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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934
                   For the fiscal year ended December 31, 1999
                         Commission file number 1-12337

                                 QC OPTICS, INC.
                 (Name of Small Business Issuer in Its Charter)

             DELAWARE
---------------------------------                                04-2916548
(State or Other Jurisdiction                                -------------------
 of Incorporation or Organization)                           (I.R.S. Employer
                                                            Identification No.)

46 Jonspin Road, Wilmington, Massachusetts                             01887
------------------------------------------                          ----------
(Address of Principal Executive Offices)                            (Zip Code)

                                 (978) 657-7007
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                                            Name of Exchange on
        Title of each class                                   Which Registered
        -------------------                                 -------------------
        Common Stock, $.01 par value per share          American Stock Exchange
        Redeemable Warrants                             American Stock Exchange

       Securities registered under Section 12(g) of the Exchange Act: None

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

         The issuer's net sales for the fiscal year ended December 31, 1999 were
$5,350,247.

         The aggregate  market value of the voting stock held by  non-affiliates
based upon the closing price for such stock on March 10, 2000 was  approximately
$8,536,674.  As of March 10, 2000,  2,977,058  shares of Common Stock,  $.01 par
value per share,  and 1,092,500  Redeemable  Warrants,  of the  registrant  were
issued and outstanding.

                       Documents Incorporated By Reference

         Portions of the  Definitive  Proxy  Statement for the Annual Meeting of
Stockholders  for the fiscal year ended  December 31, 1999, to be filed pursuant
to Regulation 14A (the "Proxy Statement"), are incorporated by reference in Part
III of this Form 10-KSB.

         Transitional Small Business Disclosure Format (check one):

                           Yes                    No  X
                              -----                 -----
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

         This report contains  forward-looking  statements regarding anticipated
increases in revenues,  marketing of products and proposed products,  liquidity,
downturns in the computer  hard disk  industry,  product  performance,  patents,
patent applications, competition, adequacy of the Company's facilities and other
matters.  These  statements,  in addition to statements made in conjunction with
the words "anticipate,"  "expect,"  "intend,"  "believe," "seek," "estimate" and
similar   expressions   are   forward-looking   statements  that  are  based  on
management's  current  expectations  and are  subject to a number of factors and
uncertainties  that could cause actual results to differ  materially  from those
described  in the  forward-looking  statements.  Such  risks  and  uncertainties
include, but are not limited to the following: business conditions and growth in
certain market segments and the general economy;  fluctuating operating results;
new product  development;  the cyclical nature of the semiconductor and computer
hard disk industries; an increase in competition;  increased or continued market
acceptance  of the  Company's  products and proposed  products;  the loss of the
services of one or more of the Company's key  employees;  the  uncertainty  that
existing patents will be valid, if challenged,  and that any additional  patents
will be  issued  or  that  the  scope  of any  patent  protection  will  exclude
competitors; dependence on few customers; the availability of additional capital
to  fund  expansion  on  acceptable  terms,  if at  all;  and  other  risks  and
uncertainties indicated from time to time in the our filings with the Securities
and Exchange Commission. See also "Factors That May Affect Future Results."

         GENERAL

         We design,  manufacture and market laser-based defect detection systems
primarily  for the  semiconductor  and computer  hard disk  markets.  We use our
patented and other  proprietary  technology  in lasers and optical  systems that
scan a computer hard disk or photomask for defects or contamination. Our systems
combine  automatic  handling,  clean room  capability and computer  control with
reliable laser based  technology.  We believe that these  features  enable us to
maintain  a strong  presence  in the  United  States  in the  semiconductor  and
computer  hard  disk  inspection   industries  where  high  quality   inspection
capabilities  are required.  Our customers  include many of the world's  largest
leading semiconductor and computer hard disk manufacturers.  Currently,  we have
over 350 systems installed in 17 countries.

         Our systems, such as the QCO-4000(TM) and DISKAN-9000(TM), are designed
to fit into our customers'  production  line virtually  eliminating the need for
special  handling  or  special  production   procedures  while  performing  100%
inspection  throughout  the process.  In addition,  these systems sort out fatal
defects on disks and  pelliclized  photomasks  before  they cause  manufacturing
yield or other quality  problems.  As more  manufacturers of computer hard disks
move toward total inspection  protocols versus statistical  sampling,  potential
demand for our products that inspect computer hard disks increases.  We are also
working on  research  and  development  for a new higher  sensitivity  photomask
inspection system, which we expect to release as a product during 2000.

         QC  Optics,  Inc.  (the  "Company")  was  formed in 1986 as a  Delaware
corporation  to acquire  the assets of a division of GCA  Corporation.  In early
1996, management of the Company exercised an option granted in 1995 to acquire a
62.2%  equity  interest  through a  management  buyout with bank  supplied  debt
financing personally  guaranteed by the Company's senior management.  In October
1996,  the Company  completed its initial  public  offering  through the sale of
Common Stock and Redeemable  Warrants and received net proceeds of approximately
$5,000,000.

                                      -2-
<PAGE>

         Our  principal  offices  and  manufacturing  facilities  are  based  in
Wilmington,  Massachusetts. We also maintain regional sales or service personnel
in Florida and California. We currently have approximately 42 employees and have
manufacturer representatives in Europe and Asia and distributors in Asia.

MARKETS

         We currently serve  primarily two markets with our inspection  systems:
semiconductors  and computer  hard disks.  In  addition,  we plan to continue to
develop  additional  products,  based on our existing  patented and  proprietary
technologies, to further develop laser-based inspection systems.

         Our core technology inspects by illuminating critical surfaces and then
examining and analyzing light  reflected from the surface.  This analysis allows
the end user to analyze and determine the type of defect on the surface.  Lasers
are used to provide the stable,  high-intensity  light  source  needed for these
inspection  processes.  Certain  ultraviolet  light  lasers  are used to  detect
smaller defects. The angular distribution and the intensity of the reflected and
scattered  light from the  surface  provide a  "fingerprint"  of the surface and
defects. This information passes through analog and digital signal processes and
is then analyzed using our proprietary software.

SEMICONDUCTOR PHOTOMASK INSPECTION SYSTEMS

         In the  manufacture  of  semiconductors,  photomasks  are used to image
integrated  circuit  patterns onto silicon wafers.  Semiconductor  manufacturing
begins with the creation of a photomask,  in which the circuit design is written
onto the photomask, one layer at a time. A wafer stepper uses the photomask like
a  photographic  negative  to rapidly  make  numerous  repetitive  images of the
circuit pattern on the wafer. The stepper  transfers light through the photomask
onto  photoresist  that is spread over the surface of the wafer.  Those areas of
the  photoresist  that have been  exposed  to light are  dissolved  by  chemical
developers, and the exposed areas of the layer under the resist are then etched.
A different  photomask  is required  for each layer of the  integrated  circuit.
Successive  steps of  deposition,  lithography  and etch  build  the  layers  of
patterns that make up a single integrated circuit.

         In the  1990's,  a number of  advancements  in  photomask  design  have
allowed  manufacturers  to  manufacture  integrated  circuits with  increasingly
smaller  linewidths.  These  linewidths are now as low as 0.18  micrometers  and
less.  In the late  1980's  and early  1990's,  the  development  of a number of
technologies  allowed  photomasks to be used much more efficiently.  During this
period,  the  demand  for  photomask  inspection  equipment  was  less  than the
increased demand for  semiconductors  as more advanced  photomask  technologies,
such as  computer-automated  design  equipment  and  pellicles,  were  utilized.
Pellicles are a thin transparent  membrane  suspended over the photomask surface
on a frame  mounted  to the  photomask.  The  pellicle  increases  semiconductor
manufacturing  yields by  preventing  airborne  particles  from falling onto the
surface of the  photomask  and  printing  as defects on the wafer.  Since  their
introduction in the early 1980's,  pellicles have significantly reduced the need
to clean photomasks during production,  thus substantially extending the life of
a photomask.  Accordingly,  the introduction of pellicles  significantly reduced
the  number  of  photomasks  required  in  high  volume   semiconductor   device
manufacturing.

         We believe that the increased complexity in semiconductor  devices will
contribute   to  high  demand  for   complex   photomasks   and  for   increased
sophistication in photomask inspection equipment.  As semiconductors become more
and more  complex,  the  potential  for  defects in  photomasks  has  increased.
Similarly,  demand  for  inspection  of  photomasks  has  increased  to  improve
manufacturing  yields by identifying  defects or contaminations in photomasks as
early as possible.  Quickly attaining and then maintaining high yields is one of


                                      -3-
<PAGE>

the most important determinants of profitability in the semiconductor  industry.
We believe  that our  customers  typically  experience  rapid  paybacks on their
investments in our inspection systems.  Semiconductor factories are increasingly
expensive to build and equip.  Yield  management and monitoring  systems,  which
typically represent a small percentage of the total investment required to build
and equip a fabrication  facility,  enable integrated  circuit  manufacturers to
leverage these expensive facilities and improve their returns on investment.  In
addition to utilizing state-of-the-art inspection systems on a statistical basis
to improve manufacturing yields, semiconductor manufacturers increasingly demand
the ability to inspect  photomasks during the  manufacturing  process to provide
real time  inspection  capability.  In-process  inspection  is a critical  yield
enhancement and cost reduction  technique  because it allows defect detection in
real-time rather than waiting until after final test results become available to
discover problems that have a significant negative impact on yield.

         The overall  semiconductor  industry has been and could  continue to be
cyclical with periods of oversupply.  Our ability to reduce expenses in response
to any such  downturn  is  limited  by our  needs  for  continued  research  and
development and for customer service and support.  Previous downturns in capital
investment by the semiconductor  fabrication  industry have materially  affected
our  operating  results  and  other  businesses  in  the  semiconductor  capital
equipment industry and future downturns may have similar adverse effects. Demand
for laser inspection  equipment typically lags demand for production  equipment.
We anticipate increased demand for our semiconductor products in the second half
of 2000.

COMPUTER HARD DISK INSPECTION

         Computer hard disk manufacturers use advanced  deposition  processes to
produce thin film disks.  Typically,  an aluminum substrate is nickel plated and
then  precision  polished  to provide  the  extremely  smooth  and flat  surface
required for the recording head to "fly" over the disk in the disk drive.  Other
substrates,  such as glass, are gaining market share, and the DISKAN(TM) product
series is generally compatible with these alternative  substrate materials.  The
substrate  is then  commonly  textured  (portions  of the disk are  modified  to
slightly roughen the surface, to prevent the recording head from sticking to the
surface of the disk). Thin films of magnetic material and a protective  overcoat
are then deposited onto the surface of the disk. Prior to shipment the disks are
checked for quality,  most commonly by visual and electronic tests. Our computer
hard disk inspection systems have been utilized for over 15 years for inspecting
disks throughout the manufacturing  process to identify  conditions  outside set
control ranges by inspecting a small sample of the total production  volume. Any
defect or contaminant on the disk increases the risk that information  cannot be
properly stored. As storage  densities have increased,  the size of defects that
affect data storage has  decreased,  and computer hard disk  manufacturers  have
begun to find it cost  effective  to move  from  inspecting  a  sample  of their
production volume to inspecting close to 100% of their products. This transition
to 100%  inspection  increases  the  potential  market  for  computer  hard disk
inspection  equipment.  Over 80 of our  installed  systems  are  used  for  100%
inspection.

         The  overall  computer  hard  disk  drive  industry  has been and could
continue  to be  cyclical  with  periods of  oversupply.  Our  ability to reduce
expenses  in response  to this  downturn  is limited by our needs for  continued
research  and  development  and  for  customer  service  and  support.  Previous
downturns  in  capital  investment  by the  computer  hard  disk  industry  have
materially  affected our operating  results and other businesses in the computer
hard disk industry and future downturns may have similar adverse effects.

