SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


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


                                    FORM 10-Q


                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999


                           Commission File No. 0-20097
                           ---------------------------


                       ADVANCED MACHINE VISION CORPORATION


                            A California Corporation
                   IRS Employer Identification No. 33-0256103
                             3709 Citation Way #102
                                Medford, OR 97504
                             Telephone: 541-776-7700




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 |_|

On June 30, 1999,  registrant had 12,821,884 shares of Class A Common Stock, and
47,669 shares of Class B Common Stock, all no par value, issued and outstanding.






                            Exhibit Index at Page 19

<PAGE>

                                      INDEX


                                                                     Page Number
                                                                     -----------

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

          Consolidated Balance Sheets..........................................1
          Consolidated Statements of Operations - Three Months.................2
          Consolidated Statements of Operations - Six Months...................3
          Consolidated Statement of Shareholders' Equity.......................4
          Consolidated Statements of Cash Flows................................5
          Notes to Unaudited Consolidated Financial Statements.................6

Item 2.   Management's Discussion and Analysis of Financial
             Condition and Results of Operations..............................10


PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K....................................19

          Signature...........................................................22

<PAGE>

                          PART I. FINANCIAL INFORMATION
                          -----------------------------


Item 1.  Financial Statements
-----------------------------

--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Balance Sheets
--------------------------------------------------------------------------------

                                                  June 30,         December 31,
                                                    1999               1998
                                                 (unaudited)        (audited)
                                                 -----------        ---------

                                     ASSETS
Current assets:
     Cash and cash equivalents                 $   2,886,000      $   4,423,000
     Accounts receivable - net                     5,336,000          4,073,000
     Inventories                                   9,205,000          7,379,000
     Prepaid expenses                                349,000            181,000
     Current deferred tax asset                    1,175,000          1,175,000
                                               -------------      -------------

              Total current assets                18,951,000         17,231,000
Property, plant and equipment - net                4,976,000          5,274,000
Intangible assets - net                            4,534,000          4,894,000
Deferred tax asset                                   925,000            925,000
Other assets                                         997,000          1,515,000
                                               -------------      -------------

                                               $  30,383,000      $  29,839,000
                                               =============      =============


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                          $   2,209,000      $     984,000
     Accrued liabilities                             568,000            997,000
     Customer deposits                             2,123,000          1,151,000
     Accrued payroll                                 564,000            761,000
     Warranty reserve                                401,000            448,000
     Current portion of notes payable                 40,000            790,000
                                               -------------      -------------

              Total current liabilities            5,905,000          5,131,000
                                               -------------      -------------
Notes payable, less current portion                6,314,000          7,862,000
                                               -------------      -------------
Commitments and contingencies
Shareholders' equity:
     Preferred stock                               2,579,000          2,579,000
     Common stock:
         Class A and B - 12,869,553 shares
              issued and outstanding at
              June 30, 1999 and
              December 31, 1998                   26,103,000         24,329,000
     Common stock warrants                                --            110,000
     Additional paid in capital                    5,020,000          4,910,000
     Accumulated deficit                         (15,478,000)       (15,112,000)
     Cumulative translation adjustment               (60,000)            30,000
                                               -------------      -------------

              Total shareholders' equity          18,164,000         16,846,000
                                               -------------      -------------

                                               $  30,383,000      $  29,839,000
                                               =============      =============


     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>

--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Operations - Three Months
--------------------------------------------------------------------------------

                                                   Three Months Ended June 30,
                                                  -----------------------------
                                                      1999             1998
                                                      ----             ----
                                                          (unaudited)


Net sales                                         $  7,198,000  $     9,087,000
Cost of sales                                        2,965,000        4,052,000
                                                  ------------     ------------

Gross profit                                         4,233,000        5,035,000
                                                  ------------     ------------

Operating expenses:
     Selling and marketing                           1,582,000        1,613,000
     Research and development                        1,426,000        1,031,000
     General and administrative                        754,000        1,032,000
     Amortization of intangible assets                 180,000          173,000
                                                  ------------     ------------

                                                     3,942,000        3,849,000

Income from operations before other
     income and expenses                               291,000        1,186,000

Other income and expense:
     Investment and other income                        64,000           49,000
     Interest expense                                 (137,000)        (177,000)
                                                  ------------     ------------

Income before income taxes                             218,000        1,058,000

Provision for income taxes                               8,000           42,000
                                                  ------------     ------------

Net income                                        $    210,000     $  1,016,000
                                                  ============     ============

Earnings per share (Note 5):
     Basic                                        $      0.02      $       0.10
                                                  ===========      ============
     Diluted                                      $      0.02      $       0.08
                                                  ===========      ============

Average shares outstanding -
     assuming dilution                             13,729,000        14,677,000
                                                 ============      ============


     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>

--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Operations - Six Months
--------------------------------------------------------------------------------

                                                    Six Months Ended June 30,
                                                  ----------------------------
                                                      1999             1998
                                                      ----             ----
                                                           (unaudited)


Net sales                                         $ 12,356,000     $ 16,190,000
Cost of sales                                        5,469,000        7,822,000
                                                  ------------     ------------

Gross profit                                         6,887,000        8,368,000
                                                  ------------     ------------

Operating expenses:
     Selling and marketing                           2,529,000        2,617,000
     Research and development                        2,686,000        2,181,000
     General and administrative                      1,548,000        1,741,000
     Amortization of intangible assets                 360,000          347,000
                                                  ------------     ------------

