<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K
/x/ Annual report pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 (Fee Required) For fiscal year ended December 31, 1996,
    or

/ / Transition report pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 (Fee Required) For the transition period
    from ______________ to _______________

    Commission file number 0-12728



                                  MEDAR, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Michigan                                   38-2191935
---------------------------------       ---------------------------------------
 (State or other jurisdiction of        (I.R.S. Employer Identification Number)
  incorporation or organization)

        38700 Grand River Avenue,
       Farmington Hills, Michigan                          48335
 ----------------------------------------           -------------------
 (Address of principal executive offices)                (Zip Code)

Registrant's telephone number,                          (810) 471-2660
including area code:                             ----------------------------


Securities registered pursuant to Section 12(b) of the Act:


                                          Name of each exchange
       Title of each class                 on which registered
       -------------------                 -------------------
              NONE                                NONE


Securities registered pursuant to Section 12(g) of the Act:

            COMMON STOCK, NO PAR VALUE, STATED VALUE $.20 PER SHARE
            -------------------------------------------------------
                                (Title of Class)

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 and (2) has been subject to the filing
requirements for at least the past 90 days.

                               YES   X        NO
                                   -----         -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [   ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1997:

     Common Stock, No Par Value, Stated Value $.20 Per Share - $27,081,920

        The number of shares outstanding on each of the issuer's classes
                   of common stock, as of February 28, 1997:

      Common Stock, No Par Value, Stated Value $.20 Per Share - 8,852,401



                                     Page 1
<PAGE>   2

                      DOCUMENTS INCORPORATED BY REFERENCE




Portions of the proxy statement for the annual shareholders meeting to be held
May 28, 1997 are incorporated by reference into Part III.



                                     Page 2
<PAGE>   3
                                     PART I

ITEM 1. BUSINESS

GENERAL

Medar, Inc. ("The Company") develops, manufactures and markets
microprocessor-based process monitoring and control systems for use in
industrial manufacturing environments.  The principal applications for the
Company's products include optical inspection systems and resistance welding
controls.  From its incorporation in 1978 to 1983, the Company was 100% owned by
Maxco Inc., a publicly-held, Michigan-based holding company ("Maxco").  In June
of 1983, the Company issued to the public 800,000 shares of Common Stock,
reducing Maxco's ownership to 80%.  As of February 28, 1997, Maxco's ownership
of the Company's Common Stock was approximately 21%.

The Company has two wholly-owned subsidiaries.  Most of the Company's Canadian
sales of resistance welding controls are effected through Medar Canada Ltd.,
located in Oshawa, Ontario, Canada.  In February 1995, the Company acquired 100%
of the common stock and preference shares of Integral Vision Ltd. ("Integral"),
an English corporation, for 654,282 previously unissued shares of Medar, Inc.
common stock.  Integral is a machine vision company which develops solutions for
OEM's and end-users.  Sales of the Company's vision inspection systems are
effected through Integral Vision-AID (a division of the Company), Integral
Vision, Ltd., or the Company.

In 1994, the Company formed a joint venture with Shanghai Electric Welding
Machine Works and Lida, USA called Shanghai Medar Welding Equipment Corp., Ltd.,
a manufacturer of resistance welding controls located in China.  The Company
owns 21.3% of this joint venture.

When used herein, unless the context indicates otherwise, "Medar" or the
"Company" also refers to the Company's division and subsidiaries.  The
Company's principal offices are located at 38700 Grand River Avenue, Farmington
Hills, Michigan 48335 and its telephone number is (810) 471-2660.

The Company's products are principally resistance welding controls and optical
inspection and gauging equipment.  Medar's welding controls monitor and
automatically regulate electrical current for industrial resistance welding
applications.  The majority of the Company's optical inspection equipment is
used to detect manufacturing defects in various optical storage media such as
audio compact discs ("Audio CDs") and compact discs-read only memory
("CD-ROM's"), recordable compact discs ("CD-Rs"), and digital versital discs
("DVD's").  The Company also markets a general purpose vision inspection
product.

Resistance Welding Controls

The Company markets a full line of welding controls.  These controls monitor
and automatically regulate electrical current passing through materials being
welded, compensating for variations in materials, coatings and certain other
welding system characteristics.  Many of the Company's products are fully
programmable, allowing users to tailor welding sequences to particular
applications using one welding control.  The Company has designed two levels of
"integration," combining its controls with other forms of factory automation as
follows: "Level 1" integration replaces "hard-wired" connections between the
welding control and other equipment ("discrete input/output") with a serial
communications link; "Level 2" integration allows customers to incorporate the
welding controls directly into existing microprocessor-based factory floor
automation system control racks.  This approach reduces overall system
complexity, manufacturing floor space requirements, and total welding system
cost.

The Company's products range from the low-end MedWeld 200 Series to the
high-end MedWeld 700 and 3000 Series.  The MedWeld 200 Series are low-cost,
stand-alone systems for fixed weld sequences targeted at industrial
manufacturers in emerging markets as well as domestic appliance manufacturers.
The MedWeld 700 Series controls, also stand-alone systems, are capable of Level
1 integration and feature fully-programmable weld sequences and serial
communications capabilities.  This series is used by automotive and aerospace
manufacturers in North America.  The Company provides Level 1 integration with
robotic equipment manufacturers including Fanuc Robotics North America, Inc.
and Kawasaki Robotics USA.  The MedWeld 3000 Series are welding subsystems that
permit Level 2 integration with programmable controllers and robotic welding
systems.  The MedWeld 3000 Series is currently integrated with equipment
manufactured by Allen-Bradley Company, Inc., ABB Robotics, Inc. and Nachi
Robotics Systems, Inc.  The Company believes that its integrated approach
continues to represent a significant market opportunity.

The Company's product line uses common design elements, incorporates
communications links and includes sophisticated feedback systems.  The Company
has developed a "weld kernel" that consists of core hardware and software
needed for production of a wide range of welding controls in a single modular
design.  This weld kernel results in significantly reduced manufacturing and
service costs as well as faster product design cycles.  The


                                     Page 3
<PAGE>   4
Company's communications products, including Weld Information Centers and Weld
Support Systems, link multiple controls with customers' computer systems in
order to program weld sequences and archive data for trend analysis and
substantiation of weld quality, all from a central location.

Medar's feedback systems include SureWeld Stepper, which regulates current to
compensate for electrode wear, and the Thermal Force Feedback System, which
monitors the expansion of parts as they are welded to determine when a
high-quality weld has been formed.

Optical Inspection of Compact Discs ("CD's")

The Company has developed optical inspection systems that utilize white-light
illumination, linear-array or matrix technologies, and sophisticated analytical
software.  The cornerstone of the Company's optical inspection capability is
its expertise in linear array technology.

In the Company's linear array optical disc inspection systems, a line of white
light is projected onto the disc using specially-developed optics and collected
with a linear array camera.  Image processing software then analyzes and
compares collected data to customer quality specifications.  This collected
data may also be used for statistical analysis and process control.  The
Company's systems can be integrated into production lines and are capable of
completing an inspection cycle in less than one second.  The Company believes
its products provide a cost-effective solution to optical disc inspection due
to a variety of software features that are available.

Optical discs, made of a translucent plastic raw material, are molded with
microscopic pits that represent digital information.  A thin layer of
reflective aluminum is applied, followed by a protective lacquer coating and a
silk-screened printed label.  Discs are generally marked with a bar code or
alphanumeric code for identification purposes.  The Company offers optical
inspection systems for a wide range of optical disc formats.  Medar's standard
defect inspection equipment can detect surface scratches, bubbles, black
specks, pin holes, disc warp and other imperfections down to resolutions of 40
microns. Customers can specify optional features for reading bar codes,
inspecting lacquer coatings, and birefringence measurement.  Inspection systems
can be configured to achieve resolutions to 20 microns to satisfy the demanding
tolerances of higher-density optical storage media such as "write-once" CD-R's
and "multiple write" Magneto-Optical ("MO") discs.

The Company's current family of optical inspection equipment is sold primarily
to original equipment manufacturers ("OEMs") and end-users of CD manufacturing
equipment.  For sales to OEMs, the Company's products are typically integrated
directly into optical disc production equipment.  The Company's inspection
systems are the systems of choice for many OEMs worldwide that sell optical disc
manufacturing equipment.

The acquisition of Integral in 1995 provided the Company with additional
inspection products to its existing matrix product line as well as synergies
with its existing optical inspection product line, including systems
which inspect the printed surface of a compact disc to verify label quality and
another which reads and identifies alphanumeric catalog identification codes to
prevent mislabeling.

General Purpose Vision Inspection Software ("VisionBlox")

Machine vision is the application of technology to acquire, process and analyze
image data so that conclusions can be drawn and actions taken based on those
results.  Machine vision technology is most frequently used to insure
manufactured product quality by monitoring and controlling the manufacturing
process.  In the past, vision systems required dedicated systems with
customized software.  The programming of customized software accounted for the
majority of the development effort.

VisionBlox takes advantage of the advances in PC technology and uses that power
to offer the first PC based, software-only machine vision product for OEMs,
integrators, and machine builders to build low unit cost, low engineering
investment, high-performance PC vision systems.  VisionBlox can be configured
in a variety of ways to customize every machine vision application.  By
supporting an open system's architecture, other third party hardware and
software products can be easily linked into the VisionBlox application, thereby
allowing developers to take advantage of off-the-shelf hardware and software
products.  Custom and powerful vision applications can be developed, tested,
and released in man-weeks -- not man-months, or man-years.

VisionBlox includes custom controls for image processing, image analysis, third
party products, calibration space, and transformations/geometry (2-D and 3-D
space).  VisionBlox has an open architecture and can support any commercial
frame grabber or vision processor.  System requirements include a Pentium IBM
compatible PC with 32 MB RAM, 100 MB disk space, a single SVGA display monitor,
Microsoft Visual Basic or Microsoft Visual C++, and Microsoft Windows.


                                     Page 4
<PAGE>   5
Vision developers obtain tangible benefits from using VisionBlox, such as per
unit cost reductions, reduction in engineering development time, eliminating
the need to develop core vision algorithms, and providing a Windows user
interface.  These are just some of the reasons why, during its introductory
year, VisionBlox was voted by readers of Test & Measurement World magazine one
of this year's top products.  Voters were asked to consider value-for-price,
technical support, ease of use, overall quality, and reliability when making
their selection.

See the notes to the Consolidated Financial Statements for details of Segment
Data.

PRODUCT DEVELOPMENT

The markets in which the Company competes are characterized by rapid
technological change.  The Company's continued success will depend in large
part upon its ability to develop and successfully introduce new products and
product enhancements.  For example, improvements in Audio CD and CD-ROM
manufacturing systems, as well as the introduction of new optical storage
formats such as DVD, CD-R and MO, require the Company to continually improve
its optical inspection systems and provide additional features.  The Company
has devoted and will continue to devote substantial resources to research and
development.  There can be no assurance that the Company will be able to
successfully develop, introduce and market new products or enhancements, or
that new products or enhancements will meet the requirements of the marketplace
and achieve market acceptance.  If the Company is unable to develop and
introduce new products and enhancements in a timely manner in response to
changing market conditions or customer requirements, the Company's results of
operations could be materially and adversely affected.  In addition,
technological developments have resulted and may continue to result in the
obsolescence of components and subassemblies the Company holds as inventory.

