SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                     --------------------------------------

                                    FORM 10-K

                |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                           Commission File No. 0-20097

                       Advanced Machine Vision Corporation
             (Exact name of registrant as specified in its charter)

               California                               33-0256103
     (State or other jurisdiction of                 (I.R.S. Employer
      incorporation or organization)                Identification No.)

         3709 Citation Way #102
            Medford, Oregon                                97504
(Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code: (541) 776-7700


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

Securities registered pursuant to Section 12(g) of the Act:
                                              Class A Common Stock, no par value
                                              Preferred Share Purchase Rights

                     --------------------------------------


Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.                         Yes |X| No |_|

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.                                                                   |X|

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of March 10, 1999, was approximately $10,727000. (All officers and
directors of the registrant are considered  affiliates;  Class B Common Stock is
assumed to be equal in value to Class A Common Stock.)

On March 10, 1999, the registrant had 12,813,551  shares of Class A Common Stock
and  56,002  shares  of Class B  Common  Stock,  all no par  value,  issued  and
outstanding.


                          See Page 22 for Exhibit Index

<PAGE>

                                     Part I
                                     ======


Item 1. Business
================================================================================

History
=======

From inception in 1987 until early 1990,  Advanced Machine Vision  Corporation's
("AMV" or the "Company") predecessor company, Applied Laser Systems ("ALS"), was
principally  engaged in research and development and  organizational  activities
and its revenues were insignificant. Beginning in early 1990, ALS engaged in the
business of  designing,  developing,  manufacturing  and  marketing  laser diode
devices. In March 1992, ALS completed its initial public offering,  the proceeds
of which were used to repay bridge  financing  and other loans,  and for working
capital.

In February 1994, the Company acquired all of the issued and outstanding capital
stock of Simco/Ramic Corporation,  now SRC VISION, Inc. ("SRC") for $8.1 million
in cash. During late 1993 and early 1994, AMV entered a number of other proposed
acquisition  transactions.  In Spring 1994, a new management  team was hired for
AMV. By  September  1994,  AMV  terminated  the other  acquisition  transactions
resulting in  significant  losses in 1994.  Following  these  terminations,  the
Company restructured to concentrate on its SRC-based vision systems business. In
October 1995,  the Company sold the ALS  operation for cash. In March 1996,  the
Company acquired Netherlands-based Pulsarr Holding BV ("Pulsarr"),  and, in July
1996, the Company acquired the assets and operations of Ventek, Inc. ("Ventek"),
both of which are also  engaged in  designing  and  marketing  automated  vision
systems.  In May 1997,  the Company sold Pulsarr after  receiving an unsolicited
offer. The current operating subsidiaries of AMV are SRC and Ventek.

Business
========

The Company

The Company designs,  develops,  manufactures and markets machine vision systems
that process  images not  discernible  to the human eye.  These systems  combine
technologies in four key areas (lighting,  cameras,  processors and software) to
improve quality,  enhance yield, reduce production costs and increase throughput
in a variety of markets and applications where human vision is inadequate due to
fatigue,  visual acuity or speed.  Where needed,  AMV employs highly specialized
mechanical  technologies to help customers integrate machine vision systems into
their  production  processes.   Applications  include  quality  control  in  the
processing of food, pulp wood, tobacco, and plastics for recycling,  and quality
control and automated process control in wood panel production.

Since its founding in 1964,  SRC has evolved from a  single-product  company (an
optical  device to measure  length and diameter of freshly cut logs) serving the
timber  industry,  into a provider  of machine  vision  systems  for a number of
processing industries. In 1984, SRC released its first machine vision product, a
fully  automated  defect removal system for the french fry processing  industry,
designed to improve  productivity and quality.  The system utilized  proprietary
material  conveying  systems,  light  sources,  linear array CCD cameras,  image
processing  software,  and standard bus based  electronics  to detect  defective
french fries and  efficiently  remove them from a rapidly moving product stream.
SRC built upon its  experience in potato  processing to develop  machine  vision
systems for other food  processing  customers.  These new  systems  increasingly
possessed more sophisticated  capabilities,  such as fully automated sorting and
continuous high volume product analysis.

From 1984 through the present,  SRC has continued to advance and refine its core
technologies  to  increase  the speed and  improve  the  accuracy of its machine
vision  products.  Over 35 patents have  resulted  from these  ongoing  efforts.
Additionally,  many more patent  applications have been filed. Early SRC systems
for the food processing industry benefited from state-of-the-art microprocessors
which have been  replaced  with more  powerful  microprocessors  as they  became
available over time. When full color  recognition  systems were first introduced
in 1987,  SRC responded to the need for color signal  processing by developing a
three-color image processing system.  SRC then invented a high-resolution  "RGB"
(red green blue) or "true color" camera because  commercially  available cameras
lacked the ability to detect the precise color of objects being viewed. The true
color camera  significantly  increased  the  accuracy of SRC's color  processing
machine vision  systems.  SRC used the experience it gained  developing the true
color camera to develop a high resolution panchromatic camera, so that customers
who require only black and white image  processing can achieve the same level of
precision made possible by SRC's true color camera.

SRC has further increased the visual discrimination  capabilities of its machine
vision systems with  lighting,  spectral  analysis and mechanical  technologies.
Since  1989,  SRC has  developed  specialty  lamps  that take  advantage  of the
different  reflective  properties of items being processed on a single conveyer.
SRC began adding to its spectral  characterization  capability  in 1992.  During
this period, SRC developed several mechanical technologies, including high-speed
ejection modules,  high-speed  material handling,  air-assist  stabilization and
high-speed  video  motion  analysis to  facilitate  processing  on a  high-speed
conveyer.  SRC continued to make significant  technological  advances until 1993
when  previous  management  reduced  expenditures  on research  and  development
resulting in a technology gap.

Following the  acquisition of SRC in 1994,  the Company  embarked upon a plan to
revitalize its growth potential  through  significantly  increased  research and
development efforts and a reassessment of marketing goals. At the same time, the
Company  established a new management  team  dedicated to  identifying  untapped
markets for machine vision systems. New management targeted marketing efforts at
niche markets in non-food processing  industries such as plastics for recycling,
pulp wood and  tobacco,  which have  resulted  in higher  average per unit sales
prices.  For a discussion of the Company's  current  technology and research and
development  expenditures,   see  "Technology,   Engineering  and  Research  and
Development" below.

Ventek was founded in 1991 by three  engineers  who were an integral part of the
design and  development of the  "Infrascan"  scanner.  In the early 1970's,  the
Infrascan became the industry  standard for detecting defects in wood veneer and
it remained the standard  until 1994,  when Ventek  introduced  its "New Vision"
system.  Ventek's experience in wood panel production  complements the Company's
lighting,  camera, processing and software capabilities.  The addition of Ventek
in July 1996 gave the Company its first machine vision system application in the
wood panel production  industry.  The Company believes that an enhanced level of
precision will be achieved by incorporating  SRC's  high-speed  line-scan camera
into Ventek's  veneer  scanning  systems,  thereby  increasing  their ability to
separate  the  product  into  various  grades,  as well as to detect  and remove
defects.  This improved grading  capability is expected to increase the yield of
high margin grades by correctly  identifying them and minimizing waste, enabling
customers to increase  margins on the product  produced from any given amount of
raw inputs.

Industry Background

Machine Vision: Like human vision,  machine vision requires sensing elements and
image processors.  The camera and lighting  components of machine vision systems
are capable of sensing  images beyond the region of the  electromagnetic  energy
spectrum  called  "visible  light."  Machine vision systems  working outside the
visible  light range can often  provide  significantly  enhanced  discrimination
capabilities  beyond that detectable to the human eye. For example,  in plastics
recycling, this capability allows machine vision systems to discriminate between
two different types of plastics,  PVC and PET, both of which are the same color.
Under the right kind of non-visible light, the different  reflective  properties
of these two plastics make them easily  distinguishable  to a high-speed camera.
In addition,  machine vision systems are capable of clearly viewing and reacting
to objects  moving at speeds of up to 1,200 feet per minute.  The  processor and
software  components of machine vision systems are capable of rapidly processing
and analyzing  signals with a high level of uniformity.  Because  machine vision
systems do not fatigue,  they are often  preferable for  high-speed,  repetitive
scanning or viewing of objects over  indefinite  periods of time, as required in
many production processes.

Quality  Control:  Processing  applications  typically  combine a computer-based
conveyor  system with a machine  vision system.  The conveyor  presents a moving
stream of raw product to a high-speed  inspection  camera.  Data gathered by the
camera is processed by the computer using specially  developed software with the
goal of  identifying  the location on the  conveyor of  defective  items for the
express purpose of rejecting such defective  material.  Processors of food, pulp
wood,  tobacco and recycled  plastics  products must process large quantities of
raw product through different stages,  including defect detection and sorting to
remove defective pieces and inspect for quality.  In the agricultural  area, the
frequency  and  severity  of  defects  in the raw  product  is highly  variable,
depending upon a variety of factors affecting crops.

Historically,  defect  detection,  removal and quality control in the industries
addressed  by the  Company  have been labor  intensive  and  dependent  upon and
limited by the variability of the work force. These functions are performed by a
work force that is frequently  unskilled  and subject to a high  turnover  rate.
Large numbers of individual workers stand along a conveyor and visually identify
and manually remove  defective  pieces from the stream of moving product.  These
manual methods cause inconsistent  defect removal, as well as limited throughput
that varies based upon the number and abilities of the workers.  Manual  methods
also usually cause excessive  amounts of good product to be discarded along with
defective product.  The industry has sought to replace these manual methods with
automated systems that achieve higher yield and better quality at reduced costs.

Automated Process Control:  Many types of manufacturing  and processing  require
machine vision systems because of the increasing demands for speed and accuracy.
In  high-volume  manufacturing  processes,  the demand for production of quality
products has driven the need for 100% inspection.  The identification of defects
in a  continuous  stream of  plywood  veneer for wood  panel  production  is the
Company's  first such  application.  However,  while machine vision systems have
been  successfully  used to identify and remove defects in panel  production and
other  industries,  human  eyes and hands  are  typically  still  used to repair
defects,  grade and sort various  types of products.  Other  companies,  such as
Cognex  Corporation,  have and are addressing  this need, but must combine their
pattern  recognition  software and computer  hardware  with lighting and cameras
provided by other entities.  The Company  believes that its ability to adapt its
proprietary  lighting and cameras gives it an advantage over companies that must
rely on outside suppliers for these key components.

AMV Solutions

The Company  seeks to provide its  customers  with a  competitive  advantage  by
reducing  high labor  costs,  increasing  yields and  throughput  and  improving
quality control.  The Company's  machine vision systems are capable of automated
defect  detection  and removal and  real-time  quality  analysis.  These machine
vision  systems use advanced  optical  inspection  technology to help  customers
recover more of the good product  (higher yield) and remove a higher  percentage
of  defective  product  (quality  control)  than the manual  sorting  and defect
removal  methods  historically  used  by  food  processors.  In the  wood  panel
production  industry,  increasing the number of decisions made by machine vision
systems can also result in increased throughput and higher yield with fewer line
workers.  Machine vision systems of the type produced by AMV can add significant
value in  environments  where raw product is highly  variable by  improving  the
uniformity of finished product.

Machine vision  technology used for inspection and control of processes  (beyond
defect removal) throughout manufacturing can eliminate adding value to defective
products,  thereby  reducing the finished  product  scrap rate.  Machine  vision
systems  can be used for  automated  process  control  to add value and  improve
efficiency  in highly  repetitive  processes,  such as grading  and  statistical
collection,  that require  speed,  accuracy and rapid  throughput.  In addition,
machine  vision systems are capable of providing  real-time  feedback that could
enable  manufacturers to rapidly alter or modify  production  specifications  to
achieve a high level of  consistent  quality not  previously  achievable.  Thus,
automated process control applications present an opportunity for AMV to achieve
higher margins,  while achieving  substantial cost savings for customers through
the reduction of direct labor and improved product quality.

Strategy

The Company seeks to establish  itself as the  technological  leader and premier
provider of machine vision systems in the markets it serves by adapting its core
competencies  in camera,  lighting,  processing  and  software to meet  customer
needs.  The Company  believes that the 1996 acquisition of Ventek and continuous
development of vision systems apart from mechanical  product handling  equipment
can  increase  gross  margins and enable the Company to enter new higher  margin
markets. Important elements of the Company's growth strategy include:

   *  Leverage   Expertise  in  Lighting,   Camera,   Processing   and  Software
     Technologies:  The Company  believes its core  competitive  strength is its
     breadth  and  depth of  expertise  in  optical,  lighting,  processing  and
     software technologies. The Company and its predecessors have developed this
     expertise over a period of years,  and the Company  continues to expand its
     capabilities  through  research  and  development.  AMV seeks to expand the
     applications  for its  technology and to capitalize on its ability to apply
     its technology to develop new products and product enhancements.

   *  Identify and Target Key Niche  Markets:  The Company will seek to identify
     well-defined,  niche  markets with the  potential of higher per unit profit
     margins.  The Company  believes that it will achieve  higher  margins where
     customers   require  the  full  range  of  its  machine   vision   systems'
     capabilities in automated process control as well as in quality control. In
     order to gain increased  acceptance and market  penetration for its machine
     vision   systems,   AMV  will  continue  to  focus  on  forming   strategic
     relationships  with leading  companies in its target  markets.  The Company
     believes this method of strategic market  penetration to be very effective.
     The Company believes that its previous relationship with Union Carbide, and
     current relationships with FMC Corporation ("FMC") and CAE Machinery,  Ltd.
     and others  demonstrate  recognition  of the  technical  advantages  of its
     systems.

   *  Customize  Technology to Meet Customer Needs:  AMV designs its products to
     be adaptable to individual  customer  requirements.  AMV believes that this
     flexibility,  particularly in lighting and camera capabilities,  gives it a
     competitive advantage in being able to respond rapidly to changing needs in
     existing and new markets. AMV adapts, customizes and integrates its machine
     vision  systems  to solve  customers'  particular  problems  and  therefore
     satisfy customers' needs.

   *  Expand  Sales and  Distribution:  The Company  intends to expand sales and
     distribution  by  implementing a regional sales and service office concept.
     In 1997, the Company  established  its  Eindhoven-based  European sales and
     service center. The Company may add additional sales offices in the future.
     These  regional  sales and services  offices  would  oversee and direct the
     efforts of  representatives  for AMV.  The Company  plans to  strategically
     locate  these  regional  sales  and  service  offices  and to  equip  them,
     financing  permitting,  with demonstration systems to facilitate customers'
     testing their products on systems  similar to the equipment that they would
     order from AMV. In 1998,  the Company  entered a  representative  agreement
     with FMC  whereby FMC will act as a sales  representative  in many parts of
     the world.

   *  Aggressively Pursue Use of Trial Units at Customer Sites: The Company will
     seek to place  increased  numbers of trial  units at  potential  customers'
     sites.  AMV's  experience  with trial units has been  successful  because a
     company  which has a trial unit  machine  vision  system  installed  in its
     facility  will  frequently  decide to retain and purchase  the unit.  Trial
     units provide  potential  customers  with the  opportunity  to experience a
     reduction in their  production cost prior to making the capital  commitment
     involved in purchasing one or more of the Company's machine vision systems.

   *  Evaluate and Pursue New Vision Related Products:  The Company will seek to
     identify  technologies and capabilities  that enhance its product offerings
     and market applications through joint ventures, acquisitions,  partnerships
     or other business relationships.

Products

AMV currently offers the following products:

       Product                   Industry                Applications
--------------------------------------------------------------------------------
   VHS OPTISORT(TM)         Food processing,        Potato Chips, French Fries,
                            Plastics recycling      Whole Potatoes, Vegetables,
                                                    Polyethyl Teraphthalate
                                                    Green/Clear
--------------------------------------------------------------------------------
   KROMA-SORT(R)            Food processing,        Vegetables, Plastic Flake
                            Plastics recycling
--------------------------------------------------------------------------------
   SPECTRA-SORT(TM)         Food processing,        Potato Products, Cereals,
                            Plastics recycling      Vegetables
--------------------------------------------------------------------------------
   Length & Defect          Food processing         French Fries
   Analyzer(TM)
--------------------------------------------------------------------------------
   Pulp Wood Sorter         Forest industry         Wood Chips
--------------------------------------------------------------------------------
   Tobacco Sorter II        Tobacco                 Tobacco, Dry Food Products
--------------------------------------------------------------------------------
   "New Vision" Veneer      Plywood Veneer          Softwood Veneer Production
   Scanning System
--------------------------------------------------------------------------------
   "Sequoia Sentry"         Plywood Veneer          Softwood Veneer Production
   Dryer Control System
--------------------------------------------------------------------------------

AMV's machine vision systems utilize lighting,  camera and software  components,
and housing and structural  components made principally of stainless steel. They
are modular in design,  which  provides  flexibility in  configuration  to allow
adaptability to products of many types of industries.  The mechanical  design of
these systems is extremely sturdy and conforms to various  industry  regulations
and standards.

Defect  Detection  and Removal:  The  technology  used in AMV's  machine  vision
systems is capable of viewing,  discriminating  between usable versus  defective
pieces in periods ranging from 20 to 60 milliseconds  (thousandths of a second),
and removing the defect while the product is traveling at speeds of 500 to 1,200
feet per minute.  Initially, the product stream is mono-layered (arranged into a
single  layer)  by a  vibrating  infeed  conveyor  belt,  and fed  onto the main
conveyor by a steep infeed chute. The chute  accelerates the product to separate
product  units in the flow  direction.  Mono-layering  and creating a sufficient
space  between  each piece of product  inspected,  such as  individual  raisins,
facilitate  rapid,  accurate  analysis by AMV's image  processing  hardware  and
software.

Once separated,  product is moved through the system by the high-speed main belt
conveyor.  Customers  select the belt color to provide a sharp contrast with the
product  being  sorted.  Lighting is selected to maximize the  difference in the
images  reflected  by  acceptable  and  defective  pieces of  product.  Intense,
specially  conditioned  fluorescent  or  exotic  gas  discharge-produced   light
illuminates the product beneath AMV's high-speed  line-scan  camera.  High-speed
imaging in the camera module stores and compares light levels  reflected by each
piece of product. Levels that fall within discrimination windows selected by the
operator are considered defects.

During the scanning and  analysis,  the system  processor  monitors the conveyor
belt position of each  defective  piece and tracks it through the short distance
to the downstream end of the main  conveyor.  The distance  between the point at
which the camera  detects  the moving  product and the point at which the jet of
air expels  the  defective  piece  ranges  from two to 25  inches.  Just as each
defective  piece is leaving  the main  conveyor,  a short jet of air is released
from one or more of the finely tuned  ejectors.  This jet of air rapidly changes
the paths of the  defective  pieces  downward so that they miss the main outfeed
chute.  Accepts are unaffected,  pass across the gap to be gently decelerated on
the outfeed chute, and then travel on to downstream processing equipment.

AMV's  machine  vision  systems  allow the customer to establish  basic  sorting
criteria  prior to running the system and are easily  fine-tuned  for day-to-day
changes in product characteristics and light levels.

Markets, Customers and Applications

To further its growth strategy,  the Company is actively  pursuing  expansion in
both its current  markets and by identifying and entering into new niche markets
(i.e.,  markets that are well defined and have the  potential  for higher profit
margins and in which there is little competition). At the same time, AMV engages
in continuous  modifications  of its lighting,  camera,  processing and software
technologies to adapt them for new  applications.  Until  recently,  the Company
marketed its machine  vision  systems  primarily for quality  control in sorting
applications.  However,  the Company believes that many additional  applications
for its  machine  vision  systems  exist  in both  food  and  non-food  markets,
particularly in the area of automated process control.  The Company believes its
ability  to  respond  to  customers'  needs in  niche  markets  by  customizing,
developing and  integrating its core technology will allow it to penetrate these
markets.

Food: The Company's largest market is the food processing industry.  Within food
processing,  the largest  market  sectors for the  Company's  products have been
potatoes (principally french fries), vegetables and snack foods. The Company has
also penetrated fruits,  cereals and confections,  as well as a variety of other
market sectors. Customers in the food industry include McCains, Lamb Weston, Del
Monte Foods, PepsiCo, Inc. (Frito-Lay, Inc.) and Hershey Chocolate USA.

AMV's systems are used by fruit and vegetable  processors where  field-harvested
products are cleaned, graded, automatically sorted, blanched and processed prior
to freezing,  canning or packaging for sale to institutional and retail markets.
Principal  fruit  and  vegetable  market  sectors  for the  Company  are  potato
products,  green beans, peas, corn, carrots,  onions,  raisins and peaches.  The
Company's  prospects for sales in the vegetable and fruit industry  benefit from
its proprietary  color automated defect removal systems,  since defect detection
in most fruit and vegetable  applications  requires color analysis. In contrast,
the potato industry has been able to achieve effective detection of good and bad
product using black and white optical scanning technology.

Snack  food  processors  use  AMV's  machine  vision  systems  in a  variety  of
applications.  Candy  manufacturers  scan  product to remove  partially  wrapped
pieces.  Potato  chip  manufacturers  use AMV's  vision  capabilities  to ensure
consistent color and quality.

Tobacco:   AMV's  machine  vision  systems  provide  tobacco  companies  sorting
capability to remove impurities and foreign matter from a stream of raw tobacco.
AMV has sold  systems  to  leading U. S. and  international  tobacco  companies,
particularly  in Japan.  AMV believes  market  growth for tobacco  systems shows
great  promise  based upon the high  degree of  acceptance  demonstrated  by its
customers and the significant size of the worldwide tobacco  processing  market.
The  Company  utilizes  the  services  of several  manufacturers  and sellers of
tobacco processing machinery systems worldwide,  whereby such entities represent
AMV on a non-exclusive  basis in all areas of the world outside of North America
and Japan.

