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 SEPTEMBER 30, 1998


                           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 September 30, 1998, registrant had 10,655,218 shares of Class A Common Stock,
and  64,335  shares  of Class B  Common  Stock,  all no par  value,  issued  and
outstanding.


                            Exhibit Index at Page 18

<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 - Nine Months.......3
             Consolidated Statements of Cash Flows.....................4

             Notes to Unaudited Consolidated Financial Statements......5

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.........................18

             Signature................................................21

<PAGE>

                          PART I. FINANCIAL INFORMATION
                          =============================

Item 1.  Financial Statements
--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                September 30,       December 31,
                                                                    1998               1997
                                                                 (unaudited)         (audited)
                                                                -------------       ------------
<S>                                                            <C>                <C>
                                     ASSETS
                                     ------
Current assets:
     Cash and cash equivalents                                 $   4,285,000      $   6,045,000
     Accounts receivable - net                                     3,550,000          2,711,000
     Inventories                                                   6,563,000          5,181,000
     Prepaid expenses                                                140,000            138,000
                                                               -------------      -------------

              Total current assets                                14,538,000         14,075,000
Property, plant and equipment - net                                5,335,000          4,775,000
Intangible assets - net                                            5,014,000          5,535,000
Other assets                                                       1,185,000            850,000
                                                               -------------      -------------

                                                               $  26,072,000      $  25,235,000
                                                               =============      =============

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

Current liabilities:
     Accounts payable                                          $     948,000      $   1,436,000
     Accrued liabilities                                           1,006,000          1,146,000
     Customer deposits                                               535,000          1,073,000
     Accrued payroll                                               1,205,000            783,000
     Warranty reserve                                                447,000            477,000
     Current portion of notes payable                              3,288,000             27,000
                                                               -------------      -------------

              Total current liabilities                            7,429,000          4,942,000
                                                               -------------      -------------
Notes payable, less current portion                                5,374,000          8,342,000
                                                               -------------      -------------
Commitments and contingencies
Shareholders' equity:
     Common stock:
         Class A and B--10,720,000 and 10,679,000 shares
           issued and outstanding at September 30, 1998
           and December 31, 1997, respectively                    24,330,000         24,285,000
     Common stock warrants                                           110,000          2,197,000
     Additional paid in capital                                    4,910,000          2,823,000
     Accumulated deficit                                         (16,081,000)       (17,354,000)
                                                               -------------      -------------

              Total shareholders' equity                          13,269,000         11,951,000
                                                               -------------      -------------

                                                               $  26,072,000      $  25,235,000
                                                               =============      =============

</TABLE>

     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>

--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Operations - Three Months
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                               Three Months Ended September 30,
                                                               --------------------------------
                                                                   1998              1997
                                                                   ----              ----
                                                                         (unaudited)
<S>                                                            <C>              <C>
Net sales                                                      $  5,546,000     $  5,861,000
Cost of sales                                                     2,667,000        2,832,000
                                                               ------------     ------------

Gross profit                                                      2,879,000        3,029,000
                                                               ------------     ------------

Operating expenses:
     Selling and marketing                                          644,000        1,089,000
     Research and development                                     1,116,000        1,029,000
     General and administrative                                     767,000          581,000
     Amortization of intangible assets                              174,000          174,000
                                                               ------------     ------------

                                                                  2,701,000        2,873,000

Income from operations before other income and expense              178,000          156,000

Other income and expense:
     Investment and other income                                     72,000          106,000
     Interest expense                                              (172,000)        (428,000)
                                                               ------------     ------------

Income before income taxes                                           78,000         (166,000)

Provision for income taxes                                            3,000           (6,000)
                                                               ------------     ------------

Net income                                                     $     75,000     $   (160,000)
                                                               ============     ============

Earnings per share (Note 5):
     Basic                                                     $      0.01      $      (0.01)
                                                               ===========      ============
     Diluted                                                   $      0.01      $      (0.01)
                                                               ===========      ============

Average shares outstanding - assuming dilution                   11,234,000       10,865,000
                                                               ============     ============

</TABLE>

     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>

--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Operations - Nine Months
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                              Nine Months Ended September 30,
                                                                 1998                1997
                                                                 ----                ----
                                                                        (unaudited)


<S>                                                           <C>              <C>         
Net sales                                                     $ 21,736,000     $ 22,805,000
Cost of sales                                                   10,489,000       11,236,000
                                                              ------------     ------------