The following table sets for the periods indicated certain amounts relating to
the Company's product development activities.


<TABLE>
<CAPTION>
                                                  Year ended December 31
        -----------------------------------------------------------------
                                                    1996    1995    1994
         -----------------------------------------------------------------
                                                      (in millions)
        -----------------------------------------------------------------
<S>                                                <C>     <C>     <C>
        Gross engineering expenses                   $9.7    $8.0    $5.7


        Capitalized computer software                (4.7)   (3.3)   (2.5)
        development costs

        Costs directly related to customer orders    (1.4)   (1.8)   (0.4)

        Technical sales support expenses             (0.0)   (0.8)   (0.4)
        -----------------------------------------------------------------
          Net research and development expense       $3.6    $2.1    $2.4
        =================================================================
        Amortization of capitalized computer
        software development costs                   $2.5    $2.3    $1.6
        =================================================================
</TABLE>



SALES AND MARKETING; CUSTOMERS

The Company markets its welding control and CD optical inspection products to
both end-users and OEMs, and utilizes agents for the distribution of its
products in Europe, Asia, South America and Mexico.  The Company integrates
these products with other manufacturers' factory automation systems.
Management believes this approach allows the Company to leverage the sales and
marketing capabilities of equipment manufacturers such as Allen-Bradley
Company, Inc., ABB Robotics, Inc., Marubeni America, and Toolex Alpha. The
Company markets its VisionBlox software products worldwide to OEMs, integrators
and volume end users utilizing a direct sales force, distributors, and alliance
partners.  Direct sales activities are aimed at location and alignment
applications at high potential OEMs in the electronics, semiconductor, and
printing industries where integrated motion/calibration capabilities make
VisionBlox extremely competitive.   The Company participates in numerous trade
shows each year and regularly advertises in various trade magazines.

Pricing for the Company's weld control and CD optical inspection products
generally is determined by competitive bidding followed by negotiations. Pricing
for the Company's systems is based on features, system configuration and the
customer's volume requirements.  The Company generally provides a one-year
warranty for all products sold. For sales to OEMs and agents, the Company offers
discounts from list pricing. Pricing for the Company's VisionBlox software is
determined by the type of package and the accumulated quantity purchased over a
one year period.



                                     Page 5
<PAGE>   6
For the years ended December 31, 1996, 1995 and 1994, sales to Chrysler
Corporation accounted for approximately 14%, 9%, and 14% respectively, of the
Company's net sales.  Sales to General Motors Corporation for the same periods
accounted for approximately 19%, 21% and 23% of net sales, respectively.  At
December 31, 1996, approximately 40% and 23% of the Company's backlog was
attributable to GM and Chrysler, respectively. The loss of either of these
customers or cancellation of orders by them could have a material adverse
effect on the Company's results of operations.  The Company anticipates that in
the near term it will continue to be dependent upon certain large customers for
a significant portion of its revenues.  VisionBlox was introduced in 1996.
Marketing relationships have been established with a number of frame grabber
companies in addition to working with several large customers who are currently
integrating VisionBlox into product plans and new machines.

Because a significant portion of the Company's resistance welding controls
sales are to domestic automotive manufacturers, the cyclical nature of the U.S.
automotive industry significantly affects the Company's revenues and operating
results.  The Company's dependence on a few large customers in its resistance
welding business, together with its reliance on large orders, and its reliance
on a relatively discrete industry in its vision business have also contributed
to the variability of the Company's operating results. In the past, downturns
in the U.S.  automotive industry have negatively affected the Company's
resistance welding control sales, most recently in 1990.  There can be no
assurance that the Company will not be affected by future industry downturns in
the U.S. automotive manufacturing industry.

Export sales accounted for 23%, 21% and 27% of the Company's net sales in 1996,
1995 and 1994, respectively.  The Company expects that such sales will continue
to represent a significant percentage of its net sales. The Company conducts
sales and service operations for its welding control products in Canada through
a wholly-owned Canadian subsidiary and a joint venture agreement with Shanghai
Electric Welding Machine Works for production of resistance welding control
equipment in China.  Also, certain optical inspection sales are effected
through Integral Vision Ltd. in the United Kingdom.  Non-U.S. sales involve a
number of risks, including fluctuations in exchange rates, changes in trade
policies, tariff regulations and changes in governments.  Most of the Company's
international sales are denominated in U.S. dollars, Canadian sales are
denominated in Canadian dollars, and Japanese sales of optical inspection
equipment are denominated in yen.  For certain non-U.S. sales, the Company
markets and sells its products through independent sales representatives in
Europe, Asia, South America and Mexico.  The loss of a key foreign sales agent
or OEM could have a material adverse effect on the Company's non-U.S. sales
and, accordingly, the Company's results of operations.

See the notes to the Consolidated Financial Statements (Item 8) for details of
geographic area information.

COMPETITION

The markets for microprocessor-based manufacturing control and optical
inspection equipment are highly competitive.  For welding controls, the
Company's primary competitors include Weltronic Company, Robotron Corporation
and Robert Bosch GmbH.  To a lesser extent, the Company also competes with,
among others, Dengensha America Corp./Dengensha Mfg. Co., Ltd., Nadex Co.,
Ltd./Nagoya Dengensha Co., Ltd., British Federal, Ltd., and Miyachi Technos
Corporation.  The Company believes competition for welding controls is based
primarily upon price, performance, technical expertise, customer support and
durability. For optical inspection, the Company's primary competitors are Dr.
Schenk GmbH and Basler GmbH.  The Company believes the principal competitive
factors for optical inspection are quality, price, cycle times, and features.
While the Company believes it currently competes favorably with respect to the
above factors, there can be no assurance that it will be able to continue to do
so or that competition will not have a material adverse effect on the Company's
results of operations and financial condition.  VisionBlox sales efforts are
pre-directed towards the electronics, semiconductor, and printing industries
where the Company believes it is extremely competitive in location and
alignment applications.  Dominant competitors include Cognex and AISI.  While
the Company may face competition from additional sources in all aspects of its
business, the Company believes that competition in the optical disc inspection
industry in particular may intensify, and that companies with significantly
greater technical, financial and marketing resources than the Company may enter
its markets.

MANUFACTURING AND SUPPLIERS

The Company manufactures its products at its headquarters in Farmington Hills,
Michigan. Manufacturing consists primarily of assembling standard electrical
and electronic components and hardware subassemblies purchased from suppliers
into finished products.  The Company also utilizes outside vendors to
manufacture certain subassemblies and finished products.

The Company designs printed circuit boards for its hardware products as needed.
In most cases, the Company purchases components for circuit boards directly and
forwards them to outside contractors for assembly, although in certain limited
circumstances, the Company performs in-house circuit board assembly.


                                     Page 6
<PAGE>   7
The Company generally does not rely on a single source for parts or
subassemblies, unless design alternatives exist that permit use of other parts
should single source supply be interrupted.  Certain of the components and
subassemblies included in the Company's products may be obtained from a limited
number of suppliers. Although the Company believes it will be able to develop
alternative sources for any of the components used in its products, significant
delays or interruptions in the delivery of components by suppliers or
difficulties or delays in shifting manufacturing capacity to new suppliers
could have a material adverse effect on the Company.

BACKLOG

As of December 31, 1996, the Company had an order backlog of approximately $5.6
million, compared to approximately $12.9 million as of December 31, 1995.  The
Company's dependence on a few large customers in its resistance welding
business, together with its reliance on large orders, have contributed to
variability in the Company's backlog.  For the years 1996, 1995 and 1994,
approximately 14%, 9% and 14%, respectively, of the Company's net sales were
attributable to sales to Chrysler Corporation ("Chrysler") and approximately
19%, 21% and 23%, respectively, were attributable to sales to General Motors
Corporation ("GM").  At December 31, 1996 and 1995, approximately 40% and 62%,
respectively, of the Company's backlog was attributable to GM and approximately
23% and 4%, respectively, of the Company's backlog was attributable to
Chrysler.  The loss of either of these customers or cancellation of orders by
them could have a material adverse effect on the Company's results of
operations.  The Company anticipates that in the near term it will continue to
be dependent upon certain large customers for a significant portion of its
revenues.  The Company's production schedule is generally based on a
combination of sales forecasts and the receipt of specific customer orders, and
typically no advance or progress payments are required from customers unless
the system ordered includes custom features.  Purchase orders are generally
cancelable, although the Company may assess penalties.  The Company expects to
be able to ship products representing all of this backlog before the end of the
current fiscal year, although there is no assurance that the Company will be
able to do so.  The amount of backlog at any date does not necessarily indicate
revenues in any future period.

PATENTS AND PROPRIETARY RIGHTS

The Company believes that technology incorporated in its resistance welding
control, optical inspection, and general vision products give it advantages
over its competitors and prospective competitors.  The Company attempts to
protect its technology through a combination of patents, confidentiality
agreements and trade secrets.

The Company has ten U.S. patents on technology involved in its resistance
welding controls. In addition, certain of these technologies are protected by
foreign patents.   The Company also has a license to use certain patents
originally developed by Square D Company and a license to use certain patents
originally developed by Owens-Illinois, Inc. relating to optical inspection
technology.  Recently, the Company has applied for patent protection of certain
software products.  There can be no assurance that any patents applied for will
be granted or that patents the Company holds will be considered valid if
challenged or sufficiently broad to protect the proprietary nature of the
Company's technology.  In addition, the software technology of the Company's
products is advancing so quickly that in the 2-3 years it takes to get a patent
issued in the U.S. and the up to ten years in some foreign countries, the
technology may become obsolete before the patent issues.

The Company also relies on trade secrets and proprietary know-how that it seeks
to protect through confidentiality agreements with certain employees and
suppliers and has established procedures to maintain confidentiality of
sensitive information.  There can be no assurance that confidentiality
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that others will not develop substantially equivalent
technology and techniques or otherwise gain access to the Company's trade
secrets.  In addition, the laws of foreign countries may not protect the
Company's proprietary rights to its technology, including patent rights, to the
same extent as the laws of the U.S.

Although the Company believes it has independently developed its technology and
attempts to assure that its products do not infringe the proprietary rights of
others, if infringement were proven, there can be no assurance that the Company
could obtain necessary licenses on terms and conditions that would not have an
adverse affect on the Company.  In the event of a dispute concerning the
Company's technology, including an alleged infringement by a competitor,
litigation could become necessary.  Adverse findings in any proceeding could
subject the Company to liability to third parties, require the Company to seek
licenses from third parties, or otherwise adversely affect the Company's
ability to manufacture and sell affected products.

ENVIRONMENTAL COMPLIANCE

The costs to the Company of complying with federal, state and local provisions
regulating protection of the environment are not material.


                                     Page 7
<PAGE>   8
EMPLOYEES

As of February 28, 1997, the Company had approximately 330 permanent employees,
as compared to 325 at February 29, 1996 and 214 at February 28, 1995.  The
Company also engages a limited number of contract workers, primarily for
assembly operations, the number of which varies, depending upon production
requirements. None of the Company's employees is represented by a labor union.

