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

                                  FORM 10-K /A

                               Amendment Number 1


[X]                Annual report pursuant to Section 13 or 15(d) of the
                   Securities Exchange Act of 1934 (Fee Required) 
                   For the fiscal year ended December 31, 1997, or


[ ]                Transition report pursuant to Section 13 or 15(d) of the
                   Securities Exchange Act of 1934 (Fee Required)
                   For the transition period from ___________ to 


Commission file number 0-12728

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
                                                                                   Name of each exchange
                   Title of each class                                              on which registered
                   -------------------                                             ---------------------
                          NONE                                                             NONE
</TABLE>

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. [X]

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

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

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

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


                                     Page 1
<PAGE>   2
ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
             RESULTS OF OPERATIONS

OVERVIEW

Medar develops, manufactures and markets microprocessor-based process monitoring
and control products for use in industrial manufacturing environments. The
Company's revenues are primarily derived from the sale of optical inspection
equipment and resistance welding controls. Optical inspection equipment is
principally sold to end users and suppliers of audio and DVD disc manufacturing
equipment. Resistance welding control products are currently marketed primarily
to automobile manufacturers and suppliers of industrial automation equipment.

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

RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>

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



                                     Page 2

<PAGE>   3

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

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

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

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

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

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

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

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

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

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

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

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

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

Patent litigation costs and excess product quality, warranty and other costs
represent expenses that were concluded as of December 31, 1995.

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



                                     Page 3
<PAGE>   4
QUARTERLY INFORMATION

The following table sets forth consolidated statements of operations data for
each of the eight quarters in the two year period ended December 31, 1997. The
unaudited quarterly information has been prepared on the same basis as the
annual information and, in management's opinion, includes all adjustments
necessary for a fair presentation of the information for the quarters presented.

<TABLE>
<CAPTION>

                                                             QUARTER ENDED
------------------------------------------------------------------------------------------------------------------
                                           1997                                         1996
------------------------------------------------------------------------------------------------------------------
                         DEC 31     SEP 30     JUN 30      MAR 31     DEC 31      SEP 30     JUN 30      MAR 31
------------------------------------------------------------------------------------------------------------------
                                                  (IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------------------------------
<S>                      <C>       <C>         <C>        <C>          <C>       <C>         <C>        <C>    
Net revenues             $8,358    $10,970     $10,985    $10,211      $5,312    $13,721     $12,216    $10,222
Gross margin              1,667      3,672       3,331      2,777        (537)     3,840       3,913      3,467
Net earnings (loss)        (991)       420         401         26      (3,800)       607         887        327
==================================================================================================================
Basic and diluted
earnings (loss) per      
share                    $ (.11)   $   .05     $   .04    $   .00      $ (.43)   $   .07     $   .10    $   .04 
==================================================================================================================
</TABLE>

SEASONALITY AND QUARTERLY FLUCTUATIONS

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

LIQUIDITY AND CAPITAL RESOURCES 

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

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

Management believes that it has options available for increasing tangible net
worth through the sales of certain tangible and intangible assets in addition to
expense reductions that will either bring the Company into compliance with the
lender agreements or which will show sufficient progress towards compliance that
the lenders will issue additional waivers. Such assets may include one or both
of the Company's buildings and a patent for 3-D technology not currently being
exploited by the Company. There can be no assurance however that management's
plans will be successful or that the lenders will grant any required waivers.

The Company generated $2.8 million of cash from operations in 1997. This cash
was combined with $4.1 million of financing activities to fund $6.2 million of
additions to property and equipment and capitalized software. Management
believes that much of the investment activities are discretionary and can be
deferred or eliminated. However, it is the Company's intention to continue to
make those investments in product development which it believes will best
enhance its competitive position. Opportunities will be carefully evaluated in
light of the Company's then current financial resources.The Company has no
material commitments for the purchase of property and 


                                     Page 4
<PAGE>   5

equipment or software development costs. The amount of software development
costs incurred and capitalized in 1998 will be dependent on determinations
throughout the year of long and short term revenue opportunities in the various
products the Company continues to support in both the welding and the vision
divisions. In no case would it be expected that total capitalization of software
costs would exceed amortization. There is no assurance, however, that the
investments which can be made at any given time based on the Company's financial
resources will be sufficient depending on the magnitude of the changes required
and the opportunities that may be presented.

