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

Financial Statements:

     Consolidated Balance Sheets -
         December 31, 1997 and 1996                                      F-3

     Consolidated Statements of Operations -
         Fiscal Years Ended December 31, 1997, 1996 and 1995             F-4

     Statements of Shareholders' Equity -
         Fiscal Years Ended December 31, 1997, 1996 and 1995             F-5

     Consolidated Statements of Cash Flows -
         Fiscal Years Ended December 31, 1997, 1996 and 1995             F-6

     Notes to Consolidated Financial Statements                          F-7

     Financial Statement Schedule:

         Schedule VIII - Valuation and Qualifying Accounts              F-22

Consent of Independent Accountants                                      F-23

Management's Discussion and Analysis of Financial Condition
   and Results of Operations                                            F-24

Annual Report Close                                                     F-28


                                       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 accompanying
index  present  fairly,  in all material  respects,  the  financial  position of
Advanced  Machine Vision  Corporation and its  subsidiaries at December 31, 1997
and 1996,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1997,  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/ PRICE WATERHOUSE LLP
------------------------
    PRICE WATERHOUSE LLP

Portland, Oregon
January 23, 1998, except as to Note 10, which is as of March 10, 1998


                                      F-2

<PAGE>
================================================================================
Advanced Machine Vision Corporation
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
                                                                        December 31,
                                                             --------------------------------
                                                                  1997               1996
                                                             -------------      -------------
                                     ASSETS
Current assets:
<S>                                                          <C>                <C>
     Cash and cash equivalents                               $   6,045,000      $   1,909,000
     Accounts receivable, net of allowance for
        doubtful accounts of $180,000 and $280,000
        at December 31, 1997 and 1996, respectively              2,711,000          4,979,000
     Inventories (Note 2)                                        5,181,000          8,132,000
     Prepaid expenses                                              138,000            391,000
                                                             -------------      -------------

          Total current assets                                  14,075,000         15,411,000
Property, plant and equipment - net (Notes 3 and 6)              4,775,000          6,488,000
Intangible assets, net (Note 4)                                  5,535,000          7,876,000
Other assets                                                       850,000          1,163,000
                                                             -------------      -------------

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

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                        $   1,436,000      $   1,897,000
     Short-term borrowings (Note 6)                                     --            947,000
     Accrued liabilities (Notes 5 and 9)                         1,146,000          1,299,000
     Customer deposits                                           1,073,000          2,463,000
     Accrued payroll                                               783,000            707,000
     Warranty reserve                                              477,000            479,000
     Current portion of notes payable (Note 6)                      27,000          1,706,000
                                                             -------------      -------------

          Total current liabilities                              4,942,000          9,498,000
                                                             -------------      -------------
Notes payable, less current portion (Note 6)                     8,342,000         14,940,000
                                                             -------------      -------------
Commitments and contingencies (Note 9)

Shareholders' equity (Notes 8 and 10):
     Common stock:
         Class A and B - 10,679,000 and 11,250,000
             shares issued and outstanding at
             December 31, 1997 and 1996, respectively           24,285,000         25,720,000
     Common stock warrants                                       2,197,000          2,403,000
     Additional paid in capital                                  2,823,000          2,797,000
     Accumulated deficit                                       (17,354,000)       (24,370,000)
     Cumulative translation adjustment                                  --            (50,000)
                                                             -------------      -------------

          Total shareholders' equity                            11,951,000          6,500,000
                                                             -------------      -------------

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

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

                                      F-3
<PAGE>

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

                                                              Year Ended December 31,
                                                  -----------------------------------------------
                                                      1997              1996             1995
                                                      ----              ----             ----
<S>                                               <C>               <C>              <C>
Net sales                                         $ 31,974,000      $ 29,938,000     $ 19,394,000
Cost of sales                                       16,042,000        15,794,000       11,194,000
                                                  ------------      ------------     ------------