The continued success of the Company is dependent in large part on certain key
management and technical personnel, the loss of one or more of whom could
adversely affect the Company's business.  In particular, the Company relies
upon the services and expertise of its product development and engineering
staff.  The Company believes that its future success will depend significantly
upon its ability to attract, retain and motivate skilled technical, sales and
management employees.  The Company could encounter competition for these
personnel.

                                     Page 8
<PAGE>   9
ITEM 2. PROPERTIES

Manufacturing, engineering and administrative functions of Medar are performed
at two facilities owned by the Company in Farmington Hills, Michigan which total
approximately 100,000 square feet.  In addition, Medar leases approximately
7,000 square feet of warehouse space in another location in Farmington Hills,
Michigan on a month-to-month basis.  Integral leases two facilities located in
Bedford, United Kingdom approximating 5,000 square feet each to perform sales,
some engineering, and administrative functions.  These leases expire through
2015.  Sales and service functions principally for Canadian sales are performed
at Medar Canada, Ltd., which currently leases a 4,000 square foot facility in
Oshawa, Ontario, Canada with a lease term expiring November 30, 1999.

The Company believes its facilities are suitable for their respective
activities.  Although the Company believes its facilities are adequate for its
current operations, the Company may require additional space as operations
expand.   The Company believes that adequate space at reasonable terms is
readily available in each of the areas in which the Company may seek to expand.


ITEM 3. LEGAL PROCEEDINGS

The Company is not currently involved in any material litigation.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                                     None.


                                     Page 9
<PAGE>   10
                                    PART II



ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the over-the-counter market (NASDAQ) as
a National Market Issue under the symbol MDXR.  As of February 28, 1997, there
were approximately 4,000 stockholders of the Company including individual
participants in security position listings.

The table below shows the high and low sales prices for the Company's common
stock for each quarter in the past two years.  The closing sales price for the
Company's common stock on February 28, 1997 was $4 1/8 per share.



<TABLE>
<CAPTION>
                                                  1996
----------------------------------------------------------------------
                                    Mar 31   Jun 30    Sept 30  Dec 31
----------------------------------------------------------------------
<S>                                 <C>      <C>      <C>     <C>
             High                   $ 9 1/8  $11 1/4  $11       $6 5/8
             Low                      6 1/8    8 1/8    6 5/8    4 5/8

                                                   1995
-----------------------------------------------------------------------
                                    Mar 31   Jun 30     Sept 30  Dec 31
-----------------------------------------------------------------------
             High                   $16 1/2  $11 1/2  $14 3/8   $11 3/4
             Low                      8 1/2    6 3/4    9 1/8     7 5/8
=======================================================================
</TABLE>



The market for securities of small market-capitalization companies has been
highly volatile in recent years, often for reasons unrelated to a company's
results of operations.  Management believes that factors such as quarterly
fluctuations in financial results, changes in the automotive, audio
electronics, and optical storage media industries, failure of new products to
develop as expected,  sales of common stock by existing shareholders, and
substantial product orders may contribute to the volatility of the price of the
Company's common stock.  General economic trends such as recessionary cycles
and changing interest rates may also adversely affect the market price of the
Company's Common Stock.

The Company has never paid a dividend and does not anticipate doing so in the
foreseeable future.  The Company expects to retain earnings to finance the
expansion and development of business.



                                    Page 10
<PAGE>   11
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                Year ended December 31
--------------------------------------------------------------------------------------------------------------
                                          1996             1995           1994           1993           1992
--------------------------------------------------------------------------------------------------------------
                                                        (in thousands, except per share data)
--------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>             <C>           <C>             <C>
Net sales                               $41,471         $ 39,771        $40,218         $28,694        $20,981

Gross margin                             10,683            9,655         13,451          10,416          7,711

Earnings (loss) before extraordinary
credit                                   (1,979)         (11,583)         3,688           3,300          1,344

Extraordinary credit*                                                                                      735
                                       -----------------------------------------------------------------------
Net earnings (loss)                     $(1,979)        $(11,583)       $ 3,300         $ 3,688        $ 2,079

Earnings (loss) per share:
   Before extraordinary credit          $  (.22)        $  (1.33)       $   .43         $   .44        $   .19

   Extraordinary credit                                                                                    .10

Net earnings (loss) per share           $  (.22)        $  (1.33)       $   .43         $   .44        $   .29

Weighted average shares                   8,820            8,692          8,524           7,529          7,251
==============================================================================================================
</TABLE>

* Tax benefit resulting from utilization of net operating loss carry forward.



<TABLE>
<CAPTION>
                                                                    At December 31
--------------------------------------------------------------------------------------------------------------
                                         1996             1995           1994           1993           1992
--------------------------------------------------------------------------------------------------------------
                                                                  (in thousands)
--------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>             <C>           <C>             <C>
Working capital                       $17,041           $18,676         $23,459       $14,015         $ 6,245

Total assets                           50,276            44,723          43,523        29,109          22,015

Long-term debt,
  including current portion            21,647            16,437           2,444         8,451           1,932

Stockholders' equity                   21,302            22,767          34,001        16,087          12,416
=============================================================================================================
</TABLE>


The above selected financial data should be read in conjunction with
consolidated financial statements, including the notes thereto (Item 8) and
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7).  The Company has never paid a dividend and does not
anticipate doing so in the foreseeable future.  The Company expects to retain
earnings to finance the expansion and development of business.


                                    Page 11
<PAGE>   12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

OVERVIEW

Medar develops, manufactures and markets microprocessor-based process
monitoring and control products for use in industrial manufacturing
environments.  The Company's revenues are primarily derived from the sale of
optical inspection equipment and resistance welding controls.  Optical
inspection equipment is principally sold to suppliers of audio compact disc
("Audio CD") and compact disc-read only memory ("CD-ROM") manufacturing
equipment.  Resistance welding control products are currently marketed
primarily to automobile manufacturers and suppliers of industrial automation
equipment.  For the years of 1996, 1995 and 1994, approximately 14%, 9% and
14%, respectively, of the Company's net sales were attributable to sales to
Chrysler Corporation and approximately 19%, 21% and 23%, respectively, of the
Company's net sales were attributable to General Motors Corporation.

The Company typically manufactures and sells its products subject to customer
specifications.  For most orders, revenue is recognized upon shipment.  For
orders that are considered long-term contracts under applicable accounting
standards, revenue is recognized using the percentage-of-completion method.
Long-term contracts include a relatively high engineering content.  For such
long-term contracts, customers generally are not billed and payment is not
received until products are shipped.  Revenues recognized on long-term
contracts in excess of amounts billed to customers are classified as current
assets, as these contracts are expected to be completed within one year.

Most of the Company's international sales are denominated in U.S.  dollars,
Canadian welding sales are denominated in Canadian dollars and Japanese sales
of optical inspection equipment are denominated in yen.  The impact of foreign
currency fluctuations has historically not been significant.  For additional
information on export sales, see the notes to the Consolidated Financial
Statements (Item 8).

The markets in which the Company competes are technologically advanced and
highly competitive.  Accordingly, the Company's continued success requires
substantial research and development expenditures.  While developing new
products, the Company attempts to be cognizant of inventory currently in its
possession in order to help mitigate inventory becoming obsolete.  Software
development expenditures that are not chargeable to specific customer orders
are expensed as research and development until technical feasibility is
established.  Thereafter, such expenditures are capitalized, reflected as other
assets at the lower of cost or net realizable value, and amortized over the
shorter of the remaining estimated economic life of the related products or
five years.  Capitalized software development costs were $4.7 million, $3.3
million and $2.5 million in 1996, 1995 and 1994, respectively.  Amortization of
capitalized software included in cost of sales was $2.5 million, $2.3 million
and $1.6 million in 1996, 1995 and 1994, respectively.  Engineering and
development expenditures relating to certain orders are incorporated in the
price charged to customers and are reflected in cost of sales.  Those costs
were $1.4 million, $1.8 million and $0.4 million in 1996, 1995 and 1994,
respectively.  The Company expects to continue its commitment to research and
development in the future.

Management's future expectations and results of operations, and other forward
looking statements contained in this document, involve a number of risks and
uncertainties.  Among these are business conditions and the general economy;
competitive factors, such as pricing and marketing efforts of rival companies,
margins actually realized on product sales, and the timing and success of new
product introductions.



                                   Page 12
<PAGE>   13
RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain items from the
Company's Statements of Operations as a percentage of net sales. The impact of
inflation for the periods presented was not significant.


<TABLE>
<CAPTION>
                                                                   Year ended December 31
----------------------------------------------------------------------------------------------
                                                                   1996       1995      1994
----------------------------------------------------------------------------------------------
                                                                        (in thousands)
----------------------------------------------------------------------------------------------
<S>                                                               <C>       <C>        <C>
Net sales                                                          100.0%    100.0%    100.0%
Cost of sales                                                       74.2      75.7      66.6
----------------------------------------------------------------------------------------------
  Gross margin                                                      25.8      24.3      33.4
Marketing expense                                                   10.9      12.6       9.5
General and administrative expense                                   7.7       8.6       6.8
Research and development expense                                     8.6       5.2       5.9
Patent litigation costs                                                       13.7       1.6
Excess product quality, warranty and other costs                              12.3
----------------------------------------------------------------------------------------------
                                                                    27.2      52.4      23.8
----------------------------------------------------------------------------------------------
Earnings (loss) from operations                                     (1.4)    (28.1)      9.6

Interest:
  Expense                                                            3.7       1.5       0.6
  Income                                                            (0.1)     (0.2)     (0.5)
----------------------------------------------------------------------------------------------
                                                                     3.6        1.3       0.1
----------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and extraordinary credit        (5.0)     (29.4)      9.5
Provision (credit) for income taxes                                 (0.2)      (0.3)      0.3
----------------------------------------------------------------------------------------------
Net earnings (loss)                                                 (4.8%)    (29.1%)     9.2%
==============================================================================================
</TABLE>


YEAR ENDED DECEMBER 31, 1996, COMPARED TO DECEMBER 31, 1995

Net sales increased $1.7 million (4.3%) to $41.5 million in 1996 from $39.8
million in 1995.  The increase resulted from an increase in resistance welding
product sales and a decrease in sales of optical inspection products.  The
increase in the sales of resistance welding products resulted principally from
continued strong orders from General Motors and Chrysler to satisfy retooling
programs.  The decrease in sales in optical vision products resulted
principally from an industry wide drop in the growth of orders for audio CD's
and CD-ROM's which resulted in reductions in and cancellations of orders for CD
inspection equipment, particularly in the second half of the year.

Cost of sales increased to $30.8 million from $30.1 million and as a percent
age of net sales decreased to 74.2% from 75.7%.  Although 1996 and 1995
percentages are comparative, the cost of sales percentage remains higher than
prior years and management's goals.  This results from costs of amortization of
software and other fixed costs not being fully absorbed at the sales levels
achieved in 1996 and 1995.

Marketing expense decreased to $4.5 million from $5.0 million and as a
percentage of net sales from 12.6% to 10.9%.  The decrease resulted from better
control of marketing costs, particularly the more effective integration of the
AID and Integral Vision sales forces in the current year.

General and administrative expense decreased to $3.2 million from $3.4 million
and as a percentage of net sales from 8.6% to 7.7%.  The decrease resulted from
cost savings following the closing of the former AID facility in Toledo early
in 1996 and better consolidation of general and administrative costs related to
Integral Vision in the UK.

