<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 the fiscal
           year ended December 31, 1997, 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)
<TABLE>
<S><C>

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

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

Registrant's telephone number, including area code:                     (248) 471-2660
                                                              --------------------------------------

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:

</TABLE>
             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. [ X ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1998:

      Common Stock, No Par Value, Stated Value $.20 Per Share - $22,116,439

   The number of shares outstanding on each of the issuer's classes of common
                        stock, as of February 28, 1998:

       Common Stock, No Par Value, Stated Value $.20 Per Share - 9,024,901



                                     Page 1

<PAGE>   2


                       DOCUMENTS INCORPORATED BY REFERENCE



Portions of the proxy statement for the annual shareholders meeting to be held
May, 27, 1998 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"). Through a
series of transactions since 1983, Maxco's ownership of the Company's Common
Stock has been reduced to approximately 23%.

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. Most of the Company's European sales of
vision inspection systems are effected through Integral Vision LTD located in
Bedford England. Most other sales are effected through Integral Vision-AID (a
division of the Company), Integral Vision, Ltd., or the Company.

The Company has a joint venture Shanghai Medar Welding Equipment Corp., Ltd.,
with Shanghai Electric Welding Machine Works and Lida, USA . The Company owns
21.3% of this organization which is located in China and is a manufacturer of
resistance welding controls.

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 (248) 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 (CDs; CD-ROMs;
CD-Rs and DVDs). The Company's products include 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 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.


                                     Page 3
<PAGE>   4

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 markets 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. Replacement of existing Audio
CDs as a principal medium for music and the failure of one or more of DVD,
CD-ROM, CD-R, or MO storage technologies to gain widespread acceptance could
adversely affect the markets for the Company's products.

The Company's current family of optical inspection equipment is sold 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 has other products for this market, 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 a 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 a
fraction of the time previously required.

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.

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.

Turnkey Systems

The Company markets specific applications of VisionBlox software. Company sales
personnel and engineers meet with potential customers to identify inspection
opportunities. In some cases the opportunities represent situations

                                     Page 4

<PAGE>   5

where inspection systems provided by other organizations are to be replaced and
in others the inspection systems will be newly developed applications.

Using VisionBlox as a base, applications are developed to fill the inspection
needs of the customer. In some cases entire systems consisting of industrial
computers fitted with vision boards and connected to cameras are delivered. In
other cases, only the Visionblox software programmed to meet the specific needs
of the customer is delivered. In those situations, the customers will obtain the
hardware needed for the application from other suppliers.

The systems are generally custom designed under contracts or purchase orders in
order to provide a basis for assuring that delivered systems meets the
expectation of the customer.

The Company has had particular success in delivering systems used in the
manufacture of cellular telephones. It is believed, however, that the market for
these systems is much wider and that many other companies involved in process
manufacturing will be interested in acquiring these cost-effective systems.

Because of the high software content of these systems, generally margins are
significantly higher than those of the Company's other products.

See the notes to the Consolidated Financial Statements (Item 8) 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 vision and welding
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. New welding
products, such as the middle frequency control, require similar levels of
improvement. The Company has devoted substantial resources to research and
development. There can be no assurance that the Company will be able to continue
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
and other factors have resulted and may continue to result in the obsolescence
of components and subassemblies the Company holds as inventory.

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

<TABLE>
<CAPTION>

                                                           YEAR ENDED DECEMBER 31
         ----------------------------------------------------------------------------------
                                                      1997          1996          1995
         ----------------------------------------------------------------------------------
                                                                (IN MILLIONS)
         ----------------------------------------------------------------------------------
         <S>                                       <C>           <C>          <C>
         Gross engineering expenses                $    9.3      $    9.7     $    8.0

         Capitalized computer software
         development costs                             (5.4)         (4.7)        (3.3)
         Costs directly related to customer
         orders                                        (1.4)         (1.4)        (1.8)
         Technical sales support expenses              (0.1)         (0.0)        (0.8)
                                                      -----         -----        -----
           Net research and development expense    $    2.4      $    3.6     $    2.1

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

         Amortization of capitalized computer
         software development costs                $    3.6      $    2.5     $    2.3

         ==================================================================================
</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 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. The Company markets its


                                     Page 5

<PAGE>   6

VisionBlox software products worldwide to OEMs, integrators and volume end users
using distributors and alliance partners.

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.

For the years ended December 31, 1997, 1996 and 1995, sales to Chrysler
Corporation accounted for approximately 9%, 14% and 9% respectively, of the
Company's net sales. Sales to General Motors Corporation for the same periods
accounted for approximately 10%, 19% and 21% of net sales, respectively. At
December 31, 1997, approximately 42% and 19% 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.

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 20%, 23% and 21% of the Company's net sales in 1997,
1996 and 1995, 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 quoted
in Canadian dollars, Japanese sales of optical inspection equipment are quoted
in yen, and UK sales are denominated in pound sterling. For certain non-U.S.
sales, the Company markets and sells its products through independent sales
representatives in 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 and turnkey system sales efforts
are pre-directed towards the electronics, semiconductor, and printing
industries. Dominant competitors include Cognex, ICOS, 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 primarily 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.


                                     Page 6
<PAGE>   7

The Company designs printed circuit boards for its hardware products as needed
and contracts for them to be built by outside contractors.

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, 1997, the Company had an order backlog of approximately $4.1
million, compared to approximately $5.6 million as of December 31, 1996. 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. At December 31, 1997 and 1996,
approximately 42% and 40%, respectively, of the Company's backlog was
attributable to General Motors Corporation and approximately 19% and 23%,
respectively, of the Company's backlog was attributable to Chrysler Corporation.
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. 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 and vision products. 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, 1998, the Company had approximately 275 permanent employees,
as compared to 330 at February 28, 1997 and 325 at February 29, 1996. 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. Integral leases a facility located in
Bedford, United Kingdom approximating 5,000 square feet to perform sales, some
engineering, and administrative functions. The lease expires in 1998. 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
add or dispose of facilities as business requirements dictate. The Company
believes that adequate space at reasonable terms is readily available should it
need to expand operations.


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, 1998, 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, 1998 was $3 3/8 per share.


