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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, 1997
                         COMMISSION FILE NUMBER 1-12337

                                QC OPTICS, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                  DELAWARE                                      04-2916548
(STATE OR OTHER JURISDICTION OF INCORPORATION      (I.R.S. EMPLOYER IDENTIFICATION NO.)
               OR ORGANIZATION)
 46 JONSPIN ROAD, WILMINGTON, MASSACHUSETTS                        01887
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

                                 (978) 657-7007
                (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

         SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

<TABLE>
<CAPTION>
                                                     NAME OF EACH EXCHANGE
               TITLE OF EACH CLASS                    ON WHICH REGISTERED
               -------------------                   ---------------------
<S>                                                 <C>
Common Stock, $.01 par value per share              American Stock Exchange
Redeemable Warrants                                 American Stock Exchange
</TABLE>

      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, 1997 were
$10,091,834.

     The aggregate market value of the voting stock held by non-affiliates based
upon the closing price for such stock on March 24, 1998 was approximately
$4,778,813. As of March 24, 1998, 3,242,500 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

     The Definitive Proxy Statement for the Annual Meeting of Stockholders for
the fiscal year ended December 31, 1997, to be filed pursuant to Regulation 14A
(the "Proxy Statement"), is incorporated by reference in Part III of this Form
10-KSB.

     Transitional Small Business Disclosure Format (check one):

                       Yes  X                     No ___

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                                     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,
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 involve a number of risks and uncertainties. Such statements 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 factors and
uncertainties include, but are not limited to the following: business conditions
and growth in certain market segments and general economy; 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, which could have a material adverse effect on the Company; 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 Company's filings
with the Securities and Exchange Commission.

GENERAL

     QC Optics, Inc. (the "Company" or "QCO") designs, manufactures and markets
laser based defect detection systems for the semiconductor, computer hard disk
drive and flat panel display markets. QCO uses its patented and other
proprietary technology in lasers and optical systems that scan a computer hard
disk, photomask or flat panel display for defects or contamination. The
Company's systems combine automatic handling, clean room capability and computer
control with reliable laser based technology. The Company believes that these
features enable the Company to maintain a leading market position in the United
States in the semiconductor, computer hard disk drive and flat panel display
industries where high quality inspection capabilities are required. The
Company's customers include many of the world's largest leading semiconductor
and computer hard disk manufacturers. Currently, QCO has over 250 systems
installed in sixteen countries.

     The Company introduced its QCO-4000 automatic pelliclized (a protective
cover) photomask laser based inspection systems in March 1996, which has the
sensitivity to detect defects or contamination of less than 0.3 micrometers (the
equivalent of 0.06 micrometers on the semiconductor wafer), which will be
required to detect defects in the next generation of semiconductors. As
semiconductor devices have become more complex, the semiconductor manufacturing
process has become very sensitive to photomask errors, requiring more complex
photomasks and, as a result, increasingly sophisticated photomask inspection
tools.

     In the fourth quarter of 1997, the Company introduced the DISKAN-9000 which
is targeted to provide computer hard disk manufacturers with the capability to
inspect 100% of their production volume. Compared to the Company's previous
equipment, the DISKAN-9000 provides more than 70% higher throughput and a 30%
reduction in footprint.

     The Company's systems, such as its QCO-4000 and DISKAN-9000, are designed
to fit into its 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, demand
during the past year for the Company's products which can inspect computer hard
disks has increased significantly. The Company is also working on research and
development for porting, which is applying the Company's technology in its other
systems, to the inspection of flat panel displays.

     QCO was formed in 1986 as a Delaware corporation to acquire the assets of a
division of GCA Corporation. The Company funded its product development
primarily with equity investments and debt financing from Kobe Steel Ltd. and
its subsidiaries including Kobe Steel USA Holdings, Inc., a Delaware

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corporation, and Kobe Steel USA International, Inc., a Delaware corporation
(collectively, "Kobe Steel"). From 1986 to 1990, the Company focused its efforts
in developing inspection systems for computer hard disk inspection. Using the
Company's patented and proprietary information, the Company expanded its efforts
to use this technology for inspection of photomasks used to image integrated
circuit patterns onto semiconductor wafers. 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 QCO's senior management.

     QCO's principal offices and manufacturing facilities are based in
Wilmington, Massachusetts. The Company also maintains regional sales or service
personnel in Texas, Florida, New Mexico and California. The Company currently
has approximately 60 employees and has manufacturer's representatives in Europe
and distributors in Asia.

MARKETS

     The Company currently serves three markets with its inspection systems:
semiconductors, computer hard disks and flat panel displays. In addition, the
Company plans to continue to develop additional products, based on the Company's
existing patented and proprietary technologies, to further develop laser based
inspection systems.

     The Company's core technology inspects by illuminating critical surfaces
and 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 provides a "fingerprint" of the surface and
defects. This information passes through analog and digital signal processes and
is then analyzed using the Company's 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 1990s, 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 0.25 micrometers and less. In the
late 1980s and early 1990s, 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 1980s, 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.

     Management believes 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.
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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
the most important determinants of profitability in the semiconductor industry.
The Company believes that its customers typically experience rapid paybacks on
their investments in the Company's 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. A downturn in the demand for semiconductors
would likely reduce the demand for photomasks as well as reduce the demand for
photomask inspection equipment or, alternatively, place pricing pressure on
photomask inspection equipment vendors. The Company's ability to reduce expenses
in response to any such downturn is limited by its needs for continued research
and development expenses and in customer service and support. Previous downturns
in capital investment by the semiconductor fabrication industry have materially
affected the operating results of other businesses in the semiconductor capital
equipment industry and future downturns may have similar adverse effects. In
order to address these concerns, the Company sells its inspection technologies
into other markets, such as computer hard disk inspection, and plans to expand
into other emerging markets, such as flat panel displays.

  Computer Hard Disk Inspection

     Computer hard disk manufacturers use advanced deposition processes to
produce thin film disks. An aluminum substrate is nickle 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. The nickle
substrate is then typically 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. QC Optics'
computer hard disk inspection systems have been utilized for over a decade 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 and resulted in the increase in the Company's
DISKAN product series sales in 1997.

  Flat Panel Displays

     Over time, the use of flat panel displays ("FPDs") is expected to
significantly replace vacuum tube monitors used in televisions and computer
monitors, providing users with quality images on less bulky displays. The
manufacture of these devices is in the very early stages of commercial
development in the United States. FPDs are currently being designed to include
electronic substrates which undergo a lithography process similar to
semiconductors as well as glass substrates which require inspection prior to the
lithography process.

     The market for FPDs has grown significantly in recent years as a result of
the increasing popularity of portable computers and other electronic devices
which utilize screens and other types of displays to provide information in
digital format and graphical displays to the end user. The weight and narrow
form factor of FPDs are enabling new display applications where the previously
predominant monitor technology, cathode ray tubes ("CRTs"), did not allow such
use. Laptop and notebook computers, personal digital assistants,
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portable video games, digital phones and a variety of devices for the
automotive, technical, medical and military markets are examples of electronic
products in fast growing markets which cannot be served by CRT technology. The
Company expects that FPD manufacturers will increase their purchases of
inspection equipment in response to both the growth in the FPD market as well as
the shift to larger and higher resolution displays.

STRATEGY

     The Company's goal is to maintain a leadership position in the photomask
and computer hard disk inspection system markets and use its patented and
proprietary technology to pursue other opportunities in high performance
inspection systems. The Company intends to achieve this goal through the
implementation of the following strategies:

     - Expand Marketing Efforts for Existing Products.  Since its introduction
       of photomask and computer hard disk inspection systems, the Company's
       objective has been to expand its leadership position in these fields. The
       Company is also working to extend its sales and marketing activities
       outside of the United States into Europe and Asia, where the Company
       believes very sizable market demand exists for state-of-the-art
       inspection systems in both photomasks and computer hard disks. In
       addition, in the computer hard disk market, the Company intends to
       continue to market its computer hard disk inspection systems for 100%
       production line inspection versus statistical sampling inspection.

     - Maintain Technology Leadership Position.  Since its formation, the
       Company's objective has been to maintain a leadership position in
       inspection technology in the photomask and computer hard disk inspection
       system markets. To maintain technology leadership, the Company intends to
       continue to work closely with major customers, several of which are the
       leading suppliers of semiconductors and computer hard disks in their
       respective industries. In addition, the Company believes that the recent
       management buyout, as well as the funds received from its initial public
       offering, will increase its attraction as a joint venture or strategic
       alliance partner with other semiconductor and computer hard disk
       manufacturers.