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

IMPACT OF YEAR 2000

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

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

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

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










                                     Page 5
<PAGE>   6



                           ANNUAL REPORT ON FORM 10-K


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


              LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
                                    SCHEDULES


                                CERTAIN EXHIBITS


                          FINANCIAL STATEMENT SCHEDULES


                          YEAR ENDED DECEMBER 31, 1997


                                   MEDAR, INC.


                           FARMINGTON HILLS, MICHIGAN




                                     Page 6
<PAGE>   7


FORM 10-K - ITEM 14(a)(1) and (2)
MEDAR, INC. AND SUBSIDIARIES



LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES


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

               Report of Independent Auditors
               Consolidated Balance Sheets-December 31, 1997 and 1996
               Consolidated Statements of Operations-Years ended December 31,
                 1997, 1996 and 1995 
               Consolidated Statements of Stockholders' Equity-Years ended 
                 December 31, 1997, 1996 and 1995
               Consolidatedstatements of cash flows-Years ended December 31,
                 1997, 1996 and 1995 
               Notes to Consolidated Financial Statements-December 31, 1997

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

                  Schedule II      Valuation and qualifying accounts


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





                                     Page 7
<PAGE>   8



REPORT OF ERNST & YOUNG LLP,  INDEPENDENT AUDITORS




Board of Directors and Stockholders
Medar, Inc.

We have audited the consolidated balance sheets of Medar, Inc. and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Medar,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

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



                                                           /S/ Ernst & Young LLP



Detroit, Michigan
February 25, 1998



                                     Page 8
<PAGE>   9
CONSOLIDATED BALANCE SHEETS
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                                                             1997          1996
--------------------------------------------------------------------------------------------------------------------
                                                                                                (in thousands)
ASSETS
CURRENT ASSETS
<S>                                                                                          <C>          <C>  
   Cash                                                                                      $    831     $    215
   Accounts receivable, less allowance of $400,000                                             10,682        9,415
   Inventories                                                                                 14,227       15,991
   Costs and estimated earnings in excess of billings on incomplete contracts                   2,568        1,841
   Other current assets                                                                           881          543
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                           29,189       28,005
PROPERTY AND EQUIPMENT
   Land and improvements                                                                          377          368
   Building and building improvements                                                           6,317        6,147
   Production and engineering equipment                                                         3,791        3,303
   Furniture and fixtures                                                                       1,022          990
   Vehicles                                                                                       875          878
   Computer equipment                                                                           5,241        5,058
--------------------------------------------------------------------------------------------------------------------
                                                                                               17,623       16,744
   Less accumulated depreciation                                                                8,021        6,625
--------------------------------------------------------------------------------------------------------------------
                                                                                                9,602       10,119
OTHER ASSETS
   Capitalized computer software development costs, less accumulated amortization              10,796        8,908
   Patents, less accumulated amortization                                                       2,127        2,328
   Other                                                                                        1,444          916
--------------------------------------------------------------------------------------------------------------------
                                                                                               14,367       12,152
--------------------------------------------------------------------------------------------------------------------
                                                                                             $ 53,158     $ 50,276
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable                                                                          $  4,472     $  5,218
   Employee compensation                                                                        1,001        1,110
   Accrued and other liabilities                                                                  714        1,108
   Current maturities of long-term debt                                                        19,415        3,637
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                      25,711       10,964

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

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

See accompanying notes


                                     Page 9
<PAGE>   10
CONSOLIDATED STATEMENTS OF OPERATIONS
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

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

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

See accompanying notes


                                    Page 10
<PAGE>   11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                                ADDITIONAL     RETAINED      ACCUMULATED
                                                                 PAID-IN       EARNINGS      TRANSLATION
                                               COMMON STOCK      CAPITAL       (DEFICIT)     ADJUSTMENT       TOTAL
------------------------------------------------------------------------------------------------------------------------
                                                                           (IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>          <C>               <C>          <C>     
BALANCES AT JANUARY 1, 1995                       $  1,726      $  29,101    $   3,262         $   (88)     $ 34,001
   Exercise of options to purchase 84,262
      common shares                                     17            400                                        417
   Translation adjustments                                                                          (4)           (4)
   Other                                                (1)           (63)                                       (64)
   Net loss for the year ended December 31,
      1995                                                                     (11,583)                      (11,583)

