<PAGE>   1

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934.

         For the quarterly period ended September 30, 1998
                                        ------------------

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934.

         For the transition period from __________ to __________

Commission file number  1-5601

                       AMERICAN PRECISION INDUSTRIES INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)
      

           DELAWARE                                             16-1284388
------------------------------                              -------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                              Identification No.)



2777 WALDEN AVENUE,  BUFFALO, NEW YORK                              14225
--------------------------------------                            ---------
(Address of principal executive offices)                          (Zip Code)


                                 (716) 684-9700
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

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    .
                                       ---     ---

                      Number of shares of outstanding stock
                         on November 10, 1998 7,478,533








<PAGE>   2




ITEM 1.  FINANCIAL STATEMENTS
         --------------------

                       AMERICAN PRECISION INDUSTRIES INC.
                                AND SUBSIDIARIES

                       CONSOLIDATED STATEMENT OF EARNINGS
                       ----------------------------------
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                   THIRD QUARTER ENDED                   NINE MONTHS ENDED
                                              ----------------------------          ----------------------------
                                               SEPTEMBER 30,    OCTOBER 3,          SEPTEMBER 30,    OCTOBER 3,
(In thousands, except per share data)              1998            1997                 1998           1997
                                              -------------  -------------          -------------  -------------
                                                                                
<S>                                            <C>               <C>                  <C>               <C>     
NET SALES                                      $ 54,995          $ 55,014             $163,667          $130,429


COSTS AND EXPENSES
     Cost of products sold                       38,542            38,592(1)           114,668            90,461(1)
     Selling and administrative                  11,627            11,283               36,012            26,382
     Research and product development             1,096             1,021                3,594             2,527
     Interest and debt expense,
         net of investment income                   784               870                2,411             1,889
     Other expense                                    -               210(1)                 -               210(1)
                                               --------          --------             --------          --------
                                                 52,049            51,976              156,685           121,469
                                               --------          --------             --------          --------

EARNINGS BEFORE INCOME TAXES                      2,946             3,038                6,982             8,960
INCOME TAXES                                      1,060               780                2,513             2,847
                                               --------          --------             --------          --------
NET EARNINGS                                   $  1,886          $  2,258             $  4,469          $  6,113
                                               ========          ========             ========          ========

EARNINGS PER COMMON SHARE
         BASIC                                 $   0.25          $   0.30             $   0.60          $   0.83
                                               ========          ========             ========          ========
         DILUTED                               $   0.20          $   0.24             $   0.48          $   0.74
                                               ========          ========             ========          ========

WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING
         Basic                                    7,473             7,412                7,459             7,365
                                               ========          ========             ========          ========
         Diluted                                  9,463             9,383                9,406             8,310
                                               ========          ========             ========          ========
</TABLE>


(1)   Cost of products sold includes a pre-tax inventory charge of $816,000.
      Other expense includes $331,000 of pre-tax cost related to a dispute
      settlement with the U.S. Government, offset by non-operating income of
      $121,000. Total after-tax impact of these items is $636,000.






                                       2
<PAGE>   3



                       AMERICAN PRECISION INDUSTRIES INC.
                                AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
--------------------------
        (Unaudited)

<TABLE>
<CAPTION>

                                                        SEPTEMBER 30,     DECEMBER 31,
(In thousands, except share and per share data)             1998              1997
                                                        -------------     ------------

<S>                                                       <C>               <C>     
ASSETS

CURRENT ASSETS
     Cash and cash equivalents                            $  3,109          $  2,313
     Accounts receivable less allowance for
      doubtful accounts of $996 and $1,124                  36,257            32,163
     Inventories - net                                      41,663            38,510
     Prepaid expenses                                        2,200             4,744
     Deferred income taxes                                   4,224             4,338
                                                          --------          --------
          TOTAL CURRENT ASSETS                              87,453            82,068

INVESTMENTS                                                      -               686

OTHER ASSETS
     Cost in excess of net assets acquired - net            20,446            19,853
     Prepaid pension costs                                   1,635             1,669
     Net cash value of life insurance                        3,750             3,199
     Other                                                   2,417             2,251
                                                          --------          --------
                                                            28,248            26,972

DEFERRED INCOME TAXES                                          314               297

PROPERTY, PLANT AND EQUIPMENT
     Land                                                    3,596             3,409
     Buildings and improvements                             20,753            20,327
     Machinery, equipment and furniture                     58,455            51,427
     Construction in process                                 3,834             2,689
                                                          --------          --------
                                                            86,638            77,852
     Less accumulated depreciation                          31,695            25,205
                                                          --------          --------
          NET PROPERTY, PLANT AND EQUIPMENT                 54,943            52,647
                                                          --------          --------
          TOTAL ASSETS                                    $170,958          $162,670
                                                          ========          ========
</TABLE>