         The computer  hard disk  industry is  currently  in a severe  downturn,
which  has lead to  large  reductions  in  capital  expenditures.  Technological
advances in data storage  density  have reduced the average  number of disks per
drive,  and unit volume  increases  in disk drives have not kept pace with these
disks per drive reductions. As a result, the unit volume of disks has decreased.

                                      -4-
<PAGE>

An over capacity of disk production  factories has led to a precipitous  decline
in capital equipment expenditures in the industry. As industry consolidation and
increased  demand for disk drives bring supply and demand into balance,  capital
expenditures  will resume.  We believe that in the  long-term  the computer hard
disk industry will grow.  New  applications,  such as storage for personal video
recorders ("PVR") ought to increase demand for disk storage.

STRATEGY

         Our goal is to  maintain a  leadership  position in the  photomask  and
computer  hard  disk  inspection   system  markets  and  use  our  patented  and
proprietary  technology  to  pursue  other  opportunities  in  high  performance
inspection systems. We intend to achieve this goal through the implementation of
the following strategies:

     *         EXPAND MARKETING EFFORTS FOR EXISTING PRODUCTS.  We have extended
               our sales,  service and marketing  activities in Europe and Asia,
               where   we   believe   long-term   market   demand   exists   for
               state-of-the-art  inspection  systems in photomasks  and computer
               hard  disks.  In the  computer  hard  disk  market,  we intend to
               continue to market our computer hard disk inspection  systems for
               100%  production  line  inspection  versus  statistical  sampling
               inspection,  and to penetrate additional inspection points in the
               manufacturing process.

     *         MAINTAIN TECHNOLOGY  LEADERSHIP POSITION.  To maintain technology
               leadership,   we  intend  to  continue  to  make  investments  in
               engineering   programs   and  to  work  closely  with  our  major
               customers,   several   of  which   are   leading   suppliers   of
               semiconductors and computer hard disks.

     *         BROADEN  PRODUCT  OFFERINGS  THROUGH  ACQUISITIONS.  Although  no
               assurance can be given that we will complete any acquisition,  we
               plan to expand our  activities  in related  markets.  There are a
               number of smaller  companies that have technology,  manufacturing
               and market links with our existing businesses.

     *         PROVIDE BROAD RANGE OF PHOTOMASK INSPECTION SOLUTIONS. We provide
               a broad range of technical  solutions,  leveraged off of existing
               technologies, with different performance characteristics. Certain
               of  our  inspection   systems   currently  address  less  complex
               photomask  designs while new products,  such as the QCO-4000(TM),
               are  designed  to  address  the  most  sophisticated   photomasks
               currently  used.  We  are  currently   working  on  research  and
               development  for a new higher  sensitivity  photomask  inspection
               system, which we expect to release as a new product during 2000.

     *         PROVIDE BROAD RANGE OF COMPUTER HARD DISK  INSPECTION  SOLUTIONS.
               Our  strategy is to expand and improve our product  offerings  by
               strengthening our current technologies to provide 100% inspection
               tools such as the  DISKAN-9000(TM)  as well as  failure  analysis
               tools,  such  as the  DISKAN-FA-ST(TM)  introduced  in the  third
               quarter of 1999.

     *         LEVERAGE  INSTALLED  BASE.  In marketing new products to existing
               customers,  we intend to leverage our existing  customer  base to
               upgrade the over 350 of our systems  currently  in the field with
               new  product  offerings.  Many of our  products  are  built  with
               modular   systems   that  are  designed  to   facilitate   future
               enhancements, as well as new system software.


                                      -5-
<PAGE>

     *         EXPAND  CUSTOMER  SUPPORT  SERVICES.  We currently  provide local
               support and service  with  personnel  located in  California  and
               Florida in addition to our principal  engineering services at our
               Wilmington,  Massachusetts  headquarters.  We also  have  factory
               trained service  representatives in the UK, France, Japan, Korea,
               Taiwan,  Malaysia and Thailand. We intend to expand the number of
               customer  support sites in both the United States and overseas to
               help facilitate  customer support as well as support future sales
               opportunities.

PRODUCTS AND SERVICES

         Our  current  products  consist of  photomask  and  computer  hard disk
inspection systems.  Our systems are designed to provide a low cost of ownership
through high  performance,  reliability and integration  into the  manufacturing
process.  We utilize a number of  different  forms of lasers in our laser- based
inspection systems, allowing us to cover a broad range of technical requirements
and cost sensitivities for our customers.

         Many of our  newer  systems  are  designed  to fit into our  customer's
production  lines,  virtually  eliminating  the need  for  special  handling  or
production  procedures while performing 100% inspection  throughout the process.
Our systems sort out fatal defects on disks and  pelliclized  photomasks  before
they become  manufacturing  yield or other quality problems.  All of our systems
have the sensitivity to detect defects or  contamination  down to less than 0.25
micrometers.  The DISKAN-9000(TM) provides computer hard disk manufacturers with
the  capability  to inspect  100% of their  production  volume.  Compared to our
previous equipment, the DISKAN-9000(TM) provides more than 70% higher throughput
and  a 30%  reduction  in  footprint.  We  are  also  working  on  research  and
development for a new higher sensitivity  photomask  inspection system, which we
expect to release as a new product during 2000.

         The following is a list of some of our products:

         QCO-4000(TM):   The  QCO-4000(TM)  represents  what  we  believe  is  a
state-of-the-art  system  for  inspecting  pelliclized  photomasks.  Defects  on
complex,   small  featured   photomasks  are   non-destructively   detected  and
characterized  with a  sensitivity  down to 0.25  micrometers,  using the latest
technologies  in  ultraviolet  argon  ion laser  optics  and  innovative  signal
processing. The QCO-4000(TM) is capable of inspecting all four critical surfaces
of the photomask,  which are the front and back pellicles and the front and back
of the  photomask.  The  QCO-4000(TM)  also  provides for  inspection  both on a
sampling  basis  as  well as 100%  inspection.  This  allows  the  system  to be
extremely  versatile  for needs  ranging from  incoming  inspection  to complete
process  characterization and documentation.  Utilizing advanced systems control
technology,  the operator has complete  control over all system  operations  and
decisions. Computers incorporated in the product and several communication ports
allow the QCO-4000(TM) to be easily integrated into the  manufacturing  process,
manufacturing resource planning ("MRP") and similar systems.

         API-3000/5(TM):  This automatic pelliclized photomask inspection system
has a  sensitivity  of  0.5  micrometers  and is  compatible  with  many  of the
photomasks most commonly used in today's semiconductor  manufacturing processes.
This product is used by  semiconductor  manufacturers  to qualify the  photomask
just  prior  to  its  use on  lithography  equipment  as  well  as for  incoming
inspection.  Photomask  manufacturers utilize the system for final inspection as
well as process control.

         API-1100(TM):  This equipment is a photomask  blank  inspection  system
with full automatic  handling capable of detecting  pinholes and particulates as
small as 0.3 micrometers.  This product is utilized by photomask blank substrate
manufacturers  for final  inspection and transfers the finished product directly
into a shipping cassette from a process cassette. Quartz and glass manufacturers
also use this equipment for final inspection.

                                      -6-
<PAGE>

         DISKAN(TM) SERIES: These are computer hard disk inspection systems that
are equipped with integrated  automatic  handling or external  handling systems.
DISKAN-9000(TM)  is  configured  to provide  the  customer  with the  ability to
inspect  100% of  their  production  and has 70%  higher  throughput  with a 30%
smaller  footprint  than  our  previous  systems.  In  addition,  we  offer  the
DISKAN-FA-1(TM),  which  incorporates  multiple  cassette-to-cassette  automatic
handling, and is used to inspect a sample of the customer's total production for
process  control.  The  DISKAN-FA-2(TM),  where  disks are loaded  from a single
cassette into the system, is used for failure analysis,  process development and
process  control.  The  DISKAN-FA-ST(TM),  is used for failure  analysis  and is
optimized for glass substrates.


PRODUCTS UNDER DEVELOPMENT

         Our product development strategy is to make continuous  improvements to
our existing  product  line by relying on our  proprietary  technologies  and to
expand  prior  development  efforts in  applications  related to the  markets we
serve.  We currently have an  engineering  and product  development  staff of 15
individuals  who assist our  customers  in  integrating  our  products  into the
customer's  work  environment.  This work  provides  us an  opportunity  to keep
abreast of new market opportunities for our technologies.

         Currently  we are  working  on  product  enhancements  to both  our QCO
photomask and DISKAN(TM)  product  lines.  During 1999, we introduced a new disk
failure  analysis  tool,  the  DISKAN-FA-ST(TM),  with  capabilities  to inspect
computer  hard disks  that  target new  inspection  points in the  manufacturing
process.  If the new inspection  points prove to be  economically  justified for
100%  inspection,  it  would  further  increase  the  market  potential  for the
DISKAN(TM)  product series.  This system provides even higher  sensitivities  in
measurements  and is optimized  for glass  substrates.  We expect that these new
systems will  significantly  improve the cost effectiveness of the equipment for
100%  inspection  of the  customers'  production.  We plan to  introduce  a next
generation  photomask  inspection  tool in 2000,  with improved  sensitivity  to
support future generation (0.15 micrometer and below design rule) photomasks. In
addition, we are developing photomask handling systems,  which will be sold to a
leading factory automation company on an OEM basis.

         Our success in developing and selling new and enhanced products depends
upon a variety of factors,  including  accurate  prediction  of future  customer
requirements,   introduction   of  new  products  on  schedule,   cost-effective
manufacturing  and product  performance in the field. Our new product  decisions
and development  commitments must anticipate the equipment needed to satisfy the
requirements for inspection processes one or more years in advance of sales. Any
failure  to  accurately  predict  customer   requirements  and  to  develop  new
generations  of  products  to meet those  requirements  would  have a  sustained
material  adverse  effect on our  business,  financial  condition and results of
operations.  New product  transitions  could adversely  affect sales of existing
systems, and product introductions could contribute to quarterly fluctuations in
operating  results as orders for new  products  commence and orders for existing
products or enhancements of existing products fluctuate.

CUSTOMER SERVICE AND SUPPORT

         In addition to selling and installing  standard  products and providing
support services, we provide  individualized  engineering services for customers
as well as technical support  worldwide.  Our service and support personnel also
advise  customers  about  product   applications,   provide  customer  training,
coordinate upgrades, manage spare parts and provide preventative maintenance.

                                      -7-
<PAGE>

         Our warranty  obligations  for our systems  generally  cover a 12-month
period.  However, many customers request service and support beyond the warranty
period.  Generally,  we have historically  derived less than 10% of our revenues
from annual service and maintenance  for our installed base of systems.  Some of
our systems are currently  serviced under service  contracts and other customers
purchase repairs on a labor and materials basis. Service revenues for the fiscal
year ended  December 31, 1999 were $842,341  compared to $879,874 for the fiscal
year  ended  December  31,  1998.  Historically,  warranty  expenses  have  been
consistent with established allowances.

CUSTOMERS

         Our  customers  include  semiconductor  and other  device  fabricators,
photomask  fabricators and their suppliers and computer hard disk manufacturers.
Repeat  sales to  existing  customers  represent  a  significant  portion of our
product  revenues,  and we believe that our  installed  base of over 350 systems
represents  a  significant  competitive  advantage,  particularly  in the United
States.

