, and has rights to market this equipment line
throughout certain countries in Southeast Asia and the Pacific Rim. Marubeni's
Japanese office established on behalf of the Company is headed by the Company's
long-time photovoltaic equipment sales representative in Japan. Management
believes that this office will give the Company the in-country presence it needs
to grow its already established photovoltaic module manufacturing equipment
business in Japan. The Company also has recently opened an office in Denver,
Colorado, to support the Company's marketing activities in the Far West and
Midwest.

     In the biomedical area, the Company concentrates on identifying and serving
the leading U.S. manufacturers of orthopedic and other medical devices. Where
possible, the Company seeks to be the sole provider of surface processing
services to its biomedical customers. The Company is expanding its marketing
program in this area to include physicians and hospitals who utilize such
devices.

     The Company's scientists are responsible for submitting proposals to the
U.S. government and other outside sources for sponsored research and development
work, particularly in the optoelectronics area. The Company has been increasing
its efforts to commercialize its extensive optoelectronics technology, by
focusing on marketing new optoelectronic products and forming relationships for
exploitation of the Company's optoelectronics technology, both domestically and
internationally. See "Risk Factors - Dependence on Outside Funding for Research
and Development," " - Reliance on Sales Representatives" and "Technological
Advances; Dependence on Future Product Development and Market Acceptance."

MANUFACTURING AND QUALITY CONTROL

       The Company manufactures all of its products and performs all of its
biomedical processing services in a single facility. The fulfillment of each
customer order for the Company's photovoltaic module manufacturing equipment
requires 





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<PAGE>   5

customized engineering and systems design. While the time required to fill
orders is slightly different for each item of equipment, it generally takes
approximately six months from date of order to delivery to the customer. The
first few months of this process are devoted to customizing the design of the
item of equipment to meet the customer's requirements. The balance of the time
is spent on internal assembly, wiring and testing of the equipment. The Company
maintains quality control measures throughout each step of the manufacturing
process. Employees are responsible for reviewing incoming materials, conducting
interim testing throughout the Company's processing of the materials, and
servicing and testing final products before shipment to the Company's customers.

     The Company's MOCVD reactors produce wafers with layers of semiconductor
materials, some of which are further processed into semiconductor devices. All
the Company's semiconductor wafers and semiconductor devices are tested in the
Company's measuring lab for quality control before shipment to the customer. The
Company currently produces semiconductor wafers only to order. In the biomedical
area, customers ship medical devices to be surface-processed to the Company.
These devices are reviewed for surface defects prior to undergoing the Company's
surface processing, and are reviewed again for defects upon completion of the
processing. The devices are then shipped back to the customer.

     The Company assembles its photovoltaic module manufacturing equipment from
a combination of components purchased from a variety of suppliers and
self-fabricated components. The Company has not experienced any major price
instability, or lack of availability, of its components. For many items,
alternate sources are available. The Company believes that the loss of any
supplier would not be material due to the ability to use alternate suppliers or
to substitute other items with minimal re-engineering. The Company anticipates
that it will be able to manufacture and procure all such parts and materials in
sufficient quantities to meet its needs. See "Risk Factors - Dependence on
Single Manufacturing Facility."

PROPRIETARY RIGHTS

     Over the course of more than 25 years of research and development, the
Company has accumulated extensive scientific and technological expertise. The
Company actively protects certain of its technological advances as trade
secrets, in part through confidentiality agreements with employees, consultants
and third parties. The Company also seeks and enforces patents as appropriate.
The Company currently has 40 U.S. patents, of which two are jointly owned, four
patents pending in the United States and two foreign patents pending, all of
which cover elements of its materials and processing technologies.

     Substantially all of the Company's research and development work is funded
by the U.S. government and other entities. The U.S. government retains the right
to obtain a patent on any invention developed under government contracts as to
which the Company does not seek and obtain a patent, and may require the Company
to grant a third party license of such invention if steps to achieving practical
application of the invention have not been taken. The U.S. government also
retains a non-exclusive, royalty-free, non-transferable license to all
technology developed under government contracts, whether or not patented, for
government use, including use by other parties to U.S. government contracts.
Furthermore, the Company's U.S. government contracts prohibit the Company from
granting exclusive rights to use or sell any inventions unless the grantee
agrees that any product using the invention will be manufactured substantially
in the United States. See "Risk Factors - Protection of Proprietary Technology"
and "Government Regulation."

COMPETITION

     The Company sells its products and services in competitive markets.
Entities now operating in related markets may enter the Company's markets. Some
of the Company's current and potential competitors have financial and technical
resources greater than those of the Company. Competitive factors for the Company
in its various markets include the amount and pace of technological innovation,
financial resources, product quality, timely delivery, service and price. The
Company believes that there are considerable barriers to entry into the markets
it serves, including a significant investment in specialized capital equipment
and product design and development, and the need for a staff with sophisticated
scientific and technological knowledge.




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     The Company faces competition from various companies in the terrestrial
photovoltaic module manufacturing equipment market, particularly in Japan. As an
industry leader, the Company has been subject to pricing pressures on certain
components of its photovoltaic module manufacturing equipment product line. The
Company's more technologically sophisticated and highly automated equipment
competes with more labor intensive, lower priced alternatives. Furthermore, the
Company competes in foreign countries where there may be a preference for doing
business with local companies. In addition, large manufacturers may from time to
time produce certain items of equipment for their own internal use, eliminating
the purchase of such equipment from commercial vendors.

     With respect to its optoelectronics and biomedical products and services,
the Company competes on the basis of overall quality of service and price, and
at times on the basis of value added. The Company's products and services also
compete against products based on alternate technologies. In addition, the
Company faces competition from numerous other businesses, particularly small
businesses throughout the United States, for contracts for research and
development funded by the U.S. government and other outside sources.

     In the space solar cell market, which the Company anticipates entering, the
Company will face competition from larger, established companies with greater
financial resources than the Company. Furthermore, the space solar cells the
Company anticipates offering may compete with space solar cells of other
manufacturers, which use different technologies. In addition, the expansion of
the space solar cell market may attract more companies to enter the market, and
may cause companies already in the market to expand capacity, which may affect
the ability of the Company to compete effectively.

     Because the Company often markets its photovoltaic products to governmental
agencies or financiers in foreign countries, it faces certain risks inherent in
international sales, such as regulatory requirements, political and economic
changes and disruptions and transportation delays. The Company also faces
competition from government or private companies in these countries. The Company
addresses these issues by working with local commissioned sales representatives,
seeking to establish a local presence, such as through its agreements with
Marubeni, maintaining technological leadership, and quoting prices and accepting
payment only in U.S. dollars, generally against letters of credit. Because the
Company sells its products only in U.S. dollars, the Company's sales could be
adversely affected to the extent that its customers have limited access to U.S.
dollars and to the extent that fluctuations in exchange rates may render the
Company's prices less competitive relative to competitors' prices. See "Risk
Factors - Competition" and " - Dependence on Export Sales."

EMPLOYEES

     As of December 31, 1997, the Company employed 141 people, of whom 131 were
full-time. Twelve of the Company's employees hold Ph.D.'s. The Company has 41
employees on its technical staff and 10 on its manufacturing staff. The Company
has never experienced a work stoppage and considers its relationship with its
employees to be good. See "Risk Factors - Competition" and " - Dependence on
Export Sales."

GOVERNMENT REGULATION

     The Company's government contracting activities are subject to a large
number of federal regulations and oversight requirements. Compliance with the
array of government regulations requires extensive record keeping and the
maintenance of complex policies and procedures relating to all aspects of the
Company's business, as well as to work performed for the Company by any
subcontractors. The Company believes that it has put in place systems and
personnel to ensure compliance with all U.S. government regulations relating to
contracting.

     The Company also is subject to export control regulations that govern the
export of Company products to certain countries, as well as the release of
technical information to non-U.S. individuals and entities. Further, the Company
is subject to federal, state and local governmental environmental regulations
and to federal OSHA regulations. The Company believes that it has complied in
all material respects with all applicable environmental and safety regulations
and has all permits necessary to conduct its business. The Company employs a
full-time Environmental and Safety Engineer to manage its compliance efforts.
The cost of such compliance has not been material to the Company.






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     The introduction by the Company's customers of certain new biomedical
products depends on passage of these products through various stages of review
by the FDA. The process of obtaining regulatory approvals involves lengthy and
detailed laboratory and clinical testing and other costly and time-consuming
procedures. The Company continues to refine its interaction with its customers
in the regulatory approval process in an effort to streamline its customers'
application process. See "Risk Factors Government Regulation."

                                  RISK FACTORS

     In addition to the other information in this SEC Form 10-KSB, prospective
investors should consider the following risk factors inherent in and affecting
the business of the Company. The discussion in this SEC Form 10-KSB contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results and the timing of certain events may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."

     DEPENDENCE ON MARKET GROWTH. The ability of the Company to sustain or
expand its business depends substantially on the stability and growth of the
various markets for the Company's products and services.

     The growth of the photovoltaic market is tied to the continued growth of
worldwide need for wireless power, especially in the developing world, and on
domestic and international government funding of initiatives to promote solar
energy as an alternative to the burning of fossil fuels and other energy
production methods. There can be no assurance that government funding for such
initiatives will continue to be available, or that solar energy will prove to be
a cost-effective alternative to other energy sources and gain acceptance where
traditional energy sources continue to be available. Most of the Company's
revenues from its optoelectronics activities are generated by research and
development contracts with the U.S. government. There can be no assurance that
the U.S. government will continue to fund research and development projects at
the same or higher levels than it has in the past. The growth of the Company's
biomedical business depends on the condition of the health care system and the
industry sectors serving that system. The health care system recently has been
characterized by pricing pressures and consolidations which could reduce or
eliminate demand for the Company's processing services. The merger or
consolidation of manufacturers of orthopedic and other medical devices could
reduce the number of customers for the Company's biomedical processing services.

     COMPETITION. The Company sells its products and services in competitive
markets. Entities now operating in related markets may enter the Company's
markets. Some of the Company's current and potential competitors have financial
and technical resources greater than those of the Company. Competitive factors
for the Company in its various markets include the amount and pace of
technological innovation, financial resources, product quality, timely delivery,
service and price. Although the Company believes that there are considerable
barriers to entry into the markets it serves, including a significant investment
in specialized capital equipment and product design and development, and the
need for a staff with sophisticated scientific and technological knowledge,
there can be no assurance that new or existing entities will not seek to enter
the Company's markets.

     The Company faces competition from various companies in the terrestrial
photovoltaic module manufacturing equipment market, particularly in Japan. The
Company's more technologically sophisticated and highly automated photovoltaic
module manufacturing equipment competes with more labor intensive, lower priced
alternatives. Furthermore, the Company competes in foreign countries where there
may be a preference for doing business with local companies. In addition, large
manufacturers may from time to time produce certain items of equipment for their
own internal use, eliminating the purchase of such equipment from commercial
vendors. With respect to its optoelectronics and biomedical products and
services, the Company competes on the basis of overall quality of service and
price, and at times on the basis of value added. The Company's products and
services also compete against products based on alternate technologies. In the
space solar cell market, which the Company anticipates entering, the Company
will face competition from larger, established companies with greater financial
resources than the Company. The expansion of this market may attract more
companies to enter the market, and may cause companies already in the market to
expand capacity, which may affect the ability of the Company to compete
effectively. In addition, the Company faces competition from numerous other






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businesses, particularly small businesses throughout the United States, for
contracts for research and development funded by the U.S. government and other
outside sources.