     - Broaden Product Offerings through Acquisitions.  Although no acquisition
       is currently planned and there can be no assurance that the Company will
       complete any acquisition, QCO plans to expand its activities in related
       inspection markets, such as the expected market for flat panel displays.
       In addition, there are a number of smaller companies in the inspection
       market that have technology and market links with the Company's existing
       businesses, including material handling and stocking equipment, cleaning
       equipment, and related products.

     - Provide Broad Range of Computer Hard Disk Inspection Solutions.  The
       Company's strategy is to expand and improve its product offerings by
       leveraging its current technologies to provide 100% inspection tools such
       as the recently introduced DISKAN-9000, as well as enhanced failure
       analysis tools.

     - Provide Broad Range of Photomask Inspection Solutions.  The Company's
       strategy is to provide a broad range of technical solutions, leveraged
       off of existing technologies, with different performance characteristics.
       Certain of the Company's inspection systems currently address less
       complex photomask designs while new products, such as the QCO-4000, are
       designed to address the most sophisticated photomasks currently used.

     - Leverage Installed Base.  In marketing new products to existing
       customers, the Company intends to leverage its existing customer base to
       upgrade the over 250 Company systems currently in the field with new
       product offerings. Many of the Company's products are built with modular
       systems which are designed to facilitate future enhancements, as well as
       new system software.

     - Expand Customer Support Services.  The Company currently provides local
       support and service with personnel located in California, Texas, New
       Mexico and Florida in addition to its principal engineering services at
       its Wilmington, Massachusetts headquarters. The Company also has factory
       trained service representatives in the UK, France, Germany, Japan, Korea,
       Taiwan and Malaysia. The Company
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       intends 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

     QCO's current products consist of photomask, computer hard disk and flat
panel display inspection systems. The Company's systems are designed to provide
a lower cost of ownership through high performance, reliability and integration
into the manufacturing process. The Company utilizes a number of different forms
of lasers in its laser based inspection systems, allowing it to cover a broad
range of technical requirements and cost sensitivities for its customers.

     Many of QCO's newer systems are designed to fit into its customer
production lines virtually eliminating the need for special handling or
production procedures while performing 100% inspection throughout the process.
QCO's systems sort out fatal defects on disks and pelliclized photomasks before
they become manufacturing yield or other quality problems. All of QCO's systems
have the sensitivity to detect defects or contamination down to less than 0.5
micrometers. In the fourth quarter of 1997, the Company introduced the
DISKAN-9000 which is targeted to provide computer hard disk manufacturers with
the capability to inspect 100% of their production volume. Compared to the
Company's previous equipment, the DISKAN-9000 provides more than 70% higher
throughput and a 30% reduction in footprint. The Company also introduced its new
QCO-4000 in March 1996. This new system has the ability to detect defects or
contamination of 0.3 micrometers (the equivalent of 0.06 micrometers on the
semiconductor wafer), which will be required to detect defects in the next
generation of semiconductors. Specific Company products include the following:

     QCO-4000:  The QCO-4000 represents what the Company believes is a
state-of-the-art breakthrough for inspecting pelliclized photomasks. Defects on
complex, small featured photomasks are non-destructively detected and
characterized with a sensitivity down to .25 micrometers, using the latest
technologies in ultraviolet argon ion laser optics and innovative signal
processing. The QCO-4000 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 also provides for inspection both on a sampling
basis as well as 100% inspection. This allows this 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 to be easily integrated into the manufacturing process,
manufacturing resource planning ("MRP") and similar systems. The average selling
price for this system is approximately $900,000 to $1,300,000, although various
options can increase or reduce the price of a specific system.

     API-3000/5:  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. The average selling price for this system is approximately
$500,000 to $750,000, although various options can increase or reduce the price
of a specific system.

     API-1100:  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 manufacturers also use
this equipment for final inspection. The average selling price for this system
is approximately $300,000 to $600,000, although various options can increase or
reduce the price of a specific system.

     DISKAN SERIES:  These are computer hard disk inspection systems which are
equipped with either integrated automatic handling, manual handling or external
handling systems. The Company's newest product, the DISKAN-9000 which was
introduced in 1997, 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
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the Company's previous systems. During 1997 the Company experienced increasing
demand from customers to provide a system for 100% inspection. In addition, the
Company offers the DISKAN-6000, which incorporates cassette-to-cassette
automatic handling, and is used to inspect a sample of the customer's total
production for process control. The DISKAN-7000, where disks are manually loaded
into the system, is used for failure analysis, process development and process
control. The average selling price for these systems is approximately $100,000
to $330,000, although various options can increase or reduce the price of a
specific system.

     API-1100FP:  The API-1100FP is the Company's first product to address the
inspection demands for flat panel display substrates inspection systems,
including systems with automatic handling capability. This product is utilized
for process control by flat panel display manufacturers, as well as flat panel
display glass substrate manufacturers. The average selling price for this system
is approximately $300,000 to $600,000, although various options can increase or
reduce the price of a specific system.

PRODUCTS UNDER DEVELOPMENT

     The Company's product development strategy is to make continuous
improvements to its existing product line relying on its proprietary
technologies and to expand prior development efforts in applications related to
the markets it serves. The Company currently has an engineering and product
development staff of 16 individuals who assist the Company's customers in
integrating the Company's products into the customer's work environment. This
engineering work provides the Company an opportunity to keep abreast of new
market opportunities for the Company's technologies.

     Currently the Company is working on product enhancements to both its
QCO-4000 and DISKAN product lines. The Company is continuing development
activities for the next generation of disk inspection systems market which were
introduced in late 1997. During 1998, the Company will introduce new DISKAN
failure analysis tools 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 product series. These systems will
provide even higher sensitivities in measurements and higher throughput than
currently provided with the DISKAN products. Management expects that these new
systems will significantly improve the cost effectiveness of the equipment for
100% inspection of the customers' production. In addition, the Company continues
its efforts in the flat panel display market to modify its existing products for
research and development in the inspection of flat panel displays. The
technology used in flat panel displays will continue to evolve significantly and
as a result, the Company expects that it will be required to continue to expend
significant efforts in improving and developing new technologies for the flat
panel display markets.

     The Company's 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. The Company's 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 the Company's 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, the Company provides individualized engineering services for
customers as well as technical support worldwide. In addition to providing
technical support, the Company's service and support personnel advise customers
about product applications, provide customer training, coordinate upgrades,
manage spare parts and provide preventative maintenance.

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     The Company's warranty obligations for its systems generally cover a
12-month period beginning upon customer acceptance. However, many customers
request service and support beyond the warranty period. The Company has
historically derived less than 10% of its revenues from annual service and
maintenance for its installed base of systems. Some of the Company's 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, 1997 and the fiscal year ended December 31, 1996 were $1,135,094
and 1,210,508, respectively. Historically, warranty expenses have been
consistent with established allowances.

CUSTOMERS

     The Company's customers include semiconductor fabricators, photomask
fabricators and suppliers, computer hard disk manufacturers and customers
interested in developing flat panel displays. Repeat sales to existing customers
represent a significant portion of the Company's product revenues, and the
Company believes that its installed base of over 250 systems represents a
significant competitive advantage, particularly in the United States.

     Historically, the Company has sold a significant proportion of its systems
to a limited number of customers as the markets that the Company participates in
are primarily dominated by a few major companies. Approximately 95% and 75% of
net sales in Fiscal 1997 and Fiscal 1996, respectively were to the ten largest
customers in each fiscal year. Sales to the largest customer accounted for
approximately 49% of net sales during Fiscal 1997. The failure to replace sales
with sales to other customers in succeeding periods would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company expects that sales to relatively few customers will
continue to account for a high percentage of the Company's revenues in any
accounting period in the foreseeable future. A reduction in orders from any such
customer or the cancellation of any significant order could have a material
adverse effect on the Company's business, financial condition and results of
operations. None of the Company's customers has entered into a long-term
agreement requiring it to purchase the Company's products.

     In addition, due to the substantial purchase price for the Company's
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

     QCO markets and distributes its products directly in the United States. The
Company maintains sales offices in Wilmington, Massachusetts and Santa Clara,
California, and service or sales personnel in New Mexico, Florida and Texas. The
Company also sells through manufacturers' representatives, distributors and
directly to certain customers internationally.