------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995                        1,742         29,438       (8,321)            (92)       22,767
   Exercise of options to purchase 140,812
      common shares                                     29            329                                        358
  Translation adjustments                                                                          156           156
  Net loss for the year ended December 31,
      1996                                                                      (1,979)                       (1,979)
------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996                        1,771         29,767      (10,300)             64        21,302
   Issuance of 150,000 common shares                    30            720                                        750
   Exercise of options to purchase 22,500
       common shares                                     4             98                                        102
   Issuance of  stock warrants                                                                                   602
                                                                      602
  Translation adjustments                                                                          (57)          (57)
   Net loss for the year ended December 31,
       1997                                                                       (144)                         (144)
------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997                     $  1,805      $  31,187    $ (10,444)        $     7      $ 22,555
========================================================================================================================
</TABLE>

See accompanying notes.


                                    Page 11
<PAGE>   12
CONSOLIDATED STATEMENTS OF CASH FLOWS
MEDAR, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

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

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

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

See accompanying notes.




                                    Page 12
<PAGE>   13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MEDAR, INC. AND SUBSIDIARIES


NOTE A - SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The 1997 and 1996 consolidated financial statements include the accounts of the
Company and its two 100% owned subsidiaries: Integral Vision Ltd., United
Kingdom; and Medar Canada Ltd., Canada. The 1995 consolidated financial
statements include the accounts of Integral Vision-AID, Inc. Integral
Vision-AID, Inc. became a division of Medar, Inc. in 1996. Upon consolidation,
all significant intercompany accounts and transactions are eliminated.

USE OF ESTIMATES

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

TRANSLATION OF FOREIGN CURRENCIES

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

ACCOUNTS RECEIVABLE

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

Customers which accounted for 10% or more of the Company's resistance welding
controls sales in any of the three years ended December 31, 1997 and the
respective sales in each year are:

<TABLE>
<CAPTION>

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

</TABLE>



                                    Page 13

<PAGE>   14
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventories are stated at the lower of first-in, first-out cost or market, and
at December 31 consisted of the following (net of obsolescence reserve of
$210,000 in 1997 and $156,000 in 1996):

<TABLE>
<CAPTION>

                                                                      1997                  1996
                ------------------------------------------------------------------------------------------
                                                                            (IN THOUSANDS)
                ------------------------------------------------------------------------------------------
<S>                                                                 <C>                    <C>      
                Raw materials                                       $  6,076               $  7,677
                Work in process                                        1,654                  3,106
                Finished goods                                         6,497                  5,208
                ------------------------------------------------------------------------------------------
                                                                    $ 14,227               $ 15,991
                ==========================================================================================
</TABLE>

PROPERTY AND EQUIPMENT

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

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

CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS

Computer software development costs are capitalized after the establishment of
technological feasibility of the related technology. These 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). Management continually reviews the net realizable value of
capitalized software costs. At the time that a determination is made that
capitalized software amounts exceed the estimated net realizable value of
amounts capitalized, any amounts in excess of the estimated realizable amounts
are written off.

Amortization of the capitalized costs amounted to $3,590,000, $2,522,000, and
$2,314,000 in 1997, 1996 and 1995, respectively. Total accumulated amortization
at December 31, 1997 and 1996, was $13,483,000 and $ 9,893,000 respectively.

PATENTS

Patents are stated at cost less accumulated amortization of $1,048,000 and
$660,000 at December 31, 1997 and 1996, respectively. Amortization of the
patents amounted to $388,000, $317,000 and $204,000 in 1997, 1996, and 1995,
respectively. These costs are amortized on a straight-line basis over the
estimated useful lives of the assets.