Gross profit                                                    11,247,000       11,569,000
                                                              ------------     ------------

Operating expenses:
     Selling and marketing                                       2,977,000        3,772,000
     Research and development                                    3,297,000        2,980,000
     General and administrative                                  2,792,000        2,425,000
     Amortization of intangible assets                             521,000          555,000
                                                              ------------     ------------

                                                                 9,587,000        9,732,000

Income from operations before other income and expense           1,660,000        1,837,000

Other income and expense:
     Gain on sale of Pulsarr                                            --        4,989,000
     Investment and other income                                   183,000          275,000
     Interest expense                                             (517,000)      (1,084,000)
                                                              ------------     ------------

Income before income taxes                                       1,326,000        6,017,000

Provision for income taxes                                          53,000           41,000
                                                              ------------     ------------

Net income                                                    $  1,273,000     $  5,976,000
                                                              ============     ============

Earnings per share (Note 5)
     Basic                                                    $      0.12      $       0.53
                                                              ===========      ============
     Diluted                                                  $      0.10      $       0.41
                                                              ===========      ============

Average shares outstanding--assuming dilution                   13,182,000       15,377,000
                                                              ============     ============

</TABLE>

     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>

--------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                Nine Months Ended September 30,
                                                                                -------------------------------
                                                                                    1998              1997
                                                                                    ----              ----
                                                                                          (unaudited)
<S>                                                                             <C>              <C>
Cash flows from operating activities:
     Net income                                                                 $  1,273,000     $  5,976,000
     Adjustments to reconcile net income to net cash
         (used in) provided by operating activities:
         Gain on sale of Pulsarr                                                          --       (4,989,000)
         Charge for deferred debt issue costs                                             --          233,000
         Depreciation and amortization                                             1,051,000          963,000
         Changes in assets and liabilities:
              Accounts receivable                                                   (840,000)        (527,000)
              Inventories                                                         (1,383,000)        (657,000)
              Prepaid expenses and other assets                                     (334,000)        (111,000)
              Accounts payable, short-term borrowings, accrued liabilities,
                  customer deposits, accrued payroll and warranty reserve           (729,000)       2,034,000
                                                                                ------------     ------------

                  Net cash (used in) provided by operating activities               (962,000)       2,922,000
                                                                                ------------     ------------

Cash (used in) provided by investing activities:
     Proceeds from the sale of Pulsarr                                                    --        7,010,000
     Purchases of property and equipment                                          (1,088,000)        (533,000)
                                                                                ------------     ------------

                  Net cash (used in) provided by investing activities             (1,088,000)       6,477,000
                                                                                ------------     ------------

Cash provided by (used in) financing activities:
     Notes payable to bank and others, net                                           282,000       (3,779,000)
     Repurchase of common stock and warrants                                              --       (1,962,000)
     Proceeds from exercise of stock options                                           8,000           14,000
                                                                                ------------     ------------

                  Net cash provided by (used in) financing activities                290,000       (5,727,000)
                                                                                ------------     ------------

Net (decrease) increase in cash                                                   (1,760,000)       3,672,000

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

Cash and cash equivalents, end of period                                        $  4,285,000     $  5,581,000
                                                                                ============     ============

</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,  1997),  reflect  all  adjustments  (consisting  of  normal
recurring accruals) necessary to present fairly the Company's financial position
at September 30, 1998,  and December 31, 1997, the results of operations for the
three- and nine-month  periods ended  September 30, 1998 and 1997 and cash flows
for the  nine-month  periods ended  September  30, 1998 and 1997.  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 its  respective  subsidiary,  Pulsarr  Holding BV ("Pulsarr")
(see Note 6) to its May 6, 1997 disposition date, and Ventek,  Inc.  ("Ventek").
The Company's current operating subsidiaries are SRC and Ventek.

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  1997
annual report on Form 10-K.