<TABLE>
<CAPTION>

                                            1997
       ---------------------------------------------------------------------
                             MAR 31       JUN 30    SEPT 30        DEC 31
       ---------------------------------------------------------------------
       <S>                   <C>         <C>        <C>          <C>
       High                  $7 1/8       $6 1/8     $9 1/4        $8 1/2
       Low                    3 1/2        4 5/8      4 7/8         4 3/4

       ---------------------------------------------------------------------
<CAPTION>
                                           1996
       ---------------------------------------------------------------------
       <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

       =====================================================================
</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
-------------------------------------------------------------------------------------------------------------------
                                            1997           1996           1995           1994           1993
-------------------------------------------------------------------------------------------------------------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>             <C>             <C>
Net revenues                               $40,524       $41,471       $ 39,771        $40,218         $28,694
Gross margin                                11,447        10,683          9,655         13,451          10,416
Net earnings (loss)                           (144)       (1,979)       (11,583)         3,688           3,300
Basic earnings per share                     (0.02)        (0.22)         (1.33)          0.45            0.46
Diluted earnings per share                   (0.02)        (0.22)         (1.33)          0.43            0.44
Weighted average shares                      8,897         8,820          8,692          8,524           7,529
===================================================================================================================
<CAPTION>
                                                                      AT DECEMBER 31
-------------------------------------------------------------------------------------------------------------------
                                             1997           1996          1995           1994            1993
-------------------------------------------------------------------------------------------------------------------
                                                                      (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
<S>                                          <C>         <C>            <C>             <C>            <C>
Working capital                            $ 4,478       $17,041        $18,676        $23,459         $14,015
Total assets                                53,158        50,276         44,723         43,523          29,109
Long-term debt,
  including current portion                 24,307        21,647         16,437          2,444           8,451
Stockholders' equity                        22,555        21,302         22,767         34,001          16,087
===================================================================================================================
</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 end users and suppliers of audio and DVD disc manufacturing
equipment. Resistance welding control products are currently marketed primarily
to automobile manufacturers and suppliers of industrial automation equipment.

Except for the historical information contained herein, the matters discussed in
this document are forward-looking statements made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties which
could cause actual results to differ materially from those described in the
forward-looking statements. Such factors and uncertainties include, but are not
limited to: the impact of the level of the Company's indebtedness; restrictive
covenants contained in the Company's various debt agreements; general economic
conditions and conditions in the specific industries in which the Company has
significant customers; price fluctuations in the materials purchased by the
Company for assembly into final products; competitive conditions in the
Company's markets and the effect of competitive products and pricing; and
technological development by the Company, its customers and its competition. As
a result, the Company's results may fluctuate. Additional information concerning
risk factors that could cause actual results to differ materially from those
projected in the forward-looking statements is contained in the Company's
filings with the Securities and Exchange Commission. These forward-looking
statements represent the Company's best estimates as of the date of this
document. The Company assumes no obligation to update such estimates except as
required by the rules and regulations of the Securities and Exchange Commission.

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 revenue. The
impact of inflation for the periods presented was not significant.

<TABLE>
<CAPTION>

                                                                             YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------------------------
                                                                     1997             1996              1995
-------------------------------------------------------------------------------------------------------------------
                                                                                 (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                <C>           <C>
Net revenues                                                         100%               100%          100.0%
Direct cost of sales                                                 71.8               74.2            75.7
-------------------------------------------------------------------------------------------------------------------
     Gross margin                                                    28.2               25.8            24.3
Marketing expense                                                    10.2               10.9            12.6
General and administrative expense                                    6.7                7.7             8.6
Research, development, and engineering expense                        5.9                8.6             5.2
Patent litigation costs                                                                                 13.7
Excess product quality, warranty and other costs                                                        12.3
-------------------------------------------------------------------------------------------------------------------
                                                                     22.8               27.2            52.4
-------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations                                       5.4              (1.4)          (28.1)
Interest:
   Expense                                                            5.8                3.7             1.5
   Income                                                           (0.1)              (0.1)           (0.2)
-------------------------------------------------------------------------------------------------------------------
                                                                      5.7                3.6             1.3
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                            (0.3)              (5.0)          (29.4)
Provision (credit) for income taxes                                   0.1              (0.2)           (0.3)
-------------------------------------------------------------------------------------------------------------------
Net loss                                                          (0.04%)             (4.8%)         (29.1%)
===================================================================================================================
</TABLE>




                                    Page 12

<PAGE>   13

YEAR ENDED DECEMBER 31, 1997, COMPARED TO DECEMBER 31, 1996

Net revenues decreased $1.0 Million (2.4%) from $41.5 million in 1996 to $40.5
million in 1997. The decrease resulted from a decrease of welding product
revenues of $3.3 million and an increase in optical inspection product revenues
of $2.3 million. Welding product revenues decreased within the expected year to
year fluctuations in orders from the company's major customers. The increase in
optical inspection product revenues was principally in turnkey systems used in
the cellular telephone industry. Revenues from other optical inspection products
were down compared to the prior year. In particular, continuation of confusion
in the CD/DVD market resulted in decreases in sales of CD products of $1.8
million.

Direct costs of sales decreased to $29.1 million from $30.8 million or as a
percentage of sales to 71.7% from 74.2%. This decrease in cost of sales as a
percentage of sales results from sales of turnkey systems and other technology
at higher margins than experienced in 1996.

Marketing expense decreased to $4.2 million from $4.5 million and as a
percentage of net revenues from 10.9% to 10.2%. This resulted from further
control of sales expenses, in both divisions.

General and administrative expenses decreased to $2.7 million from $3.2 million
and as a percentage of net revenues from 7.7% to 6.7%. This resulted from a full
year reduction of administrative costs of Integral Vision in the UK and the
effect of other cost control measures.

Research, development and engineering costs decreased to $2.4 million from $3.6
million and as a percentage of net revenues from 8.6% to 5.9%. This decrease was
partially as a result of reductions in personnel and other costs during the year
($.5 million) and partially as a result of greater amounts of software
capitalized during 1997 ($.7 million). Software capitalized was principally
related to VisionBlox enhancements and developments of color features and
development of DVD-9.

Interest expense increased to $2.3 million from $1.5 million and as a
percentage of net revenues to 5.8% from 3.6%. The increase resulted from
additional borrowings during the year at higher average interest rates.