     DEPENDENCE ON OUTSIDE FUNDING FOR RESEARCH AND DEVELOPMENT. Substantially
all of the Company's research and development work is funded by the U.S.
government and other outside sources. Loss of outside funding may materially
adversely affect the Company's ability further to develop its proprietary
technologies and applications of these technologies to its current products and
products under development. If the Company is unable to maintain its current
level of such funding for any reason, the Company would need to generate funds
for such research from other sources, reduce its research and development effort
or increase its internal research and development. An increase in internally
funded research and development would have a negative impact on profitability.
U.S. government contracts are cancelable without the Company's consent.
Furthermore, all companies that are parties to cost-plus contracts with the U.S.
government are subject to annual government audit and possible recapture of
payments. While the Company has not incurred significant losses as a result of
government audits to date, the Defense Contract Audit Agency has not yet audited
the Company and the rates at which the Company is reimbursed for future
government contracts. Loss of a number of U.S. government or other research and
development contracts could have a material adverse effect on the Company's
business, results of operations or financial condition.

     DEPENDENCE ON EXPORT SALES. For the fiscal years ended December 31, 1997,
1996 and 1995, export sales from the United States accounted for approximately
34%, 19% and 17%, respectively, of the Company's net sales and revenues.
Substantially all of the Company's international revenues are derived from sales
of its photovoltaic module manufacturing equipment. The Company anticipates that
international sales will continue to account for a significant portion of net
sales and revenues. The Company intends to continue to expand its export sales
and to enter additional international markets, which may require significant
management attention and financial resources. The Company's operating results
are subject to the risks inherent in international sales, including, but not
limited to, regulatory requirements, political and economic changes and
disruptions, transportation delays, national preferences for locally
manufactured products and import duties or other taxes which may affect the
prices of the Company's products in other countries relative to competitors'
products. In addition, present or future U.S. government trade restrictions
relating to sales to certain countries may limit the Company's ability to sell
its products in the affected foreign countries.

     The Company currently sells its products only in U.S. dollars. As a result,
the Company's sales could be adversely affected to the extent that its customers
have limited access to U.S. dollars and to the extent that fluctuations in
exchange rates may render the Company's prices less competitive relative to
competitors' prices. If the Company chooses to accept payment for its products
in other currencies, it may be subject to reduced profits from adverse changes
in exchange rates. These factors could have a material adverse effect on the
Company's business, results of operations or financial condition.

     RELIANCE ON SALES REPRESENTATIVES. The Company markets its photovoltaic
manufacturing equipment products through a network of non-exclusive commissioned
sales representatives, as well as though its internal staff. While the Company
believes it has good relationships with its sales representatives, there can be
no assurance that the Company will be able to retain such representatives. In
addition, under the Company's agreements with Marubeni Corporation of Nagoya,
Japan, Marubeni will distribute, and in some cases manufacture under a
technology license, certain Spire photovoltaic module manufacturing equipment
under Spire's name in Japan, and has rights to market this equipment line
throughout certain countries in Southeast Asia and the Pacific Rim. The loss of
a significant number of the Company's commissioned sales representatives or the
inability of Marubeni to market and distribute the Company's products
effectively in Japan, Southeast Asia and the Pacific Rim could adversely affect
the Company's ability to market its photovoltaic products and could have a
material adverse effect on the Company's business, results of operations or
financial condition.

     RECENT INCREASE IN PROFITABILITY; FLUCTUATIONS IN OPERATING RESULTS. While
the Company reported net earnings of $1,667,000 for the year ended December 31,
1997, the Company experienced a net loss in two out of its prior three full
fiscal years, and a loss from operations in all three of such fiscal years.
There can be no assurance that the Company will sustain profitability.
Furthermore, the Company's revenues and operating results may vary significantly
from quarter to quarter as a result of a number of factors, many of which are
outside of management's control. These factors include, among others, timing of
capital expenditures by customers, changes in demand for the Company's products,
long business 







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procurement cycles, changes in pricing policies by the Company and its
competitors, cancellation or delay by customers of contracts with the Company
and access to U.S. currency by the Company's customers.

     TECHNOLOGICAL ADVANCES; DEPENDENCE ON FUTURE PRODUCT DEVELOPMENT AND MARKET
ACCEPTANCE. Each of the areas in which the Company maintains a proprietary
technology position, particularly photovoltaics and optoelectronics, is
characterized by rapid technological advances and improvements in manufacturing
efficiencies. The Company's ability to operate profitably depends in large part
on its timely access to, or development of, technological advances, and on its
ability to use those advances to improve existing products, develop new products
and manufacture those products efficiently. In addition, there can be no
assurance that the Company will be able to attain market acceptance for
commercial products based on these technologies. The failure to introduce new or
enhanced products on a timely and cost competitive basis, or to attain market
acceptance for commercial products, could have a material adverse effect on the
Company's business, results of operations or financial condition

     PROTECTION OF PROPRIETARY TECHNOLOGY. The Company actively protects certain
of its intellectual property and technological advances as trade secrets, in
part through confidentiality agreements with employees, consultants and third
parties. The Company also seeks and enforces patents as it deems appropriate.
The Company currently has 40 U.S. patents, two of which are jointly owned, four
patents pending in the United States and two foreign patents pending, all of
which cover elements of its materials and processing technologies. There can be
no assurance that the Company will be able to assert its intellectual property
rights successfully against allegedly infringing competitors, and the inability
to assert its rights successfully may have a negative impact on the Company's
competitive position and financial condition. Furthermore, there can be no
assurance that the Company's intellectual property rights will deter others from
developing substantially equivalent or competitive products or from
reverse-engineering the Company's products. Even if a third party's products
infringe upon the Company's patents or other intellectual property, it may be
costly to enforce such rights, and such enforcement efforts may divert
management attention from the operations of the Company. In addition, the
foreign legal protection afforded intellectual property rights, including
patents, if issued, may be different from that afforded under U.S. laws. To the
extent the Company relies on non-disclosure agreements to protect its rights,
there can be no assurance that such information will not be disclosed in breach
of these agreements or, if disclosed, that the Company will be able to recover
amounts sufficient to compensate it for any damage such disclosure may cause.

     Further, although no such claims are currently outstanding against the
Company, there can be no assurance that the Company will not be subject to
patent or other intellectual property rights infringement claims asserted by
others, or if asserted, that the Company will be successful in defending its
position or challenging such claims. In the event that the Company will be
successful in defending its position or challenging such claims. In the event
that the Company were to be adjudged to infringe patents or other intellectual
property rights of others, the Company might be required to pay damages, and
might be enjoined from making, using or selling the infringing product or
service, or might be required to obtain a royalty-bearing license, if available
on acceptable terms. Alternatively, in the event a license is not offered or is
not available on commercially acceptable terms, the Company may be required to
re-engineer the affected products or processes to avoid such infringement. There
can be no assurance that any such re-engineering will be successful or will
result in commercially acceptable alternatives, and any such re-engineering may
entail significant or prohibitive expense to the Company.

     In addition to the foregoing, the U.S. government retains the right to
obtain a patent on any invention developed under contract as to which patent
protection is not sought and obtained by the contractor, or to require the
contractor to grant a third party license of such invention if steps to achieve
practical application of the invention have not been taken. The Company has not
sought, and will not seek, patent protection for each of its inventions under
U.S. government contracts, either due to the nature of the invention or the cost
of applying for and obtaining a patent. This practice subjects the Company to
the potential of losing patent rights to the U.S. government. The Company also
may not achieve practical application of an invention in each instance, or in a
timely manner, thus leading to the possibility of a mandatory third party
license. Furthermore, the U.S. government retains a non-exclusive, royalty-free,
non-transferable license to all technology developed under government contracts,
whether or not patented, for government use, including use by other parties to
U.S. government contracts.




                                       9
<PAGE>   10

     DEPENDENCE ON SINGLE MANUFACTURING FACILITY. The Company has only one
manufacturing facility, and the Company's revenues are dependent upon the
continued operation of such facility. The operation of a manufacturing plant
involves many risks, including potential damage from fire or natural disasters.
In addition, the Company has obtained certain permits to conduct its business as
currently operated at its facility. There can be no assurance that such permits
would continue to be effective at the current location if the facility were
destroyed and rebuilt, or that the Company will be able to obtain similar
permits to operate at another location. While the Company maintains insurance
covering certain of such risks, including business interruption coverage, there
can be no assurance that the occurrence of these or any other operational
problems at the Company's facility would not materially adversely affect the
Company's business, results of operations or financial condition.

     NEED TO MANAGE GROWTH. The future success of the Company will depend upon,
among other factors the ability of the Company to identify and exploit new
product and services opportunities, to recruit, hire, train and retain highly
educated, skilled and experienced management and technical personnel, to
generate capital from operations and to manage the effects of growth on all
aspects of its business, including research, development, manufacturing,
distribution, sales and marketing, administration and finance. Any failure by
the Company to identify and exploit new product and service opportunities,
attract or retain necessary personnel, generate adequate revenues or conduct its
expansion or manage growth effectively could have a material adverse effect on
the Company's business, results of operations or financial condition.

     DEPENDENCE ON KEY PERSONNEL. The Company's long-term success and its growth
strategy depend on the efforts and abilities of its senior management,
particularly Roger G. Little, the Company's founder and its Chairman, Chief
Executive Officer and President, and on its technical staff. The loss of
services of Mr. Little or one or more of the Company's technical staff, or an
ability of the Company to attract and motivate highly educated and skilled
employees, could result in the Company's inability to continue certain product
offerings, and could have a material adverse effect on the Company's business,
results of operations or financial condition. The Company has recently appointed
Vice Presidents for its photovoltaics and biomedical areas, to replace two
former Vice Presidents who resigned during the fourth quarter of 1997. While the
Company believes that the two new Vice Presidents are highly qualified senior
managers, there can be no assurance that these management changes will not have
an adverse effect the Company's operations. Further, there can be no assurance
that the former employees will not compete with the Company or disclose Company
confidential information, whether or not in violation of any agreements. While
the Company would seek to enforce its rights, any such competition or disclosure
could have a material adverse effect on the Company's business, results of
operations or financial condition.

     CONTROL BY PRINCIPAL STOCKHOLDER. Roger G. Little, the Chairman of the
Board, Chief Executive Officer and President of the Company, controls
approximately 44% of the Company's outstanding Common Stock. In addition, as one
of three Trustees of the Company's 401(k) Plan, Mr. Little may exercise control
over shares of Common Stock held by the Plan. As a result, Mr. Little is in a
position to exert significant influence over actions of the Company which
require stockholder approval and generally to direct the affairs of the Company,
including potential acquisitions, sales and changes in control of the Company.

     GOVERNMENT REGULATION. The process of bidding for, obtaining, retaining and
performing U.S. government contracts is subject to a large number of U.S.
government regulations and oversight requirements. Compliance with these
government regulations requires extensive record keeping and the maintenance of
complex policies and procedures relating to all aspects of the Company's
business, as well as to work performed for the Company by any subcontractors.
Any failure by the Company to comply with applicable regulations, or to require
its subcontractors so to comply, could result in a variety of adverse
consequences, ranging from remedial requirements to termination of contracts,
reimbursement of fees, reduction of fees on a going forward basis and
prohibition from obtaining future U.S. government contracts. While the Company
believes that it has put in place systems and personnel to ensure compliance
with all U.S. government regulations relating to contracting, there can be no
assurance that it will at all times be in compliance or that any failure to
comply will not have a material adverse effect on the Company's business,
results of operations or financial condition. Furthermore, the Company's U.S.
government contracts include provisions prohibiting the Company from granting
exclusive rights to use or sell any inventions unless such grantee agrees that
any product using the invention will be manufactured substantially in the United
States.





                                       10
<PAGE>   11

     The Company is subject to export control regulations, which govern the
export of Company products to certain countries, as well as the release of
technical information to non-U.S. individuals and entities. It also is subject
to the federal Occupational Safety and Health Act ("OSHA"). While the Company
has a full-time compliance officer monitoring compliance with these laws and
regulations, there can be no assurance that it will at all times be in
compliance. Failure to comply with these laws and regulations could result in
penalties to the Company, including fines and requirements to take remedial
action, which would have a material adverse effect on the Company's business,
results of operations or financial condition.