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

In February 1994, the Company acquired all of the issued and outstanding capital
stock of SRC for $8.1 million in cash. In March 1996,  the Company  acquired all
of the issued and  outstanding  stock of Pulsarr  for cash of $6.5  million  and
notes payable of $1.3 million (see Note 6 regarding the sale of Pulsarr for $8.4
million in May 1997).  In July 1996,  the  Company  acquired  the  business  and
certain assets of Ventek,  subject to certain  liabilities,  for $5.1 million in
notes  and  other  securities.  The  operations  of each of the  three  acquired
entities  are  included  in  the  consolidated  financial  results  since  their
respective  acquisition  dates,  and  in  the  case  of  Pulsarr,   through  its
disposition date.  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  1995,  the  Company  borrowed  $2,160,000  pursuant  to a  convertible
subordinated  secured  note.  Interest  on the note was 10.25%  and was  payable
semi-annually.  The note was convertible into the Company's Class A Common Stock
at $1.875 per share.  In  connection  with the  borrowing,  the  Company  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 principal amounts of the note
were  converted by the  debtholders  into 344,000 and 133,000  shares of Class A
Common Stock.  The remaining  principal  amount of $1,265,000  was paid in April
1997. In August 1997, the warrants were repurchased by the Company (see Note 4).

In April 1996, the Company borrowed $3,400,000 pursuant to a convertible secured
note. Interest on the note was 6.75% and is payable quarterly. The interest rate
may be adjusted upward on each  anniversary date of the note if the market price
of the Company's  Class A Common Stock fails to reach certain  levels.  In April
1997,  the interest  rate was  adjusted to 9.75%.  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  Class A Common Stock at $2.125 per share. In connection with
the borrowing,  the Company  issued 340,000  warrants to purchase Class A Common
Stock at $2.125 per share.  In August and September  1997, AMV  repurchased  the
warrants  and paid off  $2,500,000  of this note leaving  $900,000  outstanding,
which is due in April 2001 (see Note 4). In conjunction with this early pay-off,
AMV wrote off  $233,000 of deferred  debt  issuance  costs in the quarter  ended
September 30, 1997. 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
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.

In April 1998, AMV entered into a credit relationship with Bank of America NT&SA
for a line of credit ("LOC") and a new mortgage. The LOC Business Loan Agreement
provides that AMV can borrow the lesser of $2,000,000 or the collateral value of
pledged marketable securities, for interest at prime rate or the bank's offshore
rate plus  1.85% and has an April  30,  1999  expiration  date.  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.

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 Class A 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 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.  On  September  25,  1997,  the three key  employees
contributed  back to the  Company  1,800,000  shares  which were  canceled.  The
remaining 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 the  conditions are not met,
the stock will be forfeited and returned to the Company.

Between  March 8, 1997 and July 31,  1998,  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  and  275,000  Class  D  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  was  amended to reduce the number of shares
issuable pursuant to the warrant from 1,000,000 to 250,000.

Schedule of Outstanding Stock,  Warrants and Potential  Dilution:  The following
table summarizes,  as of October 15, 1998,  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                          Proceeds
                                   Amount Outstanding               Stock After      Conversion        or Debt
          Security                 at October 15, 1998              Conversion          Price         Reduction
----------------------------------------------------------------------------------------------------------------
<S> <C>                               <C>                         <C>                  <C>          <C>
Outstanding Common Stock                                            10,720,000
Warrants (expiration date):
    G (2/28/99)                            240,000                     240,000         $   2.00     $    480,000
    I (7/23/01)                            250,000 (A)                 250,000             2.25          563,000
    J (9/30/99)                            300,000                     300,000             2.03          609,000
                                                                  ------------                      ------------

                                                                       790,000                         1,652,000
                                                                  ------------                      ------------
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
                                                                  ------------                      ------------

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

Potentially outstanding shares
    and proforma proceeds
    or reduction of debt                                            15,924,000                      $  6,331,000
                                                                  ============                      ============

</TABLE>

(A)  The Company  issued the  $1,529,000  note and Class I Warrant in connection
     with the Ventek  acquisition (see Note 3). 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 proforma amounts above are for illustrative purposes only. Unless the market
price of AMV's Class A Common  Stock rises  significantly  above the exercise or
conversion  prices,  it is unlikely  that any warrants will be exercised or that
the debt or preferred stock will be converted.

In addition to the FMC option  described  above,  on September 30, 1998, AMV had
outstanding  options  to  purchase  3,720,000  shares  of Class A Common  Stock,
3,089,000 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 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, 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  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.

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.

