<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, 1995, or
/ /  Transition report pursuant to Section 13 or 15(d) of the Securities 
     Exchange Act of 1934 (Fee Required) 
   For the transition period from                  to                     
                                  ----------------    ----------------
   Commission file number 0-12728

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

                       Michigan                          38-2191935
        ----------------------------------------       ---------------

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

 

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days.

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 29, 1996:

     Common Stock, No Par Value, Stated Value $.20 Per Share - $52,940,963

The number of shares outstanding on each of the issuer's classes of common
stock, as of February 29, 1996:

      Common Stock, No Par Value, Stated Value $.20 Per Share - 8,801,401





                                     Page 1
<PAGE>   2

                     DOCUMENTS INCORPORATED BY REFERENCE




Portions of the proxy statement for the annual shareholders meeting to be held
May 29, 1996 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.  In 1978, Maxco Inc., a publicly-held, Michigan-based holding company
("Maxco") formed the Company under Michigan law for the purpose of acquiring
the Company's predecessor.  The predecessor company was incorporated under
Delaware law in 1969 and was also called Medar, Inc.  From 1978 to 1983, the
Company was 100% owned by Maxco.  In June of 1983, the Company issued to the
public 800,000 shares of Common Stock, reducing Maxco's ownership to 80%.  In
July 1985, the Company issued 1,131,250 additional shares, and Maxco sold
881,250 shares, of Common Stock in a public offering, reducing Maxco's
ownership to 39%.  In May 1994, the Company issued 1,300,000 shares, and Maxco
sold 145,000 shares of common stock in a public offering, further reducing
Maxco's ownership to 22%.  As of February 29, 1996, Maxco's ownership of the
Company's Common Stock was just below 20%.

Most of the Company's Canadian sales of resistance welding controls are
effected through its wholly-owned subsidiary, Medar Canada Ltd., located in
Oshawa, Ontario, Canada.  In 1987, the Company acquired 80% of the outstanding
stock of Integral Vision-AID, Inc. ("AID"), formerly Automatic Inspection
Devices, Inc., a developer and manufacturer of optical inspection devices, from
Owens-Illinois, Inc.  In 1991, the Company acquired the remaining 20% of such
stock. Most of the Company's development and sales of certain optical
inspection products are effected through AID.

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

In February 1995, the Company acquired 100% of the common stock and preference
shares of Integral Vision Ltd. ("Integral"), an English corporation, for
654,282 previously unissued shares of Medar, Inc. common stock.  Integral is a
machine vision company which develops and manufactures solutions for OEM's and
end-users.

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


INDUSTRY BACKGROUND

Process monitoring and inspection for quality control are critical aspects of
virtually every manufacturing process.  Prior to the advent of
microprocessor-based controls, most monitoring and inspection procedures were
performed manually, often resulting in the interruption of continuous
production lines.  Manual inspection is generally less reliable than
machine-based methods and is subject to limitations in accuracy and precision.
In many cases manual inspection is performed on a random sampling basis and can
result in the failure to detect defects on a timely basis.  The introduction of
microprocessor-based control systems for manufacturing environments has enabled
high-quality monitoring and inspection without delaying continuous production.
These systems have been developed to control and automate a variety of
manufacturing tasks including resistance welding and product inspection.





                                     Page 3
<PAGE>   4

Optical Inspection Equipment

Sophisticated manufacturing techniques often require high-speed inspection that
is difficult and time-consuming to evaluate using conventional manual and
visual methods.  Human visual inspection is further limited by physical
endurance and often results in inconsistent interpretations of quality.

Recent advancements in microprocessor-based systems and other technologies
enhance the use of optics to identify defects and determine dimensional
attributes.  Which technology is deployed will depend on the types of materials
to be inspected, the physical size and shape of manufactured products, the
nature of defects and the speed with which the inspection must be performed.
Optical inspection systems use an illumination source, data collection sensors
and data analysis software.  Proper illumination is a critical factor and can
be achieved using a variety of sources such as white light or lasers.  Light is
projected through or reflected from an object and is collected by sensors, such
as cameras and photo-electric cells.  Software processes the resulting data and
compares it to established acceptable patterns and tolerances.  Based on this
comparison, the part may be rejected or other corrective actions implemented.

There are two major technologies currently used for optical inspection.  In
"matrix technology," sensors are arranged in a two-dimensional grid, gathering
two-dimensional data from a surface in a single frame.  Also, when working in
conjunction with a form of structured lighting, these two-dimensional images
can be processed to form three dimensional data.  In "linear array technology,"
sensors are arranged in a single line, can assemble a two-dimensional image
from a series of single-line scans and are capable of much higher resolutions.
The Company has the capability of providing both "matrix technology" and
"linear array technology".

Resistance Welding Controls and Systems

Resistance welding is a commonly used process for joining metals.  Materials to
be welded are mechanically forced together while a controlled amount of
electrical current is passed through them.  The materials' resistance to the
conduction of current generates sufficient heat at the point of contact to
create a semi-molten state.  As the metals cool, they are fused together.  The
welding process is difficult to monitor due to the high levels of electrical
current required and the inability to examine a weld in process.  Defective
welds generate higher manufacturing costs due to increased rejects, downtime,
and use of redundant welds.  Improper welds can also create problems ranging
from annoying squeaks and broken parts to significant safety hazards.

The major challenge in controlling the resistance welding process is properly
regulating the electrical current required to create a high-quality weld.
Insufficient current results in inadequate melting of metal, while excessive
current results in unwanted expulsion of molten metal, increasing costs and
lowering weld quality. Variations in welding conditions further complicate the
process.  For example, copper electrodes used to deliver current to the weld
spot become distorted over time, altering their conductive properties and
requiring changes in the amount of current needed to assure a high-quality
weld.  In addition, factory voltage fluctuations and differing metal conditions
alter the delivery of current to the weld.  Trends toward higher quality,
lighter weight materials and extended warranty periods have demanded the use of
coated metals, aluminum and alloys with unique conductive properties.  All of
these factors contribute to the need for more sophisticated welding controls.

Microprocessor-based welding controls, introduced in the late 1970s, improved
weld quality by continuously monitoring and automatically adjusting the
current, compensating for numerous variations in welding conditions. Controls
are typically used in conjunction with portable welding guns, robotic welders
and fixed-machine welders.  Creation of a weld involves several steps organized
in a "weld sequence," including delivery of a single pulse or multiple pulses
of current at specified intervals.  The function of a control is primarily to
provide specified amounts of electrical current for precise durations in a weld
sequence after certain conditions have been met.

The base of suppliers to the worldwide market for resistance welding controls
is highly fragmented, with demand concentrated in the automotive and appliance
industries.  The primary geographic markets for resistance welding controls are
in North America, Europe and Japan.  While the Company believes the welding
controls market in North America is mature, recent growth in the welding
control industry has resulted from improvements in welding control technology,
re-tooling associated with introduction of new automobile body styles and
improved business conditions for U.S. automobile manufacturers.  In addition,
the Company believes that higher demand for welding controls will result from
industrial modernization in China, India, Russia, South America and Southeast
Asian countries.





                                     Page 4
<PAGE>   5

THE MEDAR SOLUTION

Medar develops, manufactures, and markets microprocessor-based process
monitoring and control products for use in manufacturing environments.  The
Company focuses its efforts on resistance welding controls and optical
inspection and gauging equipment.  The Company's welding controls monitor and
automatically regulate electrical current for industrial resistance welding
applications.  The majority of the Company's optical inspection equipment is
used to detect manufacturing defects in various optical storage media such as
audio compact discs ("Audio CDs") and compact discs-read only memory
("CD-ROM's").

Optical Inspection

The Company has developed optical inspection systems that utilize white-light
or laser 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, which it began
developing in 1985.  In 1987, the Company significantly strengthened its linear
array capabilities with the acquisition of AID from Owens-Illinois, Inc.  At
that time, AID had developed linear array technology for on-line detection of
imperfections in glass containers, which the Company then adapted for
inspection of various optical media such as Audio CDs and CD-ROM's.

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 more cost-effective solution to optical disc inspection
than laser-based systems.

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 130 millimeter, 120 millimeter, 80 millimeter and 65
millimeter 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" Recordable Compact Discs ("CD-R")
and "multiple write" Magneto-Optical ("MO") discs.  Replacement of existing
Audio CDs as a principal medium for music or the failure of one or more of
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 primarily
to original equipment manufacturers ("OEMs") and end-users of Audio CD and
CD-ROM manufacturing equipment.  For sales to OEMs, the Company's products are
typically integrated directly into optical disc production equipment.  The
Company believes that its inspection systems are the systems of choice for most
of the major OEMs worldwide that sell optical disc manufacturing equipment.

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

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





                                     Page 5
<PAGE>   6

"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, which results in significantly reduced manufacturing
and service costs as well as faster product design cycles, is currently being
incorporated into the Company's welding control products under development.
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.

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.