                                                     7,123,000        6,886,000

Income (loss) from operations before
     other income and expense                         (236,000)       1,482,000

Other income and expense:
     Investment and other income                       131,000          111,000
     Interest expense                                 (277,000)        (345,000)
                                                  ------------     ------------

Income (loss) before income taxes                     (382,000)       1,248,000

Provision for (benefit from) income taxes              (16,000)          50,000
                                                  ------------     ------------

Net income (loss)                                 $   (366,000)    $  1,198,000
                                                  ============     ============

Earnings (loss) per share (Note 5):
     Basic                                        $      (0.03)    $       0.11
                                                  ============     ============
     Diluted                                      $      (0.03)    $       0.09
                                                  ============     ============

Average shares outstanding -
     assuming dilution                             11,922,000        14,676,000
                                                  ===========      ============


     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>

--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statement of Shareholders' Equity
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                            Accumulated
                                                                                                             Other Com-     Com-
                                                                                   Additional                prehensive  prehensive
                      Series B Preferred Stock       Class A and B Common Stock     Paid in     Accumulated    Income      Income
                          Shares     Amount      Shares       Amount    Warrants    Capital       Deficit      (Loss)      (Loss)
                          -------  ----------  ----------  -----------  ---------  ----------  -------------  --------   ---------

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

Conversion of note
     payable                   --          --   1,800,000    1,774,000         --          --            --         --
Issuance of restricted
     stock                     --          --     350,000           --         --          --            --         --
Cancellation/expiration
     of warrants               --          --          --           --   (110,000)    110,000            --         --
Translation adjustment         --          --          --           --         --          --            --    (90,000)  $ (90,000)
Net loss                       --          --          --           --         --          --      (366,000)        --    (366,000)
                          -------  ----------  ----------  -----------  ---------  ----------  ------------   --------   ---------

Balance,
     June 30, 1999        119,106  $2,579,000  12,870,000  $26,103,000  $      --  $5,020,000  $(15,478,000)  $(60,000)
                          =======  ==========  ==========  ===========  =========  ==========  ============   ========
Comprehensive loss                                                                                                       $(456,000)
                                                                                                                         =========

</TABLE>


          See Accompanying Notes to Consolidated Financial Statements.

<PAGE>

--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                        Six Months Ended June 30,
                                                                       ----------------------------
                                                                          1999              1998
                                                                          ----              ----
                                                                               (unaudited)
<S>                                                                    <C>              <C>
Cash flows from operating activities:
     Net income (loss)                                                 $   (366,000)    $  1,198,000
     Adjustments to reconcile net income to net cash
         (used in) provided by operating activities:
         Depreciation and amortization                                      744,000          674,000
         Changes in assets and liabilities:
              Accounts receivable                                        (1,263,000)      (1,264,000)
              Inventories                                                (1,826,000)        (797,000)
              Prepaid expenses and other assets                             348,000         (349,000)
              Accounts payable, accrued liabilities, customer
                  deposits, accrued payroll and warranty reserve          1,681,000          162,000
                                                                       ------------     ------------

                  Net cash (used in) operating activities                  (682,000)        (376,000)
                                                                       ------------     ------------

Cash (used in) investing activities:
     Purchases of property and equipment                                    (86,000)        (962,000)
                                                                       ------------     ------------

                  Net cash (used in) investing activities                   (86,000)        (962,000)
                                                                       ------------     ------------

Cash (used in) provided by financing activities:
     Notes payable to bank and others, net                                 (769,000)         291,000
     Proceeds from exercise of stock options                                     --            7,000
                                                                       ------------     ------------

                  Net cash (used in) provided by financing activities      (769,000)         298,000
                                                                       ------------     ------------

Net (decrease) in cash                                                   (1,537,000)      (1,040,000)

Cash and cash equivalents, beginning of the period                        4,423,000        6,045,000
                                                                       ------------     ------------

Cash and cash equivalents, end of period                               $  2,886,000     $  5,005,000
                                                                       ============     ============

</TABLE>


     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>

================================================================================
              ADVANCED MACHINE VISION CORPORATION AND SUBSIDIARIES

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

Note 1.  Principles of Consolidation
------------------------------------

In the opinion of the  management of Advanced  Machine Vision  Corporation  (the
"Company" or "AMV"), the accompanying  consolidated financial statements,  which
have not been audited by independent  accountants  (except for the balance sheet
as of  December  31,  1998),  reflect  all  adjustments  (consisting  of  normal
recurring accruals) necessary to present fairly the Company's financial position
at June 30,  1999,  and December 31,  1998,  the results of  operations  for the
three-  and  six-month  periods  ended  June 30,  1999 and  cash  flows  for the
six-month  period  ended June 30, 1999.  The  financial  statements  include the
accounts of the Company and its four  wholly-owned  subsidiaries,  Applied Laser
Systems,  Inc., SRC VISION,  Inc. ("SRC"),  ARC Netherlands BV and Ventek,  Inc.
("Ventek"). The Company's current operating subsidiaries are SRC and Ventek.

Certain  reclassifications  have been made to the 1998  financial  statements to
conform  to  the  financial   statement   presentation  for  fiscal  1999.  Such
reclassifications  had no effect  on the  Company's  results  of  operations  or
shareholders' equity.

Certain  notes and other  information  are  condensed  or omitted in the interim
financial  statements  presented in this  Quarterly  Report on Form 10-Q.  These
financial  statements  should be read in  conjunction  with the  Company's  1998
annual report on Form 10-K.