         Historically, we have sold a significant proportion of our systems to a
limited  number of customers as the markets that we participate in are primarily
dominated  by a few major  companies.  Approximately  95% of net sales in Fiscal
1999 and Fiscal 1998 were to the ten  largest  customers  in each  fiscal  year.
Sales to the  largest  customer  accounted  for  approximately  65% of net sales
during Fiscal 1999.  The failure to replace sales with sales to other  customers
in  succeeding  periods  would have a material  adverse  effect on our business,
financial  condition  and  results  of  operations.  We  expect  that  sales  to
relatively few customers  will continue to account for a high  percentage of our
revenues in any  accounting  period in the  foreseeable  future.  A reduction in
orders from any such customer,  the cancellation of any significant order or the
inability of a customer to pay invoices  when due could have a material  adverse
effect on our business,  financial condition and results of operations.  None of
our  customers has entered into a long-term  agreement  requiring it to purchase
our products.

         Due to the  substantial  purchase  price for our  products and systems,
revenues and operating  results may vary  significantly  from quarter to quarter
depending upon the timing of orders and shipments.

SALES AND MARKETING

         We market and distribute our products directly in the United States. We
maintain sales and service offices in Wilmington, Massachusetts and Santa Clara,
California,   and  service   personnel   in  Florida.   We  also  sell   through
manufacturer's  representatives,  distributors and directly to certain customers
internationally.

         Due to the significant involvement required to purchase our systems and
their highly  technical  nature,  the sales process is often complex,  requiring
interaction  with several  levels of the customer's  organization  and extensive
technical exchanges,  product demonstrations and commercial  negotiations.  As a
result,  the  sales  cycle  can  often be quite  long.  Purchase  decisions  are
typically made at a high level within the customer's  organization and the sales
process often requires broad participation across our organization. Accordingly,
our systems  typically  have a lengthy  sales cycle  during  which we may expend
substantial  funds and management  time and effort with no assurance that a sale
will result.

                                      -8-
<PAGE>

ENGINEERING AND PRODUCT DEVELOPMENT

         We direct our  engineering  and design efforts at products for which we
believe  there is growing  market  demand.  In  particular,  we seek to meet the
requirements of our customers for products aimed at emerging applications in the
semiconductor  and computer hard disk inspection  markets by applying the latest
available  technology and the design and  engineering  know-how  gained from our
focus on these markets.  For many of our customers,  we provide  engineering and
design support to help integrate our products into production  environments.  By
working closely with these customers, we are exposed to new market opportunities
for our products.

         We employed 13 individuals in engineering as of March 27, 2000.  During
Fiscal 1999 and Fiscal 1998, our engineering expenses totaled  approximately 19%
and 12% of net sales or $1,013,000 and $1,196,000 respectively.  This investment
in our product line enables us to meet customer  requirements in the future.  We
expense all software development costs as incurred.

         Our business  strategy  includes  investing  in or acquiring  companies
which offer us access to complementary technologies and new markets.

COMPETITION

         The markets we compete in are highly  competitive and are characterized
by rapid  technological  change,  evolving  industry  standards,  rapid  product
obsolescence and intense competition. Competitors in the semiconductor photomask
inspection  market include  Hitachi,  Horiba,  KLA Instruments and Nikon. In the
computer  hard  disk  inspection  market  competitors  include  Brown  &  Sharpe
Manufacturing  Company,  Hitachi,  Phase Metrics and System Seiko.  Based on the
number of  installations,  we believe we are a leading supplier of semiconductor
photomask  soft defect  inspection  systems and  computer  hard disk  inspection
systems  in the  United  States.  We  compete  based  on our  installed  base of
customers,  engineering and service capabilities,  breadth of products,  patents
and  proprietary  information  and  reputation.  Many  of  our  competitors  and
potential  competitors  have  greater  financial,  marketing  and  technological
resources than us. No assurance can be given that  companies with  complementary
technologies and greater financial resources will not enter these industries and
develop products that are superior to our products or achieve market acceptance.

         A  substantial  investment  is  required  by  customers  to install and
integrate  capital  equipment  into  a  production  line.  As a  result,  once a
manufacturer has selected a particular  vendor's capital  equipment,  we believe
that the  manufacturer  generally  relies upon that  equipment  for the specific
production line application and frequently will attempt to consolidate its other
capital  equipment  requirements  with  the  same  vendor.   Accordingly,  if  a
particular  customer  selects a  competitor's  capital  equipment,  we expect to
experience  difficulty in selling to that  customer for a significant  period of
time.

         We  expect   competition  to  continue  in  the  future  from  existing
competitors  and from  other  companies  that may enter our  existing  or future
markets with similar or alternative solutions that may be less costly or provide
additional features. We believe that our ability to compete successfully depends
on a number of factors,  which include  product quality and  performance,  order
turnaround,  the  provision  of  competitive  design  capabilities,  success  in
developing new  applications,  adequate  manufacturing  capacity,  efficiency of
production,  timing of new product  introductions  by us, our  customers and our
competitors,  the number and nature of our competitors in a given market,  price
and general market and economic conditions.  In addition,  increased competitive
pressure may lead to intensified  price  competition,  resulting in lower prices
and gross  margins,  which could  materially  adversely  affect our business and
results  of  operations.  No  assurance  can  be  given  that  we  will  compete
successfully  in the  future  or that we will be able to make the  technological
advances necessary to remain competitive.

                                      -9-
<PAGE>

         Changes in manufacturing processes could also have a materially adverse
effect on our  business,  financial  condition  and  results of  operations.  We
anticipate   continued   changes  in   semiconductor   and  computer  hard  disk
technologies  and  processes.  No assurance can be given that we will be able to
develop, manufacture and sell products that respond adequately to such changes.

BACKLOG

         Our backlog for products and  services  was  approximately  $507,000 at
December 31, 1999,  compared to approximately  $258,000 at December 31, 1998. We
define  backlog to include only those  systems,  accessories  and upgrades  with
respect to which a purchase order has been received and a delivery  schedule has
been specified for shipment over the next twelve (12) months,  and contracts for
services to be provided  for longer  periods up to 36 months.  Cancellations  of
product purchase orders are sometimes subject to cancellation charges.  Although
a  significant  indicator  of  business  levels,   backlog  is  not  necessarily
representative of future sales.

MANUFACTURING

         Our   manufacturing   activities   consist   of   final   assembly   of
subassemblies,  which are then integrated  into finished  systems and tested for
compliance  with customer  requirements.  We believe that  production lead time,
product quality and customer response are key elements to our success.

         Although we manufacture some of the subassemblies  used in our systems,
most  are  purchased  from   unaffiliated   subcontractors,   typically  to  our
specifications.  None of our  suppliers  are  obligated  to  provide us with any
specific  quantity of  components  or  subassemblies  over any specific  period.
Certain  of the  components  and  subassemblies  included  in our  products  are
obtained from a limited group of suppliers. In addition, because we believe that
subsystem  vendors have increased their  manufacturing  expertise,  we expect to
continue to obtain virtually all of our components and subassemblies  from third
parties  in order to  devote  our  resources  toward  systems  design,  software
development  and systems  integration,  our  primary  areas of  competence.  Our
reliance on a limited group of suppliers  involves several risks,  including the
potential  inability  to obtain an  adequate  supply of  components  and reduced
control over pricing and delivery  time. To date, we have generally been able to
obtain  adequate and timely delivery of critical  subassemblies  and components,
although we have experienced occasional delays. Because the manufacture of these
components and  subassemblies  is very complex and requires long lead times, and
although  alternative  sources are  available,  such  sources may not be readily
available.  As a result,  no  assurance  can be given that  delays or  shortages
caused by suppliers  will not occur in the future.  Any disruption of our supply
of critical  components  and  subassemblies  could  prevent us from  meeting our
manufacturing  schedules,  which could damage  relationships  with customers and
would have a material  adverse effect on our business,  financial  condition and
results of operations.

         Our ability to increase  our  manufacturing  capacity in response to an
increase in demand is limited given the complexity of the manufacturing process,
the lengthy lead times necessary to obtain critical  components and the need for
highly skilled  personnel.  Our failure to keep pace with customer  demand would
lead to further  extensions of delivery times,  which could deter customers from
placing  additional  orders,  and could  adversely  affect product  quality.  No
assurance  can  be  given  that  we  will  be   successful  in  increasing   our
manufacturing capacity.

                                      -10-
<PAGE>

GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS

         Our  products  and  worldwide   operations   are  subject  to  numerous
governmental  regulations designed to protect the health and safety of operators
of manufacturing equipment. In particular,  the European Union ("EU") has issued
regulations  relating  to  electromagnetic  fields,  electrical  power and human
exposure  to laser  radiation.  In  addition,  numerous  domestic  semiconductor
manufacturers  including certain of our customers,  have subscribed to voluntary
health and safety  standards and decline to purchase  equipment not meeting such
standards.  We believe that our products  currently  comply with all  applicable
material governmental health and safety regulations,  including those of the EU,
and with the voluntary  industry  standards  currently in effect.

PROTECTION OF PROPRIETARY  INFORMATION

         We own 13 United States patents. Several of the issued patents are also
issued in Japan,  Europe and Canada and there is one or more patent applications
pending in Europe  and Japan.  Most of the  issued  patents  relate to  advanced
inspection measurement techniques.  The issued United States patents expire from
2000 to 2015. We also have three registered trademarks in the United States that
are due for renewal in 2008 and 2009.

         Our products require technical know-how to engineer and manufacture and
are based,  in part,  upon  proprietary  technology.  To the extent  proprietary
technology  is  involved,  we rely on patents and trade  secrets that we seek to
protect, in part, through confidentiality  agreements. No assurance can be given
that such agreements will not be breached,  that we will have adequate  remedies
for any breach, or that our trade secrets will not otherwise become known to, or
independently  developed  by, our existing or potential  competitors.  We may be
involved from time to time in litigation to determine the enforceability,  scope
and validity of our rights. No assurance can be given that our products will not
infringe any patents of others.  Litigation  could result in substantial cost to
us and diversion of effort by our management and technical personnel.

EMPLOYEES

         As of March 27, 2000, we had 42 full-time employees,  of whom 9 were in
sales,  marketing and service, 13 were in engineering,  8 were in administration
and 12 were in  manufacturing.

         None of our employees is represented by a labor union.  We consider our
relationships with our employees to be satisfactory.  Our financial  performance
will depend  significantly upon the continued  contributions of our officers and
key management,  technical,  sales and support personnel,  many of whom would be
difficult to replace.  No assurance  can be given that we will be  successful in
attracting or retaining qualified personnel.

ITEM 2.           FACILITIES

         We  occupy  approximately  25,000  square  feet of  subleased  space in
Wilmington,  Massachusetts  for our principal  executive  offices,  research and
development  and  manufacturing  operations.  These  premises are subleased from
Aurora Imaging  Technology,  Inc.  (formerly  Advanced NMR Systems,  Inc.).  The
current  base rent for this  facility  is  approximately  $16,270 per month plus
utility charges. This sublease expires on May 1, 2001.

            We maintain a technical  center and sales office in an approximately
1,500 square foot facility in Santa Clara, California, leased from Koll/Intereal
Bay  Area.  The base rent of this  facility  is $2,652  per month  plus  certain

                                      -11-
<PAGE>

expenses  related to the  facility.  This lease expires on November 30, 2001. We
believe  that our  facilities  for our  technical  center  and sales  office are
adequate for our current needs.

         Although no assurance can be given, we believe that adequate facilities
for expansion, if required, are available at competitive rates. Although we have
no present plans to acquire additional  research and development,  manufacturing
or  shipping  facilities,  we may in the  future  seek to  establish  additional
research and development,  manufacturing  or shipping  facilities as a result of
our anticipated growth or acquisitions.

ITEM 3.           LEGAL PROCEEDINGS.