     Due to the significant involvement required to purchase QCO's 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 the QCO organization, from the
President to the engineers who designed the product. Accordingly, the Company's
systems typically have a lengthy sales cycle during which the Company may expend
substantial funds and management time and effort with no assurance that a sale
will result.

ENGINEERING AND PRODUCT DEVELOPMENT

     The Company directs its engineering and design efforts at products for
which the Company believes there is growing market demand. In particular, the
Company seeks to meet the requirements of its customers for products aimed at
emerging applications in the semiconductor, computer hard disk and flat panel
display inspection markets by applying the latest available technology and the
design and engineering know-how gained from the Company's focus on this market.
For many of its customers, the Company provides


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engineering and design support to help integrate the Company's products into
production environments. By working closely with these customers, the Company is
exposed to new market opportunities for its products.

     The Company employed 16 individuals in engineering and product development
as of December 31, 1997. During Fiscal 1997 and Fiscal 1996, the Company's
engineering expenses totaled approximately $1,316,000 and $1,405,000, or 13% and
10.3% of sales, respectively. The Company expenses all software development
costs as incurred.

     The Company's business strategy includes investing in or acquiring
companies which offer the Company access to complementary technologies, and new
markets within the Company's target industries.

COMPETITION

     The markets in which the Company competes are characterized by rapid
technological change, evolving industry standards, rapid product obsolescence
and intense competition. Competitors in the semiconductor photomask inspection
market include KLA Instruments, Hitachi and Nikon. In the computer hard disk
inspection market competitors include DPI Technology Systems, System Seiko,
Phase Metrics and Hitachi. Based on the number of installations, the Company
believes it is a leading supplier of semiconductor photomask soft defect
inspection systems and computer hard disk inspection systems in the United
States. The Company competes based on its installed base of customers,
engineering and service capabilities, breadth of products, patents and
proprietary information, and reputation. Many of the Company's competitors or
potential competitors have greater financial, marketing and technological
resources than the Company.

     The Company expects competition to continue in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative solutions that may be less costly or
provide additional features. The Company believes that its 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 the Company,
its customers and its competitors, the number and nature of the Company's
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 the Company's business and results of operations. No assurance
can be given that the Company will compete successfully in the future.

     The semiconductor, computer hard disk and flat panel display industries in
general, are characterized by rapid technological change and evolving industry
standards. As a result, the Company must continue to enhance its existing
products and to develop and manufacture new products and upgrades with improved
capabilities. This has required and will continue to require substantial
investments in research and development by the Company to advance a number of
state-of-the-art technologies. Continuous investments in research and
development will also be required to respond to the emergence of new
technologies. The failure to develop, manufacture and market new products, or to
enhance existing products, would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's competitors can be expected to continue to develop and introduce new
and enhanced products, any of which could cause a decline in market acceptance
of the Company's products or a reduction in the Company's margins as a result of
intensified price competition.

     Changes in manufacturing processes could also have a materially adverse
effect on the Company's business, financial condition and results of operations.
The Company anticipates continued changes in semiconductor and flat panel
display technologies and processes. There can be no assurance that the Company
will be able to develop, manufacture and sell products that respond adequately
to such changes.

BACKLOG

     The Company's backlog for products and services was approximately
$6,370,000 at December 31, 1997 compared to approximately $740,000 at December
31, 1996. QCO defines backlog to include only those


                                        8
<PAGE>   10

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 subject to
penalties, depending upon the time of cancellation. Although a significant
indicator of business levels, backlog is not necessarily representative of
future sales.

MANUFACTURING

     The Company's manufacturing activities consist of final assembly of
subassemblies, which are then integrated into finished systems and tested for
compliance with customer requirements. The Company believes that production lead
time, product quality and customer response are key elements to its success.

     Although the Company manufactures some of the subassemblies used in its
systems, most are purchased from unaffiliated subcontractors, typically to the
Company's specifications. None of the Company's suppliers is obligated to
provide the Company with any specific quantity of components or subassemblies
over any specific period. Certain of the components and subassemblies included
in the Company's products are obtained from a limited group of suppliers. In
addition, because the Company believes that subsystem vendors have increased
their manufacturing expertise, the Company expects to continue to obtain
virtually all of its components and subassemblies from third parties in order to
devote its resources toward systems design, software development and systems
integration, its primary areas of competence. To date, the Company has generally
been able to obtain adequate and timely delivery of critical subassemblies and
components, although it has 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, there can be no assurance that delays
or shortages caused by suppliers will not occur in the future. Any disruption of
the Company's supply of critical components and subassemblies could prevent the
Company from meeting its manufacturing schedules, which could damage
relationships with customers and would have a materially adverse effect on the
Company's business, financial condition and results of operations.

     The Company's systems have a large number of components and are highly
complex. To date, the Company has experienced only limited delays in
manufacturing and delivering systems and upgrades and may experience similar or
more extended delays in the future. Any inability to manufacture and ship
systems or upgrades on schedule could adversely affect the Company's
relationships with its customers and thereby materially adversely affect the
Company's business, financial condition and results of operations. Due to recent
increases in demand, the average time between order and shipment of the
Company's systems has increased over the last fiscal year. The Company's ability
to increase its 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. The failure of the Company 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 the Company will be successful in increasing its
manufacturing capacity.

GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS

     The Company's 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
recently issued regulations relating to electromagnetic fields, electrical power
and human exposure to laser radiation. In addition, numerous domestic
semiconductor manufacturers including certain of the Company's customers, have
subscribed to voluntary health and safety standards and decline to purchase
equipment not meeting such standards. The Company believes that its 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.


                                        9
<PAGE>   11

PROTECTION OF PROPRIETARY INFORMATION

     The Company holds twelve United States patents and has one additional
patent application pending. Several of the issued patents are also issued in
Japan, Europe and Canada and there are 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 2001 to
2115. The Company also has three registered trademarks in the United States
which are due for renewal in 1998 and 1999.

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

EMPLOYEES

     As of December 31, 1997, the Company had 58 full-time employees, of which
19 were in sales, marketing and service, 16 were in engineering and product
development, 6 were in administration and 17 were in manufacturing.

     None of the Company's employees are represented by a labor union. The
Company considers its relationships with its employees to be satisfactory. The
Company's financial performance will depend significantly upon the continued
contributions of its officers and key management, technical, sales and support
personnel, many of whom would be difficult to replace. In addition, the Company
believes that certain of its former employees currently provide services or
technical support to the Company's customers or competitors. No assurance can be
given that the Company will be successful in attracting or retaining qualified
personnel.

ITEM 2.  FACILITIES

     The Company maintains its principal executive offices, research and
development, and manufacturing operations in approximately 25,000 square feet of
a facility in Wilmington, Massachusetts subleased from Caprius, Inc. (formerly
Advanced NMR Systems, Inc.). The Company currently pays base rent in the amount
of approximately $16,270 per month plus utility charges with respect to the
facility, pursuant to a sublease that expires on May 1, 2001. Although no
assurance can be given, the Company believes that adequate facilities for its
principal executive offices, research and development and manufacturing
operations are available at competitive rates for its needs upon expiration of
its current lease.

     The Company also maintains a sales office in an approximately 1,000 square
foot facility in Santa Clara, California, leased from Koll/Intereal Bay Area.
The Company currently pays base rent of $1,385 per month plus certain expenses
related to the facility, pursuant to a lease that expires on January 21, 1999.
The Company believes that its facilities for its sales office are adequate for
its current needs.

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

ITEM 3.  LEGAL PROCEEDINGS

     The Company is not involved in any litigation of a material nature.

                                       10
<PAGE>   12

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

     The Company did not submit any matter during the fourth quarter of the
fiscal year covered by this report to a vote of the Company's security holders,
through the solicitation of proxies or otherwise.

                                    PART II

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

     The Company's Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol "OPC." On March 24, 1998, the closing price of the
Company's Common Stock as reported on the AMEX was $4.375. The Company's
Redeemable Warrants are traded on AMEX under the symbol "OPC+." On March 24,
1998, the closing price of the Company's Redeemable Warrants as reported on the
AMEX was $.8125.

     As of March 24, 1998, there were approximately 15 holders of record of the
Company's Common Stock and approximately 12 holders of record of the Company's
Redeemable Warrants. Management believes that there are over 500 beneficial
owners of the Company's Common Stock and over 500 beneficial owners of the
Company's Redeemable Warrants.