Gross profit                                        15,932,000        14,144,000        8,200,000
                                                  ------------      ------------     ------------
Operating expenses:
     Selling and marketing                           4,930,000         4,662,000        3,255,000
     Research and development                        3,950,000         4,038,000        1,987,000
     General and administrative                      3,303,000         3,549,000        1,933,000
     Goodwill amortization                             731,000           633,000          371,000
     Charge for acquired in-process technology              --         4,915,000               --
     Charge for royalty expense                             --           647,000               --
                                                  ------------      ------------     ------------

                                                    12,914,000        18,444,000        7,546,000
                                                  ------------      ------------     ------------
Income (loss) from continuing operations
   before other income and expense                   3,018,000        (4,300,000)         654,000

Other income and expense:
     Gain on sale of Pulsarr                         4,989,000                --               --
     Gain on rescission of stock
         compensation - net                                 --                --          732,000
     Investment and other income                       371,000           190,000          212,000
     Interest expense                               (1,263,000)       (1,150,000)        (483,000)
                                                  ------------      ------------     ------------
Income (loss) from continuing operations
   before income taxes                               7,115,000        (5,260,000)       1,115,000
Provision for income taxes (Note 7)                     99,000                --               --
                                                  ------------      ------------     ------------

Income (loss) from continuing operations             7,016,000        (5,260,000)       1,115,000
Loss from discontinued operations (Note 11)                 --                --         (173,000)
                                                  ------------      ------------     ------------

Net income (loss)                                 $  7,016,000      $ (5,260,000)    $    942,000
                                                  ============      ============     ============

Earnings (loss) per share (Note 10):
     Basic                                        $        0.64     $      (0.49)    $       0.12
     Diluted                                      $        0.49     $      (0.49)    $       0.11

</TABLE>

          See Accompanying Notes to Consolidated Financial Statements.


                                      F-4

<PAGE>

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

                               Class A and B Common Stock   Class E Common Stock      Common    Additional               Cumulative
                               --------------------------   --------------------      Stock      Paid in    Accumulated  Translation
                                Shares         Amount       Shares      Amount       Warrants    Capital       Deficit   Adjustments
                                ------         ------       ------      ------       --------  -----------  ------------ -----------
<S>                           <C>         <C>            <C>         <C>          <C>          <C>          <C>            <C>
Balance, December 31, 1994     9,951,000  $  24,087,000     497,000  $   326,000  $ 3,097,000  $ 1,500,000  $(20,052,000)  $     --
Rescission of stock
   compensation - net           (612,000)      (747,000)         --           --           --           --            --         --
Issuance of Class F Warrants          --             --          --           --       15,000           --            --         --
Exercise of options               84,000         84,000          --           --           --           --            --         --
Net income                            --             --          --           --           --           --       942,000         --
                              ----------  -------------  ----------  -----------  -----------  -----------  ------------  ---------

Balance, December 31, 1995     9,423,000     23,424,000     497,000      326,000    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)
Net loss                              --             --          --           --           --           --    (5,260,000)        --
                              ----------  -------------  ----------  -----------  -----------  -----------  ------------   --------

Balance, December 31, 1996    11,250,000     25,720,000          --           --    2,403,000    2,797,000   (24,370,000)   (50,000)

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
Net income                            --             --          --           --           --           --     7,016,000         --
                              ----------  -------------  ----------  -----------  -----------  -----------  ------------   --------

Balance, December 31, 1997    10,679,000  $  24,285,000          --  $        --  $ 2,197,000  $ 2,823,000  $(17,354,000)  $     --
                              ==========  =============  ==========  ===========  ===========  ===========  ============   ========

</TABLE>


          See Accompanying Notes to Consolidated Financial Statements.