     The Company is also subject to a number of federal, state and local
government regulations relating to the use, storage, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its business. Any
failure to comply with present or future regulations could result in the
imposition of fines and the suspension of production or a cessation of
operations. In addition, such regulations could restrict the Company's ability
to expand, or could require the Company to acquire costly equipment or incur
other significant expenses to comply with environmental regulations or to
remediate any pollution.

     The introduction by the Company's customers of certain new biomedical
products depends on such products' passage through various stages of review by
the United States Food and Drug Administration ("FDA"). The process of obtaining
regulatory approvals involves lengthy and detailed laboratory and clinical
testing and other costly and time-consuming procedures. There can be no
assurance as to the timely or positive outcome of any such review process. The
inability of the Company's customers to obtain such approvals in a timely
manner, or at all, could impede or prevent the introduction of these biomedical
products into the marketplace, and could adversely affect the Company's revenues
from its biomedical services.

     The extent of government regulation that may arise from future legislative
or administrative action cannot be predicted.

     RISK OF UNINSURED LOSS. The use of orthopedic and other medical devices may
entail a risk of physical injury to patients. To the extent the Company has been
involved in the manufacturing of these products, it may be exposed to potential
product liability and other damage claims. Furthermore, the use of the Company's
photovoltaic module manufacturing equipment could result in operator injury. To
date, no product liability or other damage claim has been initiated against the
Company. The Company maintains product liability and umbrella insurance
coverage; however, there can be no assurance that any product liability claim
assessed against the Company would not exceed its insurance coverage, or that
insurance coverage will continue to be available. While the Company typically
obtains agreements of indemnity from manufacturers of biomedical products for
which the Company provides services, there can be no assurance that any such
indemnity agreements will be enforceable or that such manufacturers will have
adequate funds to meet their obligations under such agreements. The cost of
defending a product liability, negligence or other action, and/or assessment of
damages in excess of insurance coverage, could have a material adverse effect on
the Company's business, results of operations, or financial condition.

     FLUCTUATIONS IN STOCK PRICE. The Company's Common Stock has recently
experienced price and volume fluctuations and may experience such fluctuations
in the future. Factors such as announcements of technological innovations or new
products by the Company or its competitors, changes in domestic or foreign
governmental regulations or regulatory approval processes and fluctuations in
quarterly operating results, have and may continue to have a significant impact
on the market price of the Common Stock. Moreover, the stock market (and in
particular the securities of technology companies such as the Company) has
experienced and could in the future experience extreme price and volume
fluctuations. These fluctuations may be unrelated to operating performance and
could have a significant impact on the market price of the Common Stock.

     NO DIVIDENDS. The Company has paid no dividends since its inception. The
Company anticipates retaining any future earnings for operations and does not
anticipate that dividends will be paid in the foreseeable future. Under its
credit agreement with Silicon Valley Bank, the Company is prevented from paying
dividends without the prior written consent of the Bank.





                                       11
<PAGE>   12
ITEM 2.  PROPERTIES

     The Company leases 74,000 square feet in a building located at One Patriots
Park, Bedford, Massachusetts. The production facilities and substantially all of
the Company's offices are located in the building. All of the Bedford space is
subleased from Millipore Corporation on what the Company believes are
commercially reasonable terms. Millipore leases the building from a trust of
which Roger G. Little, Chairman, Chief Executive Officer and President of the
Company, is sole trustee and principal beneficiary. The 1985 sublease originally
was for a period of ten years. The Company has exercised its option to extend
the sublease for an additional five-year period expiring on November 30, 2000
and has an option for an additional five-year extension. The Company believes
that its facilities are suitable for their present intended purposes and
adequate for the Company's current level of operations. See "Risk Factors -
Dependence on Single Manufacturing Facility" and " - Need to Manage Growth."

ITEM 3.  LEGAL PROCEEDINGS

     On March 2, 1998 the Company received a letter from the Office of the
United States Attorney for the Eastern District of Virginia stating that it was
considering the commencement of a civil action concerning seven research
initiatives undertaken by the Company in the period from 1990 to the present.
The letter alleged that, in certain instances, the Company had failed to inform
the government of pending or previously submitted proposals for work the
government alleges was related to proposals which were funded. The Company is in
the process of reviewing the allegations, and gathering the information
necessary to respond. The Company is unable to determine at this time what
effect, if any, this matter will have on the Company's financial condition or
results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

       No matters were submitted to a vote of the Company's security-holders in
the fourth quarter of 1997.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

       The Company's Common Stock, $.01 par value ("Common Stock"), is traded on
the Nasdaq National Market under the symbol "SPIR." The following chart sets
forth the high and low closing sale prices for the Common Stock for the periods
shown:
<TABLE>
<CAPTION>
                                          HIGH                  LOW
                                          ----                  ---
<S>                                      <C>                  <C>  
       1997
       First Quarter                     $ 4 1/4              $ 2 1/4
       Second Quarter                      5 3/8                4
       Third Quarter                      16 5/8                5 1/8
       Fourth Quarter                     23                   14 3/8

       1996
       First Quarter                     $ 2 1/2              $ 2
       Second Quarter                      6 3/4                2 1/2
       Third Quarter                       3 1/2                2 3/4
       Fourth Quarter                      2 3/4                2 1/4
</TABLE>

     These prices do not reflect retail mark-ups, mark-downs or commissions. The
closing price of the Common Stock on February 27, 1998 was $14.50, and on that
date, there were approximately 220 stockholders of record.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual 







                                       12
<PAGE>   13

results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and in "Risk Factors" and "Business." The following discussion is
qualified in its entirety by, and should be read in conjunction with, the
detailed information and the Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere or incorporated by reference in this Report.

OVERVIEW

     Spire develops, manufactures and markets highly-engineered photovoltaic
module manufacturing equipment and optoelectronic products and provides
biomedical processing services. Spire is the world's leader in the design and
manufacture of specialized equipment for the production of terrestrial
photovoltaic modules from solar cells, with its equipment installed in 138
factories and in 38 countries. The Company also offers certain optoelectronic
products and is continuing to develop additional advanced optoelectronic
products for telecommunications, biomedical and electronics applications,
including solar cells used to power satellites. Spire's value-added biomedical
processing services offer surface treatments to enhance the durability or the
antimicrobial characteristics of orthopedic and other medical devices.

     The Company's net sales and revenues for the year ended December 31, 1997
increased 32%, compared to the year ended December 31, 1996. All of the
Company's three areas of business have contributed to the growth in net sales
and revenues. The most significant contribution has come from the Company's
photovoltaic module manufacturing equipment line. The photovoltaic industry has
experienced increased demand for solar module capacity, which has resulted in
the Company's recent growth in its manufacturing equipment sales. The Company's
ability to maintain its growth in this area is directly tied to the industry's
continued demand for solar power. The Company continues to rely on funding from
the U.S. Government for its research and development activities. For the year
ended December 31, 1997, revenues from U.S. Government research and development
contracts represented 35% of net sales and revenues, compared to 39% for the
year ended December 31, 1996. The Company believes that such contracts are
likely to represent a decreasing percentage of net sales and revenues as sales
of the Company's commercial products and services continue to grow.

     The Company's strategy is to concentrate on growing its commercial products
and services. Operating results in any particular quarter will depend upon
product mix, as well as the timing of shipments of higher priced products from
its equipment line. Export sales, which amounted to 34% of net sales and
revenues for the year ended December 31, 1997, continue to constitute a
significant portion of the Company's net sales and revenues. Export sales are
expected to continue to grow as worldwide demand for photovoltaic energy
continues to increase.

     During 1997, the Company utilized a significant portion of its available
net operating loss and tax credit carryforwards. As a result, the Company's
financial results for future periods are expected to reflect increased tax
expense.

RESULTS OF OPERATIONS

     The following table sets forth certain items as a percentage of net sales
and revenues for the periods presented:
<TABLE>
<CAPTION>
                                                            
                                                                           Years Ended December 31,
                                                              ---------------------------------------------------
                                                                    1997          1996               1995
                                                              ---------------------------------------------------

<S>                                                                <C>           <C>                <C>   
Net sales and revenues                                             100.0%        100.0%             100.0%
Cost of sales and revenues                                          66.5          76.2               74.6
                                                              ---------------------------------------------------
Gross profit                                                        33.5          23.8               25.4
Selling, general and administrative expenses                        25.8          27.3               25.5
                                                              ---------------------------------------------------
Earnings (loss) from operations                                      7.7          (3.5)              (0.1)
Earnings (loss) before income taxes                                  7.8          (3.4)              (0.2)
Income tax expense (benefit)                                         0.6           --                (0.2)
                                                              ===================================================
Net earnings (loss)                                                  7.2%         (3.4%)              -- %
                                                              ===================================================
</TABLE>





                                       13
<PAGE>   14


YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Net Sales and Revenues

     Net sales and revenues increased $5,626,000 or 32% for the year ended
December 31, 1997 to $23,014,000, compared to $17,388,000 for the year ended
December 31, 1996. The increase is due to increased demand for commercial
products and services especially the Company's photovoltaic manufacturing
equipment, increased contract research and development revenues, and receipt of
a $600,000 one-time license fee. Contract research, service and license revenues
increased $1,195,000 or 10% to $12,642,000 for the year ended December 31, 1997
compared to $11,447,000 for 1996. Manufacturing equipment sales increased
$4,431,000 or 75% to $10,372,000 for 1997, compared to $5,941,000 for 1996, due
to increased sales of photovoltaic equipment resulting from increased demand for
photovoltaic energy. The following table categorizes the Company's net sales and
revenues for the periods presented:
<TABLE>
<CAPTION>

                                                           Years Ended December 31,
                                                       ----------------------------------
                                                            1997              1996            Change
                                                       ---------------------------------------------------

<S>                                                      <C>               <C>                   <C>
Contract research, service and license revenues          $12,642,000       $11,447,000           10%
Manufacturing equipment sales                             10,372,000         5,941,000           75%
                                                       ----------------------------------
Net sales and revenues                                   $23,014,000       $17,388,000           32%
                                                       ==================================
</TABLE>

Cost of Sales and Revenues

     The cost of sales and revenues increased $2,052,000 to $15,302,000, but
decreased to 66% of net sales and revenues, for the year ended December 31,
1997, compared to $13,250,000 or 76% of net sales and revenues for the year
ended December 31, 1996.

     The cost of contract research, service and license revenues decreased
$223,000 to $8,715,000, and decreased to 69% of related revenues, for the year
ended December 31, 1997, compared to $8,938,000 or 78% of related revenues for
the year ended December 31, 1996. Cost of manufacturing equipment sales
increased $2,275,000 to $6,587,000, but decreased to 64% of related sales, for
the year ended December 31, 1997, compared to $4,312,000 or 73% of related
sales, for the year ended December 31, 1996. The decrease in total cost of sales
and revenues as a percentage of related sales and revenues is due to increased
efficiencies in the manufacturing process, product mix and higher volume.

     The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
<TABLE>
<CAPTION>

                                                                     December 31, 1997       %      December 31, 1996        %
                                                                 -------------------------------------------------------------------

<S>                                                                    <C>                   <C>        <C>                    <C>
Contract research, service and license revenues                        $  8,715,000          69%        $  8,938,000           78%
Manufacturing equipment sales                                             6,587,000          64%           4,312,000           73%
                                                                 =========================================================
Total cost of sales and revenues                                        $15,302,000          66%         $13,250,000           76%
                                                                 =========================================================
</TABLE>

Selling, General and Administrative Expenses

     Selling, general and administrative expenses for the year ended December
31, 1997 increased $1,191,000 to $5,937,000, but decreased to 26% of sales and
revenues, compared to $4,746,000 or 27% of sales and revenues for the year ended
December 31, 1996. Selling, general and administrative expenses increased due to
increases in commissions, marketing and travel costs related to increased sales
of products and services. Also selling, general and administrative expenses
increased due to a one-time charge of $332,000 due to costs associated with the
Company's attempted secondary equity offering, which was subsequently withdrawn.





