<PAGE>   1

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


    X      Annual report pursuant to Section 13 or 15(d) of the Securities
  ----     Exchange Act of 1934 (Fee Required) For the fiscal year ended
           December 31, 1998.

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


                         COMMISSION FILE NUMBER 0-12728

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

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

         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::

                                      NONE
          Securities registered pursuant to Section 12(g) of the Act::
             COMMON STOCK, NO PAR VALUE, STATED VALUE $.20 PER SHARE
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.             YES   X           NO
                                            ---             ---

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


           The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 28, 1999:

      COMMON STOCK, NO PAR VALUE, STATED VALUE $.20 PER SHARE - $10,733,530

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



                                       1
<PAGE>   2

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the
annual shareholders meeting to be held May 26, 1999 are incorporated by
reference into Part III.


                                        2
<PAGE>   3

                                    Part I

ITEM 1.  BUSINESS

General

         Medar, Inc. ("Medar" or the "Company") is a Michigan corporation
         incorporated in 1978. Medar currently operates in two business segments
         where it develops, manufactures and markets microprocessor-based
         process monitoring and control systems for use in industrial
         manufacturing environments. The principle applications for the
         Company's products include resistance welding controls ("welding
         control products") and optical inspection systems and general purpose
         vision software and applications thereof (collectively "machine vision
         products"). The Company's products are generally sold as capital goods.
         Depending on the application, welding control products have a five to
         ten year life and machine vision systems have an indefinite life.
         Machine vision applications are more likely to require replacement
         because of technological obsolescence than because of physical wear.

         The Company operates through a division and two subsidiaries. Sales of
         welding control products are effected through Medar, Inc. and its
         wholly owned subsidiary, Medar Canada Ltd., located in Oshawa, Ontario,
         Canada. Sales of Machine vision products are effected through Integral
         Vision, a division of the Company, and through Integral Vision LTD., a
         wholly owned subsidiary of the Company, located in Bedford, England.
         The Company also has 21.3% of the stock of a joint venture for the
         manufacture of welding control products in China, Shanghai Medar
         Welding Equipment Corp. Ltd.

Welding Control Products

         Welding controls monitor and automatically regulate electrical current
         passing through material being welded. The regulation of electrical
         current compensates for variation in materials, coatings and other
         welding systems characteristics. The Company's major customers include
         General Motors Corporation and DaimlerChrysler AG. Although most sales
         are made in North America, in recent years significant sales have been
         made to United States domestic automakers in South America (principally
         Brazil) and Asia (principally China). Sales to General Motors
         Corporation and DaimlerChrysler AG were 44.5%, 30.1% and 49.3% of total
         welding revenues in the years ended December 31, 1998, 1997 and 1996.
         With sales to these customers representing such a large share of
         revenues, the loss of sales to either of these customers or a downturn
         in the automotive industry could have a significantly negative effect
         on the Company. In addition to sales of new controls, the Company has a
         significant repair, parts and services business associated with an
         installed base of up to 50,000 controls.

Machine Vision Products

         Machine vision is the application of technology to acquire, process and
         analyze image data so that conclusions can be drawn and actions taken
         based on those results. Machine vision technology is used to insure
         manufactured product quality by monitoring and controlling the
         manufacturing process.

         Medar's optical inspection systems are used to detect manufacturing
         defects in optical storage media, principally CD-R (write once disc) or
         DVD (digital versatile disc). The Company's Integral Vision division
         markets these systems all over the world with the principal markets
         currently being in Asia. In the past, the Company sold a version of
         this equipment which also inspected CD's (Compact Disc's). In early
         1998, management determined that since CD was being replaced by DVD's,
         and other factors related to the 


                                       3
<PAGE>   4
         market, it would no longer pursue this market following the liquidation
         of on hand inventory. A charge of $7.0 million of software costs and
         inventory (of which $6.0 million was related to machine vision 
         products) was recorded to recognize this decision.

         Medar's general purpose software product, VisionBlox, and certain
         applications developed by Company personnel using the VisionBlox
         software as a base, are marketed principally in the United States and
         Europe by the Company's Integral Vision division. Although sales to
         date in Asia have not been significant, the Company is involved in
         efforts to strengthen its presence in the region. By its nature as a
         general purpose product, the software can be used by OEM's and end
         users to answer a variety of needs. Current applications include
         application for inspections of cellular telephones and applications in
         medical, printing and electronics.

         See the notes to the Consolidated Financial Statements Part II - ITEM 8
         for details of segment data.

Production

         The Company's production process consists principally of assembling
         standard electrical and electronic components and hardware
         subassemblies purchased from suppliers into finished products. When
         proprietary circuit boards are needed, the Company generally contracts
         for outside vendors to build the boards based on internal company
         designs.