                                      F-5

<PAGE>

================================================================================
Advanced Machine Vision Corporation
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                 -------------------------------------------------
                                                                      1997             1996              1995
                                                                 -------------     -------------     -------------
<S>                                                              <C>               <C>               <C>
Cash flows from operating activities:
   Net income (loss)                                             $   7,016,000     $  (5,260,000)    $     942,000
   Loss from discontinued operations                                        --                --           173,000
                                                                 -------------     -------------     -------------

   Income (loss) from continuing operations                          7,016,000        (5,260,000)        1,115,000
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     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                --                --
     Cash outflows related to discontinued operations                       --                --          (728,000)
     Depreciation and amortization                                   1,369,000         1,263,000           831,000
     Stock compensation                                                     --                --          (732,000)
     Changes in assets and liabilities
       (net of amounts purchased/sold
       in acquisition/divesture):
       Accounts receivable                                              11,000        (1,741,000)         (122,000)
       Inventories                                                    (499,000)         (581,000)          402,000
       Prepaid expenses and other assets                              (186,000)          156,000          (399,000)
       Accounts payable, short-term borrowings, accrued
         liabilities, customer deposits, accrued payroll
         and warranty reserve                                          842,000            51,000           219,000
                                                                 -------------     -------------     -------------

         Net cash provided by (used in) operating activities         3,797,000          (950,000)          586,000
                                                                 -------------     -------------     -------------
Cash provided by (used in) investing activities:
   Proceeds from sale of Pulsarr/ALS                                 7,010,000                --         1,052,000
   Acquisition of Pulsarr/Ventek - net                                      --        (5,984,000)               --
   Purchases of property and equipment                              (1,014,000)       (1,527,000)         (598,000)
   Collection of notes receivable                                           --                --           280,000
                                                                 -------------     -------------    --------------

         Net cash provided by (used in) investing activities         5,996,000        (7,511,000)          734,000
                                                                 -------------     -------------    --------------
Cash (used in) provided by financing activities:
   Notes payable to bank and others - net                           (3,792,000)        4,621,000         2,137,000
   Proceeds from common stock issuances                                     --         1,896,000                --
   Proceeds from exercise of stock options                              97,000            82,000            84,000
   Repurchase of Class A Common Stock and Warrants                  (1,962,000)               --                --
   Debt issuance costs                                                      --          (400,000)         (160,000)
                                                                 -------------     -------------    --------------

         Net cash (used in) provided by financing activities        (5,657,000)        6,199,000         2,061,000
                                                                 -------------     -------------    --------------

Net increase (decrease) in cash                                      4,136,000        (2,262,000)        3,381,000

Cash and cash equivalents, beginning of the period                   1,909,000         4,171,000           790,000
                                                                 -------------     -------------    --------------

Cash and cash equivalents, end of the period                     $   6,045,000     $   1,909,000    $    4,171,000
                                                                 =============     =============    ==============

Supplemental cash flow information:
   Cash paid for:
     Interest                                                    $     939,000     $     809,000    $      372,000
     Income taxes                                                $      20,000     $          --    $           --

</TABLE>


          See Accompanying Notes to Consolidated Financial Statements.

                                      F-6

<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 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.
("ALS").

ALS  designed,  developed,   manufactured  and  marketed  laser  diode  devices,
incorporating  its  visible  laser  module,  and  "no-light"  products  based on
technology for  illumination  with infrared laser systems.  In October 1995, the
Company sold the operations of ALS to Coherent, Inc. for cash (see Note 11).

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 industries, 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 12).

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
December 28, 1997,  December 29, 1996 and December 31, 1995. 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  12).  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.

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  $7,482,000  and
$9,226,000 as of December 31, 1997 and 1996, respectively. Intangible assets are
being amortized on the straight-line basis over seven to fifteen years (see Note
4). Accumulated amortization aggregated $1,947,000 and $1,350,000 as of December
31, 1997 and 1996, 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 1997,  1996 and 1995
have  been  computed  in  accordance  with  Statement  of  Financial  Accounting
Standards No. 128 (FAS 128),  "Earnings per Share" which was effective  December
15, 1997. The changes  required by FAS 128 adjusted the  calculation of earnings
per share (EPS) under generally accepted  accounting  principles in the U. S. to
be more  consistent  with  international  standards.  Under  the  new  standard,
companies replaced the reporting of "primary" EPS with "basic" EPS. Basic EPS is
calculated  by  dividing  the income  available  to common  stockholders  by the
weighted  average number of common shares  outstanding  for the period,  without
consideration for common stock equivalents.  "Fully diluted" EPS was replaced by
"diluted" EPS. Diluted EPS is computed  similarly to fully diluted EPS under the
provisions of Accounting Principles Board (APB) Opinion No. 15.