Note 5.  Earnings Per Share
---------------------------

The computation of earnings per share is presented in the following tables:

<TABLE>
<CAPTION>
                                                        For the Three Months Ended September 30,
                                        -------------------------------------------------------------------------
                                                      1998                                    1997
                                        ---------------------------------       ---------------------------------
                                            Income             Shares              Income              Shares
                                        -------------       -------------       -------------      --------------
<S>                                     <C>                 <C>                 <C>                <C>
Calculation of EPS
Income (loss) available to
   common shareholders                  $      75,000          10,720,000       $    (160,000)        11,065,000
Reduction for contingently
   returnable shares as all conditions
   were not met as of period end                   --            (200,000)                 --           (200,000)
                                        -------------       -------------       -------------      -------------
Income (loss) available to
   common shareholders                  $      75,000          10,520,000       $    (160,000)        10,865,000
                                        =============       =============       =============      =============

----------------------------------------------------------------------------------------------------------------
Basic EPS                               $        0.01                           $      (0.01)
----------------------------------------------------------------------------------------------------------------

Effect of Dilutive Securities:
Stock options                           $          --             714,000       $          --                 --
                                        -------------       -------------       -------------      -------------
Income available to common
   shareholders and assumed
   conversions                          $      75,000          11,234,000       $    (160,000)        10,865,000
                                        =============       =============       =============      =============

----------------------------------------------------------------------------------------------------------------
Diluted EPS                             $        0.01                           $      (0.01)
----------------------------------------------------------------------------------------------------------------


                                                         For the Nine Months Ended September 30,
                                        ------------------------------------------------------------------------
                                                      1998                                    1997
                                        ---------------------------------       --------------------------------
                                            Income             Shares              Income              Shares
                                        -------------       -------------       -------------      -------------
Calculation of EPS
Income (loss) available to
   common shareholders                  $   1,273,000          10,716,000       $   5,976,000         11,382,000
Reduction for contingently
   returnable shares as all conditions
   were not met as of period end                   --            (200,000)                 --           (200,000)
                                        -------------       -------------       -------------      -------------
Income (loss) available to
   common shareholders                  $   1,273,000          10,516,000       $   5,976,000         11,182,000
                                        =============       =============       =============      =============

----------------------------------------------------------------------------------------------------------------
Basic EPS                               $        0.12                           $       0.53
----------------------------------------------------------------------------------------------------------------

Effect of Dilutive Securities:
Stock options and warrants              $          --             866,000       $          --            973,000
Note and stock appreciation
   rights agreement                            75,000           1,800,000              75,000          1,800,000
Convertible debt                                   --                  --             189,000          1,422,000
                                        -------------       -------------       -------------      -------------
Income available to common
   shareholders and assumed
   conversions                          $   1,348,000          13,182,000       $   6,240,000         15,377,000
                                        =============       =============       =============      =============

----------------------------------------------------------------------------------------------------------------
Diluted EPS                             $        0.10                           $       0.41
----------------------------------------------------------------------------------------------------------------
</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.

                                                           September 30,
                                                   -----------------------------
                                                       1998             1997
                                                   -------------   -------------
Number of shares of common stock
   exercisable from:
      Options                                          1,279,500         820,000
      Warrants                                           790,000      13,212,000
                                                   -------------   -------------

                                                       2,069,500      14,032,000
                                                   =============   =============

   Exercise price ranges                           $1.88 - $4.63   $2.03 - $4.94

Note 6.  Acquisition and Sale of 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  of $1.3  million.  This
acquisition was accounted for under the purchase method of accounting.

On May 6, 1997,  the Company sold its Pulsarr  subsidiary to Barco NV of Belgium
for $8.4 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 $5  million  gain on the sale was  largely  a result  of  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.

The condensed  combined  statements of operations,  shown below as  supplemental
information, assume that Pulsarr was sold at the beginning of 1997. However, the
proforma  combined  balances are not  necessarily  indicative of balances  which
would have  resulted  had the  divestiture  occurred as of the  beginning of the
nine-month period ending September 30, 1997.  Condensed  combined  statements of
operations are presented below:

                                                 Nine Months Ended September 30,
                                                 -------------------------------
                                                      1998             1997
                                                    (Actual)        (Proforma)
                                                 -------------   -------------

     Sales                                       $  21,736,000   $  20,247,000
                                                 =============   =============
     Gross profit                                $  11,247,000   $  10,651,000
                                                 =============   =============
     Net income                                  $   1,273,000   $     975,000
                                                 =============   =============
     Earnings per share:
         Basic                                   $        0.12   $        0.09
                                                 =============   =============
         Diluted                                 $        0.10   $        0.08
                                                 =============   =============

Note 7.  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:

                                                    Sept. 30,        Dec. 31,
                                                      1998             1997
                                                 -------------   -------------

     Raw materials                               $   2,250,000   $   1,584,000
     Work-in-process                                 1,187,000       1,359,000
     Finished goods                                  3,126,000       2,238,000
                                                 -------------   -------------

                                                 $   6,563,000   $   5,181,000
                                                 =============   =============

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

On March 1, 1996, the Company  acquired  Pulsarr.  In May 1997, the Company sold
Pulsarr for $8.4 million (see Note 6 to the Consolidated  Financial Statements).
The discussion  below pertains to the operations of AMV with Pulsarr through its
disposition date.