BUSINESS STRATEGY

The Company intends to maintain and enhance its position in both the resistance
welding control and optical inspection equipment markets by providing
technically innovative products, expanding applications for its existing
technologies and providing comprehensive customer service and support.  Key
elements of the Company's business strategy include the following:

Broaden Applications and Technology Base.  The Company actively seeks to
develop additional applications for its existing technologies.  Medar also
intends to continue to acquire or develop new technologies and introduce cost
effective products with higher performance and functionality.  For example, the
Company's mid-frequency welding control, which the Company began shipping in
early 1996, provides customers with more efficient and higher quality welds for
aluminum and heavy thicknesses of steel.  In addition, the Company believes its
VisionBlox software introduced in February 1996 has a wide range of use in many
vision applications.

Expand International Sales.   The Company continually seeks to increase the
markets for its products outside of the United States.  Although the vast
majority of the Company's welding control sales have historically been derived
in North America, the Company believes that its low-cost MedWeld 200 Series
will provide significant opportunities for sales outside of North America.  The
Company has established international distribution relationships for welding
controls in Mexico and Southeast Asia and in 1994 formed a joint venture with
Shanghai Electric Welding Machine Works, one of two primary manufacturers of
welding equipment in China.  The Company is expanding its marketing efforts for
optical disc inspection systems through both direct sales efforts and a network
of sales agents in Japan, Western Europe and Southeast Asia.  The acquisition
of Integral also gives the Company a base of operations in Europe.





                                     Page 6
<PAGE>   7


Integrate With Other Manufacturers' Products.   The Company intends to continue
the integration of its products with other manufacturers' factory automation
systems.  Integration offers many advantages to customers, including lower
costs, ease of maintenance, and reduced manufacturing floor space requirements.
Welding controls have been integrated with products from major programmable
controller manufacturers and several robotics manufacturers.  Additionally, the
Company has integrated its optical inspection equipment into various optical
disc manufacturing lines.  This integration approach allows the Company to
leverage the sales and marketing capabilities of OEMs such as Allen-Bradley
Company, Inc., ABB Robotics, Inc., Nachi Robotics Systems, Inc.,
ROBI-Systemtechnik A.G., and Origin Electric Co., Ltd.  The Company believes
there are additional opportunities to further integrate its products with those
of other manufacturers.

Provide Comprehensive Customer Service and Support.  The Company believes that
providing a high level of service and support has been and will continue to be
a significant factor in its continued success.  The Company actively seeks
qualified employees who can provide effective solutions to customer problems.
The Company also exploits its technologies to address customer needs.  For
example, Medar's networked welding control systems can be accessed remotely to
provide on-line diagnostic services via modem in the event of product failures.
The Company believes it has a solid understanding of the markets it serves
through close association with its customers.  Customer feedback regarding
product performance, desired features and emerging industry trends have helped
the Company maintain its focus on customer needs.  The Company plans to
continue expanding its customer support organization.

As part of its business strategy, the Company intends to pursue rapid growth.
This growth strategy will require expanded customer services and support,
increased personnel throughout the Company, expanded operational and financial
systems and the implementation of additional control procedures.  There is no
assurance that the Company will be able to attract qualified personnel or
successfully manage expanded operations.  Failure to manage growth effectively
could adversely affect the Company's financial condition and results of
operations.

PRODUCTS

Optical Disc Inspection Equipment

The Company markets a full line of inspection systems primarily used to detect
manufacturing defects in various optical storage media, including Audio CDs,
CD-ROM's, CD-R, Digital Video Disc (DVD), Phase Differential (PD), and MO.  The
Company's standard inspection systems can detect surface scratches, bubbles,
black specks, pinholes, disc warp, and other imperfections at resolutions down
to 40 microns.  In addition, the Company has developed and markets optical disc
inspection systems configured to achieve resolutions down to 20 microns.  These
systems satisfy the more demanding tolerances of emerging higher density
optical storage media such as CD-R, DVD and MO.  Optical disc inspection
products accounted for 30.9%, 26.0% and 27.9% of the Company's total net sales
in 1995, 1994, and 1993, respectively.  The following table summarizes key
features of the Company's optical disc inspection products.

<TABLE>
<CAPTION>
  DISC
  INSPECTION     YEAR            FEATURES AND TECHNOLOGY              LIST PRICE            TARGET APPLICATIONS
  PRODUCTS       INTRODUCED                                           RANGE
  -------------------------------------------------------------------------------------------------------------
  <S>            <C>             <C>                                  <C>                   <C>
  1100 Series    1986 - 1988     *  Defect detection to 40 microns    $50,000 - $80,000     *  Audio CD
                                 *  White light - Linear array                              *  CD-ROM

  CD-R           1993            *  Defect Detection to 20 microns    $114,000 -$120,000    *  CD-R
                                 *  Laser - Linear array                                    *  MO

  MD             1993            *  Defect detection to 40 microns    $99,000-$107,000      *  Mini-disc
                                 *  White light - Linear array

  iNSPECt-       1994 - 1995     *  High speed optical disc           $60,000-$105,000      *  Audio CD
  Series                            inspection                                                       
                                 *  Multi-channel defect                                    *  CD-ROM
                                 *  Birefringence                                           *  PD    
                                 *  Lacquer                                                 *  DVD   
                                 *  Dark field
</TABLE>





                                     Page 7
<PAGE>   8


The Company also offers numerous options for its optical disc inspection
products, including:

     Bar Code Reader.  Automated reader that prevents mislabeling of batch
     manufactured discs by verifying bar codes prior to labeling.

     Lacquer Inspection.  Verifies uniform application of protective lacquer
     coating.  This system can also be purchased as a stand-alone system.

     Birefringence Inspection.  Detects aberrant stresses in plastic substrate
     that can cause read errors.

     Dark Field Channel.  Used to detect low contrast defects.

Software Products

The Company markets a software package, called VisionBlox, which allows system
integrators, OEMs and volume end users to quickly develop powerful and custom
machine vision applications without spending time developing core vision
algorithms.  VisionBlox uses standard PC hardware and a frame grabber or vision
processor, while providing a Windows user interface.  This product, which was
introduced in February 1996, lists for $9,000, with discounting available for
volume purchases.

Other Products.  The Company offers several additional stand-alone optical
inspection systems including:
      
     Printed Label Inspection Systems.  High-speed, in-line, matrix-based system
     that inspects the printed surface of a disc to verify label quality.

     Catalog ID.  High-speed, in-line, matrix-based system that reads and 
     identifies alphanumeric catalog identification codes to prevent 
     mislabeling.

     Disc Counter.  Automated off-line linear-based system for counting batch
     processed discs.

     Birefringence Tester.  Detection of birefringence in compact discs.


Resistance Welding Control Systems

The Company markets a full line of resistance welding controls that assure weld
quality and collect data for trend analysis.  The Company's products
incorporate a number of common features designed to ensure weld quality,
including:  "Automatic Voltage Compensation", which maintains weld heat during
changes in line voltage; "Steppers", which compensate for electrode tip
degradation; and "Dynamic Power Factor Compensation", which optimizes accuracy
in heat control.  Resistance welding products accounted for 58.7%, 65.2% and
63.5% of the Company's total net sales in 1995, 1994, and 1993, respectively.
The following table summarizes key features of the Company's resistance welding
products.





                                     Page 8
<PAGE>   9
<TABLE>
<CAPTION>
  WELDING       YEAR                                                    LIST PRICE          TARGET MARKETS AND APPLICATIONS
  CONTROL       INTRODUCED      FEATURES                                RANGE
  PRODUCTS
  -------------------------------------------------------------------------------------------------------------------------
  <S>           <C>             <C>                                     <C>                 <C>
  700 Series    1982            *  Fully-Programmable                   $4,000 - $7,000     * Domestic automotive, appliance
  500 Series    1987            *  Discrete Input/Output or Optional                          and aerospace
                                   Level 1 Integration
                                *  Serial Communications
                                *  Network Capable

  400 Series    1986            *  Fixed Weld Sequence                  $2,000 - $3,000     * Low-end, discrete
                                *  Discrete Input/Output                                      manufacturing

  1000          1990            *  Fully-Programmable                   $5,000 - $11,000    * Domestic automotive
  Series                        *  Serial Communications
                                *  Network Capable
                                *  Level 1 Integration or Optional
                                   Discrete Input/Output

  3000          1993            *  Fully-Programmable                   $3,000 -$12,000     * Worldwide automotive,
  Series                        *  Serial Communications                                      appliance and aerospace
                                *  Network Capable                                          * Resistance welding OEMs
                                *  Level 2 Integration

  200 Series    1994            *  Fixed Weld Sequence                  $2,000 - $3,000     * Low-end discrete manufacturing
                                *  Discrete Input/Output
                                                                                            * Resistance welding OEMs
</TABLE>


The Company also offers numerous weld control options, including:

      SureWeld Steppers.  Software that replaces "fixed steppers",
      automatically increasing current to compensate for electrode wear and
      adjusting current as needed to compensate for long-term variations in
      materials and welding machine characteristics.