Plywood Veneer:  The Company has targeted the need for detecting and eliminating
defects (edge cuts,  knots and dark color) from the peeled ribbon of veneer used
in wood panel production for the plywood market. Since its introduction in 1994,
the Company's New Vision veneer  scanning  system has gained wide  acceptance in
the North American  plywood  industry.  The Company  believes that it has placed
systems in approximately  80% of the North American  softwood veneer  production
lines, but has not yet penetrated foreign markets to any significant extent with
only eleven systems sold outside of North America.

The New Vision veneer scanning  machine vision system allows  identification  of
open voids, wane and closed defects in a fast-moving  stream of wood veneer used
in plywood production just after a log is peeled.  After defect  identification,
the New Vision instructs a clipper  (manufactured by another company) to cut the
veneer  immediately  before and after the  defect.  The New Vision  reduces  the
amount  of  good  wood  attached  to the  defect  and  ensures  complete  defect
identification  at  the  beginning  of the  plywood  production  process,  which
decreases  the  number of  downgraded  panels,  increases  dryer  efficiency  by
eliminating  material that ultimately becomes dry waste and reduces  re-clipping
of previously  undetected defects. The savings provided by the New Vision system
in the form of higher portions of good wood recovered create  significant  added
value for customers.  Major customers  include  Georgia-Pacific,  Boise Cascade,
Champion International and Columbia Forest Products.

The Company believes that its market share in green veneer scanning reflects the
level of confidence  that customers have for the  reliability and performance of
its products. However, green veneer scanning or initial inspection of the veneer
represents only one point in the wood vertical panel  production  market.  There
are  approximately  eight other potential defect detection  applications in both
the green and dry  (i.e.,  after the veneer  has been  dried  before  lay-up and
lamination)  veneer processing.  In addition,  the Company believes that further
market potential exists in grading and matching of hardwood and  furniture-grade
veneers.  Thus,  existing and  potential new customers who process wood at other
steps in the multi-step panel production  process are an untapped market for the
Company's machine vision systems.  For example,  in 1998 the Company  introduced
its Sequoia Sentry veneer dryer control system that measures  moisture in veneer
exiting the dryer to determine if additional time in the dryer is necessary. The
Company will seek to leverage  Ventek's  brand name  recognition in green veneer
scanning to reach  customers at multiple  points in the vertical market for wood
panel  production  so that  existing and new customers can benefit from the full
range of the Company's technological capabilities.

Forest  Products:  The pulp wood industry is beginning to recognize the benefits
of using machine vision to separate  contaminants  in pulp wood.  Heavy duty AMV
machine  vision  systems,  such as the Pulp Wood Sorter,  have been developed to
sort bark,  rot and other  undesirable  wood parts from high  quality wood chips
used in making  paper.  The sorter is able to identify  bark,  rot and trash and
automatically remove unwanted material from a fast-moving,  continuous stream of
wood chips.  As a result,  high value chips can be  economically  recovered from
lower  quality and formerly  unusable  limbs and small trees.  After sorting for
bark and darker  content,  the wood chips  command a higher market price because
they require less chemical processing in the manufacture of paper products.  CAE
Machinery,  Ltd. is the Company's exclusive  distributor of the Pulp Wood Sorter
in North America.

Based on interest from major pulp producers, AMV believes that a large potential
market for this process exists worldwide.  Other potential  applications for AMV
machine vision systems for the forest products  industry include  inspection and
grading for finished lumber and reclamation of wood yard wastes.

Plastics  Recycling:  Because  different  types  of  plastics  used in  consumer
products have different characteristics,  they must be separated prior to use in
recycled  products.  AMV's  proprietary  lighting and camera  technologies  take
advantage  of  different  reflective  properties  of these  plastics  to  enable
producers of recycled plastics to accurately  separate  valuable  materials that
could otherwise be wasted.  Plastics used in recycled  plastics products include
PET (polyethyl  teraphthalate) used for transparent soda bottles, NHDPE (natural
high-density  polyethylene)  used for translucent  milk and other fluid bottles,
and colored HDPE used for a variety of opaque,  colored  bottles,  such as those
used for motor oil and  dishwashing  detergent.  Another  type of  plastic,  PVC
(polyvinyl chloride),  has melting  characteristics  different from PET or HDPE.
AMV has  developed  technologies  that (i) separate  plastics by melting  point,
which is  necessary  to ensure  purity of the  recycled  material and to prevent
costly  shut-downs  of equipment  used by recyclers in the  processes,  and (ii)
separate  plastics by color,  which is vital to the  remarketing of the recycled
material. Customers in the plastics recycling market include Union Carbide, Inc.
and Wellman Industries.

Worldwide  demand for plastics  drives the need for AMV's machine vision systems
in the recycling  business.  Key factors that may impact the demand for recycled
plastics are the cost for virgin  plastics  and  recycling  regulations.  If the
price of petroleum  products and virgin  plastics  increases in the future,  the
demand for recycled  plastics may increase.  Management  of worldwide  petroleum
supplies (e.g.,  foreign country production cutbacks) may also lead to increased
U. S. and foreign government regulations regarding the use of recycled plastics.
If  the  demand  for  recycled  plastics  products  increases  due to  price  or
regulations,  demand for the Company's  machine vision sorting  systems may also
rise. However,  there can be no assurance that the use of recycled plastics will
reach a level that would create an opportunity for the Company to increase sales
of systems to that market.

Technology, Engineering and Research and Development
----------------------------------------------------

Technology

Lighting:  AMV has developed a number of proprietary  technologies that form the
foundation  of its vision  systems,  particularly  in the areas of lighting  and
cameras.  The performance of machine vision systems is analogous to human vision
insofar as the ability to see is only as good as the lighting and optics permit.
However,  machine  vision  performance  can  be  optimized  through  the  use of
specialized  lighting to improve the contrast  between one part of an object and
another part of the same object, with the two parts having differing  reflection
properties.  AMV has developed  proprietary  lighting  technology to enhance the
contrast discrimination for objects that have nearly identical visual properties
in the visible light range. AMV's proprietary  lighting systems are manufactured
in-house.

Optimizing the performance of a machine vision system requires an  understanding
of the spectral  characteristics  of the object being analyzed.  This means that
the reflective  properties of the object must be  characterized as a function of
the  varying  color  of  light  (i.e.  wavelength  of  light)  by  which  it  is
illuminated.  This process of  characterizing  the reflection of the object as a
function of the wavelength of light is called spectral analysis or spectroscopy.

AMV's  spectroscopy  laboratory  is fully  equipped  to measure  the  reflective
properties of customer  products with lighting that ranges from ultraviolet (UV)
to infrared (IR). This ability to determine the spectral  characteristics  of an
object allows AMV to eliminate trial and error approaches to lighting and camera
configurations and, therefore,  ensures optimal visual discrimination capability
of AMV vision  systems.  To better  serve its  customers,  AMV has  developed  a
portable  spectrometer  that can be taken into the field for applications  where
measurements  must be made on location due to the mutability or perishability of
the customer's product.

Cameras:  Machine vision systems that have full color perception  capability are
limited by the camera's  ability to represent true color.  True color means that
the color seen by both the human observer and the machine vision system's camera
must result in the same  interpretation.  The  Company's  full color cameras use
three   fundamental   colors:   red,  green  and  blue  (RGB).  The  best  color
representation  can be  achieved  when  each of the R, G, and B sensor  elements
(i.e. pixels) are optically  coincident.  This means that when the RGB camera is
looking at a specific point on an object, all three (RGB) sensor arrays (charged
couple devices,  or "CCD's") have  corresponding  R, G & B pixels looking at the
same spot. Color accuracy and, therefore,  performance depends on the ability of
its  camera to  accurately  align the RGB CCD's.  SRC has a  patented  alignment
process for building its commercial full color line-scan cameras.

Processing:  An accurate  interpretation  of images  created using  lighting and
cameras depends on the image processing  capabilities of the rest of the machine
vision  system.   Real-time  image  processing  is  accomplished  by  high-speed
electronic signal  processors  (hardware) and detection  algorithms  (software).
Successive    generations    of   AMV   vision    systems    have   grown   from
pan-chromatic/gray-scale  systems to full color vision.  The current  generation
product under  development makes extensive use of DSP (digital signal processor)
chips  that  allow  commonality  within the  machine  with very high  throughput
performance and highly flexible functional expansion capability.

Software:   High-speed  vision  requires  efficient  software  algorithms.   AMV
maintains  a software  group that  develops  specialized  proprietary  detection
algorithms to achieve  real-time  signal  processing.  Multiple  generations  of
detection  algorithms have resulted in continual  refinement of image processing
capability. This in-house software resource is also responsible for the creation
of  user-friendly  Graphics User Interfaces (GUI) that make AMV products easy to
learn, use and maintain. This enables workers in a customer's production process
to achieve the benefits of AMV's systems  without  extensive and  time-consuming
training.

Research and Development

The Company anticipates research and development  expenditures will be less than
the  amount  incurred  in  1998.  Some  of the  more  significant  research  and
development  projects  undertaken  in recent  years were the  development  of an
application-specific  tobacco machine vision system for sorting,  and processing
enhancements  for  existing and new systems.  Further  research and  development
efforts are expected to flow from these activities.

AMV's  research  and  development   group  conducts  new  product  research  and
development,  provides  support  engineering  for released  products and project
engineering for custom systems.  The R&D group includes  electronic,  mechanical
and software engineers,  mathematicians and technical support personnel. Ongoing
development  activities include improvements to current products and development
of new products. The Company provides engineering support for products in all of
its locations.

AMV's research and development expenses, of which greater than 95% relate to new
products or new applications, have been as follows:

     Fiscal year ended December 31, 1996............................ $ 4,038,000
     Fiscal year ended December 31, 1997............................ $ 3,950,000
     Fiscal year ended December 31, 1998............................ $ 5,024,000

Marketing and Sales

A principal  AMV  marketing  strategy is to determine  which new niche market or
application  to  pursue,  and to form a  strategic  relationship  with a leading
company in that market.  AMV's  objective in such an alliance is (i) to interest
the leader in purchasing AMV's machine vision systems, which may lead to further
sales to other companies in the field that follow industry  trends,  and (ii) to
obtain the benefit of direct customer input and participation during the product
design  phase of adapting the AMV system to the new market or  application.  AMV
has identified  new niche market  opportunities  for  application of its machine
vision technology initially in each of its food, pulp wood, tobacco and plastics
for recycling markets.

Focused Customer Strategy:  In recent years, the Company has established certain
contractual and non-contractual relationships with existing customers, potential
customers, representatives, distributors and others. The purpose of this focused
customer strategy is to access such customers' knowledge and contacts within the
applicable industries to identify customer needs and expand sales. Relationships
entered into since 1994 include the following:

<TABLE>
<CAPTION>

Name and/or                                     Potential
Type of Company              Industry           Application            Description of Relationship
----------------------       -------------      -------------------    ---------------------------
<S>                          <C>                <C>                    <C>

1. FMC Corporation           Food               Fruit and vegetable    An exclusive and non-exclusiven sales
                                                sorting                representative agreement for the sale
                                                                       of machine vision systems to the food
                                                                       industry in many areas of the world.

2. CAE Machinery, Ltd.       Pulp wood          Wood chip sorting      AMV seeks to capitalize on the
   (major supplier to                                                  reputation of CAE in the technologically
   the North American                                                  conservative forest products industry in
   wood products                                                       in North America to speed the adoption of
   industry)                                                           machine vision sorting technology in that
                                                                       industry.

3. Columbia Forest           Wood veneer        Further automation     Agreement to mutually explore further
   Products                                     of veneer processing   automation of hardwood plywood manufacturing
                                                                       processes.

4. Boise Casdade             Wood veneer        Further automation     Agreement to develop dryer temperature control
                                                of veneer processing   and moisture detection for dried veneer panels.

5. COMAS, S.p.A.             Tobacco            Tobacco sorting        COMAS contributes market access as well as
   (manufacturer of                                                    extensive product handling experience for
   tobacco processing                                                  improving AMV sorter designs to accelerate
   equipment)                                                          market penetration with better performing
                                                                       machines.

6. Union Carbide             Plastics           Recycling whole        Processing of post-consumer colored HDPE
                             recycling          bottles and            (high-density polyethylene used for
                                                plastic flakes         translucent milk and other fluid bottles)
                                                                       to create PRISMA(TM) standard plastics
                                                                       (PRISMA(TM) is a set of color standards that
                                                                       allows for manufacture of consistently colored
                                                                       HDPE containers which require certain portions
                                                                       of post-consumer material).
</TABLE>

The Company  believes that adapting  current AMV machine  vision systems for new
applications  through strategic  relationships  such as these will contribute to
base business growth and accelerate entry into new niche markets.

Sales and  Distribution:  AMV has a direct sales force of twelve  employees.  It
also markets its products through representatives pursuant to various agreements
covering different  geographical areas. Prior to September 30, 1996, AMV offered
its  products for sale  outside the United  States and Canada  through Ham & Hak
Engineering BV and its Foodectronics  subsidiary. On September 30, 1996, SRC and
Ham & Hak terminated their ten-year  exclusive  distribution  contract.  In June
1997, the Company  established SRC VISION BV in Eindhoven,  The Netherlands,  as
its  sales  and  service  center  in  Europe.  In 1998,  the  Company  entered a
representation  agreement  with FMC to sell machine  vision  systems to the food
industry in many areas of the world.

Marketing  Through  Trial  Units:  AMV  occasionally   enters  into  Site  Lease
Agreements with potential  customers that provide for a trial period  (generally
from two to four months,  but in some cases, up to one year) for the customer to
test a system.  The potential  customer pays a monthly  rental fee for the trial
units,  which is then  credited  against the  purchase  price when the  customer
purchases the system.  Due to the high success rate in customer sales  resulting
from the use of these trial units as a marketing  tool,  the Company  intends to
seek to increase the placement of trial units in new potential customer sites.

International Sales: International sales (i.e., sales outside the United States)
for the years ended December 31, 1998,  1997 and 1996 accounted for 33%, 33% and
53% of net sales, respectively. International sales as a percentage of net sales
in 1996 were  greater than 1997  because of the  acquisition  of Pulsarr in 1996
which was sold in May 1997.  Foreign  sales are primarily  denominated  in U. S.
dollars, or, in some cases, Dutch guilders.

Backlog

AMV's  backlog for its products  was  approximately  $2,457,000  at December 31,
1998,  as  compared to  $4,206,000  at December  31,  1997.  Shipment of all the
backlog orders is scheduled to take place within nine months.  Backlog  includes
only those orders for which a purchase  order has been  received and for which a
delivery  schedule  has been  established  by AMV.  However,  such orders can be
subject  to  cancellation  by the  customer.  Because  of the  timing of orders,
customer changes in delivery  schedule,  cancellation of orders and trial period
programs that are not included in backlog, backlog as of any particular date may
not be representative of AMV's actual sales for any succeeding fiscal period.

Manufacturing and Supplies

The Company  manufactures,  assembles and ships its products from its facilities
in Medford and Eugene,  Oregon.  The Company's Medford facility has a vertically
integrated  manufacturing  process,  beginning with sheets and bars of stainless
steel that are cut and configured,  then welded to the Company's  specifications
for its components and machines.  The Medford  operation  also  manufactures  or
assembles many of the components and subassemblies used in its machines, such as
the processing  unit, air jet expulsion  component,  frames and related systems.
Additionally,  all  proprietary  components are  manufactured by AMV in Medford,
such as its RGB  Cyclops(TM)  color  cameras  used for  optical  scanning in the
KROMA-SORT(R) systems, and various lights and lamps developed by the Company for
certain of the systems.  The  Company's  Ventek  (Eugene)  operation  integrates
hardware  components  manufactured by outside  suppliers.  The Company's machine
vision systems incorporate its proprietary software and algorithms. Basic system
assembly  is  relatively   consistent   among  product  models  using  similarly
fabricated  parts for the machine  structure.  Most systems are customized as to
number of cameras, lighting configurations and certain other features.

The Company  has a  computerized  manufacturing  inventory  control  system that
integrates  and monitors  purchasing,  inventory  control and  production.  Each
vision system is tested prior to delivery to a customer.  The Company's  quality
control   process   tests  for   reliability   and   conformance   with  product
specifications.

The  Company is  dependent  on outside  unaffiliated  suppliers  for some of the
components and parts used in its vision automation systems. Most major parts and
components are available from multiple sources;  however,  the prisms and lenses
required in RGB  Cyclops(TM)  color  cameras are obtained  from a single  source
supplier.  Although  such  supplier has not  indicated any intention to limit or
reduce  sales  of  parts  to the  Company,  if it were to do so,  the  Company's
business,  results of  operations  and  financial  condition  could be adversely
affected.  Historically,  AMV has  generally  been  able  to  obtain  parts  and
components for its systems, as needed, either from its then-current suppliers or
replacement  vendors.  AMV believes  that it will  continue to be able to obtain
required  components and parts from various suppliers,  although there can be no
assurance that it will be able to do so.

Warranty and Customer Service

AMV generally provides a one-year limited warranty on its products.  Since 1993,
there have not been any claims  under AMV's  warranty  program  that  materially
affected AMV's operations. AMV also provides telephone customer support services
and offers annual service agreements.

In addition, for certain custom-designed  systems, the Company contracts to meet
certain performance  specifications for specific  applications.  The Company has
incurred  higher  warranty  expenses  related  to new  products,  especially  on
products  that  have not yet been  proven  to be  commercially  viable,  than it
typically incurs with established  products.  There can be no assurance that the
Company will not incur  substantial  warranty  expenses in the future related to
new products as well as established  products,  which may have an adverse effect
on its results of operations and customer relationships.

Competition

The vision automation system industry is subject to intense competition. Some of
AMV's  major  competitors  are  substantially  larger  in size and have  greater
financial  resources  than AMV. Some of its  competitors  sell machines that are
less expensive than AMV's.  In some instances,  a potential  customer may select
the less  expensive  alternative  even  though the AMV system  provides  greater
sorting capability.  Currently, Key Technology,  Pulsarr, Elbicon, Sortex, Allen
International, Morvue Electronics and Coe International are believed to be AMV's
direct  competitors.  There may be other  competitors  of AMV in addition to the
ones listed above.  AMV competes with its  competitors  on the basis of quality,
technology, systems solutions and price. There can be no assurance that AMV will
continue  to  successfully   differentiate   its  products  from  those  of  its
competitors.

Patents and Trademarks

AMV has been issued or assigned  approximately 25 United States patents, and has
applied for five other United States patents relating to its products, including
various inspection and detection systems.  In addition,  AMV has obtained or has
applied for patent  protection for certain of these systems in selected  foreign
countries.  AMV believes  that two of these  patents,  a system for  stabilizing
articles on a conveyor and an RGB camera,  are important to its business.  These
two patents expire in March 2011 and September  2008,  respectively.  Other than
the two patents described in the previous sentence, AMV does not consider any of
the present patents significant to its current operations.  These patents expire
at various times over a six-year period commencing in April 2005.  Additionally,
SRC  has  seven  registered   trademarks:   VHS   OPTISORT(TM),   KROMA-SORT(R),
SPECTRA-SORT(TM),   Length   and   Defect   Analyzer(TM),   Pulp  Wood   Sorter,
Quadra-View(R) and ODSS II(TM).

The Company  also  attempts to protect its trade  secrets and other  proprietary
information  through  proprietary  information  agreements  with  employees  and
consultants  and other security  measures.  There can be no assurance that these
measures will be successful in protecting the Company's  proprietary rights. The
laws  of  certain  countries  in  which  the  Company's  products  are or may be
manufactured  or sold may not protect the  Company's  products and  intellectual
property rights to the same extent as the laws of the United States.

There can be no assurance  that third  parties will not assert  infringement  of
other claims against the Company with respect to existing or future  products or
that licenses will be available on reasonable  terms, or at all, with respect to
Company   patents  or  any   third-party   technology.   Litigation  to  prevent
infringement  of Company patents or to determine the validity of any third-party
claims could result in significant expense to the Company and divert the efforts
of the  Company's  technical  and  management  personnel,  whether  or not  such
litigation is  determined  in favor of the Company.  The Company is not aware of
any threatened or pending patent actions.

As a  result  of the  1992  settlement  of a  lawsuit  alleging  certain  patent
infringements, SRC entered into a royalty agreement pursuant to which SRC agreed
to pay  royalties of 7% of certain  vision  system sales  through the earlier of
June  30,  2003,  and  the  date  at  which  aggregate  royalty  payments  equal
$1,600,000. The final royalty payment was made in July 1996.

Employees

At December 31, 1998, the Company had 191 full-time  employees,  including 66 in
manufacturing,  45 in engineering,  research and  development,  50 in marketing,
sales and  service and 30 in general  administration  and  finance.  None of the
Company's  employees is represented by a labor union. The Company  considers its
employee relations to be excellent.


Item 2. Properties
================================================================================

AMV corporate offices occupy  approximately 2,600 square feet of rented space in
Medford,  Oregon  pursuant to a three-year  lease expiring in 2001. The lease is
renewable.

The principal  executive office and manufacturing  facilities of SRC (a total of
approximately  82,000  square  feet) are  located on an  approximately  6.4 acre
parcel of land in Medford, Oregon. SRC owns the land and building,  subject to a
deed of trust securing an approximately $3 million loan made by Bank of American
National Trust and Savings Association ("BofA"). The loan bears interest at 8.3%
and is due May 1, 2008. SRC also owns 3.4 acres of land adjacent to its facility
for possible future expansion.

Ventek occupies 12,000 square feet of a building located in Eugene,  Oregon that
also  houses a  principal  supplier  of  mechanical  components  for its  vision
systems. The space is leased on a month-to-month basis.