The  Company's  backlog at  September  30,  1998,  was  $2,934,000  compared  to
$7,635,000 as of September 30, 1997.

Results of Operations - Comparison between three months ended September 30, 1998
and September 30, 1997:
-----------------------
Sales  for  the  three  months  ended  September  30,  1998  ("Q3  1998")   were
$5,546,000,  down 5% when compared to sales for the three months ended September
30, 1997 ("Q3 1997") of $5,861,000.  The decrease in sales is due to lower sales
at SRC partially offset by higher sales at Ventek.

Gross profit  decreased by $150,000 to  $2,879,000  in Q3 1998 when  compared to
$3,029,000  of gross  profit in Q3 1997.  The decrease in gross profit is due to
the decrease in sales.  Gross  profit as a  percentage  of sales was 52% in both
periods.

Selling and marketing  expense  decreased by $445,000 in Q3 1998 from Q3 1997 to
$644,000  amounting to 12% of sales in Q3 1998. Similar expenses in Q3 1997 were
$1,089,000, or 19% of sales. The decrease in selling and marketing expenses as a
percentage  of  sales  is  due  to  lower  external   commissions   and  reduced
demonstration equipment expenses.

Research and development  expenses were $1,116,000 and $1,029,000 in Q3 1998 and
Q3 1997,  or 20% and 18% of sales,  respectively.  The  increase in research and
development  expenses is related to new projects,  which include  developing new
lighting, camera and software technologies.

General and  administrative  expenses  increased $186,000 to $767,000 in Q3 1998
from $581,000 in Q3 1997. The increase in general and administrative expenses is
due principally to costs associated with a project of reevaluating the financial
and  operational  processes and  procedures at SRC in  preparation  for possible
future growth of SRC's business.

Interest  expense in Q3 1997 included a charge for deferred debt issuance  costs
of $233,000 as the result of the early  repayment of $2,500,000  of  convertible
notes payable. The remaining decrease in interest expense is due to reduced debt
balances outstanding.

Net income for Q3 1998 was  $75,000 as  compared to a net loss of $160,000 in Q3
1997. Excluding the charge for deferred debt issue costs, net income for Q3 1997
was $73,000.

Results of Operations - Comparison  between nine months ended September 30, 1998
and September 30, 1997:
-----------------------
Sales  for  the  nine  months  ended September 30, 1998 ("the 1998 Period") were
$21,736,000,  down 5% when compared to sales for the nine months ended September
30, 1997 ("the 1997 Period") of $22,805,000.  The decrease is due to the sale of
Pulsarr,  which generated revenues of $2,558,000 in 1997 and a decrease in sales
at Ventek of $1,104,000.  These decreases were largely off by increased sales at
SRC of $2,593,000.

Gross profit  decreased by 3% to $11,247,000 in the 1998 Period when compared to
$11,569,000 of gross profit in the 1997 Period. In 1998, gross profit was 52% of
sales as compared to 51% in 1997.  The  increase in gross profit as a percentage
of sales is due to a change in product mix to higher margin  products at SRC and
the elimination of lower margin Pulsarr products. These increases were partially
offset by a lower sales volume of higher-margin Ventek products.

Selling and  marketing  expense  decreased  21% in the 1998 Period from the 1997
Period to $2,977,000  amounting to 14% of sales in 1998. Similar expenses in the
1997  Period  were  $3,772,000,  or 17% of sales.  The  decrease  in selling and
marketing  expenses  as a  percent  of sales  is the  result  of lower  external
commissions, reduced spending on advertising and marketing and the spreading the
fixed sales costs at SRC over a larger sales base.

Research and  development  expenses were  $3,297,000  and $2,980,000 in the 1998
Period and the 1997 Period, or 15% and 13% of sales, respectively.  The increase
in research and  development  expense in 1998 is related to new projects,  which
include developing new lighting, camera and software technologies.