         The Company generally does not rely on a single source for parts and
         subassemblies, although certain of the components and subassemblies
         included in the Company's products may only be obtained from a limited
         number of suppliers. Management believes it will be able to develop
         alternative sources or employee alternative designs for any of the
         components used in its products thereby mitigating any exposure to
         product interruption from shortages of parts or limited suppliers.

         Management believes that technology incorporated in its products give
         it advantages over its competitors and prospective competitors.
         Protection of technology is attempted through a combination of patents,
         applied for patents, confidentiality agreements and trade secrets. The
         Company presently has 26 patents (12 related to welding controls and 10
         related to machine vision products) and has applied for 14 more. There
         can be no assurance that patents applied for will be granted, the
         Company has the resources to defend its patents or that patents that
         the Company holds will be considered valid if challenged. In addition,
         it is possible that some patents will be rendered worthless as the
         result of technological obsolescence.

Marketing

         The Company markets its welding control products to both end users and
         original equipment manufacturers (OEMs). Although primary sales are to
         North American assembly plants of US and foreign automotive companies
         and their suppliers, the Company has significant other customers in
         farm implement, appliance and other industries. In recent years the
         Company has made inroads into South America with sales to assembly
         plants of both US and European automakers and with General Motors and
         Volkswagen assembly plants in China. The Company's US and Canadian
         sales are generally made using Company employees with certain remote
         sales in the US and sales outside of the US and Canada made through
         representatives. Machine vision products are generally marketed to end
         users, but the Company has had success in integrating its products with
         end users in certain circumstances. Sales are made worldwide, however,
         the Company's strongest presence is maintained in the US (through
         Company employees), Europe (through employees of 


                                       4
<PAGE>   5

         Integral Vision, LTD.), and Asia (through a combination of
         representatives and of Company employees). Company sales employees in
         both segments are compensated by salary and commission.

Competition

         The Company experiences strong competition in both segments. For
         welding controls, competitors include Weltronic/Technitron Corp.,
         Robotron Corporation (acquired by Weltronic early in 1999) and Robert
         Bosch GmbH. In particular, competition is strongest for major welding
         control orders from automakers. Generally, sales of welding controls to
         first and second tier manufacturers and sales of parts and services
         have less competition. For machine vision, the Company experiences
         competition in all areas in which it operates. Competition is strongest
         in optical inspection systems from Dr. Schenk GmbH and Basler GmbH.
         Competition for the general-purpose vision software and applications
         comes principally from Cognex Corp.; however, many other niche
         producers also provide competition in specific markets.

Export Sales

         Sales outside of the United States and Canada accounted for 25%, 19%
         and 21% of the Company's net sales in 1998, 1997 and 1996. Management
         expects that such sales will continue to represent a significant
         percentage of its net sales. Most of the Company's export billings are
         denominated in US dollars. Welding segment billings in Canada are in
         Canadian dollars and vision segment billings in the UK and Japan are
         generally in pound sterling and yen, respectively. On occasion other
         export billings are denominated in the currency of the customer's
         country.

         See notes to the Consolidated Financial Statements Part II - Item 8 for
         details of geographic area information.

Other Information

         Segment information for the past 3 years is as follows:

<TABLE>
<CAPTION>
                                    REVENUE     OPERATING INCOME   INDENTIFIABLE     
                                                     (LOSS)           ASSETS
             ----------------------------------------------------------------------
                                               (IN THOUSANDS)
             ----------------------------------------------------------------------
<S>                                <C>            <C>                 <C>       
                  WELDING CONTROLS
             1996                  $ 27,853       $  5,121            $  27,370    
             1997                    24,569          3,261               24,248
             1998                    25,380          3,260     (1)       21,770
                  MACHINE VISION 
                    SYSTEMS
             1996                  $ 13,618       $(5,703)            $  22,423    
             1997                    15,955        (1,078)               28,358
             1998                     9,433        (4,988)     (1)       18,043
             ====================================================================
</TABLE>

         (1) Excludes charge-offs of capitalized software development costs and
         inventory which totaled $1.7 million for the welding controls segment
         and $5.3 million for the machine vision systems segment. This charge,
         which was reported in the first quarter of 1998, resulted from a
         general review of the recoverability of software development costs for
         welding and the specific decision to no longer pursue the sale of
         products for the CD market for machine vision. See Part II - ITEM 7 and
         the notes to the Consolidated Financial Statements Part II - ITEM 8 for
         further discussion of this matter.