                                       14
<PAGE>   15

Depreciation and Amortization Expenses

     Depreciation and amortization expenses for the year ended December 31, 1997
decreased $160,000 or 13% to $1,080,000, compared to $1,240,000 for the year
ended December 31, 1996. Capital expenditures increased $124,000 or 13% to
$1,067,000 for the year ended December 31, 1997, compared to $943,000 for the
year ended December 31, 1996.

Interest

     The Company earned $31,000 in interest income for the year ended December
31, 1997, compared to $17,000 for the year ended December 31, 1996. The Company
incurred insignificant interest expense in both years.

Income Taxes

     The Company recorded tax expense of $141,000 for the year ended December
31, 1997, compared to no expense for the year ended December 31, 1996. Tax
expense for the year ended December 31, 1997 benefited from a $300,000
realization of the Company's deferred tax asset. The Company recorded this
benefit because it believes that the tax effects of existing deductible
temporary differences or carryforwards of $300,000 are more likely than not to
be realized through the generation of sufficient future taxable income. At
December 31, 1997, the Company had gross deferred tax assets of $1,519,000,
against which a valuation allowance of $444,000 was applied. Total gross
deferred tax liabilities of $775,000 were applied against the resulting net
deferred tax asset of $1,075,000.

Net Earnings (Loss)

     The Company reported net earnings for the year ended December 31, 1997 of
$1,667,000, compared to a loss of $599,000 for the year ended December 31, 1996.
The improvement in the Company's profitability resulted in large part from
increased net sales and revenues in all areas of the Company's business,
particularly in manufacturing equipment sales, where the Company's profit
margins are generally higher. In addition, the Company received a $600,000
one-time license fee.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Net Sales and Revenues

     Net sales and revenues decreased $64,000 or less than 1% for the year ended
December 31, 1996 to $17,388,000, compared to $17,452,000 for the year ended
December 31, 1995. This decrease is due to decreased government contract
revenues, partially offset by an increase in photovoltaic equipment sales.
Contract research, service and license revenues decreased $1,437,000 or 11% in
1996 to $11,447,000, compared to $12,884,000 in 1995, due to decreased
government contract revenues. Government contract revenues also constituted a
lower percentage of overall revenues as the percentage of revenues represented
by the Company's commercial activities increased. Manufacturing equipment sales
increased $1,373,000 or 30% to $5,941,000, compared to $4,568,000 in 1995, due
to increased sales of photovoltaic module manufacturing equipment resulting from
increased demand for photovoltaic energy. The following table sets categorizes
the Company's net sales and revenues for the periods presented:
<TABLE>
<CAPTION>

                                                                                       Years ended December 31,
                                                                                   ----------------------------------
                                                                                           1996             1995          Change
                                                                                   -------------------------------------------------

<S>                                                                                   <C>               <C>                <C>  
Contract research, service and license revenues                                       $11,447,000       $12,884,000        (11%)
Manufacturing equipment sales                                                           5,941,000         4,568,000         30%
                                                                                   ----------------------------------
Net sales and revenues                                                                $17,388,000       $17,452,000        (<1%)
                                                                                   ==================================


</TABLE>




                                       15
<PAGE>   16


Cost of Sales and Revenues

     The cost of sales and revenues increased $225,000 to $13,250,000 or 76% of
net sales and revenues for the year ended December 31, 1996, compared to
$13,025,000 or 75% of net sales and revenues for the year ended December 31,
1995. The cost of contract research, service and license revenues decreased
$249,000 to $8,938,000, but increased to 78% of related revenues, for the year
ended December 31, 1996, compared to $9,187,000 or 71% for the same period in
1995. The increase in cost of revenues as a percentage of related revenues was
due to a reduction in sales volume and resulting underutilization of fixed
costs. Cost of manufacturing equipment sales increased $474,000 to $4,312,000,
but decreased to 73% of related sales in 1996, compared to $3,838,000 or 84% of
related sales in 1995. The decrease in cost of sales as a percentage of related
sales was due to improved product mix and increased manufacturing efficiencies.

     The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
<TABLE>
<CAPTION>

                                                                                         Years Ended December 31,
                                                                       -------------------------------------------------------------
                                                                               1996           %               1995           %
                                                                       -------------------------------------------------------------

<S>                                                                      <C>                  <C>       <C>                 <C>
Contract research, service and license revenues                          $  8,938,000         78%       $  9,187,000        71%
Manufacturing equipment sales                                               4,312,000         73%          3,838,000        84%
                                                                       -------------------------------------------------------------
Total cost of sales and revenues                                          $13,250,000         76%        $13,025,000        75%
                                                                       =============================================================
</TABLE>

Selling, General and Administrative Expenses

     Selling, general and administrative expenses increased $307,000 to
$4,746,000 or 27% of net sales and revenues for 1996, as compared to $4,439,000
or 25% of net sales and revenues for 1995. The increase in selling, general and
administrative expenses as a percentage of net sales and revenues is
attributable to increased selling activities and a decrease in net sales and
revenues.

Depreciation and Amortization Expenses

     Depreciation and amortization expenses decreased $53,000 or 4% in 1996 to
$1,240,000 from $1,293,000 in 1995. The decrease was due to a reduction in
expenditures for capital equipment during prior years and items becoming fully
depreciated. Expenditures for capital equipment increased $553,000 or 142% to
$943,000 in 1996, compared to $390,000 in 1995. During 1996 the Company made a
major investment in its MIS systems.

Interest

     The Company earned $17,000 in interest income in 1996, compared to $18,000
in 1995. The Company incurred interest expense in the amount of $11,000 in 1996
and $39,000 in 1995, of which $2,000 was capitalized in 1996 and $1,000 in 1995.
The decline in interest expense was due to the Company's reduction of debt. As
of December 31, 1996, the Company had no outstanding indebtedness.

Income Taxes

     The Company recorded no tax expense for the year ended December 31, 1996,
compared to a tax benefit of $32,000 for the year ended December 31, 1995.

Net Earnings (Loss)

     The Company reported a net loss for the year ended December 31, 1996 of
$599,000, compared to net earnings of $1,000 for the year ended December 31,
1995. The net loss in 1996 resulted primarily from increased selling, general
and administrative expenses and cost of sales and revenues, coupled with a
decrease in net sales and revenues.






                                       16
<PAGE>   17
LIQUIDITY AND CAPITAL RESOURCES

     The Company has been able to fund its liquidity requirements using cash
from operations and available lines of credit. On April 4, 1997, the Company
amended and extended its revolving credit agreement with Silicon Valley Bank.
This agreement provides for a $2 million revolving credit facility, based upon
eligible accounts receivable requirements. This line of credit has been
established to provide the Company with resources for general working capital
purposes and Standby Letter of Credit Guarantees for foreign customers. The line
is secured by all assets of the Company. Interest on the line is at the Bank's
prime rate plus one-half of one percent. The line contains covenants including
provisions relating to profitability and net worth. As of December 31, 1997, the
Company had no outstanding debt under this revolving credit facility.

     The Company believes it has sufficient resources to finance its current
operations for the foreseeable future through working capital, its existing line
of credit and available lease arrangements. Net increase (decrease) in cash and
cash equivalents for the years ended December 31, 1997, 1996 and 1995 amounted
to $725,000, ($159,000), and $964,000, respectively. Capital expenditures for
the same periods amounted to $1,067,000, $943,000 and $390,000, respectively. To
date there are no material commitments by the Company for capital expenditures.
At December 31, 1997, the Company's retained earnings were $1,632,000, compared
to a $35,000 accumulated deficit as of December 31, 1996. Working capital as of
December 31, 1997 increased 146% to $4,977,000, compared to $2,020,000 as of
December 31, 1996.

RECENT ACCOUNTING PRONOUNCEMENTS

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No. 128, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income per
share is expected to be higher than the currently presented net income per share
as the effect of dilutive stock options will not be considered in computing
basic net income per share. The Company adopted SFAS No. 128 in its fiscal
quarter ended December 31, 1997 and all historical net earnings (loss) per share
data presented are restated to conform to the provisions of SFAS No. 128.

     In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Under this concept, all revenues,
expenses, gains and losses recognized during the period are included in income,
regardless of whether they are considered to be results of operations of the
period. SFAS 130, which becomes effective for the Company in its year ending
December 31, 1998, is not expected to have a material impact on the Consolidated
Financial Statements of the Company.

     In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way that public business enterprises report
selected information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS 131, which becomes effective for the Company in its
year ending December 31, 1998, is not expected to have a material impact on the
Company's results of operations. The Company is in the process of determining
the impact of SFAS 131 on its footnote disclosures.

IMPACT OF INFLATION AND CHANGING PRICES

     Historically, the Company's business has not been materially impacted by
inflation. Manufacturing equipment sales are generally quoted, manufactured and
shipped within a cycle of approximately six months, allowing for orderly pricing
adjustments to the cost of labor and purchased parts. The Company has not
experienced any negative effects from the impact of inflation on long-term
contracts. The Company's service business is not expected to be seriously
affected by inflation because its procurement-production cycle typically ranges
from two weeks to several months, and prices 






                                       17
<PAGE>   18

generally are not fixed for more than one year. Research and development
contracts usually include cost escalation provisions.

FOREIGN EXCHANGE FLUCTUATION

     The Company sells only in U.S. dollars, generally against an irrevocable
confirmed letter of credit through a major U.S. bank. Therefore the Company is
not directly affected by foreign exchange fluctuations on its current orders.
However, fluctuations in foreign exchange rates do have an effect on the
Company's customers' access to U.S. dollars and on the pricing competition on
certain pieces of equipment that the Company sells in selected markets.

IMPACT OF THE YEAR 2000

     The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date has
been stored as just two digits (e.g. 97 for 1997). On January 1, 2000, any
clock or date recording mechanism incorporating date sensitive software which
uses only two digits to represent the year may recognize a date using 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activities.

     The Company is in the process of conducting a review of its internal
information systems to determine the extent of any Year 2000 problem. The
Company is still gathering information, but based on such review to date, the
Company does not believe that the impact or any Year 2000 problem will be
material, because its principal information systems appear to correctly define
the year 2000. Although there exists the possibility that Year 2000 issues will
be identified, based on such review to date, the Company does not currently
expect that any such problems will have a material adverse effect on the
Company's future operating results or financial condition.




                                       18
<PAGE>   19



ITEM 7.  FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>


                                                                                                                             Page
                                                                                                                           ---------
<S>                                                                                                                          <C>
Independent Auditors' Report
                                                                                                                              20
Consolidated Financial Statements:

     Consolidated Balance Sheets as of December 31, 1997 and 1996                                                             21

     Consolidated Statements of Operations for the Years Ended December 31,  1997, 1996 and 1995                              22

     Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995                     23

     Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995                               24

     Notes to Consolidated Financial Statements                                                                               25

</TABLE>





                                       19
<PAGE>   20



                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholders
Spire Corporation:


     We have audited the consolidated balance sheets of Spire Corporation and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spire
Corporation and subsidiary at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.