Note 2.  Nature of Operations
-----------------------------

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 plastic.
The Company sells its products throughout the world.

Note 3.  Financing
------------------

In April 1996, the Company borrowed $3,400,000 pursuant to a convertible secured
note,  $900,000 of which remains outstanding at June 30, 1999. The nominal 6.75%
interest rate may be adjusted upward on each  anniversary date (April 13) of the
note if the market price of the  Company's  Common Stock fails to reach  certain
levels.  In April 1999,  the interest  rate was adjusted to 10.75%.  The maximum
possible coupon  interest rate is 11.25% if none of the market price  thresholds
are met. The note is secured by 54% of the stock of ARC Netherlands BV. The note
is convertible into the Company's Common Stock at $2.125 per share.

In July 1996, 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 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 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.  All three notes are
secured by all of the issued and outstanding shares of Ventek.

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

In April 1998, AMV entered into a credit relationship with Bank of America NT&SA
("BofA") for a line of credit and a new mortgage.  The line of credit  agreement
provided that AMV could borrow the lesser of $2,000,000 or the collateral  value
of pledged marketable securities, and had an April 30, 1999 expiration date (see
below for a  description  of a  replacement  credit  facility).  The  $3,000,000
mortgage  replaced  the 9.75%  $2,680,000  prior  mortgage,  provides  for fixed
interest at 8.3% and is due on May 1, 2008.

In April  1999,  the Company  entered  into a new line of credit  Business  Loan
Agreement with BofA for two loan  facilities.  The first provides for borrowings
of up to  $2,000,000,  interest at prime rate plus .5% or BofA's  offshore  rate
plus 2.35%, and is secured by accounts receivable,  inventory and equipment. The
second  provides  for  borrowings  of up to $500,000 for letters of credit to be
secured by cash instruments. Both facilities expire April 30, 2000.

Note 4.  Equity Transactions; Reduction in Outstanding Securities; Effect of
         Remaining Warrants, Options and Convertible Securities; Stock Rights
         Plan
-----------------------------------------------------------------------------

In October 1998, the Company sold 119,106 shares of Series B Preferred  Stock to
FMC Corporation ("FMC") for $2,620,000.  The preferred stock is convertible into
1,191,000  shares  of  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 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 of the AMV common stock or $2.20 per
share.

In January 1997, 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.  The
total  number of shares of Common Stock  issuable  under the 1997 Plan shall not
exceed 2,000,000. Under the 1997 Plan, there are currently 200,000 shares issued
to  three  key  employees  of the  Company.  The  shares  cannot  be  traded  or
transferred  unless (i) the employee  remains in the employ of the Company until
January  10,  2000 and (ii) the  employee  makes a payment of $1.80 per share to
AMV.  If any of the  conditions  are not met,  the stock will be  forfeited  and
returned to the Company.

Between March 8, 1997 and February 28, 1999,  188,400 Unit Purchase  Options (to
acquire  1,696,000  shares of stock)  originally  issued in connection  with the
Company's  1992 initial  public  offering,  135,000  Laidlaw  warrants,  300,000
Gerinda  warrants,  the  Company's  Class  A,  B  and  C  Warrants  to  purchase
approximately 11.4 million shares,  275,000 Class D Warrants and 240,000 Class G
Warrants expired unexercised.

In August 1997,  the Company  purchased  1,001,640  shares of its Class A Common
Stock,  300,000  Class F Warrants  and  340,000  Class H  Warrants  in a private
transaction for $1.9 million.

In September 1997, the Company purchased at par $2.5 million of the $3.4 million
outstanding 6.75% Convertible Note.

In June 1998, the Class I Warrant,  originally issued in the Ventek acquisition,
was amended to reduce the number of shares issuable pursuant to the warrant from
1,000,000  to  250,000.  In  connection  with  the  February  1999  Ventek  debt
restructuring  (see Note 3), the remaining  Class I Warrant was canceled and the
Company issued 350,000  restricted  shares of Class A Common Stock.  The 350,000
shares  cannot be traded or  transferred  unless  $1.25 per share is paid to the
Company between February 1, 2000 and January 31, 2001. Absent such payment,  the
shares shall be forfeited and returned to the Company for cancellation.

Schedule of Outstanding Stock,  Warrants and Potential  Dilution:  The following
table  summarizes,  as of June 30, 1999,  outstanding  common  stock,  potential
dilution to the outstanding common stock upon exercise of warrants or conversion
of convertible  debt, and proforma  proceeds or debt reduction from the exercise
or conversion.  The table also sets forth the exercise or conversion  prices and
warrant expiration and debt due dates.
<TABLE>
<CAPTION>
                                                                                       Proforma
                                  Number or Principal       Common     Exercise or     Proceeds
                                  Amount Outstanding      Stock After  Conversion       or Debt
          Security                 at June 30, 1999       Conversion      Price        Reduction
-------------------------------   -------------------   -------------  -----------  ------------
<S>                                  <C>                <C>              <C>        <C>
Outstanding Common Stock                                  12,870,000
Warrants (expiration date):
    J (9/30/99)                           300,000            300,000     $ 2.03     $    609,000
                                                        ------------                ------------

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

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

Potentially outstanding shares
    and proforma proceeds
    or reduction of debt                                  15,784,000                $  3,759,000
                                                        ============                ============

</TABLE>

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

In  addition  to  the  FMC  option  described  above,  on June 30, 1999, AMV had
outstanding  options to purchase 3,250,000 shares of Common Stock,  2,616,000 of
which are under its stock option plans.