Changes  in  Classification:  Certain  reclassifications  have  been made to the
fiscal  1996  and 1995  financial  statements  to  conform  with  the  financial
statement  presentation for fiscal 1997. 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, 1997.

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. The translation  adjustment recorded as of December 31,
1996 related  entirely to Pulsarr and reduced the gain on the sale of Pulsarr in
1997 (see Note 4).


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

Inventories consist of the following:

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

Raw materials                                 $   1,584,000      $   2,662,000
Work-in-process                                   1,359,000          2,234,000
Finished goods                                    2,238,000          3,236,000
                                              -------------      -------------

                                              $   5,181,000      $   8,132,000
                                              =============      =============

The decrease is due  principally to the sale of Pulsarr in the current year (see
Note 4).


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

Property, plant and equipment consist of the following:

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

Land                                          $     879,000      $   1,339,000
Buildings                                         3,589,000          4,780,000
Machinery and equipment                             700,000            799,000
Furniture, fixtures and office equipment          1,564,000            988,000
                                              -------------      -------------

                                                  6,732,000          7,906,000
Less:  accumulated depreciation                  (1,957,000)        (1,418,000)
                                              -------------      -------------

                                              $   4,775,000      $   6,488,000
                                              =============      =============

Substantially  all  of  the property,  plant and equipment is secured by various
mortgage notes payable (see Note 6).  Depreciation expense aggregated  $638,000,
$630,000 and $460,000, respectively, for 1997, 1996 and 1995.


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 which vests over
a four-year  period  subject to Ventek's  meeting  specified  sales and earnings
goals. 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 (i) that the  acquisition of Ventek occurred as of the beginning of 1996,
and (ii) that Pulsarr was sold at the beginning of 1996.  However,  the proforma
combined  balances are not  necessarily  indicative of balances which would have
resulted had the  acquisition  and  divestiture  occurred as of the beginning of
such periods presented. Proforma condensed combined statements of operations are
presented below:

                                                     Proforma (unaudited)
                                              ---------------------------------
                                                   1997               1996
                                              -------------      -------------

Sales                                         $  29,416,000      $  25,256,000
                                              =============      =============
Gross profit                                  $  15,014,000      $  14,244,000
                                              =============      =============
Net income                                    $   2,018,000      $   1,677,000
                                              =============      =============
Earnings per share:
   Basic                                      $        0.18      $        0.16
                                              =============      =============
   Diluted                                    $        0.16      $        0.14
                                              =============      =============

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,
                                              --------------------------------
                                                   1997               1996
                                              -------------      -------------

Commissions                                   $     356,000      $     192,000
Legal claims and fees                               181,000            431,000
Interest                                            211,000            220,000
Income taxes                                         79,000                 --
Other                                               319,000            456,000
                                              -------------      -------------

                                              $   1,146,000      $   1,299,000
                                              =============      =============


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

Short-term borrowings  represented Pulsarr's outstanding  borrowings pursuant to
its operational line of credit. As of December 31, 1996,  Pulsarr had borrowings
under this line of credit totaling $947,000.

Long-term debt consists of the following:
                                                         December 31,
                                              --------------------------------
                                                   1997               1996
                                              -------------      -------------

Mortgage note (SRC)                           $   2,690,000      $   2,715,000
6.75% convertible note                              900,000          3,400,000
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
10.25% convertible note                                  --          1,515,000
Mortgage notes (Pulsarr)*                                --          1,962,000
Pulsarr acquisition note*                                --            316,000
6% convertible note*                                     --            927,000
Technical development grant*                             --          1,032,000
                                              -------------      -------------

                                                  8,369,000         16,646,000
Less:  current maturities                           (27,000)        (1,706,000)
                                              -------------      -------------

                                              $   8,342,000      $  14,940,000
                                              =============      =============

 * These  notes  and  the  operational  line  of  credit were either paid off or
   assumed by the buyer in connection with the sale of Pulsarr in May 1997.