         In February 2000, we settled the previously reported litigation with K.
Andrew Bernal.  Mr.  Bernal's suit against us has been dismissed with prejudice,
and the 314,754  shares of Common Stock  beneficially  owned by Mr.  Bernal were
repurchased by us and are now classified as treasury shares. The settlement will
not have a material  adverse  effect on our  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 security  holders  during the
fourth quarter of Fiscal 1999 through the solicitation of proxies or otherwise.





                                      -12-
<PAGE>
                                     PART II

ITEM 5.           MARKET FOR REGISTRANT'S  COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS.

         Our Common  Stock is traded on the  American  Stock  Exchange  ("AMEX")
under the symbol  "OPC." On March 10, 2000,  the closing  price of the Company's
Common  Stock as reported on the AMEX was $6.69.  Our  Redeemable  Warrants  are
traded on AMEX under the symbol  "OPC+." On March 10, 2000, the closing price of
the Company's Redeemable Warrants as reported on the AMEX was $1.125.

         As of March 10, 2000, there were  approximately 34 holders of record of
the  Company's  Common  Stock  and  approximately  33  holders  of record of our
Redeemable Warrants. We believe that there are over 500 beneficial owners of our
Common Stock and over 500 beneficial owners of our Redeemable Warrants.

         For the periods indicated,  the following table sets forth the range of
high and low sale  prices  for our  Common  Stock  and  Redeemable  Warrants  as
reported by AMEX.

                                                                   Redeemable
                                             Common Stock           Warrants
                                            High       Low       High       Low
 1998

 First Quarter                              $5.125    $3.375     $1.00     $.375
 Second Quarter                             $4.875    $2.375     $.938     $.25
 Third Quarter                              $2.625    $1.50      $.50      $.25
 Fourth Quarter                             $1.875    $1.188     $.313     $.125

 1999

 First Quarter                              $2.25     $1.063     $.563     $.125
 Second Quarter                             $1.50     $.875      $.250     $.125
 Third Quarter                              $1.375    $.75       $.250     $.063
 Fourth Quarter                             $1.50     $.75       $.188     $.031

 2000

 First Quarter (through March 10, 2000)     $11.50    $1.063     $3.00     $.031


         We have not paid cash dividends on our Common Stock since inception and
do not  anticipate  paying  any  cash  dividends  on  our  Common  Stock  in the
foreseeable  future.  We currently intend to reinvest  earnings,  if any, in the
development and expansion of our business. Any future determination with respect
to the payment of dividends  will be subject to the  discretion  of our Board of
Directors and will depend upon our  earnings,  capital  requirements,  financial
position, general economic conditions and other pertinent factors. Our agreement
with our primary  bank lender  prohibits  the payment of  dividends  without the
bank's prior written consent.


                                      -13-
<PAGE>

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

         The following  discussion  and analysis  should be read in  conjunction
with the financial statements and notes thereto appearing elsewhere herein.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 ("FISCAL 1999") COMPARED TO YEAR ENDED DECEMBER 31,
1998 ("FISCAL 1998").

         We have been  adversely  affected  by a  general  slowdown  in  capital
equipment  spending in the computer disk drive  industry as evidenced by the low
$507,000 customer order backlog at December 31, 1999.

         Net sales for  Fiscal  1999 were  $5,350,247  compared  to net sales of
$9,909,876 for Fiscal 1998, a decrease of 46%. Historically, we have experienced
significant fluctuations in operating results due to the relatively small number
of high  dollar  volume  sales in any year.  We  expect  these  fluctuations  to
continue.  As a result of the steep  declines  in  capital  expenditures  in the
computer  hard disk  industry,  we expect  that we will not  achieve  break-even
results for the first quarter of 2000.

         The  Securities  and  Exchange  Commission  released  Staff  Accounting
Bulletin No. 101,  Revenue  Recognition  in Financial  Statements  (SAB 101), on
December 3, 1999.  This SAB provides  additional  guidance on the accounting for
revenue  recognition  including  both  broad  conceptual  discussion  as well as
certain  industry-specific  guidance.  We are in the process of accumulating the
information  necessary to quantify the potential impact of this new guidance, if
any.

         The gross margin  remained the same as a result of cost  reductions and
changes  in the mix of  product  sales.  Cost  of  sales  for  Fiscal  1999  was
$2,846,949  as compared to $5,248,844  for Fiscal 1998.  Gross profit for Fiscal
1999 was $2,503,298  (47% of net sales) as contrasted to $4,661,032  (47% of net
sales) in Fiscal 1998, a decrease of 46.3%. The decrease in gross profit was due
primarily to lower system sales in 1999.

         Selling,  general and  administrative  expenses decreased to $2,860,512
for Fiscal 1999 as compared to $3,315,869 in Fiscal 1998. This decrease of 13.7%
was due primarily to decreased travel and staffing costs in 1999.

         Engineering expenses as a percentage of sales increased from 12% to 19%
in Fiscal 1999. The $183,881  decrease in engineering  expenses from Fiscal 1998
to Fiscal  1999  resulted  primarily  from  decreases  in  staffing  and  travel
expenses.  Research and  development  costs,  which are included in  engineering
expenses, remained relatively constant at approximately $443,000 for Fiscal 1999
and $415,000 for Fiscal 1998.

         Fiscal 1999 pretax losses of $1,186,322  compare  unfavorably to Fiscal
1998 pretax  income of  $329,883.  The  decrease  reflects the decrease in gross
profit offset somewhat by smaller decreases in operating expenses.

         The  provision  for  income  taxes  for  Fiscal  1999 was  $15,000  (an
effective  rate of 1.3%)  compared to $118,800 (an effective  rate of 36.0%) for
Fiscal 1998.  The lower tax rate relates to not benefiting  operating  losses in
Fiscal  1999 due to the  uncertainty  surrounding  the  ability to utilize  such
losses in the future.

                                      -14-
<PAGE>

         Net loss was  $1,201,322  for Fiscal  1999 as compared to net income of
$211,083 for Fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1999, we had cash and cash  equivalents  of $3,844,168,
an increase of $530,279 from  $3,313,889 at December 31, 1998.  Working  capital
was  $7,147,446  at December 31, 1999 as compared to  $8,023,392 at December 31,
1998,  a decrease of  $875,946.  Cash  provided by  operating  activities  was
$541,354 in 1999  compared to cash used by operating  activities  of $421,793 in
1998.

         We have a revolving line of credit with Citizens Bank  (formerly  State
Street Bank and Trust  Company).  At December  31,  1999,  we had no  borrowings
outstanding   under  the  revolving   credit   agreement  and   availability  of
approximately  $573,000.  The revolving line of credit  agreement was amended on
June 29, 1998 and allows for  maximum  borrowings  of  $2,000,000  and  requires
monthly payment of interest on the  outstanding  balance to maturity on June 30,
2000. Borrowings under the revolving line of credit agreement are limited to 80%
of qualifying accounts receivable.  Borrowings under the agreement bear interest
at the bank's  prime rate (8.5% at  December  31,  1999).  The terms of the loan
agreement  provide for the  maintenance of certain  specified  financial  ratios
including the quick ratio and debt to equity,  minimum  earnings tests and other
negative and affirmative  covenants and restricts certain  transactions  without
the bank's prior written consent. As of December 31, 1999, we were in default of
the minimum  earnings  covenant,  but obtained a waiver of  compliance  from our
bank.

         Based on our current cash balances,  current bank credit facilities and
anticipated  results of operations,  we believe that we have sufficient funds to
meet our working capital requirements for the next twelve months. Thereafter, we
anticipate that we could need additional financing to meet our current plans for
expansion and working capital needs. No assurance can be given of our ability to
obtain  financing  on  favorable  terms,  if at all.  If we are unable to obtain
additional  financing,  our ability to meet our current plan for  expansion  and
working capital needs could be materially adversely affected.

INFLATION

         To date, inflation has not had a material effect on our business.

YEAR 2000 DISCLOSURE

         We have not experienced any Year 2000 problems, and we are not aware of
any situations of noncompliance that would have a material adverse effect on our
operations or financial condition.  Year 2000 costs were not material for Fiscal
1999. No assurance can be given that instances of noncompliance which could have
a material  adverse  effect on our  operations  or financial  condition  will be
identified;  that the systems of other companies with which we transact business
will be corrected on a timely basis;  that a failure by such entities to correct
a Year 2000 problem or a conversion which is incompatible with our systems would
not have a material adverse effect on our operations or financial condition;  or
that even if all planned  actions are  completed,  we will not  experience  some
adverse effects from Year 2000 related issues.

                     FACTORS THAT MAY AFFECT FUTURE RESULTS

         As  previously  discussed,  information  provided  by  the  Company  or
statements made by its employees from time to time may contain "forward-looking"
information which involves risks and  uncertainties.  In particular,  statements
contained in this report that are not historical facts may be  "forward-looking"


                                      -15-
<PAGE>

statements.  The Company's actual future results may differ  significantly  from
those  stated in any  forward-looking  statements.  Factors  that may cause such
differences include, but are not limited to, the factors discussed below.

         DEPENDENCE  ON  CYCLICAL  INDUSTRIES.  Our  business  is  significantly
dependent  on capital  expenditures  by  semiconductor  and  computer  hard disk
manufacturers.  The semiconductor and computer hard disk industries are cyclical
and have historically  experienced  periodic downturns,  which have had a severe
effect on the demand for capital  equipment.  Prior  semiconductor  and computer
hard disk industry downturns and construction of excess capacity by the industry
have adversely affected our revenues,  gross margin and net income and have also
adversely affected the market price for our Common Stock.  Moreover, the overall
computer industry has been and is likely to continue to be cyclical with periods
of  oversupply.  Recently,  computer hard disk  manufacturers  have  experienced
excess  capacity  and poor  operating  results  and,  as a result,  our sales to
computer hard disk customers were substantially  weaker in 1999 compared to 1998
and 1997.  Our ability to reduce  expenses  in response to any such  downturn is
limited by our need for continued  investment in research and development and in
customer  service  and  support.  A  downturn  in demand for  semiconductor  and
computer  hard  disk  equipment  would  have a  material  adverse  effect on our
business, financial condition and results of operations.

         FLUCTUATIONS  IN  OPERATING  RESULTS.  We  derive  most  of our  annual
revenues  from a  relatively  small  number of sales of  products,  systems  and
upgrades.  As a result,  any delay in the  recognition  of  revenue  for  single
products,  systems  or  upgrades  would have a  material  adverse  effect on our
results of operations for a given accounting  period.  In addition,  some of our
net sales have been realized near the end of a quarter.  Accordingly, a delay in
a  shipment  scheduled  to occur  near  the end of a  particular  quarter  could
materially adversely affect our results of operations for that quarter.

         Our operating  results have  historically  been subject to  significant
quarterly and annual  fluctuations.  We believe that our operating  results will
continue  to  fluctuate  on a  quarterly  and  annual  basis due to a variety of
factors,  including  but not limited to the  cyclical  nature of the  industries
served by our inspection  products,  patterns of capital  spending by customers,
the timing of significant orders, order cancellations and shipment rescheduling,
market  acceptance  of our  products,  fluctuations  in the grant and funding of
development  contracts,  consolidation  of  customers,  unanticipated  delays in
design,   engineering  or  production  or  in  customer  acceptance  of  product
shipments,  changes in pricing by us or our  competitors,  the timing of product
announcements  or  introductions  by us or our  competitors,  the mix of systems
sold, the relative  proportions of product  revenues and service  revenues,  the
timing of payments of sales  commissions,  the  availability  of components  and
subassemblies,  changes in product  development costs,  expenses associated with
acquisitions  and exchange rate  fluctuations.  Over the years, our gross margin
has  fluctuated  and we  anticipate  that our  gross  margin  will  continue  to
fluctuate.  We cannot  predict  the  impact of these  and other  factors  on our
financial performance in any future period.