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

Net revenues 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 revenues and a decrease in sales of optical inspection products. The
increase in the revenues from resistance welding products resulted from
continued strong orders from General Motors and Chrysler to satisfy retooling
programs. The decrease in revenues in optical vision products principally
resulted 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.

Direct cost of sales increased to $30.8 million from $30.1 million and as a
percentage of net revenues 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 revenues 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 revenues 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, development and engineering costs increased to $3.6 million from $2.1
million and as a percentage of net revenues from 5.2% to 8.6%. The increase
principally represents increased expenditures related to development of
VisionBlox and DVD and CD-R technologies.

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 revenues 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.





                                    Page 13
<PAGE>   14


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, 1997. 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
------------------------------------------------------------------------------------------------------------------
                                           1997                                         1996
------------------------------------------------------------------------------------------------------------------
                         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 revenues             $8,358    $10,970     $10,985    $10,211      $5,312    $13,721     $12,216    $10,222
Gross margin              1,667      3,672       3,331      2,777       (537)      3,840       3,913      3,467
Net earnings (loss)       (991)        420         401         26     (3,800)        607         887        327
==================================================================================================================
Basic and diluted
earnings (loss) per
share                    $(.11)    $   .05     $   .04    $   .00      $(.43)      $ .07     $   .10    $   .04
==================================================================================================================
</TABLE>

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company's revenues and operating results have varied substantially from
quarter to quarter. Net revenues 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 revenues and earnings to continue to fluctuate from quarter to quarter.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, the Company had a revolving note payable to bank, due
August 1999, subordinated debentures due 2000 through 2005 and various term
notes some of which mature in 2 to 4 years. Levels of advances under the
revolving note are based upon levels of acceptable accounts receivable and
inventory. At December 31, 1997 $13,886,000 was available for advances of which
$12,258,000 had been advanced. (See note C to the Consolidated Financial
Statements - Item 8) The Company is prohibited from paying dividends under the
terms of the credit agreements.

The agreements related to the revolving note and the subordinated debentures
require that the Company maintain certain levels of tangible net worth as
defined and certain debt to equity ratios. The Company's tangible net worth at
December 31 was less than the agreements by $600,000. Both the bank and the
subordinated debt holders have waived the shortfall as of December 31, 1997
however they have not waived any shortfalls that may occur in the future. If the
company is not successful in adding to tangible net worth, it will again be in
violation of its agreements and will require further waivers from the lenders
and there is no assurance that waivers will be granted. In addition, in the
event that waivers are not granted, it is not known what position the lenders
will take with respect to the loans outstanding, including declaring them to be
immediately payable. The amount of defined tangible net worth can be increased
by net operating earnings or by reducing the amount of capitalized software.

Management believes that it has options available for increasing tangible net
worth through the sales of certain tangible and intangible assets in addition to
expense reductions that will either bring the Company into compliance with the
lender agreements or which will show sufficient progress towards compliance that
the lenders will issue additional waivers. There can be no assurance however
that management's plans will be successful or that the lenders will grant any
required waivers.

The Company generated $2.8 million of cash from operations in 1997. This cash
was combined with $4.1 million of financing activities to fund $6.2 million of
additions to property and equipment and capitalized software. Management
believes that much of the investment activities are discretionary and can be
deferred or eliminated. The Company has no material commitments for the purchase
of property and equipment or software development costs. The amount of software
development costs incurred and capitalized in 1998 will be dependent on
determinations throughout the year of long and short term revenue opportunities
in the various products the






                                    Page 14

<PAGE>   15

Company continues to support in both the welding and the vision divisions. In no
case would it be expected that total capitalization of software costs would
exceed amortization.

The Company believes that its current financial resources together with any cash
generated from operations or asset sales are adequate to meet cash needs through
1998.

IMPACT OF YEAR 2000

Some of the Company's older computer programs used in its internal data
processing were written using two digits rather than four to define the
applicable year. As a result, those computer programs have time-sensitive
software that recognize a date using "00" as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.

The Company has completed an assessment and has concluded it will have to
replace portions of its internal data processing software so that its computer
system will function properly with respect to dates in the year 2000 and
thereafter. The total Year 2000 project cost is estimated at approximately
$350,000, which includes $300,000 for the purchase of new software that will be
capitalized and $50,000 that will be expensed as incurred. It is expected that
substantially all of the purchase cost of the software will be financed with a
lease.

The project is estimated to be completed not later than December 31, 1998, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions of new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.

The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially form those anticipated.


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 15
<PAGE>   16


                                    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, 1997), 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, 1997), 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, 1997), 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, 1997), with respect to directors and executive officers
of the Company, is incorporated herein by reference.









                                    Page 16
<PAGE>   17


                                     PART IV

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

(a)(1) and (2)      The response to this portion of Item 14 is 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 registrants Form 10-K for the year ended December 31,
                    1995, SEC file 0-12728, and incorporated herein by
                    reference.)

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, 1994, SEC file 0-12728, and incorporated herein by
                    reference).

4.1                 Note and Warrant Purchase Agreement (filed as Exhibit 4.1 to
                    the registrants Form 8-K dated July 15, 1997, SEC file
                    0-12728, and incorporated herein by reference).

4.2                 Form of 12.95% Senior Subordinated Secured Note (filed as
                    Exhibit 4.2 to the registrants Form 8-K dated July 15, 1997,
                    SEC file 0-12728, and incorporated herein by reference).

4.3                 Form of Medar, Inc. Common Stock Purchase Warrant
                    Certificate (filed as Exhibit 4.3 to registrants Form 8-K
                    dated July 15, 1997, 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







                                    Page 17

<PAGE>   18


                    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).

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 18

<PAGE>   19

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 30, 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, (filed as Exhibit 10.31 to the
                    registrant's Form 10-K for the year ended December 31, 1996,
                    SEC file 0-12728, and incorporated herein by reference).

10.32               Over Formula Loan Note dated February 27, 1997 by and
                    between Medar, Inc., Integral Vision, Ltd. and NBD Bank,
                    (filed as Exhibit 10.31 to the registrant's Form 10-K for
                    the year ended December 31, 1996, SEC file 0-12728, and
                    incorporated herein by reference).

10.33               Bridge Loan Note dated February 27, 1997 by and between
                    Medar, Inc., Integral Vision, Ltd., and NBD Bank, (filed as
                    Exhibit 10.31 to the registrant's Form 10-K for the year
                    ended December 31, 1996, SEC file 0-12728, and incorporated
                    herein by reference).