Research and development costs increased to $3.6 million from $2.1 million and
as a percentage of net sales from 5.2% to 8.6%.  The increase principally
represents increased expenditures related to development of VisionBlox and DVD
and CD-R technologies.



                                    Page 13
<PAGE>   14
Patent litigation costs and excess product quality, warranty and other costs
represent expenses that were concluded as of December 31, 1995.

Interest expense increased to $1.5 million from $.6 million and as a percentage
of net sales to 3.7% from 1.5%.  The increase was due to additional average
borrowings under the revolving note payable to the bank, and the full year
effect of the patent license payable incurred in the third quarter of 1995 and
the term note related to the acquisition of a new production facility in the
fourth quarter of 1995.

YEAR ENDED DECEMBER 31, 1995, COMPARED TO DECEMBER 31, 1994

Net sales remained relatively the same in 1995 when compared to 1994.  This was
a result of an increase in sales volume of vision products being offset by a
decrease in sales volume of welding products.  The increase in vision sales was
comprised of an increase in shipments of the Company's optical disc inspection
system and related equipment.  The decrease in welding sales was due to a
decrease in sales to the Company's two largest customers.

Cost of sales increased to $30.1 million from $26.8 million and as a percentage
of net sales to 75.7% from 66.6%.  The increase was due to after-sale costs,
manufacturing inefficiencies and higher levels of overhead which were added in
anticipation of higher sales volume, and in some lines, more competitive
pricing of products.

Marketing expense increased to $5.0 million from $3.8 million and as a
percentage of net sales to 12.6% from 9.5%.  The increase was primarily the
result of allocating more resources to market and promote newer vision
products.

General and administrative expense increased to $3.4 million from $2.7 million
and as a percentage of net sales to 8.6% from 6.8%.  The increase was due to
additional costs associated with the acquisition of the Company's U.K.
subsidiary, and an increase in the Company's infrastructure.

Research and development expense decreased to $2.1 million from $2.4 million
and as a percentage of net sales to 5.2% from 5.9%.  The decrease resulted from
engineering resources which were directed towards resolving manufacturing
issues in two of the Company's new product lines which were introduced over the
past two years.

Patent litigation costs increased to $5.5 million from $0.7 million and as a
percentage of net sales to 13.7% from 1.6%.  The increase was the result of the
settlement with Square D Company related to the use of technology in prior
years as well as legal and other costs to defend the case.  The Company, in
addition, will make yearly payments related to the use of future technology in
accordance with the cross license agreement which was part of the settlement.

Excess product quality, warranty and other costs relate to costs incurred in
connection with after-sale and other costs experienced with recent product
introductions.  These accounts receivable, inventory, warranty and other costs,
while not all directly related to the fourth quarter of 1995, were identified
at such time, following an extensive review of these areas.

Interest expense increased to $0.6 million from $0.3 million and as a
percentage of net sales to 1.5% from 0.6%.  The increase was due to additional
borrowings associated with the revolving note payable to bank, the patent
license payable and an additional term note related to the addition of a new
building to add capacity.  The increase in the revolving note was principally
the result of the net loss incurred in 1995.

The credit for income taxes in 1995 was due to the net loss experienced in
1995.  There was income tax expense in 1994 due to the profitability during
that year.


                                   Page 14
<PAGE>   15
QUARTERLY INFORMATION

The following table sets forth consolidated statements of operations data for
each of the eight quarters in the two year period ended December 31, 1996.  The
unaudited quarterly information has been prepared on the same basis as the
annual information and, in management's opinion, includes all adjustments
necessary for a fair presentation of the information for the quarters
presented.

<TABLE>
<CAPTION>
                                                                        Quarter Ended
--------------------------------------------------------------------------------------------------------------------------
                                                    1996                                           1995
--------------------------------------------------------------------------------------------------------------------------
                                 Dec 31      Sep 30     Jun 30      Mar 31       Dec 31     Sep 30      Jun 30     Mar 31
--------------------------------------------------------------------------------------------------------------------------
                                                            (in thousands except per share data)
--------------------------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>         <C>         <C>        <C>         <C>         <C>         <C>
Net Sales                        $5,312     $13,721     $12,216     $10,222     $7,441     $9,777      $11,194     $11,359
Gross margin (loss)                (537)      3,840       3,913       3,467        109      2,091        3,790       3,665
Net earnings (loss)              (3,800)        607         887         327     (8,788)      (649)      (2,293)        147
==========================================================================================================================
Net earnings (loss) per share    $ (.43)       $.07        $.10        $.04     $(1.01)     $(.07)       $(.26)       $.02
==========================================================================================================================
</TABLE>


SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company's sales and operating results have varied substantially from
quarter to quarter.  Net sales and earnings are typically lower in the fourth
and first quarters.  The most significant factors affecting these fluctuations
are the seasonal buying patterns of the Company's customers.  The principal
customers for the Company's resistance welding control products traditionally
make purchases in connection with re-tooling for new automobile body styles and
tend to purchase the Company's equipment in the second and third quarters.  The
end users of the Company's optical inspection products typically add
manufacturing capacity in the second and third quarters in anticipation of
higher production requirements in the fourth quarter.  The Company expects its
net sales and earnings to continue to fluctuate from quarter to quarter.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the company had a revolving note payable to bank due
August 11, 1998, with a maximum balance of $16.0 million.  In February, 1997,
following negotiations with the bank, the Company restructured its bank
obligation as follows:

     Revolving note payable to bank, with interest at the bank's prime rate,
     plus 1/4%, due August 11, 1998.

     Note payable to bank, with interest at the bank's prime rate, plus 2%, due
     $1.5 million July 31, 1997 and $1.5 million December 31, 1997.

     $1.5 million demand note payable to bank, with interest at the bank's
     prime rate, plus 1%, guaranteed by a stockholder.

The total of these obligations is limited to $16.0 million (decreasing to $15.0
million on July 31, 1997) with availability of the revolving note based upon
levels of eligible accounts receivable and inventory.  $15.6 million was
borrowed on the line as of December 31, 1996.  Substantially all of the
Company's assets are pledged in support of these obligations and the mortgage
notes payable.

The agreement with the bank includes tangible net worth covenants and ratios at
levels which the Company believes can be maintained over the life of the
agreement.

In 1996, the Company used proceeds from long-term borrowings to fund additions
to capitalized software and property and equipment.  Despite the operating
loss, actual cash used in operations was minimal.  No significant commitments
for capital expenditures existed as of December 31, 1996.  The Company expects
to capitalize approximately $3.0 million of software development costs in 1997
and has no other plans for significant capital expenditures.

Although the Company believes that current financial resources together with
cash generated from operations are adequate to meet cash needs through 1997, it
expects to issue subordinated debt in the first six months of 1997 that will be
used to refinance the demand note and support working capital requirements.


                                    Page 15
<PAGE>   16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements and quarterly results of operations are submitted in
separate sections of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None.



                                   Page 16
<PAGE>   17
                                    PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information contained in the Medar, Inc. proxy statement (to be filed
within 120 days of December 31, 1996), with respect to directors and executive
officers of the Company, is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

The information contained in the Medar, Inc. proxy statement (to be filed
within 120 days of December 31, 1996), with respect to directors and executive
officers of the Company, is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information contained in the Medar, Inc. proxy statement (to be filed
within 120 days of December 31, 1996), with respect to directors and executive
officers of the Company, is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information contained in the Medar, Inc. proxy statement (to be filed
within 120 days of December 31, 1996), with respect to directors and executive
officers of the Company, is incorporated herein by reference.



                                   Page 17
<PAGE>   18
                                    PART IV



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K

(a)(1)     The response to this portion of Item 14 is
and (2)    submitted as a separate section of this report.
 (3)       Listing of Exhibits

Exhibit
Number                    Description of Document
------                    ----------- -- --------

3.1        Articles of Incorporation, as amended. (Filed as
           Exhibit 3.1 to the registrant's Form.)

3.2        Bylaws of the Registrant, as amended (filed as
           Exhibit 3.1 to the registrant's Form 10-K for the
           year ended December 31, 1991, SEC file 0-12728, and
           incorporated herein by reference).

10.1       Incentive Stock Option Plan of the Registrant as
           amended (filed as Exhibit 10.4 to the registrant's
           Form S-1 Registration Statement effective July 2,
           1985, SEC File 2-98085, and incorporated herein by
           reference).

10.2       Second Incentive Stock Option Plan (filed as Exhibit
           10.2 to the registrant's Form 10-K for the year ended
           December 31, 1992, SEC File 0-12728, and incorporated
           herein by reference).

10.3       Amendment to Medar, Inc. Incentive Stock Option Plan
           dated May 10, 1993 (filed as Exhibit 10.3 to the
           registrant's Form 10-K for the year ended December
           31, 1993, SEC File 0-12728, and incorporated herein
           by reference).

10.4       Non-qualified Stock Option Plan (filed as Exhibit
           10.3 to the registrant's Form 10-K for the year ended
           December 31, 1992, SEC File 0-12728, and incorporated
           herein by reference).

10.5       Medar, Inc. Employee Stock Option Plan (filed as
           Exhibit 10.5 to the registrant's Form 10-Q for  the
           quarter ended September 30, 1995, SEC file 0-12728,
           and incorporated herein by reference).

10.6       Form of Confidentiality and Non-Compete Agreement
           Between the Registrant and its Employees (filed as
           Exhibit 10.4 to the registrant's Form 10-K for the
           year ended December 31, 1992, SEC File 0-12728, and
           incorporated herein by reference).

10.7       Contract between Shanghai Electric Welding Machine
           Works, Medar, Inc. and Lida U.S.A. dated August 30,
           1993, related to joint venture agreement (both the
           original Chinese version and the English translation)
           (filed as Exhibit 10.7 to the registrant's Form 10-K
           for the year ended December 31, 1993, SEC File
           0-12728, and incorporated herein by reference).

10.8       Asset Purchase Agreement between Medar, Inc. and Air
           Gage Company dated February 28, 1994 (filed as
           Exhibit 10.8 to the registrant's Form 10-K for the
           year ended December 31, 1993, SEC File 0-12728, and
           incorporated herein by reference).

10.9*      License Agreement number 9303-004 between Medar, Inc.
           and Allen-Bradley Company, Inc. dated April 12, 1993
           (filed as Exhibit 10.9 to the registrant's Form 10-K
           for the year ended December 31, 1993, SEC File
           0-12728, and incorporated herein by reference).

10.10*     License Agreement number 9304-009 between Medar,
           Inc. and Allen-Bradley Company, Inc. dated May 10,
           1993 (filed as Exhibit 10.10 to the registrant's Form
           10-K for the year ended December 31, 1993, SEC File
           0-12728, and incorporated herein by reference).

10.11      Agreement by and between Medar, Inc. and ABB
           Robotics, Inc. dated December 1992 regarding joint
           development to integrate a weld controller into the
           S3 robot control (filed as Exhibit 10.11 to the
           registrant's Form 10-K for the year ended December
           31, 1993, SEC File 0-12728, and incorporated herein
           by reference).