General and administrative expenses increased $367,000 to $2,792,000 in the 1998
Period  from  $2,425,000  in the  1997  Period.  The  increase  in  general  and
administrative expenses is due principally to costs associated with a project of
reevaluating  the financial and  operational  processes and procedures at SRC in
preparation for possible future growth of SRC's business.

On May 6,  1997,  AMV sold  Pulsarr  to Barco NV of  Belgium  for $8.4  million,
resulting in a gain of  $4,989,000.  AMV had purchased  Pulsarr on March 1, 1996
for $7.8 million.  This gain  primarily  represents a recovery of the $4,915,000
charge for acquired  in-process  technology  expensed in the quarter ended March
31, 1996.

Interest  expense in 1997 included a charge for deferred debt issuance  costs of
$233,000 as a result of the early  repayment of $2,500,000 of convertible  notes
payable.  The  remaining  decrease  in  interest  expense  is due to lower  debt
balances outstanding.

Net income for 1998 was  $1,273,000 as compared to a net income of $5,976,000 in
1997. Excluding the gain on the sale of Pulsarr and the charge for deferred debt
issuance costs, net income for the 1997 Period was $1,220,000.

Liquidity and Capital Resources
-------------------------------
The Company's cash balance and working  capital were  $4,285,000 and $7,109,000,
respectively,  at September 30, 1998 as compared to $6,045,000  and  $9,133,000,
respectively,  at December 31, 1997.  The Company's  long-term debt decreased by
approximately $3 million primarily as a result of the current  classification of
debt  relating  to the  Ventek  acquisition  which is due in July  1999.  Equity
balances at September 30, 1998 and December 31, 1997 were similar.

During the 1998 Period,  net cash used in operating  activities totaled $962,000
compared to cash  provided by operating  activities  of  $2,922,000  in the 1997
Period. Larger increases in receivables, inventories and other assets as well as
a large reduction of accounts payable, accrued liabilities and customer deposits
in the 1998 Period as compared to the 1997 Period caused the change in cash used
in  operations  in the 1998  Period as compared  to cash  generated  in the 1997
Period.

Cash used in investment  activities  totaled $1,088,000 in 1998 compared to cash
provided by investment  activities of $6,477,000 in 1997. The Company  purchased
3.4 acres of land  adjacent to its Medford,  Oregon  facility for  approximately
$460,000  during the 1998  Period.  The 1997 Period  includes  approximately  $7
million  provided  from  the  sale  of  Pulsarr.  The  Company  has no  material
commitments for capital expenditures at September 30, 1998.

Cash provided by financing  activities  totaled  $290,000 in 1998 as compared to
cash used in financing  activities of  $5,727,000  in 1997.  In April 1998,  the
Company  refinanced  its  existing  $2,680,000  mortgage  due  2003  with  a new
$3,000,000  mortgage due 2008. The mortgage interest rate was lowered from 9.75%
to 8.3%.  Additionally,  the Company  obtained a  $2,000,000  revolving  line of
credit that will expire on April 30, 1999. The 1997 Period includes the purchase
of  1,001,640  shares of Class A Common  Stock and 640,000  warrants to purchase
Class A Common Stock for  $1,962,000,  the early  repayment of $2,500,000 of its
$3,400,000  Convertible  Note  dated  April  1996,  and  the  final  payment  of
$1,265,000 related to the payoff of a Convertible Note dated April 1995.

In October  1998,  the Company  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).

Management  believes that the Company has sufficient  cash to enable the Company
to sustain its  operations  and to adequately  fund the cash flow expected to be
used in operating activities for the next twelve months.

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

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

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

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

These risk factors are discussed in further detail below.

History of Losses;  Negative Cash Flow:
---------------------------------------
Prior  to  1995  and  in  1996,  the  Company  experienced  losses and  negative
operating cash flow. The Company believes it may operate at a negative cash flow
for  certain  periods  in the  future  due to  (i)  the  need  to  fund  certain
development  projects,  (ii) cash  required  to enter new  market  areas,  (iii)
irregular bookings by customers due to seasonality or economic downturns in some
markets and the  relatively  high per-unit cost of the Company's  products which
may cause  fluctuations in quarterly or yearly revenues,  (iv) cash required for
the  repayment  of debt,  especially  $3.25  million  due in July 1999,  and (v)
possible cash needed to fully  integrate SRC's and Ventek's  operations.  If the
Company is unable to  consistently  generate  sustained  positive cash flow from
operations, the Company must rely on debt or equity financing.