The existence of these outstanding  warrants,  options, and convertible debt and
preferred stock,  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 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 Common  Stock at the
time such options and warrants are exercised or debt is converted.  For the life
of the warrants, options,  convertible debt and preferred stock, the holders are
given, at little or no cost, the opportunity to profit from a rise in the market
price of their 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.

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.

Note 5.  Earnings (Loss) Per Share
----------------------------------

The  computation  of earnings  (loss) per share is  presented  in the  following
tables:
<TABLE>
<CAPTION>
                                                           For the Three Months Ended June 30,
                                        -------------------------------------------------------------------------
                                                      1999                                    1998
                                        ---------------------------------       ---------------------------------
                                            Income              Shares              Income              Shares
                                            ------              ------              ------              ------
<S>                                     <C>                 <C>                 <C>                <C>
Calculation of EPS
Income available to
   common shareholders                  $     210,000          12,870,000       $   1,016,000         10,715,000
Reduction for contingently
   returnable shares as all conditions
   were not met as of period end                   --            (550,000)                 --           (200,000)
                                        -------------       -------------       -------------      -------------
Income available to
   common shareholders                  $     210,000          12,320,000       $   1,016,000         10,515,000
                                        =============       =============       =============      =============

-----------------------------------------------------------------------------------------------------------------
Basic earnings per share                $        0.02                           $       0.10
-----------------------------------------------------------------------------------------------------------------

Effect of Dilutive Securities:
Preferred stock                         $          --           1,191,000       $          --                 --
Stock options and warrants                         --             218,000                  --            938,000
Note and stock appreciation
   rights agreement                                                    --              25,000          1,800,000
Convertible debt                                                       --              63,000          1,424,000
                                        -------------       -------------       -------------      -------------
Income available to
   common shareholders and
   assumed conversions                  $     210,000          13,729,000       $   1,104,000         14,677,000
                                        =============       =============       =============      =============

-----------------------------------------------------------------------------------------------------------------
Diluted earnings per share              $        0.02                           $       0.08
-----------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
                                                            For the Six Months Ended June 30,
                                        -------------------------------------------------------------------------
                                                      1999                                    1998
                                        ---------------------------------       ---------------------------------
                                         Income (Loss)          Shares              Income              Shares
                                         -------------          ------              ------              ------
<S>                                     <C>                 <C>                 <C>                <C>
Calculation of EPS
Income (loss) available to
   common shareholders                  $    (366,000)         12,472,000       $   1,198,000         10,714,000
Reduction for contingently
   returnable shares as all conditions
   were not met as of period end                   --            (550,000)                 --           (200,000)
                                        -------------       -------------       -------------      -------------
Income (loss) available to
   common shareholders                  $    (366,000)         11,922,000       $   1,198,000         10,514,000
                                        =============       =============       =============      =============

-----------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share         $       (0.03)                          $       0.11
-----------------------------------------------------------------------------------------------------------------

Effect of Dilutive Securities:
Stock options and warrants              $          --                  --       $          --            938,000
Note and stock appreciation
   rights agreement                                --                  --              50,000          1,800,000
Convertible debt                                   --                  --             126,000          1,424,000
                                        -------------       -------------       -------------      -------------
Income (loss) available to
   common shareholders and
   assumed conversions                  $    (366,000)         11,922,000       $   1,374,000         14,676,000
                                        =============       =============       =============      =============

-----------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share       $       (0.03)                          $       0.09
-----------------------------------------------------------------------------------------------------------------
</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 for the six-month  periods  because  their
exercise  prices were greater  than the average  market price of common stock or
the inclusion of such shares would be antidilutive, are listed below.

                                                           For Six Months
                                                           Ended June 30,
                                                    ----------------------------
                                                         1999           1998
                                                    -------------   ------------
Number of shares of common stock exercisable from:
   Options                                              3,250,000        541,000
   Warrants                                               300,000        375,000
   Convertible debt                                     1,424,000             --
                                                    -------------  -------------

                                                        4,974,000        916,000

   Exercise price ranges                            $1.00 - $3.00  $2.19 - $4.94


Note 6.  Inventories
--------------------

Inventories  are  stated at the lower of cost or market  and  include  material,
labor and related manufacturing  overhead.  The Company determines cost based on
the first-in, first-out (FIFO) method. Inventories consisted of:

                                                      June 30,         Dec. 31,
                                                        1999            1998
                                                   -------------   -------------

     Raw materials                                 $   3,698,000   $   2,837,000
     Work-in-process                                   1,662,000       1,563,000
     Finished goods                                    3,845,000       2,979,000
                                                   -------------   -------------

                                                   $   9,205,000   $   7,379,000
                                                   =============   =============


Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations
------------------------------------------------------------------------

Our backlog at June 30, 1999 was  $5,277,000  compared to  $4,991,000 as of June
30, 1998.

Results of Operations - Comparison  between three months ended June 30, 1999 and
June 30, 1998
-------------
Sales for the three months ended June 30, 1999 ("Q2 1999") were $7,198,000, down
21% when  compared to sales for the three months ended June 30, 1998 ("Q2 1998")
of $9,087,000.  The  $1,889,000  decrease in sales is due to lower sales in food
processing and plastic sorting applications  partially offset by higher sales in
softwood veneer production applications.