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

<TABLE>
<CAPTION>
                                                                                REDEEMABLE
                                                           COMMON STOCK          WARRANTS
                                                         ----------------    -----------------
                                                          HIGH      LOW       HIGH       LOW
                                                         ------    ------    -------    ------
<S>                                                      <C>       <C>       <C>        <C>
1996
  Fourth Quarter (from October 24, 1996)(1)............  $6.50     $4.75     $1.625     $.625
1997
  First Quarter........................................  $5.875    $3.75     $1.50      $.50
  Second Quarter.......................................  $3.75     $2.375    $ .75      $.3125
  Third Quarter........................................  $5.25     $3.25     $1.1875    $.4375
  Fourth Quarter.......................................  $5.00     $3.25     $1.1875    $.4375
1998
  First Quarter (through March 24, 1998)...............  $5.125    $3.375    $1.00      $.375
</TABLE>

---------------
(1) The Company's securities began trading on AMEX on October 24, 1996.

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

USE OF PROCEEDS

     Pursuant to Rule 463 of the Securities Act, the Company filed its initial
Form SR with the Securities and Exchange Commission on January 31, 1997
reporting for the period from October 24, 1996 (the effective date of the
Company's registration statement for its initial public offering) through
January 24, 1997. On August 12, 1997 the Company filed its first amendment to
its Form SR covering the period from January 24, 1997 through July 24, 1997. The
following reflects as of December 31, 1997 an estimate of the amount of net
offering proceeds received by the Company from its initial public offering used
for each of the purposes set

                                       11
<PAGE>   13

forth below (and reflects only the changes to the information provided by the
Company in the Form 10QSB for the quarter ended September 30, 1997 filed on
November 14, 1997):

<TABLE>
<S>                                                             <C>
Direct or indirect payments to directors, officers, persons
owning ten percent or more of any class of equity securities
of the Company, and affiliates of the Company:
  Repayment of debt.........................................        $  750,000
Direct or indirect payments to others:
  Research and development..................................        $  564,825
  Sales and marketing.......................................        $  295,527
  Working capital...........................................        $  478,959
  Temporary investments in money market fund................        $2,985,000
</TABLE>

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

  Fiscal Year Ended December 31, 1997 ("Fiscal 1997") Compared to Fiscal Year
  Ended December 31, 1996 ("Fiscal 1996")

     Net sales for Fiscal 1997 were $10,091,834 compared to net sales of
$13,577,104 for Fiscal 1996, a decrease of 25.7%. The decrease resulted
primarily from decreased demand for the Company's products for the inspection of
photomasks.

     Cost of sales for Fiscal 1997 was $4,786,110 as compared to $5,900,121 for
Fiscal 1996. As a result of decreased sales, gross profit for Fiscal 1997 was
$5,305,724 (52.6% of net sales) as contrasted to $7,676,983 (56.5% of net sales)
in Fiscal 1996, a decrease of 30.9%. The decrease in gross profit as a
percentage of net sales was due primarily to the spreading of fixed overhead
costs over a smaller revenue base.

     Selling, general and administrative expenses decreased to $3,785,536 for
Fiscal 1997 (37.5% of net sales) as compared to $3,824,002 in Fiscal 1996 (28.2%
of net sales). Decreased commissions were partially offset by increased staffing
and travel expenses. The increase as a percent of net sales was due to the
decrease in net sales.

     Engineering expenses in Fiscal 1997 decreased to $1,316,469 from $1,404,850
in Fiscal 1996. The decreases in staffing expenses were partially offset by an
increase in travel costs. Engineering expenses as a percent of net sales were
13% in Fiscal 1997 as compared to 10.3% for Fiscal 1996 primarily due to the
25.7% decrease in net sales.

     The Company recorded a management buyout charge of $1,701,000 in the first
quarter of Fiscal 1996 which represents a non-cash, non-recurring charge
associated with the acquisition of a 62.2% equity interest in the Company by
management. This charge (12.5% of net sales) is not deductible for income tax
purposes and as a result of this charge additional paid-in capital was increased
by a like amount. See footnote 9 to the financial statements.

     Interest income was $202,434 for Fiscal 1997 compared to $56,170 in Fiscal
1996. This was due to the investment during Fiscal 1997 of part of the proceeds
from the Company's initial public offering in October, 1996 ("IPO").

     Interest expense decreased to $13,597 for Fiscal 1997 from $163,956 in
Fiscal 1996 due to the repayment of all loans payable to an affiliate and
repayment of the Company's borrowings under its revolving line of credit during
the fourth quarter of Fiscal 1996.

                                       12
<PAGE>   14

     Income before provision for income taxes was $392,196 (3.9% of net sales)
for Fiscal 1997 as compared to $639,345 in Fiscal 1996 (4.7% of net sales).
Without the non-cash, non-recurring management buyout charge, in Fiscal 1996 the
income before provision for taxes would have been $2,340,345 (17.2% of net
sales). Excluding the management buyout charge, income before provision for
taxes declined in Fiscal 1997 from Fiscal 1996 due to the 25.7% decrease in net
sales and the resulting reduction in gross profit.

     The provision for income taxes for Fiscal 1997 was $146,900 (an effective
rate of 37.5%). Due to limitations on the utilization of the Company's net
operating loss ("NOLs") carryforwards and the non-deductibility of the
management buyout charge, there was a provision for income taxes of $846,200 for
Fiscal 1996. In connection with the management buyout and the issuances of
shares in the Company's IPO, the Company is restricted in the NOLs it can use in
future fiscal years in accordance with Section 382 of the Internal Revenue Code
of 1986, as amended. As a result of the management buyout, the Company is
limited to approximately $161,000 of loss utilization per year.

     Net income was $245,296 (2.4% of net sales) for Fiscal 1997. With the
non-recurring, non-cash management buyout charge and the inability to fully
utilize NOLs in Fiscal 1996, the Company incurred a net loss for Fiscal 1996 of
$206,855 (1.5% of net sales). Excluding the non-cash, non-recurring management
buyout charge, the Company would have had net income of $1,494,145 (11.0% of net
sales) in Fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1997, the Company had cash and cash equivalents of
$3,766,534, a decrease of $1,256,238 from $5,022,772 at December 31, 1996.
Working capital was $7,607,447 at December 31, 1997 as compared to $7,669,497 at
December 31, 1996, a decrease of $62,050. Cash used by operating activities was
$1,074,204 during Fiscal 1997 compared to $3,569,831 of cash provided by
operating activities in Fiscal 1996 primarily due to the decline in operating
results (excluding the management buyout charge) and the timing of accounts
receivable collections and payments of accrued expenses. During Fiscal 1997, the
Company made increased investments in property and equipment in comparison with
Fiscal 1996 primarily as a result of the relocation of its headquarters.

     From time to time since inception, the Company has received loans from Kobe
Steel and its affiliates to meet certain obligations, capital expenditures and
general working capital requirements of the Company. On March 29, 1996, Kobe
Steel USA Holdings, Inc. made a capital infusion of $4,250,000 to repay a loan
of $4,250,000 previously made to the Company by Kobe Steel USA International,
Inc. In addition, the Company repurchased 62.2% of the Company's common stock
(99.5% of the Company was previously held by Kobe Steel USA Holdings, Inc.) for
$5,000,000. Payment for the shares was made with $3,250,000 from a revolving
line of credit from the Company's bank, $1,000,000 of cash from the Company's
cash accounts and a $750,000 loan from Kobe Steel USA Holdings, Inc. which was
paid in full in October 1996 using a portion of the proceeds of the Company's
IPO. Subsequent to the repurchase, but prior to the IPO, the Company utilized
cash provided from operations to reduce borrowings under the revolving line of
credit from the Company's bank by $3,011,612.

     In connection with the stock repurchase from Kobe Steel USA Holdings, Inc.,
the Company entered into a revolving line of credit with State Street Bank and
Trust Company. The revolving line of credit agreement allows for maximum
borrowings of $4,000,000 and requires monthly payment of interest on the
outstanding balance to maturity on June 30, 1998. Borrowings under the revolving
line of credit agreement are limited to 80% of qualifying accounts receivable
and 10% (not to exceed $350,000) of qualifying inventory. Borrowings under the
agreement bear interest at the bank's prime rate (8.5% at December 31, 1997)
plus .5%. The terms of the loan agreement provide for the maintenance of certain
specified financial ratios, including the quick ratio and debt to equity,
minimum levels of capital, minimum earnings tests and other negative and
affirmative covenants and restricts certain transactions without the bank's
prior written consent. As of December 31, 1997, the Company was in default of
the minimum earnings test covenant, but has obtained a waiver of compliance from
its bank for the quarter ended December 31, 1997. The Company is not in default
of any other covenants or provisions of the credit agreement. Borrowings under
the agreement are secured by substantially all the assets of the Company. At
December 31, 1997, the Company had no borrowings outstanding under the revolving
credit agreement and availability of approximately $2,290,000.