Item 3. Legal Proceedings
================================================================================

The  information  required  by this item is  incorporated  by  reference  to the
Company's 1998 Annual Report to stockholders.


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

None.

<PAGE>

                                     Part II
                                     =======


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

The  information  required  by this item is  incorporated  by  reference  to the
Company's 1998 Annual Report to stockholders.


Item 6. Selected Financial Data
================================================================================

The selected  financial data for the Company presented below is derived from and
is qualified  by the  Company's  audited  financial  statements  included in the
Company's  1998 Annual  Report,  which  financial  statements are included in an
exhibit to this Form 10-K and should be read in conjunction  with such financial
statements  and the related  notes  thereto.  Until early 1990,  the Company was
principally  engaged in research and development and  organizational  activities
relating to its laser  operations.  In October 1995,  the Company sold its laser
operations. The laser operations have been treated as a discontinued business in
the selected financial data.

In February  1994,  the  Company  acquired  SRC. In March and July of 1996,  the
Company acquired Pulsarr and Ventek, respectively. In May 1997, the Company sold
Pulsarr.  Purchased  entity  operations  account  for a  large  portion  of  the
fluctuation in amounts between fiscal years.  Selected  financial data should be
read in light of these facts and in conjunction  with the financial  statements,
notes to financial  statements and other financial  information  included in the
Company's 1998 Annual Report.

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                            ----------------------------------------------------------------------------
                                                 1998           1997            1996           1995             1994
                                            ------------    ------------   ------------     ------------    ------------
<S>                                         <C>             <C>            <C>              <C>             <C>
Net sales                                   $ 27,041,000    $ 31,974,000   $ 29,938,000     $ 19,394,000    $ 11,922,000
Cost of sales                                 12,585,000      16,042,000     15,794,000       11,194,000       8,537,000
                                            ------------    ------------   ------------     ------------    ------------
Gross profit                                  14,456,000      15,932,000     14,144,000        8,200,000       3,385,000
Operating expenses                            13,894,000      12,914,000     12,882,000        7,546,000       8,897,000
Charge for acquired in-process technology             --              --      4,915,000               --              --
Charge for royalty expense                            --              --        647,000               --              --
Gain on sale of Pulsarr                               --       4,989,000             --               --              --
Interest and other (expense)-net                (403,000)       (892,000)      (960,000)         461,000         (37,000)
                                            ------------     -----------   ------------     ------------    ------------

Income (loss) from continuing operations         159,000       7,115,000     (5,260,000)       1,115,000      (5,549,000)
Loss from discontinued operations                     --              --             --         (173,000)     (2,248,000)
Provision for (benefit from) income taxes     (2,083,000)         99,000             --               --              --
                                            ------------     -----------   ------------     ------------    ------------

Net income (loss)                           $  2,242,000    $  7,016,000   $ (5,260,000)    $    942,000    $ (7,797,000)
                                            ============    ============   ============     ============    ============
Basic earnings (loss) per share:
   Continuing operations                    $       0.21    $       0.64   $      (0.49)    $      0.12     $      (0.57)
   Discontinued operations                            --              --             --           (0.02)           (0.23)
                                            ------------    ------------   ------------     -----------     ------------
      Total                                 $       0.21    $       0.64   $      (0.49)    $      0.10     $      (0.80)
                                            ============    ============   ============     ===========     ============
Diluted earnings (loss) per share:
   Continuing operations                    $       0.18    $       0.49   $      (0.49)    $      0.11     $      (0.57)
   Discontinued operations                            --              --             --           (0.02)           (0.23)
                                            ------------    ------------   ------------     -----------     ------------
      Total                                 $       0.18    $       0.49   $      (0.49)    $      0.09     $      (0.80)
                                            ============    ============   ============     ===========     ============
Weighted average number of common
   stock outstanding                          10,717,000      11,202,000     10,704,000        9,451,000       9,703,000

Balance Sheet Data:
Current assets                              $ 17,231,000    $ 14,075,000   $ 15,411,000     $ 10,391,000    $  7,766,000
Current liabilities                            5,131,000       4,942,000      9,498,000        3,501,000       3,181,000
Working capital                               12,100,000       9,133,000      5,913,000        6,890,000       4,585,000
Net assets relating to discontinued
  operations                                          --             --               --              --         393,000
Total assets                                  29,839,000      25,235,000     30,938,000       17,628,000      14,876,000
Long-term debt                                 7,862,000       8,342,000     14,940,000        4,875,000       2,737,000
Total shareholders' equity                    16,846,000      11,951,000      6,500,000        9,252,000       8,958,000

</TABLE>


Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations
================================================================================

Introduction

With the  exception of certain  cautionary  statements  and risk factors  listed
below, the information required by this item is incorporated by reference to the
Company's 1998 Annual Report to stockholders.

Cautionary Statements and Risk Factors

The Company and its  representatives  may from time to time make written or oral
forward-looking  statements with respect to long-term objectives or expectations
of the Company, including statements contained in the Company's filings with the
Securities  and  Exchange  Commission,  in its  reports to  stockholders  and in
information provided in its web site.

The words or phrases "will  likely," "are  expected to," "is  anticipated,"  "is
predicted,"  "forecast," "estimate," "project," "plans to continue," "believes,"
or similar expressions identify "forward-looking  statements" within the meaning
of the Private  Securities  Litigation Reform Act of 1995. Such  forward-looking
statements  are  subject to certain  risks and  uncertainties  that could  cause
actual results to differ materially from historical earnings and those presently
anticipated  or projected.  The Company  wishes to caution  readers not to place
undue reliance on any such  forward-looking  statements,  which speak only as of
the date made.  In connection  with the "Safe Harbor"  provisions on the Private
Securities  Litigation  Reform Act of 1995,  the  Company is hereby  identifying
important  factors that could affect the  Company's  financial  performance  and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements  expressed with respect to future periods in any
current statements.

The Company cautions that the following list of important factors may not be all
inclusive,  and it specifically declines to undertake any obligation to publicly
revise any  forward-looking  statements that have been made to reflect events or
circumstances  after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Among the factors that could have an impact
on the Company's  ability to achieve its operating results and growth plan goals
and/or affect the market price of the Company's stock are:

   * The Company's history of losses and negative cash flow.
   * Fluctuations in quarterly operating results and seasonality in certain of
     the Company's markets.
   * Rapid technological change in the Company's markets and the need for new
     product development.
   * Market acceptance of the Company's new products.
   * AMV's dependence on certain markets and the need to expand into new
     markets.
   * The lengthy sales cycle for the Company's products.
   * The Company's highly competitive marketplace.
   * The dependence on certain suppliers.
   * The risks associated with dependence upon significant customers and
     reliance on certain distributors.
   * The risks associated with international sales.
   * The uncertain ability to manage growth and integrate acquired businesses.
   * Risks associated with acquisitions and other relationships.
   * Dependence upon key personnel.
   * The Company's ability to protect its intellectual property.
   * The possibility of product liability or other legal claims.
   * Exposure to possible warranty and litigation claims.
   * The possible need for additional financing.
   * The impact of the 1998 Shareholder Rights Plan.
   * The inability of the Company or its suppliers or customers to remedy
     potential problems with information systems related to the arrival of the
     year 2000.

These risk factors are discussed in further detail below.

History of Losses;  Negative Cash Flow:  Prior to 1995 and in 1996,  the Company
experienced losses and negative operating cash flow. The Company believes it may
operate at a negative cash flow for certain periods in the future due to (i) the
need to fund  certain  development  projects,  (ii) cash  required  to enter new
market  areas,  (iii)  irregular  bookings by customers  due to  seasonality  or
economic  downturns in some markets and the relatively high per-unit cost of the
Company's products which may cause fluctuations in quarterly or yearly revenues,
(iv) cash  required for the  repayment of debt,  especially  $2.5 million due in
July 2000,  and (v) possible cash needed to fully  integrate  SRC's and Ventek's
operations. If the Company is unable to consistently generate sustained positive
cash flow from operations, the Company must rely on debt or equity financing.

Although the Company achieved profitability in 1995, 1997 and 1998, there can be
no assurance as to the Company's profitability on a quarterly or annual basis in
the future. Furthermore,  the non-recurring expenses in early 1996 resulted in a
significant loss for the 1996 year.

Fluctuations  in  Quarterly  Operating  Results;  Seasonality:  The  Company has
experienced  and  may in  the  future  experience  significant  fluctuations  in
revenues and  operating  results from quarter to quarter as a result of a number
of factors, many of which are outside the control of the Company.  These factors
include the timing of significant  orders and shipments,  product mix, delays in
shipment,  capital spending patterns of customers,  competition and pricing, new
product introductions by the Company or its competitors,  the timing of research
and  development  expenditures,  expansion of marketing and support  operations,
changes  in  material   costs,   production   or  quality   problems,   currency
fluctuations,  disruptions in sources of supply,  regulatory changes and general
economic conditions. These factors are difficult to forecast, and these or other
factors  could have a material  adverse  effect on the  Company's  business  and
operating results.  Moreover,  due to the relatively fixed nature of many of the
Company's costs, including personnel and facilities costs, the Company would not
be  able to  reduce  costs  in any  quarter  to  compensate  for any  unexpected
shortfall  in net  sales,  and such a  shortfall  would  have a  proportionately
greater  impact on the  Company's  results of operations  for that quarter.  For
example, a significant portion of the Company's quarterly net sales depends upon
sales of a relatively small number of high-priced systems.  Thus, changes in the
number of such  systems  shipped in any given  quarter can  produce  substantial
fluctuations  in net  sales,  gross  profits,  and net  income  from  quarter to
quarter. In addition, in the event the Company's machine vision systems' average
selling price  increases,  of which there can be no  assurance,  the addition or
cancellation  of sales may  exacerbate  quarterly  fluctuations  in revenues and
operating results.

The Company's operating results may also be affected by certain seasonal trends.
For  example,  the Company may  experience  lower sales and order  levels in the
first  quarter  when  compared  with the  preceding  fourth  quarter  due to the
seasonality  of  certain  harvested  food  items  and the  timing  of  annual or
semi-annual  customer plant shut-downs  during which systems are installed.  The
Company expects these patterns to continue.

Rapid Technological Change;  Product Development:  The markets for the Company's
machine  vision  products  are  characterized  by rapidly  changing  technology,
evolving  industry   standards  and  frequent  new  product   introductions  and
enhancements.  For example,  the Company believes that the 1995  introduction by
Key  Technology,  Inc.  of its new line of vision  sorting  equipment  adversely
affected bookings in late 1995 and 1996. Sales of the Company's  products depend
in part on the  continuing  development  and  deployment of new  technology  and
services and  applications.  The Company's  success will depend to a significant
extent  upon its  ability to enhance  its  existing  products  and  develop  new
products that gain market acceptance. There can be no assurance that the Company
will be successful in selecting,  developing and  manufacturing  new products or
enhancing  its  existing  products on a timely or  cost-effective  basis or that
products  or  technologies  developed  by others  will not render the  Company's
products  noncompetitive  or  obsolete.  Moreover,  the  Company  may  encounter
technical problems in connection with its product  development that could result
in the delayed introduction of new products or product enhancements.

Market  Acceptance of New Products:  The Company's future operating results will
depend upon its ability to  successfully  introduce and market,  on a timely and
cost-effective basis, new products and enhancements to existing products.  There
can be no  assurance  that  new  products  or  enhancements,  if  developed  and
manufactured,  will achieve market acceptance.  The Company is marketing its new
generation  of  high-speed  software and digital  signal  processing  technology
designed to significantly improve system performance.  There can be no assurance
that a market for this system  will  develop  (i.e.,  that a need for the system
will exist,  that the system will be favored over other  products on the market,
etc.).

Dependence on Certain Markets and Expansion Into New Markets: The future success
and growth of the Company is  dependent  upon  continuing  sales in domestic and
international food processing markets as well as successful penetration of other
existing  and  potential  markets.  A  substantial   portion  of  the  Company's
historical sales has been in the potato and other vegetable  processing markets.
Reductions in capital equipment expenditures by such processors due to commodity
surpluses,  product price fluctuations,  changing consumer  preferences,  longer
product  evaluation periods or other factors could have an adverse effect on the
Company's  results  of  operations.  The  Company  also  intends  to expand  the
marketing of its processing  systems in additional food markets such as meat and
granular  food  products,  as well as non-food  markets such as  plastics,  wood
products and tobacco,  and to expand its sales activities in foreign markets. In
the case of Ventek, the wood products market served is narrow and cyclical,  and
saturation  of that market and the  potential  inability to identify and develop
new markets could adversely  affect Ventek's growth rate. The Company may not be
able to successfully  penetrate  additional food and non-food  markets or expand
further in foreign markets.

Lengthy Sales Cycle:  The sales cycle in the marketing and sale of the Company's
machine vision systems,  especially in new markets or in a new  application,  is
lengthy and can be as long as three years. Even in existing markets,  due to the
$150,000  to  $600,000  price  range for each  system and  possibly  significant
ancillary costs required for a customer to install the system, the purchase of a
machine  vision system can  constitute a substantial  capital  investment  for a
customer  (which  may need more than one  machine  for its  particular  proposed
application)  requiring lengthy consideration and evaluation.  In particular,  a
potential customer must develop a high degree of assurance that the product will
meet its needs,  successfully  interface with the customer's own  manufacturing,
production or processing system,  and have minimal warranty,  safety and service
problems.  Accordingly,  the time lag from  initiation  of marketing  efforts to
final sales can be lengthy.

Competition:  The markets for the Company's products are highly  competitive.  A
major  competitor  of the  Company  introduced  several  years ago a new optical
sorter product which has increased the  competition  that the Company faces.  In
the case of Ventek, the wood industry continues to develop alternative  products
to plywood (e.g., oriented strand board) which do not require vision systems for
quality control. Some of the Company's competitors, including Pulsarr, which was
sold  in  May  1997  to a  company  significantly  larger  than  AMV,  may  have
substantially greater financial,  technical,  marketing and other resources than
the Company.  Important  competitive  factors in the Company's  markets  include
price,  performance,  reliability,  customer  support and service.  Although the
Company  believes that it currently  competes  effectively with respect to these
factors,  the Company may not be able to continue to compete  effectively in the
future.

Dependence Upon Certain Suppliers: Certain key components and subassemblies used
in the Company's  products are currently obtained from sole sources or a limited
group  of  suppliers,  and the  Company  does  not  have  any  long-term  supply
agreements to ensure an uninterrupted  supply of these components.  Although the
Company seeks to reduce  dependence  on sole or limited  source  suppliers,  the
inability to obtain sufficient sole or limited source components as required, or
to develop  alternative  sources if and as  required,  could result in delays or
reductions in product  shipments which could materially and adversely affect the
Company's results of operations and damage customer relationships.  The purchase
of certain of the components used in the Company's  products  require an 8 to 12
week lead time for delivery. An unanticipated  shortage of such components could
delay  the  Company's  ability  to timely  manufacture  units,  damage  customer
relations,  and have a material  adverse effect on the Company.  In addition,  a
significant  increase  in the  price  of one or  more  of  these  components  or
subassemblies could adversely affect the Company's results of operations.

Dependence Upon Significant Customers and Distribution Channel: The Company sold
equipment to an unaffiliated  customer  totaling 14% of sales in 1997 and to two
unaffiliated  customers  totaling 13% and 12% of sales in 1996.  Ventek's  sales
have been to a relatively small number of multi-location  plywood manufacturers.
In the emerging  pulp wood  industry,  the Company  utilizes a single  exclusive
distributor  for its products in North America.  In 1998, the Company entered an
agreement  with  FMC  Corporation  to be its  exclusive  or  nonexclusive  sales
representative in much of the United States and in many areas in the rest of the
world.  While the Company  strives to create  long-term  relationships  with its
customers, distributors and representatives, there can be no assurance that they
will continue ordering or selling additional  systems.  The Company may continue
to  be   dependent   on  a  small   number  of   customers,   distributors   and
representatives,  the  loss  of  which  would  adversely  affect  the  Company's
business.

Risk of International  Sales: Due to its export sales, the Company is subject to
the risks of conducting business  internationally,  including unexpected changes
in regulatory requirements;  fluctuations in the value of the U. S. dollar which
could increase the sales prices in local currencies of the Company's products in
international  markets;  delays in obtaining export licenses,  tariffs and other
barriers  and  restrictions;  and the  burdens  of  complying  with a variety of
international  laws.  For  example,  the  possibility  of  sales  to  Indonesian
customers has been  adversely  affected by that country's  currency  devaluation
when compared to the U. S. dollar over the past few years. In addition, the laws
of certain foreign countries may not protect the Company's intellectual property
rights to the same extent as do the laws of the United States.

Uncertain Ability to Manage Growth and Integrate Acquired Businesses: As part of
its business strategy,  the Company intends to pursue rapid growth. In March and
July 1996, the Company  acquired  Pulsarr and Ventek.  Pulsarr was  subsequently
sold in May 1997. A growth  strategy  involving the integration of new entities,
such as Ventek,  will require the  establishment of a sales  representative  and
distribution  relationships,  expanded  customer service and support,  increased
personnel   throughout  the  Company  and  the  continued   implementation   and
improvement of the Company's  operational,  financial and management information
systems.  There  is no  assurance  that  the  Company  will be  able to  attract
qualified personnel or to accomplish other measures necessary for its successful
integration of Ventek or other acquired entities or for internal growth, or that
the Company can successfully manage expanded operations. As the Company expands,
it may from time to time experience  constraints  that will adversely affect its
ability to satisfy customer demand in a timely fashion. Failure to manage growth
effectively could adversely affect the Company's financial condition and results
of operations.

Risks   Associated  With   Acquisitions:   The  Company  may  pursue   strategic
acquisitions  or joint  ventures  in  addition  to the  acquisitions  of Pulsarr
(subsequently  divested in May 1997) and Ventek as part of its growth  strategy.
While the Company  presently has no  understandings,  commitments  or agreements
with respect to any further  acquisition,  the Company  anticipates  that one or
more potential  opportunities  may become available in the future.  Acquisitions
and joint  ventures  would  require  investment  of  operational  and  financial
resources and could require integration of dissimilar  operations,  assimilation
of new employees, diversion of management resources, increases in administrative
costs and additional costs associated with debt or equity  financing.  For these
reasons,  any  acquisition  or joint  venture by the Company may have an adverse
effect on the  Company's  results of  operations  or may result in  dilution  to
existing shareholders.  If additional attractive opportunities become available,
the Company may decide to pursue them actively. Any future acquisitions or joint
ventures may materially and adversely affect the Company.

Dependence  Upon Key Personnel:  The Company's  success depends to a significant
extent upon the continuing contributions of its key management, technical, sales
and  marketing  and other key  personnel.  Except  for  William  J.  Young,  the
Company's  President and Chief Executive  Officer,  Alan R. Steel, the Company's
Chief  Financial  Officer,  Dr. James Ewan,  SRC's President and Chief Executive
Officer,  and the four former  stockholders of Ventek, the Company does not have
long-term  employment  agreements or other  arrangements  with such  individuals
which would  encourage  them to remain with the Company.  The  Company's  future
success also depends upon its ability to attract and retain  additional  skilled
personnel.  Competition  for such employees is intense.  The loss of any current
key  employees or the inability to attract and retain  additional  key personnel
could have a material  adverse  effect on the  Company's  business and operating
results.

Intellectual Property: The Company's competitive position may be affected by its
ability to protect its proprietary technology. Although the Company has a number
of United States and foreign  patents,  such patents may not provide  meaningful
protection for its product  innovations.  The Company may experience  additional
intellectual  property risks in  international  markets where it may lack patent
protection.

Product Liability and Other Legal Claims:  From time to time, the Company may be
involved  in  litigation  arising  out of the  normal  course  of its  business,
including product  liability,  patent and other legal claims.  While the Company
has a general  liability  insurance  policy  which  includes  product  liability
coverage up to an aggregate  amount of $10 million,  the Company may not be able
to maintain  product  liability  insurance  on  acceptable  terms in the future.
Litigation,  regardless of its outcome,  could result in substantial cost to and
diversion  of effort  by the  Company.  Any  infringement  claims or  litigation
against  the  Company  could  materially  and  adversely  affect  the  Company's
business,  operating results and financial  condition.  If a substantial product
liability or other legal claim against the Company were  sustained  that was not
covered  by  insurance,  there  could  be an  adverse  effect  on the  Company's
financial condition and marketability of the affected products.

Warranty Exposure and Performance Specifications: The Company generally provides
a  one-year  limited  warranty  on  its  products.  In  addition,   for  certain
custom-designed  systems,  the Company  contracts  to meet  certain  performance
specifications.  In the past, the Company has incurred higher warranty  expenses
related to new products than it typically incurs with established products.  The
Company may incur  substantial  warranty  expenses in the future with respect to
new  products,  as  well  as  established  products,  or  with  respect  to  its
obligations to meet performance specifications, which may have an adverse effect
on its results of operations and customer relationships.

Possible  Need  for  Additional  Financing:  The  Company  may  seek  additional
financing;  however,  the  Company  may  not be able to  obtain  any  additional
financing on terms satisfactory to the Company,  if at all. Potential  increases
in the number of outstanding shares of the Company's Class A Common Stock due to
convertible debt and preferred stock,  warrants and stock options, a substantial
loss in 1996 and debt incurred for the  acquisition  of Ventek due in 2000,  may
limit the Company's ability to negotiate additional debt or equity financing.

Shareholder  Rights Plan:  In February  1998,  the Company  implemented  a stock
rights program. Pursuant to the program,  stockholders of record on February 27,
1998 received a dividend of one right to purchase for $15 one one-hundredth of a
share of a newly created  Series A Junior  Participating  Preferred  Stock.  The
rights are attached to AMV's Class A Common Stock and will also become  attached
to shares  issued in the future.  The rights will not be traded  separately  and
will not become exercisable until the occurrence of a triggering event,  defined
as an  accumulation  by a single person or group of 20% or more of AMV's Class A
Common Stock.  The rights will expire on February 26, 2008 and are redeemable at
$.0001 per right.