         CUSTOMER  CONCENTRATION  AND  CREDIT  RISK.  Relatively  few  customers
account  for a  substantial  portion of our  revenues.  Sales to our ten largest
customers  accounted  for  approximately  95% of net sales for each of the years
ended  December 31, 1998 and December  31, 1999.  Sales to the largest  customer
accounted  for  approximately  55% and 65% of net  sales  for  the  years  ended
December 31, 1998 and December  31, 1999,  respectively.  The failure to replace
sales with sales to other customers in succeeding  periods would have a material
adverse effect on our business,  financial  condition and results of operations.
We expect that sales to relatively  few customers will continue to account for a
high  percentage  of our revenues in any  accounting  period in the  foreseeable
future.  A reduction in orders from any such customer,  the  cancellation of any
significant  order or the inability of a customer to pay invoices when due could
have a material adverse effect on our business,  financial condition and results
of operations.  Several  companies  including our customers in the computer hard


                                      -16-
<PAGE>

disk industry have been adversely  effected by the general  slowdown in the disk
industry and are in poor financial  condition,  and may represent  credit risks.
None of our  customers  has entered into a long-term  agreement  requiring it to
purchase our products.

         NEW PRODUCTS AND TECHNOLOGICAL  CHANGE.  The semiconductor and computer
hard disk  industries,  in general,  are  characterized  by rapid  technological
advances,  changing  customer  requirements,  evolving  industry  standards  and
frequent  new product  introductions  and  enhancements.  We believe  that these
trends will continue into the foreseeable  future.  Our success will depend upon
our ability to enhance our existing products and to develop new products to meet
customer  requirements  and  to  achieve  market  acceptance.  There  can  be no
assurance  that  we  will be  successful  in  introducing  products  or  product
enhancements  on a timely  basis,  if at all,  or that we will be able to market
successfully  these products and product  enhancements once developed.  Further,
there can be no assurance that our products will not be rendered obsolete by new
industry standards or changing technology.

         HIGHLY COMPETITIVE INDUSTRIES.  The markets for our products are highly
competitive and are subject to rapid  technological  change,  evolving  industry
standards,  rapid product obsolescence and intense  competition.  Competitors in
the  semiconductor  photomask  inspection  market include Hitachi,  Horiba,  KLA
Instruments and Nikon. In the computer hard disk inspection  market  competitors
include Brown & Sharpe Manufacturing Company,  Hitachi, Phase Metrics and System
Seiko.  A number of our current and  potential  competitors  have  substantially
greater  resources  than  we do.  There  can be no  assurance  that  we  will be
successful in selling our products to end users,  regardless of the  performance
or the price of our  products.  Competitors  may  develop  superior  products or
products  of  similar  quality  at the same or  lower  prices.  Other  technical
innovations  may impair our  ability  to market  our  products.  There can be no
assurance that we will be able to compete successfully.

         PATENTS  AND  PROPRIETARY  INFORMATION.   We  attempt  to  protect  our
proprietary  technology  through  patents,  copyrights,   trademarks  and  trade
secrets.  No assurance can be given as to the issuance of additional patents or,
if so issued,  as to their scope and validity.  Patents  granted may not provide
meaningful protection from competitors.  Even if a competitor's products were to
infringe patents owned by us, it would be costly for us to enforce our rights in
an  infringement  action and would  divert  funds and other  resources  from our
operations. In addition, effective patent, copyright and trade secret protection
may be unavailable or limited in certain  foreign  countries.  Our issued United
States  patents  expire from 2000 to 2015,  and the  expiration of patents could
cause  additional  competitive  pressure.  No  assurance  can be given  that our
products  or  processes  will not  infringe  any  patents or other  intellectual
property  rights of third parties.  If our products or processes do infringe the
rights of third parties,  no assurance can be given that we can obtain a license
from the intellectual property owner on commercially reasonable terms or at all.

         Some customers using certain products of ours have received a notice of
infringement from the Lemelson  Foundation,  alleging that equipment used in the
manufacture of semiconductor  products infringes patents issued to Mr. Jerome H.
Lemelson relating to "computer image analysis" or "digital signal generation and
analysis."  Certain  of these  customers  have  notified  us that  they may seek
indemnification from us for any damages and expenses resulting from this matter.
Neither QC Optics,  Inc.  nor any of our  products  has been  identified  by the
Lemelson  Foundation  as  infringing  its  patents.  There can be no  assurance,
however,  that the Lemelson  Foundation  would not bring a claim  against us for
infringement  or that we would  prevail  in any  such  action.  If the  Lemelson
Foundation  were to  prevail in any such  action,  we might be  required  to pay
license fees or royalties to the Foundation,  which could have an adverse impact
on our profitability.

                                      -17-
<PAGE>

         We rely on trade  secrets  that we seek to protect,  in part,  through,
confidentiality  agreement  with  employees,  consultants  and our customers and
potential customers. No assurance can be given that these agreements will not be
breached,  that we will have adequate  remedies for any breach or that our trade
secrets  will not  otherwise  become  known  to or  independently  developed  by
competitors.  As we intend to enforce our patents, trademarks and copyrights and
protect our trade secrets, we may be involved from time to time in litigation to
determine  the  enforceability,  scope and  validity of these  rights.  Any such
litigation could result in substantial cost to us and diversion of effort by our
management and technical personnel.

         DEPENDENCE  ON  SUPPLIERS.  We do not  maintain  any  long-term  supply
agreements with any of our suppliers and the majority of the critical components
and subassemblies  included in our products are obtained from a limited group of
suppliers.  The  manufacture  of certain  components and  subassemblies  is very
complex and requires long lead times and our systems cannot be produced  without
certain critical  components.  Additionally,  alternative  suppliers for many of
these components may not be readily  available,  and no substantial  increase in
the number of  alternative  suppliers is  anticipated.  We intend to continue to
rely on outside suppliers  because of their  specialized  expertise in component
fabrication and subsystem assembly. Our reliance on a limited group of suppliers
involves several risks,  including the potential inability to obtain an adequate
supply of components and reduced  control over pricing and delivery time.  There
can be no assurance that delays or shortages caused by suppliers will not occur.
Any  inability  to obtain  adequate,  timely  deliveries  of  subassemblies  and
components could prevent us from meeting scheduled  shipment dates,  which would
damage  relationships  with current and  prospective  customers  and  materially
adversely affect our business, financial condition and results of operations.

         RISKS OF ACQUISITIONS. Our business strategy includes expanding product
lines and markets through internal product development and/or acquisitions.  Any
acquisition may result in potentially  dilutive  issuances of equity securities,
the  incurrence of debt and contingent  liabilities,  and  amortization  expense
related to intangible assets acquired,  any of which could materially  adversely
affect our financial condition and results of operations. In addition,  acquired
businesses may be experiencing  operating  losses.  Any acquisition will involve
numerous  risks,  including  difficulties  in the  assimilation  of the acquired
company's operations and products,  the diversion of management's attention from
other business concerns,  uncertainties associated with operating in new markets
and working with new customers, and the potential loss of the acquired company's
key employees. To date, we have had no experience in acquisitions.  There can be
no  assurance  that  any  such  integration  will be  accomplished  smoothly  or
successfully.  The  difficulties  of such  integration  may be  increased by the
necessity of coordinating organizations, which are separated geographically. The
inability  of  management  to  successfully  integrate  the  operations  of such
acquired  businesses  could have a material  adverse  effect on our business and
results of operations.

         MARKET PRICE OF SECURITIES.  The stock market in general and the market
for shares of technology  companies in particular have experienced extreme price
fluctuations,  which have often been  unrelated to the operating  performance of
the affected  companies.  Many companies in the  semiconductor and computer hard
disk  industries,  including  us, have  experienced  dramatic  volatility in the
market  prices  of  their  common  stock.   We  believe  that  factors  such  as
announcements  of  developments  related to our business or our  competitors' or
customers' businesses, fluctuations in our financial results, general conditions
or developments in the semiconductor and computer hard disk drive industries and
the worldwide economy, sales of the Common Stock into the market,  announcements
of  technological  innovations  or  new  or  enhanced  products  by  us  or  our
competitors,  a shortfall in revenue, gross margin,  earnings or other financial
results or changes in research  analysts'  expectations,  the limited  number of
shares of Common Stock traded on a daily basis,  or a variety of factors  beyond
our control  could  cause the price of our Common  Stock to  fluctuate,  perhaps
substantially.  There can be no  assurance  that the market  price of our Common


                                      -18-
<PAGE>

Stock will not  experience  significant  fluctuations  in the future,  including
fluctuations that are material, adverse and unrelated to our performance.

         CONTROL BY EXISTING STOCKHOLDERS.  As of March 10, 2000, the QC Optics,
Inc.  Voting  Trust  and  Kobe  Steel  USA  Holdings,  Inc.  beneficially  owned
approximately  56%  of  the  Company's   outstanding  shares  of  Common  Stock.
Accordingly,  acting  together  they have the  ability  to control  all  matters
requiring  approval by our  stockholders,  including  the election of directors.
This  concentration  of  ownership  may also  have the  effect  of  delaying  or
preventing a change of control of QC Optics.

         RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.  Based on the
location to which  products  were shipped or services  were  rendered,  sales to
customers in countries other than the United States accounted for 66% and 73% of
net sales in Fiscal 1998 and Fiscal 1999,  respectively.  We anticipate that the
international  shipments,  principally  to Japan and Malaysia,  will continue to
account for a significant portion of net sales for the foreseeable future. Sales
and  operations  outside of the United  States are  subject to certain  inherent
risks,  including  fluctuations  in the value of the U. S.  dollar  relative  to
foreign currencies,  tariffs, quotas, taxes and other market barriers, political
and economic  instability,  restrictions  on the export or import of technology,
potentially limited intellectual  property protection,  difficulties in staffing
and managing international  operations and potentially adverse tax consequences.
There can be no  assurance  that any of these  factors  will not have a material
adverse effect on our business, financial condition or results of operations. In
particular although our international  sales are primarily  denominated in U. S.
dollars,  currency exchange fluctuations in countries where we do business could
materially  adversely  affect our business,  financial  condition and results of
operations by rendering us less price-competitive than foreign manufacturers.

         LENGTHY SALES CYCLE.  Installing and integrating  inspection  equipment
requires a substantial  investment by a customer.  In addition,  customers often
require a significant  number of product  presentations and  demonstrations,  as
well as substantial  interaction with our senior  management,  before reaching a
sufficient level of confidence in the system's  performance  characteristics and
compatibility with the customer's target applications.  Accordingly, our systems
typically  have a lengthy  sales cycle  during  which we may expend  substantial
funds and management time and effort with no assurance that a sale will result.

         HEALTH AND SAFETY REGULATIONS AND STANDARDS. Our products and worldwide
operation are subject to numerous  governmental  regulations designed to protect
the health and safety of operators of  manufacturing  equipment.  In particular,
the  European  Union  ("EU")  regulations  relating to  electromagnetic  fields,
electrical power and human exposure to laser radiation have been implemented. In
addition,  numerous domestic semiconductor  manufacturers,  including certain of
our  customers,  have  subscribed to voluntary  health and safety  standards and
decline to purchase  equipment not meeting such  standards.  We believe that our
products currently comply with all applicable  material  governmental health and
safety  regulations  and  standards,  including  those  of the EU,  and with the
voluntary  industry  standards  currently in effect.  In part because the future
scope of these and other  regulations and standards  cannot be predicted,  there
can be no assurance that we will be able to comply with any future regulation or
industry standard.  Noncompliance  could result in governmental  restrictions on
sales or reductions in customer acceptance of our products.  Compliance may also
require significant product  modifications;  potentially  resulting in increased
costs and impaired product performance.