10.34               Sixth Amendment to Revolving Credit and Loan Agreement dated
                    March 28, 1997 by and between Medar, Inc. and Integral
                    Vision, Ltd. and NBD bank (filed as Exhibit 10.34 to the
                    registrant's Form 10-Q for the quarter ended June 30, 1997,
                    SEC file 0-12728, and incorporated herein by reference).

10.35               Seventh Amendment to Revolving Credit and Loan Agreement
                    dated June 27, 1997 by and between Medar, Inc. and Integral
                    Vision, Ltd. and NBD bank (filed as Exhibit 10.35 to the
                    registrant's Form 10-Q for the quarter ended June 30, 1997,
                    SEC file 0-12728, and incorporated herein by reference).

10.36               Eighth Amendment to Revolving Credit and Loan Agreement
                    dated July 15, 1997 by and between Medar, Inc. and Integral
                    Vision, Ltd. and NBD bank (filed as Exhibit 10.36 to the
                    registrant's Form 10-Q for the quarter ended June 30, 1997,
                    SEC file 0-12728, and incorporated herein by reference).

10.37               Amended and Restated Term Note dated July 15, 1997 by and
                    between Medar, Inc. and NBD bank (filed as Exhibit 10.37 to
                    the registrant's Form 10-Q for the quarter ended June 30,
                    1997, SEC file 0-12728, and incorporated herein by
                    reference).

10.38               Collateral Assignment of Property Rights and Security
                    Agreement dated July 15, 1997 by and between Medar, Inc. and
                    NBD bank (filed as Exhibit 10.38 to the registrant's Form
                    10-Q for the quarter ended June 30, 1997, SEC file 0-12728,
                    and incorporated herein by reference).

10.39               Stock Purchase Agreement between Maxco, Inc. and Medar, Inc.
                    dated July 23, 1997 (filed as Exhibit 10.39 to the
                    registrant's Form 10-Q for the quarter ended June 30, 1997,
                    SEC file 0-12728, and incorporated herein by reference).

10.40               Ninth Amendment to Revolving Credit and Loan Agreement dated
                    March 9, 1998 by and between Medar, Inc. and Integral
                    Vision, Ltd. and NBD bank.

10.41               Waiver of debt covenants from sub-debt holders.

21                  Subsidiaries of the Registrant.

23                  Consent of Independent Accountants.

(b)                 There were no reports on Form 8-K filed in the quarter ended
                    December 31, 1997.

(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 19
<PAGE>   20


                                   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, 1998                                     MEDAR, INC.


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

                            By:  /S/RICHARD R. CURRENT
                            -----------------------------------------
                            Richard R. Current, Executive Vice President of
                            Finance (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.


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


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


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



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


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


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


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



                                    Page 20
<PAGE>   21


                           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, 1997


                                   MEDAR, INC.


                           FARMINGTON HILLS, MICHIGAN










                                    Page 21
<PAGE>   22


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, 1997 and 1996
               Consolidated Statements of Operations-Years ended December 31,
                 1997, 1996 and 1995
               Consolidated Statements of Stockholders'
                 Equity-Years ended December 31, 1997, 1996 and 1995
               Consolidated statements of cash flows-Years ended December 31,
                 1997, 1996 and 1995
               Notes to Consolidated Financial Statements-December 31, 1997

  (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 22
<PAGE>   23

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, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. 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.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note C, the
Company has not complied with certain covenants of its loan agreements with
regard to tangible net worth as a result of recurring operating losses. While
the lenders have waived the violations as of December 31, 1997, no waivers of
possible future violations have been granted.  The Company has projected
operating losses in early 1998 which will likely require waivers or forbearance
by the lenders at measurement dates in 1998. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are more fully described in Note C. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.



                                                        /s/ Ernst & Young LLP



Detroit, Michigan
February 25, 1998








                                    Page 23

<PAGE>   24

CONSOLIDATED BALANCE SHEETS
MEDAR, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                                                             1997          1996
--------------------------------------------------------------------------------------------------------------------
                                                                                               (IN THOUSANDS)
ASSETS
CURRENT ASSETS
<S>                                                                                      <C>            <C>
   Cash                                                                                  $        831   $      215
   Accounts receivable, less allowance of $400,000                                             10,682        9,415
   Inventories                                                                                 14,227       15,991
   Costs and estimated earnings in excess of billings on incomplete contracts                   2,568        1,841
   Other current assets                                                                           881          543
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                           29,189       28,005

PROPERTY AND EQUIPMENT
   Land and improvements                                                                          377          368
   Building and building improvements                                                           6,317        6,147
   Production and engineering equipment                                                         3,791        3,303
   Furniture and fixtures                                                                       1,022          990
   Vehicles                                                                                       875          878
   Computer equipment                                                                           5,241        5,058
--------------------------------------------------------------------------------------------------------------------
                                                                                               17,623       16,744
   Less accumulated depreciation                                                                8,021        6,625
--------------------------------------------------------------------------------------------------------------------
                                                                                                9,602       10,119
OTHER ASSETS
   Capitalized computer software development costs, less accumulated amortization              10,796        8,908
   Patents, less accumulated amortization                                                       2,127        2,328
   Other                                                                                        1,444          916
--------------------------------------------------------------------------------------------------------------------
                                                                                               14,367       12,152
--------------------------------------------------------------------------------------------------------------------
                                                                                         $     53,158   $   50,276
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                                                      $      4,472   $    5,218
   Employee compensation                                                                        1,110        1,001

   Accrued and other liabilities                                                                  714        1,108
   Current maturities of long-term debt                                                        19,415        3,637
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                      25,711       10,964

LONG-TERM DEBT, less current maturities                                                         4,892       18,010

STOCKHOLDERS' EQUITY
   Common stock, without par value, stated value $.20 per share; 15,000,000
     shares authorized; 9,024,901 shares issued and outstanding (8,852,401
     shares at December 31, 1996)                                                                1,805        1,771
   Additional paid-in capital                                                                   31,187       29,767
   Retained-earnings deficit                                                                  (10,444)     (10,300)
   Accumulated translation adjustment                                                                7           64
--------------------------------------------------------------------------------------------------------------------
 TOTAL STOCKHOLDERS' EQUITY                                                                     22,555       21,302
--------------------------------------------------------------------------------------------------------------------
                                                                                          $     53,158  $    50,276
====================================================================================================================
</TABLE>