After a triggering  event, the rights will detach from the Class A Common Stock.
If AMV is then merged into, or is acquired by, another corporation,  the Company
has the  opportunity  to either (i) redeem the rights or (ii)  permit the rights
holder to receive in the merger stock of AMV or the  acquiring  company equal to
two times the exercise price of the right (i.e.,  $30). In the latter  instance,
the rights attached to the acquirer's  stock become null and void. The effect of
the rights  program  is to make a  potential  acquisition  of the  Company  more
expensive for the acquirer if, in the opinion of AMV's Board of  Directors,  the
offer is inadequate.

In October 1998, FMC acquired 119,106 shares of the Company's Series B Preferred
Stock,  which,  if  converted  into common stock in  accordance  with its terms,
represented  a 10%  ownership  position  in the  Company on that date.  FMC also
received a five-year option to acquire 15% of the Company's  outstanding  common
stock  on the date of  exercise.  While  FMC's  resulting  beneficial  ownership
exceeds 20%, the transaction was not a triggering  event as defined in the Stock
Rights Plan since the  acquisition  of shares was directly from the Company.  As
stated in a Schedule 13D filed with the  Securities  and Exchange  Commission on
October 22, 1998, FMC's purpose was to invest in the Company and its technology.
FMC  currently  intends  to  review  its  investment  position  in  the  Company
periodically  and,  depending  on  such  review  and  factors  including  market
conditions  and share prices,  the  Company's  business  prospects,  technology,
future developments and applicable legal  requirements,  FMC may seek to acquire
additional  securities of the Company from time to time in the open market or in
negotiated  transactions.  In December 1998, the Company amended the Shareholder
Rights Plan to permit FMC to purchase on the open market up to 1,600,000  shares
of Class A Common Stock without such purchase being a triggering event.

While the Company is not aware of any other  circumstance  that might  result in
the acquisition of a sufficient  number of shares of the Company's  common stock
to trigger distribution of the Rights,  existence of the Rights could discourage
offers for the Company's  stock that may exceed the current  market price of the
stock, but that the Board of Directors deems inadequate.

Year 2000 Issues:  AMV has established a company-wide  initiative to examine the
implications  of the Year 2000 on the  Company's  computing  systems and related
technologies,  and to assess the  potential  need for  changes.  The Company has
identified areas of potential business impact, and appropriate  modifications to
its  computing   systems  are  underway.   Management   believes  this  will  be
accomplished  in a  timely  manner.  The  Company  is  also  communicating  with
suppliers and customers to coordinate Year 2000 conversion.  Management does not
currently  believe that the costs related to the Company's  compliance  with the
Year 2000 issue will have a material  adverse effect on the Company's  financial
position,  results of operations or cash flows.  However,  in the event that the
Company or any of the Company's  significant  suppliers or customers  experience
disruptions  due to the Year  2000  issue,  the  Company's  operations  could be
adversely affected.

<PAGE>

                                    Part III
                                    ========


Item 10. Directors and Executive Officers of the Registrant
================================================================================

The  information  required  by this item is  incorporated  by  reference  to the
Company's  Proxy  Statement  to  be  filed  with  the  Securities  and  Exchange
Commission before April 30, 1999.


Item 11. Executive Compensation
================================================================================

The  information  required  by this item is  incorporated  by  reference  to the
Company's  Proxy  Statement  to  be  filed  with  the  Securities  and  Exchange
Commission before April 30, 1999.


Item 12. Security Ownership of Certain Beneficial Owners and Management
================================================================================

The  information  required  by this item is  incorporated  by  reference  to the
Company's  Proxy  Statement  to  be  filed  with  the  Securities  and  Exchange
Commission before April 30, 1999.


Item 13. Certain Relationships and Related Transactions
================================================================================

The  information  required  by this item is  incorporated  by  reference  to the
Company's  Proxy  Statement  to  be  filed  with  the  Securities  and  Exchange
Commission before April 30, 1999.

<PAGE>

                                   SIGNATURES
                                   ==========

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

DATED:  March 8, 1999                  ADVANCED MACHINE VISION CORPORATION


                                       By: /s/ William J. Young
                                       -----------------------------------------
                                           William J. Young
                                           Chief Executive Officer and President

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

<TABLE>
<CAPTION>

         Signature                                          Title                               Date
         ---------                                          -----                               ----
<S>                                         <C>                                              <C>
/s/   William J. Young                      Chairman of the Board of Directors,
--------------------------------------      Chief Executive Officer and President,
William J. Young                            Principal Executive Officer                      March 8, 1999


/s/   Alan R. Steel                         Chief Financial Officer, Principal
--------------------------------------      Financial and Accounting Officer                 March 8, 1999
Alan R. Steel


/s/   Haig S. Bagerdjian                    Director                                         March 11, 1999
--------------------------------------
Haig S. Bagerdjian


/s/   Vikram Dutt                           Director                                         March 10, 1999
--------------------------------------
Vikram Dutt


/s/   James Ewan                            Director                                         March 1, 1999
--------------------------------------
James Ewan


                                            Director                                         March __, 1999
--------------------------------------
Marc T. Giles


/s/   Robert M. Loeffler                    Director                                         March 5, 1999
--------------------------------------
Robert M. Loeffler


/s/   Jack Nelson                           Director                                         March 8, 1999
--------------------------------------
Jack Nelson


/s/   Rodger A. Van Voorhis                 Director                                         March 11, 1999
--------------------------------------
Rodger A. Van Voorhis

</TABLE>
<PAGE>

                                     Part IV
                                     =======


Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K
================================================================================

(a)    The following documents are filed as part of this report:

    1,2.          Financial Statements and Schedules.

                  The financial  statements and schedules of the Company are set
                  forth in the  "Index to  Financial  Statements  and  Financial
                  Statement Schedules" on page F-1.

      3.          Exhibits.

   Exhibit
   Number         Description
   -------        -----------

     3.1          Restated Articles of Incorporation of the Company as amended
                  to date. (9)

     3.2          Restated and Amended By-Laws of the Company. (2)

     4.1          Form of Class G Warrant Agreement. (5)

     4.2          Form of Class H Warrant Agreement. (8)

     4.3          Form of Class I Warrant Agreement. (6)

     4.4          Form of stock option plan and stock option agreement. (1)

     4.5          Form of 1997 Restricted Stock Plan and restricted stock
                  agreement. (7)

     4.6          Form of amendments to restricted stock agreements. (19)

     4.7          Rights Agreement dated February 27, 1998 between the Company
                  and American Stock Transfer and Trust Company ("AST"). (13)

     4.8          Amendment to Rights Agreement between the Company and AST.
                  (20)

     4.9          Amendment to Class I Warrant Agreement. (15)

    4.10          Form of Certificate of Determination for Series A Junior
                  Participating Preferred Stock. (16)

    4.11          Form of Certificate of Determination for Series B Preferred
                  Stock. (18)

    10.1          Form of Indemnity Agreement between the Company and each of
                  its officers and directors. (1)

    10.2          Employment Agreement between Alan R. Steel and the Company
                  dated January 1, 1998. (14)

    10.3          Employment Agreement between William J. Young and the Company
                  dated January 1, 1998. (14)

    10.4          Employment Agreement between William J. Young and SRC VISION,
                  Inc. dated January 1, 1998. (14)

    10.5          Employment Agreement between James Ewan and SRC VISION, Inc.
                  dated January 1, 1998. (14)

    10.6          Asset Purchase Agreement dated September 22, 1995 between
                  Applied Laser Systems, Inc. and Coherent, Inc. (3)

    10.7          Stock Purchase Agreement dated March 1, 1996 (without
                  exhibits) between Meijn Beheer BV and ARC Netherlands BV, a
                  wholly-owned subsidiary of the Company. (4)

    10.8          Stock Purchase Agreement dated March 1, 1996 between J. C.
                  Scholt and ARC Netherlands BV, a wholly-owned subsidiary of
                  the Company. (4)

    10.9          Convertible Note dated March 1, 1996 issued in connection with
                  that certain Stock Purchase Agreement dated March 1, 1996
                  between J. C. Scholt and ARC Netherlands BV. (4)

   10.10          Subscription Agreement dated January 18, 1996 between the
                  Company and Swiss American Securities, Inc, as agent for
                  Credit Suisse related to the private placement of 1,400,000
                  shares of the Company's Class A Common Stock. (4)

   10.11          Subscription Agreement dated April 9, 1996, between the
                  Company and Swiss American Securities, Inc., as agent for
                  Credit Suisse, related to the private placement of $3,400,000
                  of convertible secured notes. (5)

   10.12          Convertible Secured Note dated April 17, 1996, between the
                  Company and Ilverton International, Inc. (8)

   10.13          $1,000,000 Note dated July 24, 1996, between AMV and Ventek.
                  (6)

   10.14          $2,250,000 Convertible Note dated July 24, 1996, between AMV
                  and Ventek. (6)

   10.15          $1,125,000 Note dated July 24, 1996, between AMV and Ventek.
                  (6)

   10.16          Stock Appreciation Rights Agreement dated July 24, 1996
                  between AMV and Ventek. (6)

   10.17          Stock Appreciation Rights Agreement dated July 24, 1996
                  between AMV and Ventek. (6)

   10.18          Form  of  Employment  Agreement  dated  July  24,  1996
                  between Ventek and each of the four stockholders of Ventek.
                  (6)

   10.19          Pledge and Security Agreement dated July 24, 1996, by and
                  among AMV, AMV Subsidiary, Inc., Ventek and Solin and
                  Associates, P.C. (6)

   10.20          1997 SRC VISION, Inc. Stock Option Plan and forms of stock
                  option agreements. (12)

   10.21          Plan of Merger between ARC Capital and AMV to effect an
                  amendment to the Company's Articles of Incorporation to change
                  the Company's name from ARC Capital to Advanced Machine Vision
                  Corporation. (9)

   10.22          Share Purchase Agreement dated April 29, 1997 between Barco NV
                  and ARC Netherlands BV. (10)

   10.23          Settlement Agreement dated August 12, 1997. (11)

   10.24          1997 Nonqualified Stock Option Plan and form of option
                  agreement. (11)

   10.25          Business Loan Agreement dated April 30, 1998 between AMV and
                  Bank of America NT&SA, together with related documents. (17)

   10.26          Promissory Note dated April 24, 1998 to Bank of America NT&SA,
                  together with related documents. (17)

   10.27          $250,000 Note dated June 5, 1998 from Rodger A. Van Voorhis to
                  Ventek. (15)

   10.28          Series B Preferred Stock Purchase Agreement between AMV and
                  FMC Corporation dated October 14, 1998. (18)

   10.29          Intellectual Property and Security Agreement dated October 14,
                  1998 between SRC VISION, Inc. and FMC Corporation. (18)

   10.30          1998 Senior Management and Director Stock Purchase Plan. (20)

      13          Annual Report to Security Holders.

      23          Consent of Independent Public Accountants.

      27          Financial Data Schedule


----------------------


(1)     Previously filed as an exhibit to Form S-1 (File No. 33-45126).

(2)     Previously filed as an exhibit to Form S-3 (File No. 333-10847).

(3)     Filed with the SEC on October 5, 1995, as an exhibit to the Company's
        Form 8-K dated October 2, 1995.

(4)     Filed with the SEC on March 6, 1996, as an Exhibit to the Company's Form
        8-K dated March 1, 1996.

(5)     Filed with the SEC on April 14, 1996, as an exhibit to the Company's
        Form 10-K for the year ended December 31, 1995.

(6)     Filed with the SEC on July 30, 1996, as an exhibit to the Company's Form
        8-K dated July 24, 1996.

(7)     Filed with the SEC on January 22, 1997, as an exhibit to the Company's
        Form 8-K dated January 9, 1997.

(8)     Filed with the SEC on May 14, 1996, as an exhibit to the Company's Form
        10-Q for the quarter ended March 31, 1996.

(9)     Filed with the SEC on May 14, 1997 as an exhibit to the Company's Form
        10-Q for the quarter ended March 31, 1997.

(10)    Filed with the SEC on May 9, 1997 as an exhibit to the Company's Form
        8-K regarding the sale of Pulsarr.

(11)    Filed with the SEC on October 30, 1997 as an exhibit to the Company's
        Form 10-Q for the quarter ended September 30, 1997.

(12)    Filed with the SEC on March 31, 1997 as an exhibit to the Company's Form
        10-K for the year ended December 31, 1996.

(13)    Filed with the SEC on February 20, 1998 as an exhibit to the Company's
        Form 8-A.

(14)    Filed with the SEC on February  27, 1998 as an exhibit to the Company's
        Form 8-K regarding implementation of a stock rights program and
        employment contracts.

(15)    Filed with the SEC on June 15, 1998 as an exhibit to the Company's Form
        8-K dated June 5, 1998.

(16)    Filed with the SEC on February 27, 1998 as an exhibit to the Company's
        Form 8-A dated February 27, 1998.

(17)    Filed with the SEC on August 4, 1998 as an exhibit to the Company's Form
        10-Q dated August 4, 1998.

(18)    Filed with the SEC on October 19, 1998 as an exhibit to the Company's
        Form 8-K dated October 14, 1998.

(19)    Filed with the SEC on October 30, 1998 as an exhibit to the Company's
        Form 10-Q dated October 30, 1998.

(20)    Filed with the SEC on January 14, 1999 as an exhibit to the Company's
        Form 8-K dated December 22, 1998.


(b)    Reports on Form 8-K:

       On October  19,  1998,  a Form 8-K was filed with the SEC  regarding  the
       completion of FMC's purchase of 119,106 shares of the Company's  Series B
       Preferred Stock.

       On January  14,  1999,  a Form 8-K was filed with the SEC  regarding  the
       adoption of the 1998 Senior  Management  and Director Stock Purchase Plan
       and an amendment to the Company's Stock Rights Agreement.

       On February  16, 1999,  a Form 8-K was filed with the SEC  regarding  the
       restructuring of debt due to the former owners of Ventek.

<PAGE>

                                   Exhibit 13
                                   ==========

                       Advanced Machine Vision Corporation

         Index to Financial Statements and Financial Statement Schedule
             Included in the Company's Annual Report to Stockholders


                                                                            Page
                                                                            ----

Report of Independent Accountants                                            F-2

Annual Report Introduction, Financial Highlights and
   Letter from President                                                     F-3

Financial Statements:

     Consolidated Balance Sheets -
         December 31, 1998 and 1997                                          F-7

     Consolidated Statements of Operations -
         Fiscal Years Ended December 31, 1998, 1997 and 1996                 F-8

     Consolidated Statements of Shareholders' Equity -
         Fiscal Years Ended December 31, 1998, 1997 and 1996                 F-9

     Consolidated Statements of Cash Flows -
         Fiscal Years Ended December 31, 1998, 1997 and 1996                F-10

     Notes to Consolidated Financial Statements                             F-11

Management's Discussion and Analysis of Financial Condition
   and Results of Operations                                                F-25

Other Information                                                           F-30

Financial Statement Schedule:

     Schedule VIII - Valuation and Qualifying Accounts                      F-32

Consent of Independent Accountants                                          F-33


                                      F-1

<PAGE>

Report of Independent Accountants
================================================================================

To the Board of Directors and Shareholders of Advanced Machine Vision
   Corporation:

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 14(a)(1) and (2) on Page 22 present fairly, in all material
respects,  the financial position of Advanced Machine Vision Corporation and its
subsidiaries  (the  "Company") at December 31, 1998 and 1997, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.  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 of these statements in
accordance with generally accepted auditing standards which 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,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.


/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Portland, Oregon
February 16, 1999


                                      F-2

<PAGE>

Introduction
================================================================================

Advanced Machine Vision  Corporation,  through its SRC VISION,  Inc. and Ventek,
Inc. subsidiaries,  designs,  develops,  manufactures and markets machine vision
systems that process  images not  discernible  to the human eye.  These  systems
combine  technologies  in four key  areas  (lighting,  cameras,  processors  and
software)  to  improve  quality,  enhance  yield,  reduce  production  costs and
increase  throughput in a variety of markets and applications where human vision
is inadequate due to fatigue,  visual acuity or speed. Where needed, AMV employs
highly specialized  mechanical  technologies to help customers integrate machine
vision systems into their  production  processes.  Applications  include quality
control  in the  processing  of  food,  pulp  wood,  tobacco  and  plastics  for
recycling,  and quality  control  and  automated  process  control in wood panel
production.

The Company is headquartered in Medford,  Oregon and currently has approximately
190 employees.  Advanced Machine Vision  Corporation's common stock is traded on
the Nasdaq Stock Market under the symbol AMVC.













Financial Highlights
================================================================================

<TABLE>
<CAPTION>
Statement of Operations Data
(in thousands, except percentages and per-share amounts)

-------------------------------------------------------------------------------------------------------------------
                                           1998            1997           1996            1995           1994
-------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>             <C>            <C>            <C>        
Net sales                               $    27,041    $    31,974     $    29,938    $    19,394    $    11,922
Gross profit                                 14,456         15,932          14,144          8,200          3,385
Gross margin                                    53%            50%             47%            42%            28%
Income (loss) from continuing
   operations before special items              142          2,027             302            383         (5,549)
Benefit from deferred income taxes            2,100             --              --             --             --
Gain on sale of Pulsarr                          --          4,989              --             --             --
Charge for acquired in-process
   technology                                    --             --          (4,915)            --             --
Charge for royalty expense                       --             --            (647)            --             --
Gain from arbitration                            --             --              --            732             --
Loss from discontinued operations                --             --              --           (173)        (2,248)
Net income (loss)                             2,242          7,016          (5,260)           942         (7,797)
Basic income (loss) per share           $      0.21    $      0.64     $     (0.49)   $      0.10    $     (0.80)
Shares outstanding                           10,720         10,679          11,250          9,423          8,951

-------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
-------------------------------------------------------------------------------------------------------------------
Total assets                            $    29,839    $    25,235     $    30,938    $    17,628    $    14,876
Total debt                                    8,652          8,369          16,646          4,897          2,759
Shareholders' equity                         16,846         11,951           6,500          9,252          8,958
===================================================================================================================
</TABLE>

                                      F-3

<PAGE>

Letter from the President
================================================================================

Dear Fellow Shareholders:

Difficult worldwide economic  conditions led to disappointing  operating results
in 1998.  Order  levels  were  significantly  lower  during the second half with
consequently  reduced  sales  levels  extending  into 1999.  Some  international
customers  exercised  caution by postponing  capital  projects that included our
vision systems.

On the technology front,  however, 1998 proved to be another year of significant
advancement  for Advanced  Machine Vision  Corporation.  Major new products were
introduced, culminating multi-year research and development efforts. In October,
we expanded our  relationship  with FMC  Corporation  with FMC  emphasizing  its
commitment  to sell our  machine  vision  systems  in many parts of the world by
purchasing a 10% interest in AMV.

Building for the Future with New Products and Technology

The foundation of AMV's future is continued product development.  Although large
research and development  expenditures have reduced reported income in the past,
our efforts have produced new and enhanced products that should provide expanded
sales and profit opportunities.

In  November  of  1998,  AMV's  SRC  VISION  subsidiary  demonstrated  its  next
generation  machine  vision  system  at the  International  Exposition  for Food
Processors  trade  show in  Chicago.  The new  platform  not  only  includes  an
innovative  mechanical  design,  but a new processing  architecture  housed in a
stylized controller containing  state-of-the-art  operating components.  The new
design incorporates major improvements in the areas of aesthetics,  cleanliness,
serviceability  and reliability.  Much of the previously exposed cabling will be
enclosed in the  environmentally  controlled  housing;  other new features  make
in-plant maintenance easier. New processing architecture contains improved color
recognition,  customer  algorithms  for specific  products (for color,  size and
shape), the ability to recognize ten times more pixels per second and a platform
that supports incremental programming improvements.  Best of all, our new system
will  keep the same  footprint  and  maintain  its  flexibility  of  modularity,
allowing for cost-effective  configuration  adaptations and technology upgrades.
We expect the new generation of optical sorters for the food industry will begin
to contribute to sales during the second half of 1999.

Also in the fourth quarter,  Ventek  installed its first "Sequoia  Sentry" dryer
management control system for the plywood industry.  The dryer system eliminates
the mismarking of veneer exiting the dryer,  improving  dryer  productivity  and
veneer quality.  Sequoia Sentry  continuously  looks at the percentage of re-dry
and over-dry, adjusting the dryer speed accordingly, providing a more responsive
control system.  Sequoia Sentry  eliminates the cycles of  over-compensation--no
more wide swings in dryer speed, yielding too much over-dry followed by too much
re-dry.  Sequoia Sentry also builds a database of valuable information for plant
operators.  Its high-speed  processors,  Windows NT-based  software and built-in
networking  capabilities  make its data easily accessible for other computers in
the  plant.  From  a  central   location,   plant  operators  can  now  pinpoint
inefficiencies in dryer operations.

These and other  innovations  have enabled AMV to extend its technology  lead in
machine vision systems used in defect detection and removal,  and have increased
our ability to control  other  manufacturing  processes  for our  customers.  We
expect process control to become a larger part of AMV's business in the future.

Building a Worldwide Selling Network

In the food  industry,  which makes up about 50% of total AMV sales,  we entered
into a representative agreement with FMC Corporation's FoodTech Division, one of
the world's leading producers of machinery and equipment for food processing and
agriculture applications. AMV's SRC VISION subsidiary will work closely with FMC
FoodTech's Food Systems and Handling Division to develop specialized FMC in-feed
and take-away  conveying  equipment to optimize the  performance of SRC VISION's
optical  sorting  equipment  for the customer.  Longer term,  SRC VISION and FMC
FoodTech will work together to develop new machine vision  applications  for the
existing FMC FoodTech  customer base.