      Dynamic Squeeze/Closed-Loop Pressure Control.  Software and hardware
      that monitor welding pressure and initiate a weld based on programmed
      pressure conditions, reducing weld cycle times.

      Hand-held Terminal ("HHT").  A portable means for programming and
      accessing information for any welding control attached to the Company's
      serial communications network.

      Weld Information Center ("WIC").  Hardware and PC-based graphical
      software that link communications between weld controls and customers'
      computer systems.

      Weld Support System ("WSS").  Communications software for UNIX-based
      welding control systems.

Other Products.  The Company sells a limited number of butt welding control
systems, used primarily in the manufacture of automotive wheel rims.  In
addition, the Company offers a Thermal Force Feedback system that measures and
automatically adjusts for the deflection of electrode arms due to thermal
expansion and contraction during welding.  To date, the Company has not sold
any Thermal Force Feedback Systems.

PRODUCT DEVELOPMENT

The markets in which the Company competes are characterized by rapid
technological change.  The Company's continued success will depend in large
part upon its ability to develop and successfully introduce new products and
product enhancements.  For example, improvements in Audio CD and CD-ROM
manufacturing systems, as well as the introduction of new optical storage
formats such as CD-R and MO, require the Company to continually improve its
optical inspection systems to decrease inspection time.  The Company has
devoted and will continue to devote substantial resources to research and
development.  There can be no assurance that the Company will be able to
successfully develop, introduce and market new products or enhancements, or
that new products or enhancements will meet the requirements of the marketplace
and achieve market acceptance.  If the Company is unable to develop and
introduce new products and enhancements in a timely manner in response to
changing market conditions or





                                     Page 9
<PAGE>   10

customer requirements, the Company's results of operations will be materially
and adversely affected.  In addition, technological developments have resulted
and may continue to result in the obsolescence of components and subassemblies
the Company holds as inventory.

As of December 31, 1995, the Company employed 121 persons in its engineering
and product development efforts.  The Company is continually investigating new
techniques and applications building on its existing technology base and
expertise.  For welding controls, the Company's goal is to increase integration
efforts and improve weld quality.  For optical inspection, the Company intends
to develop products with higher resolution and decreased inspection cycle
times.

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

                                                                 1995    1994      1993
                                                                 ----    ----      -----
                                                                     (in millions)
           <S>                                                  <C>     <C>        <C>
           Gross engineering expenses                           $8.0    $5.7        $4.2

           Capitalized computer software development costs      (3.3)   (2.5)       (2.0)

           Costs directly related to customer orders            (1.8)   (0.4)       (0.7)

           Technical sales support expenses                     (0.8)   (0.4)       (0.2)
                                                                ----    ----        ---- 
             Net research and development expense               $2.1    $2.4        $1.3
                                                                ====    ====        ====

           Amortization of capitalized computer software
           development costs                                    $2.3    $1.6        $1.2 
                                                                ====    ====        ==== 
</TABLE>


The Company's product development efforts have resulted in numerous technical
achievements.  Recent innovations include:

     -Introduction of a new generation of the iNSPECt series of optical
     inspection systems which inspect compact discs at high speeds;

     -Development of 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;

     -Continued development of a "weld kernel", resulting in significantly
     reduced manufacturing and service costs and faster product design cycles;

     -Development of VisionBlox, a rapid application development tool for
     machine vision applications; and

     -Development of an optical disc inspection system which meets 
     specifications that allow the Company continued access to the European 
     Common Market.





                                    Page 10
<PAGE>   11


The Company is developing a distributed processing scheme for high-performance
optical disc inspection based on multiple cameras, networked microprocessors
and graphical user interface software.  Management believes this approach will
result in higher resolutions, lower inspection cycle times and reduced
manufacturing costs.  In addition, the Company is developing a gauging system
that combines the Gauging Software with its existing gauging sensors in order
to provide an advanced, non-contact gauging system.

SALES AND MARKETING; CUSTOMERS

As of December 31, 1995 the Company employed a full-time direct sales force of
40 persons, 23 of whom were located at Medar headquarters in Farmington Hills,
Michigan, 6 at Integral, 3 at Medar Canada, and 8 at AID.  The Company markets
its products to both end-users and OEMs, and utilizes agents for the
distribution of its products in Europe, Asia and Mexico.  The Company
integrates its welding control and optical inspection products with other
manufacturers' factory automation systems.  Management believes this approach
allows the Company to leverage the sales and marketing capabilities of
equipment manufacturers such as Allen-Bradley Company, Inc., ABB Robotics,
Inc., ROBI-Systemtechnik A.G., Origin Electric Co., Ltd., and Toolex Alpha.
The Company participates in approximately 20 trade shows each year and
regularly advertises in various trade magazines.

Pricing for the Company's products generally is determined by competitive
bidding followed by negotiations with the client.  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.

For the years ended December 31, 1995, 1994 and 1993, sales to Chrysler
Corporation accounted for approximately 9%, 14% and 29%, respectively, of the
Company's net sales.  Sales to General Motors Corporation for the same periods
accounted for approximately 21%, 23% and 11% of net sales, respectively.  At
December 31, 1995, approximately 62% and 4% 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, 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 downturns in
the U.S.  automotive manufacturing industry.

Export sales accounted for 21%, 27% and 21% of the Company's net sales in 1995,
1994 and 1993, respectively.  The Company expects that such sales will continue
to represent a significant percentage of its net sales.  In addition, the
Company conducts sales and service operations for its welding control products
in Canada through a wholly-owned Canadian subsidiary and in 1994 entered into a
joint venture agreement with Shanghai Electric Welding Machine Works for
production of resistance welding control equipment in China.  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, although
Integral generally quotes sales in Pounds Sterling, Canadian sales are quoted
in Canadian dollars and Japanese sales of optical inspection equipment are
quoted in yen.  For certain non-U.S. sales, the Company markets and sells its
products through independent sales representatives in Western Europe, Asia and
Latin America.  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 Note J to the Consolidated Financial Statements (Item 8) for details of
geographic area information.





                                    Page 11
<PAGE>   12


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,
Robert Bosch GmbH, and Square D Company.  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. 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.  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
components and subassemblies purchased from suppliers into finished products.
The Company also utilizes outside vendors to manufacture certain subassemblies
and finished products.  All products are tested for functionality before
shipment.  The Company's products are assembled primarily with standard
electrical and electronic components and hardware.

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

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, 1995, the Company had an order backlog of approximately
$12.9 million, compared to approximately $7.9 million as of December 31, 1994.
The Company's dependence on a few large customers in its resistance welding
business, together with its reliance on large orders, have contributed to
variability in the Company's backlog.  For the years 1995, 1994 and 1993,
approximately 9%, 14% and 29%, respectively, of the Company's net sales were
attributable to sales to Chrysler Corporation ("Chrysler") and approximately
21%, 23% and 11%, respectively, were attributable to sales to General Motors
Corporation ("GM").  At December 31, 1995 and 1994, approximately 62% and 34%,
respectively, of the Company's backlog was attributable to GM and approximately
4% and 5%, respectively, of the Company's backlog was attributable to Chrysler.
The loss of either of these customers or cancellation of orders by them could
have a material adverse effect on the Company's results of operations.  The
Company anticipates that in the near term it will continue to be dependent upon
certain large customers for a significant portion of its revenues.  The
Company's production schedule is generally based on a combination of sales
forecasts and the receipt of specific customer orders, and typically no advance
or progress payments are required from customers unless the system ordered
includes custom features.  Purchase orders are generally cancelable, although
the company may assess penalties.  The Company expects to be able to ship
products representing all of this backlog before the end of the current fiscal
year, although there is no assurance that the Company will be able to do so.
The amount of backlog at any date does not necessarily indicate revenues in any
future period.





                                    Page 12
<PAGE>   13


PATENTS AND PROPRIETARY RIGHTS

The Company believes that technology incorporated in its resistance welding
control and optical inspection 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 nine U.S. patents on technology involved in its resistance
welding controls as well as one patent application pending in the U.S., two in
Germany, and two in Japan.  In addition, one more welding related patent
application has been allowed in the U.S. and simply awaits final action by the
patent office.  The Company also has a U.S. patent application pending on
technology relating to the Company's optical inspection equipment.  AID has a
license to use certain patents originally developed by Owens-Illinois, Inc.
relating to optical inspection technology and the Company is seeking a license
as to certain other patents for use in gauging products under development.
Medar is also the owner of all rights to two patents purchased from Chesapeake
Laser Systems, Inc. which relate to optical inspection technology.

Generally, the Company has not applied for patent protection of the software
components of its 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 becomes 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.

In July 1995, the Company settled its patent litigation  with Square D Company.
The terms of the settlement provide for a cross licensing agreement on all
single phase welding patents held by either company.

See Note I to the Consolidated Financial Statements (Item 8) for further
discussion of settlement of patent litigation.

ENVIRONMENTAL COMPLIANCE

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

EMPLOYEES

As of February 29, 1996, the Company had approximately 325 permanent employees,
as compared to 214 at February 28, 1995 and 182 at February 28, 1994.  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.