See accompanying notes

                                    Page 24
<PAGE>   25


CONSOLIDATED STATEMENTS OF OPERATIONS
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                                         YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------------------------------------
                                                             1997                 1996                 1995
--------------------------------------------------------------------------------------------------------------------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                   <C>                 <C>
NET REVENUES                                               $  40,524             $  41,471           $   39,771
Direct costs of sales                                         29,077                30,788               30,116
--------------------------------------------------------------------------------------------------------------------
                                                              11,447                10,683                9,655
Other costs and expenses
   Marketing                                                   4,161                 4,510                5,016
   General and administrative                                  2,700                 3,203                3,416
   Research, engineering, and development                      2,403                 3,552                2,088
   Patent litigation costs                                                                                5,461
   Excess product quality, warrant and other costs                                                        4,872
--------------------------------------------------------------------------------------------------------------------
                                                               9,264                11,265               20,853
--------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations                                2,183                 (582)             (11,198)
Interest:
   Expense                                                     2,338                 1,523                  587
   Income                                                       (49)                  (50)                 (72)
--------------------------------------------------------------------------------------------------------------------
                                                               2,289                 1,473                  515
--------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                       (106)               (2,055)             (11,713)
Provision (credit) for income taxes                               38                  (76)                (130)
--------------------------------------------------------------------------------------------------------------------
NET LOSS                                                  $    (144)            $  (1,979)           $ (11,583)
====================================================================================================================

Basic and diluted loss per share                          $    (.02)            $   (0.22)           $   (1.33)
====================================================================================================================
</TABLE>
See accompanying notes







                                    Page 25
<PAGE>   26


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, 1995                       $  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
   Issuance of 150,000 common shares                    30            720                                        750
   Exercise of options to purchase 22,500
       common shares                                     4             98                                        102
   Issuance of  stock warrants                                                                                   602

  Translation adjustments                                             602                         (57)          (57)
   Net loss for the year ended December 31,
       1997                                                                       (144)                        (144)
------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997                     $  1,805      $  31,187    $ (10,444)        $     7      $ 22,555
========================================================================================================================
</TABLE>

See accompanying notes.






                                    Page 26
<PAGE>   27


CONSOLIDATED STATEMENTS OF CASH FLOWS
MEDAR, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                                 YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------------------------
                                                                           1997           1996           1995
-------------------------------------------------------------------------------------------------------------------
                                                                                     (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S>                                                                    <C>           <C>            <C>
Net loss                                                               $   (144)     $  (1,979)     $ (11,583)
Adjustments to reconcile net loss to net cash provided by (used in)
   operating activities:
        Depreciation and amortization                                      5,279          4,529          3,672
        Credit for deferred income taxes                                                   (76)          (130)
        (Increase) decrease in net accounts receivable                   (1,267)          (797)          3,305
        (Increase) decrease in inventories                                 1,764        (2,824)        (1,752)
        (Increase) decrease in costs and estimated earnings
            in excess of billings on incomplete contracts                  (727)        (1,160)          1,610
        (Increase) decrease in other assets                              (1,053)            310          (658)
        Increase (decrease) in accounts payable and accrued
            expenses                                                     (1,031)          1,884        (1,431)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities                        2,821          (113)        (6,967)

INVESTING ACTIVITIES
Sale of short-term investments                                                                           4,018
Purchase of property and equipment                                         (879)        (2,283)        (5,204)
Investment in capitalized software                                       (5,383)        (4,669)        (3,253)
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                    (6,262)        (6,952)        (4,439)

FINANCING ACTIVITIES
Proceeds from exercise of stock options and other                            102            358            353
Proceeds from sale of common stock                                           750
Proceeds from issuance of stock warrants                                     602
Debt repayments on long-term debt and capital lease
   obligations                                                          (34,740)       (20,154)        (8,139)
Proceeds from long-term debt borrowings                                   37,400         25,364         20,161
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                  4,114          5,568         12,375
-------------------------------------------------------------------------------------------------------------------
Other                                                                       (57)            156              1
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash                                                  616        (1,341)            970
Cash at beginning of  year                                                   215          1,556            586
-------------------------------------------------------------------------------------------------------------------
Cash at end of year                                                    $     831     $      215     $    1,556
===================================================================================================================
</TABLE>
See accompanying notes.







                                    Page 27
<PAGE>   28


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MEDAR, INC. AND SUBSIDIARIES


NOTE A - SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The 1997 and 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 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 equipment and
automobile manufacturers located in North America for welding products and from
equipment manufacturers and end users 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, 1997 and the
respective sales in each year are:
<TABLE>
<CAPTION>

                                        1997           1996         1995
      -------------------------------------------------------------------------
                                                (IN THOUSANDS)
      -------------------------------------------------------------------------
      <S>                              <C>           <C>         <C>
      Chrysler Corporation              $3,504        $6,009      $3,400
      General Motors Corporation         3,903         7,730       8,500
      =========================================================================
</TABLE>










                                    Page 28


<PAGE>   29


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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
$210,000 in 1997 and $156,000 in 1996):
<TABLE>
<CAPTION>

                                       1997                  1996
       --------------------------------------------------------------------
                                             (IN THOUSANDS)
       --------------------------------------------------------------------
       <S>                          <C>                    <C>
       Raw materials                $   6,076              $   7,677
       Work in process                  1,654                  3,106
       Finished goods                   6,497                  5,208
       --------------------------------------------------------------------
                                    $  14,227              $  15,991
       ====================================================================
</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 $3,590,000, $2,522,000, and
$2,314,000 in 1997, 1996 and 1995, respectively. Total accumulated amortization
at December 31, 1997 and 1996, was $13,483,000 and $ 9,893,000 respectively.

PATENTS

Patents are stated at cost less accumulated amortization of $1,048,000 and
$660,000 at December 31, 1997 and 1996, respectively. Amortization of the
patents amounted to $388,000, $317,000 and $204,000 in 1997, 1996, and 1995,
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 29



<PAGE>   30


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to Statement 128 requirements.