                                       3
<PAGE>   4



                       AMERICAN PRECISION INDUSTRIES INC.
                                AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
--------------------------
      (Unaudited)


<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,      DECEMBER 31,
(In thousands, except share and per share data)                     1998              1997
                                                               -------------      ------------

<S>                                                              <C>                <C>      
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
     Short-term borrowings                                       $  13,844          $  14,086
     Accounts payable                                               15,244             15,792
     Accrued compensation and payroll taxes                          7,863              6,585
     Other liabilities and accrued expenses                          8,145              7,980
     Current portion of long-term obligations                        1,372              1,329
                                                                 ---------          ---------
             TOTAL CURRENT LIABILITIES                              46,468             45,772

DEFERRED INCOME TAXES                                                1,977              1,926
OTHER NONCURRENT LIABILITIES                                         3,113              3,488
LONG-TERM OBLIGATIONS, LESS CURRENT PORTION                         36,186             34,884

SHAREHOLDERS' EQUITY
      Series B seven percent (7%) convertible
             preferred stock, par value $1.00 a share,
             1,236,337 shares issued and outstanding                26,156             26,156
      Common stock, par value $.66 2/3 a share:
             Authorized - 30,000,000 shares
             Issued - 7,847,223 and 7,812,215 shares                 5,231              5,207
      Additional paid-in capital                                    13,390             13,107
      Retained earnings                                             40,041             35,572
      Accumulated other comprehensive income                         1,234               (604)
                                                                 ---------          ---------
                                                                    86,052             79,438
      Less cost of 374,262 treasury shares                           2,838              2,838
                                                                 ---------          ---------
             TOTAL SHAREHOLDERS' EQUITY                             83,214             76,600
                                                                 ---------          ---------
             TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $ 170,958          $ 162,670
                                                                 =========          =========
</TABLE>






                                       4


<PAGE>   5
                       AMERICAN PRECISION INDUSTRIES INC.
                                AND SUBSIDIARIES

     CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------------
                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                  Nine Months Ended
                                                                             -----------------------------   
                                                                             September 30,     October 3,
(Dollars in thousands)                                                            1998            1997        
                                                                             -------------   -------------   
<S>                                                                           <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings                                                                  $  4,469           $ 6,113
Adjustments to reconcile net income to cash and 
cash equivalents provided by operating activities:
     Depreciation/Amortization                                                   6,985             4,624
     Gain on sale of investments/fixed assets                                       14                51
     Stock compensation programs                                                  (309)              281
     Change in various allowance accounts                                          364                72
     Other                                                                         186               302
(Increase) Decrease in:       
     Accounts receivable                                                        (3,627)           (6,819)
     Inventory                                                                  (2,186)            1,015
     Prepaid expenses                                                            1,646              (416)
     Prepaid income taxes                                                        1,054                 -
     Deferred income tax assets                                                    236              (492)
     Other assets, net                                                            (971)             (356)
Increase (Decrease) in:                                                          
     Accounts payable                                                             (911)            2,302
     Accrued expenses                                                              875            (3,764)
     Federal, state and foreign income taxes                                       118                44
     Other noncurrent liabilities                                                 (280)               (6)
                                                                             ---------         ---------
        Net Cash Provided by Operating Activities                                7,663             2,951
                                                                             ---------         ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in acquisitions, net of cash & cash equivalents acquired                (9)           (7,708)
Purchases of investments and marketable securities                                 (15)              (55)
Additions to property, plant and equipment                                      (7,419)           (6,640)
Proceeds from investments, marketable securities                                   718             2,944
                                                                             ---------         ---------
        Net Cash (Used) by Investing Activities                                 (6,725)          (11,459)
                                                                             ---------         ---------
   CASH FLOWS FROM FINANCING ACTIVITIES     
Exercise of stock options                                                          306             1,070
Payment of long-term obligations, including current maturities                  (1,002)             (978)
Dividends paid                                                                       -              (471)
Increase in long-term obligations                                                1,909             6,527
Increase (Decrease) in short-term borrowings                                    (1,175)            3,832
                                                                             ---------         ---------
        Net Cash Provided by Financing Activities                                   38             9,980
                                                                             ---------         ---------

Effect of Exchange Rate Changes                                                   (180)                -

Net Increase (Decrease) in Cash and Cash Equivalents                               796             1,472
Cash and Cash Equivalents at Beginning of Year                                   2,313             2,412
                                                                             ---------         ---------
Cash and Cash Equivalents at End of Year                                       $ 3,109           $ 3,884              
                                                                             =========         =========
</TABLE>



                                       5
<PAGE>   6
                       AMERICAN PRECISION INDUSTRIES INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
                     Third Quarter Ended September 30, 1998
                   ------------------------------------------