                                       F-4

<PAGE>

In  October  1998,  the  relationship  between the two companies was enhanced by
FMC's  purchase  of  119,106  shares of AMV  Series B  Preferred  Stock for $2.6
million.  The preferred  stock is convertible  into  1,191,060  shares of common
stock at $2.20 per share,  which, if converted,  would represent a 10% ownership
position  based on the current number of AMV common shares  outstanding  (please
refer  to the  financial  statements  for a  more  complete  description  of the
preferred stock  transaction).  Concurrent  with the investment,  Marc T. Giles,
General  Manager of FMC  FoodTech's  Food  Systems and  Handling  Division,  was
elected to AMV's Board of Directors, increasing the size of the board from seven
to eight  members.  FMC's  investment  and the new  board  member  represent  an
increased  commitment to the  long-term  market  acceptance  and growth of AMV's
proprietary  technologies.  We are  looking  forward  to a  mutually  beneficial
relationship.

During 1998,  AMV expanded its sales  capability by almost  doubling the size of
its customer service  organization.  In the tobacco  industry,  initial contacts
were made  with  three  additional  designers,  fabricators  and  installers  of
manufacturing  equipment who may represent SRC tobacco machine vision systems in
the future.

Progress in Meeting our Long-Term Goals

As stated in last  year's  Annual  Report,  our three  major  goals are:  (i) to
achieve  long-term  sales and income  growth,  (ii) to  simplify  AMV's  capital
structure and (iii) to gain recognition for our products and growth potential in
the financial and commercial  marketplace.  1998 and early 1999 progress  toward
these goals is discussed below.

To achieve sales and income growth, AMV must continue to offer our customers the
best solution for their quality  needs.  I have  described  several new products
developed in 1998 and want to reiterate  our  commitment  to remain the industry
leader  in  machine  vision  systems  utilizing  all five  critical  components:
lighting, cameras, processors, software and mechanical design. AMV is one of the
few companies in the vision systems industry that offers this complete solution.

Statistical  operating  results in 1998 appear  elsewhere in this report.  Sales
were lower in 1998 than in the prior year,  primarily  due to the  exclusion  of
Pulsarr,  which was sold in 1997. We are seeing customers extending the time for
making  purchasing  decisions,  which sometimes  involves lengthy trial periods.
Additionally,  global  economic  instability  caused some  customers to postpone
projects that included our systems. While we cannot predict the impact on AMV of
continued economic turmoil, we believe our focus on technology will enable us to
sustain  long-term  growth.  One indication of the added value provided by AMV's
machine vision systems is the achievement of consistently  greater gross margins
in the face of increasing competition. In 1998, gross margin was 53%, the fourth
consecutive year of increase.

Lower 1998 operating results reflect greater selling and R&D expenses as well as
costs incurred to redefine and enhance SRC's basic  internal  systems to prepare
SRC for future  growth.  Significant  R&D was expended in the fourth  quarter to
finalize SRC's next generation  machine vision system for the food industry.  We
are confident that this effort will yield positive long-term results.

AMV's  capital  structure was  significantly  simplified in 1998 and early 1999.
Through  expiration or negotiation,  warrants to purchase 12.7 million shares of
common  stock  were  eliminated.  Debt due to the  former  owners of Ventek  was
restructured  to  postpone  from 1999 to 2000 the payment of  $2,500,000.  After
including  the  preferred  stock sold to FMC and the  effects of the Ventek debt
restructuring,  the cumulative  number of outstanding and  potentially  issuable
shares for warrants and convertible securities declined 42% during the year.

With  respect  to  our  third  major  goal,  the  completion  of  the  strategic
relationship with FMC and the continued acceptance of our products confirmed our
image as the technology leader in our industry over those of our competitors. In
1998, we participated in head-to-head  demonstrations  with several  competitors
and emerged as the successful solution.

We have maintained our public  relations  program to the financial  community by
participating  in investor  conferences  and numerous  meetings  with  analysts,
brokers and investment advisors. We will continue an open and candid dialog with
our  stockholders  and these other  constituents  to maintain the credibility we
have built. AMV is now followed by The Red Chip Review and Stonegate Securities,
Inc. Red Herring Online and Oregon  Business  Magazine  featured AMV in November
and  December.  We are  encouraged  by  the  reception  we  have  received.  The
combination of this ongoing effort,  long-term sales and earnings growth through
technology innovation, and capital structure simplification is aimed to increase
AMV shareholder value.

                                      F-5

<PAGE>

Summary

We  recognized  early in 1998 that the year would be somewhat  difficult  due to
factors beyond our control. As I have said many times, AMV's value should not be
judged based on a single  quarter's or year's  results,  but the business basics
that form its foundation.  That foundation is technology that provides the means
for our customers to achieve  consistently  high product quality at a reasonable
cost.  Our customers are competing in a worldwide  marketplace,  which demands a
consistent  quality standard.  AMV technology  innovations help set that quality
standard.

At this time, I expect 1999 results to approach  those of 1998.  We anticipate a
return to increasing sales during the second half of 1999.

Sincerely,



William J. Young
Chairman, President and CEO







Safe Harbor  Statement  under the  Private  Securities  Litigation  Act of 1995:
Statements in this Annual Report that are forward-looking statements are subject
to various risks and  uncertainties,  such as the  Company's  ability to sustain
adequate customer order levels, the impact of international  economic conditions
on our  markets,  the  ability of the  Company  to  successfully  introduce  new
products,  the possible negative impact of competitive  products and/or pricing,
the uncertainty as to whether the relationship  with FMC will help contribute to
revenues, the Company's ability to sustain a positive cash flow, the impact of a
strengthened of U.S. currency on the Company's ability to compete effectively in
the foreign  markets and the effect of these  factors on the market price of the
Company's  Class A Common  Stock.  Investors  are  encouraged  to  review a more
comprehensive listing of cautionary statements and risk factors contained in the
Company's Forms 10-K and 10-Q SEC filings.

                                      F-6

<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Balance Sheets
-------------------------------------------------------------------------------------------------------------------

                                                                                          December 31,
                                                                                --------------------------------
                                                                                     1998               1997
                                                                                -------------      -------------
<S>                                                                             <C>                <C>          
                                                      ASSETS
                                                      ------
Current assets:
     Cash and cash equivalents                                                  $   4,423,000      $   6,045,000
     Accounts receivable, net of allowance for doubtful
        accounts of $230,000 and $180,000 at
        December 31, 1998 and 1997, respectively                                    4,073,000          2,711,000
     Inventories (Note 2)                                                           7,379,000          5,181,000
     Prepaid expenses                                                                 181,000            138,000
     Current deferred tax asset (Note 7)                                            1,175,000                 --
                                                                                -------------      -------------

              Total current assets                                                 17,231,000         14,075,000
Property, plant and equipment - net (Notes 3 and 6)                                 5,274,000          4,775,000
Intangible assets, net (Note 4)                                                     4,894,000          5,535,000
Deferred tax asset (Note 7)                                                           925,000                 --
Other assets                                                                        1,515,000            850,000
                                                                                -------------      -------------

                                                                                $  29,839,000      $  25,235,000
                                                                                =============      =============

                                       LIABILITIES AND SHAREHOLDERS' EQUITY
                                       ------------------------------------

Current liabilities:
     Accounts payable                                                           $     984,000      $   1,436,000
     Accrued liabilities (Notes 5 and 9)                                              997,000          1,146,000
     Customer deposits                                                              1,151,000          1,073,000
     Accrued payroll                                                                  761,000            783,000
     Warranty reserve                                                                 448,000            477,000
     Current portion of notes payable (Note 6)                                        790,000             27,000
                                                                                -------------      -------------

              Total current liabilities                                             5,131,000          4,942,000
                                                                                -------------      -------------
Notes payable, less current portion (Note 6)                                        7,862,000          8,342,000
                                                                                -------------      -------------
Commitments and contingencies (Note 9)
Shareholders' equity (Notes 8 and 10):
     Preferred stock                                                                2,579,000                 --
     Common stock:
         Class A and B - 10,720,000 and 10,679,000 shares issued and
              outstanding at December 31, 1998 and 1997, respectively              24,329,000         24,285,000
     Common stock warrants                                                            110,000          2,197,000
     Additional paid in capital                                                     4,910,000          2,823,000
     Accumulated deficit                                                          (15,112,000)       (17,354,000)
     Cumulative translation adjustment                                                 30,000                 --
                                                                                -------------      -------------

              Total shareholders' equity                                           16,846,000         11,951,000
                                                                                -------------      -------------

                                                                                $  29,839,000      $  25,235,000
                                                                                =============      =============



                                   See Accompanying Notes to Consolidated Financial Statements.
</TABLE>

                                      F-7

<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Operations
-------------------------------------------------------------------------------------------------------------------

                                                                          Year Ended December 31,
                                                              ------------------------------------------------
                                                                   1998             1997              1996
                                                                   ----             ----              ----
<S>                                                           <C>               <C>              <C>
Net sales                                                     $ 27,041,000      $ 31,974,000     $ 29,938,000
Cost of sales                                                   12,585,000        16,042,000       15,794,000
                                                              ------------      ------------     ------------

Gross profit                                                    14,456,000        15,932,000       14,144,000
                                                              ------------      ------------     ------------

Operating expenses:
     Selling and marketing                                       4,762,000         4,930,000        4,662,000
     Research and development                                    5,024,000         3,950,000        4,038,000
     General and administrative                                  3,413,000         3,303,000        3,549,000
     Goodwill amortization                                         695,000           731,000          633,000
     Charge for acquired in-process technology                          --                --        4,915,000
     Charge for royalty expense                                         --                --          647,000
                                                              ------------      ------------     ------------

                                                                13,894,000        12,914,000       18,444,000
                                                              ------------      ------------     ------------

Income (loss) before other income and expense                      562,000         3,018,000       (4,300,000)

Other income and expense:
     Gain on sale of Pulsarr                                            --         4,989,000               --
     Investment and other income                                   286,000           371,000          190,000
     Interest expense                                             (689,000)       (1,263,000)      (1,150,000)
                                                              ------------      ------------     ------------

Income (loss) before income taxes                                  159,000         7,115,000       (5,260,000)

Provision for (benefit from) income taxes (Note 7)              (2,083,000)           99,000               --
                                                              ------------      ------------     ------------

Net income (loss)                                             $  2,242,000      $  7,016,000     $ (5,260,000)
                                                              ============      ============     ============

Earnings (loss) per share (Note 10):
     Basic                                                    $        0.21     $       0.64     $      (0.49)
     Diluted                                                  $        0.18     $       0.49     $      (0.49)



                                   See Accompanying Notes to Consolidated Financial Statements.

</TABLE>

                                      F-8

<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Shareholders' Equity
------------------------------------------------------------------------------------------------------------------------------------

                               Series B            Class A, B and                                            Accumulated
                            Preferred Stock        E Common Stock         Common   Additional                  Other       Compre-
                          -------------------- -----------------------    Stock     Paid in    Accumulated  Comprehensive  hensive
                           Shares     Amount      Shares      Amount     Warrants   Capital      Deficit       Income      Income
                           ------     ------      ------      ------    ---------- ---------- -------------  ---------   ----------

<S>                       <C>       <C>        <C>         <C>          <C>        <C>          <C>         <C>        <C>
Balance, December 31,
   1995                         --  $       --  9,920,000  $23,750,000  $3,112,000 $1,500,000 $(19,110,000) $      --

Redemption of Class
   E Common Stock               --          --   (497,000)    (326,000)         --    326,000           --         --
Expiration of Class
   E Warrants                   --          --         --           --    (971,000)   971,000           --         --
Issuance of Class G,
   H, I and J Warrants          --          --         --           --     262,000         --           --         --
Common Stock issued
   through Regulation
   S Offering                   --          --  1,400,000    1,571,000          --         --           --         --
Exercise of options             --          --     83,000       80,000          --         --           --         --
Partial conversion of
   note payable                 --          --    344,000      645,000          --         --           --         --
Translation adjustment          --          --         --           --          --         --           --    (50,000) $    (50,000)
Net loss                        --          --         --           --          --         --   (5,260,000)        --    (5,260,000)
                          --------  ---------- ----------  -----------  ----------  ---------  -----------  ---------  ------------

Balance, December 31,
   1996                         --          -- 11,250,000   25,720,000   2,403,000  2,797,000  (24,370,000)   (50,000)
Comprehensive loss 1996                                                                                                $ (5,310,000)
                                                                                                                       ============

Issuance of restricted
   stock                        --          --  2,000,000           --          --         --            --        --
Retirement of restricted
   stock                        --          -- (1,800,000)          --          --         --            --        --
Repurchase of Class A
   Common Stock and
   Class F and H
   Warrants                     --          -- (1,001,000)  (1,782,000)   (180,000)        --            --        --
Exercise of options             --          --     97,000       97,000          --         --            --        --
Partial conversion of
   note payable                 --          --    133,000      250,000          --         --            --        --
Expiration of warrants          --          --         --           --     (26,000)    26,000            --        --
Translation adjustment          --          --         --           --          --         --            --    50,000  $     50,000
Net income                      --          --         --           --          --         --     7,016,000        --     7,016,000
                          -------- ----------- ----------  -----------  ---------- ----------    ----------  --------  ------------

Balance, December 31,
   1997                         --          -- 10,679,000  $24,285,000   2,197,000  2,823,000    17,354,000)       --
Comprehensive income 1997                                                                                              $  7,066,000
                                                                                                                       ============

Expiration of warrants          --          --         --           --  (2,087,000) 2,087,000            --        --
Exercise of options             --          --      8,000        8,000          --         --            --        --
Issuance of
   restricted stock             --          --     33,000       36,000          --         --            --        --
Issuance of
   preferred stock         119,106   2,579,000         --           --          --         --            --        --
Translation adjustment          --          --         --           --          --         --            --    30,000  $     30,000
Net income                      --          --         --           --          --         --     2,242,000        --     2,242,000
                          -------- ----------- ----------  -----------  ---------- ----------  ------------  --------  ------------

Balance, December 31,
   1998                    119,106 $ 2,579,000 10,720,000  $24,329,000  $  110,000 $4,910,000  $(15,112,000) $ 30,000
                          ======== =========== ==========  ===========  ========== ==========  ============  ========
Comprehensive income 1998                                                                                              $  2,272,000
                                                                                                                       ============



                                   See Accompanying Notes to Consolidated Financial Statements.

</TABLE>

                                      F-9

<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------



                                                                             Year Ended December 31,
                                                                 -------------------------------------------------
                                                                      1998              1997             1996
                                                                 -------------     -------------    --------------
<S>                                                              <C>               <C>              <C>
Cash flows from operating activities:
   Net income (loss)                                             $   2,242,000     $   7,016,000    $  (5,260,000)
   Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
       Benefit from deferred income taxes                           (2,100,000)               --               --
       Gain on sale of Pulsarr                                              --        (4,989,000)              --
       Charge for acquired in-process technology                            --                --        4,915,000
       Charge for royalty expense                                           --                --          247,000
       Charge for deferred debt issuance costs                              --           233,000               --
       Depreciation and amortization                                 1,610,000         1,369,000        1,263,000
     Changes  in  assets  and  liabilities
       (net of amounts purchased/sold in
       acquisition/divesture):
          Accounts receivable                                       (1,363,000)           11,000       (1,741,000)
          Inventories                                               (2,199,000)         (499,000)        (581,000)
          Prepaid expenses and other assets                           (760,000)         (186,000)         156,000
          Accounts payable, accrued liabilities, customer
           deposits, accrued payroll and warranty reserve             (539,000)          842,000           51,000
                                                                 -------------     -------------    -------------

          Net cash provided by (used in) operating activities       (3,109,000)        3,797,000         (950,000)
                                                                 -------------     -------------    -------------

Cash provided by (used in) investing activities:
   Proceeds from sale of Pulsarr                                            --         7,010,000               --
   Acquisition of Pulsarr/Ventek - net                                      --                --       (5,984,000)
   Purchases of property and equipment                              (1,383,000)       (1,014,000)      (1,527,000)
                                                                 -------------     -------------    -------------

          Net cash provided by (used in) investing activities       (1,383,000)        5,996,000       (7,511,000)
                                                                 -------------     -------------    -------------

Cash provided by (used in) financing activities:
   Notes payable to bank and others - net                              283,000        (3,792,000)       4,621,000
   Proceeds from preferred stock issuance                            2,579,000                --                --
   Proceeds from common stock issuances                                     --                --        1,896,000
   Proceeds from exercise of stock options                               8,000            97,000           82,000
   Repurchase of Class A Common Stock and Warrants                          --        (1,962,000)              --
   Debt issuance costs                                                      --                --         (400,000)
                                                                 -------------     -------------    -------------

          Net cash provided by (used in) financing activities        2,870,000        (5,657,000)       6,199,000
                                                                 -------------     -------------    -------------

Net increase (decrease) in cash                                     (1,622,000)        4,136,000       (2,262,000)

Cash and cash equivalents, beginning of the period                   6,045,000         1,909,000        4,171,000
                                                                 -------------     -------------    -------------

Cash and cash equivalents, end of the period                     $   4,423,000     $   6,045,000    $   1,909,000
                                                                 =============     =============    =============

Supplemental cash flow information:
   Cash paid for:
      Interest                                                   $     583,000     $     939,000    $     809,000
      Income taxes                                               $      62,000     $      20,000    $          --



                                   See Accompanying Notes to Consolidated Financial Statements.

</TABLE>

                                      F-10


<PAGE>


              ADVANCED MACHINE VISION CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


Note 1 - Summary of Significant Accounting Policies
================================================================================

Basis  of  Presentation:  The  consolidated  financial  statements  include  the
accounts of Advanced Machine Vision Corporation ("AMV" or the "Company") and its
four wholly-owned subsidiaries: SRC VISION, Inc. and its wholly-owned SRC VISION
BV  subsidiary  ("SRC");   Ventek,  Inc.  ("Ventek")  from  its  July  24,  1996
acquisition date; ARC Netherlands BV (inactive) and its respective  wholly-owned
subsidiary,  Pulsarr Holding BV ("Pulsarr"),  from its March 1, 1996 acquisition
date to its May 6,  1997  disposition  date  (see  Note 4);  and  Applied  Laser
Systems, Inc. (inactive).

Through  its  subsidiaries,   the  Company  designs,  manufactures  and  markets
computer-aided  vision defect detection and sorting and defect removal equipment
for use in a variety of applications,  including food processing,  wood products
and recycling.  The Company's  systems  combine  optical and mechanical  systems
technologies  to perform diverse  scanning,  analytical  sensing,  measuring and
sorting  applications  on a variety of products such as food, wood and plastics.
The Company sells its products throughout the world (see Note 11).

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 period. Actual results could differ from those estimates.

Accounting  Period:  The Company utilizes a 52- to 53-week fiscal year ending on
the Sunday closest to the end of the fiscal  period.  Fiscal periods shown ended
January 3, 1999,  December 28, 1997 and December  29, 1996.  In these  financial
statements,  the  fiscal  periods  are  shown  as  December  31 for  clarity  of
presentation.

Cash Equivalents:  For financial  reporting  purposes,  cash equivalents consist
primarily of money market instruments and bank certificates of deposit that have
original maturities of three months or less.

Concentrations of Credit Risk:  Financial  instruments that potentially  subject
the Company to concentrations of credit risk consist principally of money market
instruments and trade receivables.  The Company invests its excess cash in money
market  instruments  and  certificates  of  deposit  with  high  credit  quality
financial  institutions,  and by policy, limits the amount of credit exposure to
any one issuer.  Concentrations of credit risk with respect to trade receivables
exist  because the  Company's  subsidiaries  rely heavily on a relatively  small
number  of  customers  (see  Note  11).  The  Company  performs  ongoing  credit
evaluations  of its  customers and generally  does not require  collateral.  The
Company maintains reserves for potential credit losses and such losses, to date,
have been within management's expectations.

Inventories:  Inventories  are  stated  at  the  lower of cost or net realizable
value,  with  cost  determined  principally  by  use  of the first-in, first-out
method.

Property,  Plant,  and  Equipment:  Property,  plant and equipment are stated at
cost.  Depreciation and amortization are computed by either the straight-line or
an accelerated method over the estimated useful lives of the assets, which range
from three to twenty  years.  When assets are retired or otherwise  disposed of,
the cost and related accumulated  depreciation are removed from the accounts and
any resulting gain or loss is recognized in operations for the period.  The cost
of  maintenance  and  repairs is charged  to  expense as  incurred;  significant
renewals and betterments are capitalized.

                                      F-11
<PAGE>

Intangible  Assets:  Intangible  assets  primarily  represent  the excess of the
purchase  price  of  acquisitions  over the fair  value of net  assets  acquired
("goodwill").  Intangible  assets also  represent  costs  allocated  to existing
technologies and other  specifically  identifiable  assets arising from business
acquisitions.  The gross cost of intangible  assets  aggregated  $7,536,000  and
$7,482,000 as of December 31, 1998 and 1997, respectively. Intangible assets are
being amortized on the straight-line basis over seven to fifteen years (see Note
4). Accumulated amortization aggregated $2,642,000 and $1,947,000 as of December
31, 1998 and 1997, respectively.  The Company assesses the recoverability of its
intangible assets as described under Long-Lived Assets below.