                                       5
<PAGE>   6

         As of December 31, 1998, the Company had an order backlog of
         approximately $3,900,000 for welding control products and $600,000 for
         machine vision products compared to $3,300,00 for welding and $800,000
         for vision at December 31, 1997. The nature of the Company's business
         is that, although it has many individual customers, it has two major
         customers and those major customers tend to place large orders. As
         such, backlog at any point in time can vary dramatically. At December
         31, 1998 and 1997, approximately 8% and 42% of the Company's backlog
         was attributable to welding control products for General Motors
         Corporation and approximately 2% and 19%, was attributable to welding
         control products for DaimlerChrysler AG. Management expects that the
         Company will ship products representing this entire backlog in 1999.

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

         As of February 28, 1999, the Company had approximately 227 permanent
         employees, as compared to 275 at February 28, 1998 and 330 at February
         28, 1997. The Company also engages contract workers, primarily for
         assembly operations, the number of which varies depending upon
         production requirements. None of the Company's employees are
         represented by a labor union.

ITEM 2.  PROPERTIES

         Manufacturing, engineering and administrative functions of Medar are
         performed at two very similar, approximately 50,000 square foot
         facilities owned by the Company in Farmington Hills, Michigan.
         Operations related to the welding controls segment are located in one
         building with the vision segment and administrative functions located
         in the other building. In addition, Medar Canada Ltd. leases a 4,000
         square foot facility in Oshawa, Ontario, Canada and Integral Vision
         LTD. leases a 5,000 square foot facility in Bedford, England for sales
         and administrative functions.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not currently involved in any material litigation.

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

         None.


                                       6
<PAGE>   7

                                     Part II

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

         The Company's common stock is traded on the over-the-counter market
         (NASDAQ) as a National Market Issue under the symbol MDXR. As of
         February 28, 1999, there were approximately 4,500 stockholders of the
         Company including individual participants in security position
         listings.

         The table below shows the high and low sales prices for the Company's
         common stock for each quarter in the past two years. The closing sales
         price for the Company's common stock on February 28, 1999 was $1.625
         per share.

<TABLE>
<CAPTION>
                                                   1998
        -------------------------------------------------------------------------------
                          MAR 31           JUN 30          SEPT 30           DEC 31
        -------------------------------------------------------------------------------
<S>                  <C>              <C>              <C>              <C>         
        High         $     5.500      $     3.500      $      2.500     $      1.813
        Low                1.938            1.875             1.563            0.875
        -------------------------------------------------------------------------------
                                                    1997
        -------------------------------------------------------------------------------
        High         $     7.125      $     6.125      $      9.250     $      8.500
        Low                3.500            4.625             4.875            4.750
        ===============================================================================
</TABLE>


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

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



                                       7
<PAGE>   8


ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------------------------
                                   1998             1997              1996              1995              1994
----------------------------------------------------------------------------------------------------------------------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>               <C>               <C>              <C>           
Net revenues                 $     34,813     $      40,524     $      41,471     $     39,771     $       40,218
Gross margin                        9,071            11,447            10,683            9,655             13,451
Net earnings (loss)              (11,184)             (144)           (1,979)         (11,583)              3,688
Basic earnings per share           (1.24)            (0.02)            (0.22)           (1.33)               0.45
Diluted earnings per share         (1.24)            (0.02)            (0.22)           (1.33)               0.43
Weighted average shares             9,025             8,897             8,820            8,692              8,524
======================================================================================================================
<CAPTION>

                                                                  AT DECEMBER 31
----------------------------------------------------------------------------------------------------------------------
                                   1998             1997              1996              1995              1994
----------------------------------------------------------------------------------------------------------------------
                                                                  (IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>               <C>               <C>              <C>           
Working capital              $      2,641     $       3,478     $      17,041     $     18,676     $       23,459
Total assets                       39,813            52,606            49,793           44,392             43,523
Long-term debt                     
   including current portion       21,677            24,307            21,647           16,437              2,444
Stockholders' equity               10,861            22,003            20,819           22,436             34,001
======================================================================================================================
</TABLE>

         The above selected financial data should be read in conjunction with
         Consolidated Financial Statements, including the notes thereto (Part II
         - ITEM 8) and Management's Discussion and Analysis of Financial
         Condition and Results of Operations (Part II - ITEM 7). The Company has
         never paid a dividend and does not anticipate doing so in the
         foreseeable future. The Company expects to retain earnings to finance
         the expansion and its development of business.
          