Note A         Consolidated Financial Statements
------         ---------------------------------

               The Consolidated Balance Sheet as of September 30, 1998, and the
               Consolidated Statement of Earnings and the Consolidated Statement
               of Cash Flows for the periods ended September 30, 1998 and
               October 3, 1997 have been prepared by the Company without audit.
               In the opinion of management, all adjustments necessary to
               present fairly the financial position, results of operations, and
               changes in cash flow at September 30, 1998 and for all periods
               presented have been made. The Consolidated Balance Sheets include
               the assets, liabilities and resulting goodwill of all
               subsidiaries. The Consolidated Statements of Earnings and Cash
               Flows for the nine months ended October 3, 1997 include the
               results of API Schmidt-Bretten and API Portescap since January
               31, 1997 and July 8, 1997, the dates of their respective
               acquisitions.

               Certain information and footnote disclosures normally included in
               financial statements prepared in accordance with Generally
               Accepted Accounting Principles have been condensed or omitted. It
               is suggested these condensed consolidated financial statements be
               read in conjunction with the financial statements and the notes
               thereto included in the Company's 1997 Annual Report to
               Shareholders.

Note B         Inventories
------         -----------

               The major classes of inventories are as follows:

<TABLE>
<CAPTION>

                                               September 30,   December 31,
                          (In thousands)            1998             1997
                                               -------------   ------------

<S>                                              <C>              <C>    
                          Finished goods         $ 6,688          $ 9,133
                          Work in process         10,983           10,807
                          Raw materials           23,992           18,570
                                                 -------          -------
                                                 $41,663          $38,510
                                                 =======          =======
</TABLE>

                Had the cost of all inventories at September 30, 1998 and
                December 31, 1997 been determined by the FIFO method, these
                amounts would have been greater by $1,052 for both periods.





                                       6
<PAGE>   7


Note C         Long-Term Obligations
------         ---------------------

<TABLE>
<CAPTION>

                                                        September 30, 1998                          December 31, 1997
                                             ------------------------------------------------------------------------------------
                                               Out-                          Long-           Out-                         Long-
                (In thousands)               standing         Current        Term          standing        Current         Term
                                             ---------       --------       --------       --------        -------        -------

<S>                                            <C>            <C>            <C>            <C>            <C>            <C>    
                 Industrial
                     Revenue Bonds             $11,443        $ 1,146        $10,297        $12,294        $ 1,130        $11,164

                 Revolving Credit Debt          19,250              -         19,250         17,300              -         17,300

                 Supplemental
                     Benefit Program               750          1,034            199            835
                                                                                                               976            226

                 Portescap Debt-
                     Mortgage and Other
                     Long-Term Loans             5,889              -          5,889          5,585              -          5,585
                                               -------        -------        -------        -------        -------        -------
                                               $37,558        $ 1,372        $36,186        $36,213        $ 1,329        $34,884
                                               =======        =======        =======        =======        =======        =======
</TABLE>

Note D         Earnings Per Share
------         ------------------

                All earnings per share amounts reflect the implementation of
                Statement of Financial Accounting Standards No. 128 Earnings per
                Share ("SFAS 128"). SFAS 128 established new standards for
                computing and presenting earnings per share and requires all
                prior period earnings per share data to be restated to conform
                with the provisions of the statement. Basic earnings per share
                is computed by dividing net earnings by the weighted average
                number of shares outstanding during the period. Diluted earnings
                per share is computed using the weighted average number of
                shares determined for the basic computations plus the number of
                shares of common stock that would be issued assuming all
                contingently issuable shares having a dilutive effect on
                earnings per share were outstanding for the period.

Note E         Foreign Currency Translation
------         ----------------------------

               The financial statements of subsidiaries outside the United
               States are measured using the local currency as the functional
               currency. Assets, including goodwill, and liabilities are
               translated at the rates of exchange at the balance sheet date.
               The resulting translation adjustments are included in equity
               adjustment from foreign currency translation, a separate
               component of shareholders' equity reported in Accumulated other
               comprehensive income. Income and expense items are translated at
               average monthly rates of exchange.

               The Company utilizes forward foreign currency exchange contracts
               to manage exposures resulting from fluctuations in foreign
               currency exchange rates on monetary assets and liabilities
               denominated in foreign currencies arising from its operations.
               Gains and losses on foreign currency transactions are recorded in
               income and are not material during the periods presented. The
               Company does not engage in foreign currency speculation.

               As of September 30, 1998 and December 31, 1997 foreign exchange
               contracts outstanding were not significant.