                                    Page 13
<PAGE>   14


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 President, Charles J. Drake, and its
product development and engineering staff.  The Company maintains a key man
life insurance policy on Mr. Drake in the amount of $1.0 million.  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 14
<PAGE>   15

ITEM 2. PROPERTIES

Manufacturing, engineering and administrative functions of Medar are performed
at two facilities owned by the Company in Farmington Hills, Michigan which
total approximately 100,000 square feet.  In addition, Medar leases
approximately 7,000 square feet of warehouse space in another location in
Farmington Hills, Michigan with a lease which expires in less than one year.
Accounting and administrative functions of Medar Canada, Ltd. and AID are
consolidated at the Company's corporate facility.  Integral leases two
facilities located in Bedford, United Kingdom approximating 5,000 square feet
each to perform manufacturing, engineering and administrative functions.  These
leases expire through 2015.  Sales and service functions principally for
Canadian sales are performed at Medar Canada, Ltd., which currently leases a
4,000 square foot facility with a lease term expiring within a year in Oshawa,
Ontario, Canada.  AID currently utilizes an 11,000 square foot leased facility
in Toledo, Ohio for sales, engineering and service activities.  The Company
anticipates moving out of this facility during the second quarter of 1996 and
performing these activities in the Farmington Hills locations in the future.
The AID lease will be terminated without further charge upon the Company's
abandonment of the facility.

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


ITEM 3. LEGAL PROCEEDINGS

The Company is not currently involved in any material litigation.  See the
Notes to the Consolidated Financial Statements (Item 8) for a discussion of
settlement of patent litigation.



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

None.





                                    Page 15
<PAGE>   16

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 29, 1996, 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 29, 1996 was $8 1/16 per share.

<TABLE>
<CAPTION>
                                            Mar 31      Jun 30     Sept 30      Dec 31
                                            ------      ------     -------      ------
                        <S>                 <C>          <C>        <C>         <C>
                        1995
                        ----

                        High                $16 1/2      $11 1/2    $14 3/8     $11 3/4

                        Low                   8 1/2        6 3/4      9 1/8       7 5/8


                        1994
                        ----
                        High                $16 3/4      $14 1/2    $13 1/8     $14 1/4

                        Low                  10 1/4       10 3/4          9      11 3/4
</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, 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 16
<PAGE>   17

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                       ---------------------------------------------------------------------
                                                       (In thousands, except per share data)
                                            1995          1994          1993           1992           1991
                                       ---------------------------------------------------------------------
 <S>                                    <C>           <C>             <C>            <C>             <C>
 Net sales                               $ 39,771        $40,218       $28,694        $20,981        $18,161

 Gross margin                               9,655         13,451        10,416          7,711          6,404
 Earnings (loss) before
 extraordinary credit                     
  extraordinary credit                    (11,583)         3,688         3,300          1,344            638

 Extraordinary credit*                                                                 735.00         370.00

 Net earnings (loss)                      (11,583)         3,688         3,300          2,079          1,008
 Earnings (loss) per share:

    Before extraordinary credit         $   (1.33)    $     0.43      $   0.44       $   0.19        $  0.09
    Extraordinary credit                                                                 0.10           0.06

 Net earnings (loss) per share              (1.33)          0.43          0.44           0.29           0.15

 Weighted average shares                    8,692          8,524         7,529          7,251          6,589
</TABLE>

* Tax benefit resulting from utilization of net operating loss carryforward.

<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                       ---------------------------------------------------------------------
                                                                   (In thousands)
                                               1995         1994          1993            1992          1991
                                       ---------------------------------------------------------------------
 <S>                                        <C>          <C>           <C>             <C>           <C>
 Working capital                            $18,676      $23,459       $14,015         $ 6,245       $ 4,885

 Total assets                                44,723       43,523        29,109          22,015        18,182
 Long-term debt,
   including current portion                 16,437        2,444         8,451           1,932         4,934

 Stockholders' equity                        22,767       34,001        16,087          12,416         7,075
</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 17
<PAGE>   18


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Medar develops, manufactures and markets microprocessor-based process
monitoring and control products for use in industrial manufacturing
environments.  The Company's revenues are primarily derived from the sale of
optical inspection equipment and resistance welding controls.  Optical
inspection equipment is principally sold to suppliers of audio compact disc
("Audio CD") and compact disc-read only memory ("CD-ROM") manufacturing
equipment.  Resistance welding control products are currently marketed
primarily to automobile manufacturers and suppliers of industrial automation
equipment.  For the years of 1995, 1994 and 1993, approximately 9%, 14% and
29%, respectively, of the Company's net sales were attributable to sales to
Chrysler Corporation and approximately 21%, 23% and 11%, respectively, of the
Company's net sales were attributable to General Motors Corporation.  The
Company began manufacturing resistance welding controls in the early 1970s.  In
March of 1987, the Company acquired 80% of Integral Vision-AID, Inc. ("AID"),
formerly Automatic Inspection Devices, Inc., a manufacturer of optical
inspection equipment, from Owens-Illinois, Inc.  The Company acquired the
remaining 20% in October of 1991.

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

Most of the Company's international sales are denominated in U.S. dollars,
although Integral generally quotes sales in Pounds Sterling, Canadian welding
sales are quoted in Canadian dollars and Japanese sales of optical inspection
equipment are quoted in yen.  The impact of foreign currency fluctuations has
historically not been significant.  For additional information on export sales,
see Note J to the Consolidated Financial Statements.

The markets in which the Company competes are technologically advanced and
highly competitive.  Accordingly, the Company's continued success requires
substantial research and development expenditures.  While developing new
products, the Company attempts to be cognizant of inventory currently in its
possession in order to help mitigate inventory becoming obsolete.  Software
development expenditures that are not chargeable to specific customer orders
are expensed as research and development until technical feasibility is
established.  Thereafter, such expenditures are capitalized, reflected as other
assets at the lower of cost or net realizable value, and amortized over the
shorter of the remaining estimated economic life of the related products or
five years.  Capitalized software development costs were $3.3 million, $2.5
million and $2.1 million in 1995, 1994 and 1993, respectively.  Amortization of
capitalized software included in cost of sales was $2.3 million, $1.6 million
and $1.2 million in 1995, 1994 and 1993, respectively.  Engineering and
development expenditures relating to certain orders are incorporated in the
price charged to customers and are reflected in cost of sales.  Those costs
were $1.8 million, $0.4 million and $0.7 million in 1995, 1994 and 1993,
respectively.  The Company expects to continue its commitment to research and
development in the future.

In February 1995, the Company acquired 100% of the common stock and preference
shares of Integral Vision Ltd. (Integral), an English corporation, for 654,282
previously unissued shares of Medar, Inc. common stock.  Integral is a machine
vision company which develops and manufactures solutions for OEMs and
end-users.  See Note B to the Consolidated Financial Statements (Item 8) for
further information.





                                    Page 18
<PAGE>   19


RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain items from the
Company's Statements of Operations as a percentage of net sales. Years ended
December 31, 1994 and 1993 have been restated to reflect the effect of the
pooling with Integral Vision Ltd.  The impact of inflation for the periods
presented was not significant.


<TABLE>
<CAPTION>
                                                                  1995              1994            1993
---------------------------------------------------------------------------------------------------------
                                                                          Year ended December 31
---------------------------------------------------------------------------------------------------------
 <S>                                                             <C>                <C>            <C>
 Net sales                                                        100.0%            100.0%          100.0%
 Cost of sales                                                     75.7              66.6            63.7
---------------------------------------------------------------------------------------------------------
      Gross margin                                                 24.3              33.4            36.3
 Marketing expense                                                 12.6               9.5            11.1
 General and administrative expense                                 8.6               6.8             7.1
 Research and development expense                                   5.2               5.9             4.4
 Patent litigation costs                                           13.7               1.6
 Excess product quality, warranty and other costs                  12.3
---------------------------------------------------------------------------------------------------------
                                                                   52.4              23.8            22.6
---------------------------------------------------------------------------------------------------------
 Earnings (loss) from operations                                  (28.1)              9.6            13.7
 Interest:
    Expense                                                         1.5               0.6             1.8
    Income                                                         (0.2)             (0.5)
---------------------------------------------------------------------------------------------------------
                                                                    1.3               0.1             1.8
---------------------------------------------------------------------------------------------------------
 Earnings (loss) before income taxes and extraordinary            
 credit                                                           (29.4)              9.5            11.9
 Provision (credit) for income taxes                               (0.3)              0.3             0.4
---------------------------------------------------------------------------------------------------------
 Net earnings (loss)                                              (29.1%)             9.2%           11.5%
=========================================================================================================
</TABLE>


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

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

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

Marketing expense increased to $5.0 million from $3.8 million and as a
percentage of net sales to 12.6% from 9.5%.  The increase was primarily the
result of allocating more resources to market and promote newer vision
products.  One of the primary new products being marketed is VisionBlox, a
rapid application development tool for machine vision applications.