                                       13
<PAGE>   15

     On October 24, 1996, the Company's Registration Statement on Form SB-2 was
declared effective by the Securities and Exchange Commission and the Company
completed its IPO of 950,000 shares of Common Stock at $6.00 per share and
950,000 Redeemable Warrants at $.10 per warrant. Further, on November 15, 1996,
the underwriters exercised their over-allotment option and purchased an
additional 142,500 shares of Common Stock at $6.00 per share and 142,500
Redeemable Warrants at $.10 per warrant. The Company received total net proceeds
of $5,074,311 after deducting underwriters' discounts, commissions and other
offering expenses.

     Based on its current cash balances, current bank credit facilities and
anticipated results of operations, management believes that the Company has
sufficient funds to meet its working capital requirements for the next twelve
months. Thereafter, the Company anticipates that it could need additional
financing to meet its current plans for expansion. No assurance can be given of
the Company's ability to obtain financing on favorable terms, if at all. If the
Company is unable to obtain additional financing, its ability to meet its
current plan for expansion could be materially adversely affected.

INFLATION

     To date, inflation has not had a material effect on the Company's business.

YEAR 2000 DISCLOSURE

     The Company has considered the potential problems that may arise because of
the year 2000 as it relates to the Company's internal information systems. It is
the Company's opinion that, having considered the systems that the Company
presently utilizes, the year 2000 should not present material problems with
respect to its own internal information systems. To date, the Company is unaware
of any situations of noncompliance that would materially adversely affect its
operations or financial condition. There can be no assurance, however, that
instances of noncompliance which could have a material adverse effect on the
Company's operations or financial condition will not be identified; that the
systems of other companies with which the Company transacts business will be
corrected on a timely basis; or that a failure by such entities to correct a
Year 2000 problem or a correction which is incompatible with the Company's
information systems would not have a material adverse effect on the Company's
operations or financial condition.

                                       14
<PAGE>   16

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, 1996 and December 31,
  1997......................................................  F-3
Statements of Operations for the years ended December 31,
  1996 and December 31, 1997................................  F-4
Statements of Stockholders' Equity for the years ended
  December 31, 1996 and December 31, 1997...................  F-5
Statements of Cash Flows for the years ended December 31,
  1996 and December 31, 1997................................  F-6
Notes to Financial Statements...............................  F-7

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

     During the two most recent fiscal years of the Company, there have been no
changes in the Company's independent public accountants or disagreements between
the Company and its independent public accountants.

                                    PART III

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

     The Company intends to file a Definitive Proxy Statement within 120 days of
the completion of the Company's fiscal year ended December 31, 1997. The
information required by this item is incorporated by reference from the Proxy
Statement.

ITEM 10.  EXECUTIVE COMPENSATION.

     The information required by this Item is incorporated by reference from the
Proxy Statement, to be filed with the Commission not later than 120 days after
the close of the Company's fiscal year ended December 31, 1997.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by this Item is incorporated by reference from the
Proxy Statement, to be filed with the Commission not later than 120 days after
the close of the Company's fiscal year ended December 31, 1997.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this Item is incorporated by reference from the
Proxy Statement, to be filed with the Commission not later than 120 days after
the close of the Company's fiscal year ended December 31, 1997.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

  (a) Exhibits.

     (1) The following exhibits are filed herewith:

EXHIBIT
  NO.    TITLE
-------  -----

10a      Sublease Agreement between the Company and Advanced NMR
         Systems dated as of April 15, 1997.
27       Financial Data Schedule.


                                       15
<PAGE>   17

     (2) 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:

<TABLE>
<CAPTION>
EXHIBIT
  NO.    TITLE
-------  -----
<S>      <C>
 3a      Certificate of Incorporation, as amended.
 3b      Bylaws, as amended.
 4a      Sections of Bylaws and Certificate of Incorporation defining
         the rights of securityholders (contained in Exhibits 3a and
         3b).
 4b      Specimen Common Stock Certificate.
 4c      Form of Representative's Warrant Agreement (revised).
 4d      Form of Lock-Up Letters.
 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.
10h      Promissory Note of QC Optics, Inc. to State Street Bank and
         Trust Company, dated March 29, 1996.
10i      Security Agreement (All Assets) by and between the Company
         and State Street Bank and Trust Company, dated March 29,
         1996.
10j      Credit Agreement by and between the Company and State Street
         Bank and Trust Company, dated March 29, 1996.
10k      Collateral Assignment of Trademarks and Patents by and
         between the Company and State Street Bank and Trust Company,
         dated March 29, 1996.
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, Abdu Boudour and John R.
         Freeman.
10s      Distribution Agreement by and between ETEC Systems, Inc. and
         the Company, dated December 19, 1994.
</TABLE>

  (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.

                                       16
<PAGE>   18

                                   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
                       ----                                        --------                      ----
<C>                                                    <S>                                  <C>

                 /s/ ERIC T. CHASE                     President, Chief Executive           March 30, 1998
---------------------------------------------------      Officer, and Chairman of the
                   Eric T. Chase                         Board of Directors (Principal
                                                         Executive Officer)

                /s/ JOHN R. FREEMAN                    Vice President of Finance and        March 30, 1998
---------------------------------------------------      Treasurer (Principal Financial
                  John R. Freeman                        and Principal Accounting
                                                         Officer)

                /s/ CHARLES H. FINE                    Director                             March 30, 1998
---------------------------------------------------
                  Charles H. Fine

                 /s/ JOHN M. TARRH                     Director                             March 30, 1998
---------------------------------------------------
                   John M. Tarrh
</TABLE>

                                       17
<PAGE>   19

                                QC OPTICS, INC.

                                     INDEX

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................   F-2
Balance Sheets as of December 31, 1996 and 1997.............   F-3
Statements of Operations for the Years Ended December 31,
  1996 and 1997.............................................   F-4
Statements of Stockholders' Equity for the Years Ended
  December 31, 1996 and 1997................................   F-5
Statements of Cash Flows For the Years Ended December 31,
  1996 and 1997.............................................   F-6
Notes to Financial Statements...............................   F-7
</TABLE>

                                       F-1
<PAGE>   20

                    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, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of QC Optics, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1997, in conformity with generally
accepted accounting principles.

                                          ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 13, 1998

                                       F-2
<PAGE>   21

                                QC OPTICS, INC.

                  BALANCE SHEETS -- DECEMBER 31, 1996 AND 1997

                                     ASSETS

<TABLE>
<CAPTION>
                                                                 1996          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
CURRENT ASSETS:
  Cash and cash equivalents.................................  $ 5,022,772   $ 3,766,534
  Accounts receivable, less allowance of $100,000 and
    $50,000 at December 31, 1996 and 1997, respectively.....    1,884,694     2,509,002
  Inventory.................................................    3,383,060     4,025,428
  Prepaid expenses..........................................       69,597        76,974
                                                              -----------   -----------
         Total current assets...............................   10,360,123    10,377,938
                                                              -----------   -----------
PROPERTY AND EQUIPMENT, AT COST:
  Furniture and fixtures....................................      148,391       189,350
  Machinery and equipment...................................      299,822       342,609
  Leasehold improvements....................................       57,085        76,714
  Motor vehicles............................................       23,458        21,574
                                                              -----------   -----------
                                                                  528,756       630,247
  Less -- Accumulated depreciation..........................      408,902       402,528
                                                              -----------   -----------
         Property and equipment, net........................      119,854       227,719
                                                              -----------   -----------
DEFERRED TAX ASSETS.........................................      208,000       349,500
                                                              -----------   -----------
OTHER ASSETS................................................       24,943        82,924
                                                              -----------   -----------
         Total assets.......................................  $10,712,920   $11,038,081
                                                              ===========   ===========

                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $   683,847   $   742,563
  Accrued payroll and related expenses......................      427,897       457,505
  Accrued commissions.......................................      538,061        59,894
  Accrued income taxes......................................      469,200       221,789
  Accrued expenses..........................................      414,059       642,923
  Customer deposits.........................................      157,562       645,817
                                                              -----------   -----------
         Total current liabilities..........................    2,690,626     2,770,491
                                                              -----------   -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value --
    Authorized -- 1,000,000 shares
    Issued and outstanding -- no shares at December 31, 1996
      and 1997..............................................           --            --
  Common stock, $.01 par value --
    Authorized -- 10,000,000 shares
    Issued and outstanding -- 3,242,500 shares at December
      31, 1996 and 1997.....................................       32,425        32,425
  Additional paid-in capital................................    9,902,886     9,902,886
  Accumulated deficit.......................................   (1,913,017)   (1,667,721)
                                                              -----------   -----------
         Total stockholders' equity.........................    8,022,294     8,267,590
                                                              -----------   -----------
         Total liabilities and stockholders' equity.........  $10,712,920   $11,038,081
                                                              ===========   ===========
</TABLE>

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

                                       F-3
<PAGE>   22

                                QC OPTICS, INC.