         DEPENDENCE  ON KEY  PERSONNEL  AND  POSSIBLE  LACK OF  AVAILABILITY  OF
QUALIFIED  PERSONNEL.  We are dependent to a large degree on the  experience and
abilities of our Chief Executive Officer, President and Chairman, Eric T. Chase,
and our Vice President of Technology, Jay L. Ormsby. The loss of the services of
either of these  individuals  could  have a material  adverse  effect on us. The

                                      -19-
<PAGE>

Company  has  entered  into  employment  agreements,  containing  noncompetition
restrictions, with each of Messrs. Chase and Ormsby. We are the sole beneficiary
of key person life insurance policies, each in the amount of $1,000,000,  on the
lives of Messrs. Chase and Ormsby.

         Our future  success and growth  strategy will depend in large part upon
our ability to attract  and retain  highly  skilled  managerial,  technical  and
marketing personnel.  Competition for such personnel in our industry is intense.
No assurance  can be given that we will be successful in attracting or retaining
the qualified  personnel  necessary for our business and anticipated growth, and
the failure to attract or retain such  personnel  could have a material  adverse
effect on our business, financial condition and results of operations.

ITEM 7.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The following financial statements are filed as part of this report:
                                                                            Page

 Report of Independent Public Accountants   ................................ F-2
 Balance Sheets as of December 31, 1998 and December 31, 1999............... F-3
 Statements of Operations for the years ended December 31, 1998 and
    December 31, 1999....................................................... F-4
 Statements of Stockholders' Equity for the years ended
    December 31, 1998 and December 31, 1999................................. F-5
 Statements of Cash Flows for the years ended December 31, 1998
    and December 31, 1999................................................... F-6
 Notes to Financial Statements.............................................. F-7


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

         None.


                                      -20-
<PAGE>

                                    PART III


         Items 9 to 12 are  incorporated  by reference to our  definitive  Proxy
Statement to be filed with the Securities and Exchange Commission in April 2000.

Item 13. Exhibits and Reports on Form 8-K.

         (a)      Exhibits.

                  (1)      The following exhibits are filed herewith:

Exhibit
  No.                      Title
-------                    -----
  23              Consent of Arthur Andersen LLP.

  27              Financial Data Schedule.

                  (2) The following exhibits were filed as part of the Company's
Quarterly  Report on Form  10-QSB for the  quarter  ended June 30,  1998 and are
incorporated herein by reference:


Exhibit
  No.                               Title
-------                             -----
10h               Allonge to Promissory Note of the Company to State Street Bank
                  and Trust Company ("State Street"), dated June 29, 1998.

10j               Amended  and  Restated  Credit  Agreement  by and  between the
                  Company and State Street, dated June 29, 1998.

                  (3) The following exhibits were filed as part of the Company's
Annual  Report on Form  10-KSB  for the year  ended  December  31,  1997 and are
incorporated herein by reference:

Exhibit
  No.                               Title
-------                             -----
10a               Sublease  Agreement  between  the  Company  and  Advanced  NMR
                  Systems (now known as Aurora Imaging Technology,  Inc.), dated
                  as of April 15, 1997.

                  (4) The following exhibits were filed as part of the Company's
Registration  Statement on Form SB-2 (No. 333-07683),  declared effective by the
Commission on October 24, 1996 and are incorporated herein by reference:

Exhibit
  No.                               Title
-------                             -----
  3a              Certificate of Incorporation, as amended.

  3b              Bylaws, as amended.


                                      -21-
<PAGE>

Exhibit
  No.                               Title
-------                             -----
  4a              Sections of Bylaws and Certificate of  Incorporation  defining
                  the rights of security  holders  (contained in Exhibits 3a and
                  3b).

  4b              Specimen Common Stock Certificate.

  4c              Form of Representative's Warrant Agreement (revised).

  4e              Specimen Warrant Certificate.

  4f              Form of Warrant  Agreement between the Company and the Warrant
                  Agent.

  9               QC Optics  Voting  Trust u/d/t dated as of October 27, 1995 by
                  and among Eric T. Chase, as trustee,  and Eric T. Chase,  Karl
                  Andrew Bernal, Jay L. Ormsby, John R. Freeman, Albert E. Tobey
                  and Abdu Boudour.

  10p             1996 Stock Option Plan.

  10q             1996 Director Formula Stock Option Plan.

  10r             Form of  Employment  Agreements  effective  as of July 1, 1996
                  entered into by and between the Company and Eric T. Chase, Jay
                  L. Ormsby, Albert E. Tobey and Abdu Boudour.

          (B)     REPORTS ON FORM 8-K.

         No reports on Form 8-K have been filed by the  Company  during the last
quarter of the period covered by this report.



                                      -22-
<PAGE>

                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934,  as  amended,  the  registrant  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                                         QC OPTICS, INC.



                                           By:/s/ Eric T. Chase
Eric T. Chase                                 ----------------------------------
                                           President and Chief Executive Officer

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

<TABLE>
<CAPTION>

         Name                                        Capacity                           Date
         ----                                        --------                           ----

<S>                                        <C>                                         <C>
/s/ Eric T. Chase                           President, Chief Executive Officer,         March 28, 2000
----------------------------------          and Chairman of the Board of
Eric T. Chase                               Directors (Principal Executive
                                            Officer)

/s/ Richard C. Allard                       Vice President of Finance and               March 28, 2000
----------------------------------          Treasurer (Principal Financial
Richard C. Allard                           and Principal Accounting Officer)


/s/ Allan Berman                            Director                                    March 28, 2000
---------------------------------
Allan Berman

/s/ John M. Tarrh                           Director                                    March 28, 2000
---------------------------------
John M. Tarrh

</TABLE>



                                      -23-
<PAGE>


                                 QC OPTICS, INC.

                                      INDEX



                                                                            PAGE

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                     F-2

BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999                              F-3

STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999      F-4

STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
1998 AND 1999                                                                F-5

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999      F-6

NOTES TO FINANCIAL STATEMENTS                                                F-7










                                      F-1
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To QC Optics, Inc.:

We have audited the accompanying  balance sheets of QC Optics,  Inc. (a Delaware
corporation)  as of December 31, 1998 and 1999,  and the related  statements  of
operations, stockholders' equity and cash flows for the years ended December 31,
1998  and  1999.  These  financial  statements  are  the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of QC Optics, Inc. as of December
31, 1998 and 1999,  and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1999, in conformity with accounting principles
generally accepted in the United States.




                                                             ARTHUR ANDERSEN LLP




Boston, Massachusetts
February 23, 2000



                                      F-2
<PAGE>
                                 QC OPTICS, INC.

                   BALANCE SHEETS--DECEMBER 31, 1998 AND 1999

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                          1998              1999
<S>                                                                                    <C>              <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                            $   3,313,889    $   3,844,168
   Accounts receivable, less allowance of $50,000 at December 31, 1998 and 1999             1,897,564        1,125,994
   Inventory                                                                                3,732,134        2,861,571
   Refundable income taxes                                                                         --          201,494
   Prepaid expenses                                                                            68,001           58,056
                                                                                        -------------    -------------
         Total current assets                                                               9,011,588        8,091,283

PROPERTY AND EQUIPMENT, NET                                                                   176,125          125,314

DEFERRED TAX ASSETS                                                                           243,500               --

OTHER ASSETS                                                                                   35,656            4,591
                                                                                        -------------    -------------
         Total assets                                                                   $   9,466,869    $   8,221,188
                                                                                        =============    =============



CURRENT LIABILITIES:
   Accounts payable                                                                     $     119,414    $     102,710
   Accrued payroll and related expenses                                                       271,244          252,289
   Accrued commissions                                                                          9,615           21,539
   Accrued expenses                                                                           455,491          478,153
   Customer deposits                                                                          132,432           89,146
                                                                                      ---------------    -------------
         Total current liabilities                                                            988,196          943,837

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value-
     Authorized--1,000,000 shares
     Issued and outstanding--No shares at December 31, 1998 and 1999                               --              --

   Common stock, $.01 par value-
     Authorized--10,000,000 shares
     Issued and outstanding--3,242,500 shares at December 31, 1998 and 1999                    32,425           32,425
   Additional paid-in capital                                                               9,902,886        9,902,886
   Accumulated deficit                                                                     (1,456,638)      (2,657,960)
                                                                                       ---------------    -------------

         Total stockholders' equity                                                         8,478,673        7,277,351
                                                                                      ---------------     ------------


         Total liabilities and stockholders' equity                                     $   9,466,869    $    8,221,188
                                                                                        =============    ==============

</TABLE>

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


                                      F-3
<PAGE>
                                 QC OPTICS, INC.

                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
                                                                                             1998              1999
<S>                                                                                  <C>              <C>
NET SALES                                                                             $    9,909,876   $     5,350,247

COST OF SALES                                                                              5,248,844          2,846,949
                                                                                      --------------   ----------------

         Gross profit                                                                      4,661,032          2,503,298

OPERATING EXPENSES:
   Selling, general and administrative expenses                                            3,315,869          2,860,512
   Engineering expenses                                                                    1,196,393          1,012,512
                                                                                      --------------   ----------------

         Total operating expenses                                                          4,512,262          3,873,024
                                                                                      --------------   ----------------

         Operating income (loss)                                                             148,770        (1,369,726)

INTEREST INCOME                                                                              190,074           191,008

INTEREST EXPENSE                                                                              (8,961)           (7,604)
                                                                                      ---------------   ---------------

         Income (loss) before provision for income taxes                                     329,883        (1,186,322)

PROVISION FOR INCOME TAXES                                                                   118,800            15,000
                                                                                      --------------    --------------

         Net income (loss)                                                            $      211,083   $    (1,201,322)
                                                                                      ==============   ================

BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE                $    0.06         $   (0.37)
                                                                                          =========         ==========

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                           3,242,500         3,242,500
                                                                                      ==============   ===============

DILUTED WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
                                                                                           3,251,465         3,242,500
                                                                                      ==============   ===============
</TABLE>

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


                                      F-4
<PAGE>

                                 QC OPTICS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>

                                     Preferred Stock              Common Stock          Additional                         Total
                                  Number of                 Number of                    Paid-in      Accumulated     Stockholders'
                                   Shares    Par Value       Shares       Par Value      Capital        Deficit           Equity

<S>                                    <C> <C>              <C>         <C>            <C>            <C>             <C>
BALANCE, DECEMBER 31, 1997              -   $         -      3,242,500   $    32,425    $  9,902,886   $ (1,667,721)   $  8,267,590

   Net income                           -             -              -             -               -        211,083         211,083
                              -----------   -----------    -----------   -----------    ------------   ------------    ------------

BALANCE, DECEMBER 31, 1998              -             -      3,242,500        32,425       9,902,886     (1,456,638)      8,478,673

   Net loss                             -             -              -             -               -     (1,201,322)     (1,201,322)
                              -----------   -----------    -----------   -----------    ------------   -------------   -------------

BALANCE, DECEMBER 31, 1999              -   $         -      3,242,500   $    32,425    $  9,902,886   $ (2,657,960)   $  7,277,351
                              ===========   ===========    ===========   ===========    ============   ============    ============

</TABLE>

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


                                      F-5
<PAGE>

                                 QC Optics, Inc.