The SRC mortgage  note is payable to a bank in monthly  installments  of $23,000
including  interest at 9.5%,  with the remaining  unpaid balance due on February
15, 2003. In February 1996, and every three years thereafter until maturity, the
note  provides  that the interest  rate will be adjusted to 3.5% above the prime
rate.  While a normal February 1996 adjustment  would have resulted in a rate of
12%,  the holder of the note has agreed to fix the  interest  rate at 9.5% until
February  1999.  The  note  is  secured  by all of  SRC's  property,  plant  and
equipment.  The loan  agreement  contains  certain  covenants  and  restrictions
including limitations on incurrence of debt and payment of dividends.

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 bear interest at 6.75% 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 300,000 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.

As  of  December  31,  1997,  the  aggregate  amount  of  minimum  maturities of
long-term debt are as follows:  1998--$27,000; 1999--$4,809,000;  2000--$32,000;
2001--$936,000; 2002--$40,000; and thereafter $2,525,000.


Note 7 - Income Taxes
================================================================================

Income (loss) from continuing  operations before income taxes is composed of the
following:

                                  1997             1996             1995
                                  ----             ----             ----

Domestic                      $  2,143,000     $     75,000     $  1,115,000
Foreign                          4,972,000       (5,335,000)              --
                              ------------     ------------     ------------

                              $  7,115,000     $ (5,260,000)    $  1,115,000
                              ============     ============     =============

<PAGE>

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

                                  1997             1996             1995
                                  ----             ----             ----
Federal:
   Current                    $     99,000     $         --     $          --
   Deferred                        870,000         (124,000)          386,000
                              ------------     ------------     -------------

     Total federal                 969,000         (124,000)          386,000
                              ------------     ------------     -------------

State:
   Deferred                        107,000          (14,000)           45,000
                              ------------     ------------     -------------

     Total state                   107,000          (14,000)           45,000
                              ------------     ------------     -------------

Increase (decrease) in
   valuation allowance            (977,000)         138,000          (431,000)
                              ------------     ------------     -------------

     Total provision          $     99,000     $         --     $          --
                              ============     ============     =============


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

                                                          December 31,
                                                 -------------------------------
                                                     1997             1996
                                                     ----             ----
Deferred tax asset:
     Loss carry-forwards                         $  4,957,000     $  6,181,000
     Reserves and accruals                            634,000          454,000
     Research and development costs                   109,000          167,000
     Property basis differences                       645,000          520,000
                                                 ------------     ------------

                                                    6,345,000        7,322,000

Deferred tax asset valuation allowance             (6,345,000)      (7,322,000)
                                                 ------------     ------------

     Net deferred tax asset                      $         --     $         --
                                                 ============     ============

The  deferred  tax  asset  has  been  fully  reserved in accordance with FAS 109
because  the  Company  cannot  anticipate  future  taxable income to realize the
potential benefits of the gross deferred tax asset.

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,
                                                   ------------------------------------------------
                                                         1997              1996            1995
                                                         ----              ----            ----
<S>                                                <C>                <C>              <C>
Provision for (benefit from) income taxes
   at federal statutory rate                       $    2,419,000     $  (1,788,000)   $    320,000
State taxes (benefit)                                     107,000          (259,000)         38,000
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                                  (1,302,000)          191,000              --
Deferred tax valuation allowance                          370,000           138,000        (431,000)
Alternative Minimum Tax                                    99,000                --              --
Other                                                     102,000            47,000          73,000
                                                   --------------     -------------    ------------
                                                   $       99,000     $          --    $         --
                                                   ==============     =============    ============
</TABLE>

The Company has net operating loss carry-forwards of approximately  $13,000,000.
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  $6,500,000 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.


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, 1997, and their  respective  weighted
average exercise price per share:

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

     Balance at December 31, 1994                1,789,000         $ 4.02
         Granted                                 1,957,000           1.00
         Exercised                                 (84,000)          1.00
         Canceled                               (1,012,000)          3.89
                                                ----------         ------

     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
                                               ===========         ======


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

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

  1.00           1,323,000        7 years        1.00     1,298,000      1.00
  1.44-2.38      1,481,000        9 years        1.75       229,000      1.74
  3.00-4.94        645,000        3 years        4.06       645,000      4.06
                 ---------                                ---------

                 3,449,000                                2,172,000
                 =========                                =========

As of December 31, 1997 there were 278,000 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, 1997,  there were 73,000  shares  available  for future
grant under the SRC Plan.