10.15      Amended and Restated Mortgage and Security Agreement
           dated June 29, 1993 by and between Medar, Inc. and
           NBD Bank, N.A. (filed as Exhibit 4.5 to the
           registrant's Form 10-K for the year ended December
           31, 1993, SEC File 0-12728, and incorporated herein
           by reference).


                                   Page 18
<PAGE>   19
10.16      Revolving Credit and Loan Agreement dated August 10,
           1995 by and between Medar, Inc., Automatic Inspection
           Devices, Inc. and Integral Vision, Ltd. and NBD Bank
           (filed as Exhibit 10.1 to the registrant's Form 10-Q
           for the quarter ended June 30, 1995, SEC File
           0-12728, and incorporated herein by reference).

10.17      Amendment No. 2 to Loan and Credit Agreement and Term
           Note dated August 10, 1995 by and between Medar,
           Inc., Automatic Inspection Devices, Inc. and NBD Bank
           (filed as Exhibit 10.2 to the registrant's Form 10-Q
           for the quarter ended June 30, 1995, SEC File
           0-12728, and incorporated herein by reference).

10.18      First Amendment to Revolving Credit and Loan
           Agreement dated October 12, 1995, by and between
           Medar ,Inc., Automatic Inspection Devices, Inc. and
           Integral Vision, Ltd. and NBD Bank (filed as Exhibit
           10.18 to the registrant's Form 10-Q for the quarter
           ended September 30, 1995, SEC File 0-12728, and
           incorporated herein by reference).

10.19      Second Amended and Restated Revolving Note dated
           October 12, 1995, by and between Medar, Inc.,
           Automatic Inspection Devices, Inc. and Integral
           Vision, Ltd. and NBD Bank (filed as Exhibit 10.19 to
           the registrant's Form 10-Q for the quarter ended
           September 30, 1995, SEC File 0-12728, and
           incorporated herein by reference).

10.20      Mortgage dated October 31, 1995 by and between Medar,
           Inc. and NBD Bank (filed as Exhibit 10.21 to the
           registrant's Form 10-Q for the quarter ended
           September 30, 1995, SEC File 0-12728, and
           incorporated herein by reference).

10.21      Installment Business Loan Note dated October 31,
           1995, by and between Medar, Inc. and NBD Bank (filed
           as Exhibit 10.22 to the registrant's Form 10-Q for
           the quarter ended September 30, 1995, SEC File
           0-12728, and incorporated herein by reference).

10.22      Guarantee and Postponement of Claim  dated August 10,
           1995  between Medar Canada, Ltd. and NBD Bank (filed
           as Exhibit 10.23 to the registrant's Form 10-Q for
           the quarter ended September 30, 1995, SEC File
           0-12728, and incorporated herein by reference).

10.23*     Patent License Agreement dated October 4, 1995
           by and between Medar, Inc. and Square D Company
           (filed as Exhibit 10.24 to the registrant's Form 10-Q
           for the quarter ended September 30, 1995, SEC File
           0-12728, and incorporated herein by reference).

10.24      Third Amendment to Revolving Credit and Loan
           Agreement dated March 29, 1996 by and between Medar,
           Inc., Integral Vision-AID, Inc., Integral Vision
           Ltd., and NBD Bank (filed as Exhibit 10.24 to the
           registrant's Form 10-Q for the quarter ended March
           31, 1996, SEC file 0-12728, and incorporated herein
           by reference).

10.25      Third Amended and Restated Revolving Note dated March
           29, 1996 by and between Medar, Inc., Integral
           Vision-AID, Inc., Integral Vision Ltd., and NBD Bank
           (filed as Exhibit 10.25 to the registrant's Form 10-Q
           for the quarter ended March 31, 1996, SEC file
           0-12728, and incorporated herein by reference.)

10.26      General Security Agreement dated March 29, 1996 by
           and between Medar, Inc., and NBD Bank (filed as
           Exhibit 10.26 to the registrant's Form 10-Q for the
           quarter ended March 31, 1996, SEC file 0-12728, and
           incorporated herein by reference).

10.27      General Security Agreement dated March 29, 1996 by
           and between Integral Vision-AID, Inc. and NBD Bank
           (filed as Exhibit 10.27 to the registrant's Form 10-Q
           for the quarter ended March 31, 1996, SEC file
           0-12728, and incorporated herein by reference).

10.28      General Security Agreement dated May 1, 1996 by and
           between Medar Canada Ltd., and NBD Bank (filed as
           Exhibit 10.28 to the registrant's Form 10-Q for the
           quarter ended June 30, 1996, SEC file 0-12728, and
           incorporated herein by reference).

10.29      Composite Guarantee and Debenture dated May 29, 1996
           by and between Integral Vision, Ltd. and NBD Bank
           (filed as Exhibit 10.29 to the registrant's Form 10-Q
           for the quarter ended June 30, 1996, SEC file
           0-12728, and incorporated herein by reference).



                                   Page 19
<PAGE>   20
10.30      Fourth Amendment to Revolving Credit and Loan
           Agreement dated August 11, 1996 by and between Medar,
           Inc., Integral Vision-AID, Inc., Integral Vision Ltd.
           and NBD Bank (filed as Exhibit 10.30 to the
           registrant's Form 10-Q for the quarter ended
           September 10, 1996, SEC file 0-12728, and
           incorporated herein by reference).

10.31      Fifth amendment to revolving credit and loan
           agreement dated February 27, 1997 by and between
           Medar, Inc. and Integral Vision, Ltd. and NBD Bank.

10.32      Over formula loan note dated February 27, 1997 by and
           between Medar, Inc., Integral Vision, Ltd. and NBD
           Bank.

10.33      Bridge loan note dated February 27, 1997 by and
           between Medar, Inc., Integral Vision ,Ltd., and NBD
           Bank.

10.34      Guaranty by Maxco, Inc. dated February 27, 1997 of
           $1,500,000 bridge loan note by and between Medar,
           Inc., Integral Vision, Ltd., and NBD Bank.

11         Calculation of Earnings per Share.

21         Subsidiaries of the Registrant.

23         Consent of Independent Accountants.

27         Financial Data Schedule

(b)        There were no reports on Form 8-K filed in the
                quarter ended December 31, 1996.

(c)        Exhibits - The response to this portion of Item 14 is
                submitted as a separate section of this report.

(d)        Financial Statement Schedules - The response to this
                portion of Item 14 is submitted as a separate
                section of this report.


           * The Company has been granted confidential treatment with
             respect to certain portions of this exhibit pursuant to
             Rule 24b-2 under the Securities Exchange Act of 1934, as
             amended.



                                   Page 20
<PAGE>   21
                                   SIGNATURES


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


Date:      March 25, 1997     MEDAR, INC.
           --------------


                              By:   //CHARLES J. DRAKE//
                                    --------------------------------------------
                              Charles J. Drake, President, Chairman of the Board
                              (Principal Executive Officer)


                              By:   //RICHARD R. CURRENT//
                                    --------------------------------------------
                              Richard R. Current, Executive Vice President of
                              Finance and Operations (Principal Financial and
                              Accounting Officer)


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


   //CHARLES J. DRAKE//       President, Chairman of the Board (Principal
---------------------------   Executive Officer) and Director
Charles J. Drake


   //MAX A. COON//            Vice Chairman, Secretary and Director
---------------------------
Max A. Coon


   //RICHARD R. CURRENT//     Executive Vice President of Finance and Operations
---------------------------   (Principal Financial and Accounting Officer) and
Richard R. Current             Director


   //VINCENT SHUNSKY//        Treasurer and Director
---------------------------
Vincent Shunsky


   //WILLIAM B. WALLACE//     Director
---------------------------
William B. Wallace



   //STEPHAN SHARF//          Director
---------------------------
Stephan Sharf


   //STEPHEN ZYNDA//          Director
---------------------------
Stephen Zynda



                                    Page 21
<PAGE>   22





                           ANNUAL REPORT ON FORM 10-K


                       ITEM 14(a)(1) AND (2), (c) AND (d)


              LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
                                   SCHEDULES


                                CERTAIN EXHIBITS


                         FINANCIAL STATEMENT SCHEDULES


                          YEAR ENDED DECEMBER 31, 1996


                                  MEDAR, INC.


                           FARMINGTON HILLS, MICHIGAN












                                   Page 22
<PAGE>   23
FORM 10-K - ITEM 14(a)(1) and (2)
MEDAR, INC. AND SUBSIDIARIES



LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES


(a)(1)    The following consolidated financial statements of
          Medar, Inc. and subsidiaries are included in Item 8:

              Report of independent auditors
              Consolidated balance sheets-December 31, 1996 and 1995
              Consolidated statements of operations-Years ended
                December 31, 1996, 1995 and 1994
              Consolidated statements of stockholders' equity-Years
                ended December 31, 1996, 1995 and 1994
              Consolidated statements of cash flows-Years ended
                December 31, 1996, 1995 and 1994
              Notes to consolidated financial statements-December 31, 1996

   (2)    The following consolidated financial statement schedule of Medar,
          Inc. and subsidiaries is submitted herewith:

                  SCHEDULE II    Valuation and qualifying accounts



All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.



                                   Page 23
<PAGE>   24
REPORT OF ERNST & YOUNG LLP,  INDEPENDENT AUDITORS




Board of Directors and Stockholders
Medar, Inc.


We have audited the consolidated balance sheets of Medar, Inc.  and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996.  Our audits included the
financial statement schedule listed in the index at Item 14(a).  These
financial statements and schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Medar,
Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.  Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.


                                                               Ernst & Young LLP


Detroit, Michigan
February 27, 1997



                                   Page 24
<PAGE>   25
CONSOLIDATED BALANCE SHEETS
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31
--------------------------------------------------------------------------------------------------------------------
                                                                                                   1996         1995
--------------------------------------------------------------------------------------------------------------------
                                                                                                   (in thousands)
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>          <C>
ASSETS
CURRENT ASSETS (Note D)

   Cash                                                                                         $   215      $ 1,556
   Accounts receivable, less allowance of $400,000 in 1996, and $355,000 in 1995                  9,415        8,618
   Inventories (Note A)                                                                          15,991       13,167
   Costs and estimated earnings in excess of billings on incomplete contracts  (Note C)           1,841          681
   Other current assets                                                                             543          849
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                             28,005       24,871

PROPERTY AND EQUIPMENT (Note D)
   Land and improvements                                                                            368          329
   Building and building improvements                                                             6,147        6,109
   Production and engineering equipment                                                           3,303        2,733
   Furniture and fixtures                                                                           990          891
   Vehicles                                                                                         878          660
   Computer equipment                                                                             5,058        3,907
--------------------------------------------------------------------------------------------------------------------
                                                                                                 16,744       14,629
   Less accumulated depreciation                                                                  6,625        4,965
--------------------------------------------------------------------------------------------------------------------
                                                                                                 10,119        9,664
OTHER ASSETS
   Capitalized computer software development costs, less accumulated amortization (Note A)        8,908        6,761
   Patents, less accumulated amortization (Note A)                                                2,328        2,507
   Other                                                                                            916          920
--------------------------------------------------------------------------------------------------------------------
                                                                                                 12,152       10,188
--------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                    $50,276      $44,723
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   ACCOUNTS PAYABLE                                                                             $ 5,218      $  ,202
   EMPLOYEE COMPENSATION                                                                          1,001          674
   ACCRUED AND OTHER LIABILITIES                                                                  1,108        1,567
   CURRENT MATURITIES OF LONG-TERM DEBT (NOTE D)                                                  3,637          752
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                        10,964        6,195
LONG-TERM DEBT, less current maturities (Note D)                                                 18,010       15,685
DEFERRED INCOME TAXES                                                                                             76
STOCKHOLDERS' EQUITY (Note H)
   Common stock, without par value, stated value $.20 per share; 15,000,000
     shares authorized; 8,852,401 shares issued and outstanding (8,711,589 shares at
     December 31, 1995)                                                                           1,771        1,742
   Additional paid-in capital                                                                    29,767       29,438
   Earnings deficit retained                                                                    (10,300)      (8,321)
   Accumulated translation adjustment                                                                64          (92)
--------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                                       21,302       22,767
--------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                      $50,276      $44,723
====================================================================================================================
</TABLE>
See accompanying notes.