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

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

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

Rapid Technological Change; Product Development:
------------------------------------------------
The  markets  for  the  Company's  machine vision products  are characterized by
rapidly  changing  technology,  evolving  industry  standards  and  frequent new
product  introductions and enhancements.  For example, the Company believes that
the 1995 introduction by Key Technology,  Inc. of its new line of vision sorting
equipment  adversely  affected  bookings  in late  1995 and  1996.  Sales of the
Company's  products depend in part on the continuing  development and deployment
of new  technology  and services and  applications.  The Company's  success will
depend to a significant extent upon its ability to enhance its existing products
and develop new products that gain market acceptance.  There can be no assurance
that the Company will be successful in selecting,  developing and  manufacturing
new products or enhancing  its existing  products on a timely or  cost-effective
basis or that products or  technologies  developed by others will not render the
Company's  products  noncompetitive  or  obsolete.  Moreover,  the  Company  may
encounter  technical  problems in connection with its product  development  that
could   result  in  the  delayed   introduction   of  new  products  or  product
enhancements.  Market Acceptance of New Products: The Company's future operating
results will depend upon its ability to successfully  introduce and market, on a
timely and  cost-effective  basis,  new  products and  enhancements  to existing
products.  There can be no  assurance  that new  products  or  enhancements,  if
developed  and  manufactured,  will achieve  market  acceptance.  The Company is
currently in the initial  prototype  stage of  development  on a new  high-speed
software and digital  signal  processing  technology  designed to  significantly
improve  system  performance.  There can be no assurance  that a market for this
system will  develop  (i.e.,  that a need for the system  will  exist,  that the
system will be favored over other products on the market,  etc.) or, if a market
does develop,  that the Company will be able,  financially or operationally,  to
market and support the system successfully.

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

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

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

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

Dependence Upon Significant Customers and Distribution Channel:
---------------------------------------------------------------
The  Company  sold  equipment  to  an  unaffiliated  customer  totaling  14%  of
sales in 1997 and to two unaffiliated customers totaling 13% and 12% of sales in
1996. Sales to another two unaffiliated  customers  totaled 19% and 16% of sales
in 1995. Ventek's sales have been to a relatively small number of multi-location
plywood manufacturers.  In the emerging pulp wood industry, the Company utilizes
a single exclusive  distributor for its products in North America.  In 1998, the
Company  entered  an  agreement  with FMC  Corporation  to be its  exclusive  or
nonexclusive sales representative in much of the United States and in many areas
in the  rest of the  world.  While  the  Company  strives  to  create  long-term
relationships with its customers, distributors and representatives, there can be
no assurance that they will continue ordering or selling additional systems. The
Company  may  continue  to  be  dependent  on  a  small  number  of   customers,
distributors and  representatives,  the loss of which would adversely affect the
Company's business.

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

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

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

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

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

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

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

Possible Need for Additional Financing:
---------------------------------------
The Company may seek additional financing;  however, the Company may not be able
to  obtain  any additional financing on terms satisfactory to the Company, if at
all.  Potential  increases  in the number of outstanding shares of the Company's
Class A Common Stock due to convertible debt and preferred  stock,  warrants and
stock options,  a substantial loss in 1996 and debt incurred for the acquisition
of Ventek due in 1999, may limit the Company's  ability to negotiate  additional
debt or equity financing.

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

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

In October 1998, FMC acquired 119,106 shares of the Company's Series B Preferred
Stock,  which,  if  converted  into common stock in  accordance  with its terms,
represents  a 10%  ownership  position  in the  Company.  FMC  also  received  a
five-year option to acquire 15% of the Company's outstanding common stock on the
date of exercise.  While FMC's resulting  beneficial  ownership exceeds 20%, the
transaction was not a triggering event as defined in the Stock Rights Plan since
the acquisition of shares was directly from the Company. As stated in a Schedule
13D filed with the Securities and Exchange Commission on October 22, 1998, FMC's
purpose was to invest in the Company and its technology.  FMC currently  intends
to review its investment position in the Company  periodically and, depending on
such  review and factors  including  market  conditions  and share  prices,  the
Company's business  prospects,  technology,  future  developments and applicable
legal requirements, FMC may seek to acquire additional securities of the Company
from  time  to time in the  open  market  or in  negotiated  transactions.  Such
possible additional acquisitions may result in triggering events.