REVENUE RECOGNITION

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





                                    Page 14
<PAGE>   15
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RESEARCH AND DEVELOPMENT EXPENSES

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

INCOME TAXES

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

EARNINGS PER SHARE

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


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

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

<TABLE>
<CAPTION>

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

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




                                    Page 15
<PAGE>   16
NOTE C - LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

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

<TABLE>
<CAPTION>

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

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

The term notes to bank are payable as follows:

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

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

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

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

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

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

While there can be no assurance that the lenders will grant waivers for any
violations that might be incurred, management believes that the expenditure
reductions already initiated and other actions to raise cash through excess
asset sales as well as the possible recovery of sales levels later in the year
will be sufficient to convince the lenders that it will be prudent for them to
forbear any actions that they may be legally entitled to take under terms of the
agreements related to the Company's debt. Excess assets may include one or both
of the Company's buildings and a patent for 3-D technology not currently being
exploited by the Company. The sales of the building or buildings are expected in
the late third or in the fourth quarter and the sale of the technology is
expected in the second quarter.

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

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

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



                                    Page 16
<PAGE>   17
NOTE D - STATEMENT OF CASH FLOWS

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


NOTE E - INCOME TAXES

The Company establishes valuation allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes." The Company
continually reviews realizability of deferred tax assets and recognizes these
benefits only as reassessment indicates that it is more likely than not that the
benefits will be realized.

As of December 31, 1997, the Company has cumulative net operating loss
carryforwards approximating $22,750,000 (expiring: $4,502,000 in 2007,
$7,955,000 in 2010, $3,889,000 in 2011, and $6,404,000 in 2012) for tax purposes
available for reduction of taxable income of future periods and unused
investment and research and development tax credits approximating $947,000 which
expire through 2012. 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 remaining valuation
allowance is necessary due to the uncertainty of future income estimates. The
valuation allowance decreased $55,000 in 1997 and increased $448,000 and
$3,896,000 in 1996 and 1995, respectively.

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


<TABLE>
<CAPTION>

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





                                    Page 17
<PAGE>   18
NOTE E - INCOME TAXES (CONTINUED)

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

<TABLE>
<CAPTION>

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

                Deferred:
                   Federal                                                                           $(130)
                   Foreign                                                     
                                                                                     $(76)
                ------------------------------------------------------------------------------------------------
                                                                                      (76)            (130)
                ------------------------------------------------------------------------------------------------
                                                                      $38            $(76)           $(130)
                ================================================================================================

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

<CAPTION>

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


NOTE F - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

<CAPTION>

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

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

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

For additional disclosures regarding stock options and warrants see Note H

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





                                    Page 18
<PAGE>   19
NOTE G - EMPLOYEE SAVINGS PLAN

The Company has an Employee Savings Plan covering substantially all United
States' employees. The Company contributes $.20 to the Plan for every dollar
contributed by the employees up to 6% of their compensation. The Plan also
provides for discretionary contributions by the Company as determined annually
by the Board of Directors. Company contributions charged to operations under the
Plan were $66,000, $89,000, and $61,000 for the years ended December 31, 1997,
1996 and 1995, respectively.


NOTE H - STOCK OPTIONS AND WARRANTS

A summary of the status of the Option Plan is as follows:

<TABLE>
<CAPTION>

                                                                       NON-QUALIFIED                     
                                                     QUALIFIED ISO      STOCK OPTION                     
                                                          PLAN              PLAN           1995 PLAN
-----------------------------------------------------------------------------------------------------
                                                           (number of shares in thousands)
-----------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>             <C>
                     Options outstanding                   213                 20              429
                     Options exercisable                   213                 20              163
                     Options Granted During:
                          1997                             -0-                -0-              267
                          1996                             -0-                -0-              132
                          1995                             -0-                -0-              211
                     Options Available
                          For Grant                        -0-                -0-               63
=====================================================================================================
</TABLE>

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


A summary of option activity under all plans follows:

<TABLE>
<CAPTION>

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

The following table provides additional detail about stock options outstanding
at December 31, 1997:

<CAPTION>

                                                      Weighted                Weighted                               
       Range of                 Number                 Average                Average                 Number
       Exercise               Outstanding             Remaining               Exercise              Exercisable
        Prices                at 12/31/97               Life                   Price                at 12/31/97
-----------------------------------------------------------------------------------------------------------------
<S>                            <C>                    <C>                   <C>                      <C>
     $1.75 to 2.50                 27                     .60                   $2.21                    27
      4.00 to 4.88                255                    6.58                    4.53                   104
      5.38 to 5.75                115                    9.26                    5.63                     0
      6.00 to 6.25                174                    6.56                    6.18                   174
      8.50 to 9.25                 91                    6.68                    8.71                    91
-----------------------------------------------------------------------------------------------------------------
     $1.75 to 9.25                662                    6.76                   $5.64                   396