                                       7
<PAGE>   8

Note F         Selected Segment Data
------         ---------------------

               The Company conducts operations in two major industrial
               classifications: Heat Transfer Technology and Motion
               Technologies. Information about the net sales and operating
               profit of these segments is set forth below:

<TABLE>
<CAPTION>
                                                          THIRD QUARTER ENDED                NINE MONTHS ENDED
                                                       -------------------------         --------------------------
                                                       SEPTEMBER 30,   OCTOBER 3,        SEPTEMBER 30,   OCTOBER 3,
                (Dollars in thousands)                        1998       1997               1998           1997
                                                       -------------   ---------         --------------------------
<S>                                                      <C>              <C>              <C>              <C>   
                 NET SALES:
                       Heat Transfer                     24,676           24,715           71,547           69,591
                       Motion                            30,319           30,299           92,120           60,838
                                                       --------         --------         --------         --------
                                                         54,995           55,014          163,667          130,429
                                                       ========         ========         ========         ========

                 OPERATING PROFIT:
                       Heat Transfer                      2,696            2,073            6,637            6,432
                       Motion                             2,214            3,366            6,074            7,342
                                                       --------         --------         --------         --------
                                                          4,910            5,439           12,711           13,774

                 GENERAL CORPORATE EXPENSE, NET          (1,180)          (1,531)          (3,318)          (2,925)

                 INTEREST AND DEBT EXPENSE                 (784)            (870)          (2,411)          (1,889)
                                                       --------         --------         --------         --------

                 EARNINGS BEFORE INCOME TAXES             2,946            3,038            6,982            8,960
                                                       ========         ========         ========         ========
</TABLE>


Note G         Adoption of SFAS No. 130
------         ------------------------

               In the first quarter of 1998, the Company adopted Statement of
               Financial Accounting Standards (SFAS) No. 130, "Reporting
               Comprehensive Income." Comprehensive income is defined as "the
               change in equity of a business enterprise during a period from
               transactions and other events and circumstances from non-owner
               sources". Under SFAS 130, the term "comprehensive income" is used
               to describe the total net earnings plus other comprehensive
               income which for the Company includes foreign currency
               translation adjustments and minimum pension liability not yet
               recognized as net periodic pension cost.

               The adoption of SFAS 130 did not impact the calculation of net
               earnings or earnings per share nor did it impact reported assets,
               liabilities or total shareholders' equity. It did impact the
               presentation of the components of shareholders' equity within the
               balance sheet and will result in the presentation of the
               components of comprehensive income within an annual financial
               statement, which must be displayed with the same prominence as
               other financial statements.



                                       8
<PAGE>   9



               The components of the Company's total comprehensive income (loss)
               were:

<TABLE>
<CAPTION>

                                                                     NINE MONTHS ENDED
                                                                 --------------------------
                                                                 SEPTEMBER 30,   OCTOBER 3,
                 (In thousands)                                      1998          1997
                                                                 -------------   ----------

<S>                                                                <C>             <C>    
                 Net earnings                                      $ 4,469         $ 6,113

                 Other comprehensive income (loss):
                   Foreign currency translation adjustments          1,312            (215)
                   Minimum pension liability, net of tax               (78)            (74)
                                                                   -------         -------

                 Total comprehensive income (loss)                 $ 5,703         $ 5,824
                                                                   =======         =======
</TABLE>


               The foreign currency translation adjustments are not currently
               adjusted for income taxes since they relate to investments which
               are permanent in nature.



                                       9
<PAGE>   10


ITEM 2.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                ------------------------------------------------

SALES

American Precision Industries Inc. ("API") consolidated sales for the third
quarter of 1998 were $55.0 million, equal to the similar period of 1997. For the
first nine months of 1998, consolidated sales of $163.7 million were 25.5% above
sales for the first nine months of 1997. The acquisition of Portescap, a Swiss
micromotor company acquired July 8, 1997 and of Schmidt-Bretten, a German heat
exchanger company acquired January 31, 1997, accounted for $31.1 million of the
$33.2 million increase in nine-month comparative sales. The remaining $2.1
million sales increase resulted from higher sales of API Motion's brakes,
clutches, resolvers and magnetic components and of API Heat Transfer's
air-cooled products offset by lower demand for other Motion Control products
(weak semi-conductor industry demand), including Gettys turbo motors (delayed
new product introduction) and for shell and tube heat exchangers (weak
refrigeration market demand).


COST OF PRODUCTS SOLD

Cost of products sold for the third quarter and first nine months of 1998 were
$38.5 million and $114.7 million respectively as compared to $38.6 million and
$90.5 million for similar periods in 1997. The third quarter of 1998 cost of
goods sold was $.8 million higher than the similar period in 1997 when third
quarter 1997 is adjusted to exclude one-time inventory write-downs. The majority
of the higher cost was related to manufacturing inefficiencies at the Company's
air-cooled heat exchanger facility. The causes of these inefficiencies were
resolved late in the third quarter of 1998 by the addition of furnace capacity.
The acquisition of Portescap and Schmidt-Bretten accounted for $21.2 million of
the increase in cost of goods sold for the nine-month period compared with the
similar period in 1997. The remaining $3.0 million increase was the result of
the manufacturing inefficiencies mentioned above and the higher sales volume.


SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative costs in the third quarter 1998 were $11.6 million, a
$.3 million increase as compared to 1997's third quarter. Currency rate
fluctuations increased the dollar value of selling, general and administrative
expenses at the Company's foreign operations, accounting for the comparative
increase.

Selling and administrative costs for the nine-month period of 1998 are $36.0
million, up $9.6 million compared with the prior year. The Portescap and
Schmidt-Bretten acquisitions account for $7.2 million of the increase. In
addition, higher selling costs related to volume growth of brakes and clutches,
resolvers, magnetic components and plate and frame heat exchangers, costs to
support market introduction of Gettys' turbo motors, and the currency rate
fluctuations mentioned above account for the balance of the comparative
increase.


                                       10
<PAGE>   11


RESEARCH AND PRODUCT DEVELOPMENT

Product development spending was $1.1 million and $3.6 million for the third
quarter and nine-month periods of 1998 compared with $1.0 million and $2.5
million for similar periods in 1997. Development spending for product redesigns
of Gettys motors and Portescap micromotors account for the quarterly comparative
increase. For the nine months, the Portescap acquisition accounts for $1.0
million of the comparative increase.


INTEREST AND DEBT EXPENSE

Interest and Debt Expense, net of investment income, was $.8 million in the
third quarter of 1998 compared with $.9 million last year. The lower expense
reflects the lower interest resulting from the fourth quarter 1997 restructuring
of Portescap's Swiss franc debt following the July 8, 1997 Portescap
acquisition. For the first nine months of 1998 compared with the similar period
for 1997, interest and debt expense increased to $2.4 million from $1.9 million
principally as a result of interest on the debt acquired with Portescap.


OTHER EXPENSE

The 1997 other expense reflected a September 1997 agreement with the United
States government relating to government sub-contract work performed by API's
former Rapidsyn Division between 1987 and 1995. This cost was partially offset
by a $121,000 gain from the sale of a non-operating investment.


TAXES

The year-to-date tax rate for the nine-month period of 1998 was 36.0% compared
to a rate of 31.8% for the same period last year. The 1997 rate included
non-recurring benefits from adjustments to pre-1997 tax provisions as audits
were successfully completed. The geographic mix of the Company's earnings, most
notably increased profits in Germany, account for the remainder of the rate
increase in 1998 when compared with 1997.

During the fourth quarter of 1998, API Portescap was granted a 10-year exemption
from Cantonal taxes on profits from its new products produced in Switzerland.
The Canton of Neuchatel also recommended to the federal authorities that a
similar exemption from federal taxes be approved. The statutory federal income
tax rate is 8.5%. The Company is currently discussing with Swiss authorities the
details for the calculations of the tax holidays' benefits.

NET EARNINGS

Net Earnings for the third quarter and first nine months of 1998 were $1.9
million and $4.5 million respectively as compared to $2.3 million and $6.1
million for the similar periods of 1997. For the third quarter, excluding
one-time items in 1997, 1998 net income was $1.0 million below the similar
quarter of 1997 due to the lower semi-conductor demand for API's motion control
products, the design, development and product introduction costs for API's new
turbo motors, and the higher tax rate. For the first nine months of 1998, the
increased net income from the acquisitions of Portescap and Schmidt-Bretten were
more than offset by the 


                                       11
<PAGE>   12

production issues related to air-cooled heat exchangers, costs related to the
introduction of new motor and drive products at API Motion, higher corporate
costs and a higher tax rate.

SEGMENT DATA DISCUSSION

Heat Transfer
-------------

Third quarter 1998 sales in the heat transfer segment were $24.7 million, equal
to the third quarter of 1997. 1998 third quarter operating profit was $2.7
million, $.6 million or 30% above the third quarter of last year. When adjusted
to exclude a one-time $.4 million third quarter 1997 inventory write-down,
comparative operating profit increased by 8%.

-  For the shell and tube product line, lower sales to the refrigeration market
   caused third quarter 1998 sales to be 8% below last year. Manufacturing cost
   reductions were more than offset by the lower sales volume resulting in
   operating profit to fall 5% below (excluding 1997's inventory adjustment) the
   third quarter 1997 level.

-  The plate and frame heat exchanger product line had third quarter sales and
   operating profit increase by 1% and 158% compared with the third quarter of
   1997. The third quarter of 1997 included a large systems order. Excluding
   this order, 1998's sales and operating profit were respectively 11% and 51%
   above the similar quarter of 1997.