Statement of Financial Accounting  Standards  No. 123 ("FAS 123"):  During 1995,
the Financial  Accounting  Standards Board issued FAS 123, "Accounting for Stock
Based  Compensation,"  which  defines  a  fair value method of accounting for an
an  employee  stock  option or similar  equity  instrument  and  encourages  all
entities  to adopt that method of  accounting  for all of their  employee  stock
compensation  plans.  However,  it also  allows an entity to continue to measure
compensation costs for those plans using the method of accounting  prescribed by
APB 25.  Entities  electing  to remain with the  accounting  in APB 25 must make
proforma  disclosures of net income and earnings per share, as if the fair value
method of accounting defined in this Statement has been applied.

The Company has elected to account for its stock-based  compensation plans under
APB 25; however,  the Company has computed for proforma  disclosure purposes the
value of all options granted during 1997 and 1996 using the Black-Scholes option
pricing  model  as  prescribed  by FAS 123 and the  following  weighted  average
assumptions used for grants:

                                                     1997             1996
                                                   --------         --------

Risk-free interest rate                              6.12%            6.77%
Expected dividend yield                                 0%               0%
Expected lives                                     5 Years          5 Years
Expected volatility                                    63%              67%

Adjustments are made for options forfeited prior to vesting.  The total value of
options  granted was computed to be the  following  approximate  amounts,  which
would be amortized over the vesting period of the options:

Year ended December 31, 1997                 $     752,000
Year ended December 31, 1996                 $     789,000

If the Company had  accounted  for these plans in  accordance  with FAS 123, the
Company's net income (loss) and proforma net income  (loss) per share would have
been reported as follows:

                                                          December 31,
                                                 -------------------------------
                                                     1997             1996
                                                     ----             ----
Net income (loss):
    As reported                                  $  7,016,000    $  (5,260,000)
    Proforma                                     $  6,807,000    $  (5,797,000)
Proforma diluted earnings (loss) per share:
    As reported                                  $       0.49    $       (0.46)
    Proforma                                     $       0.46    $       (0.51)

The  weighted  average  fair value of options  granted  during 1997 and 1996 was
$1.04 and $1.13, respectively.


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

AMV is a party to several  suits 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
================================================================================

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, 1997, there were 10,602,000 shares of Class A Common Stock and 77,000 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.

On March 9,  1998,  Class A, B and C Warrants  to  purchase  approximately  11.4
million  shares  of Class A Common  Stock  expired.  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  Class A  Common  Stock.  The  Class D  Warrants  also  provide  for such an
adjustment  upon issuance of shares of Class A Common Stock at prices lower than
the market price then in effect other than  issuances  upon  exercise of options
granted to employees, directors and consultants to AMV, or options to be granted
under any AMV stock option plan.

Schedule  of  Outstanding  Stock,  Warrants,   Convertible  Debt  and  Potential
Dilution: The following table summarizes outstanding common stock as of December
31, 1997,  potential  dilution to the outstanding  common stock upon exercise of
warrants  remaining after March 9, 1998 and conversion of convertible  debt, 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>
                                      Number or                                         Proforma
                                   Principal Amount     Class A Common    Exercise or   Proceeds
                                    Outstanding at        Stock After     Conversion    or Debt
    Security                       December 31, 1997      Conversion         Price     Reduction
-----------------------------------------------------------------------------------------------------
<S>                                 <C>                 <C>               <C>        <C>
Common Stock:
   Class A                            10,602,000           10,602,000
   Class B                                77,000               77,000
                                                        -------------

Total currently outstanding                                10,679,000

Warrants (expiration date):

   D (6/30/98-7/31/98)                   275,000              275,000     $ 2.75     $    756,000
   G (2/28/99)                           240,000              240,000       2.00          480,000
   I (7/23/01)                         1,000,000 (A)        1,000,000       2.25        2,250,000
   J (9/30/99)                           300,000              300,000       2.03          608,000
                                                        -------------                ------------