NOTE B - 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>
                                                                    1997                   1996
                  ---------------------------------------------------------------------------------------
                                                                          (IN THOUSANDS)
                  ---------------------------------------------------------------------------------------
                  <S>                                             <C>                     <C>
                  Contract costs to date                          $   3,499               $  4,567
                  Estimated contract earnings                         3,377                  3,040
                  ---------------------------------------------------------------------------------------
                                                                      6,876                  7,607
                  Less billings to date                               4,308                  5,766
                  ---------------------------------------------------------------------------------------
                  Costs and estimated earnings in excess
                     of billings on incomplete contracts          $   2,568               $  1,841
                  =======================================================================================
</TABLE>

The Company anticipates that the majority of costs incurred on long-term
contracts at December 31, 1997, will be billed and collected in 1998.











                                    Page 30
<PAGE>   31


NOTE C - LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>

                                                                               1997             1996
-----------------------------------------------------------------------------------------------------------
                                                                                   (IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>
Revolving note payable to bank                                              $12,258          $12,604
Note payable to bank                                                                           3,000
Term notes payable to bank                                                    3,660            3,967
Subordinated debentures, 12.95%
     (Net of unaccreted value assigned to related warrants of
     $510,000 in 1997)                                                        6,490
Patent license payable                                                        1,715            1,863
Other                                                                           184              213
-----------------------------------------------------------------------------------------------------------
                                                                             24,307           21,647
Less current maturities                                                      19,415            3,637
-----------------------------------------------------------------------------------------------------------
                                                                            $ 4,892          $18,010
===========================================================================================================
</TABLE>


The revolving note payable to bank is due August 31, 1999, and provides for
advances of up to $15,000,000 based upon levels of eligible accounts receivable
and inventory. At December 31,1997, $13,886,000 was available for advances and
interest was at the bank's prime rate plus 1/4%. Under the terms of a related
agreement with the bank, the Company agreed, among other covenants, to maintain
net worth and the ratio of debt to net worth, all as defined, at specified
levels. Substantially all company assets not previously pledged under term notes
(see below), have been pledged as collateral for this indebtedness.

The term notes to bank are payable as follows:

    -  $62,500 quarterly plus interest at the bank's prime rate, plus 1/4%, due
       June 29, 2002; collateralized by a first mortgage on the Company's Grand
       River facility;

    -  $14,111 monthly, plus interest at 7.7%, due October 31, 2000;
       collateralized by a first mortgage on the Company's Crestview facility;

    -  $2,189 monthly, plus interest at the bank's prime rate, plus 1/4%; due
       March 20, 2002;

The subordinated debentures mature $700,000 on each June 30 in the years 2000 to
2004, with the balance due June 30, 2005. Interest on the debentures is payable
quarterly at 12.95%. Terms with respect to the maintenance of levels of net
worth and net worth ratios are the same as with the bank under the agreements
related to the revolving note. Substantially all company assets are secondarily
pledged as collateral for the debentures.

The debenture holders have warrants for the purchase of 1,400,000 shares of
Medar common stock at $6.86. These warrants expire June 30, 2005.

At December 31, 1997, the Company's equity did not meet the levels required in
debt agreements related to the Company's revolving bank loan and subordinated
debentures. Although the lenders waived this shortfall as of December 31, 1997,
no waivers for possible future violations were obtained. As the Company expects
to report operating losses in the first and possibly the second quarters, it
will have to approach the lenders for additional waivers or forbearance at
quarterly reporting periods in 1998, and, therefore, these debt issues are
classified as current liabilities.

While there can be no assurance that the lenders will grant waivers for any
violations that might be incurred, management believes that the expenditure
reductions already initiated and other actions to raise cash through excess
asset sales as well as the possible recovery of sales levels later in the year
will be sufficient to convince the lenders that it will be prudent for them to
forbear any actions that they may be legally entitled to take under terms of the
agreements related to the Company's debt.

The patent license payable relates to future payments to a corporation for use
of certain patents. The payments are due in eight remaining installments and
have been discounted at 8%.

The fair values of these financial instruments approximates their carrying
amounts at December 31, 1997.

Maturities of long-term debt and capitalized lease obligations are $12,944,000
in 1999; $3,048,000 in 2000; $1,186,000 in 2001, $1,176,000 in 2002 and
$5,286,000 thereafter.








                                    Page 31
<PAGE>   32


 NOTE D - STATEMENT OF CASH FLOWS

The Company paid interest on its debt instruments of $2,039,000, $1,646,000, and
$356,000 in 1997, 1996 and 1995, respectively. There were no income tax payments
in 1997,1996 or 1995.


NOTE E - INCOME TAXES

As of December 31, 1997, the Company has cumulative net operating loss
carryforwards approximating $22,750,000 for tax purposes available for reduction
of taxable income of future periods through 2012 and unused investment and
research and development tax credits approximating $947,000 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
decreased $55,000 in 1997 and increased $448,000 and $3,896,000 in 1996 and
1995, respectively.

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 are as
follows:
<TABLE>
<CAPTION>

                                                                                  1997          1996
             ---------------------------------------------------------------------------------------------
                                                                                    (IN THOUSANDS)
             ---------------------------------------------------------------------------------------------
             <S>                                                                 <C>           <C>
             Deferred tax liabilities:
                Deductible software development costs, net of
                   amortization                                                  $3,609        $2,931
                Tax over book depreciation                                          275           344
                Percentage of completion                                            873           491
             ---------------------------------------------------------------------------------------------
                       Total deferred tax liabilities                             4,757         3,766
             Deferred tax assets:
                Net operating loss carryforwards                                  7,592         6,836
                Credit carryforwards                                              1,061           987
                Reserve for warranty                                                 68            68
                Other                                                               325           219
             ---------------------------------------------------------------------------------------------
                       Total deferred tax assets                                  9,046         8,110
                Valuation allowance for deferred tax assets                       4,289         4,344
             ---------------------------------------------------------------------------------------------
                       Net deferred tax assets                                    4,757         3,766
             ---------------------------------------------------------------------------------------------
                       Net deferred tax                                          $    0        $    0
             =============================================================================================
</TABLE>









                                    Page 32



<PAGE>   33


NOTE E - INCOME TAXES (CONTINUED)

Significant components of the credit for income taxes are as follows:
<TABLE>
<CAPTION>