                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>


                                                                                           1998              1999
<S>                                                                                  <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                                  $       211,083  $   (1,201,322)
   Adjustments to reconcile net income to net cash used in operating activities-
     Depreciation and amortization                                                             82,446          61,886
     Decrease in deferred taxes, net                                                          106,000             -
     Changes in operating assets and liabilities-
       Accounts receivable                                                                    611,438         771,570
       Inventory                                                                              293,294         870,563
       Prepaid expenses and other assets                                                       56,241          41,010
       Accounts payable                                                                      (623,149)        (16,704)
       Accrued expenses                                                                      (645,761)         57,637
       Customer deposits                                                                     (513,385)        (43,286)
                                                                                       ---------------   -------------

              Total adjustments                                                              (632,876)       1,742,676
                                                                                       ---------------   -------------

              Net cash provided by (used in) operating activities                            (421,793)         541,354

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                                         (30,852)         (11,075)
                                                                                       ---------------   --------------

              Net cash used in investing activities                                           (30,852)         (11,075)

CASH FLOWS FROM FINANCING ACTIVITIES:                                                               -                -
                                                                                      ---------------    --------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                         (452,645)         530,279

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                3,766,534        3,313,889

CASH AND CASH EQUIVALENTS, END OF YEAR                                                $     3,313,889  $     3,844,168
                                                                                      ===============  ===============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid (refunded) for-
     Interest                                                                         $         9,177  $         7,604
                                                                                      ===============  ===============

     Income taxes                                                                     $       242,450  $       (48,105)
                                                                                      ===============  ================

</TABLE>

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


                                      F-6
<PAGE>

                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)


(1)    DESCRIPTION OF BUSINESS

       QC  Optics,  Inc.  (the  Company)  was  formed  in 1986 and  manufactures
       high-end   critical   surface   inspection   systems  for  sales  to  the
       semiconductor and computer hard disk industries.

(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       REVENUE RECOGNITION

       Revenues from product sales and the sale of spare parts are recognized at
       the time  equipment is shipped.  Revenues  from  service and  maintenance
       agreements  are  recognized  ratably  over  the  period  covered  by  the
       agreement. Net sales of the Company by products,  spares and service were
       as follows:

                                                 FOR THE YEARS ENDED
                                               1998              1999

           Products                       $    8,479,725   $   3,944,360
           Spares and service                  1,430,151       1,405,887
                                          --------------   -------------

           Total sales                    $    9,909,876   $   5,350,247
                                          ==============   =============

       The Company derives most of its annual  revenues from a relatively  small
       number of sales of products, systems and upgrades. As a result, any delay
       in the  recognition  of revenue for a single  product,  system or upgrade
       could  have a  material  adverse  effect  on  the  Company's  results  of
       operations  for a  given  accounting  period.  In  addition,  some of the
       Company's  net  sales  have  been  realized  near  the end of a  quarter.
       Accordingly,  a delay in a shipment  scheduled to occur near the end of a
       particular  quarter could have a material adverse affect on the Company's
       results of operations for that quarter.

       The  Company's  operating  results  have  historically  been  subject  to
       significant quarterly and annual fluctuations.  The Company believes that
       its  operating  results will  continue to  fluctuate  on a quarterly  and
       annual basis due to a variety of factors,  including the  cyclicality  of
       the industries served by the Company's inspection  products;  patterns of
       capital spending by customers;  the timing of significant  orders;  order
       cancellations  and  shipment  rescheduling;   market  acceptance  of  the
       Company's products;  consolidation of customers;  unanticipated delays in
       design,  engineering or production,  or in customer acceptance of product
       shipments;  changes in pricing by the Company or its competitors; the mix
       of systems sold; the relative proportions of product revenues and service
       revenues; the timing of payment of sales commissions;  changes in product
       development costs;  expenses associated with acquisitions,  exchange rate
       fluctuations and the availability of components and subassemblies.


                                      F-7
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)

       The Securities and Exchange Commission released Staff Accounting Bulletin
       No. 101,  Revenue  Recognition  in  Financial  Statements  (SAB 101),  on
       December 3, 1999. This SAB provides additional guidance on the accounting
       for revenue  recognition  including both broad  conceptual  discussion as
       well as certain industry-specific guidance. The Company is in the process
       of  accumulating  the  information  necessary to quantify  the  potential
       impact of this new guidance, if any.

       WARRANTY COSTS

       The Company  accrues  warranty costs in the period the related revenue is
       recognized.

       RESEARCH AND DEVELOPMENT COSTS

       Research and development  costs are expensed as incurred and are included
       in  engineering  expenses in the  accompanying  statements of operations.
       Research and development  costs for the years ended December 31, 1998 and
       1999 amounted to approximately $415,000 and $443,000 respectively.

       CASH AND CASH EQUIVALENTS

       Cash and cash equivalents include highly liquid investments with original
       maturities of three months or less.

       INVENTORY

       Inventory is stated at the lower of cost (first-in,  first-out) or market
       and consists of the following:

                                                           December 31,
                                                      1998              1999

          Raw materials and finished parts      $    1,815,183    $    1,270,450
          Work-in-process                            1,189,882         1,002,563
          Finished goods                               727,069           588,558
                                                --------------    --------------

                                                $    3,732,134    $    2,861,571
                                                ==============    ==============

       Work-in-process  and finished goods inventories  include material,  labor
       and manufacturing overhead.


                                       F-8
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)


       PROPERTY AND EQUIPMENT

       Property and equipment are stated at cost.  Maintenance  and repair items
       are  charged to expense  when  incurred;  renewals  and  betterments  are
       capitalized. When property and equipment are retired or sold, their costs
       and related accumulated  depreciation are removed from the accounts,  and
       any resulting gain or loss is included in income.  Leasehold improvements
       are depreciated  over the life of the lease or useful life,  whichever is
       shorter.

       The Company provides for depreciation  using the straight-line  method to
       amortize  the cost of plant and  equipment  over their  estimated  useful
       lives, which are generally as follows:

                                                         ESTIMATED
          ASSET CLASSIFICATION                           USEFUL LIFE

          Furniture and fixtures                          3-8 years
          Machinery and equipment                         3-8 years
          Motor vehicles                                  3-5 years

       Accumulated  depreciation  of property  and  equipment  was  $484,974 and
       $331,603 at December 31, 1998 and 1999, respectively.

       INCOME TAXES

       The Company utilizes the liability method of accounting for income taxes,
       as set forth in Statement of Financial  Accounting  Standards  (SFAS) No.
       109,  Accounting for Income Taxes.  SFAS No. 109 requires the recognition
       of deferred  tax assets and  liabilities  for the  temporary  differences
       between the tax and financial  statement  carrying  amounts of assets and
       liabilities.  Deferred  tax assets are  recognized  net of any  valuation
       allowance.

       CONCENTRATION OF CREDIT RISK/SIGNIFICANT CUSTOMERS

       Financial   instruments  that   potentially   expose  the  Company  to  a
       concentration  of credit risk include  accounts  receivable  and cash and
       cash equivalents.

       The  Company  sells its  products  primarily  to a small  number of large
       corporate  customers in the  semiconductor  and computer  hard disk drive
       industries and performs ongoing  evaluations of its customers'  financial
       conditions.  Concentration of credit risk with respect to sales and trade
       receivables is significant and summarized as follows:

                            NET SALES FOR THE          ACCOUNTS RECEIVABLE AS OF
                         YEARS ENDED DECEMBER 31,                DECEMBER 31,
                               1998          1999              1998        1999

        Company A        $  5,400,000   $  3,485,000    $  1,447,000   $ 384,000

        Company B           1,693,000        108,000           2,000      27,000
        Company C             260,000        644,000          15,000     457,000



                                      F-9
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)

       The  Company  maintains  its  cash  and  cash  equivalents  at  financial
       institutions in Massachusetts. Accounts at these institutions are insured
       by the Federal Deposit  Insurance  Corporation up to $100,000.  Uninsured
       cash  and  cash  equivalent  bank  balances   amounted  to  approximately
       $2,991,000 and $3,863,000 at December 31, 1998 and 1999, respectively.

       Net sales by country, denominated in U.S. dollars, were as follows, based
       on the  location  to which the  products  were  shipped  or the  services
       provided:

                                     FOR THE YEARS ENDED
                                 1998                1999

          United States    $    3,453,854        $ 1,448,447

          Japan                 1,906,440            107,687
          Thailand              1,798,652              1,368
          Malaysia              2,486,663          3,087,285
          Other                   264,267            705,460

       FAIR VALUE OF FINANCIAL INSTRUMENTS

       The Company's  financial  instruments  consist primarily of cash and cash
       equivalents,  accounts  receivable  and  accounts  payable.  The carrying
       amounts of the Company's cash and cash equivalents,  accounts  receivable
       and  accounts  payable  approximate  fair  value due to their  short-term
       nature.

       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 revenues and expenses
       during the  reporting  periods.  Actual  results  could differ from those
       estimates.

       NET INCOME (LOSS) PER COMMON SHARE

       Basic earnings per common share is computed by dividing net income (loss)
       by the  weighted  average  number of shares of common  stock  outstanding
       during the year. Diluted earnings per common share is calculated the same
       as basic except,  if not  antidilutive,  stock options are included using
       the treasury  stock method to the extent that the average  share  trading
       price exceeds the exercise price.  Basic and diluted  earnings per common
       share  for the  years  ended  December  31,  1998  and 1999  were  equal;
       therefore,  no  reconciliation  between  basic and diluted  earnings  per
       common share is required.


                                      F-10
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)


       COMPREHENSIVE INCOME (LOSS)

       Comprehensive  income  (loss) for the years ended  December  31, 1998 and
       1999 were equal to the net income (loss) as included in the  accompanying
       statement of operations for the years ended December 31, 1998 and 1999.

       SEGMENT REPORTING

       QC Optics  operates in one  segment  and does not analyze its  operations
       based upon separate geographical or product-line information.

(3)    INCOME TAXES

       The components of the income tax provision (benefit) are as follows:

                           FOR THE YEARS ENDED DECEMBER 31,
                                  1998             1999

          Current-

             Federal       $   4,900   $        -
             State             7,900       15,000
                           ---------   ----------
                              12,800       15,000
                           ---------   ----------
          Deferred-

             Federal          91,750           -
             State            14,250           -
                           ---------   ----------
                             106,000           -
                           $ 118,800   $   15,000
                           =========   ==========


       The Company's  effective tax rate differs from the federal statutory rate
       of 34% in 1998 and 1999 due to the following:

                                                            1998         1999

   Computed tax provision (benefit) at statutory rate    $ 112,160   $ (403,349)

   Increase resulting from-
       State taxes                                             971       15,000
       Net operating losses not benefited                        -      394,994
       Items not deductible for income tax purposes          5,669        8,355
                                                             -----        -----

                                                         $ 118,800   $   15,000
                                                         =========   ==========


                                      F-11
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)


       Deferred  income  taxes at December  31, 1998 and 1999  consisted  of the
following:

                                                     1998             1999
  Deferred tax assets-
     Inventories                               $      580,000    $       580,000
     Other reserves                                   210,000            222,000
     Net operating loss carryforwards                 432,000            815,000
                                               --------------    ---------------
           Total gross deferred tax assets          1,222,000          1,617,000
           Less--Valuation allowance                  978,500          1,617,000
                                                --------------    --------------
           Net deferred tax assets             $      243,500    $             -
                                               ==============    ===============


       Under the Tax Reform  Act of 1986,  the  amount of the  benefit  from net
       operating  losses may be  impaired  or limited in certain  circumstances,
       including a  cumulative  stock  ownership  change of more than 50% over a
       three-year  period,  which  occurred in  connection  with the  management
       buyout which was consummated on March 29, 1996. As a result,  the Company
       is limited to approximately $161,000 of loss utilization per year.

       Limitations on the utilization of the Company's net operating losses from
       the  management  buyout and  uncertainty  surrounding  the ability of the
       Company to generate future income have caused management to conclude that
       realizability  of the  deferred  tax assets as of  December  31,  1999 is
       uncertain and has, therefore, provided a full valuation allowance against
       its deferred tax assets.