                                    Page 25
<PAGE>   26
CONSOLIDATED STATEMENTS OF OPERATIONS
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                             Year ended December 31
---------------------------------------------------------------------
                                             1996      1995      1994
---------------------------------------------------------------------
                                (in thousands, except per share data)
---------------------------------------------------------------------
<S>                                       <C>       <C>       <C>
Net sales                                 $41,471   $39,771   $40,218
Cost of  sales                             30,788    30,116    26,767
---------------------------------------------------------------------
                                           10,683     9,655    13,451
Costs and expenses:
   Marketing                                4,510     5,016     3,814
   General and administrative               3,203     3,416     2,738
   Research and development                 3,552     2,088     2,362
   Patent litigation costs (Note I)                   5,461       665
   Excess product quality, warrant and
     other costs (Note J)                             4,872
---------------------------------------------------------------------
                                           11,265    20,853     9,579
---------------------------------------------------------------------
Earnings (loss) from operations              (582)  (11,198)    3,872

Interest:
   Expense                                  1,523       587       251
   Income                                     (50)      (72)     (199)

---------------------------------------------------------------------
                                            1,473       515        52
---------------------------------------------------------------------
Earnings (loss) before income taxes        (2,055)  (11,713)    3,820
Provision (credit) for income taxes
  (Note F)                                    (76)     (130)      132
---------------------------------------------------------------------
Net earnings (loss)                       $(1,979) $(11,583)   $3,688
=====================================================================
Net earnings (loss) per share (Note A)      $(.22)   $(1.33)     $.43
=====================================================================
</TABLE>

See accompanying notes.





                                   Page 26
<PAGE>   27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MEDAR, INC. AND SUBSIDIARIES





<TABLE>
<CAPTION>
                                                                        Additional        Retained    Accumulated
                                                           Common        Paid-In          Earnings    Translation
                                                            Stock         Capital         (Deficit)    Adjustment   Total
----------------------------------------------------------------------------------------------------------------------------
                                                                                     (in thousands)
----------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>             <C>            <C>        <C>
BALANCES AT JANUARY 1, 1994                                 $1,452          $15,145        $    (411)      $(99)     $16,087
   Exercise of options to purchase 37,200
     common shares                                               8               89                                       97
   Issuance of 30,000 shares to acquire
     technology                                                  6              463                                      469
   Issuance of 1,300,000 shares                                260           13,406                                   13,666
   Translation adjustments                                                                                   11           11
   Other                                                                         (2)             (15)                    (17)
   Net earnings for the year ended December
     31, 1994                                                                                  3,688                   3,688
----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994                                1,726           29,101            3,262        (88)      34,001
   Exercise of options to purchase 84,262
     common shares                                              17              400                                      417
   Translation adjustments                                                                                   (4)          (4)
   Other                                                        (1)             (63)                                     (64)
   Net loss for the year ended December 31,
     1995                                                                                    (11,583)                (11,583)
----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995                                1,742           29,438           (8,321)       (92)      22,767
  Exercise of options to purchase 140,812
     common shares                                              29              329                                      358
  Translation adjustments                                                                                   156          156
  Net loss for the year ended December
     31, 1996                                                                                 (1,979)                 (1,979)
----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996                               $1,771          $29,767         $(10,300)      $ 64      $21,302
============================================================================================================================
</TABLE>

See accompanying notes.



                                   Page 27
<PAGE>   28
CONSOLIDATED STATEMENTS OF CASH FLOWS
MEDAR, INC. AND SUBSIDIARIES


<TABLE>
<CAPTION>
                                                                                   Year Ended December 31
------------------------------------------------------------------------------------------------------------------
                                                                                1996            1995          1994
------------------------------------------------------------------------------------------------------------------
                                                                                       (in thousands)
------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>             <C>              <C>
OPERATING ACTIVITIES
Net earnings (loss)                                                        $  (1,979)      $ (11,583)      $ 3,688
Adjustments to reconcile net earnings (loss) from operations to
  net cash provided by (used in) operating activities:
      Depreciation and amortization                                            4,529           3,672         2,399
      Provision (credit) for deferred income taxes                               (76)           (130)           91
      (Increase) decrease in net accounts receivable                            (797)          3,305        (2,641)
      Increase in inventories                                                 (2,824)         (1,752)       (4,468)
      (Increase) decrease in costs and estimated earnings
         in excess of billings on incomplete contracts                        (1,160)          1,610           383
      Decrease in other assets                                                   310            (658)         (937)
      Increase (decrease) in accounts payable and accrued
         expenses                                                              1,884          (1,431)        2,289
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities                             (113)         (6,967)          804

INVESTING ACTIVITIES
Sale (purchase) of short-term investments                                                      4,018        (4,018)
Purchase of property and equipment                                            (2,283)         (5,204)       (1,915)
Investment in capitalized software                                            (4,669)         (3,253)       (2,507)
------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                         (6,952)         (4,439)       (8,440)

FINANCING ACTIVITIES
Proceeds from exercise of stock options and other                                358             353            79
Net proceeds from sale of common stock                                                                      13,666
Debt repayments on long-term debt and capital lease
  obligations                                                                (20,154)         (8,139)      (12,778)
Proceeds from long-term debt borrowings                                       25,364          20,161         6,765
------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                      5,568          12,375         7,732
------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                          156               1           (10)
------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in cash                                                   (1,341)            970            86
Cash at beginning of  year                                                     1,556             586           500
------------------------------------------------------------------------------------------------------------------
Cash at end of year                                                        $     215       $   1,556       $   586
==================================================================================================================
</TABLE>

See accompanying notes.

                                    Page 28
<PAGE>   29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MEDAR, INC. AND SUBSIDIARIES


NOTE A - SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The 1996 consolidated financial statements include the accounts of the Company
and its two 100% owned subsidiaries: Integral Vision Ltd., United Kingdom; and
Medar Canada Ltd., Canada.  The 1995 and 1994 consolidated financial statements
include the accounts of Integral Vision-AID, Inc.  Integral Vision-AID, Inc.
became a division of Medar, Inc. in 1996.  Upon consolidation, all significant
intercompany accounts and transactions are eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

TRANSLATION OF FOREIGN CURRENCIES

The financial statements of Integral Vision Ltd. and Medar Canada Ltd. are
translated into United States dollar equivalents at exchange rates as follows:
balance sheet accounts at year-end rates; income statement accounts at average
exchange rates for the year.  Transaction gains and losses are reflected in net
earnings and are not significant.

ACCOUNTS RECEIVABLE

Trade accounts receivable primarily represent amounts due from automobile and
other equipment manufacturers located in North America for welding products and
from equipment manufactured in North America, Asia and Europe for vision
products

Customers which accounted for 10% or more of the Company's resistance welding
controls sales in any of the three years ended December 31, 1996 and  the
respective sales in each year are:

<TABLE>
<CAPTION>
                                                                        1996             1995            1994
              -----------------------------------------------------------------------------------------------
                                                                            (in thousands)
              -----------------------------------------------------------------------------------------------
              <S>                                                     <C>              <C>             <C>
              Chrysler Corporation                                    $6,009           $3,400          $5,600
              General Motors Corporation                               7,730            8,500           9,100
              ================================================================================================
</TABLE>



                                    Page 29
<PAGE>   30
INVENTORIES

Inventories are stated at the lower of first-in, first-out cost or market, and
at December 31 consisted of the following (net of obsolescence reserve of
$156,000 in 1996 and $154,000 in 1995):


<TABLE>
<CAPTION>
                                                                            1996                1995
              --------------------------------------------------------------------------------------
                                                                               (in thousands)
              --------------------------------------------------------------------------------------
              <S>                                                       <C>                 <C>
              Raw materials                                             $  7,677            $  7,095
              Work in process                                              3,106               3,305
              Finished goods                                               5,208               2,767
              --------------------------------------------------------------------------------------
                                                                         $15,991             $13,167
              ======================================================================================
</TABLE>


PROPERTY AND EQUIPMENT

Property and equipment is stated on the basis of cost.  Equipment capitalized
under lease agreements and the related accumulated amortization is included in
property and equipment.  Expenditures for normal repairs and maintenance are
charged to operations as incurred.

Depreciation, including amortization of assets recorded under capital lease
obligations, is computed by the straight-line method based on the estimated
useful lives of the assets (buildings-40 years, other property and equipment-3
to 10 years).

CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS

Computer software development costs are capitalized after the establishment of
technological feasibility of the related technology.  These amounts are stated
at the lower of cost or net realizable value.  These costs are amortized
following general release of products based on current and estimated future
revenue for each product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the product (not to
exceed 5 years).  Amortization of the capitalized costs amounted to $2,522,000,
$2,314,000, and $1,638,000 in 1996, 1995 and 1994, respectively.  Total
accumulated amortization at December 31, 1996 and 1995, was $9,893,468 and
$7,371,563 respectively.

PATENTS

Patents are stated at cost less accumulated amortization of $660,000 and
$343,000 at December 31, 1996 and 1995, respectively.  Amoritization of the
patents amounted to $317,000, $204,000 and $30,000 in 1996, 1995, and 1994,
respectively.  These costs are amortized on a straight-line basis over the
estimated useful lives of the assets.

REVENUE RECOGNITION

Revenues are recorded at the time services are performed or when products are
shipped, except for long-term contracts.  Revenues on long-term contracts are
recognized using the percentage of completion method .  The effects of changes
to estimated total contract costs are recognized in the year determined and
losses, if any, are fully recognized when identified.  Costs and estimated
earnings recognized in excess of amounts billed are classified under current
assets as costs and estimated earnings in excess of billings on incomplete
contracts.  Long-term contracts include a relatively high percentage of
engineering costs and are generally less than one year in duration.


                                    Page 30
<PAGE>   31
RESEARCH AND DEVELOPMENT EXPENSES

Research and development costs not recovered from customers are expensed as
incurred.

INCOME TAXES

Deferred income taxes are provided when necessary to recognize the effect of
temporary differences between financial and income tax accounting related
principally to contract revenues, depreciation and capitalized computer
software development costs.