                                                   1997             1996             1995
                             -------------------------------------------------------------------
                                                               (IN THOUSANDS)
                             -------------------------------------------------------------------
                             <S>                     <C>            <C>             <C>
                             Current:
                                Federal
                                State
                                Foreign               $38
                             -------------------------------------------------------------------

                             Deferred:
                                Federal                                              $(130)
                                Foreign                              $(76)

                             -------------------------------------------------------------------
                                                                      (76)            (130)
                             -------------------------------------------------------------------
                                                      $38            $(76)           $(130)
                             ===================================================================
</TABLE>

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

<TABLE>
<CAPTION>

                                                    1997             1996             1995
        --------------------------------------------------------------------------------------
                                                             (IN THOUSANDS)
        --------------------------------------------------------------------------------------
        <S>                                         <C>             <C>            <C>
        Tax credit at U.S. statutory rates          $(36)           $(699)         $(3,983)
        Change in valuation allowance                (55)             488            3,896
        Other nondeductible expenses                  43               73               75
        Other                                         86               62             (118)
        ======================================================================================
                                                    $ 38            $ (76)         $  (130)
        ======================================================================================
</TABLE>


NOTE F - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>

                                                        1997                1996                1995
      -----------------------------------------------------------------------------------------------------
      NUMERATOR:
      <S>                                         <C>                <C>                 <C>
      Net loss for basic and diluted earnings
      per share:                                  $   (144,000)       $ (1,979,000)       $(11,583,000)
      *there was no effect of dilutive
      securities see below

      DENOMINATOR:
      Denominator for basic and diluted
      earnings per share weighted-average
      shares                                         8,897,000           8,820,000           8,692,000
      =====================================================================================================
      *there was no effect of dilutive
      securities see below

       Basic and diluted loss per share           $      (0.02)       $      (0.22)       $      (1.33)
      ========================================= =================== =================== ===================
</TABLE>

For additional disclosures regarding stock options and warrants see Note H

Warrants to purchase 1,400,000 shares of common stock were outstanding during
1997 and options to purchase 662,100, 589,100 and 787,800 shares of common stock
were outstanding during 1997, 1996 and 1995 respectively, but were not included
in the computation of diluted earnings per share because the inclusion of these
options would have an antidilutive effect.









                                    Page 33

<PAGE>   34

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 $66,000, $89,000, and $61,000 for the years ended December 31, 1997,
1996 and 1995, respectively.


NOTE H - STOCK OPTIONS AND WARRANTS

A summary of the status of the Option Plan is as follows:
<TABLE>
<CAPTION>

                                                                        NON-QUALIFIED
                                                        QUALIFIED ISO   STOCK OPTION
                                                          PLAN             PLAN              1995 PLAN
---------------------------------------------------------------------------------------------------------
                                                                (NUMBER OF SHARES IN THOUSANDS)
---------------------------------------------------------------------------------------------------------
                     <S>                                 <C>                <C>              <C>
                     Options outstanding                    213                20               429
                     Options exercisable                    213                20               163
                     Options Granted During:
                          1997                               -0-               -0-              267
                          1996                               -0-               -0-              132
                          1995                               -0-               -0-              211
                     Options Available
                          For Grant                          -0-               -0-               63
=========================================================================================================
</TABLE>

Option grants are approved by the Compensation Committee of the Board of
Directors. The option price is the market price on the date of the grant, and
vesting generally occurs after one year and the expiration occurs after ten
years from the date of the grant.


A summary of option activity under all plans follows:
<TABLE>
<CAPTION>

                                                 1997                         1996                        1995
--------------------------------------------------------------------------------------------------------------------
                                                              WEIGHTED                     WEIGHTED
                                                              AVERAGE                      AVERAGE
                                                              EXERCISE                     EXERCISE
                                                  SHARES       PRICE          SHARES        PRICE         SHARES
--------------------------------------------------------------------------------------------------------------------
                                                                (NUMBER OF SHARES IN THOUSANDS)
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>          <C>             <C>          <C>             <C>
Outstanding at beginning of year                   589         $5.87            788         $5.82           664
Granted ($6.25 to $8.50 per share)                 267          5.20            132          6.25           211
Exercised ($.35 to $7.50 per share)               (23)          4.57          (141)          2.52          (84)
Canceled  ($5.625 to $11.50 per share)           (171)          5.88          (190)          8.46           (3)
--------------------------------------------------------------------------------------------------------------------
Outstanding at end of year
    ($1.75  to $9.25 per share)                    662          5.64            589          5.87           788
====================================================================================================================
Exercisable ($1.75 to $9.25 per share)             396         $5.93            464         $4.54           577
====================================================================================================================
</TABLE>

Exercise prices for options outstanding as of December 31, 1997 ranged from
$1.75 to $9.25. The weighted-average fair value of options outstanding as of
December 31, 1997 was $4.92. The weighted-average remaining contractual life of
those options is 6.8 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
$470,000 ($.05 per share), $2,393,000 ($.27 per share) and $11,730,000 ($1.35
per share) for 1997, 1996 and 1995 respectively. Assumptions used in determining
the above proforma disclosures were risk free interest rates of 6.00%, 6.12%
and 6.23% in 1997, 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 through 1997 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.








                                    Page 34
<PAGE>   35


In connection with the private placement of $7.0 million of debentures in 1997,
the company issued warrants for the purchase of 1,400,000 Medar common shares at
$6.86. The estimated value of these warrants was recognized as discount on the
debentures and will be accreted and reported as additional interest expense over
the life of the debentures.


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 are 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 $107,000 in 1998 and $32,000
in 1999. Rent expense charged to operations approximated $156,000, $276,000, and
$380,000 in 1997, 1996, and 1995, respectively.


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.