-  For air-cooled products, third quarter 1998 sales were up 8% compared with
   the third quarter of 1997. On a comparative basis, third quarter 1998 profits
   were 38% lower than last year's third quarter results. Progress in resolving
   manufacturing inefficiencies improved significantly following the mid-July
   start-up of a new furnace. September sales were at record levels and
   operating profit exceeded that of the similar month of 1997.

For the nine months of 1998, Heat Transfer sales of $71.5 million were 2.8%
above the similar period last year. Operating profit of $6.6 million was 3.2%
higher comparatively. Ownership of Schmidt-Bretten, acquired January 31, 1997,
for a full nine months in 1998 and increased sales of air-cooled products offset
lower shell and tube heat exchanger sales. Lower operating profit due to
manufacturing inefficiencies related to air-cooled products was more than offset
by cost reductions and margin improvements in the other products.


Motion
------

1998 third quarter sales for Motion (including sales of magnetic components
previously reported as the Electronic Components segment) were $30.3 million,
equal to sales in the third quarter 1997. Operating profit was $2.2 million,
down $1.2 million when compared to third quarter 1997's operating profit, and
down $1.6 million excluding a $.4 million one-time inventory write-down in
1997's third quarter.



                                       12
<PAGE>   13



-        For Controls and for Gettys motors products, weak semi-conductor
         industry demand for both current and new motion control products and
         the phase out of older motor products as Gettys continued its new turbo
         motor development and introduction reduced third quarter 1998 sales by
         34% as compared to the same period in 1997. The sales decline plus
         turbo motor development and market introduction costs lowered operating
         profit by $1.1 million in 1998's third quarter when compared to the
         third quarter of 1997.

-        Motion's brakes, clutches and resolver sales increased 22% in the third
         quarter of 1998 when compared with the third quarter of 1997. Price
         competition in the markets served by these products and added marketing
         resources offset the profit from the higher sales.

-        Micromotor manufacturing productivity at Motion's Portescap facility in
         Switzerland attained higher levels during the third quarter, 1998,
         similar to our experience late in the second quarter. This followed the
         low productivity levels in April 1998 during Portescap's conversion to
         a flow manufacturing process. Sequentially, third quarter 1998
         operating profits increased 78% as compared with the second quarter of
         1998.

-        When adjusted to exclude the impact of currency fluctuation, sales in
         the third quarter of 1998 were $1.1 million lower when compared with
         sales in the third quarter of 1997. The lower sales reflect 1997 order
         timing, which experienced lower early year demand and stronger second
         half shipments. The lower comparative volume accounted for the majority
         of the $.9 million lower third quarter 1998 operating profit compared
         with 1997's third quarter result. The balance of the shortfall is the
         net result of lower margins related to the work-off of old, higher cost
         inventory offset by cost savings from earlier restructuring activities.

-        The magnetic components product line showed a 151% sales increase in
         the third quarter of 1998 compared with the prior year. Higher sales
         and cost control produced a 17% increase in quarterly operating profit
         compared to the prior year.

For the first nine month 1998 period, sales of $92.1 million were up $31.3
million compared with the similar period of 1997. Portescap's acquisition on
July 8, 1997 accounts for $29.4 million of the increase. Higher demand for
brakes, clutches, resolvers and components offset by lower sales of controls and
Gettys motors account for the remainder of the increase. Operating profit for
the nine months was $6.1 million, $1.3 million below operating profit for the
first nine months of 1997.



                                       13
<PAGE>   14



FINANCIAL POSITION

Comparative information on the Company's liquidity position follows (000
omitted).

<TABLE>
<CAPTION>

                                                 September 30,       October 3,
                                                 -------------     -------------
                                                     1998               1997
                                                 -------------     -------------

<S>                                                 <C>              <C>    
                 Net Working Capital                $40,985          $31,764
                 Current Ratio                          1.9              1.6
                 Cash and Cash Equivalents          $ 3,109          $ 3,884

<CAPTION>

                                                       Nine Months Ended
                                                 -------------------------------
                                                 September 30,      October 3,
                                                     1998              1997
                                                 -------------     -------------

                 Cash Flow from Operations          $ 7,663          $ 2,951
                 Capital Expenditures               $ 7,419          $ 6,640
</TABLE>

The Company has available short-term lines of credit which it utilizes to fund
current operations. On August 31, 1998, the Company signed a loan agreement with
Marine Midland Bank and Fleet Bank for a $100 million, multi-currency, five-year
unsecured Revolving Credit Facility with a variable rate of interest based on
either the prime rate or LIBOR, with $50 million of the facility available in
foreign currencies selected by the Company. The new credit facility replaced the
Company's $20 million Revolving Credit Facility with Marine Midland Bank.
Twenty-five million dollars ($25 million) of the new facility will be used to
repay the existing line and for general corporate purposes. The balance of the
facility is available for acquisitions and the possible redemption of some or
all of the Company's Series B 7% Cumulative Convertible preferred stock which
has an aggregate redemption value of approximately $26 million. The facility is
guaranteed by the Company's U.S. domestic subsidiaries.