Gross profit  decreased by $802,000 to  $4,233,000  in Q2 1999 when  compared to
$5,035,000  of gross  profit in Q2 1998.  The decrease in gross profit is due to
the decrease in sales. Gross profit as a percentage of sales was 59% in 1999 and
55% in 1998.  The increase in gross profit as a percentage  of sales is due to a
larger percentage of higher-margin products included in Q2 1999 sales.

Selling and  marketing  expense  decreased by $31,000 in Q2 1999 from Q2 1998 to
$1,582,000  amounting  to 22% of sales in Q2 1999.  Similar  expenses in Q2 1998
were $1,613,000, or 18% of sales. The increase in selling and marketing expenses
as a percentage of sales is due to higher  commissions  as well as fixed selling
expenses spread over a lower sales base.

Research and development  expenses were $1,426,000 and $1,031,000 in Q2 1999 and
Q2 1998,  or 20% and 11% of sales,  respectively.  The  increase in research and
development  expenses is related to the continuing  development of the Company's
new  generation  of  processor  as  well as new  products  for  softwood  veneer
production applications.

General and  administrative  expenses  decreased $278,000 to $754,000 in Q2 1999
from $1,032,000 in Q2 1998.  The decrease is due principally  to lower personnel
costs and professional fees.

The  decrease  in  interest  expense is due to a decrease  in  outstanding  debt
balances.

Net income for Q2 1999 was $210,000 as compared to net income of  $1,016,000  in
Q2 1998.

Results of  Operations -  Comparison  between six months ended June 30, 1999 and
June 30, 1998
-------------
Sales  for the  six  months  ended  June  30,  1999  ("the  1999  Period")  were
$12,356,000,  down 24% when  compared to sales for the six months ended June 30,
1998 ("the 1998 Period") of  $16,190,000.  The decrease is due to lower sales in
food processing,  plastic sorting and agricultural sorting  applications.  These
decreases were partially  offset by higher sales in softwood  veneer  production
applications.

Gross profit  decreased by 18% to $6,887,000 in the 1999 Period when compared to
$8,368,000 of gross profit in the 1998 Period.  In 1999, gross profit was 56% of
sales as compared to 52% in 1998.  The  increase in gross profit as a percentage
of sales is due to a larger  percentage of  higher-margin  products  included in
1999 sales.

Selling  and  marketing  expense  decreased  3% in the 1999 Period from the 1998
Period to $2,529,000  amounting to 20% of sales in 1999. Similar expenses in the
1998  Period  were  $2,617,000,  or 16% of sales.  The  increase  in selling and
marketing  expenses as a percent of sales is the result of higher commissions as
well as fixed selling expenses spread over a lower sales base.

Research and  development  expenses were  $2,686,000  and $2,181,000 in the 1999
Period and the 1998 Period, or 22% and 13% of sales, respectively.  The increase
in  research  and  development  expense  in 1999 is  related  to the  continuing
development of the Company's new generation of processor as well as new products
for softwood veneer production applications.

General and administrative expenses decreased $193,000 to $1,548,000 in the 1999
Period  from  $1,741,000  in  the  1998  Period.  The  decrease  in  general and
administrative  expenses  is  due  principally  to  lower  personnel  costs  and
professional fees.

The  decrease  in  interest  expense is due to a decrease  in  outstanding  debt
balances.

The net loss for 1999 was $366,000 as compared to a net income of  $1,198,000 in
1998.

Liquidity and Capital Resources
-------------------------------
Our  cash  balance  and  working  capital  were   $2,886,000  and   $13,046,000,
respectively,  at June 30,  1999 as  compared  to  $4,423,000  and  $12,100,000,
respectively,   at  December  31,  1998.   Our  long-term   debt   decreased  by
approximately   $2.3   million   primarily  as  a  result  of  the  Ventek  debt
restructuring.  Equity at June 30, 1999  increased from December 31, 1998 due to
the Ventek debt restructuring, offset by a $366,000 net loss for 1999.

During 1999, net cash used in operating  activities totaled $682,000 compared to
cash used for operating  activities of $376,000 in 1998.  The 1999 usage was due
to the  $366,000  net loss,  an  increase in  accounts  receivable  due to large
shipments  in June and an  increase  in  inventories  due to an  increase in the
number of systems that are installed in customer plants on a trial basis.  These
increases were partially offset by an increase in current liabilities.  The 1998
usage was due principally to an increase in accounts receivable, inventories and
prepaid and other assets.

Cash used in investment activities totaled $86,000 in 1999 compared to cash used
in investment activities of $962,000 in 1998.  We  have  no material commitments
for capital expenditures at June 30, 1999.

Cash used in financing  activities  totaled $769,000 in 1999 as compared to cash
generated  from  financing  activities of $298,000 in 1998. In February 1999, we
paid $750,000 of a $1,000,000 note and issued  1,800,000  shares of Common Stock
in payment of a  $1,529,000  note as part of the Ventek debt  restructuring.  In
1998, we  refinanced  our mortgage  payable  increasing  the amount  borrowed to
$3,000,000 from $2,680,000 (see Note 3 to Consolidated Financial Statements).

In October 1998, we received  $2,620,000 from FMC Corporation for 119,106 shares
of newly issued Series B Preferred Stock (see Note 4 to  Consolidated  Financial
Statements).