                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
                                                                 1996          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
NET SALES...................................................  $13,577,104   $10,091,834
COST OF SALES...............................................    5,900,121     4,786,110
                                                              -----------   -----------
          Gross profit......................................    7,676,983     5,305,724
                                                              -----------   -----------
OPERATING EXPENSES:
  Selling, general and administrative expenses..............    3,824,002     3,785,536
  Engineering expenses......................................    1,404,850     1,316,469
  Management buyout charge (Note 9).........................    1,701,000            --
                                                              -----------   -----------
          Total operating expenses..........................    6,929,852     5,102,005
                                                              -----------   -----------
          Operating income..................................      747,131       203,719
INTEREST INCOME.............................................       56,170       202,434
INTEREST EXPENSE............................................     (163,956)      (13,957)
                                                              -----------   -----------
          Income before provision for income taxes..........      639,345       392,196
PROVISION FOR INCOME TAXES..................................      846,200       146,900
                                                              -----------   -----------
          Net income (loss).................................  $  (206,855)  $   245,296
                                                              ===========   ===========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND COMMON
  EQUIVALENT SHARE..........................................  $      (.09)  $      0.08
                                                              ===========   ===========
DILUTED WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
  OUTSTANDING...............................................    2,349,301     3,245,478
                                                              ===========   ===========
</TABLE>

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

                                       F-4
<PAGE>   23

                                QC OPTICS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

<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, 1995...........        --     $    --    2,150,000    $21,500    $3,888,500   $(1,706,162)   $2,203,838
  Net loss...........................        --          --          --          --            --      (206,855)     (206,855)
  Issuance of shares -- management
    buyout (Note 9)..................        --          --          --          --     1,701,000            --     1,701,000
  Issuance of initial public offering
    shares (Note 10).................        --          --    1,092,500     10,925     5,063,386            --     5,074,311
  Recapitalization (Note 9)..........        --          --          --          --      (750,000)           --      (750,000)
                                       ---------    -------    ---------    -------    ----------   -----------    ----------
BALANCE, DECEMBER 31, 1996...........        --          --    3,242,500     32,425     9,902,886    (1,913,017)    8,022,294
  Net income.........................        --          --          --          --            --       245,296       245,296
                                       ---------    -------    ---------    -------    ----------   -----------    ----------
BALANCE, DECEMBER 31, 1997...........        --     $    --    3,242,500    $32,425    $9,902,886   $(1,667,721)   $8,267,590
                                       =========    =======    =========    =======    ==========   ===========    ==========
</TABLE>

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

                                       F-5
<PAGE>   24

                                QC OPTICS, INC.

                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
                                                                 1996          1997
                                                              ----------    -----------
<S>                                                           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................................  $ (206,855)   $   245,296
                                                              ----------    -----------
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities --
     Management buyout charge (Note 9)......................   1,701,000             --
     Depreciation and amortization..........................      50,659         74,169
     Increase in deferred taxes, net........................    (208,000)      (141,500)
     Changes in operating assets and liabilities --
       Accounts receivable..................................   1,352,012       (624,308)
       Inventory............................................    (489,938)      (642,368)
       Prepaid expenses and other assets....................     (51,601)       (65,358)
       Accounts payable.....................................     196,073         58,716
       Accrued expenses.....................................   1,104,836       (467,106)
       Customer deposits....................................     121,645        488,255
                                                              ----------    -----------
          Total adjustments.................................   3,776,686     (1,319,500)
                                                              ----------    -----------
          Net cash provided by (used in) operating
            activities......................................   3,569,831     (1,074,204)
                                                              ----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment........................     (52,334)      (182,034)
                                                              ----------    -----------
          Net cash used in investing activities.............     (52,334)      (182,034)
                                                              ----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from initial public offering, net (Note 10)......   5,074,311             --
  Borrowings from revolving line of credit..................   4,886,611             --
  Payments on revolving line of credit......................  (8,136,611)            --
  Recapitalization and management buyout --
     Capital contribution from Kobe Steel...................   4,250,000             --
     Payment on loan payable to affiliate...................  (4,250,000)            --
     Borrowings from revolving line of credit...............   3,250,000             --
     Redemption of common stock from Kobe Steel.............  (5,000,000)            --
                                                              ----------    -----------
          Net cash provided by financing activities.........      74,311             --
                                                              ----------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........   3,591,808     (1,256,238)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................   1,430,964      5,022,772
                                                              ----------    -----------
CASH AND CASH EQUIVALENTS, END OF YEAR......................  $5,022,772    $ 3,766,534
                                                              ==========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid for --
     Interest...............................................  $  170,822    $    14,422
                                                              ==========    ===========
     Income taxes...........................................  $  656,000    $   535,811
                                                              ==========    ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING
  ACTIVITIES:
  Issuance of shares (Note 9)...............................  $1,701,000    $        --
                                                              ==========    ===========
</TABLE>

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

                                       F-6
<PAGE>   25

                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1997

(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, flat panel
display and computer hard disk drive 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. Service and
maintenance revenues were 9% and 11% of total net sales for the years ended
December 31, 1996 and 1997, respectively. Product sales accounted for
approximately 84% and 83% of revenues for the years ended December 31, 1996 and
1997, respectively. Additional revenues are generated from the sale of spare
parts.

     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
reschedulings; 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; and the availability of components and
subassemblies, among others.

  Warranty Costs

     The Company accrues warranty costs in the period the related revenue is
recognized. Warranty costs were not material for the years ending December 31,
1996 and 1997.

  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, 1996 and 1997 amounted to
$577,327 and $439,765, respectively.

  Cash and Cash Equivalents

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


                                       F-7
<PAGE>   26
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

  Inventory

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

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      ------------------------
                                                         1996          1997
                                                      ----------    ----------
<S>                                                   <C>           <C>
Raw materials and finished parts....................  $1,149,376    $1,931,130
Work-in-process.....................................   2,233,684     2,094,298
                                                      ----------    ----------
                                                      $3,383,060    $4,025,428
                                                      ==========    ==========
</TABLE>

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

  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.

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

<TABLE>
<CAPTION>
                                                               ESTIMATED
                    ASSET CLASSIFICATION                      USEFUL LIFE
                    --------------------                      -----------
<S>                                                           <C>
Furniture and fixtures......................................   3-8 years
Machinery and equipment.....................................   3-8 years
Leasehold improvements......................................  8-10 years
Motor vehicles..............................................   3-5 years
</TABLE>

  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. The Company and Kobe Steel
USA Holdings, Inc. (Kobe Steel), 99.5% owner of the Company prior to March 29,
1996 (see Note 9), had a tax-allocation agreement stipulating that the Company
must provide (benefit) and make payments (receive refunds) as if the Company had
filed its own separate company tax returns. Prior to March 29, 1996, the
Company's results of operations were included in the consolidated federal return
of Kobe Steel.

  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, flat panel displays and computer hard
disk drive industries and performs ongoing evaluations

                                       F-8
<PAGE>   27
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

of its customers' financial conditions. Concentration of credit risk with
respect to sales and trade receivables is significant and summarized as follows:

<TABLE>
<CAPTION>
                                      NET SALES FOR THE          ACCOUNTS RECEIVABLE AS OF
                                   YEARS ENDED DECEMBER 31,             DECEMBER 31,
                                   ------------------------      --------------------------
                                      1996          1997            1996           1997
                                   ----------    ----------      ----------    ------------
<S>                                <C>           <C>             <C>           <C>
Company A........................  $1,871,000    $  831,000       $501,000      $  122,000
Company B........................   1,309,000        50,000        325,000          10,000
Company C........................   1,596,000            --             --              --
Company D........................     358,000            --        250,000              --
Company E........................     227,000       224,000        227,000              --
Company F........................     441,000         5,000        288,000              --
Company G........................     412,000     1,043,000         29,000         224,000
Company H........................      69,000     4,956,000          5,000       1,615,000
</TABLE>

     The Company maintains cash balances and short-term investments 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 $4,976,000 and $3,775,000 at
December 31, 1996 and 1997, respectively.