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





                                    Page 19
<PAGE>   20


YEAR ENDED DECEMBER 31, 1995, COMPARED TO DECEMBER 31, 1994 (CONT)

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

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

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

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

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


YEAR ENDED DECEMBER 31, 1994, COMPARED TO DECEMBER 31, 1993

Net sales increased $11.5 million (40.2%) to $40.2 million in 1994 from $28.7
million in 1993.  The majority of the increase was due to higher volume of
resistance welding control sales, primarily as a result of the continuation of
retooling programs for new automobile body styles introduced by General Motors
Corporation and Chrysler Corporation.  Sales of optical inspection products
also increased in 1994 from 1993 as the introduction of an advanced optical
inspection system for detection of smaller defects at higher speeds generated
additional sales volumes.  The Company's U.K. subsidiary also experienced an
increase in sales volume of vision equipment.

Cost of sales increased to $26.8 million from $18.3 million and as a percentage
of net sales to 66.6% from 63.7%.  One of the reasons for the increase was due
to more competitive pricing of product sold to the automotive industry.  In
addition, the Company  sold certain products at lower margin percentages in
order to increase volume and incurred additional costs upon introduction of new
vision and welding products.

Marketing expense increased to $3.8 million from $3.2 million, but decreased as
a percentage of net sales to 9.5% from $11.1%.  The increase is a result of
committing additional resources to support the higher sales volume.

General and administrative expense increased to $2.7 million from $2.0 million,
but decreased as a percentage of net sales to $6.8% from $7.1%.  The major
reasons for this increase were an increase in bad debt expense, stockholder
relation costs and additional costs to support the growth of the Company's U.K.
subsidiary.

Research and development expense increased to $2.4 million from $1.3 million
and as a percentage of net sales to 5.9% from 4.4%.  The increase resulted from
continued development of new products and the enhancement of existing products.

The patent litigation costs in 1994 primarily relate to legal fees incurred to
defend the Company in a patent litigation suit.

Interest expense decreased to $0.3 million from $0.5 million and as a
percentage of net sales to 0.6% from 1.8%.





                                    Page 20
<PAGE>   21


YEAR ENDED DECEMBER 31, 1994, COMPARED TO DECEMBER 31, 1993 (CONT)

The decrease is the result of gains realized upon the sale of interest rate
swaps and the elimination of a portion of interest expense upon paying off the
Company's revolving credit note with stock offering proceeds from the sale of
1,300,000 shares of the Company's common stock to the public effective May 24,
1994.

Interest income in 1994 was generated from the investment of the stock offering
proceeds not utilized to pay off debt.

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, 1995.
1994 data has been restated to include the effect of the pooling with Integral
Vision, Ltd.  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>
                                              1995                                     1994
 -----------------------------------------------------------------------------------------------------------
                                                              Quarter Ended
 -----------------------------------------------------------------------------------------------------------
                              DEC 31    SEP 30    JUN 30    MAR 31     Dec 31    Sep 30    Jun 30     Mar 31
 -----------------------------------------------------------------------------------------------------------
                                                  (in thousands, except per share data)
 -----------------------------------------------------------------------------------------------------------
 <S>                         <C>         <C>      <C>       <C>         <C>       <C>       <C>        <C>
 Net sales                     $7,441    $9,777   $11,194    $11,359    $9,464    $10,838   $10,666    $9,250
  Gross margin                    109     2,091     3,790      3,665     2,673      4,187     3,516     3,075
 Net earnings (loss)           (8,788)     (649)   (2,293)       147       203      1,412     1,115       958
 ============================================================================================================
 Net earnings (loss) per
 share                         $(1.01)    $(.07)    $(.26)     $ .02     $ .02      $ .16     $ .13     $ .12
 ============================================================================================================
</TABLE>


SEASONALITY AND QUARTERLY FLUCTUATIONS

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

LIQUIDITY AND CAPITAL RESOURCES

The Company has a revolving note payable to its bank with a maximum balance of
$10 million.  This note expires August 10, 1997 and has advances which bear
interest at the bank's prime rate or a choice of other rates made available
under terms of the agreement.  The availability on this note at December 31,
1995 was $0.2 million.  As of March 29, 1996, the Company has negotiated an
amendment to its revolving note payable which provides for advances of up to
$16 million based on certain percentages of eligible accounts receivable and
inventory.  The amendment also changed certain financial covenants of the
agreement.  Accounts receivable and inventory are specifically collateralized
under the terms of the amendment and the Company may borrow only at the prime
rate.

The Company utilized proceeds from long-term debt borrowings, the sale of
short-term investments and the decrease in accounts receivable to fund the net
loss experienced in 1995, the purchase of property and equipment and the
investment in capitalized software.  A significant portion of the purchase of
property and equipment relates to the acquisition of an additional building to
give the Company additional capacity.  Accounts receivable decreased due to
decreased invoicing activity at the end of 1995.  The Company believes
increased invoicing in the future will not increase accounts receivable to
prior levels (as a percentage of net sales) as a result of closer management.





                                    Page 21
<PAGE>   22


LIQUIDITY AND CAPITAL RESOURCES (CONT)

The increase in patents primarily relates to the cross license agreement which
was part of the patent litigation settlement finalized in 1995.  There is also
a component of debt which was set up to reflect future payments to be made
under this agreement.

The Company believes that current financial resources (working capital and its
ability to obtain additional financing, if needed), together with cash
generated from operations, will be adequate to meet cash needs through 1996.

No significant commitments for capital expenditures existed as of December 31,
1995.  The Company expects to capitalize approximately $3,000,000 of software
development costs in 1996 and has no other plans for any significant capital
expenditures.





                                    Page 22
<PAGE>   23

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 23
<PAGE>   24

                                   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, 1995), 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, 1995), 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, 1995), 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, 1995), with respect to directors and executive
officers of the Company, is incorporated herein by reference.





                                    Page 24
<PAGE>   25

                                    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
  (3)              separate section of this report. Listing of Exhibits

Exhibit
Number                              Description of Document
-------                             -----------------------
2.1                Stock Purchase Agreement of Integral Vision effective
                   January 1, 1995 (filed as Exhibit 2.1 to the
                   registrant's Form 8-K dated March 2, 1995, SEC file 0-12728,
                   and incorporated herein by reference).

2.2                Stock Purchase Agreement for Preference Shares of Integral
                   Vision effective January 1, 1995 (filed as Exhibit 2.2
                   to the registrant's Form 8-K dated March 2, 1995, SEC file
                   0-12728, and incorporated herein by reference).

3.1                Articles of Incorporation, as amended.

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).

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).





                                    Page 25
<PAGE>   26


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

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

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

10.12              1993 Incentive Program (filed as Exhibit 10.14 to the
                   registrant's Form 10-K for the year ended December 31, 1993,
                   SEC File 0-12728, and incorporated herein by reference).

10.13              1994 Incentive Program (filed as Exhibit 10.12 to the
                   registrant's Form 10-K for the year ended December 31,
                   1994, SEC file 0-12728, and incorporated herein by
                   reference).

10.14              Term Note dated June 29, 1993 by and between Medar, Inc. and
                   NBD Bank, N.A. (filed as Exhibit 4.2 to the Registrant's
                   Form 10-Q for the quarter ended June 30, 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              Second Amendment to Revolving Credit and Loan Agreement
                   dated October 31, 1995, by and between Medar ,Inc.,
                   Automatic Inspection Devices, Inc. and Integral Vision, Ltd.
                   and NBD Bank (filed as Exhibit 10.20 to the registrant's Form
                   10-Q for the quarter ended September 30, 1995, SEC File
                   0-12728, and incorporated herein by reference).





                                    Page 26
<PAGE>   27



10.21              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).

10.22              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).

10.23              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).

10.24*             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).

11                 Calculation of Earnings per Share.

21                 Subsidiaries of the Registrant.

23                 Consent of Independent Accountants.

27                 Financial Data Schedule

(b)                There were no reports on Form 8-K filed in the quarter
                        ended December 31, 1995.

(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 27
<PAGE>   28

                                   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 27, 1996                   MEDAR, INC.


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

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


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


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


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


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



-----------------------------------                Director
Stephen Zynda



-----------------------------------                Director
Frederico de Magalhaes





                                    Page 28
<PAGE>   29

                           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, 1995


                                  MEDAR, INC.


                           FARMINGTON HILLS, MICHIGAN





                                    Page 29
<PAGE>   30

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, 1995 and 1994
               Consolidated statements of operations-Years ended December 31, 
               1995, 1994 and 1993
               Consolidated statements of stockholders' equity-Years ended 
               December 31, 1995, 1994 and 1993
               Consolidated statements of cash flows-Years ended December 31, 
               1995, 1994 and 1993
               Notes to consolidated financial statements-December 31, 1995

  (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 30
<PAGE>   31


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, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995.  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, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.  Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.