In April  1999,  we  entered  into a Business  Loan  Agreement  providing  up to
$2,500,000 of working capital  financing (see Note 3 to  Consolidated  Financial
Statements).

We  believe that we have sufficient  cash to enable us to sustain our operations
and to adequately fund the cash flow expected to be used in operating activities
for the next twelve months.

Cautionary Statements and Risk Factors
--------------------------------------
In our capacity as Company management,  we may from time to time make written or
oral  forward-looking  statements  with respect to our  long-term  objectives or
expectations  which may be  included  in our  filings  with the  Securities  and
Exchange Commission, reports to stockholders and information provided in our 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.  We wish to caution you 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,  we are  calling  to your  attention  important
factors  that could  affect our  financial  performance  and could cause  actual
results for future periods to differ  materially from any opinions or statements
expressed with respect to future periods in any current statements.

The  following  list  of  important  factors  may not be all  inclusive,  and we
specifically  decline  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 our  ability to achieve  expected  operating  results  and growth  plan goals
and/or affect the market price of our stock are:

   * A history of losses and negative cash flow.
   * Fluctuations in quarterly operating results and seasonality in certain of
     our markets.
   * Rapid technological change in our markets and the need for new product
     development.
   * Market acceptance of our new products.
   * Our dependence on certain markets and the need to expand into new markets.
   * The lengthy sales cycle for our products.
   * Our highly competitive marketplace.
   * The dependence on certain suppliers.
   * The risks associated with dependence upon significant customers and
     reliance on certain distribution channels.
   * 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.
   * Our ability to protect our 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.
   * Our inability or our suppliers' or customers' inabilities 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 and in certain
fiscal quarters  thereafter,  we experienced  losses and negative operating cash
flow. We believe that we may operate at a negative cash flow for certain periods
in the future due to (a) the need to fund certain development projects, (b) cash
required to enter new market areas,  (c) irregular  bookings by customers due to
seasonality  or  economic  downturns  in some  markets and the  relatively  high
per-unit  cost of our  products  which may cause  fluctuations  in  quarterly or
yearly  revenues,  and (d) cash required for the  repayment of debt,  especially
$2.5  million  due in July  2000.  If we are  unable  to  consistently  generate
sustained  positive  cash flow from  operations,  we must rely on debt or equity
financing.

Although  we  achieved  profitability  in 1995,  1997 and 1998,  there can be no
assurance as to future profitability on a quarterly or annual basis.

Fluctuations in Quarterly  Operating Results;  Seasonality:  We have 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  our  control.  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 us or our  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 our business and operating results.  Moreover, due to
the  relatively  fixed  nature of many of our  costs,  including  personnel  and
facilities  costs,  we  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 our results of  operations  for that
quarter.  For example, a significant  portion of our quarterly net sales depends
upon sales of a relatively small number of high-priced systems. Thus, changes in
the  number of 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 our machine vision systems' average selling
price changes,  the addition or cancellation  of sales may exacerbate  quarterly
fluctuations in revenues and operating results.

Our  operating  results  may also be affected by certain  seasonal  trends.  For
example,  we 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. We expect these patterns to
continue.

Rapid Technological  Change;  Product  Development:  The markets for our machine
vision  products are  characterized  by rapidly  changing  technology,  evolving
industry standards and frequent new product introductions and enhancements.  For
example,  we believe that the 1995  introduction by Key Technology,  Inc. of its
new line of vision  sorting  equipment  adversely  affected our bookings in late
1995  and  1996.  Sales  of our  products  depend  in  part  on  the  continuing
development and deployment of new technology and services and applications.  Our
success will depend to a significant extent upon our ability to enhance existing
products and develop new products that gain market acceptance. We cannot be sure
that we will be  successful  in  selecting,  developing  and  manufacturing  new
products or enhancing  existing products on a timely or cost-effective  basis or
that products or  technologies  developed by others will not render our products
non-competitive or obsolete.  Moreover,  we may encounter  technical problems in
connection   with  product   development   that  could  result  in  the  delayed
introduction of new products or product enhancements.

Market Acceptance of New Products: Our future operating results will depend upon
our ability to successfully introduce and market, on a timely and cost-effective
basis,  new products and  enhancements  to existing  products.  We are currently
marketing a new generation of high-speed  software and digital signal processing
technology  designed to significantly  improve system  performance.  In 1998 and
1999, we placed machines  incorporating  the new technology at several  customer
locations as trial  units.  Converting  these  systems to sales will depend upon
completion of product development and ultimate  acceptance by the customers.  We
cannot be sure that a market for these systems 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: Our future success
and growth  depends 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 our 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 our results of  operations.  We
also intend to expand the marketing of our 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 our 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 our growth rate. We
may not be able to successfully  penetrate  additional food and non-food markets
or expand further in foreign markets.

Lengthy  Sales  Cycle:  The  marketing  and sales cycle for our  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 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 our products are highly competitive.  Several years
ago,  a major  competitor  introduced  a new  optical  sorter  product  that has
increased the competition that we face. 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 our
competitors may have substantially greater financial,  technical,  marketing and
other  resources  than we have.  Important  competitive  factors in our  markets
include price, performance,  reliability, customer support and service. Although
we believe that we currently compete  effectively with respect to these factors,
we may not be able to compete effectively in the future.