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

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

<PAGE>

                           PART 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. (8)

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

     4.1      Form of Class D Warrant Agreement. (1)

     4.2      Form of Class G Warrant Agreement. (3)

     4.3      Form of Class H Warrant Agreement. (7)

     4.4      Form of Class I Warrant Agreement. (5)

     4.5      Form of Laidlaw Warrant Agreement. (5)

     4.6      Form of stock option agreement. (4)

     4.7      Form of 1997 Restricted Stock Plan and restricted stock agreement.
              (6)

     4.8      Form of amendments to restricted stock agreements.

     4.9      Rights Agreement dated February 27, 1998 between the Company and
              American Stock Transfer and Trust Company. (12)

     4.10     Amendment to Class I Warrant Agreement. (14)

     4.11     Form of Certificate of Determination for Series A Junior
              Participating Preferred Stock. (15)

     4.12     Form of Certificate of Determination for Series B Preferred Stock.
              (17)

    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. (13)

    10.3      Employment Agreement between William J. Young and the Company
              dated January 1, 1998. (13)

    10.4      Employment Agreement between William J. Young and SRC VISION, Inc.
              dated January 1, 1998. (13)

    10.5      Employment Agreement between James Ewan and SRC VISION, Inc. dated
              January 1, 1998. (13)

    10.6      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. (3)

    10.7      Convertible Secured Note dated April 17, 1996, between the Company
              and Ilverton International, Inc. (7)

    10.8      Asset Purchase Agreement dated July 24, 1996, by and among AMV,
              Ventek and the shareholders of Ventek. (5)

    10.9      $1,000,000 Note dated July 24, 1996, between AMV and Ventek. (5)

    10.10     $2,250,000 Convertible Note dated July 24, 1996, between AMV and
              Ventek. (5)

    10.11     $1,125,000 Note dated July 24, 1996, between AMV and Ventek. (5)

    10.12     Stock Appreciation Rights Agreement dated July 24, 1996 between
              AMV and Ventek. (5)

    10.13     Form of Employment Agreement dated July 24, 1996 between Ventek
              and each of the four stockholders of Ventek. (5)

    10.14     Pledge and Security Agreement dated July 24, 1996, by and among
              AMV, AMV Subsidiary, Inc., Ventek and Solin and Associates, P.C.
              (5)

    10.15     1997 SRC VISION, Inc. Stock Option Plan and forms of stock option
              agreements. (11)

    10.16     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. (8)

    10.17     Share Purchase Agreement dated April 29, 1997 between Barco NV and
              ARC Netherlands BV. (9)

    10.18     Settlement Agreement dated August 12, 1997. (10)

    10.19     1997 Nonqualified Stock Option Plan and form of option agreement.
              (10)

    10.20     Business Loan Agreement dated April 30, 1998 between AMV and Bank
              of America NT&SA, together with related documents. (16)

    10.21     Promissory Note dated April 24, 1998 to Bank of America NT&SA,
              together with related documents. (16)

    10.22     $250,000 Note dated June 5, 1998 from Rodger A. Van Voorhis to
              Ventek. (14)

    10.23     Series B Preferred Stock Purchase Agreement between AMV and FMC
              Corporation dated October 14, 1998. (17)

    10.24     Intellectual Property and Security Agreement dated October 14,
              1998 between SRC VISION, Inc. and FMC Corporation. (17)

    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 April 14, 1996, as an exhibit to the Company's
         Form 10-K for the year ended December 31, 1995.

     (4) Filed with the SEC as an exhibit to Form S-1 (File No. 33-45126).

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

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

     (7) 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.

     (8) 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.

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

    (10) 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.

    (11) 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.

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

    (13) 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.

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

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

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

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

(b)  Reports on Form 8-K:
-------------------------

     On February 27, 1998, a Form 8-K was filed regarding the implementation of
     a stock rights program and employment contracts.

     On June 15, 1998, a Form 8-K was filed regarding a $250,000 loan to a
     director and reduction in the number of shares of common stock issuable
     upon exercise of the Class I Warrant.

     On September 14, 1998, a Form 8-K was filed regarding a non-binding letter
     of intent between the Company and FMC Corporation ("FMC") whereby FMC may
     acquire 119,106 shares of the Company's Series B Preferred Stock for $2.6
     million.

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


                                    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.



     October 30, 1998                            /s/  Alan R. Steel
-------------------------------                  -------------------------------
                                                          Alan R. Steel
                                                     Vice President, Finance
                                                 (Principal Financial and duly
                                                       Authorized Officer)