</TABLE>

The weighted-average fair value of options outstanding as of December 31, 1997
was $4.92. The Company has elected to follow APB No. 25 "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its employee
stock options because, in management's opinion, the models required to be used
by FASB Statement No. 123, "Accounting for Stock-Based Compensation," were not
developed for use in 



                                    Page 19
<PAGE>   20

valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. After adjusting for
the proforma effect of stock compensation, the net loss is estimated to be
$470,000 ($.05 per share), $2,393,000 ($.27 per share) and $11,730,000 ($1.35
per share) for 1997, 1996 and 1995 respectively. Assumptions used in determining
the above proforma disclosures were risk free interest rates of 6.00%, 6.12% and
6.23% in 1997, 1996 and 1995, respectively, no dividend yields, .51 market price
volatility, and 8-year weighted average life of option. These proforma results
reflect only stock options granted in 1995 through 1997 and may not be
comparable with the results of applying the fair market value methodology to all
stock options granted prior to the initial adoption of this statement.

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


NOTE I - COMMITMENTS AND CONTINGENCIES

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

The Company and its subsidiaries use equipment under long-term operating lease
agreements requiring rental payments approximating $107,000 in 1998 and $32,000
in 1999. Rent expense charged to operations approximated $156,000, $276,000, and
$380,000 in 1997, 1996, and 1995, respectively.


NOTE J - RELATED PARTY TRANSACTIONS AND OTHER MATTERS

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

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



                                    Page 20
<PAGE>   21
NOTE K - GEOGRAPHIC AREA

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

<TABLE>
<CAPTION>

                                                                 YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------------------
                                                     1997                   1996                1995
-------------------------------------------------------------------------------------------------------------
                                                                     (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>                    <C>
Net revenues:
   Unaffiliated customers
          United States                             $  38,865            $  34,366          $   33,330
          United Kingdom                                  960                2,440               3,815
          Canada                                          699                4,665               2,626
-------------------------------------------------------------------------------------------------------------
                                                       40,524               41,471              39,771
=============================================================================================================
Earnings (loss) before income taxes:
          United States                                 2,216               (1,616)            (11,766)
          United Kingdom                               (2,232)                (495)               (200)
          Canada                                          122                   56                 253
-------------------------------------------------------------------------------------------------------------
                                                         (106)              (2,055)            (11,713)
=============================================================================================================
Identifiable assets:
          United States                                50,610               45,021              42,101
          United Kingdom                                4,471                4,993               3,844
          Canada                                          163                1,712               1,145
          Eliminations                                 (2,086)              (1,450)             (2,367)
-------------------------------------------------------------------------------------------------------------
                                                       53,158               50,276              44,723
=============================================================================================================
Liabilities:
          United States                                30,696               26,380              19,341
          United Kingdom                                7,045                5,170               3,762
          Canada                                           70                1,656               1,092
          Eliminations                                 (7,208)              (4,232)             (2,239)
-------------------------------------------------------------------------------------------------------------
                                                       30,603               28,974              21,956
=============================================================================================================
Net export sales by domestic operations:
   North America                                          576                  903               1,944
   Europe                                               4,237                5,986               3,785
   Asia                                                 3,011                2,434               2,451
   Other                                                  302                  275                 259
-------------------------------------------------------------------------------------------------------------
                                                    $   8,126            $   9,598          $    8,439
=============================================================================================================
</TABLE>





                                    Page 21
<PAGE>   22
NOTE L - SEGMENT DATA

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

<TABLE>
<CAPTION>

                                  DECEMBER 31, 1997 AND THE YEAR THEN ENDED
                                                     VISION-BASED          RESISTANCE WELDING
                                                  INSPECTION SYSTEMS            CONTROLS           CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                       <C>                   <C>    
Net revenues                                           $15,955                   $24,569               $40,524

Research, engineering, and development                                                                             
expense                                                  1,285                     1,118                 2,403
Earnings (loss) from operations                         (1,078)                    3,261                 2,183
Net interest expense                                                                                     2,289
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                                                               $   106