YEAR 2000

The Company is addressing through its Heat Transfer, Motion, Components and
Corporate Groups the business and technology issues presented by the year 2000
("Y2K") and the possibility that computer programs may not properly recognize a
year that begins with a "20" instead of the familiar "19." The Company oversees
and coordinates its Y2K efforts through a management committee which is chaired
by the Company's Chief Financial Officer and which includes a business executive
and information technology ("IT") managers from each Group. The members also
comprise the leadership team for their Group. The Y2K Committee and the various
Groups utilize outside computer consultants as the need arises. Periodic status
reports are provided to the Company's Audit Committee.

The Y2K Committee has organized its efforts into four categories:

1.       IT Systems - hardware and software for operational and administrative
         systems



                                       14
<PAGE>   15

2.       Non-IT Areas - production and testing equipment, office equipment and
         facilities

3.       Products and customers

4.       Suppliers (material and services)

In all areas, the primary focus is on assuring that mission critical systems are
or will become Y2K compliant.

The Company's Y2K efforts can best be summarized by discussing separately its
U.S. and European operations.

U.S. Business and Corporate Groups:
-----------------------------------

The Company's U.S. IT environment consists of relatively new mainframe hardware,
a mixed age range of personal computers and package software purchased or
licensed from recognized software providers. The Company policy has been to not
customize source code.

An inventory and assessment of its IT systems for Y2K compliance occurred in
mid-1997. This effort indicated a few non-compliant critical systems and
identified remedies which were not difficult or costly to implement. Most
non-compliant systems required software upgrades to Y2K compliant release levels
available from the software package suppliers. Such upgrades are either complete
or will be so by the second quarter of 1999. Written certification of compliance
is being secured from the suppliers of the release upgrades.

Reviews of non-IT areas were undertaken in early 1998. No mission critical
non-compliance issues have been identified. The Company intends to continue to
monitor this area.

Product reviews have not identified any products containing embedded logic which
would be non-compliant. However, the Company is limited in its ability to
identify and review all products that were sold in the past, particularly by its
Motion Group, and, therefore, the Company cannot be certain that there are not
older products still in use which contain embedded logic which may be non-Y2K
compliant.

Supplier surveys have begun to assess the compliance status of the Company's
critical suppliers and the Company intends to continue to survey its suppliers
throughout the Y2K period.

European Businesses:
--------------------

The Company made two European acquisitions in 1997 - Schmidt Bretten, a German
heat transfer company, and Portescap, a Swiss micromotor company. Status reviews
of Y2K compliance for these units identified critical systems requiring upgrade.
Schmidt-Bretten is in the process of replacing its operating and administrative
systems. This project is scheduled to be completed in mid-1999. Portescap will
require upgrades to certain of its software and expects to complete these by
mid-1999.

The Company's European units will be conducting reviews of non-IT areas,
products and suppliers similar to those undertaken in the U.S., and plans are to
have these reviews completed in mid-1999.



                                       15
<PAGE>   16



Costs and Contingency Plans:
----------------------------

Domestically, the Company's Y2K compliance costs have not been material.
Management estimates that costs incurred to date for Y2K related hardware and
software upgrades to be less than $.2 million and costs for outside consultants
to be less than $.1 million. Future costs are currently not expected to exceed
an additional $.3 million.

Internationally the Company has budgeted the equivalent of $.3 million to
replace the outdated administrative system at its German heat transfer
subsidiary. This replacement provides a number of operating improvements,
including Y2K compliance. The Company has begun implementing a general upgrade
of IT systems at its Swiss micromotor subsidiary. Future costs specifically
related to Y2K compliance at the swiss micromotor subsidiary are currently
estimated to be less than $.2 million.

At this time the Company does not have reason to believe that there will be any
significant interruption in the Company's operations caused by a Y2K problem
that is unique to the Company, and, therefore, the Company has not adopted a
contingency plan for that event. However, the Y2K Committee will continue to
monitor this possibility and will attempt to identify cost effective and timely
solutions should a problem in this regard be likely.