                                         /S/KPMG Peat Marwick LLP
                                         ------------------------
                                            KPMG PEAT MARWICK LLP


Boston, Massachusetts
March 6, 1998




                                       20
<PAGE>   21
                        SPIRE CORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                         ------------------------------
                                                                                            1997             1996
                                                                                         ------------------------------
                                             ASSETS
<S>                                                                                       <C>                  <C>    
 CURRENT ASSETS
   Cash and cash equivalents                                                              $ 1,695,727      $   970,997
    Accounts receivable, trade (Note 3):
        Amounts billed                                                                      3,012,701        2,333,588
        Retainage                                                                              69,772          130,215
        Unbilled costs                                                                        621,760          650,345
                                                                                         ------------------------------
                                                                                            3,704,233        3,114,148
        Less allowance for doubtful accounts                                                   40,000          100,000
                                                                                         ------------------------------
            Net accounts receivable                                                         3,664,233        3,014,148
                                                                                         ------------------------------

    Inventories (Note 4)                                                                      988,580        1,020,928
    Deferred income taxes (Note 9)                                                            300,000               --
    Prepaid expenses and other current assets                                                 501,650          287,513
                                                                                         ------------------------------
            Total current assets                                                            7,150,190        5,293,586
                                                                                         ------------------------------

Property and equipment (Note 6)                                                            24,015,445       22,919,385
    Less accumulated depreciation and amortization                                         19,242,437       18,299,072
                                                                                         ------------------------------
            Net property and equipment                                                      4,773,008        4,620,313
                                                                                         ------------------------------

Computer software costs (less accumulated amortization, $810,466 in 1997 and
    $791,846 in 1996)                                                                          51,135           31,735
Patents (less accumulated amortization, $542,344 in 1997 and $697,119 in 1996)                274,810          385,245
Other assets                                                                                   19,679          235,230
                                                                                         ------------------------------
                                                                                              345,624          652,210
                                                                                         ------------------------------
                                                                                          $12,268,822      $10,566,109
                                                                                         ==============================
                              LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Accounts payable                                                                      $   903,581      $ 1,233,548
    Accrued liabilities (Note 5)                                                              859,093          654,232
    Advances on contracts in progress                                                         410,370        1,385,462
                                                                                         ------------------------------
        Total current liabilities                                                           2,173,044        3,273,242
                                                                                         ------------------------------

COMMITMENTS (NOTES 7 AND 10)

STOCKHOLDERS' EQUITY (NOTE 8)
    Common stock, $.01 par value; shares authorized 20,000,000 in 1997, and 6,000,000
         shares in 1996; issued 3,757,082 shares in 1997 and 3,567,185 shares in 1996          37,571           35,672
    Additional paid-in capital                                                              9,645,468        8,491,066
    Retained earnings (deficit)                                                             1,632,427          (34,808)
                                                                                         ------------------------------
                                                                                           11,315,466        8,491,930
    Treasury stock at cost, 552,160 shares in 1997 and 547,160 shares in 1996              (1,219,688)      (1,199,063)
                                                                                         ------------------------------
        Total stockholders' equity                                                         10,095,778        7,292,867
                                                                                         ------------------------------
                                                                                          $12,268,822      $10,566,109
                                                                                         ==============================
</TABLE>

          See accompanying notes to consolidated financial statements.





                                       21
<PAGE>   22
                        SPIRE CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                           ------------------------------------------------
                                                              1997              1996              1995
                                                           ------------------------------------------------
<S>                                                         <C>              <C>              <C>

NET SALES AND REVENUES
   Contract research, service and license revenues           $12,642,251      $11,447,000      $12,883,770
    Sales of manufacturing equipment                          10,372,190        5,941,319        4,568,426
                                                            -----------------------------------------------
        Total sales and revenues                              23,014,441       17,388,319       17,452,196
                                                            -----------------------------------------------

COSTS AND EXPENSES
    Cost of contract research, services and licenses           8,714,713        8,938,034        9,187,422
    Cost of manufacturing equipment                            6,587,331        4,311,774        3,837,536
    Selling, general and administrative expenses               5,937,018        4,746,235        4,438,578
                                                            -----------------------------------------------
        Total costs and expenses                              21,239,062       17,996,043       17,463,536
                                                            -----------------------------------------------

EARNINGS (LOSS) FROM OPERATIONS                                1,775,379         (607,724)         (11,340)
-------------------------------

Interest income (expense), net (Note 6)                           32,856            8,492          (19,539)
                                                            -----------------------------------------------

Earnings (loss) before income taxes                            1,808,235         (599,232)         (30,879)
 
Income tax expense (benefit) (Note 9)                            141,000               --          (32,010)
                                                            -----------------------------------------------

NET EARNINGS (LOSS)                                          $ 1,667,235      $  (599,232)     $     1,131
-------------------
                                                            ===============================================

EARNINGS (LOSS) PER SHARE OF COMMON STOCK - BASIC            $      0.54      $     (0.20)     $      0.00
-------------------------------------------------
                                                            ===============================================

EARNINGS (LOSS) PER SHARE OF COMMON STOCK - DILUTED          $      0.52      $     (0.20)     $      0.00
---------------------------------------------------
                                                            ===============================================

Weighted average number of common 
    shares outstanding - basic                                 3,086,326        3,028,850        3,084,067
                                                            ===============================================

Weighted average number of common and  common equivalent
    shares outstanding - diluted                               3,217,467        3,028,850        3,084,067
                                                            ===============================================
</TABLE>

          See accompanying notes to consolidated financial statements.





                                       22
<PAGE>   23



                        SPIRE CORPORATION AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>

                                                                                                                   
                                          COMMON STOCK          ADDITIONAL        TREASURY STOCK           RETAINED
                                     ------------------------    PAID-IN    ----------------------------   EARNINGS
                                        SHARES       AMOUNT      CAPITAL       SHARES         AMOUNT       (DEFICIT)        TOTAL
                                     -----------------------------------------------------------------------------------------------

<S>                                    <C>          <C>        <C>            <C>        <C>             <C>            <C>        
Balance, December 31, 1994             3,560,360    $35,604    $8,468,903     495,160    $(1,044,063)    $  563,293     $ 8,023,737
    Repurchase of treasury stock              --         --            --      42,000       (130,625)            --        (130,625)
    Net earnings                              --         --            --          --             --          1,131           1,131
                                     -----------------------------------------------------------------------------------------------

Balance, December 31, 1995             3,560,360     35,604     8,468,903     537,160     (1,174,688)       564,424       7,894,243
    Exercise of stock options              6,825         68        22,163          --             --             --          22,231
    Repurchase of treasury stock              --         --            --      10,000        (24,375)            --         (24,375)
    Net loss                                  --         --            --          --              --      (599,232)       (599,232)
                                     -----------------------------------------------------------------------------------------------

Balance, December 31, 1996             3,567,185     35,672     8,491,066     547,160     (1,199,063)       (34,808)      7,292,867
    Exercise of stock options            189,897      1,899       680,095          --             --             --         681,994
    Tax benefit of disqualifying
       dispositions of stock
       option  exercises                      --         --       474,307          --             --             --         474,307
    Repurchase of treasury stock              --         --            --       5,000        (20,625)            --         (20,625)
    Net earnings                              --         --            --          --             --      1,667,235       1,667,235
                                     -----------------------------------------------------------------------------------------------

Balance, December 31, 1997             3,757,082    $37,571    $9,645,468     552,160    $(1,219,688)    $1,632,427     $10,095,778
                                     ===============================================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.








                                       23
<PAGE>   24
                        SPIRE CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                             YEARS ENDED DECEMBER 31,
                                                                   ---------------------------------------------
                                                                       1997            1996            1995
                                                                   ---------------------------------------------
<S>                                                                 <C>             <C>             <C>                    

 Cash flows from operating activities:
   Net earnings (loss)                                              $ 1,667,235     $  (599,232)     $    1,131
    Adjustments to reconcile net earnings (loss) to net
      cash provided by operating activities:
        Depreciation and amortization                                 1,079,572       1,240,215       1,293,114
        Deferred income taxes                                          (300,000)             --              --
        Changes in assets and liabilities:
          Accounts receivable                                          (650,085)       (161,074)      1,083,552
          Inventories                                                    32,348         105,806        (237,987)
          Prepaid expenses and other current assets                    (214,137)         81,970          15,103
          Refundable income tax                                              --              --          27,230
          Accounts payable and accrued liabilities                     (125,106)       (396,250)       (394,717)
          Advances on contracts in progress                            (975,092)        629,706         526,046
                                                                   ---------------------------------------------
             Net cash provided by operating activities                  514,735         901,141       2,313,472
                                                                   ---------------------------------------------

Cash flows from investing activities:
    Additions to property and equipment                              (1,067,457)       (943,053)       (389,647)
    Increase in patent costs                                            (39,546)       (129,797)       (100,090)
    Increase in software production costs                               (34,229)             --              --
    Other assets                                                        215,551          24,823          67,823
                                                                   ---------------------------------------------
             Net cash used in investing activities                     (925,681)     (1,048,027)       (421,914)
                                                                   ---------------------------------------------

Cash flows from financing activities:
    Net payments on short-term debt                                          --         (10,401)       (750,000)
    Payments on long-term borrowing                                          --              --         (47,072)
    Tax benefit of disqualifying dispositions of stock
         option exercises                                               474,307              --              --
    Exercise of stock options                                           681,994          22,231              --
    Repurchase of common stock                                          (20,625)        (24,375)       (130,625)
                                                                   ---------------------------------------------
             Net cash provided by (used in) financing activities      1,135,676         (12,545)       (927,697)
                                                                   ---------------------------------------------

Net increase (decrease) in cash and cash equivalents                    724,730        (159,431)        963,861

Cash and cash equivalents, beginning of year                            970,997       1,130,428         166,567
                                                                   ---------------------------------------------
Cash and cash equivalents, end of year                              $ 1,695,727     $   970,997      $1,130,428
                                                                   =============================================
Supplemental disclosures of cash flow information:
 Cash paid during the year for:
            Interest expense                                        $     5,118     $     4,084     $    43,567
                                                                   =============================================
            Income taxes                                            $    51,595     $        --     $        -- 
                                                                   =============================================

  </TABLE>
          See accompanying notes to consolidated financial statements.



                                       24
<PAGE>   25
                        SPIRE CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


(1)  NATURE OF THE BUSINESS

     Spire develops, manufactures, and markets highly engineered photovoltaic
manufacturing equipment and optoelectronic products and provides biomedical
processing services. Spire designs and manufactures specialized equipment for
the production of terrestrial photovoltaic modules from solar cells. The Company
offers certain optoelectronic products and is continuing to develop additional
advanced optoelectronic products for telecommunications, biomedical and
electronics applications, including solar cells used to power satellites. In
addition, Spire's value-added service offerings to biomedical customers provide
surface treatments to enhance the performance of medical products.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a) Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Spire International Sales Corporation. All
significant intercompany balances and transactions have been eliminated in
consolidation.

     (b)  Revenue Recognition

     Revenue for equipment sales is recognized upon shipment. Revenue for
service contracts is recognized upon performance of the service. Revenue on
government research contracts is recorded as costs are incurred and includes a
pro-rated portion of the estimated profit.

     (c)  Inventories

     Inventories are stated at the lower of cost or market, cost being
determined by the average cost method, on a first-in, first-out (FIFO) basis.

     (d)  Property and Equipment

     Property and equipment is stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
respective assets, as follows:

          Machinery and equipment            7 years
          Furniture and fixtures             5 years
          Leasehold improvements             Lesser of 10 years or 
                                             remaining life of facility lease

     Maintenance and repairs are charged to expense as incurred. Major renewals
and betterments are added to property and equipment accounts at cost.

     (e)  Patent Costs

     Patent costs are capitalized and amortized over five years using the
straight-line method.




                                       25
<PAGE>   26
                        SPIRE CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 1997, 1996 AND 1995


     (f)  Computer Software Costs

     Capitalized computer software costs are amortized by the straight-line
method over the estimated economic life of the product. The amount of
amortization charged to expense was $15,000, $9,000 and $10,000 for 1997, 1996
and 1995, respectively. The recoverability of such costs is reviewed on an
ongoing basis.

    (g)  Income Taxes

     The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

     (h)  Research and Development Costs

     Research and development costs are charged to operations as incurred,
except where such costs are reimbursable under customer funded contracts. During
the years ended December 31, 1997, 1996 and 1995, unfunded research and
development costs were $133,000, $84,000 and $59,000, respectively.

     (i)  Earnings (Loss) Per Share

     Earnings per share are computed based on Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or contingent
stock arrangements). EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period.  Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would have and
antidilutive effect on earnings. 

     (j)  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.

    (k)  Financial Instruments

     Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable and accounts payable. The carrying amounts of these
financial instruments approximate their fair value.




                                       26
<PAGE>   27
                        SPIRE CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 1997, 1996 AND 1995

    (l)  Long-lived Assets

     The Company reviews its long-lived assets for impairment whenever events
or changes in circumtances indicate that the carrying amount of an asset may
not be recoverable.