                                                            1,815,000                   4,094,000
                                                        -------------                ------------
Convertible Debt (due date):
   6.75% Notes (4/16/01)            $    900,000              423,000       2.13          900,000
   6.75% Ventek Note (7/23/99)      $  2,250,000            1,000,000       2.25        2,250,000
   Ventek Note (7/23/99)            $  1,529,000 (A)        1,800,000                   1,529,000
                                                        -------------                ------------

                                                            3,223,000                   4,679,000
                                                        -------------                ------------
Potentially outstanding shares and proforma proceeds
   and reduction of debt                                   15,717,000                $  8,773,000
                                                        =============                ============

</TABLE>

(A)  The Company  issued the  $1,529,000  note and Class I Warrant in connection
     with the Ventek  acquisition (see Note 4). The note is payable,  (a) at the
     Company's option, in cash or by delivery of up to 1,800,000 shares of Class
     A Common Stock on the third  anniversary date of the note; or (b) solely in
     cash in the  event AMV  Common  Stock is  delisted  from the  Nasdaq  Stock
     Market.  The Warrant  vests 25% per year through 1999 if sales and earnings
     objectives  are achieved.  As of December 31, 1997, the first 25% increment
     (for 1996) of the  Warrant  was vested  and the second 25%  increment  (for
     1997) did not vest as the  objectives  were not met.  The second  increment
     will only vest in the future if cumulative goals are achieved.

The proforma  amounts above are for  illustrative  purposes only and exclude the
Class A, B and C Warrants  which expired March 9, 1998.  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,  1997,  AMV had outstanding  options to purchase
3,449,000 shares of Class A Common Stock, 2,957,000 of which are under its stock
option plans (see Note 8).

The existence of these  outstanding  warrants,  options,  and convertible  debt,
including  those  granted or to be granted  under  AMV's stock  option  plans or
otherwise,  and potentially issuable shares pursuant to antidilution  provisions
of warrant  agreements  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 Class A 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 Class A 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 Class A 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  Class A 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.

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 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.

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,
                               ----------------------------------------------------------------------------------
                                         1997                          1996                          1995
                               ----------------------        -----------------------        ---------------------
                                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         $  7,016       11,202        $  (5,260)       10,704        $ 1,115         9,451
Reduction for contingently
   returnable shares as all
   conditions were not
   met as of period end              --         (200)              --            --             --            --
                               --------     --------        ---------      --------        -------      --------
Income (loss) available to
   common shareholders         $  7,016       11,002        $  (5,260)       10,704        $ 1,115         9,451


-----------------------------------------------------------------------------------------------------------------
Basic EPS                                   $   0.64                       $  (0.49)                   $    0.12
-----------------------------------------------------------------------------------------------------------------

Effect of Dilutive Securities:
Note and stock appreciation
   rights agreement                 100        1,800               --            --             --            --
Stock options and warrants           --          663               --            --             --           770
Convertible debt                    252        1,423               --            --             --            --
                               --------     --------        ---------      --------        -------      --------
Income (loss) available to
   common shareholders
   and assumed conversions     $  7,368       14,888        $  (5,260)       10,704        $ 1,115        10,221
                               ========     ========        =========      ========        =======      ========


-----------------------------------------------------------------------------------------------------------------
Diluted EPS                                 $   0.49                       $  (0.49)                    $   0.11
-----------------------------------------------------------------------------------------------------------------
</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.

                                      1997            1996            1995
                                      ----            ----            ----
Number of shares of common
   stock exercisable from:
   Options                           1,135,000       1,120,000         800,000
   Warrants                         13,215,000      13,990,000      14,084,000
   Convertible debt                         --       3,849,000       1,152,000
                                 -------------   -------------   -------------

                                    14,350,000      18,959,000      16,036,000
                                 =============   =============   =============

   Exercise price ranges         $2.00 - $4.94   $2.00 - $4.94   $1.88 - $4.94

On March 9, 1998, the Class A, B and C Warrants to purchase 11,400,000 shares of
common stock expired, and therefore,  will not potentially impact diluted EPS in
future periods.