EARNINGS PER SHARE

Earnings per share is based on the weighted average number of shares of common
stock outstanding and, to the extent dilutive, stock options outstanding during
the period.  The weighted average number of shares of common stock and common
stock equivalents utilized in the computation of net earnings per share was
8,820,140 for the year ended December 31, 1996, 8,691,750 shares for the year
ended December 31, 1995, and 8,523,715 for the year ended December 31, 1994.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company adopted the Financial Accounting Standards Board Statement No. 121,
Accounting for the Impariement of Long-Lived Asets and for Long-lived Asets to
be Disposed of, which requires impairment losses to be recorded on long-lived
asets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount.  Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of.  The affect of adoption
was immaterial to the financial statements.

NOTE B - ACQUISITION OF INTEGRAL VISION LTD.

Effective January 1, 1995, the Company acquired 100% of the common stock and
preference shares of Integral Vision Ltd. (Integral) for 654,282 previously
unissued shares of Medar, Inc. common stock.  Integral is a machine vision
company located in the United Kingdom, which develops and manufactures
solutions for OEM's and end-users.  This transaction has been accounted for as
a pooling of interests and accordingly, the consolidated financial statements
for all periods prior to the transaction have been restated to include the
accounts of Integral.


NOTE C - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON INCOMPLETE
CONTRACTS

Costs and estimated earnings in excess of billings on incomplete contracts at
December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                                                         1996                  1995
                -----------------------------------------------------------------------------------
                                                                           (in thousands)
                -----------------------------------------------------------------------------------
                <S>                                                  <C>                   <C>
                Contract costs to date                               $  4,567               $ 4,278
                Estimated contract earnings                             3,040                 1,985
                -----------------------------------------------------------------------------------
                                                                        7,607                 6,263

                Less billings to date                                  (5,766)               (5,582)
                -----------------------------------------------------------------------------------
                Costs and estimated earnings in excess
                   of billings on incomplete contracts               $  1,841              $    681
                ===================================================================================
</TABLE>


The Company anticipates that the majority of costs incurred on long-term
contracts at December 31, 1996, will be billed and collected in 1997.


                                    Page 31
<PAGE>   32
NOTE D - LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

Long-term debt at December 31 consists of the following:

<TABLE>
<CAPTION>
                                                                           1996                1995
               ------------------------------------------------------------------------------------
                                                                              (in thousands)
               ------------------------------------------------------------------------------------
               <S>                                                      <C>                 <C>
               Revolving note payable to bank                           $12,604             $ 9,818
               Note payable to bank                                       3,000
               Term notes payable to bank                                 3,967               4,463

               Patent license payable                                     1,863               2,000
               Other                                                        213                 156
               ------------------------------------------------------------------------------------
                                                                         21,647              16,437

               Less current maturities                                    3,637                 752
               ------------------------------------------------------------------------------------
                                                                        $18,010             $15,685
               ====================================================================================
</TABLE>


In February, 1997, the agreement with the bank covering the revolving note
payable to bank and the $3,000,000 note payable to bank was re-negotiated.
Under the terms of the revised agreement, covenants, interest rates and terms
were adjusted.  The debt in the December 31, 1996 financial statements has been
classified in accordance with the terms of the revised agreement.

The $15,000,000 revolving note payable to bank is due August 10, 1998, and
provides for advances based upon levels of eligible accounts receivable and
inventories.  Interest is at the bank's prime rate plus 1/4%.

The $3,000,000 note payable to bank is due $1,500,000 July 31, 1997, and
$1,500,000 December 31, 1997.  Interest is at the bank's prime rate plus 2%.

Additionally, in February, 1997, the bank advanced $1,500,000 under a demand
note, which has been guaranteed by a stockholder.  Interest is at the bank's
prime rate plus 1%.

The revised agreement provides for total borrowings on the revolving note
payable to bank and the note payable to bank (including the $1,500,000 February
note payable) of up to $16,000,000 through July 31, 1997 and up to $15,000,000
thereafter under the terms of the revised agreement.  The Company has agreed,
among other covenants, to maintain net worth and the ratio of debt to equity,
all as defined, at specified levels which will next be measured at September
30, 1997.  The notes are collateralized by substantially all of the Company's
assets including assets previously pledged to secure term loans described
below.

The Company has two term notes payable to bank.  One note is payable in
quarterly installments of $62,500 plus interest at the bank's prime rate, with
the balance becoming due June 29, 1998.  The second note is payable in monthly
installments of $14,111 plus interest at the bank's prime rate or other rates
made available under the terms of the agreement, with the balance becoming due
September 30, 2000.  The notes are collateralized by the Medar office and
production facilities in Farmington Hills, Michigan, and machinery and
equipment, inventory and accounts receivable at all North American locations.

The patent license payable relates to future payments to be made to Square D
Company related to the settlement of patent litigation.  The payments are due
in ten equal installments and have been discounted at 8%.

The fair values of these financial instruments approximates their carrying
amounts at December 31, 1996.

Maturities of long-term debt is $14,359,000 in 1998; $398,000 in 1999;
$2,059,000 in 2000; $204,000 in 2001 and $990,000 thereafter.


                                    Page 32
<PAGE>   33
NOTE E - STATEMENT OF CASH FLOWS

The Company paid interest on its debt instruments of $1,646,000, $356,000, and
$384,000 in 1996, 1995 and 1994, respectively.  Payments for income taxes were
$125,000 in 1994.  There were no income tax payments in 1996 or 1995.

NOTE F - INCOME TAXES

As of December 31, 1996, the Company has cumulative net operating loss
carryforwards approximating $18,530,000 for tax purposes available for
reduction of taxable income of future periods from 2010 through 2011 and unused
investment and research and development tax credits approximating $870,000
which expire through the same period.  For financial reporting purposes, the
net operating losses have been offset against net deferred tax liabilities
based upon their expected amortization during the loss carryforward period.
The valuation allowance increased $448,000 and 3,896,000 in 1996 and 1995,
respectively, and decreased $944,000 in 1994.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  Significant components
of the Company's deferred tax liabilities and assets as of December 31, 1996
are as follows:

<TABLE>
<CAPTION>
                                                                                  1996          1995
            ----------------------------------------------------------------------------------------
                                                                                   (in thousands)
            ----------------------------------------------------------------------------------------
            <S>                                                              <C>             <C>
            Deferred tax liabilities:
               Deductible software development costs, net of amortization       $2,931        $2,224


               Tax over book depreciation                                          344           346

               Percentage of completion                                            491           184
            ----------------------------------------------------------------------------------------
                      Total deferred tax liabilities                             3,766         2,754
            Deferred tax assets:

               Net operating loss carryforwards                                  6,836         4,840
               Credit carryforwards                                                987           987
               Reserve for warranty                                                 68           237

               Other                                                               219           510
            ----------------------------------------------------------------------------------------
                      Total deferred tax assets                                  8,110         6,574
               Valuation allowance for deferred tax assets                       4,344         3,896
            ----------------------------------------------------------------------------------------
                      Net deferred tax assets                                    3,766         2,678
            ----------------------------------------------------------------------------------------
                      Net deferred tax liabilities                              $    0        $   76
            ========================================================================================
</TABLE>


                                    Page 33
<PAGE>   34
Significant components of the provision (credit) for income taxes are as
follows:

<TABLE>
<CAPTION>
                                                              1996                  1995             1994
              -------------------------------------------------------------------------------------------
                                                                              (in thousands)
              -------------------------------------------------------------------------------------------
              <S>                                            <C>                 <C>                <C>
              Current:
                 Federal                                                                             $ 20
                 Foreign                                                                               (7)

                 State                                                                                 28
              -------------------------------------------------------------------------------------------
                                                                                                       41
              Deferred:

                 Federal                                                         $(130)               130
                 Foreign                                     $ (76)                                   (39)
              -------------------------------------------------------------------------------------------
                                                               (76)               (130)                91
              -------------------------------------------------------------------------------------------
                                                             $ (76)              $(130)              $132
              ===========================================================================================
</TABLE>


The reconciliation of income taxes computed at the U.S. federal statutory tax
rates to income tax expense is as follows:

<TABLE>
<CAPTION>
                                                                   1996            1995              1994
              -------------------------------------------------------------------------------------------
                                                                          (in thousands)
              -------------------------------------------------------------------------------------------
             <S>                                                 <C>            <C>               <C>
             Tax (credit) at U.S. statutory rates                 $(699)        $(3,983)           $1,299

             Utilization of net operating loss                                                     (1,330)

             Valuation allowance established                        488           3,896

             Other nondeductible expenses                            73              75                38

             Other                                                   62            (118)               97

             State income taxes                                                                        28
              -------------------------------------------------------------------------------------------
                                                                 $  (76)        $  (130)          $   132
              ===========================================================================================
</TABLE>


NOTE G - EMPLOYEE SAVINGS PLAN

The Company has an Employee Savings Plan covering substantially all United
States' employees.  The Company contributes $.20 to the Plan for every dollar
contributed by the employees up to 6% of their compensation.  The Plan also
provides for discretionary contributions by the Company as determined annually
by the Board of Directors.  Company contributions charged to operations under
the Plan were $89,000, $61,000, and $87,000 for the years ended December 31,
1996, 1995 and 1994, respectively.

NOTE H - STOCK OPTIONS

The terms of the Company's qualified incentive stock option plan provide for
the issuance of options for the purchase of up to 800,000 shares of the
Company's common stock at market value at the date of the option grant.
Options are granted with various vesting requirements established by the
Compensation Committee of the Board of Directors and expire ten years from the
date of grant.  There were 21,700 options granted under this plan during 1994.
No options were granted under this plan during 1995 or 1996.  Options for
298,700 shares were outstanding and exercisable at December 31, 1996.

Under the Company's non-qualified stock option plan, options to purchase
200,000 shares were available to grant at option prices set by the Compensation
Committee of the Board of Directors.  There were 19,000 options granted under
this plan during 1994.  No options were granted under this plan during 1995 or
1996.   Options for 90,000 shares were outstanding and exercisable at December
31, 1996.


                                    Page 34
<PAGE>   35
The Company also has a third stock option plan under which it may issue
qualified or non-qualified options for the purchase of up to 500,000 shares at
option prices set by the Compensation Committee of the Board of Directors.
There were 131,900 and 211,000 options granted under this plan in 1996 and
1995, respectively.  Options for 200,400 shares were outstanding and 75,200
were exercisable at December 31, 1996.


A summary of option activity under all plans follows ):

<TABLE>
<CAPTION>
                                                   1996                     1995               1994
------------------------------------------------------------------------------------------------------
                                                       Weighted                  Weighted
                                                       Average                   Average
                                           Shares      Exercise      Shares      Exercise     Shares
                                                        Price                     Price
------------------------------------------------------------------------------------------------------
                                                            (number of shares in thousands)
------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>           <C>        <C>           <C>
Outstanding at beginning of year                788         $5.82         664        $4.87         660
Granted ($6.25 to $8.50 per share)              132          6.25         211         8.50          41

Exercised ($.35 to $7.50 per share)            (141)         2.52         (84)        4.95         (37)
Canceled  ($5.625 to $11.50 per share)         (190)         8.46          (3)        7.50
------------------------------------------------------------------------------------------------------
Outstanding at end of year
    ($1.75 to $9.25 per share)                  589          5.87         788         5.82         664

======================================================================================================
Exercisable ($1.75 to $9.25 per share)          464         $4.54         577        $4.84
======================================================================================================
</TABLE>


Exercise prices for options outstanding as of December 31, 1996 ranged from
$1.75 to $9.25.  The weighted-average fair value of options outstanding as of
December 31, 1996 was $3.99.  The weighted-average remaining contractual life
of those options is 5.15 years.