    (m)  Stock-Based Compensation

     Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net earnings (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.

(3)  ACCOUNTS RECEIVABLE

     Unbilled costs on contracts in progress represent revenues recognized on
contracts for which billings have not been presented to customers as of each
balance sheet date. These amounts are billed and generally collected within one
year.

     Retainage represents revenues on certain United States Government sponsored
research and development contracts. These amounts, which usually represent 15%
of the Company's research fee on each applicable contract, are not collectible
until a final cost review has been performed by government auditors. Included in
retainage are amounts expected to be collected after one year which totaled
$70,000 and $130,000 at December 31, 1997 and 1996, respectively. All other
accounts receivable are expected to be collected within one year.

     All contracts with United States Government agencies have been audited and
settled through December 1995. To date, the Company has not incurred significant
losses as a result of government audits.

     On March 2, 1998 the Company received a letter from the Office of the
United States Attorney for the Eastern District of Virginia stating that it was
considering the commencement of a civil action concerning seven research
initiatives undertaken by the Company in the period from 1990 to the present.
The letter alleged that, in certain instances, the Company had failed to inform
the government of pending or previously submitted proposals for work the
government alleges was related to proposals which were funded. The Company is in
the process of reviewing the allegations, and gathering the information
necessary to respond. The Company is unable to determine at this time what
effect, if any, this matter will have on the Company's financial condition or
results of operations.

(4)   INVENTORIES
<TABLE>
<CAPTION>

     Inventories consist of the following:
                                                       December 31,
                                           ------------------------------------
                                                   1997            1996
                                           ------------------------------------

<S>                                              <C>            <C>        
       Raw materials                             $736,930       $  572,309
       Work in process                            251,650          448,619
                                           -----------------------------------
                                                 $988,580       $1,020,928
                                           ====================================
</TABLE>




                                       27
<PAGE>   28



                        SPIRE CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 1997, 1996 AND 1995

(5)   ACCRUED LIABILITIES

      Accrued liabilities include the following:
<TABLE>
<CAPTION>
                                                              December 31,
                                                   ------------------------------------
                                                         1997              1996
                                                   ------------------------------------

<S>                                                     <C>                <C>     
          Accrued payroll and payroll taxes             $294,248           $289,078
          Accrued other                                  564,845            365,154

                                                   ------------------------------------
                                                       $ 859,093          $ 654,232
                                                   ====================================

(6)   PROPERTY AND EQUIPMENT

      Property and equipment consists of the following:
                                                             December 31,
                                                  ------------------------------------
                                                        1997                 1996
                                                  ------------------------------------

          Machinery and equipment                    $19,413,429        $19,118,037
          Furniture and fixtures                       2,820,567          2,603,296
          Leasehold improvements                       1,541,582          1,193,782
          Construction in progress                       239,867              4,270
                                                  ------------------------------------
                                                     $24,015,445        $22,919,385
                                                  ====================================
</TABLE>

     Interest costs of $0, $11,000 and $39,000 were incurred of which $0, $2,000
and $1,000 were capitalized in 1997, 1996 and 1995, respectively. In connection
with the construction of equipment for internal use, the Company has capitalized
overhead costs of $157,000, $50,000 and $41,000 for the years ended December 31,
1997, 1996 and 1995, respectively.

(7)   LONG-TERM DEBT AND CREDIT ARRANGEMENTS

     On April 4, 1997, the Company amended and extended its revolving credit
agreement with Silicon Valley Bank. This agreement established a $2 million
revolving credit facility, with availability limited to 80% of eligible accounts
receivable. This line of credit has been established to provide the Company with
resources for general working capital purposes and standby letter of credit
guarantees for foreign customers. The line has been secured by all assets of the
Company. Interest on the line is at the bank's prime rate plus one-half of one
percent. The line contains restrictive covenants including provisions relating
to profitability and net worth. As of December 31, 1997, the Company had no
outstanding debt under this revolving credit line.

 (8)  STOCKHOLDERS' EQUITY

     The Company has two employee stock option plans: the 1985 Incentive Stock
Option Plan, and the 1996 Equity Incentive Plan. These plans provide that the
Board of Directors may grant options to purchase the Company's common stock to
key employees of the Company. Incentive options must be granted at the fair
market value of the common stock or, in the case of certain optionees, at 110%
of such fair market value at the time of grant. The exercise price of options is
determined by the Board of Directors. The options may be exercised, subject to
certain vesting requirements, for periods up to ten years from the date of
issue.





                                       28
<PAGE>   29
                        SPIRE CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 1997, 1996 AND 1995


     Through December 31, 1997, the Company has outstanding under its Directors
Stock Option Plan 23,000 non-qualified stock options and under its 1996 Equity
Incentive Plan 5,000 non-qualified stock options to the unaffiliated directors
of the Company for the purchase of common stock at an average price of $5.06 per
share. The options may be exercised, subject to certain vesting requirements,
for periods up to ten years from the date of issue. The Company may no longer
award options under any plans except the 1996 Equity Incentive Plan.

      A summary of the activity of these plans follows:
                                                                Weighted
                                                 Number of       Average
                                                   Shares      Option Price
                                                -----------------------------

   Outstanding, December 31, 1994                 321,750         $3.51
        Granted                                     1,325         $2.25
        Exercised                                      --            --
        Terminated                                (33,000)        $3.38
                                                -----------------------------
   Outstanding, December 31, 1995                 290,075         $3.51
        Granted                                    99,425         $2.63
        Exercised                                  (6,825)        $3.26
        Terminated                                (23,500)        $3.40
                                                -----------------------------
   Outstanding, December 31, 1996                 359,175         $3.28
        Granted                                    76,825         $5.36
        Exercised                                (189,897)        $3.57
        Terminated                                (26,222)        $3.24
                                                -----------------------------
   Outstanding, December 31, 1997                 219,881         $3.75
                                                =============================
   Options exercisable at December 31, 1997        89,094         $3.12
                                                =============================

     The following table summarizes information about stock options outstanding
at December 31, 1997:

                               Options Outstanding           Options Exercisable
                         --------------------------------   --------------------
                                       Weighted 
                                       Average   Weighted               Weighted
                                      Remaining   Average                Average
                            Number   Contractual Exercise      Number   Exercise
Range of Exercise Price  Outstanding     Life      Price    Exercisable   Price 
-----------------------  ----------- ----------- --------   ----------- --------

$0.00 TO $3.00 ........    100,306    7.7 YEARS    $2.63       47,594     $2.63
$3.01 TO $5.00 ........     94,575    6.3 YEARS    $4.17       41,500     $3.68
$5.01 TO $12.63 .......     25,000    9.5 YEARS    $6.63           --     $  --
                           -------                             ------          
                           219,881    7.3 YEARS    $3.75       89,094     $3.12
                           =======                             ======          

     There were 367,631 shares reserved for issuance under all plans at 
December 31, 1997. The per-share weighted-average fair value of stock options
granted in 1997, 1996 and 1995 was $4.24, $1.39 and $1.19, respectively, on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions:

              Expected         Risk-Free        Expected         Expected
   Year    Dividend Yield    Interest Rate    Option Life    Volatility Factor
-------------------------------------------------------------------------------

   1997          0%              5.50%           5 years           68.4%
   1996          0%              5.07%           5 years           54.7%
   1995          0%              5.05%           5 years           54.7%

     The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its options under SFAS No.
123, the Company's net earnings (loss) would have been reduced (increased) to
the pro forma amounts indicated below.



                                       29
<PAGE>   30



                        SPIRE CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
                                                                          1997         1996          1995
                                                                        ------------------------------------
<S>                                                                     <C>          <C>             <C>   

   Net earnings (loss) as reported                                      $1,667,235   $(599,232)    $  1,131
      Earnings (loss) per share of common stock - diluted, as reported        0.52       (0.20)        0.00
   Net earnings (loss) pro forma                                         1,592,349    (649,724)     (20,331)
      Earnings (loss) per share of common stock - diluted, pro forma          0.49       (0.21)       (0.01)
</TABLE>

     Pro forma net earnings (loss) reflect only options granted in 1997, 1996
and 1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings (loss)
amounts presented above because compensation cost is reflected over the options'
vesting period of five years and compensation cost for options granted prior to
January 1, 1995 is not considered.

(9)   INCOME TAXES

     Total federal and state income tax expense (benefit) for the years ended
December 31, 1997, 1996 and 1995, consists of the following:

                                1997            1996              1995
                           -----------------------------------------------
     Current:
          State              $  68,663        $     --          $(32,010)
          Federal              372,337              --                --
                           -----------------------------------------------
                               441,000              --           (32,010)
                           -----------------------------------------------
     Deferred:
          State                (46,710)             --                --
          Federal             (253,290)             --                --
                           -----------------------------------------------
                              (300,000)             --                --
                           -----------------------------------------------
                             $ 141,000        $     --          $(32,010)
                           ===============================================


     Actual income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 differs from the "expected" income tax expense (benefit) for the
year (computed by applying the U.S. federal corporate income tax rate of 34% to
earnings (loss) before income taxes) as follows:

<TABLE>
<CAPTION>
                                                     1997         1996        1995
                                                 ------------------------------------
<S>                                              <C>           <C>          <C>

Computed "expected" income tax expense (benefit) $  614,800    $(203,739)   $(10,499)
State tax, net of federal benefit                   119,453      (34,327)     (1,936)
Increase (decrease) in valuation allowance         (498,247)     298,686      55,354
Permanent differences                                32,953       15,289      10,470
Increase in tax credit carryforwards               (103,089)     (15,300)    (36,172)
Recovery of prior year estimate                          --      (62,912)         --
Other                                               (24,870)       2,303     (49,227)
                                                 ------------------------------------
                                                 $  141,000    $      --    $(32,010)
                                                 ====================================
</TABLE>

     The amount recorded as a deferred income tax asset as of December 31, 1997
represents the amount of tax benefits of existing deductible temporary
differences or carryforwards that are more likely than not to be realized
through the generation of sufficient future taxable income within the
carryforward period. At December 31, 1997, based on the Company's level of net
income and projected earnings, the Company reduced the valuation allowance by
$498,247. The Company continually re-evaluates the recoverability of deferred
tax assets.



                                       30
<PAGE>   31
                        SPIRE CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 1997, 1996 AND 1995


     The tax effects of temporary differences that give rise to significant
portions of net deferred tax assets at December 31, 1997 and 1996 are presented
below:

<TABLE>
<CAPTION>
                                                            1997          1996
                                                       -------------------------
                                                       <C>           <C>        
Deferred tax assets:
  Charitable contributions                             $    7,164    $    4,168
  Accounts receivable                                      16,108        40,270
  Accruals                                                118,385        96,278
  Inventories                                              56,439       112,784
  Federal net operating loss carryforwards                 96,648       281,651
  General business credit carryforwards                   752,998       752,998
  Alternative minimum tax credit carryforwards            342,030       340,416
  Foreign tax credit                                       48,475            --
  State net operating loss and investment tax credit       80,524        84,293
                                                       -------------------------
      Total gross deferred tax assets                   1,518,771     1,712,858
      Less: valuation allowance                          (444,033)     (942,280)
                                                       -------------------------
      Net deferred tax assets                           1,074,738       770,578
                                                       -------------------------
Deferred tax liabilities:
  Property and equipment                                 (745,740)     (725,815)
  Capitalized software                                    (20,904)       (9,436)
  Patents                                                  (5,544)      (15,080)
  Research agreements                                      (2,550)      (20,247)
                                                       -------------------------
      Total gross deferred tax liabilities               (774,738)     (770,578)
                                                       -------------------------
  Net deferred tax assets                              $  300,000    $        -
                                                       =========================
</TABLE>

     The valuation allowance for deferred tax assets as of December 31, 1997 was
$444,000. The net change in the total valuation allowance for the year ended
December 31, 1997 was a decrease of $498,000.