                                    Page 35
<PAGE>   36


NOTE K - GEOGRAPHIC AREA

Net revenues from 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
-------------------------------------------------------------------------------------------------------------
                                                     1997                   1996                1995
-------------------------------------------------------------------------------------------------------------
                                                                       (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                  <C>                 <C>
Net revenues:
   Unaffiliated customers
          United States                              $ 38,865             $ 34,366           $  33,330
          United Kingdom                                  960                2,440               3,815
          Canada                                          699                4,665               2,626
-------------------------------------------------------------------------------------------------------------
                                                       40,524               41,471              39,771
=============================================================================================================
Earnings (loss) before income taxes:
          United States                                2,216               (1,616)            (11,766)
          United Kingdom                              (2,232)                (495)               (200)
          Canada                                          122                   56                 253
-------------------------------------------------------------------------------------------------------------
                                                        (106)              (2,055)            (11,713)
=============================================================================================================
Identifiable assets:
          United States                                50,610               45,021              42,101
          United Kingdom                                4,471                4,993               3,844
          Canada                                          163                1,712               1,145
          Eliminations                                (2,086)              (1,450)             (2,367)
-------------------------------------------------------------------------------------------------------------
                                                       53,158               50,276              44,723
=============================================================================================================
Liabilities:
          United States                                30,696               26,380              19,341
          United Kingdom                                7,045                5,170               3,762
          Canada                                           70                1,656               1,092
          Eliminations                                (7,208)              (4,232)             (2,239)
-------------------------------------------------------------------------------------------------------------
                                                       30,603               28,974              21,956
=============================================================================================================
Net export sales by domestic operations:
   North America                                          576                  903               1,944
   Europe                                               4,237                5,986               3,785
   Asia                                                 3,011                2,434               2,451
   Other                                                  302                  275                 259
-------------------------------------------------------------------------------------------------------------
                                                     $  8,126             $  9,598           $   8,439
=============================================================================================================
</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, 1997 AND THE YEAR THEN ENDED

<TABLE>
<CAPTION>

                                                     VISION-BASED          RESISTANCE WELDING
                                                  INSPECTION SYSTEMS            CONTROLS           CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                       <C>                   <C>
Net revenues                                           $15,955                   $24,569               $40,524
AmortIzation of software development cost                2,678                       912                 3,590
Research, engineering, and development
expense                                                  1,285                     1,118                 2,403
Earnings (loss) from operations                         (1,078)                    3,261                 2,183
Net interest expense                                                                                     2,289
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                                                             $     106
-------------------------------------------------------------------------------------------------------------------
Identifiable assets at December 31, 1997               $28,358                   $24,800               $53,158
===================================================================================================================

                                                                DECEMBER 31, 1996 AND THE YEAR THEN ENDED
<CAPTION>
                                                     VISION-BASED          RESISTANCE WELDING
                                                  INSPECTION SYSTEMS            CONTROLS           CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                       <C>                   <C>
Net revenues                                           $13,618                   $27,853               $41,471
Amortization of software development cost                1,608                       914                 2,522
Research, engineering,  and development
expense                                                  2,138                     1,414                 3,552
Earnings (loss) from operations                         (5,703)                    5,121                  (582)
Net interest expense                                                                                     1,473
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                                                                $2,055
-------------------------------------------------------------------------------------------------------------------
Identifiable assets at December 31, 1996               $22,423                   $27,853               $50,276
===================================================================================================================

                                                                DECEMBER 31, 1995 AND THE YEAR THEN ENDED
<CAPTION>

                                                     VISION-BASED          RESISTANCE WELDING
                                                  INSPECTION SYSTEMS            CONTROLS           CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                       <C>                   <C>
Net revenues                                           $16,428                   $23,343              $ 39,771
Amortization of software development cost                1,375                       939                 2,314
Research, engineering, and development
expense                                                    376                     1,712                 2,088
Loss from operations                                    (6,948)         (1)       (4,250)              (11,198)
Net interest expense                                                                                       515
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                                                              $ 11,713
===================================================================================================================
Identifiable assets at December 31, 1995               $20,802                   $23,921              $ 44,723
===================================================================================================================
</TABLE>


Interest expense and income taxes have been excluded from the calculation of
earnings (loss) from operations.

Identifiable assets 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 $4,826,000
and $1,623,000, respectively. Depreciation and amortization for machine
vision-based inspection systems and resistance welding controls was $3,176,000
and $2,103,000, respectively.

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







                                    Page 37
<PAGE>   38
                 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       CHARGED TO COSTS    CHARGED TO OTHER      DEDUCTIONS-      BALANCE AT END
                                    BEGINNING OF PERIOD     AND EXPENSES     ACCOUNTS-DESCRIBE        DESCRIBE          OF PERIOD
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                 <C>              <C>                  <C>               <C>
Year ended December 31, 1997:
  Accounts receivable allowance           $    400            $    120                               $    120 (3)        $   400
  Inventory obsolescence reserve               156                 622                                    568 (1)            210
  Deferred tax valuation allowance           4,344                                                         55 (2)          4,289
                                          --------            --------                                 -------          --------
                                          $  4,900            $    742                               $  1,253 (3)        $ 4,899
=================================================================================================================================
Year ended December 31, 1996:
  Accounts receivable allowance           $    355            $    120                               $     75 (3)        $   400
  Inventory obsolescence reserve               154                 458                                    456 (1)            156
  Deferred tax valuation allowance           3,896                 448                                                     4,344
                                          --------            --------                                 -------          --------
                                          $  4,405            $  1,026                               $     31            $ 4,900
=================================================================================================================================
Year ended December 31, 1995:
  Accounts receivable allowance           $    311            $     78                               $     34 (3)        $   355
  Inventory obsolescence reserve               463                 130                                    439 (1)            154
  Deferred tax valuation allowance                                             $ 3,896 (2)                                 3,896
                                          --------            --------         -------                 -------          --------
                                          $    774            $    208         $ 3,896               $    473            $ 4,405
=================================================================================================================================
</TABLE>




------------------------------
1  Write-off obsolete Inventory.
2  Net change in deferred tax valuation allowance.
3  Net accounts receivable write-offs.






                                    Page 38
<PAGE>   39




                              EXHIBITS TO FORM 10-K



                                   MEDAR, INC.



                          YEAR ENDED DECEMBER 31, 1997


                         COMMISSION FILE NUMBER 0-12728

















                                    Page 39
<PAGE>   40





EXHIBIT                          EXHIBIT INDEX
NUMBER                           DESCRIPTION
-------                          -------------

10.40             Ninth Amendment to Revolving Credit and Loan Agreement dated
                  March 9, 1998 by and between Medar, Inc. and Integral Vision,
                  Ltd. and NBD Bank.

10.41             Waiver of debt covenants from sub-debt holders.

21                Subsidiaries of the Registrant.

23                Consent of Independent Accountants.
















                                    Page 40