                                                               Ernst & Young LLP


Detroit, Michigan
February 14, 1996





                                    Page 31
<PAGE>   32

CONSOLIDATED BALANCE SHEETS
MEDAR, INC. AND SUBSIDIARIES


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                                1995           1994

-------------------------------------------------------------------------------------------------------------------
                                                                                                  (in thousands)
 <S>                                                                                      <C>             <C>
 ASSETS
 CURRENT ASSETS (Note D)

    Cash and cash equivalents                                                               $ 1,556       $    586
    Short-term investments                                                                                   4,018
    Accounts receivable, less allowance of $355,000 in 1995, and $311,000 in 1994             8,618         11,938
    Inventories (Note A)                                                                     13,167         11,432
    Costs and estimated earnings in excess of billings on incomplete contracts  (Note C)        681          2,291
    Other current assets                                                                        849            744
------------------------------------------------------------------------------------------------------------------
 TOTAL CURRENT ASSETS                                                                        24,871         31,009

 PROPERTY AND EQUIPMENT (Note D)
    Land and improvements                                                                       329            324
    Building and building improvements                                                        6,109          3,538
    Production and engineering equipment                                                      2,733          2,170
    Furniture and fixtures                                                                      891            685
    Vehicles                                                                                    660            186
    Computer equipment                                                                        3,907          2,623
------------------------------------------------------------------------------------------------------------------
                                                                                             14,629          9,526
    Less accumulated depreciation                                                             4,965          3,906
------------------------------------------------------------------------------------------------------------------
                                                                                              9,664          5,620

 OTHER ASSETS

    Capitalized computer software development costs, less accumulated amortization            
     (Note A)                                                                                 6,761          5,701
    Patents, less accumulated amortization (Note A)                                           2,507            206
    Deferred income taxes                                                                                       73
    Other                                                                                       920            914
------------------------------------------------------------------------------------------------------------------
                                                                                             10,188          6,894
------------------------------------------------------------------------------------------------------------------
                                                                                            $44,723        $43,523
==================================================================================================================

 LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES
    Accounts payable                                                                        $ 3,202        $ 4,390
    Employee compensation                                                                       674          1,107
    Accrued and other liabilities                                                             1,567          1,301
    Current maturities of long-term debt (Note D)                                               752            472
    Deferred income taxes                                                                                      280
------------------------------------------------------------------------------------------------------------------
 TOTAL CURRENT LIABILITIES                                                                    6,195          7,550

 LONG-TERM DEBT, less current maturities (Note D)                                            15,685          1,972

 DEFERRED INCOME TAXES                                                                           76

 STOCKHOLDERS' EQUITY (Note H)

    Common stock, without par value, stated value $.20 per share; 15,000,000 shares
      authorized; 8,711,589 shares issued and outstanding (8,630,469 shares          
      at December  31, 1994)                                                                  1,742          1,726
    Additional paid-in capital                                                               29,438         29,101
    Retained earnings (deficit)                                                              (8,321)         3,262
    Accumulated translation adjustment                                                          (92)           (88)
------------------------------------------------------------------------------------------------------------------
 TOTAL STOCKHOLDERS' EQUITY                                                                  22,767         34,001
------------------------------------------------------------------------------------------------------------------
                                                                                            $44,723        $43,523
==================================================================================================================
</TABLE>


See accompanying notes.




                                    Page 32
<PAGE>   33

CONSOLIDATED STATEMENTS OF OPERATIONS
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                Year ended December 31
 -----------------------------------------------------------------------------------------------------------
                                                                          1995           1994           1993
                                                                                       NOTE B         NOTE B
 -----------------------------------------------------------------------------------------------------------
                                                                     (in thousands, except per share data)
 -----------------------------------------------------------------------------------------------------------
 <S>                                                                 <C>             <C>             <C>
 Net sales                                                            $39,771        $40,218         $28,694
 Cost of sales                                                         30,116         26,767          18,278
 -----------------------------------------------------------------------------------------------------------
                                                                        9,655         13,451          10,416
 Costs and expenses:
    Marketing                                                           5,016          3,814           3,202
    General and administrative                                          3,416          2,738           2,036
    Research and development                                            2,088          2,362           1,251
    Patent litigation costs (Note I)                                    5,461            665
    Excess product quality, warranty and other costs (Note K)           4,872
 -----------------------------------------------------------------------------------------------------------
                                                                       20,853          9,579           6,489
 -----------------------------------------------------------------------------------------------------------
 Earnings (loss) from operations                                      (11,198)         3,872           3,927
 Interest:
    Expense                                                               587            251             507
    Income                                                                (72)          (199)
 -----------------------------------------------------------------------------------------------------------
                                                                          515             52             507
 -----------------------------------------------------------------------------------------------------------
 Earnings (loss) before income taxes                                  (11,713)         3,820           3,420
 Provision (credit) for income taxes (Note F)                            (130)           132             120
 -----------------------------------------------------------------------------------------------------------
 Net earnings (loss)                                                 $(11,583)       $ 3,688         $ 3,300
 ===========================================================================================================
 Net earnings (loss) per share (Note A)                                $(1.33)        $  .43          $  .44
 ===========================================================================================================
</TABLE>

 See accompanying notes.





                                    Page 33
<PAGE>   34

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                    Retained      Accumulated
                                               Common  Additional   Earnings      Translation
                                                Stock     Paid-In  (Deficit)       Adjustment       Total
---------------------------------------------------------------------------------------------------------
                                                                      (in thousands)
---------------------------------------------------------------------------------------------------------
 <S>                                           <C>        <C>       <C>                 <C>     <C>
 BALANCES AT JANUARY 1, 1993 - NOTE B          $1,420     $15,080   $(3,711)            $(90)    $ 12,699
    Exercise of options to purchase
       162,100 common shares                       32          65                                      97
    Translation adjustments                                                               (9)          (9)
    Net earnings for the year ended
       December 31, 1993                                              3,300                         3,300
 --------------------------------------------------------------------------------------------------------
 BALANCES AT DECEMBER 31, 1993 - NOTE B         1,452      15,145      (411)             (99)      16,087
    Exercise of options to purchase 37,200
       common shares                                8          89                                      97
    Issuance of 30,000 shares to acquire
       technology                                   6         463                                     469
    Issuance of 1,300,000 shares                  260      13,406                                  13,666
    Translation adjustments                                                               11           11
    Other                                                      (2)      (15)                          (17)
    Net earnings for the year ended
       December 31, 1994                                              3,688                         3,688
 --------------------------------------------------------------------------------------------------------
 BALANCES AT DECEMBER 31, 1994 - NOTE B         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
 ========================================================================================================
</TABLE>


See accompanying notes.





                                    Page 34
<PAGE>   35

CONSOLIDATED STATEMENTS OF CASH FLOWS
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31
 ----------------------------------------------------------------------------------------------------------
                                                                           1995           1994         1993
                                                                                        NOTE B       NOTE B
 ----------------------------------------------------------------------------------------------------------
                                                                                 (in thousands)
 ----------------------------------------------------------------------------------------------------------
 <S>                                                                  <C>             <C>            <C>
 OPERATING ACTIVITIES
 Net earnings (loss)                                                  $(11,583)        $3,688        $3,300
 Adjustments to reconcile net earnings (loss) from operations
    to net cash provided by (used in) operating activities:
       Depreciation and amortization                                     3,672          2,399         1,761
       Provision (credit) for deferred income taxes                       (130)            91
       (Increase) decrease in net accounts receivable                    3,305         (2,641)       (3,908)
       Increase in inventories                                          (1,752)        (4,468)         (985)
       (Increase) decrease in costs and estimated earnings
          in excess of billings on incomplete contracts                  1,610            383        (1,179)
       Increase in other assets                                           (658)          (937)          (87)
       Increase (decrease) in accounts payable and accrued
          expenses                                                      (1,431)         2,289         1,202
 ----------------------------------------------------------------------------------------------------------
 Net cash provided by (used in) operating activities                    (6,967)           804           104

 INVESTING ACTIVITIES
 Sale (purchase) of short-term investments                               4,018         (4,018)
 Purchase of property and equipment                                     (5,204)        (1,915)         (421)
 Investment in capitalized software                                     (3,253)        (2,507)       (2,066)
 -----------------------------------------------------------------------------------------------------------
 Net cash used in investing activities                                  (4,439)        (8,440)       (2,487)

 FINANCING ACTIVITIES
 Net decrease in borrowings under line of credit                                                     (2,470)
 Repayment of notes payable upon debt refinancing                                                    (1,155)
 Proceeds from long-term debt upon refinancing                                                        2,500
 Proceeds from exercise of stock options and other                         353             79            45
 Net proceeds from sale of common stock                                                13,666
 Debt repayments on long-term debt and capital lease
    obligations                                                         (8,139)       (12,778)       (9,573)
 Proceeds from long-term debt borrowings                                20,161          6,765        13,075
 ----------------------------------------------------------------------------------------------------------
 Net cash provided by financing activities                              12,375          7,732         2,422
 ----------------------------------------------------------------------------------------------------------
 Effect of exchange rate changes on cash                                     1            (10)
 ----------------------------------------------------------------------------------------------------------
 Increase in cash                                                          970             86            39
 Cash at beginning of  year                                                586            500           461
 ----------------------------------------------------------------------------------------------------------
 Cash at end of year                                                    $1,556           $586          $500
===========================================================================================================
</TABLE>
See accompanying notes.