     At December 31, 1997, the Company has approximately $753,000 of general
business tax credits available to offset future taxable income which expire
through 2001. The Company also has approximately $342,000 of alternative minimum
tax credits to offset future taxable income. However, if changes in the
Company's stock ownership exceed 50% of the value of the Company's stock during
any three-year period, the utilization of credit carryforwards may be subject to
limitations.

(10)  COMMITMENTS

     The Company subleases its facilities from a company that leases the
building from a trust; the principal beneficiary of the trust is the principal
stockholder of the Company. The sublease originally was for a period of ten
years, after which the Company exercised its option to extend for an additional
five-year period expiring on November 30, 2000 with an option for an additional
five-year extension period. The agreement provides for minimum rental payments
plus annual increases linked with the Consumer Price Index. Total rent expense
under this lease was $889,000, $922,000 and $853,000 in 1997, 1996 and 1995,
respectively.

     The Company has also entered into other noncancelable operating leases.
Total rent expense charged to these noncancelable leases was $110,000, $90,000,
and $51,000 in 1997, 1996 and 1995, respectively.





                                       31
<PAGE>   32



                        SPIRE CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                        DECEMBER 31, 1997, 1996 AND 1995


      Future minimum lease payments under operating leases are as follows:

               1998                      $1,006,000
               1999                       1,002,000
               2000                         879,000
                                         ---------- 
                                         $2,887,000
                                         ==========
(11)  CASH OR DEFERRED PROFIT SHARING PLANS

     In 1985, the Company adopted a profit sharing plan under Section 401(k) of
the Internal Revenue Code. This plan allows employees to defer up to 17.5% of
their income up to certain dollar limits on a pretax basis through contributions
to the plan. The Company contributes its Common Stock in an amount equal to 40%
of the employee's contribution up to a maximum of 15% of the employee's cash
compensation. Expense recognized under the plan in 1997, 1996 and 1995 was
$199,000, $145,000 and $148,000, respectively.

(12)  SIGNIFICANT CUSTOMERS AND EXPORT REVENUES

     Revenues from contracts with United States Government agencies for the
years ended December 31, 1997, 1996 and 1995 were $7,972,000, $6,706,000 and
$8,232,000 or 35%, 39% and 48% of net sales and revenues, respectively.

     In 1997, 1996 and 1995, export revenues were $7,890,000, $3,330,000 and
$2,894,000, respectively, or 34%, 19% and 17% of net sales and revenues,
respectively.

(13)  EARNINGS (LOSS) PER SHARE

     The following table provides a reconciliation of the denominators of
diluted earnings (loss) per share computations for the years ended December 31:

<TABLE>
<CAPTION>
                                                          1997          1996           1995
                                                        ---------------------------------------

<S>                                                     <C>            <C>           <C>
Weighted average number of common shares outstanding     3,086,326     3,028,850     3,084,067
                                                                                               
Add net additional common shares upon exercise of 
  common stock options                                     131,141            --            --  
                                                        ---------------------------------------
Adjusted weighted average common shares outstanding      3,217,467     3,028,850     3,084,067
                                                        =======================================
</TABLE>

(14)  QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following is a summary of the consolidated quarterly results for the
years ended December 31, 1996 and 1997:

<TABLE>
<CAPTION>
                                                               1996
                                                        Three Months Ended
                                     -------------------------------------------------------
                                        March 31      June 30    September 30   December 31
                                     -------------------------------------------------------
<S>                                  <C>            <C>           <C>           <C>       

Net sales and revenues               $3,837,899     $4,489,053    $4,212,525    $4,848,842
Costs and expenses                    4,109,847      4,466,404     4,680,876     4,738,916
Earnings (loss) before income taxes    (266,441)        33,062      (471,757)      105,904
Income tax expense (benefit)                 --             --         6,773        (6,773)
Net earnings (loss)                    (266,441)        33,062      (478,530)      112,677
Net earnings (loss) per share             (0.09)          0.01         (0.16)         0.04

                                                               1997
                                                        Three Months Ended
                                     -------------------------------------------------------
                                        March 31      June 30    September 30   December 31
                                     -------------------------------------------------------

Net sales and revenues               $4,450,699     $6,432,848    $6,176,034    $5,954,860
Costs and expenses                    4,304,022      5,631,200     5,461,402     5,842,438
Earnings before income taxes            150,294        801,677       724,926       131,338
Income tax expense                           --        100,000            --        41,000
Net earnings                            150,294        701,677       724,926        90,338
Net earnings per share                     0.05           0.22          0.22          0.03
</TABLE>


                                       32
<PAGE>   33

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

      None.
                                    PART III
                                    --------

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

     Information concerning the directors and executive officers of the Company
is set forth under "Election of Directors" and "Executive Officers" in the Proxy
Statement for the Special Meeting in Lieu of 1998 Annual Meeting of Stockholders
("Proxy Statement") and is incorporated herein by reference. Information
concerning compliance with Section 16(a) of the Exchange Act during 1997 is set
forth under "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Proxy Statement and is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

     Information concerning executive compensation is set forth under "Executive
Compensation" in the Proxy Statement and is incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information concerning security ownership of certain beneficial owners and
management is set forth under "Ownership of Securities" in the Proxy Statement
and is incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information concerning certain relationships and related transactions is
set forth under "Other Transactions and Relationships" in the Proxy Statement
and is incorporated herein by reference.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (1)   EXHIBITS

     The following Exhibits are either filed herewith or are incorporated by
     reference as may be indicated.

          3(a) Articles of Organization as amended, incorporated by reference to
               Exhibit 3 (a) to the Company's Form 10-QSB for the quarter ended
               June 30, 1997.

          3(b) By-Laws, as amended, incorporated by reference to Exhibit 3 (b)
               to the Company's Form 10-K for the year ended December 31, 1989.

          10.1 Equipment Manufacturing License Agreement with Marubeni
               Corporation, incorporated by reference to Exhibit 10.1 to
               Registration Statement 333-41445, filed December 3, 1997.

          10.2 Distribution Agreement with Marubeni Corporation, incorporated by
               reference to Exhibit 10.2 to Registration Statement 333-41445,
               filed December 3, 1997.

          10   (a) Sublease Agreement for facility at Bedford, Massachusetts
               dated November 25, 1985, incorporated by reference to Exhibit 10
               (a) to the Company's Form 10-K for the year ended December 31,
               1985 ("1985 10-K").





                                       33
<PAGE>   34

          EMPLOYEE AND DIRECTOR BENEFIT PLANS

          10(f)Spire Corporation 1985 Incentive Stock Option Plan incorporated
               by reference to Exhibit 10 (d) to the Company's Form 10-K for the
               year ended December 31, 1984 ("1984 10-K").

          10(g)Spire Corporation Cash or Deferred Profit Sharing Plan,
               including Adoption Agreement, incorporated by reference to
               Exhibit 10 (e) to the 1984 10-K.

          10(h)Spire Corporation Directors' Stock Option Plan, incorporated by
               reference to Exhibit 10 (f) to the 1985 10-K.

          10(i)Spire Corporation 1996 Equity Incentive Plan, incorporated by
               reference to Exhibit 99 to Registration Statement 333-22223,
               filed February 21, 1997.

          11   Statement Regarding Computation of Per Share Earnings.

          22   Subsidiary of the Company, incorporated by reference to Exhibit
               22 to the Company's Form 10-K for the year ended December 31,
               1988.

          23.1 Accountants' Consent.

          27   Financial Data Schedule.


     (2)   REPORTS ON FORM 8-K

           The Company filed no Reports on Form 8-K during the last quarter of
1997.

                                     PART IV
                                     -------

                                      11-K

Supplemental Information Pursuant to Rule 15d-21 Regarding Annual Report of
Employee Benefit Plans for the fiscal year ended December 31, 1997.

             Spire Corporation Cash or Deferred Profit Sharing Plan


FINANCIAL STATEMENTS AND EXHIBITS


A.   FINANCIAL STATEMENTS

     1.   Audited Statements of Net Assets Available for Plan Benefits as of
          December 31, 1997 and 1996.

     2.   Audited Statements of Changes in Net Assets Available for Plan
          Benefits for each of the years in the three year period ended December
          31, 1997.

B.   EXHIBITS

     1.   Accountants' Consent.

     2.   Financial Data Schedule.






                                       34
<PAGE>   35







                       SPIRE CORPORATION CASH OR DEFERRED
                           PROFIT SHARING 401(k) PLAN

                              Financial Statements

                                December 31, 1997

                   (With Independent Auditor's Report Thereon)


<PAGE>   36



                       SPIRE CORPORATION CASH OR DEFERRED
                           PROFIT SHARING 401(k) PLAN









                          Index to Financial Statements


Independent Auditor's Report

Statements of Net Assets Available for Plan Benefits

Statements of Changes in Net Assets Available for Plan Benefits

Notes to the Financial Statements


<PAGE>   37






                 [Gerald P. Bonder & Company, P.C. Letterhead]








                          INDEPENDENT AUDITOR'S REPORT



The Participants and Administrator of
The Spire Corporation Cash or Deferred
Profit Sharing 401(k) Plan:


We have audited the accompanying statements of net assets available for plan
benefits of the Spire Corporation Cash or Deferred Profit Sharing 401(k) Plan as
of December 31, 1997 and 1996, and the related statements of changes in net
assets available for plan benefits for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits at December
31, 1997 and 1996, and the changes in net assets available for plan benefits for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.

                      /s/ Gerald P. Bonder & Company, P.C.

March, 1998


<PAGE>   38



SPIRE CORPORATION CASH OR DEFERRED
PROFIT SHARING 401(k) PLAN

STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS

DECEMBER 31,                                               1997         1996
-------------------------------------------------------------------------------



ASSETS:

Investments:
   At fair value:

      Common stock - Spire Corporation                 $3,282,873      504,776
      Mutual funds                                      3,804,892            -

   At contract value:

      Hartford Fixed Income Fund                          334,330      406,582

      Hartford Group Annuity Contracts                          -    2,861,592
                                                       ----------    ---------

         Total investments                              7,422,095    3,772,950

Contribution receivable - employer                              -        5,191
Participants' loan receivable                             153,005       85,992
Cash                                                       14,822       94,734
                                                       ----------    ---------
         NET ASSETS AVAILABLE FOR BENEFITS             $7,589,922    3,958,867
                                                       ==========    =========










SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS


<PAGE>   39


SPIRE CORPORATION CASH OR DEFERRED PROFIT SHARING 401(k) PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                    1997                                                         1996       1995

                                        Group       Fixed      Company                  Mutual
                             Loans     Annuity     Income       Stock      Other         Funds       Total       Total      Total
                            --------------------------------------------------------------------------------   ---------  ---------
<S>                         <C>      <C>          <C>         <C>         <C>          <C>        <C>          <C>        <C>    
Additions to Net Assets 
  attributed to:

Investment income:

Interest and dividends                              21,351                                            21,351      24,999     65,197
Interest-other                8,122                                            251           464       8,837       7,055      7,885
Realized gains                            5,022                                                        5,022       4,426    305,825
Net appreciation 
  (depreciation) in
  fair value of 
  investments as
  determined by quoted 
  market price                          453,989               3,170,741                  404,519   4,029,249     436,159     36,782

                              8,122     459,011     21,351    3,170,741        251       404,983   4,064,459     472,639    415,689

Contributions:
  Employer                                                       78,018     84,393                   162,411     137,929    150,852
  Employees                             356,642     13,377                   1,926       291,574     663,519     403,918    381,894

Total additions               8,122     815,653     34,728    3,248,759     86,570       696,557   4,890,389   1,014,486    948,435

Transfers                    62,556  (3,590,738)     2,580       99,147   (171,430)    3,597,885

Deductions from Net 
  Assets attributed to:

Benefits paid to 
  participants               (3,665)    (86,507)  (109,560)    (569,809)      (243)     (489,550) (1,259,334)   (310,109)  (271,357)

Insurance premiums paid 
  for participants                                                                                                (2,270)    (1,362)