Dependence Upon Certain Suppliers: Certain key components and subassemblies used
in our products are  currently  obtained from sole sources or a limited group of
suppliers,  and we do not have any  long-term  supply  agreements  to  ensure an
uninterrupted supply of these components.  Although we seek 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 our results of  operations  and damage
customer  relationships.  The purchase of certain of the components  used in our
products  require  an  eight-  to  twelve-week   lead  time  for  delivery.   An
unanticipated  shortage  of such  components  could  delay our ability to timely
manufacture units, damage customer relations, and have a material adverse effect
on us. In addition,  a significant increase in the price of one or more of these
components or subassemblies could negatively affect our results of operations.

Dependence  Upon  Significant   Customers  and  Distribution  Channel:  We  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,  we utilize a single  exclusive  distributor
for our products in North America. In 1998, FMC Corporation became our exclusive
or non-exclusive  sales  representative in much of the United States and in many
areas  in  the  rest  of  the  world.   While  we  strive  to  create  long-term
relationships with our customers, distributors and representatives, there can be
no assurance that they will continue ordering or selling additional  systems. We
may continue to be dependent on a small number of  customers,  distributors  and
representatives, the loss of which would adversely affect our business.

Risk of  International  Sales:  Due to our export  sales,  we are 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 our  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 was 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 our  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
our business strategy, we intend to pursue rapid growth. In March and July 1996,
we acquired  Pulsarr and Ventek.  Pulsarr was  subsequently  sold in May 1997. A
growth  strategy  involving  the  integration  of new  entities  may require the
establishment of additional sales representative and distribution relationships,
expanded  customer  service and  support,  increased  personnel  throughout  the
Company and the continued  implementation  and  improvement of our  operational,
financial  and  management  information  systems.  We may be unable  to  attract
qualified  personnel or to accomplish  other  measures  necessary for successful
integration  of  entities  that may be  acquired  in the future or for  internal
growth, and we may be unable to successfully manage expanded  operations.  As we
expand,  we may from time to time  experience  constraints  that will  adversely
affect our ability to satisfy  customer demand in a timely  fashion.  Failure to
manage growth  effectively could negatively  affect our financial  condition and
results of operations.

Risks  Associated With  Acquisitions:  We may pursue  strategic  acquisitions or
joint ventures in addition to the acquisitions of Pulsarr (subsequently divested
in May 1997) and Ventek as part of our growth strategy.  While we presently have
no  understandings,  commitments  or  agreements  with  respect  to any  further
acquisition, we anticipate that one or more potential opportunities may arise 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 may have
an adverse  effect on our  results of  operations  or may result in  dilution to
existing shareholders.  If additional attractive opportunities become available,
we may decide to pursue them actively.

Dependence Upon Key Personnel:  Our success depends to a significant extent upon
the continuing contributions of key management,  technical,  sales and marketing
and other key  personnel.  Except for William J. Young,  our President and Chief
Executive Officer,  Alan R. Steel, our Chief Financial Officer,  Dr. James Ewan,
SRC's President and Chief Executive Officer, and the four former stockholders of
Ventek,  we do not have long-term  employment  agreements or other  arrangements
with employees which would encourage them to remain with the Company. Our future
success also depends upon our 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 our business and operating results.

Intellectual  Property:  Our competitive position may be affected by our ability
to protect  proprietary  technology.  Although we have a number of United States
and foreign patents,  such patents may not provide meaningful protection for our
product innovations. We may experience additional intellectual property risks in
international markets where we may lack patent protection.

Product Liability and Other Legal Claims:  From time to time, we may be involved
in litigation  arising out of the normal course of business,  including  product
liability,  patent and other  legal  claims.  While we have a general  liability
insurance  policy which includes product  liability  coverage up to an aggregate
amount  of $10  million,  we 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  and  diversion  of  effort.  Any
infringement  claims or  litigation  against us could  materially  and adversely
affect our business, operating results and financial condition. If a substantial
product  liability or other legal claim  against us was  sustained  that was not
covered  by  insurance,  there  could  be an  adverse  effect  on our  financial
condition and marketability of the affected products.

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

Possible  Need  for  Additional  Financing:  We may seek  additional  financing;
however, we may not be able to obtain additional financing on terms satisfactory
to us, if at all. Potential increases in the number of outstanding shares of our
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 our ability to negotiate additional debt or equity
financing.

Shareholder  Rights  Plan:  In February  1998,  we  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 our 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 our 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,  we have the
opportunity  to either (a) redeem the rights or (b) 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 our Board of Directors, the offer is inadequate.

In October 1998, FMC acquired  119,106  shares of our 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 our 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
FMC acquired the shares  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,  our
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,
we amended  the  Shareholder  Rights  Plan to permit FMC to purchase on the open
market up to 1,600,000  shares of Common Stock  without  such  purchase  being a
triggering event.

While we are not  aware of any  other  circumstance  that  might  result  in the
acquisition  of a  sufficient  number of shares of our  Common  Stock to trigger
distribution of the Rights,  existence of the Rights could discourage offers for
our stock that may exceed the current  market  price of the stock,  but that the
Board of Directors deems inadequate.

Year 2000  Issues:  We are aware of the  potential  for  industry-wide  business
disruption  which could occur due to problems  related to the "Year 2000" issue.
We believe  we have a prudent  plan in place to  address  this issue  within the
Company and its supply chain. The components of this plan include: an assessment
of internal  systems for modification  and/or  replacement,  communication  with
external  suppliers  to  determine  their  state of  readiness  to  maintain  an
uninterrupted  supply of goods and services to the Company, and an evaluation of
products  sold by us to  customers  as to the  ability of the  products  to work
properly after the turn of the century.