Basic and diluted earnings (loss) per share presented for income from continuing
operations and loss from discontinued operations for the year ended December 31,
1995 are as follows:

Basic EPS:
Income from continuing operations                 $  0.12
Loss from discontinued operations                   (0.02)
                                                  -------

   Net income                                     $  0.10
                                                  =======

Diluted EPS:
Income from continuing operations                 $  0.11
Loss from discontinued operations                   (0.02)
                                                  -------

   Net income                                     $  0.09
                                                  =======


Note 11 - Discontinued Operations
================================================================================

In October 1995, the Company sold the ALS laser operations to Coherent, Inc. for
approximately  $1,052,000 in cash,  which  represented the net book value of the
operation.  Operating  results  for the above  discontinued  business  have been
excluded from the  Consolidated  Statements of Operations to present  separately
the results of continuing operations.  Net sales for ALS for the year ended 1995
were $2,279,000.


Note 12 - Business Segment and Geographic Information
================================================================================

The Company is engaged in one principal  activity--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:

                             1997                1996             1995
                             ----                ----             ----
Net sales:
     United States      $  29,416,000       $  21,506,000     $ 19,394,000
     Europe                 2,558,000           8,432,000               --
                        -------------       -------------     ------------

                        $  31,974,000       $  29,938,000     $ 19,394,000
                        =============       =============     ============
Net income (loss):
     United States      $   2,229,000 (D)   $      75,000 (A) $    942,000 (E)
     Europe                 4,787,000 (C)      (5,335,000)(B)           --
                        -------------       -------------     ------------

                        $   7,016,000       $  (5,260,000)    $    942,000
                        =============       =============     ============
Identifiable assets:
     United States      $  24,294,000       $  20,784,000     $ 17,628,000
     Europe                   941,000          10,154,000               --
                        -------------       -------------     ------------

                        $  25,235,000       $  30,938,000     $ 17,628,000
                        =============       =============     ============

(A) Includes charges of $647,000 for the write-off of deferred royalty expense.
(B) Includes a charge of $4,915,000 for the write-off of acquired in-process
    technology.
(C) Includes a gain of $4,989,000 from the sale of Pulsarr.
(D) Includes a charge of $233,000 for the write-off of deferred debt issue costs
    associated with the early retirement of debt.
(E) Includes a gain of $732,000 from arbitration.

Included  in  United  States  sales  are  export  sales of  $7,999,000  in 1997,
$7,504,000 in 1996 and $5,117,000 in 1995.

The Company sold equipment to a single  customer  totaling 14% of sales in 1997,
to  two different  customers  totaling 13% and 12% of sales in 1996,  and to two
different customers totaling 19% and 16% of sales in 1995.


Note 13 - Quarterly Financial Data (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Quarters Ended                        March 31         June 30     September 30      December 31        Total
-------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>            <C>               <C>            <C>
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


Fiscal 1996
Sales                            $    3,613,000    $   6,419,000  $   10,097,000    $   9,809,000  $  29,938,000
Gross profit                          1,479,000        2,598,000       5,094,000        4,973,000     14,144,000
Net income (loss)                    (6,797,000)        (900,000)        985,000        1,452,000     (5,260,000)
Basic earnings (loss) per share           (0.69)           (0.08)           0.09             0.13          (0.49)
Diluted earnings (loss) per share         (0.69)           (0.08)           0.07             0.09          (0.49)

</TABLE>

                                      F-21

<PAGE>

Advanced Machine Vision Corporation
Schedule VIII - Valuation and Qualifying Accounts
For the Years Ended December 31, 1995, 1996 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                     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, 1995:
    Allowance for excess and obsolete
    inventory                               $          --  $     305,000  $          --  $          --   $     305,000
                                            =============  =============  =============  =============   =============

    Allowance for doubtful accounts         $     165,000  $          --  $          --  $          --   $     165,000
                                            =============  =============  =============  =============   =============

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
                                            =============  =============  =============  =============   =============
</TABLE>

                                      F-22