Total deductions             (3,665)    (86,507)  (109,560)    (569,809)      (243)     (489,550) (1,259,334)   (312,379)  (272,719)


Net increase(decrease)       67,013  (2,861,592)   (72,252)   2,778,097    (85,103)    3,804,892   3,631,055     702,107    675,716

Net assets available for 
  plan benefits:

Beginning of year            85,992   2,861,592    406,582      504,776     99,925                 3,958,867   3,256,760  2,581,044
                            --------------------------------------------------------------------------------   ---------  ---------
End of year                 153,005                334,330    3,282,873     14,822     3,804,892   7,589,922   3,958,867  3,256,760
</TABLE>


SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS




<PAGE>   40



SPIRE CORPORATION CASH OR DEFERRED PROFIT SHARING 401(k) PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                            1996

                                                             Group          Fixed          Company
                                                 Loans      Annuity        Income           Stock         Other       Total
                                                -----------------------------------------------------------------------------
<S>                                             <C>        <C>            <C>              <C>           <C>        <C>      
Additions to Net Assets attributed to:

Investment income:

Interest and dividends                                                      22,230           2,769                     24,999
Interest-other                                   7,055                                                                  7,055
Realized gains                                                 4,426                                                    4,426
Net appreciation(depreciation) in
  fair value of investments as
  determined by quoted market price                          396,284                        39,875                    436,159

                                                 7,055       400,710        22,230          42,644                    472,639

Contributions:
  Employer                                                                                  38,004       99,925       137,929
  Employees                                      9,471       353,664        36,633           4,150                    403,918

Total additions                                 16,526       754,374        58,863          84,798       99,925     1,014,486

Transfers                                                     32,091       (24,344)        (7,747)

Deductions from Net Assets attributed to:

Benefits paid to participants                   (2,994)     (137,875)     (102,551)        (66,689)                  (310,109)

Insurance premiums paid for
  participants                                                                                           (2,270)       (2,270)

Total deductions                                (2,994)     (137,875)     (102,551)        (68,959)                  (312,379)

Net increase(decrease)                          13,532       648,590       (68,032)          8,092       99,925       702,107

Net assets available for plan benefits:

Beginning of year                               72,460     2,213,002       474,614         496,684                  3,256,760

End of year                                     85,992     2,861,592       406,582         504,776       99,925     3,958,867


<CAPTION>
                                                                            1995

                                                             Group          Fixed          Mutual       Company
                                                 Loans      Annuity        Income           Funds        Stock        Total
                                               ------------------------------------------------------------------------------
<S>                                            <C>         <C>             <C>          <C>             <C>         <C>      
Additions to Net Assets attributed to:                                                                   
                                                                                                         
Investment income:
                                                                             7,956                       57,241        65,197
Interest and dividends                           7,885                                                                  7,885
Interest-other                                                                             305,825                    305,825
Realized gains                                                                                                      
Net appreciation(depreciation) in                                                                                   
  fair value of investments as                                                                                      
  determined by quoted market price                           64,911                                    (28,129)       36,782
                                                                                                                    
                                                 7,885        64,911         7,956         363,066      (28,129)      415,689
                                                                                                                    
Contributions:                                                                                                      
  Employer                                                                                              150,852       150,852
  Employees                                    (44,875)      114,708        12,805         294,830        4,426       381,894
                                                                                                                    
Total additions                                (36,990)      179,619        20,761         657,896      127,149       948,435
                                                                                                                    
Transfers                                                  2,033,383       529,389      (2,555,022)      (7,750)    
                                                                                                                    
Deductions from Net Assets attributed to:                                                                           
                                                                                                                    
Benefits paid to participants                                              (75,536)       (154,131)     (41,690)     (271,357)
                                                                                                                    
Insurance premiums paid for                                                                                         
  participants                                                                                           (1,362)       (1,362)
                                                                                                                    
Total deductions                                                           (75,536)       (154,131)     (43,052)     (272,719)
                                                                                                                    
                                                                                                                    
Net increase(decrease)                         (36,990)    2,213,002       474,614      (2,581,044)      76,347       675,716
                                                                                                                    
Net assets available for plan benefits:                                                                             
                                                                                                                    
Beginning of year                              109,450                                   2,051,257      420,337     2,581,044
                                                                                                                    
End of year                                     72,460     2,213,002       474,614                      496,684     3,256,760
</TABLE>



SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS




<PAGE>   41


SPIRE CORPORATION CASH OR DEFERRED
PROFIT SHARING 401(k) PLAN

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------


(1)   DESCRIPTION OF PLAN

      The following description of the Spire Corporation (Company) Cash or
      Deferred Profit Sharing 401(k) Plan (Plan) provides only general
      information. Participants should refer to the Plan agreement for a more
      complete description of the Plan's provisions.

      (a)     GENERAL

              The Plan is a salary reduction (401(k)) plan covering all
              full-time employees of the Company who have three months of
              service and are age twenty-one or older. It is subject to the
              provisions of the Employee Retirement Income Security Act of 1974
              (ERISA).

      (b)     CONTRIBUTIONS

              1.    EMPLOYER CONTRIBUTION

                    The Company will contribute to the Plan an amount equal to
                    40% of an employee's contributions up to a maximum of 6% of
                    an employee's cash compensation. The Company's contribution
                    will always be used to purchase/acquire Company common stock
                    on the open market.

              2.    EMPLOYEE CONTRIBUTION

                    Employees electing to participate in the Plan may defer
                    receipt of up to 17.5% of their compensation subject to the
                    limitation imposed by the Internal Revenue Code in any one
                    calendar year, by directing the Company to invest the
                    deferred amount in various investment vehicles. The
                    investment choices are the Company's common stock, several
                    mutual funds and a fixed income fund offered by Hartford
                    Life Insurance Company.

      (c)     PARTICIPANTS' ACCOUNTS

              Each participant's account is credited with the participant's
              contribution and the Company's match contribution, plus an
              allocation of (a) plan earnings, and (b) forfeitures of terminated
              participants' nonvested accounts. The benefit to which a
              participant is entitled is the benefit that can be provided from
              the participant's account.

      (d)     VESTING

              Participants are immediately vested in their voluntary
              contributions plus actual earnings thereon. Vesting in other
              amounts is based on years of continuous service. A participant is
              100 percent vested after six years of credited service.


<PAGE>   42




SPIRE CORPORATION CASH OR DEFERRED                                             2
PROFIT SHARING 401(k) PLAN

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      (e)     EMPLOYEE LOANS

              Participants may borrow from their fund accounts a loan up to a
              maximum equal to the lesser of $50,000 or 50% of their vested
              account balance. Loan transactions are treated as a transfer from
              the investment fund to the Participant Loan fund. Loan terms range
              from 1-5 years or up to 25 years for the purchase of a primary
              residence. The loans are secured by the balance in the
              participant's account and bear interest at a rate commensurate
              with local prevailing rates as determined by the Plan
              administrator. Interest rates range from 8% to 11%. Principal and
              interest is paid ratably through payroll deductions.

      (f)     PAYMENTS OF BENEFITS

              On termination of service, a participant may elect to receive
              either a lump-sum amount equal to the value of his or her account,
              or annual installments over a period no longer than ten years.

              In addition, a participant is eligible to receive distributions
              under financial hardship rules for medical, housing and education
              needs.

(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      (a)     USE OF ESTIMATES

              The preparation of financial statements in conformity with
              generally accepted accounting principles requires the plan
              administrator to make estimates and assumptions that affect
              certain reported amounts and disclosures. Accordingly, actual
              results could differ from those estimates.

      (b)     CONCENTRATION OF CREDIT RISK

              Financial instruments which subject the Plan to concentration of
              credit risk principally of guaranteed investment contracts. The
              Plan restricts investment of guaranteed investment contracts to
              financial institutions with high credit standing.

(3)   INVESTMENTS AND ADMINISTRATION OF PLAN ASSETS

      During 1997, the plan trustees entered into an agreement with Benefit
      Concepts Inc. to provide investment options and record keeping for the
      participants of the plan. Prior to July 1, 1997 the plan custodian was
      Hartford Life Insurance Company. Under the terms of the agreement, certain
      assets of the plan are held in a Deposit Administration Account for the
      benefit of the participants. The Deposit Administration Account consists
      of:

      (a)     The Fixed Income Fund, which includes amounts allocated to
              Hartford's General Investment Account. These amounts are
              guaranteed as to principal and minimum interest earnings. The
              interest rate guaranteed for the year ended December 31, 1997 was
              4.75%.


<PAGE>   43




SPIRE CORPORATION CASH OR DEFERRED                                             3
PROFIT SHARING 401(k) PLAN

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


(3)   INVESTMENTS AND ADMINISTRATION OF PLAN ASSETS (CONTINUED)

      (b)     The Direct Participation Account, which consists of amounts
              allocated to Separate Investment Accounts. The Separate Investment
              Accounts include investments in international and domestic equity
              growth funds, balanced funds, income funds and money market funds.
              The amounts invested in the Direct Participation Account are not
              guaranteed as to principal or minimum interest earnings.

      The common shares of the Company and the mutual fund shares are valued at
      fair value on December 31 of each year. Fair value is determined by using
      quoted market values. The fixed income fund and group annuity contracts
      are stated at contract value, which approximates fair value, as reported
      to the plan by Hartford. During the years ended December 31, the Plan's
      investments appreciated (depreciated) in value by $4,029,249 in 1997 and
      $436,159 in 1996 and $36,782 in 1995.

(4)   INCOME TAXES

      The Plan qualifies for certain tax benefits under Section 401(a) and
      401(k) of the Internal Revenue code. The Federal tax consequences to
      employees participating in the Plan, and to the Company, under present tax
      laws are as follows:

      Salary reductions designated by employees to be contributed to the Plan
      from their compensation are not includable in employees' taxable income
      and are not subject to Federal tax withholding at the time such
      contributions are made.

      Additionally, interest, dividends and other earnings on such contributions
      are not subject to tax when earned. Employees will be taxed on such
      contributions and earnings at the time such amounts are returned as
      withdrawals or distributions.

(5)   PLAN TERMINATION

      Although it has not expressed any intent to do so, the Company has the
      right under the Plan to discontinue its contribution at any time and to
      terminate the Plan subject to the provisions of ERISA. In the event of
      plan termination, participants will become 100 percent vested in their
      accounts.

(6)   EXPENSES NOT INCLUDED IN THE FINANCIAL STATEMENTS

      The Company pays all professional fees and other expenses related to the
      Profit Sharing 401(k) Plan.





<PAGE>   44

                                   SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                      SPIRE CORPORATION
                      (Registrant)


                      By:   /S/ROGER G. LITTLE                    March 31, 1998
                          -------------------------------------
                            Roger G. Little
                            President, Chief Executive Officer
                            and Chairman of the Board



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


      SIGNATURE                            TITLE                     DATE


/S/ROGER G. LITTLE                President ,Chief Executive    March 31, 1998
----------------------------      Officer and Chairman 
Roger G. Little                   of the Board
                                  


/S/Richard S. Gregorio            Vice President and Chief      March 31, 1998
----------------------------      Financial Officer,
Richard S. Gregorio               Treasurer, Clerk,
Principal Accounting Officer      


/S/Michael T. Eckhart             Director                      March 31, 1998
----------------------------
Michael T. Eckhart


/S/A. John Gale                   Director                      March 31, 1998
----------------------------
A. John Gale


/S/Udo Henseler                   Director                      March 31, 1998
----------------------------
Udo Henseler


/S/Roger W. Redmond               Director                      March 31, 1998
----------------------------
Roger W. Redmond


/S/John A. Tarello                Director                      March 31, 1998
---------------------------- 
John A. Tarello



<PAGE>   45




                                  EXHIBIT INDEX



                                                                          PAGE
EXHIBIT                        DESCRIPTION                                NUMBER
-------                        -----------                                ------

  11    Statement Regarding Computation of Per Share Earnings (Loss).      38

 23.1   Accountants' Consent.                                              39

  27    Financial Data Schedule.                                           40