     Export net sales, denominated in U.S. dollars, were as follows:

<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED
                                                      ------------------------
                                                         1996          1997
                                                      ----------    ----------
<S>                                                   <C>           <C>
Asia/Pacific........................................  $4,883,940    $2,363,714
Europe..............................................     110,567       973,790
Other...............................................      19,529           918
</TABLE>

  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.

  Impairment of Long-Lived Assets

     SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of, addresses accounting and reporting
requirements for long-term assets based on their fair market values. SFAS No.
121 did not have a material impact on the Company's financial condition and
results of operations as of and for the years ended December 31, 1996 and 1997.

  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.

                                       F-9
<PAGE>   28
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

  Net Income (Loss) per Common Share

     In 1997, the Company adopted SFAS No. 128, Earnings Per Share, effective
December 15, 1997. 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. As of December 31, 1996 and 1997, there were 253,064 and
266,700 options outstanding, respectively. Of these potentially dilutive
securities, 146,818 and 70,647 qualified for inclusion in the diluted earnings
per share calculation for part of the years ended December 31, 1996 and 1997,
respectively. These options yielded incremental shares of 11,904 and 11,910, or
weighted average incremental shares for the year of 2,976 and 2,978 for the
years ended December 31, 1996 and 1997, respectively. As a result, the year-end
weighted average shares outstanding were 2,349,301 and 3,245,478 as of December
31, 1996 and 1997, respectively. The implementation of this standard did not
have an effect on earnings per common share in 1996 and, therefore, did not
require restatement. Basic and diluted earnings per common share for the years
ended December 31, 1996 and 1997 were equal; therefore, no reconciliation
between basic and diluted earnings per common share is required.

     In June 1996, the Company's Board of Directors approved an approximate
1.72-for-1 common stock split. Accordingly, all share and per share amounts of
common stock for all periods presented have been retroactively adjusted to
reflect the split. In addition, the stockholders increased the authorized
capital stock of the Company to 1,000,000 shares of $.01 par value preferred
stock and 10,000,000 shares of $.01 par value common stock.

(3)  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED
                                                           DECEMBER 31,
                                                      -----------------------
                                                         1996         1997
                                                      ----------    ---------
<S>                                                   <C>           <C>
Current --
  Federal...........................................  $  836,429    $ 248,400
  State.............................................     217,771       40,000
                                                      ----------    ---------
                                                       1,054,200      288,400
                                                      ----------    ---------

Deferred --
  Federal...........................................    (176,800)    (120,275)
  State.............................................     (31,200)     (21,225)
                                                      ----------    ---------
                                                        (208,000)    (141,500)
                                                      ----------    ---------
                                                      $  846,200    $ 146,900
                                                      ==========    =========
</TABLE>

                                      F-10
<PAGE>   29
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

     The Company's effective tax rate differs from the federal statutory rate of
34% in 1996 and 1997 due to the following:

<TABLE>
<CAPTION>
                                                                1996         1997
                                                              ---------    --------
<S>                                                           <C>          <C>
Computed tax provision at statutory rate....................  $ 217,377    $133,347
Increase (reductions) resulting from --
  Management buyout charge..................................    578,340          --
  State taxes...............................................    142,951       3,855
  Items not deductible for income tax purposes..............     24,333       9,698
  Change in valuation reserve...............................   (116,801)         --
                                                              ---------    --------
                                                              $ 846,200    $146,900
                                                              =========    ========
</TABLE>

     Deferred income taxes at December 31, 1996 and 1997 consisted of the
following:

<TABLE>
<CAPTION>
                                                                 1996          1997
                                                              ----------    ----------
<S>                                                           <C>           <C>
Deferred tax assets --
  Inventories...............................................  $  460,000    $  560,000
  Other reserves............................................     196,000       303,000
  Net operating loss carryforwards..........................     542,000       487,000
                                                              ----------    ----------
          Total gross deferred tax assets...................   1,198,000     1,350,000
          Less -- Valuation allowance.......................     981,000       986,500
                                                              ----------    ----------
          Net deferred tax assets...........................     217,000       363,500
                                                              ----------    ----------
Deferred tax liabilities --
  Depreciation..............................................       9,000        14,000
                                                              ----------    ----------
          Net deferred tax asset............................  $  208,000    $  349,500
                                                              ==========    ==========
</TABLE>

     Given the limitations on the utilization of the Company's net operating
losses as a result of the management buyout and uncertainty surrounding the
ability of the Company to generate future income in order to realize deferred
tax assets in the future, primarily due to such factors as dependence on a few
customers, rapid technological change and the cyclical nature of the
semiconductor, computer hard disk and flat panel display industries, management
has concluded that realizability of the deferred tax assets as of December 31,
1997 is uncertain and has, therefore, provided a valuation allowance against a
portion of the deferred tax assets.

     For tax reporting purposes, the Company has a U.S. federal net operating
loss carryforward of approximately $1,432,000, subject to Internal Revenue
Service (IRS) review and approval and certain IRS limitations on net operating
loss utilization. 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 2008 if not utilized.

     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 (see Note 9). As a
result of the management buyout, the Company is limited to approximately
$161,000 of loss utilization per year.


                                      F-11
<PAGE>   30
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (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, 1996 and 1997 amounted to approximately
$245,000 and $255,000, respectively. Future minimum commitments under all
noncancelable operating leases at December 31, 1997 are as follows:

<TABLE>
<S>                                                 <C>
1998............................................    $211,862
1999............................................     196,626
2000............................................     195,240
2001............................................      65,080
</TABLE>

     The Company entered into a security agreement with a customer as a result
of the numerous sales orders placed during 1997. The customer agreed to provide
advances to the Company to purchase the necessary materials and supplies to
manufacture the systems ordered. Under this agreement, the customer has a
security interest in the event of a default in the amount of approximately
$567,000, which represents advances included in customer deposits in the
accompanying balance sheet as of December 31, 1997.

(5)  EMPLOYEE BENEFIT PLAN

     The Company participated in the 401(k) retirement savings plan of an
affiliated company (the Plan) through July 1996. The Plan is a
defined-contribution 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 a certain
maximum percentage, and a future Company contribution can be made at the
Company's discretion. During July 1996, the Company ceased participation in the
Plan and began a new 401(k) retirement savings plan sponsored by the Company
with equivalent provisions to the former Plan.

     The Company charged to expense approximately $113,000 and $76,000 related
to contributions to the Plan for the years ended December 31, 1996 and 1997,
respectively. Included in accrued expenses is approximately $79,000 and $60,000
for Company matching and discretionary contributions to the Plan for the years
ended December 31, 1996 and 1997, respectively.

(6)  RELATED PARTY TRANSACTIONS

     Kobe Steel Ltd., an affiliated Japanese company, through its various
subsidiaries, has provided loans to the Company by means of a revolving-credit
arrangement (the Affiliate Loan) over the years. On March 29, 1996, the Company
paid the outstanding $4,250,000 of principal on the Affiliate Loan (see Note 9).
Interest on the loans during the year ended December 31, 1996 amounted to
approximately $53,000.

(7)  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

                                      F-12
<PAGE>   31
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

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. In June 1996, the Company granted
options under the 1996 Plan for the purchase of 124,492 shares at $5.10 per
share, the estimated fair market value on the date of grant, which become
exercisable over three years, beginning on June 20, 1997, one year from the date
of grant. In addition, in June 1996, the Company granted options to purchase
107,500 shares of common stock at $6.30 per share, which became exercisable on
October 24, 1996, the date the Company's initial public offering became
effective (see Note 10). To date, all options have been issued with an exercise
price at or above fair market value.