Purchase of property and equipment                         128                       751                   879
Depreciation                                               498                     1,191                 1,689
Capitalized software development costs                   4,644                       739                 5,383
Amortization of software development costs               2,678                       912                 3,590
Identifiable assets at December 31, 1997               $28,358                   $24,800               $53,158
===================================================================================================================

<CAPTION>

                              DECEMBER 31, 1996 AND THE YEAR THEN ENDED
                                                     VISION-BASED          RESISTANCE WELDING
                                                  INSPECTION SYSTEMS            CONTROLS           CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                       <C>                   <C>    
Net revenues                                           $13,618                   $27,853               $41,471

Research, engineering,  and development                                                                            
expense                                                  2,138                     1,414                 3,552
Earnings (loss) from operations                         (5,703)                    5,121                  (582)
Net interest expense                                                                                     1,473
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                                                                $2,055

Purchase of Property and equipment                       2,065                       218                 2,283
Depreciation                                             1,558                       449                 2,007
Capitalized software development costs                   3,826                       843                 4,669
Amortization of software development costs               1,608                       914                 2,522
Identifiable assets at December 31, 1996               $22,423                   $27,853               $50,276     
===================================================================================================================

<CAPTION>

                              DECEMBER 31, 1995 AND THE YEAR THEN ENDED
                                                     VISION-BASED          RESISTANCE WELDING
                                                  INSPECTION SYSTEMS            CONTROLS           CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                       <C>                  <C>     
Net revenues                                           $16,428                   $23,343              $ 39,771

Research, engineering, and development                                                                             
expense                                                    376                     1,712                 2,088
Loss from operations                                    (6,948)           (1)     (4,250)              (11,198)
Net interest expense                                                                                       515
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                                                              $ 11,713

Purchase of property and equipment                       1,566                     3,638                 5,204
Depreciation                                               752                       606                 1,358
Capitalized software development costs                   2,418                       835                 3,253
Amortization of software development costs               1,375                       939                 2,314
Identifiable assets at December 31, 1995               $20,802                   $23,921              $ 44,723
===================================================================================================================
</TABLE>



                                    Page 22
<PAGE>   23


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

Identifiable assets allocated to each industry are those assets that are used in
the Company's operations in each industry.

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



                                    Page 23
<PAGE>   24
                 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
------------------------------------------------------------------------------------------------------------------------------------
                                           BALANCE AT       CHARGED TO COSTS    CHARGED TO OTHER      DEDUCTIONS-     BALANCE AT END
            DESCRIPTION               BEGINNING OF PERIOD     AND EXPENSES     ACCOUNTS-DESCRIBE        DESCRIBE         OF PERIOD
====================================================================================================================================

Year ended December 31, 1997:
<S>                                           <C>              <C>                                        <C>               <C>
  Accounts receivable allowance               $   400          $    120                                   $   120(3)        $   400
  Inventory obsolescence reserve                  156               622                                       568(1)            210
  Deferred tax valuation allowance              4,344                                                          55(2)          4,289
                                              -------          --------                                   -------           -------
                                              $ 4,900          $    742                                   $ 1,253           $ 4,899
====================================================================================================================================
Year ended December 31, 1996:
  Accounts receivable allowance              $    355          $    120                                   $    75(3)        $   400
  Inventory obsolescence reserve                  154               458                                       456(1)            156
  Deferred tax valuation allowance              3,896               448                                                       4,344
                                              -------          --------                                   -------           -------
                                             $  4,405          $  1,026                                   $    31           $ 4,900
====================================================================================================================================
Year ended December 31, 1995:
  Accounts receivable allowance              $    311         $      78                                   $    34(3)        $   355
  Inventory obsolescence reserve                  463               130                                       439(1)            154
  Deferred tax valuation allowance                                                   $3,896(2)                                3,896
                                              -------          --------              ------               -------           -------
                                             $    774          $    208              $3,896               $   473           $ 4,405
====================================================================================================================================
</TABLE>

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







                                    Page 24


<PAGE>   25


                                   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:       August 31, 1998                                    MEDAR, INC.


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

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


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


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


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


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


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


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


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


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



                                    Page 25