Internal Systems:  Our process  for achieving  Year 2000 compliance for internal
systems is as follows:

     1. Develop an inventory of all internal systems that may be affected by
        Year 2000 issues;

     2. Determine the Year 2000 compliance status of each internal system;

     3. Prioritize the importance of Year 2000 compliance for each internal
        system;

     4. Determine the method to be used to achieve compliance (modify, replace,
        cease use);

     5. Complete the planned action;

     6. Test the system.

We have  completed  the six steps for  internal  systems in use  throughout  the
Company that may be affected by Year 2000 issues. The Company is internally Year
2000-compliant.

Suppliers:  We have initiated a program to survey the Year 2000 readiness of our
major and critical suppliers.  We have sent letters to these suppliers outlining
our  approach   towards  the  Year  2000  issue  and  asking  for  either  their
certification  that their product is Year  2000-compliant or their commitment to
resolve any issues they may have. We have  identified  suppliers that we view as
critical  to our  business.  We have  defined a critical  supplier  as one whose
inability to continue to provide goods and services would have a serious adverse
impact on our ability to produce,  deliver and collect  payment for our product.
To date, we have received responses from nearly all critical  suppliers.  We are
following up on those suppliers who have not responded.

Products:  The main  functionality  of our  products is not affected by the date
function.  Our products shipped subsequent to June 1998 are Year 2000-compliant.
For products  shipped prior to June 1998, we have provided  instructions  to our
customers on how to make our equipment  fully  compliant.  We have contacted all
customers to ensure they have ample time to become fully complaint.

Costs:  Costs  incurred  in our Year 2000  compliance  effort  are  expensed  as
incurred  and  funded  with cash  generated  from  operations.  These  costs are
included in the normal,  recurring  costs incurred for product  development  and
systems  maintenance and are not material to our results of operations,  nor are
they expected to be in the future.  There have been no significant  deferrals of
other information technology projects.

Risks and  Contingency  Plan:  Although we believe we are taking  prudent action
related to the identification and resolution of issues related to the Year 2000,
our assessment is still in progress. We may never be able to know with certainty
whether certain critical suppliers are compliant.  Failure of critical suppliers
to make their  computer  systems  Year  2000-compliant  could result in delaying
deliveries  of products and services to us. If such delays are  extensive,  they
could have a material adverse effect on our business.

The  failure  to  correct  a  material  Year  2000  problem  could  result in an
interruption  in, or a failure of,  certain  normal  business  activities.  Such
failures  could  negatively  affect our  results of  operations,  liquidity  and
financial  condition.  Due to the general uncertainty  inherent in the Year 2000
issue,  resulting  in part from the  uncertainty  of the Year 2000  readiness of
third-party  suppliers,  we are unable to  determine  at this time  whether  the
consequences of Year 2000 failures will have a material impact on our results of
operations, liquidity or financial position. The Year 2000 compliance project is
expected to reduce,  but not eliminate,  our level of uncertainty about the Year
2000 issue and, in particular,  about the Year 2000  compliance and readiness of
its critical  suppliers.  We believe that,  with the completion of the Year 2000
compliance project as scheduled, the possibility of significant interruptions to
normal operations should be reduced.

We continue to evaluate the risks  associated  with potential Year  2000-related
failures.  As we better  understand  the risks within our unique set of internal
systems,  business partners and products, a formal contingency plan to alleviate
the  impact  of  high  potential  or  serious  failures  will be  developed.  We
anticipate  having this  contingency  plan outlined by September  30, 1999.  The
components  of this plan will likely  include raw material  and  finished  goods
inventory  levels,   alternative   suppliers  and  backup  systems.   Until  the
contingency  plan is completed,  we do not possess the information  necessary to
estimate the potential negative impact of Year 2000 compliance issues related to
internal systems, its suppliers, its customers or other parties.

<PAGE>

                           PART II. OTHER INFORMATION
================================================================================


Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------


(a)  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     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)

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

  10.8     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)

  10.9     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)

 10.10     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)

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

 10.12     $1,000,000 Note dated July 24, 1996, between AMV and Ventek. (6)

 10.13     $2,250,000 Convertible Note dated July 24, 1996, between AMV and
           Ventek. (6)

 10.14     $1,125,000 Note dated July 24, 1996, between AMV and Ventek. (6)

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

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

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

 10.18     1997 SRC VISION, Inc. Stock Option Plan and forms of stock option
           agreements. (12)

 10.19     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)

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

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

 10.22     1997 Nonqualified Stock Option Plan and form of option agreement.
           (11)

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

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

 10.25     $250,000 Note dated June 5, 1998 from Rodger A. Van Voorhis to
           Ventek. (15)

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

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

 10.28     1998 Senior Management and Director Stock Purchase Plan. (20)

 10.29     Business Loan Agreement dated April 12, 1999 between AMV and Bank of
           America NT&SA. (21)

    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.

(21)    Filed with the SEC on May 11, 1999 as an exhibit to the Company's Form
        10-Q dated May 11, 1999.

<PAGE>


(b)    Reports on Form 8-K:

None


                                    SIGNATURE
                                    ---------

     Pursuant to the  requirements  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.


     August 6, 1999                                    /s/  Alan R. Steel
-----------------------                            -----------------------------
                                                            Alan R. Steel
                                                      Vice President, Finance
                                                   (Principal Financial and duly
                                                         Authorized Officer)