Long-Lived Assets: Statement of Financial Accounting Standard No. 121 (FAS 121),
Accounting for the Impairment of Long-Lived  Assets and For Long-Lived Assets to
Be  Disposed  Of,  requires  that  long-lived  assets and  certain  identifiable
intangible  assets to be held and used by a company be reviewed  for  impairment
whenever events or changes in  circumstances  indicate that expected future cash
flows  (undiscounted and without interest  charges) for individual  subsidiaries
may not be sufficient to support the recorded assets. If undiscounted cash flows
are not sufficient to support the recorded  assets,  an impairment is recognized
to reduce the  carrying  value of the assets based on expected  discounted  cash
flows of the  subsidiary.  The Company  adopted the  statement  in fiscal  1996;
however,  the adoption did not have a material impact on the Company's financial
statements.

Revenue  Recognition:  The Company  recognizes revenue upon shipment of products
or, in the case of trial units,  upon the customer's  acceptance of the product.
Customer deposits represent monies received in advance of shipment of products.

Research and Development Costs:  Research and development  costs are expensed as
incurred. Research and development expense is related to developing new products
and to improving existing products or processes.

Earnings (Loss) Per Share:  Earnings  (loss) per  share for 1998,  1997 and 1996
have  been  computed  in  accordance  with  Statement  of  Financial  Accounting
Standards No. 128 (FAS 128), "Earnings per Share."

Changes  in  Classification:  Certain  reclassifications  have  been made to the
fiscal  1997  and 1996  financial  statements  to  conform  with  the  financial
statement  presentation for fiscal 1998. Such reclassifications had no effect on
the Company's results of operations or shareholders' equity.

Income Taxes: The Company accounts for income taxes in accordance with Statement
of  Financial  Accounting  Standards  No. 109 (FAS 109),  Accounting  for Income
Taxes.  FAS 109 requires the  recognition of deferred tax assets and liabilities
for the expected tax effects from  differences  between the financial  reporting
and tax bases of assets and liabilities.  In estimating future tax effects,  FAS
109  generally  considers all expected  future  events other than  enactments of
changes in tax law or statutorily imposed rates.

Stock-Based Compensation:  The Company uses the intrinsic  value based method in
accounting  for  its  stock  option  plans as prescribed by APB Opinion  No. 25,
Accounting for Stock Issued to Employees (see Note 8).

Fair  Value  of  Financial  Assets  and  Liabilities:   Statement  of  Financial
Accounting  Standards  No.  107,  Disclosures  About  Fair  Value  of  Financial
Instruments,  requires  disclosure of the fair value of certain financial assets
and liabilities. The Company estimates the fair value of its monetary assets and
liabilities  based upon the existing  interest  rates related to such assets and
liabilities  compared to current market rates of interest for similar nature and
degree of risk.  The Company  estimates  that the  carrying  value of all of its
monetary assets and liabilities approximates fair value as of December 31, 1998.

Foreign Currency Translation: All assets and liabilities of foreign subsidiaries
are translated into  U. S. dollars at fiscal year-end exchange rates. Income and
expense  items  are translated  at  average exchange rates prevailing during the
fiscal year.  The resulting translation adjustments are recorded  as a component
of shareholders' equity.

Comprehensive Income:  The Company has adopted Statement of Financial Accounting
Standards  No.  130,  "Reporting  Comprehensive  Income"  as of January 1, 1998.
Translation  adjustments represent the Company's only Other Comprehensive Income
item.


Note 2 - Inventories
================================================================================

Inventories consist of the following:

                                                        December 31,
                                               --------------------------------
                                                   1998               1997
                                               -------------      -------------

     Raw materials                             $   2,837,000      $   1,584,000
     Work-in-process                               1,563,000          1,359,000
     Finished goods                                2,979,000          2,238,000
                                               -------------      -------------

                                               $   7,379,000      $   5,181,000
                                               =============      =============


Note 3 - Property, Plant and Equipment
================================================================================

Property, plant and equipment consist of the following:

                                                        December 31,
                                               --------------------------------
                                                   1998                1997
                                               -------------      -------------

     Land                                      $   1,338,000      $     879,000
     Buildings                                     3,734,000          3,589,000
     Machinery and equipment                         869,000            700,000
     Furniture, fixtures and office equipment      2,026,000          1,564,000
                                               -------------      -------------

                                                   7,967,000          6,732,000
     Less: accumulated depreciation               (2,693,000)        (1,957,000)
                                               -------------      -------------

                                               $   5,274,000      $   4,775,000
                                               =============      =============

Substantially  all  of  the  property,  plant and equipment is secured by a note
payable (see Note 6).  Depreciation  expense aggregated  $915,000,  $638,000 and
$630,000, respectively, for 1998, 1997 and 1996.


Note 4 - Acquisitions
================================================================================

SRC: On February 2, 1994, the Company purchased all of the outstanding shares of
stock of SRC for $8.1  million  in cash.  The  Company  has  accounted  for this
acquisition using the purchase method. The cost of the acquisition was allocated
to the assets acquired and liabilities assumed on the bases of their fair values
at the  date of  acquisition.  Goodwill  of $2.6  million  was  recorded  as the
difference  between  the  acquisition  cost and the fair  values  of the  assets
acquired and liabilities  assumed. The Company is amortizing goodwill over seven
years using the straight-line method.

Pulsarr:  On March 1, 1996, the Company acquired all of the outstanding  capital
stock of Pulsarr for cash of $6.5  million and notes  payable  aggregating  $1.3
million  (see Note 6). The  acquisition  was  accounted  for under the  purchase
method of accounting. The $7.8 million purchase price was allocated based on the
fair  values of the  identifiable  assets of Pulsarr as  follows:  $1.1  million
represented  the fair values of net  tangible  assets of Pulsarr,  $4.9  million
represented  acquired  in-process  technology which was charged to operations in
the quarter ended March 31, 1996, and the remainder of $1.8 million  represented
existing  technologies and goodwill to be amortized over fifteen years. The fair
values of the  acquired  in-process  technology  and existing  technologies  and
goodwill were determined from independent appraisals received by the Company.

On May 6, 1997,  the Company sold its Pulsarr  subsidiary to Barco NV of Belgium
for $8.4  million  resulting  in a gain of  approximately  $5 million.  The sale
resulted in net cash proceeds to AMV of approximately $7 million and a reduction
of current and long-term  debt of  approximately  $4.6 million.  The gain on the
sale of Pulsarr is largely a result of the  previous  reduction  in the carrying
value of AMV's investment in Pulsarr due to the $4.9 million charge for acquired
in-process  technology the Company  recorded in the quarter ended March 31, 1996
in conjunction with this acquisition.

Ventek:  On July 24, 1996, the Company  acquired certain assets and the business
of Ventek, subject to certain liabilities.  The purchase price was approximately
$5.1 million in notes and other securities (see Note 6). The Company also issued
a warrant to purchase  1,000,000  shares of Class A Common Stock.  In 1998,  the
warrant  was  reduced to  250,000  fully  vested  shares,  and was  subsequently
eliminated upon the  restructuring  of the  acquisition  notes (see Note 6). The
acquisition is accounted for under the purchase  method of accounting.  The $5.1
million   purchase  price  was  allocated  based  on  the  fair  values  of  the
identifiable  assets of Ventek as  follows:  $.2  million  represented  the fair
values  of net  tangible  assets  of  Ventek,  and the  remaining  $4.9  million
represented goodwill to be amortized over fifteen years.

The consolidated results of operations for the Company include SRC's,  Pulsarr's
and Ventek's results of operations from their respective  acquisition dates, and
in the case of Pulsarr, through its disposition date in May 1997.

Unaudited  Proforma  Statements of Operations:  The unaudited proforma condensed
combined  statements of  operations,  shown below as  supplemental  information,
assume that  Pulsarr was sold at the  beginning of 1997.  However,  the proforma
combined  balances are not  necessarily  indicative of balances which would have
resulted  had the  divestiture  occurred  as of the  beginning  of such  periods
presented.  Proforma condensed  combined  statements of operations are presented
below:

                                                                      1997
                                                                    Proforma
                                                                   (unaudited)
                                                                  -------------

     Sales                                                        $  29,416,000
                                                                  =============
     Gross profit                                                 $  15,014,000
                                                                  =============
     Net income                                                   $   2,018,000
                                                                  =============
     Earnings per share:
        Basic                                                     $        0.18
                                                                  =============
        Diluted                                                   $        0.16
                                                                  =============


Supplemental  Cash Flow  Disclosures  Relating  to  Acquisitions:  In 1996,  the
Company paid  $5,984,000 in cash, net of cash  acquired,  as part of the cost to
acquire Pulsarr and Ventek as follows:

     Fair value of tangible assets acquired                       $   6,997,000
     Acquired existing and in-process technologies                    6,653,000
     Goodwill and other intangible assets                             4,987,000
     Liabilities assumed                                             (6,368,000)
     Issuance of acquisition notes and warrants                      (6,285,000)
                                                                  -------------

        Cash paid                                                 $   5,984,000
                                                                  =============


Note 5 - Accrued Liabilities
================================================================================

Accrued liabilities consist of the following:
                                                        December 31,
                                               --------------------------------
                                                   1998                1997
                                               -------------      -------------

     Commissions                               $     359,000      $     356,000
     Interest                                        317,000            211,000
     Legal claims and fees                           113,000            181,000
     Income taxes                                     34,000             79,000
     Other                                           174,000            319,000
                                               -------------      -------------

                                               $     997,000      $   1,146,000
                                               =============      =============


Note 6 - Financing Arrangements
================================================================================

The Company  has a line of credit with a  commercial  bank that  provides  for a
secured operating line of credit up to $2,000,000. At the option of the Company,
interest is stated at the prime rate or at an  "offshore  rate" plus 1.85%.  The
Business  Loan  Agreement  governing  the  line  of  credit  contains  covenants
requiring certain levels of liquid assets,  tangible equity and working capital.
At December 31, 1998,  the Company had no  borrowings  under the line and was in
compliance with all covenants. The line expires on April 30, 1999.

Long-term debt consists of the following:

                                                        December 31,
                                               --------------------------------
                                                   1998                1997
                                               -------------      -------------


     Mortgage note (SRC)                       $   2,979,000      $   2,690,000
     6.75% convertible note                          900,000            900,000
     6.75% note (Ventek)                           1,000,000          1,000,000
     6.75% convertible note (Ventek)               2,250,000          2,250,000
     Ventek note                                   1,529,000          1,529,000
                                               -------------      -------------

                                                   8,658,000          8,369,000
     Less: current maturities                       (790,000)           (27,000)
                                               -------------      -------------

                                               $   7,868,000      $   8,342,000
                                               =============      =============

The SRC mortgage  note is payable to a bank in monthly  installments  of $24,000
including  interest at 8.3%,  with the  remaining  unpaid  balance due on May 1,
2008.  The note is secured by  substantially  all of SRC's  property,  plant and
equipment and is guaranteed by the Company.  The loan agreement contains certain
covenants and restrictions including limitations on incurrence of debt.

On April 13, 1995,  the Company  borrowed  $2,160,000  pursuant to a convertible
subordinated secured note. Interest on the note was 10.25% and was payable twice
yearly.  The note was  convertible  into the  Company's  Class A Common Stock at
$1.875 per share. In connection  with the borrowing,  the Company paid a finders
fee of $160,000 and issued 300,000  warrants to purchase Class A Common Stock at
$1.875 per share.  In October  1996 and March  1997,  $645,000  and  $250,000 of
principal of the note were  converted into 344,000 and 133,333 shares of Class A
Common Stock,  respectively.  The remaining  principal balance of $1,265,000 was
paid as scheduled in April 1997. The 300,000 warrants issued in conjunction with
this borrowing were repurchased in August 1997.

In April 1996, in connection with the acquisition of Pulsarr, the Company raised
a net of $3,000,000 in a private placement of $3,400,000 of convertible  secured
notes.  The notes  presently  bear  interest at 10.25%  payable  quarterly.  The
interest rate may be adjusted  upward on each  anniversary  date of the notes if
the market price of the  Company's  Class A Common Stock fails to reach  certain
levels.  The  maximum  possible  coupon  interest  rate is 11.25% if none of the
market price thresholds are met. The principal amount will be due in April 2001.
The notes are secured by 54% of the stock of ARC  Netherlands BV, a wholly-owned
subsidiary  of the  Company  established  to  purchase  Pulsarr.  The  notes are
convertible  into the  Company's  Class A Common  Stock at $2.125 per share.  In
connection  with the borrowing,  the Company paid a finder's fee of $400,000 and
issued 340,000 warrants to purchase Class A Common Stock at $2.125 per share. In
September 1997, the Company prepaid $2,500,000 of the note. The 340,000 warrants
issued in conjunction with this borrowing were repurchased in August 1997.

AMV issued the following notes in connection with the acquisition of Ventek: (i)
a 6.75% $1,000,000 note due July 23, 1999; (ii) a 6.75% $2,250,000 note due July
23, 1999 convertible into the Company's Class A Common Stock at $2.25 per share;
and  (iii) a  $1,125,000  note and  stock  appreciation  rights  payable  (a) by
issuance of up to 1,800,000  shares of Class A Common Stock or, at the Company's
option,  in cash on July 23, 1999, or (b) solely in cash in the event AMV Common
Stock is delisted from the Nasdaq Stock Market.  The  $1,125,000  note and stock
appreciation  rights payable were valued at $1,529,000 on the  acquisition  date
based upon an independent appraisal received by the Company. All three notes are
secured by all of the issued and outstanding  shares of Ventek.  The three notes
are  payable to Veneer  Technology,  Inc.,  a company  owned by the four  former
stockholders of Ventek,  all of whom are current  employees of the Company.  The
6.75%  $2,250,000  note also contains a provision  that,  upon an initial public
offering  ("IPO") of the common stock of one or more of, or any  combination of,
SRC and Ventek (together,  "Subsidiary"), but only if such IPO occurs during the
term of the note, the noteholder  shall have the right to sell back to AMV up to
1,000,000  shares of AMV  Class A Common  Stock  received  upon  conversion  for
consideration  consisting of Subsidiary common stock owned by AMV. The number of
shares of Subsidiary common stock to be paid shall be determined by dividing the
total  market value (as defined) of the shares of AMV Class A Common Stock to be
sold by 70% of the IPO price of Subsidiary's common stock.

In February 1999, the Ventek notes were restructured. $750,000 of the $1,000,000
note was prepaid,  and the maturity date of the remaining  $250,000 was extended
to July 23, 2000. The maturity date of the $2,250,000  note was extended to July
23,  2000.  The  $1,125,000  note  was  paid in full by  delivery  of  1,800,000
restricted  shares  (see  Note  10)  and  the  stock  appreciation  rights  were
cancelled.

As of December 31, 1998, the aggregate amount of minimum maturities of long-term
debt,  as  adjusted  for  the  Ventek  debt   restructuring,   are  as  follows:
1999--$790,000;  2000--$4,072,000;  2001--$946,000; 2002--$50,000; 2003--$55,000
and thereafter $2,745,000.


Note 7 - Income Taxes
================================================================================
<TABLE>
<CAPTION>
Income (loss) before income taxes is composed of the following:

                                                      1998            1997              1996
                                                 ------------    -------------     --------------
<S>                                              <C>             <C>               <C>           
Domestic                                         $    366,000    $   2,143,000     $       75,000
Foreign                                              (207,000)       4,972,000         (5,335,000)
                                                 ------------     ------------     --------------

                                                 $    159,000     $  7,115,000     $   (5,260,000)
                                                 ============     ============     ==============

The components of the provision
   for income taxes are as follows:

                                                      1998            1997              1996
                                                      ----            ----              ----
Federal:
   Current                                       $     17,000     $     99,000     $           --
   Deferred                                            59,000          870,000           (124,000)
                                                 ------------     ------------     --------------

     Total federal                                     76,000          969,000           (124,000)
                                                 ------------     ------------     --------------

State:
   Deferred                                            15,000          107,000            (14,000)
                                                 ------------     ------------     --------------

     Total state                                       15,000          107,000            (14,000)
                                                 ------------     ------------     ---------------

Increase (decrease) in valuation allowance         (2,174,000)        (977,000)           138,000
                                                 ------------     ------------     --------------

     Total provision                             $ (2,083,000)    $     99,000     $           --
                                                 ============     ============     ==============

</TABLE>

The tax effect of temporary  differences between financial reporting and the tax
bases of assets and liabilities relate to the following:

                                                            December 31,
                                                  -----------------------------
                                                        1998           1997
                                                  ------------     ------------
Deferred tax asset:
     Loss carry-forwards                          $  4,686,000     $  4,957,000
     Property basis differences                        876,000          576,000
     Reserves and accruals                             563,000          634,000
     Research and development costs                     69,000          109,000
     Alternative minimum taxes                          77,000           69,000
                                                  ------------     ------------

                                                     6,271,000        6,345,000

Deferred tax asset valuation allowance              (4,171,000)      (6,345,000)
                                                  ------------     ------------

     Net deferred tax asset                       $  2,100,000     $         --
                                                  ============     ============


The net reduction in the valuation allowance of  $977,000 in 1997 was the result
of the utilization of the net operating loss  carry-forwards  to reduce  current
income taxes, partially offset by the net changes in temporary differences.

The net  reduction  in the  valuation  allowance of  $2,174,000  in 1998 was the
result of the  utilization  of the net operating loss  carry-forwards  to reduce
current  income  taxes,  partially  offset  by  the  net  changes  in  temporary
differences, and to recognize a deferred tax asset of $2,100,000. The recognized
deferred  tax  asset  is  based  upon  expected  utilization  of  the  temporary
differences as well as a portion of the net operating loss carry-forwards.

The Company has assessed its past earnings  history and trends,  budgeted  sales
and the expiration  dates of  carry-forwards  and has determined that it is more
likely than not that $2,100,000 of the deferred tax asset will be realized.  The
remaining  valuation  allowance  of  $4,171,000  is  maintained  against the net
operating  loss  carry-forwards,  which the  Company has  determined  may not be
realized.

The Company has net operating loss carry-forwards of approximately  $12,300,000.
Such  carry-forwards  may be used to offset  taxable  income,  if any, in future
years  through their  expirations  in 2007 to 2011.  Because of the  substantial
change in the  Company's  ownership  which  occurred  as a result of the initial
public  offering in March 1992 and  subsequent  issuances of common  stock,  the
annual  amount of tax loss  carry-forward  which  can be  utilized  is  limited.
Utilization of approximately  $5,800,000 of the above  carry-forwards is limited
to  approximately  $1,800,000  per year.  Such  limitation  could  result in the
expiration of a part of the carry-forwards before their utilization.

The  provision for  (benefit  from) income taxes differs from an amount computed
using the statutory federal income tax rate as follows:

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                             -------------------------------------------------
                                                                   1998             1997              1996
                                                             --------------     -------------    -------------
<S>                                                          <C>                <C>              <C>
     Provision for (benefit from) income taxes
        at federal statutory rate                            $      124,000     $   2,419,000    $  (1,788,000)
     State taxes (benefit)                                           15,000           107,000         (259,000)
     Non-deductible in-process technology charge                         --                --        1,671,000
     Non-taxable gain on sale of Pulsarr                                 --        (1,696,000)              --
     Realized benefit from utilizing net operating
        loss carry-forward                                         (271,000)       (1,302,000)         191,000
     Deferred tax valuation allowance                            (1,903,000)          370,000          138,000
     Alternative Minimum Tax                                         17,000            99,000               --
     Other                                                          (65,000)          102,000           47,000
                                                             --------------     -------------    -------------
                                                             $   (2,083,000)    $      99,000    $          --
                                                             ==============     =============    =============

</TABLE>


Note 8 - Employee Benefit and Stock Option Plans
================================================================================

The Company sponsors a defined  contribution 401(k) plan covering  substantially
all employees. Pursuant to the provisions of the plan, eligible participants may
elect to  contribute  up to 15% of their base  compensation,  subject to certain
limitations, and the Company may, at its option, match employee contributions up
to a certain percentage. No Company matching has occurred under the plan.

The Company maintains  several stock option plans under which  non-qualified and
incentive stock options for the Company's Class A Common Stock have been granted
to directors,  officers and other  employees.  The plans are administered by the
Stock  Option   Committee  of  the  Board  of   Directors   (the   "Committee").
Additionally,   the  Company  has  occasionally   granted  non-plan  options  to
directors,  officers or consultants on terms similar to plan options.  The stock
option price per share for options granted is determined by the Committee and is
based on the market  price of the  Company's  common stock on the date of grant,
and each  option is  exercisable  within  the period  and in the  increments  as
determined by the Committee,  except that no option can be exercised  later than
ten years from the date it was granted.  The stock options  generally  vest over
one to four years.  The terms of non-plan  options  are  determined  by the full
Board of Directors or the Compensation Committee of the Board.

The following  table  sets forth the  options  granted,  forfeited and exercised
during the three years ended December 31, 1998,  and their  respective  weighted
average exercise price per share:

                                                                Weighted
                                               Shares            Average
                                            Under Option     Price Per Share
                                            ------------     ---------------

     Balance at December 31, 1995              2,650,000         $ 1.94
         Granted                                 698,000           1.93
         Exercised                               (83,000)          1.00
         Canceled                               (138,000)          1.21
                                             -----------         ------

     Balance at December 31, 1996              3,127,000         $ 2.00
         Granted                               1,194,000           1.75
         Exercised                               (97,000)          1.00
         Canceled                               (775,000)          2.21
                                             -----------         ------

     Balance at December 31, 1997              3,449,000         $ 1.89
         Granted                                 528,000           1.86
         Exercised                                (8,000)          1.00
         Canceled                               (539,000)          4.05
                                             -----------         ------

     Balance at December 31, 1998              3,430,000         $ 1.55
                                             ===========         ======


<TABLE>
<CAPTION>
The following table sets forth  information  about stock options  outstanding at
December 31, 1998:

                          Options Outstanding                                    Options Exercisable
----------------------------------------------------------------------       --------------------------
                                           Weighted           Weighted                         Weighted
                                            Average            Average                          Average
   Range of            Number              Remaining          Exercise         Number          Exercise
Exercise Price       Outstanding       Contractual Life         Price        Exercisable         Price
--------------       -----------       ----------------       --------       -----------       --------
<S>                    <C>                   <C>                <C>            <C>               <C>
  1.00                 1,315,000             6 years            1.00           1,315,000         1.00
  1.19-2.19            1,900,000             8 years            1.77             381,000         1.71
  3.00                   215,000             5 years            3.00             215,000         3.00
                     -----------                                             -----------

                       3,430,000                                               1,911,000
                     ===========                                             ===========

</TABLE>

As of December 31, 1998 there were 429,000 shares available for future grants.