     In June 1997, 64,996 options previously granted under the 1996 Plan were
repriced from an original exercise price of $5.10 per share to an exercise price
of $3.25 per share with vesting and option life calculated from the original
grant date. In November 1997, the Company granted options under the 1996 Plan
for the purchase of 26,500 shares at $4.13 per share, the estimated fair market
value on the date of grant, which become exercisable as previously discussed. 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 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
June 1996, the Company granted options under the Formula Plan to two nonemployee
directors for the purchase of 30,000 shares at $5.10 per share, the estimated
fair market value on the date of grant, which become exercisable as previously
discussed.

     In June 1997, the Company granted options to a new nonemployee director
under the Formula Plan for the purchase of 15,000 shares at $3.25 per share, the
estimated fair market value on the date of grant, which become exercisable as
previously discussed. 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

     In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which 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 in 1996 and 1997
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

                                      F-13
<PAGE>   32
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

on the Company's net income (loss) and net income (loss) per common and common
equivalent shares would have been as follows:

<TABLE>
<CAPTION>
                                                                  1996         1997
                                                                ---------    --------
<S>                                                             <C>          <C>
Net income (loss) --
  As reported...............................................    $(206,855)   $245,296
  Pro forma.................................................     (258,795)    153,485
Diluted net income (loss) per common and common equivalent
  shares --
  As reported...............................................    $    (.09)   $    .08
  Pro forma.................................................         (.11)        .05
</TABLE>

     Compensation expense for options granted is reflected over the vesting
period; therefore, future compensation expense may be greater 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:

<TABLE>
<CAPTION>
                                                          1996         1997
                                                         -------    ----------
<S>                                                      <C>        <C>
Volatility...........................................         50%           42%
Risk-free interest rate..............................       7.03%         6.38%
Expected life of options.............................    5 years    5.28 years
Dividends............................................       None          None
</TABLE>

     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-14
<PAGE>   33
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

  Stock Option Activity

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

<TABLE>
<CAPTION>
                                                                 DECEMBER 31, 1996
                                             ----------------------------------------------------------
                                                      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.....        --         $  --              --          $  --
  Granted..................................   231,992          5.66          30,000           5.10
  Exercised................................        --            --              --             --
  Forfeited................................    (8,928)         5.10              --             --
                                              -------         -----          ------          -----
Options outstanding, end of year...........   223,064         $5.68          30,000          $5.10
                                              =======         =====          ======          =====
Options exercisable........................   107,500         $6.30           3,750          $5.10
                                              =======         =====          ======          =====
Options available for grant................   136,936                        70,000
                                              =======                        ======
Weighted-average fair value of options
  (whose exercise price equals market
  value) granted during the year...........                   $2.68                          $2.68
                                                              =====                          =====
Weighted-average fair value of options
  (whose exercise price exceeds market
  value) granted during the year...........                   $3.00
                                                              =====
</TABLE>

<TABLE>
<CAPTION>
                                                                 DECEMBER 31, 1997
                                             ----------------------------------------------------------
                                                      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.....   223,064         $5.68          30,000          $5.10
  Granted..................................    26,500          4.13          15,000           3.25
  Exercised................................        --            --              --             --
  Repricing -- extinguish old options......   (64,996)         5.10              --             --
  Repricing -- distribute new options......    64,996          3.25              --             --
  Forfeited................................   (27,864)         4.27              --             --
                                              -------         -----          ------          -----
Options outstanding, end of year...........   221,700         $5.13          45,000          $4.48
                                              =======         =====          ======          =====
Options exercisable........................   136,733         $5.81          13,125          $4.84
                                              =======         =====          ======          =====
Options available for grant................   138,300                        55,000
                                              =======                        ======
Weighted-average fair value of options
  (whose exercise price equals market
  value) granted during the year...........                   $1.66                          $1.81
                                                              =====                          =====
</TABLE>

                                      F-15
<PAGE>   34
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

     A summary of the status of the Company's stock options at December 31, 1997
is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------------
EXERCISE               REMAINING
 PRICE    NUMBER    CONTRACTUAL LIFE
--------  -------   ----------------
<S>       <C>       <C>
             1996 PLAN
------------------------------------
   $3.25   17,489      8.5 years
   $5.10   11,744      8.5 years
   $6.30  107,500      8.5 years
            FORMULA PLAN
------------------------------------
   $3.25    1,875      9.5 years
   $5.10   11,250      8.5 years
</TABLE>

(8)  REVOLVING LINE OF CREDIT

     On March 29, 1996, the Company entered into a $4,000,000 revolving
line-of-credit agreement (the Revolving Line of Credit) with State Street Bank
and Trust Company (State Street), which matures on June 30, 1998 and bears
interest per annum at the bank's prime rate plus .5% (9.0% at December 31,
1997). The Revolving Line of Credit has a fee on the daily unused portion of the
facility at the rate of 0.25% per annum. The aggregate amount outstanding under
the Revolving Line of Credit is limited to the sum of 80% of qualifying
receivables and 10% of qualifying inventory (not to exceed $350,000). At
December 31, 1996 and 1997, the Company had no outstanding borrowings under the
Revolving Line of Credit. The Revolving Line of Credit is secured by all assets
of the Company. The Revolving Line of Credit provides for the maintenance of
certain specified financial ratios, including, but not limited to, a quick
ratio, minimum capital funds, maximum debt/capital funds ratio and a minimum
earnings test, among other negative and affirmative covenants, and restricts
certain transactions without the bank's prior written consent. The Company was
out of compliance with respect to three of its debt covenants under the
Revolving Line of Credit during 1997, for which the Company received debt
waivers from State Street.

(9)  MANAGEMENT BUYOUT

     During October 1995, the Company, certain management employees (through an
unaffiliated corporation, Sally, Inc.) and Kobe Steel entered into a series of
related agreements designed to restructure the capital of the Company and allow
management to acquire up to 89.6% of the common stock of the Company for
$7,200,000 (collectively referred to as the Management Buyout Agreement). The
Management Buyout Agreement allowed management to acquire 62.2% of the Company
by March 31, 1996 for $5,000,000 (the Original Repurchase) and an additional
27.4% of the Company for $2,200,000 within two years from the date of closing of
the Original Repurchase or upon the closing of an underwritten public offering,
pursuant to a registration statement declared effective under the Securities Act
of 1933, as amended. The Original Repurchase under the Management Buyout
Agreement, as amended on March 29, 1996, was accomplished on March 29, 1996
through the redemption of shares from Kobe Steel for $5,000,000 (the Redemption
Price) and the tax-free merger under Section 368 (a)(1)(A) of the Internal
Revenue Code of 1986, as amended, of Sally, Inc. and the Company. Of the
$5,000,000 Redemption Price, $3,250,000 was financed pursuant to the terms of a
$4,000,000 revolving credit agreement (see Note 8), $1,000,000 was provided from
available cash of the Company and $750,000 was financed pursuant to a promissory
note bearing interest at the rate of 8% per annum from the Company to Kobe Steel
(the Kobe Term Note). The transaction has been accounted for as a
recapitalization and management buyout. The Company recorded a $1,701,000
nonrecurring, noncash charge in the accompanying statement of operations for the
year ending December 31, 1996 associated with

                                      F-16
<PAGE>   35
                                QC OPTICS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

management's acquisition of 62.2% of the Company, with a corresponding increase
in additional paid-in capital on the accompanying balance sheet. This charge is
not deductible for income tax purposes. The Kobe Term Note was subsequently
repaid in October 1996.

     Simultaneous with the Original Repurchase and as required under the terms
of the Management Buyout Agreement, Kobe Steel made a capital contribution in
cash of $4,250,000 on March 29, 1996 to the Company. The Company used the
proceeds received to pay off the outstanding principal due on the Affiliate Loan
in the same amount. In addition, as required per the terms of the Management
Buyout Agreement, the Company filed a restated certificate of incorporation
providing for the recapitalization of the Company such that all shares of Class
A voting common stock and Class B nonvoting common stock became one class of
voting common stock.

     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.

(10)  INITIAL PUBLIC OFFERING

     On October 24, 1996, the Company's registration statement on Form SB-2 was
declared effective by the Securities and Exchange Commission, and the Company
completed its initial public offering of 950,000 shares of common stock at $6.00
per share and 950,000 redeemable warrants at $.10 per warrant. Further, on
November 15, 1996, the underwriters exercised their over-allotment option
granted under the terms of the underwriting agreement and purchased an
additional 142,500 shares of common stock at $6.00 per share and 142,500
warrants at $.10 per warrant. The Company received total net proceeds of
$5,074,311 after deducting underwriters' discounts, commissions and other
offering costs.

                                      F-17