       For tax reporting purposes,  the Company has a U.S. federal net operating
       loss  carryforward  of  approximately  $2,397,000,  subject  to  Internal
       Revenue Service (IRS) review and approval, of which $1,432,000 is subject
       to  the  limitations  of  stock  ownership   changes   discussed   above.
       Utilization of the net operating loss  carryforward  is contingent on the
       Company's  ability to generate  income in the future.  The net  operating
       loss carryforwards will expire from 2001 to 2009 if not utilized.



                                      F-12
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)


(4)    COMMITMENTS AND CONTINGENCIES

       The  Company  leases its  operating  facilities  under two  noncancelable
       operating  lease  agreements,  the largest of which expires in 2001. Rent
       expense  for the years  ended  December  31,  1998 and 1999  amounted  to
       approximately  $253,000  and  $298,000,   respectively.   Future  minimum
       commitments under all noncancelable operating leases are approximately as
       follows:

                         2000             $       229,000
                         2001                      97,000

(5)    EMPLOYEE BENEFIT PLAN

       The Company  sponsors a 401(k)  retirement  savings  plan (the Plan) that
       covers  substantially  all of the Company's  employees.  Participants may
       make voluntary  contributions of 1% to 16% of their annual  compensation.
       The  Company  makes  matching  contributions  up to 100%  of  participant
       voluntary  contributions up to a maximum of 2%, and an additional Company
       contribution can be made at the Company's discretion.

       The  Company  charged  to expense  approximately  $100,000  and  $113,000
       related to  contributions  to the Plan for the years ended  December  31,
       1998  and  1999,   respectively.   Included   in  accrued   expenses   is
       approximately  $71,000 and $79,000 for Company matching and discretionary
       contributions to the Plan for the years ended December 31, 1998 and 1999,
       respectively.

(6)    STOCK OPTION PLANS

       In June 1996, the Board of Directors  approved the 1996 Stock Option Plan
       (the 1996  Plan)  under  which  employees,  including  directors  who are
       employees,  may be granted  options to purchase  shares of the  Company's
       common stock at not less than fair market value on the date of grant,  as
       determined  by the Board of  Directors.  The 1996 Plan  also  allows  for
       nonqualified  stock options to be issued to employees and nonemployees at
       prices that are less than fair market  value.  Options  granted under the
       1996 Plan are  exercisable  for up to a 10-year  period  from the date of
       grant.  The  Company  has  reserved  360,000  shares of common  stock for
       issuance  under the 1996 Plan. To date, all options have been issued with
       an exercise price at or above fair market value at the date of grant.

       In January 1998,  20,232 options at $5.10 per share and 26,500 options at
       $4.13 per share  previously  granted under the 1996 Plan were repriced to
       an  exercise  price of $3.625 per share  with  vesting  and  option  life
       calculated from the original grant date. In October 1998,  63,132 options
       at $3.625  per share and 43,108  options  at $3.250 per share  previously
       granted under the 1996 Plan were repriced to an exercise  price of $1.313
       per share with vesting and option life calculated from the original grant
       date. In 1998,  the Company  granted  options under the 1996 Plan for the
       purchase of 33,000  shares at $1.313 to $3.625 per share,  the  estimated
       fair market  value on the date of grant,  which become  exercisable  over
       three  years  beginning  one year  from the date of grant.  In 1999,  the
       Company  granted  options  under the 1996 Plan for the purchase of 16,500
       shares at $1.220 per share, the estimated fair market


                                      F-13
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)

       value on the date of grant,  which become  exerciseable  over three years
       beginning one year from the date of grant.

       In June 1996,  the Board of Directors  approved a Director  Formula Stock
       Option Plan (the Formula Plan) in which options will be granted beginning
       on June 18, 1996, and every four years thereafter,  immediately following
       the Company's annual meeting of stockholders, options shall be granted to
       eligible  nonemployee  directors.  Each director will receive  options to
       purchase 15,000 shares of common stock, which vest and are exercisable in
       16 equal  installments over a period of four years beginning on the first
       day of the fiscal quarter  immediately  following the grant.  The options
       may be  exercised  at the fair market value of the shares of common stock
       on the date of grant.  The Company has reserved  100,000 shares of common
       stock for issuance under the Formula Plan.

       In January 1998, 30,000 options previously granted under the Formula Plan
       were  repriced from an original  exercise  price of $5.10 per share to an
       exercise  price  of  $3.625  per  share  with  vesting  and  option  life
       calculated from the original grant date.

       PRO FORMA STOCK-BASED COMPENSATION EXPENSE

       SFAS No.  123,  Accounting  for  Stock-Based  Compensation,  sets forth a
       fair-value-based method of recognizing stock-based  compensation expense.
       As  permitted  by SFAS No.  123,  the  Company has elected to continue to
       apply  Accounting  Principles  Board  Opinion  No. 25 to account  for its
       stock-based  compensation plans. Had compensation cost for awards granted
       under the Company's stock-based  compensation plans been determined based
       on the fair value at the grant dates consistent with the method set forth
       under SFAS No. 123, the effect on the Company's net income (loss) and net
       income (loss) per common and common  equivalent shares would have been as
       follows:

                                                        1998              1999

   Net income (loss)-
      As reported                                  $    211,083   $ (1,201,322)
      Pro forma                                         100,596     (1,287,894)

   Diluted net income (loss) per common and
   common equivalent shares-
      As reported                                  $        .06   $      (.37)
      Pro forma                                             .03          (.40)




                                      F-14
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)

       Compensation  expense for options  granted is reflected  over the vesting
       period; therefore, future compensation expense may increase as additional
       options are granted.

       The fair value of each option grant was estimated on the grant date using
       the    Black-Scholes    option   pricing   model   with   the   following
       weighted-average assumptions:

                                                           1998            1999

          Volatility                                         46%             69%
          Risk-free interest rate                          4.97%           5.41%
          Expected life of options                    4.44 years      5.00 years
          Dividends                                         none            none

       The  Black-Scholes   option  pricing  model  was  developed  for  use  in
       estimating  the fair  value of  traded  options,  which  have no  vesting
       restrictions  and are fully  transferable.  In addition,  option  pricing
       models  require  the input of highly  subjective  assumptions,  including
       expected stock price volatility. Because the Company's stock options have
       characteristics  significantly different from those of traded options and
       because changes in the subjective input assumptions can materially affect
       the fair value estimate,  in management's opinion, the existing models do
       not  necessarily  provide a reliable  single measure of the fair value of
       its employee stock options.


                                      F-15
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)

       STOCK OPTION ACTIVITY

       A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
                                                                       Year Ended December 31, 1998
                                                             1996 Plan                        Formula Plan

                                                                 Weighted                           Weighted
                                                 Number of        Average        Number of             Average
                                                  Shares       Exercise Price     Shares          Exercise Price
         <S>                                        <C>              <C>                <C>             <C>
          Options outstanding, beginning of
          year                                        221,700         $    5.13          45,000          $    4.48
            Granted                                    33,000              2.71               -                  -
            Exercised                                       -                 -               -                  -
            Repricing--Extinguish old options        (152,972)             3.80         (30,000)              5.10
            Repricing--Distribute new options         152,972              2.02          30,000               3.63
            Forfeited                                 (14,328)             3.16               -                  -
                                                 -------------                       -----------

          Options outstanding, end of year            240,372         $    3.78          45,000          $    3.50
                                                 ============         =========     ===========          =========

          Options exercisable                         165,240         $    4.79          24,375          $    3.54
                                                 ============         =========     ===========          =========

          Options available for grant                 119,628                            55,000
                                                 ============                       ===========
          Weighted-average  fair value of options
          (whose  exercise price equals market
          value) granted or repriced during the year                  $    0.97                          $    1.48
                                                                      =========                          =========

                                                                       Year Ended December 31, 1999
                                                             1996 Plan                        Formula Plan

                                                                    Weighted                           Weighted
                                                    Number of        Average        Number of             Average
                                                     Shares       Exercise Price     Shares          Exercise Price
          Options outstanding, beginning of
          year                                        240,372         $    3.78          45,000          $    3.50
            Granted                                    16,500              1.22               -                  -
            Exercised                                       -                 -               -                  -
            Forfeited                                 (15,676)             1.30           (4,688)             3.63
                                                 ------------                           ---------

          Options outstanding, end of year            241,196         $    3.77          40,312          $    3.49
                                                 ============         =========     ===========          =========

          Options exercisable                         199,182         $    4.29          32,812          $    3.52
                                                 ============         =========     ===========          =========

          Options available for grant                 118,804                            59,688
                                                 ============                       ===========
          Weighted-average  fair value of options
          (whose  exercise price equals market
          value) granted or repriced during the year                  $    0.86                          $      -
                                                                      =========                          =========
</TABLE>
                                      F-16
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)


       A summary of the status of the  Company's  stock  options at December 31,
1999 is as follows:


                          Number of        Number of
                           Options          Options        Remaining Contractual
      Exercise Price     Outstanding      Exerciseable              Life

                               1996 Plan
         $  1.220             13,500                 0                 9 years
         $  1.313            105,196            76,682          6.5 to 9 years
         $  5.100             15,000            15,000               6.5 years
         $  6.300            107,500           107,500               6.5 years

                             Formula Plan

         $  3.250             15,000             9,375               7.5 years
         $  3.625             25,312            23,437               6.5 years



                                      F-17
<PAGE>
                                 QC OPTICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

                                   (Continued)

(7)    COMMON STOCK WARRANTS

       At  December  31,  1999,  there were  outstanding  warrants  to  purchase
       1,092,500  shares  of the  Company's  Common  Stock  for  $7.80 per share
       expiring  October 23, 2001. The warrants are redeemable by the Company at
       $.20 per  redeemable  warrant on 30 days prior written  notice,  provided
       that the average  closing bid price of the Common Stock equals or exceeds
       $10.80 per share for 20  consecutive  trading days ending  within 10 days
       prior to the notice of redemption.

(8)    REVOLVING LINE OF CREDIT

       The Company has a revolving  line-of-credit  with Citizens Bank (formerly
       State  Street  Bank and  Trust  Company).  The  revolving  line-of-credit
       agreement  allows for  maximum  borrowings  of  $2,000,000  and  requires
       monthly  payment of  interest on the  outstanding  balance to maturity on
       June 30, 2000.  Borrowings under the revolving  line-of-credit  agreement
       are limited to 80% of qualifying  accounts  receivable.  Borrowings under
       the  agreement  bear  interest at the bank's prime rate (8.5% at December
       31, 1999). The terms of the loan agreement provide for the maintenance of
       certain specified  financial ratios including the quick ratio and debt to
       equity,  minimum  earnings  tests  and  other  negative  and  affirmative
       covenants and  restricts  certain  transactions  without the bank's prior
       written  consent.  As of December  31, 1999 the Company was in default of
       the minimum earnings covenant of the revolving line-of-credit  agreement.
       The  Company  obtained  a waiver  of this  covenant  for the  year  ended
       December  31, 1999.  At December  31, 1999 the Company had no  borrowings
       outstanding under the revolving line-of-credit agreement and availability
       of approximately $573,000.

(9)    VOTING TRUST

       On October 27, 1995, the Company and certain management  employees of the
       Company  entered  into a voting  trust  agreement  known as the QC Optics
       Voting Trust (the Voting Trust), of which the president of the Company is
       trustee.  The Voting  Trust  continues  in force for a period of 21 years
       from October 27, 1995 unless terminated  earlier as a result of a merger,
       dissolution, sale of all or substantially all of the Company's assets, or
       liquidation.  The  Voting  Trust  represented  approximately  42%  of the
       Company's outstanding shares at December 31, 1999.


                                      F-18