                                    Page 35
<PAGE>   36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MEDAR, INC. AND SUBSIDIARIES


NOTE A

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its three 100% owned subsidiaries; Integral Vision-AID, Inc., Toledo, Ohio;
Integral Vision Ltd., Bedford, United Kingdom; and Medar Canada Ltd., Oshawa,
Ontario.  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.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments, which mature within
three months or less, other than U.S. government securities.

SHORT-TERM INVESTMENTS

Short-term investments consist of U.S. government securities and are carried at
cost which approximates market value.

ACCOUNTS RECEIVABLE

Trade accounts receivable primarily represent amounts due from automobile and
other equipment manufacturers located in North America.

The Company's primary products are computer integrated quality control and
inspection devices which are sold as capital goods.  The activities of the
Company and its subsidiaries are conducted in one product line.

Customers which accounted for 10% or more of the Company's sales in any of the
three years ended December 31, 1995 and  the respective sales in each year are:

<TABLE>
<CAPTION>
                                                                       1995             1994            1993
               ---------------------------------------------------------------------------------------------

               ---------------------------------------------------------------------------------------------
               <S>                                                   <C>              <C>             <C>
               Chrysler Corporation                                  $3,400           $5,600          $8,300
               General Motors Corporation                             8,500            9,100           3,300
               =============================================================================================
</TABLE>





                                    Page 36
<PAGE>   37

NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONT)


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 an obsolescence reserve of
$154,000 in 1995 and $463,000 in 1994):


<TABLE>
<CAPTION>
                                                                           1995                1994
               ------------------------------------------------------------------------------------
                                                                              (in thousands)
               ------------------------------------------------------------------------------------
               <S>                                                     <C>                 <C>
               Raw materials                                           $  7,095            $  4,998
               Work in process                                            3,305               4,032
               Finished goods                                             2,767               2,402
               ------------------------------------------------------------------------------------
                                                                        $13,167             $11,432
               ====================================================================================
</TABLE>


PROPERTY AND EQUIPMENT

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

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

CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS

Computer software development costs are capitalized after the establishment of
technological feasibility of the related technology.  These amounts are stated
at the lower of cost or net realizable value.  These costs are amortized
following general release of products based on current and estimated future
revenue for each product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the product (not to
exceed 5 years).  Amortization of the capitalized costs amounted to $2,314,000,
$1,638,000 and $1,235,000 in 1995, 1994 and 1993, respectively.  Total
accumulated amortization at December 31, 1995 and 1994, was $ 7,371,563 and
$5,176,291 respectively.

PATENTS

Patents are stated at cost less accumulated amortization of $343,000 and
$139,000 at December 31, 1995 and 1994, respectively.  These costs are
amortized on a straight-line basis over the estimated useful lives of the
assets.

REVENUE RECOGNITION

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





                                    Page 37
<PAGE>   38


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONT)


RESEARCH AND DEVELOPMENT EXPENSES

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

INCOME TAXES

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

EARNINGS PER SHARE

Earnings per share is based on the weighted average number of shares of common
stock outstanding and, to the extent dilutive, stock options outstanding during
the period.  The weighted average number of shares of common stock and common
stock equivalents utilized in the computation of net earnings per share was
8,691,750 shares for the year ended December 31, 1995, 8,523,715 for the year
ended December 31, 1994 and 7,529,366 shares for the year ended December 31,
1993.


NOTE B

ACQUISITION OF INTEGRAL VISION LTD.

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

Combined and separate results of Medar and Integral prior to combination are as
follows:

<TABLE>
<CAPTION>
                                                                       1994                1993
               --------------------------------------------------------------------------------
                                                                         (in thousands)
               --------------------------------------------------------------------------------
                 <S>                                               <C>                 <C>
                 Net sales
                     Medar                                         $36,971             $26,390
                     Integral                                        3,707               2,304
                     Intercompany                                     (460)
               --------------------------------------------------------------------------------
                                                                   $40,218             $28,694
               ================================================================================

                 Net earnings (loss)
                     Medar                                          $3,866              $3,209
                     Integral                                          (93)                 91
                     Intercompany                                      (85)
               --------------------------------------------------------------------------------
                                                                    $3,688              $3,300
               ================================================================================
</TABLE>





                                    Page 38
<PAGE>   39


NOTE C

COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON INCOMPLETE CONTRACTS

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

<TABLE>
<CAPTION>
                                                                          1995                1994
               -----------------------------------------------------------------------------------
                                                                             (in thousands)
               -----------------------------------------------------------------------------------
                 <S>                                                 <C>                   <C>
                 Contract costs to date                               $ 4,278              $ 5,682
                 Estimated contract earnings                            1,985                5,415
               -----------------------------------------------------------------------------------
                                                                        6,263               11,097
                 Less billings to date                                 (5,582)              (8,806)
               -----------------------------------------------------------------------------------
                 Costs and estimated earnings in excess              
                    of billings on incomplete contracts              $    681              $ 2,291
               ===================================================================================
</TABLE>


The Company anticipates that the majority of costs incurred on long-term
contracts at December 31, 1995, will be billed and collected in 1996.

NOTE D

LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

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


<TABLE>
<CAPTION>
                                                                          1995                1994
               -----------------------------------------------------------------------------------
                                                                            (in thousands)
               -----------------------------------------------------------------------------------
                <S>                                                    <C>                  <C>
                Revolving note payable to bank                         $ 9,818
                Term notes payable to bank                               4,463              $2,125
                Patent license payable                                   2,000
                Other                                                      156                 319
               -----------------------------------------------------------------------------------
                                                                        16,437               2,444
                Less current maturities                                    752                 472
               -----------------------------------------------------------------------------------
                                                                       $15,685              $1,972
               ===================================================================================
</TABLE>


The revolving note payable to bank has a maximum balance of $10,000,000.  This
note expires August 10, 1997 and has advances which bear interest at bank's
prime rate (8.5% at December 31, 1995 and 1994) or other rates made available
under the terms of the agreement.  In connection with this note, as amended,
the Company has agreed, among other covenants, to maintain net worth and debt
to equity, as defined, at specified levels.

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





                                    Page 39
<PAGE>   40

NOTE D - LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (CONT)

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

The fair values of these financial instruments approximates their carrying
amounts at December 31, 1995.

Maturities of long-term debt and capitalized lease obligations are $10,394,000
in 1997; $1,714,000 in 1998; $352,000 in 1999; $2,032,000 in 2000; and
$1,193,000 thereafter.

NOTE E

STATEMENT OF CASH FLOWS

Acquisitions of property and equipment utilizing capital leases were $326,292
in 1993.

The Company paid interest on its debt instruments of $356,000, $384,000 and
$514,000 in 1995, 1994 and 1993, respectively.  Payments for income taxes were
$125,000 and $113,000 in 1994 and 1993, respectively.  There were no income tax
payments in 1995.

NOTE F

INCOME TAXES

As of December 31, 1995, the Company has cumulative net operating loss
carryforwards approximating $14,200,000 for tax purposes available for
reduction of taxable income of future periods through 2010 and unused
investment and research and development tax credits approximating $870,000
which expire through the same year.  For financial reporting purposes, the net
operating losses have been offset against net deferred tax liabilities based
upon their expected amortization during the loss carryforward period.  The
valuation allowance increased $3,896,000 in 1995 and decreased $944,000 and
$1,098,000 in 1994 and 1993, 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, 1995
are as follows:




<TABLE>
<CAPTION>
                                                                                 1995          1994
             --------------------------------------------------------------------------------------
                                                                                 (in thousands)
             --------------------------------------------------------------------------------------
             <S>                                                              <C>            <C>
             Deferred tax liabilities:
                Deductible software development costs, net of amortization     $2,224        $1,947
                Tax over book depreciation                                        346           368
                Percentage of completion                                          184           736
             --------------------------------------------------------------------------------------
                       Total deferred tax liabilities                           2,754         3,051

                Net operating loss carryforwards                                4,840         1,518
                Credit carryforwards                                              987           823
                Reserve for warranty                                              237            21
                Other                                                             510           482
             --------------------------------------------------------------------------------------
                       Total deferred tax assets                                6,574         2,844
                Valuation allowance for deferred tax assets                     3,896
             --------------------------------------------------------------------------------------
                       Net deferred tax assets                                  2,678         2,844
             --------------------------------------------------------------------------------------
                       Net deferred tax liabilities                           $    76        $  207
             ======================================================================================
</TABLE>





                                    Page 40
<PAGE>   41


Significant components of the provision (credit) for income taxes are as
follows:

<TABLE>
<CAPTION>
               ------------------------------------------------------------------------------------------
                                                              1995                1994               1993
               ------------------------------------------------------------------------------------------
                                                                               (in thousands)
               ------------------------------------------------------------------------------------------
               <S>                                          <C>                  <C>                 <C>
               Current:
                  Federal                                                        $ 20                $ 50
                  Foreign                                                          (7)                 30
                  State                                                            28                  40
               ------------------------------------------------------------------------------------------
                                                                                   41                 120
               Deferred:
                  Federal                                   $(130)                130
                  Foreign                                                         (39)
               ------------------------------------------------------------------------------------------
                                                             (130)                 91
               ------------------------------------------------------------------------------------------
                                                            $(130)               $132                $120
               ==========================================================================================
</TABLE>



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

<TABLE>
<CAPTION>
                                                                   1995            1994              1993
              -------------------------------------------------------------------------------------------
                                                                                  (in thousands)
              -------------------------------------------------------------------------------------------
              <S>                                              <C>             <C>                <C>
              Tax (credit) at U.S. statutory rates             $(3,983)         $1,299            $1,163
              Utilization of net operating loss carryforwards                   (1,330)           (1,116)
              Valuation allowance established                    3,896
              Other nondeductible expenses                          75              38                44
              Other                                               (118)             97               (11)
              State income taxes                                                    28                40
              -------------------------------------------------------------------------------------------
                                                               $  (130)        $   132            $  120
              ===========================================================================================
</TABLE>


NOTE G

EMPLOYEE SAVINGS PLAN

The Company has an Employee Savings Plan covering substantially all United
States' employees.  The Company contributes $.20 to the Plan for every dollar
contributed by the employees up to 6% of their compensation.  The Plan also
provides for discretionary contributions by the Company as determined annually
by the Board of Directors.  Company contributions charged to operations under
the Plan were $61,000, $87,000 and $76,000 for the years ended December 31,
1995, 1994 and 1993, respectively.





                                    Page 41
<PAGE>   42


NOTE H

STOCK OPTIONS

The terms of the Company's qualified incentive stock option plan provide for
the issuance of options for the purchase of up to 800,000 shares of the
Company's common stock at market value at the date of the option grant.
Options are granted with various vesting requirements established by the
Compensation Committee of the Board of Directors and expire ten years from the
date of grant.  There were 21,700 and 60,000 options granted under this plan
during 1994 and 1993 respectively.  No options were granted under this plan
during 1995.  Options for 378,738 shares were outstanding and exercisable at
December 31, 1995.

Under the Company's non-qualified stock option plan, options to purchase
200,000 shares were available to grant at option prices set by the Compensation
Committee of the Board of Directors.  There were 19,000 and 6,000 options
granted under this plan during 1994 and 1993, respectively.  No options were
granted under this plan during 1995.   Options for 198,000 shares were
outstanding and exercisable at December 31, 1995.

The Company also has a third stock option plan under which it may issue
qualified or non-qualified options for the purchase of up to 500,000 shares at
option prices set by the Compensation Committee of the Board of Directors.
There were 211,000 options granted under this plan in 1995.  All 211,000 of
these options were outstanding at December 31, 1995 and none were exercisable.

The Financial Accounting Standards Board issued Statement No. 123, "Accounting
for Stock Based Compensation" in October 1995 and is effective for 1996
financial statements.  The Company does not intend to adopt the recognition
provisions of the Statement, but will continue accounting for stock options in
accordance with Accounting Principles Board Opinion No. 25 "Accounting for
Stock issued to Employees" as permitted by the new Statement.  Therefore,
adoption will not materially impact the Corporation.

A summary of option activity under all plans follows:

<TABLE>
<CAPTION>
                                                                  1995             1994             1993
                ----------------------------------------------------------------------------------------
                                                                                (in thousands)
                ----------------------------------------------------------------------------------------
                <S>                                               <C>              <C>              <C>
                Outstanding at beginning of year                  664              660               756
                Granted ($4.75 to $11.50 per share)               211               41                66
                Exercised ($.35 to $7.50 per share)               (84)             (37)             (162)
                Canceled  ($1.50 to $9.25 per share)               (3)
                ----------------------------------------------------------------------------------------
                Outstanding at end of year
                    ($1.50 to $11.50 per share)                   788              664               660
                ========================================================================================
</TABLE>


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 which increased both long-term
debt and other assets by $2,000,000.  The costs of this cross-licensing
agreement will be amortized over the life of the agreement.





                                    Page 42
<PAGE>   43


NOTE I - COMMITMENTS AND CONTINGENCIES (CONT)

The Company and its subsidiaries use equipment under long-term operating lease
agreements requiring rental payments approximating $254,000 in 1996, $139,000
in 1997, and $99,000 in 1998.  Rent expense charged to operations approximated
$380,000, $390,000 and $308,000 in 1995, 1994 and 1993, respectively.

NOTE J

GEOGRAPHIC AREA

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

<TABLE>
<CAPTION>
                                                             Year Ended December 31
----------------------------------------------------------------------------------------------------
                                                         1995                 1994              1993
----------------------------------------------------------------------------------------------------
                                                                 (in thousands)
----------------------------------------------------------------------------------------------------
 <S>                                                <C>                   <C>                <C>
 Net sales:
    Unaffiliated customers
           United States                             $ 33,330             $ 34,500            $24,485
           United Kingdom                               3,815                3,247              2,304
           Canada                                       2,626                2,471              1,905
-----------------------------------------------------------------------------------------------------
                                                     $ 39,771             $ 40,218            $28,694
=====================================================================================================
 Earnings (loss) before income taxes:
           United States                             $(11,766)            $  3,992            $ 3,232
           United Kingdom                                (200)                (224)               121
           Canada                                         253                   52                 67
-----------------------------------------------------------------------------------------------------
                                                     $(11,713)            $  3,820            $ 3,420
=====================================================================================================
 Identifiable assets:
           United States                             $ 42,101             $ 42,035            $28,586
           United Kingdom                               3,844                1,885                921
           Canada                                       1,145                1,109              1,251
           Eliminations                                (2,367)              (1,506)            (1,650)
-----------------------------------------------------------------------------------------------------
                                                     $ 44,723             $ 43,523            $29,108
=====================================================================================================
 Liabilities:
           United States                             $ 19,341             $  7,886            $12,048
           United Kingdom                               3,762                1,569                837
           Canada                                       1,092                1,625              1,664
           Eliminations                                (2,239)              (1,558)            (1,528)
-----------------------------------------------------------------------------------------------------
                                                     $ 21,956             $  9,522            $13,021
=====================================================================================================
 Net export sales by domestic
 operations:
    North America                                    $  1,944             $  6,377            $ 3,355
    Europe                                              3,785                3,677              1,696
    Asia                                                2,451                  707                966
    Other                                                 259                  138                 21
-----------------------------------------------------------------------------------------------------
                                                     $  8,439             $ 10,899            $ 6,038
=====================================================================================================
</TABLE>





                                    Page 43
<PAGE>   44

NOTE K

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 44
<PAGE>   45


                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     
                                           Beginning            Costs         Charged To Other     Deductions-       Balance At End
                                           of Period         And Expenses     Accounts-Describe     Describe           Of Period
-----------------------------------------------------------------------------------------------------------------------------------
 <S>                                      <C>                <C>               <C>                 <C>                   <C>
 Year ended December 31, 1995:       
    Accounts receivable allowance         $   311            $    78                               $    34(2)             $  355
    Inventory obsolescence reserve            463                130                                   439(3)                154
    Deferred tax valuation allowance                                           $3,896(1)                                   3,896
                                          -------            -------           ------              -------                ------
                                          $   774            $   208           $3,896              $   473                $4,405
                                          =======            =======           ======              =======                ======
 Year ended December 31, 1994:       
    Accounts receivable allowance         $   166            $   230                               $    85(2)             $  311
    Inventory obsolescence reserve            405                 58                                                         463
    Deferred tax valuation allowance          944                                                      944(1)          
                                          -------            -------                               -------                ------
                                          $ 1,515            $   288                               $ 1,029                $  774
                                          =======            =======                               =======                ======
 Year ended December 31, 1993:       
    Accounts receivable allowance         $    87            $   128                               $    49(2)             $  166
    Inventory obsolescence reserve            398                 49                                    42(3)                405
    Deferred tax valuation allowance                                           $  944(1)                                     944
                                          -------            -------           ------              -------                ------
                                          $   485            $   177           $  944              $    91                $1,515
                                          =======            =======           ======              =======                ======
</TABLE>


 (1) Net change in deferred tax valuation allowance.


 (2) Net accounts receivable write-offs.


 (3) Write-off obsolete inventory.





                                    Page 45
<PAGE>   46

                             EXHIBITS TO FORM 10-K



                                  MEDAR, INC.



                          YEAR ENDED DECEMBER 31, 1995


                        COMMISSION FILE NUMBER 0-12728





                                    Page 46
<PAGE>   47
                                 EXHIBIT INDEX


Exhibit
 No.            Description                                            Page
-------         -----------                                            ----
  3.1           Articles of Incorporation, as amended

  11            Calculation of Earnings Per Share

  21            Subsidiaries of the Registrant

  23            Consent of Independent Accountants

  27            Financial Data Schedule