In January  1997,  the Company  established  an SRC stock  option plan (the "SRC
Plan") under which  incentive and  non-qualified  stock options for SRC's common
stock may be granted to  directors,  officers and other  employees.  The plan is
administered by the Stock Option Committee of the Board of Directors of SRC (the
"SRC Committee"). The stock option price per share for options granted under the
SRC Plan is  determined  by the SRC  Committee  and is based on the fair  market
value of the  Company's  common  stock on the date of grant,  and each option is
exercisable  within the period and in the  increments  as  determined by the SRC
Committee,  except that no option may be exercised before the ninth  anniversary
date of grant  unless there shall have been an IPO of SRC's  common  stock,  and
except that no option can be exercised later than ten years from the date it was
granted.

In January  1997,  SRC granted a total of 342,000  options under the SRC Plan to
purchase SRC common stock at $1.86 per share. The options become  exercisable on
January 10, 2006 and expire one year  thereafter.  Upon completion of an initial
public  offering  of SRC's  common  stock,  the  vesting  of such  options  will
accelerate so that 100% will be exercisable on the third anniversary date of the
IPO. As of December 31, 1998,  there were 317,000 options under grant and 79,000
shares available for future grant under the SRC Plan.

Disclosure  Requirements of Statement of Financial  Accounting Standards No. 123
("FAS 123"): The Company has elected to account for its stock-based compensation
plans  under  APB  25.  FAS 123  requires  that  the  Company  provide  proforma
information  regarding  net income and  earnings per share as if the Company had
accounted  for the stock  options  granted  under the fair  value  method of the
statement.   The  fair  value  of  options   granted  was  estimated  using  the
Black-Scholes model. The Company's proforma information follows:

                                                       1998            1997
                                                  ------------     ------------

     Proforma net income                          $  1,746,000     $  6,807,000
     Proforma diluted earnings per share          $       0.14     $       0.46

The fair  value of the  options  granted  was  $1.05 and $1.04 in 1998 and 1997,
respectively, and estimated using the following weighted average assumptions:

                                                       1998            1997
                                                  ------------     ------------

     Risk-free interest rate                          5.32%            6.12%
     Dividend yield                                      0%               0%
     Expected life of option                        5 years          5 years
     Volatility factor                                  61%              63%

The above  information  is based on  historical  activity and may not  represent
future trends.


Note 9 - Commitments and Contingencies
================================================================================

AMV is a party to several  lawsuits in the ordinary course of its business.  AMV
believes that the outcome of all such proceedings,  even if determined adversely
to the Company,  will not have a material  effect upon its business or financial
position.


Note 10 - Shareholders' Equity and Earnings (Loss) Per Share
================================================================================

Series B Preferred  Stock:  In October 1998,  the Company sold 119,106 shares of
Series B Preferred  Stock (the entire  authorized  number of such shares) to FMC
Corporation  ("FMC") for  $2,579,000.  The preferred  stock is convertible  into
1,191,060 shares of Class A Common Stock ("Common Stock"),  which, if converted,
represents  a 10%  ownership  position  based on the  number  of  common  shares
outstanding on the  transaction  date.  Each share of preferred stock is allowed
ten  votes in  matters  placed  before  the  common  stockholders  except in the
election of  directors,  in which case FMC has the right to elect one  director.
The preferred  stock pays no dividends.  The preferred stock has a $22-per-share
liquidation  preference.  FMC also has a five-year one-time option to purchase a
number of shares of Common Stock equal to 15% of the shares  outstanding  on the
exercise date at a price equal to the greater of the  then-current  market value
(as defined) of the Common Stock or $2.20 per share.

So long as any shares of  preferred  stock are  outstanding,  the  Company  must
obtain the consent of the holders of a majority of the  then-outstanding  shares
of preferred stock to (i) take any action which  adversely  alters or changes or
may  adversely  alter or change the rights,  preferences  or  privileges  of the
Series B Preferred  Stock;  (ii) increase or decrease the  authorized  number of
shares of  Series B  Preferred  Stock;  (iii)  create  (by  reclassification  or
otherwise)  any  class  or  series  of  shares  having  rights,  preferences  or
privileges  senior to or on a parity  with the Series B  Preferred  Stock;  (iv)
redeem or repurchase  any shares of capital  stock except in certain  instances;
(v) merge  with or into any  other  entity  or enter  into any  other  corporate
reorganization,  recapitalization,  sale of  control  or any  transaction  that,
directly  or  indirectly,   results  in  the  sale,  license,  lease,  transfer,
conveyance or other  disposition  of all or  substantially  all of the assets or
properties  of the  Company;  (vi) sell,  license,  lease,  transfer,  convey or
otherwise dispose of the Company's intellectual property in which FMC received a
security interest;  (vii) amend or waive any provision of the Company's Articles
of  Incorporation  or By-laws;  (viii)  acquire  assets or securities of another
person or entity if the aggregate  consideration  paid in all such  transactions
(other  than  those  in  the  ordinary  course  of  business)  combined  exceeds
$2,000,000  or any  one  such  transaction  exceeds  $500,000;  (ix)  issue  any
additional equity securities or any other securities convertible or exchangeable
into equity  securities  (other than issuance of shares of Common Stock pursuant
to employee  stock options or other employee stock plans in effect as of the FMC
transaction  date and,  with the approval of the Board of  Directors,  shares of
Common Stock to unrelated third parties, in arms-length transactions that do not
exceed  100,000  shares for any fiscal  year);  or (x) approve the  liquidation,
dissolution or winding up of the Company.

The  provisions  of the  preferred  stock also  provide  that if FMC  desires to
transfer  the  preferred  stock,  the Company has the right of first  refusal to
acquire such shares.  For as long as the preferred stock is outstanding,  if the
Company intends to issue equity  securities  other than to FMC, or as permitted,
FMC shall have the right to acquire a portion of such  securities  to retain its
percentage ownership immediately prior to such issuance.

The Company and FMC also entered a  Representative  Agreement  whereby FMC would
undertake to sell the Company's  machine vision  products to the food processing
industry  in many  areas  of the  world.  The  Representative  Agreement  may be
terminated  for or without cause.  Each share of Series B Preferred  Stock shall
automatically be converted into shares of Common Stock upon the later of (i) the
third  anniversary  of the date of issuance or (ii) the  sixtieth  day after the
termination of the Representative Agreement.

Common  Stock:  The  authorized  number of shares of no par value Class A Common
Stock  and no par  value  Class B Common  Stock are  60,000,000  and  3,000,000,
respectively.  Upon  sale or  transfer,  each  share of Class B Common  Stock is
automatically convertible into one share of Class A Common Stock. Both the Class
A and Class B Common  Stock are  entitled to one vote per share.  As of December
31, 1998, there were 10,664,000 shares of Class A Common Stock and 56,000 shares
of Class B Common Stock outstanding.

Common Stock Warrants:  The Company has several classes of common stock warrants
outstanding. The key terms are included in the table below.

In 1998,  Class A, B, C and D Warrants to purchase  approximately  11.7  million
shares  of Class A Common  Stock  expired.  Also in 1998,  Class I  Warrants  to
purchase  750,000 shares of Class A Common Stock were  eliminated.  In 1999, the
remaining  250,000 Class I Warrants  were  eliminated as part of the Ventek debt
restructuring  (see Note 6).  All  classes of  remaining  warrants  provide  for
adjustment  of the  exercise  price  and for a change  in the  number  of shares
issuable upon  exercise to protect  holders  against  dilution in the event of a
stock  dividend,  stock split,  combination  or  reclassification  of the Common
Stock.

Schedule  of  Outstanding  Stock,  Warrants,   Convertible  Debt  and  Potential
Dilution: The following table summarizes outstanding common stock as of December
31, 1998,  potential  dilution to the outstanding  common stock upon exercise of
warrants and conversion of convertible  debt remaining after (i) the February 9,
1999 restructuring of Ventek debt (see Note 6) and issuance of 350,000 shares of
restricted  stock,  and (ii) the February 28, 1999 expiration of 240,000 Class G
Warrants,  and  proforma  proceeds  from  the  exercise  of  warrants  and  debt
conversion.  The table also sets forth the  exercise  or  conversion  prices and
warrant expiration and debt due dates.

<TABLE>
<CAPTION>

                                                                                                      Proforma
                                   Number or Principal       Class A Common Stock   Exercise or       Proceeds
                                   Amount Outstanding          After Exercise or    Conversion         or Debt
          Security                at February 28, 1999            Conversion           Price          Reduction
     ---------------------------- --------------------       --------------------   -----------       ---------
<S>                                      <C>                    <C>                   <C>           <C>
     Common Stock:                                                12,870,000
     Warrants (expiration date):
        J (9/30/99)                           300,000                300,000          $ 2.03        $    608,000
                                                                ------------                        ------------

     Convertible Debt (due date):
        6.75% Notes (4/16/01)            $    900,000                423,000            2.13             900,000
        6.75% Ventek Note (7/23/00)      $  2,250,000              1,000,000            2.25           2,250,000
                                                                ------------                        ------------

                                                                   1,423,000                           3,150,000
                                                                ------------                        ------------

     Preferred Stock:                         119,100              1,191,000
                                                                ------------

     Potentially outstanding shares
        and proforma proceeds and
        reduction of debt                                         15,784,000                        $  3,758,000
                                                                ============                        ============

</TABLE>

The proforma amounts above are for illustrative purposes only. Unless the market
price of AMV's Class A Common  Stock rises  significantly  above the exercise or
conversion  prices,  it is unlikely  that any warrants will be exercised or that
the debt will be converted.

In  addition,  on  December  31,  1998, AMV had outstanding  options to purchase
3,430,000 shares of Class A Common Stock, 2,798,000 of which are under its stock
option plans (see Note 8).

The  existence  of  these  outstanding   warrants,   options,   and  convertible
securities, including options that may be granted under AMV's stock option plans
or otherwise,  could adversely affect AMV's ability to obtain future  financing.
The  price  which  AMV may  receive  for the Class A Common  Stock  issued  upon
exercise  of options  and  warrants,  or amount of debt  forgiven in the case of
conversion of debt, may be less than the market price of the Common Stock at the
time such options and warrants are exercised or debt is converted.  For the life
of the warrants,  options and convertible debt, the holders are given, at little
or no cost,  the  opportunity  to profit from a rise in the market  price of the
Common Stock without  assuming the risk of ownership.  Moreover,  the holders of
the options and warrants  might be expected to exercise  them at a time when AMV
would, in all likelihood,  be able to obtain needed capital by a new offering of
its  securities on terms more  favorable  than those provided for by the options
and warrants.

1997  Restricted  Stock Plan: The 1997  Restricted  Stock Plan ("1997 Plan") was
established to retain the services of selected employees, officers and directors
of the Company and provide them with strong  incentives to enhance the Company's
growth and stock  price.  The total  number of shares of Common  Stock  issuable
under the 1997 Plan shall not exceed 2,000,000.

In January 1997, the Company's Board of Directors  awarded  2,000,000  shares of
restricted  Common Stock to three key  employees  of the  Company.  In September
1997,  1,800,000  shares  were  donated  back to the Company  and  retired.  The
remaining 200,000 shares cannot be traded or transferred unless (i) the employee
remains in the employ of the Company  until  January 10, 2000 and (ii) a payment
of $1.80 per share is made by the  employee to AMV.  If any of these  conditions
are not met, the related  shares of stock will be forfeited  and returned to the
Company.

In February 1999,  the Company's  Board of Directors  awarded  350,000 shares of
restricted Common Stock to four key employees of the Company.  The shares cannot
be traded  or  transferred  unless a  payment  of $1.25 per share is made by the
employee to AMV between February 1, 2000 and January 31, 2001. If this condition
is not met, the related shares will be forfeited and returned to the Company.

Stock Rights Plan:  In February  1998,  the Company  implemented  a stock rights
program.  Pursuant to the program,  stockholders  of record on February 27, 1998
received a dividend  of one right to  purchase  for $15 one  one-hundredth  of a
share of a newly created  Series A Junior  Participating  Preferred  Stock.  The
rights are  attached  to AMV's  Common  Stock and will also  become  attached to
shares issued in the future.  The rights will not be traded  separately and will
not become exercisable until the occurrence of a triggering event, defined as an
accumulation  by a single  person or group of 20% or more of AMV's Common Stock.
The rights  will expire on February  26, 2008 and are  redeemable  at $.0001 per
right.

After a triggering  event,  the rights will detach from the Common Stock. If AMV
is then merged into, or is acquired by, another corporation, the Company has the
opportunity  to either (i) redeem the rights or (ii) permit the rights holder to
receive in the merger stock of AMV or the  acquiring  company equal to two times
the exercise price of the right (i.e., $30). In the latter instance,  the rights
attached to the acquirer's  stock become null and void. The effect of the rights
program is to make a potential acquisition of the Company more expensive for the
acquirer  if,  in the  opinion  of  AMV's  Board  of  Directors,  the  offer  is
inadequate.

In  December  1998,  the Rights  Plan was amended to permit FMC to acquire up to
1,600,000  shares  of AMV  Common  Stock on the open  market  without  causing a
triggering event.

Earnings (Loss)  Per Share:  Earnings (loss) per share, calculated in accordance
with FAS 128, is presented in the following table:
<TABLE>
<CAPTION>
                                                          For the Year Ended December 31,
                               ----------------------------------------------------------------------------------
                                         1998                          1997                          1996
                               ----------------------        -----------------------        ---------------------
                                 Income        Shares         (Loss)          Shares         Income        Shares
                               ---------      -------        ---------       --------       --------      -------
                                                       (In thousands except per-share data)
<S>                            <C>             <C>           <C>              <C>           <C>             <C>   
Calculation of EPS
Income (loss) available to
   common shareholders         $   2,242       10,717        $   7,016        11,202        $(5,260)        10,704
Reduction for contingently
   returnable shares as all
   conditions were not
   met as of period end               --         (200)              --          (200)            --             --
                               ---------     --------        ---------      --------        -------      ---------
Income (loss) available to
   common shareholders         $   2,242       10,517        $   7,016        11,002        $(5,260)        10,704


-------------------------------------------------------------------------------------------------------------------
Basic EPS                                    $   0.21                       $   0.64                      $ (0.49)
-------------------------------------------------------------------------------------------------------------------



Effect of Dilutive Securities:
Stock options and warrants            --          744               --           663             --             --
Preferred stock                       --          251               --            --             --             --
Note and stock appreciation
   rights agreement                  100        1,800              100         1,800             --             --
Convertible debt                     252        1,424              252         1,423             --             --
                               ---------     --------        ---------      --------        -------      ---------
Income (loss) available to
   common shareholders
   and assumed conversions     $   2,594       14,736        $   7,368        14,888        $(5,260)        10,704
                               =========     ========        =========      ========        =======      =========


-------------------------------------------------------------------------------------------------------------------
Diluted EPS                                  $   0.18                       $   0.49                      $ (0.49)
-------------------------------------------------------------------------------------------------------------------
</TABLE>

The  number of shares of common  stock,  along with  their  respective  exercise
prices,  underlying options,  warrants and convertible debt, which were excluded
from the  computation of diluted EPS because their exercise  prices were greater
than the average market price of common stock, are listed below.

                                       1998            1997            1996
                                  -------------   -------------   -------------
Number of shares of common
 stock exercisable from:
   Options                            2,113,000       1,135,000       1,120,000
   Warrants                             790,000      13,215,000      13,990,000
   Convertible debt                          --              --       3,849,000
                                  -------------   -------------   -------------

                                      2,903,000      14,350,000      18,959,000
                                  =============   =============   =============

   Exercise price ranges          $1.41 - $3.00   $2.00 - $4.94   $2.00 - $4.94


Note 11 - Business Segment and Geographic Information
================================================================================

The Company operates in one industry--designing,  manufacturing and marketing of
computer-aided vision defect detection and sorting and defect removal equipment.
The Company has  subsidiaries  located in the United States and The Netherlands.
Revenue  transfers  between   geographic  areas,  and  other   intergeographical
eliminations  are not material.  Net sales,  net income (loss) and  identifiable
assets by geographic areas are as follows:

                                 1998            1997             1996
                           --------------   -------------     -------------
Net sales:
     United States         $   25,272,000   $  29,416,000     $  21,506,000
     Europe                     1,769,000       2,558,000         8,432,000
                           --------------   -------------     -------------

                           $   27,041,000   $  31,974,000     $  29,938,000
                           ==============   =============     =============
Net income (loss):
     United States         $    2,449,000   $   2,229,000 (A) $      75,000  (C)
     Europe                      (207,000)      4,787,000 (B)    (5,335,000) (D)
                           --------------   --------------    -------------

                           $    2,242,000   $   7,016,000     $  (5,260,000)
                           ==============   =============     =============
Identifiable assets:
     United States         $   27,126,000   $  24,294,000     $  20,784,000
     Europe                     2,713,000         941,000        10,154,000
                           --------------   -------------     -------------

                           $   29,839,000   $  25,235,000     $  30,938,000
                           ==============   =============     =============

(A) Includes a charge of $233,000 for the write-off of deferred debt issue costs
    associated with the early retirement of debt.
(B) Includes a gain of $4,989,000 from the sale of Pulsarr.
(C) Includes  charges of $647,000 for the write-off of deferred royalty expense.
(D) Includes a charge of  $4,915,000  for the  write-off of acquired  in-process
    technology.

Included  in  United  States  sales  are  export  sales of  $7,057,000  in 1998,
$7,999,000 in 1997 and $7,504,000 in 1996.

The Company sold equipment to a single customer totaling 14% in 1997, and to two
different customers totaling 13% and 12% of sales in 1996.


Note 12 - Quarterly Financial Data (Unaudited)
================================================================================
<TABLE>
<CAPTION>

Quarters Ended                        March 31         June 30     September 30      December 31        Total
----------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>            <C>               <C>            <C>          
Fiscal 1998
Sales                            $    7,103,000    $   9,087,000  $    5,546,000    $   5,305,000  $  27,041,000
Gross profit                          3,333,000        5,035,000       2,879,000        3,209,000     14,456,000
Net income                              182,000        1,016,000          75,000          969,000      2,242,000
Basic earnings per share                   0.02             0.10            0.01             0.09           0.21
Diluted earnings per share                 0.02             0.08            0.01             0.07           0.18

Fiscal 1997
Sales                            $    9,337,000    $   7,607,000  $    5,861,000    $   9,169,000  $  31,974,000
Gross profit                          4,607,000        3,933,000       3,029,000        4,363,000     15,932,000
Net income (loss)                       769,000        5,367,000        (160,000)       1,040,000      7,016,000
Basic earnings (loss) per share            0.07             0.47           (0.01)            0.10           0.64
Diluted earnings (loss) per share          0.05             0.34           (0.01)            0.08           0.49

</TABLE>
<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================

Introduction

The  Company   acquired  Pulsarr  and  Ventek  in  March  1996  and  July  1996,
respectively.  Pulsarr was subsequently  sold in May 1997. The operations of the
acquired entities are included in the financial statements from their respective
acquisition dates, and in the case of Pulsarr, through its disposition date.

The  following  table sets forth the  results of  operations  for the last three
years (amounts in thousands):
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                           -----------------------------------------------------------------------
                                                    1998                       1997                     1996
                                           ---------------------      --------------------     -------------------
                                             Amount          %         Amount          %        Amount         %
                                           ---------    --------      --------     -------     ---------   -------
<S>                                        <C>            <C>         <C>           <C>        <C>          <C>   
Net sales                                  $  27,041      100.0%      $ 31,974      100.0%     $  29,938    100.0%
Cost of sales                                 12,585       46.5%        16,042       50.2%        15,794     52.8%
                                           ---------    --------      --------     -------     ---------   -------
   Gross profit                               14,456       53.5%        15,932       49.8%        14,144     47.2%
                                           ---------    --------      --------     -------     ---------   -------
Operating expenses:
   Selling and marketing                       4,762       17.6%         4,930       15.4%         4,662     15.6%
   Research and development                    5,024       18.6%         3,950       12.4%         4,038     13.5%
   General and administrative                  3,413       12.6%         3,303       10.3%         3,549     11.8%
   Goodwill amortization                         695        2.6%           731        2.3%           633      2.1%
   Charge for acquired in-process
     technology                                   --          --            --          --         4,915     16.4%
   Charge for royalty expense                     --          --            --          --           647      2.2%
                                           ---------    --------      --------     -------     ---------   -------
                                              13,894       51.4%        12,914       40.4%        18,444     61.6%
                                           ---------    --------      --------     -------     ---------   -------
Income (loss) before other income
   and expense                                   562        2.1%         3,018        9.4%        (4,300)   (14.4)%
Gain on sale of Pulsarr                           --          --         4,989       15.6%            --        --
Investment and other income                      286        1.1%           371        1.2%           190        .6%
Interest expense                                (689)     (2.5)%        (1,263)     (4.0)%        (1,150)    (3.8)%
                                           ---------   ---------      --------     -------     ---------   --------
Income (loss) before income taxes                159        0.6%         7,115       22.3%        (5,260)   (17.6)%
Provision for (benefit from) income
   taxes                                      (2,083)     (7.7)%            99      (0.3)%            --         --
                                           ---------   ---------      --------     -------     ---------   --------
   Net income (loss)                       $   2,242        8.3%      $  7,016       21.9%     $  (5,260)   (17.6)%
                                           =========   =========      ========     =======     =========   ========

</TABLE>

Fiscal 1998 Compared to Fiscal 1997

Sales for 1998 were  $27,041,000,  down 15% when  compared  to sales for 1997 of
$31,974,000.   Sales  of  non-food  machine  vision  systems  decreased  15%  or
$2,164,000 to $12,760,000. Sales of food machine vision systems decreased 16% or
$2,769,000 to $14,281,000.  Pulsarr sales, which were comprised entirely of food
machine vision systems,  aggregated $2,558,000 in 1997 and represent the primary
cause for the decrease in sales of food machine  vision  systems.  Total machine
vision systems sold, excluding Pulsarr, were 75 in 1998 and 90 in 1997.