                                       16
<PAGE>   17



                       AMERICAN PRECISION INDUSTRIES INC.
                                AND SUBSIDIARIES

                Components of Consolidated Statement of Earnings
                     Expressed as a Percentage of Net Sales
                ------------------------------------------------

<TABLE>
<CAPTION>

                                                                   Third Quarter Ended
                                                               ---------------------------
                                                               September 30,    October 3,
                                                                    1998           1997
                                                               -------------    ----------

<S>                                                                <C>             <C>  
Net Sales                                                          100.0           100.0
                                                                   -----           -----

Costs and Expenses
    Cost of products sold                                           70.1            70.1
    Selling and administrative                                      21.1            20.5
    Research and product development                                 2.0             1.9
    Interest and debt expense, net of investment income              1.4             1.6
    Other expense                                                      -             0.4
                                                                   -----           -----
                                                                    94.6            94.5
                                                                   -----           -----

Earnings before Income Taxes                                         5.4             5.5

Income Taxes                                                         1.9             1.4
                                                                   -----           -----

Net Earnings                                                         3.5             4.1
                                                                   =====           ===== 

Income Taxes as a percentage of
      Earnings Before Income Taxes                                  36.0%           25.7%
                                                                   =====           ===== 
</TABLE>





                                       17
<PAGE>   18



                           PART II - OTHER INFORMATION


Item 1.        Legal Proceedings
-------        -----------------

               None


Item 2.        Changes in Securities and Use of Proceeds
-------        -----------------------------------------

               None


Item 3.        Defaults Upon Senior Securities
-------        -------------------------------

               None


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

               None


Item 5.        Other Information
-------        -----------------

               None


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

               (a)      Exhibits

                        See the index to exhibits immediately preceding the
                        exhibits filed with this report.

               (b)      Reports on Form 8-K

                        The Company filed a Report on Form 8-K on September 8,
                        1998 reporting under Item 5 its new Credit Agreement
                        with Marine Midland Bank and Fleet National Bank dated
                        August 31, 1998.










                                       18
<PAGE>   19


                       AMERICAN PRECISION INDUSTRIES INC.
                                AND SUBSIDIARIES

                                   * * * * * *

               SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
               --------------------------------------------------
                          LITIGATION REFORM ACT OF 1995
                          -----------------------------


         Certain statements made in this report constitute forward-looking
         statements based upon current expectations and are made pursuant to the
         safe harbor provisions of the Private Securities Litigation Reform Act
         of 1995. Such forward-looking statements involve certain assumptions,
         risks and uncertainties that could cause actual results to differ
         materially from those included in, or contemplated, by the statements.
         These assumptions, risks and uncertainties include, but are not limited
         to, the successful transition of the acquisitions of Schmidt-Bretten
         and Portescap into the Company, the continued improvement at the
         Company's air-cooled heat exchanger operation, customer acceptance of
         the new line of motors and drives, the successful installation of the
         new flow manufacturing system at Portescap, improvements in the
         semi-conductor and refrigeration markets, stability in the interest
         rate and foreign currency environment, the Company's ability to deal
         with issues raised by the Year 2000, as well as the risks and
         uncertainties associated with general economic cycles in North America,
         Europe or the Far East. The Company expressly disclaims any obligation
         to update any forward-looking statements as a result of developments
         occurring after the date hereof.

                                   * * * * * *

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.


AMERICAN PRECISION INDUSTRIES INC.


/s/ Bruce McH. Kirchner
----------------------------------
Bruce McH. Kirchner
Chief Financial Officer


/s/ Mark E. Wood
----------------------------------
Mark E. Wood
Corporate Controller



November 11, 1998


                                       19
<PAGE>   20




                                  EXHIBIT INDEX
                                  -------------


2A         Credit Agreement, with exhibits and schedules, dated August 31, 1998,
           by and among American Precision Industries Inc., and Marine Midland
           Bank, as agent and lender, and Fleet National Bank, as lender
           (incorporated by reference to Exhibit 4(A) in the Registrant's Form
           8-K dated September 8, 1998).


4A         Rights Agreement, dated as of July 24, 1998, between American
           Precision Industries Inc. and American Securities Transfer & Trust,
           Inc., as Rights Agent (incorporated by reference to Exhibit 4 in the
           Registrant's Form 8-A dated July 24, 1998).


10A        Amendment No. 1 to the American Precision Industries Inc. 1997
           Officers Stock Option Plan


10B        Amendment No. 1 to the American Precision Industries Inc. 1995
           Directors Stock Option Plan


10C        Amendment No. 2 to the American Precision Industries Inc. 1998
           Employees Stock Option Plan


10D        Amendment No. 2 to the American Precision Industries Inc. 1995
           Employees Stock Option Plan


10E        Amendment No. 2 to the American Precision Industries Inc. 1993
           Employees Stock Option Plan


10F        Amendment No. 2 to the American Precision Industries Inc. 1989
           Employees Stock Option Plan


11         Computation of net income per share


27         Financial Data Schedule





                                       20