The Company has elected to follow APB No. 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options because, in management's opinion, the models required to be used by
FASB Statement No. 123, "Accounting for Stock-Based Compensation," were not
developed for use in valuing employee stock options.  Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.  After adjusting for
the proforma effect of stock compensation, the net loss is estimated to be
$2,393,000 ($.27 per share) and $11,730,000 ($1.35 per share) for 1996 and
1995, respectively.  Assumptions used in determining the above proforma
disclosures were risk free interest rates of 6.12% and 6.23% in 1996 and 1995,
respectively, no dividend yields, .51 market price volatility, and 8-year
weighted average life of option.  These proforma results reflect only stock
options granted in 1995 and 1996 and may not be comparable with the results of
applying the fair market value methodology to all stock options granted prior
to the initial adoption of this statement.

NOTE I - COMMITMENTS AND CONTINGENCIES

In July 1995, Medar, Inc. reached a settlement of its patent litigation which
was initiated by Square D Company in April 1994 in the Federal District Courts
in Eastern District of Michigan and in Delaware.  This resolution also settles
claims made by Medar against Square D.  The terms of the settlement made under
the auspices of the Federal District Court in Delaware provide for a cross
license agreement on all single phase welding patents held by either company
and call for a single payment related to use of technology in prior years as
well as yearly payments for the use of technology in the future.

The single payment was recorded as an expense in 1995.  The future payments
have been reflected as a noncash transaction.  The costs of this
cross-licensing agreement is being amortized over the life of the agreement.

The Company and its subsidiaries use equipment under long-term operating lease
agreements requiring rental payments approximating $145,000 in 1997, $105,000
in 1998, and $83,000 in 1999.  Rent expense charged to operations approximated
$276,000, $380,000, and $390,000 in 1996, 1995 and 1994, respectively.



                                    Page 35
<PAGE>   36
NOTE J - RELATED PARTY TRANSACTIONS AND OTHER MATTERS

Two individuals who are officers and directors of the Company receive no
compensation from the Company, but are compensated by Maxco, Inc., a major
shareholder of the Company.

Excess product quality, warranty and other costs relate to costs incurred in
1995 in connection with quality and other problems experienced with new product
introductions.

NOTE K - GEOGRAPHIC AREA

Net sales to unaffiliated customers, earnings (loss) before income taxes,
identifiable assets and liabilities, classified by geographic areas in which
the Company operates, and net export sales by domestic operations, were as
follows:

<TABLE>
<CAPTION>
                                                                      Year Ended December 31
-------------------------------------------------------------------------------------------------------
                                                           1996                1995                1994
-------------------------------------------------------------------------------------------------------
                                                                (in thousands)
-------------------------------------------------------------------------------------------------------
<S>                                                   <C>                 <C>                  <C>
Net sales:
   Unaffiliated customers
          United States                                 $34,366            $ 33,330             $34,500
          United Kingdom                                  2,440               3,815               3,247
          Canada                                          4,665               2,626               2,471
-------------------------------------------------------------------------------------------------------
                                                        $41,471            $  39,771            $40,218
=======================================================================================================
Earnings (loss) before income taxes:
          United States                                $ (1,616)           $(11,766)           $  3,992
          United Kingdom                                   (495)               (200)               (224)
          Canada                                             56                 253                  52
-------------------------------------------------------------------------------------------------------
                                                       $ (2,055)           $(11,713)           $  3,820
=======================================================================================================
Identifiable assets:
          United States                                 $45,021            $ 42,101             $42,035
          United Kingdom                                  4,993               3,844               1,885
          Canada                                          1,712               1,145               1,109
          Eliminations                                   (1,450)             (2,367)             (1,506)
-------------------------------------------------------------------------------------------------------
                                                        $ 50,276           $ 44,723             $43,523
=======================================================================================================
Liabilities:

          United States                                 $26,380            $ 19,341            $  7,886
          United Kingdom                                  5,170               3,762               1,569
          Canada                                          1,656               1,092               1,625
          Eliminations                                   (4,232)             (2,239)             (1,558)
-------------------------------------------------------------------------------------------------------
                                                        $28,974            $ 21,956            $  9,522
=======================================================================================================
Net export sales by domestic operations:
          North America                               $     903           $   1,944            $  6,377
          Europe                                          5,986               3,785               3,677
          Asia                                            2,434               2,451                 707

         Other                                              275                 259                 138
-------------------------------------------------------------------------------------------------------
                                                       $  9,598           $   8,439             $10,899
=======================================================================================================
</TABLE>


                                    Page 36
<PAGE>   37
NOTE L - SEGMENT DATA

The Company operates principally in two industries, machine vision-based
inspection systems and resistance welding controls.  Operations in machine
vision-based inspection systems involve development, production and sale of
equipment used to monitor or control the manufacturing process.  These systems
are used to supplement human inspection or provide quality assurance when
production rates exceed human capability.  Operations in resistance welding
controls involve development, production, and sale of controls that assure weld
quality and proved data about the welding process.




                   DECEMBER 31, 1996 AND THE YEAR THEN ENDED

<TABLE>
<CAPTION>
                                                       Vision-based       Resistance Welding
                                                     Inspection Systems        Controls        Consolidated
-----------------------------------------------------------------------------------------------------------
                                                                         (in thousands)
-----------------------------------------------------------------------------------------------------------
<S>                                                        <C>                  <C>               <C>
Net sales                                                  $13,618              $27,853             $41,471

Amortization of software development cost                    1,608                  914               2,522

Research and development expense                             1,923                1,130               3,053

Earnings (loss) from operations                             (5,703)               5,121                (582)

Net interest expense                                                                                $ 1,473
-----------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes                                                                        $ 2,055
===========================================================================================================

Identifiable assets at December 31, 1996                   $22,423              $27,853             $50,276
===========================================================================================================
</TABLE>





                   DECEMBER 31, 1995 AND THE YEAR THEN ENDED

<TABLE>
<CAPTION>
                                                       Vision-based      Resistance Welding
                                                     Inspection Systems      Controls          Consolidated
-----------------------------------------------------------------------------------------------------------
                                                                      (in thousands)
-----------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>                   <C>
Net sales                                                  $16,428              $23,343            $ 39,771

Amortization of software development cost                    1,375                  939               2,314

Research and development expense                               222                1,001               1,223

Earnings (loss) from operations                             (6,948)              (4,250) (1)        (11,198)

Net interest expense                                                                                    515
-----------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes                                                                       $(11,713)
===========================================================================================================

Identifiable assets at December 31, 1995                   $20,802              $23,921            $ 44,723
===========================================================================================================

</TABLE>


                                    Page 37
<PAGE>   38
                   DECEMBER 31, 1994 AND THE YEAR THEN ENDED

<TABLE>
<CAPTION>
                                                  Vision-based         Resistance Welding
                                               Inspection Systems           Controls           Consolidated
------------------------------------------------------------------------------------------------------------
                                                                      (in thousands)
------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                   <C>
Net sales                                                  $13,985             $26,233               $40,218

Amortization of software development cost                      792                 846                 1,638

Research and development expense                               628               1,121                 1,749


Earnings (loss) from operations                               (643)              4,515                 3,872

Net interest expense                                                                                      52
------------------------------------------------------------------------------------------------------------

Earnings (loss) before taxes                                                                         $ 3,820
============================================================================================================
</TABLE>


Earnings (loss) is total revenue less operating expenses.  Interest expense and
income taxes have been excluded from the calculation of earnings (loss) from
operations.

Identifiable asset allocated to each industry are those assets that are used in
the Company's operations in each industry.  Capital additions for machine
vision-based inspection systems and resistance welding controls was $2,065,000
and $218,000, respectively.  Depreciation and amortization for machine
vision-based inspection systems and resistance welding controls was $3,166,000
and $1,363,000, respectively.


(1)  In 1995 the welding control division incurred a charge of $5.5 million
     related to settlement of patent litigation.


                                    Page 38
<PAGE>   39
                SCHEDULE II - Valuation And Qualifying Accounts

                          Medar, Inc. And Subsidiaries

                                 (in thousands)


<TABLE>
<CAPTION>
                  COLUMN A                 COLUMN B                      COLUMN C                      COLUMN D           COLUMN E
------------------------------------------------------------------------------------------------------------------------------------
                                                                         ADDITIONS
------------------------------------------------------------------------------------------------------------------------------------
                 Description        Balance at Beginning  Charged to Costs    Charged To Other       Deductions-      Balance At End
                                          of Period          And Expenses      Accounts-Describe        Describe          Of Period
====================================================================================================================================
<S>                                      <C>                <C>           <C>                      <C>                  <C>
 Year ended December 31, 1996:
    Accounts receivable allowance          $    355            $  120                                $    75 (2)          $    400
    Inventory obsolescence reserve              154               458                                    456 (3)               156
    Deferred tax valuation allowance          3,896               448                                                        4,344
                                           --------            ------                                -------              --------

                                              4,405            $1,026                                $   531              $  4,900
====================================================================================================================================
 Year ended December 31, 1995:
    Accounts receivable allowance          $    311            $   78                                $    34 (2)          $    355
    Inventory obsolescence reserve              463               130                                    439 (3)               154

    Deferred tax valuation allowance                           $3,896       (1)                                              3,896
                                           --------            ------                                -------              --------
                                           $    774            $4,104                                $   473              $  4,405
====================================================================================================================================
 Year ended December 31, 1994:

    Accounts receivable allowance          $    166            $  230                                $    85 (2)          $    311

    Inventory obsolescence reserve              405                58                                                          463

    Deferred tax valuation allowance            944                                                      944 (1)
                                           --------            ------                                -------              --------
                                            $ 1,515            $  288                                $ 1,029              $    774
===================================================================================================================================
</TABLE>


 (1) Net change in deferred tax valuation allowance.

 (2) Net accounts receivable write-offs.

 (3) Write-off obsolete inventory.





                                     Page 39
<PAGE>   40




                             EXHIBITS TO FORM 10-K



                                  MEDAR, INC.



                          YEAR ENDED DECEMBER 31, 1996


                         COMMISSION FILE NUMBER 0-12728





                                     Page 40
<PAGE>   41

EXHIBIT                          EXHIBIT INDEX
NUMBER                            DESCRIPTION

10.31     Fifth amendment to revolving credit and loan agreement
          dated February 27, 1997 by and between Medar, Inc. and
          Integral Vision, Ltd. and NBD Bank.

10.32     Over formula loan note dated February 27, 1997 by and between
          Medar, Inc., Integral Vision, Ltd. and NBD Bank.

10.33     Bridge loan note dated February 27, 1997 by and between
          Medar, Inc., Integral Vision, Ltd., and NBD Bank.

10.34     Guaranty by Maxco, Inc. dated February 27, 1997 of $1,500,000
          bridge loan note by and between Medar, Inc., Integral
          Vision, Ltd., and NBD Bank.

11        Calculation of Earnings per Share.

21        Subsidiaries of the Registrant.

23        Consent of Independent Accountants.

27        Financial Data Schedule