Cost of sales was 46.5% of sales in 1998 and 50.2% in 1997.

Gross profit decreased by 9% to $14,456,000 in 1998 when compared to $15,932,000
of gross profit in 1997. In 1998,  gross profit was 53.5%,  as compared to 49.8%
in 1997.  The  increase  in gross  profit  as a  percentage  of sales in 1998 as
compared  to 1997 is  primarily  related to the  exclusion  of the  lower-margin
Pulsarr products as well as a change in sales mix to higher-margin products.

Selling and marketing  expenses  decreased  $168,000 in 1998 to $4,762,000  when
compared to $4,930,000 in 1997.  Selling and marketing expenses in 1997 included
$260,000  relating  to Pulsarr as compared to none in 1998.  This  decrease  was
partially  offset by  increased  sales  and  service  personnel  at both SRC and
Ventek.

                                      F-25
<PAGE>

Research  and  development  expenses were  $5,024,000 and $3,950,000 in 1998 and
1997,  or  18.6%  and  12.4% of sales,  respectively.  Research and  development
expenses in 1997  included  $178,000  relating to Pulsarr as compared to none in
1998.  The increased  expenses  were  incurred to  accelerate  completion of the
Company's next generation of food sorter and vision system processor, as well as
to develop new  products for the  processing  of softwood  veneer.  Research and
development expenses are expected to approximate 14% of sales in 1999.

General and  administrative  expenses  increased  $110,000 to $3,413,000 in 1998
from $3,303,000 in 1997.  General and  administrative  expenses in 1997 included
$343,000  relating  to Pulsarr as  compared  to none in 1998.  The  increase  is
primarily  the result of costs  associated  with a project of  reevaluating  the
financial and  operational  processes and procedures in preparation for possible
future growth in business, as well as an increase in personnel costs.

The  decrease  in  goodwill  amortization  is due to the  exclusion  of goodwill
related to Pulsarr in 1998 as compared to 1997.

The decrease in investment and other income is the result of lower cash balances
available for investment.

The  decrease  in  interest  expense  is  primarily  due  to lower debt balances
outstanding.  Additionally,  interest  expense  in  1997  included  $233,000  of
deferred debt issuance costs written off as the result of the early repayment of
$2,500,000 of convertible notes payable.

The  benefit  from income  taxes of  $2,083,000  is  composed of a benefit  from
deferred income taxes of $2,100,000 to recognize a deferred tax asset, partially
offset by a provision  for current  income  taxes of $17,000 due pursuant to the
Alternative  Minimum Tax rules of the  Internal  Revenue  Code.  The Company has
assessed its past earnings history and trends, budgeted sales and the expiration
dates of  carry-forwards  and  determined  that it is more  likely than not that
$2,100,000 of the deferred tax asset will be realized.  A valuation allowance of
$4,171,000 is maintained  against the  remaining  deferred tax asset,  which the
Company determined may not be realized.

Net income for 1998 was $2,242,000 as compared to $7,016,000 in 1997. Net income
for 1998 includes a benefit from deferred taxes of $2,100,000,  while net income
for 1997  includes  a gain on the sale of  Pulsarr  of  $4,989,000  and a charge
relating to the write-off of deferred debt issuance costs. Income before special
items was $142,000 for 1998 compared to  $2,260,000  for 1997 as a result of the
factors described above.

Fiscal 1997 Compared to Fiscal 1998

Sales  for 1997  were  $31,974,000,  up 7% when  compared  to sales  for 1996 of
$29,938,000.  Sales of non-food machine vision systems  decreased 4% or $600,000
to $14,924,000. Sales of food machine vision systems increased 18% or $2,636,000
to $17,050,000.  Pulsarr's sales,  which are comprised  entirely of food machine
vision systems,  aggregated $2,558,000 in 1997 and $8,432,000 in 1996. Excluding
Pulsarr from both years,  sales of food machine vision systems increased 142% or
$8,510,000 to $14,492,000  from  $5,982,000.  Total machine vision systems sold,
excluding Pulsarr, were 90 in 1997 and 77 in 1996.

Cost of sales was 50.2% of sales in 1997 and 52.8% in 1996.

Gross  profit  increased  by  13%  to  $15,932,000  in  1997  when  compared  to
$14,144,000  of gross  profit in 1996.  In 1997,  gross  profit  was  49.8%,  as
compared to 47.2% in 1996. The increase in gross profit as a percentage of sales
is primarily  related to a larger volume of higher-margin  products  included in
1997, and an increase in the overall sales volume that allowed for the spreading
of fixed costs over a larger sales base.

Selling and marketing  expenses increased 6% in 1997 to $4,930,000 when compared
to $4,662,000 in 1996.  The increase in selling and marketing  expense is due to
the increase in sales. Selling and marketing expenses amounted to 15.4% of sales
in 1997 and 15.6% of sales in 1996.

Research and  development  expenses were  $3,950,000  and $4,038,000 in 1997 and
1996, or 12.4% and 13.5% of sales, respectively.  The decrease was the result of
the inclusion of only four months of Pulsarr's  costs in 1997 as compared to ten
months in 1996,  partially  offset by  increases  in  research  and  development
expenses at the Company's other operating subsidiaries.

General and  administrative  expenses  decreased  $246,000 to $3,303,000 in 1997
from $3,549,000 in 1996. The decrease in general and administrative expenses was
the result of the  inclusion of only four months of  Pulsarr's  costs in 1997 as
compared to ten months in 1996,  partially  offset by  increases  in general and
administrative expenses at the Company's other operating subsidiaries.

The increase in goodwill amortization is due to a full year of amortization from
the  Ventek  acquisition  in  1997  as  compared  to  only  five months in 1996,
partially offset  by  lower amortization from Pulsarr as a result of its sale in
May 1997.

On May 6,  1997,  AMV sold  Pulsarr  to Barco NV of  Belgium  for $8.4  million,
resulting in a gain of  $4,989,000.  AMV had purchased  Pulsarr on March 1, 1996
for $7.8 million.  This gain  primarily  represents a recovery of the $4,915,000
charge for  acquired  in-process  technology  the  Company  recorded  in 1996 in
conjunction with this acquisition.

The  increase  in  investment  and  other  income is the  result of higher  cash
balances available for investment.

The increase in interest  expense is primarily  due to the inclusion of $233,000
of deferred  debt  issuance costs written off as a result of the early repayment
of $2,500,000 of convertible notes payable.

The  provision  for income  taxes  represents  income  taxes due pursuant to the
Alternative Minimum Tax rules of the Internal Revenue Code.

Net income for 1997 was  $7,016,000 as compared to a loss of $5,260,000 in 1996.
Net income for 1997 includes a gain on the sale of Pulsarr of  $4,989,000  and a
charge of $233,000  relating to the write-off of deferred  debt issuance  costs,
while  the  net  loss  for  1996  includes  a  charge  for  acquired  in-process
technologies  of  $4,915,000  and a charge  for  deferred  royalty  expenses  of
$647,000.  Income  before  special  items was  $2,260,000  for 1997  compared to
$302,000 for 1996 as a result of the factors discussed above.

Liquidity and Capital Resources

The  Company's  cash   balance   and   working   capital   was  $4,423,000   and
$12,100,000,  respectively,  at December  31, 1998  compared to  $6,045,000  and
$9,133,000,  respectively,  at December 31, 1997.  The Company's  debt-to-equity
ratio at December 31, 1998 was .51 compared to .70 at December 31, 1997.

During 1998, net cash used in operating  activities totaled $3,109,000  compared
to cash generated in operating activities of $3,797,000 in 1997 and cash used by
operating  activities  of  $950,000 in 1996.  Income  before  special  items was
$142,000 in 1998 as compared to  $2,260,000  in 1997 and is one of the causes of
the decrease in cash generated from  operations in 1998 as compared to 1997. The
Company used  $2,199,000 of cash in 1998 to build  inventories in order to place
more trial and demonstration machines at customer locations. Accounts receivable
increased  by  $1,363,000  in 1998 as the  result of  granting  slightly  longer
payment terms relating to certain sales.  Cash was also used in 1998 to increase
prepaid  and other  assets by  $760,000  and to reduce  current  liabilities  by
$539,000.

Income before  special  items was  $2,260,000 in 1997 as compared to $302,000 in
1996  and is the  principle  reason  for  the  increase  in cash  provided  from
operations in 1997 as compared to 1996.  Increases in  inventories  used cash of
$499,000  and  $581,000 in 1997 and 1996,  respectively,  and were  necessary to
support the growth in sales volume. A reduction in accounts  receivable provided
cash of $11,000 in 1997 as compared to an increase in accounts  receivable which
consumed  cash of  $1,741,000 in 1996.  These  changes in  receivables  were the
result of the changing level of net sales in the fourth  quarter.  Sales for the
fourth quarter of 1997,  1996 and 1995 were $9.2 million,  $9.8 million and $5.1
million, respectively.

Cash used in investment  activities  totaled $1,383,000 in 1998 compared to cash
provided  in  investment  activities  of  $5,996,000  in 1997 and  cash  used by
investment  activities  of  $7,511,000 in 1996.  Cash  resources of  $1,383,000,
$1,014,000 and $1,527,000  were used to acquire  property and equipment in 1998,
1997 and 1996, respectively. The Company has no material commitments for capital
expenditures  at December  31,  1998.  The sale of Pulsarr  provided net cash of
$7,010,000 in 1997. The  acquisition of Pulsarr in 1996 used cash of $5,984,000.
Consideration given for the Ventek acquisition was approximately $5.1 million in
notes and other securities.

Cash provided by financing  activities totaled $2,870,000 in 1998 as compared to
cash used by financing  activities  of  $5,657,000  in 1997 and cash provided by
financing  activities of $6,199,000 in 1996. In 1998,  the Company  received net
proceeds of $2,579,000 from the sale of preferred stock to FMC Corporation,  and
in April,  refinanced its 9.75%  $2,680,000  mortgage with a new 8.3% $3,000,000
mortgage.  In 1997,  cash generated from  operations and the sale of Pulsarr was
used to repay the remaining $1,265,000 principal balance of the Company's 10.25%
Convertible  Note in April 1997,  to repay early  $2,500,000  of its  $3,400,000
6.75%  Convertible  Note,  at par, in September  1997 and to purchase  1,001,640
shares of the  Company's  Class A Common Stock and 640,000  warrants to purchase
Class A Common Stock for  $1,962,000 in August 1997. In March 1996,  the Company
received  $2,000,000  from the sale of 1,400,000  shares of Class A Common Stock
pursuant to a private placement.  In April 1996, the Company received $3,000,000
representing  the net proceeds of a private  placement of convertible  debt. The
cash  generated  from this  transaction  was used to finance the  acquisition of
Pulsarr and to provide funds for working capital purposes.

In February  1999,  an agreement  was reached  with the former  owners of Ventek
pursuant to which the Company prepaid $750,000 of debt that would have otherwise
been due on July 23, 1999,  and issued  1,800,000  shares of restricted  Class A
Common Stock in prepayment  of another note.  The maturity date of the remaining
$2,500,000 was changed to July 23, 2000 (see Note 6).

The Company  believes  it will  operate at a negative  cash flow during  certain
periods in the future due to payment of notes  issued in  connection  with prior
financings and  acquisitions,  working  capital  requirements,  the need to fund
certain  development  projects,  cash  required  to enter new  market  areas and
possible cash needed to fully integrate Ventek's operations. Management believes
that the  Company  has  sufficient  cash to enable the  Company  to sustain  its
operations and to adequately fund the cash flow expected to be used in operating
activities for the next twelve months.  If the Company is unable to consistently
generate sustained  positive cash flow from operations,  the Company may have to
rely on debt or equity financing.  There can be no assurance the Company will be
able to obtain future financing on terms satisfactory to the Company.

Outlook

At this time, management believes 1999 sales will approximate  $30,000,000.  The
tendency of customers to extend the time taken to make purchasing  decisions and
the effects of  international  currency  fluctuations may continue to negatively
impact operations. With the strength of the U. S. dollar, the Company's recently
established  European sales and service  subsidiary,  SRC VISION BV, may have to
reduce the price of its products in Europe.

The Company expects ongoing pressure in the plywood  manufacturing market served
by Ventek due to competing,  less expensive wood panel products.  To combat this
pressure, Ventek has introduced or will introduce several new products.

The Company plans to continue  emphasis on research and development to penetrate
new markets and provide expanded sales  opportunities for the Company during the
next two years.

Year 2000 Conversion

The Company has  initiated a Year 2000  compliance  program  that  includes  the
following phases:  identifying computer systems,  applications and products that
need to be replaced  or fixed,  carrying  out  remediation  work and  conducting
validation  testing of systems,  applications and products to ensure compliance.
The Company has essentially  completed the identification and remediation phases
of the  program.  The amount of  remediation  work  required  was not  extensive
because  the Company  has  replaced  certain of its  financial  and  operational
systems during the last several years to better meet its functional business and
operational   requirements.   Management   believes   that   such   replacements
substantially meet or address its Year 2000 issues. In addition, the Company may
be required to modify  other  existing  software  and  hardware in order for its
computer systems to function properly with respect to dates in the year 2000 and
thereafter.  The Company  anticipates  that the remaining  remediation  work and
validation  phase will be completed no later than June 30, 1999.  The  estimated
cost of the remaining  replacement and modification for the Year 2000 conversion
is estimated at $100,000.  The Company believes that the internal aspects of the
Year 2000 conversion contain only a moderate to low level of risk.

The Company has  contacted  its major  suppliers  and  customers to assess their
preparations  for the year 2000. These actions are intended to help mitigate the
possible external impact of Year 2000 issues. Even so, it is impossible to fully
assess the potential  consequences if service interruptions occur from suppliers
or in such infrastructure  areas as utilities,  communications,  transportation,
banking  and  government.  The  Company  assigns  a higher  level  risk to these
activities as they are outside the Company's control.

The Company has not yet developed a contingency  plan to provide for  continuity
of processing  in the event of various  problem  scenarios,  but will assess the
need to develop such a plan based on the outcome of its validation phase and the
results of  surveying  its major  suppliers  and  customers.  If the  Company is
unsuccessful or if the remediation efforts of its key suppliers or customers are
unsuccessful in dealing with Year 2000 problems, there may be a material adverse
impact on the  Company's  consolidated  results  and  financial  condition.  The
Company is unable to quantify any  potential  adverse  impact at this time,  but
will continue to monitor and evaluate the situation.

Inflation

The Company has not been materially affected by general inflation.

<PAGE>


Other Information
================================================================================

Form 10-K Annual Report

The  information  contained  in this  report is  included  as an  exhibit to the
Company's  annual  report on Form 10-K filed with the  Securities  and  Exchange
Commission.  Copies of the Form 10-K report  (without  exhibits) may be obtained
free of charge  upon  written  request  to the  Investor  Relations  Department,
Advanced Machine Vision  Corporation,  3709 Citation Way #102,  Medford,  Oregon
97504, or by calling 541-776-7700.

Future Quarterly Reports

Beginning in 1999, the Company's quarterly financial  information will be posted
to AMV's web site at  www.amvcorp.com,  replacing  quarterly reports  previously
sent to  stockholders.  This will save  printing  and mailing  costs and provide
information  on a more timely basis.  Copies may be obtained by fax or mail upon
request.

Annual Meeting

The Annual Meeting of Stockholders of Advanced  Machine Vision  Corporation will
be held at the Company's  headquarters in Medford,  Oregon at 2:00 p.m.  Pacific
Time on May 13, 1999.

Market for the Company's Common Equity

The  Company's  Class A Common  Stock has been quoted on the Nasdaq Stock Market
since March 10, 1992. The symbol is AMVC.

Common Stock Market Price

Per Share of Class A Common Stock:
<TABLE>
<CAPTION>
Quarter Ended 1998                    March 31           June 30         Sept. 30           Dec. 31
------------------                  -------------    -------------     -------------    -----------
<S>                                   <C>              <C>               <C>              <C>     
High                                  $  2.34          $   2.38          $  2.16          $   1.56
Low                                      1.78              1.81             1.50              1.06

Quarter Ended 1997                    March 31           June 30         Sept. 30           Dec. 31
------------------                  -------------    -------------     -------------    -----------
High                                  $  2.00          $   1.94          $  2.34          $   2.38
Low                                      1.38              1.25             1.47              1.91

</TABLE>

On December 31, 1998, there were 133 and 19 record owners of the Company's Class
A and Class B Common Stock, respectively.  The majority of outstanding shares of
Class A Common  Stock are held of  record  by a  nominee  holder on behalf of an
unknown  number of ultimate  beneficial  owners.  The Company  believes that the
total number of beneficial owners of its common shares was approximately 2,300.

The Company has not  declared or paid any cash  dividends  upon its common stock
since its inception.  The Company does not anticipate  paying any cash dividends
in the foreseeable future. It is anticipated that earnings, if any, which may be
generated from operations will be used to finance the operations of the Company.


                                      F-30

<PAGE>

<TABLE>
<CAPTION>
Directors, Corporate Officers, Operating Units and Other Information
<S>                                  <C>                                 <C>
Directors                            Corporate Officers                  Transfer Agent and Registrar
William J. Young                     William J. Young                    American Stock Transfer
Chairman of the Board, President     President and Chief Executive       and Trust Company
and Chief Executive Officer of the   Officer                             New York, New York
Company
                                     Alan R. Steel                       Independent Auditors
Haig S. Bagerdjian                   Vice President Finance, Chief       PricewaterhouseCoopers LLP
Executive Vice President, Chief      Financial Officer and Secretary     Portland, Oregon
Legal Officer and Secretary,
Syncor International Corporation     Lee J. Robinson                     Legal Counsel
President & Chief Executive          Corporate Controller                Troy & Gould Professional Corp.
Officer, Syncor Overseas Ltd.        and Assistant Secretary             Los Angeles, California

Vikram Dutt                          Operating Units                     Public Relations
President of                         SRC VISION, Inc.                    Silverman Heller Associates
Aaron, Dutt & Edwards, Inc.          Medford, Oregon                     Los Angeles, California
                                     Dr. James Ewan, President
Dr. James Ewan
President and Chief Executive        Ventek, Inc.
Officer of SRC VISION, Inc.          Eugene, Oregon
                                     Rodger A. Van Voorhis, President
Marc T. Giles
General Manager of FMC FoodTech
Division of FMC Corporation

Robert M. Loeffler
Attorney, Director of
PaineWebber Group, Inc.

Jack Nelson
Chairman of the Board and Chief
Executive Officer of Caprius, Inc.

Rodger A. Van Voorhis
President of Ventek, Inc.

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Advanced Machine Vision Corporation
Schedule VIII - Valuation and  Qualifying  Accounts For the Years Ended
December 31, 1996, 1997 and 1998
-----------------------------------------------------------------------

                                                                      Additions
                                                            --------------------------
                                               Balance at    Charged to       Charged                    Balance
                                                beginning     cost and        to other                   at end
                                                of period     expenses        accounts    Deductions    of period
                                            --------------  -------------  ------------  -----------   -----------
<S>                                         <C>             <C>            <C>           <C>           <C>        
Year ended December 31, 1996:
    Allowance for excess and obsolete
    inventory                               $      305,000  $     131,000  $         --  $        --   $   436,000
                                            ==============  =============  ============  ===========   ===========

    Allowance for doubtful accounts         $      165,000  $      21,000  $    120,000  $   (26,000)  $   280,000
                                            ==============  =============  ============  ===========   ===========


Year ended December 31, 1997:
    Allowance for excess and obsolete
    inventory                               $      436,000  $     271,000  $         --  $        --   $   707,000
                                            ==============  =============  ============  ===========   ===========

    Allowance for doubtful accounts         $      280,000  $          --  $   (100,000) $        --   $   180,000
                                            ==============  =============  ============  ===========   ===========


Year ended December 31, 1998:
    Allowance for excess and obsolete
    inventory                               $      707,000  $     (45,000) $         --  $        --   $   662,000
                                            ==============  =============  ============  ===========   ===========

    Allowance for doubtful accounts         $      180,000  $      50,000  $         --  $        --   $   230,000
                                            ==============  =============  ============  ===========   ===========

</TABLE>

                                      F-32

<PAGE>


                                   Exhibit 23
                                   ==========

================================================================================
Consent of Independent Accountants


We  hereby  consent  to  the  incorporation  by  reference  in   the  Prospectus
constituting  part of the  Registration  Statement on Form S-3 (No.  333-10847),
Registration  Statement on Form S-8 (No.  33-87064),  Registration  Statement on
Form S-8 (No. 33-76864) and Registration  Statement on Form S-8 (No.  333-42329)
of Advanced Machine Vision  Corporation  (formerly  Applied Laser Systems or ARC
Capital) of our report dated  February  16, 1999,  appearing on page F-2 of this
Annual Report on Form 10-K.



/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Portland, Oregon
March 12, 1999