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 resistance welding controls, optical inspection equipment and
         general purpose vision software. Resistance welding control products
         are marketed primarily to automobile manufacturers and suppliers of
         industrial automation equipment. Optical inspection equipment is
         principally sold to end users and suppliers of CD-R and DVD disc
         manufacturing equipment. General purpose vision software is sold into
         numerous applications in a wide variety of industries. 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:




                                       8
<PAGE>   9




ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CON'T

         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
-------------------------------------------------------------------------------------------------------------------
                                                                     1998              1997             1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>                <C>        
Net revenues                                                       100.0     %      100.0     %        100.0     %
Direct cost of sales                                                73.9             71.8               74.2
                                                               ------------------------------------------------------
         Gross margin                                               26.1             28.2               25.8
Other costs and expenses:
         Marketing                                                  11.8             10.2               10.9
         General and administrative                                  8.5              6.7                7.7
         Engineering and development:
            Expenditures                                            21.3             22.9               23.5
            Allocated to capitalized software and direct                                                             
               cost of sales                                       (6.5)           (17.0)             (14.9)         
                                                               ------------------------------------------------------
            Net engineering and development expenses                14.8              5.9                8.6
         Product restructuring and other charges                    16.0
                                                               ------------------------------------------------------
            Total other costs and expenses                          51.1             22.8               27.2
                                                               ------------------------------------------------------
Earnings (loss) from operations                                   (25.0)              5.4              (1.4)
Interest                                                             7.1              5.7                3.6
                                                               ------------------------------------------------------
Loss before income taxes                                          (32.1)            (0.3)              (5.0)
Provision (credit) for income taxes                                                   0.1              (0.2)
                                                               ======================================================
Net loss                                                          (32.1)     %      (0.4)     %        (4.8)     %
=====================================================================================================================
</TABLE>




                                      9
<PAGE>   10




ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CON'T

Year Ended December 31, 1998, Compared to December 31, 1997

         Net revenues decreased $5.7 million (14.1%) from $40.5 million in 1997
         to $34.8 million in 1998. The decrease resulted from the net of an
         increase of welding product revenues of $.8 million and a decrease of
         vision product revenues of $6.5 million. Fifty percent of the decrease
         in vision product revenues resulted from decreased sales of optical
         inspection products as the Company phased out its iNSPECt product line
         which is marketed primarily to compact disc manufacturers and
         introduced its Omni product line used by CD-R and DVD manufacturers.
         The remainder of the decrease resulted from decreased orders for the
         Company's turnkey systems, principally those used in the cellular
         telephone industry.

         Direct cost of sales decreased to $25.7 million from $29.1 million but
         as a percentage of sales increased to 73.9% from 71.8%. The decrease in
         the dollar amounts result principally from the decrease in sales. The
         percentage increase resulted from inventory related to the iNSPECt
         product line that was charged off in the first quarter of 1998. Without
         this inventory charge-off, direct cost of sales as a percentage of
         sales would have decreased by nearly 2% as a result of cost reductions
         during the year and changes in product mix principally in the welding
         division.

         Marketing expense stayed relatively constant in dollar terms, but
         increased as a percentage of net revenues from 10.2% to 11.8%. This
         resulted principally from the fixed nature of these expenses. Although
         cost savings were achieved in some areas additional costs were incurred
         to introduce the new Omni product line and to continue the marketing of
         VisionBlox software and VisionBlox applications.

         General and administrative expense increased to $3.0 million from $2.7
         million and as a percentage of net revenues from 6.7% to 8.6%. The
         dollar amount increases resulted from additional legal expenses and
         provision for uncollectable accounts receivable during the year. The
         increases in these expenditures were each related to issues specific to
         the 1998 year. The percentage increase resulted from the dollar
         increase factors combined with the fixed nature of these expenses.

         Net engineering and development expense increased to $5.1 million from
         $2.4 million and as a percentage of net revenues from 5.9% to 14.8%.
         Actual spending related to this expense category decreased from $9.3
         million to $7.4 million because of personnel and other cost reductions
         early in the year. The net increase resulted from fewer projects that
         were eligible for capitalization during the year. Additionally,
         development efforts related to the new Omni product line and a middle
         frequency product in welding resulted in higher dollar level of net
         expense. The percentage increase came from the reduced levels of net
         revenues and from the higher levels of net expenditures.




                                       10
<PAGE>   11




ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CON'T

         During the first quarter of 1998 in response to the financial
         conditions that arose due to heavy investments necessary to complete
         certain projects under development and unexpected low levels of orders
         and sales, management terminated 15% of the Company's employees with
         combined salaries totaling 20% of total compensation. As these
         terminations severely constrained resources available for product
         support, it was followed by an extensive review of product offerings.
         This review determined that the Company would concentrate its efforts
         going forward towards products for the inspection of CD-R and DVD
         discs, products based on VisionBlox technology and certain higher
         margin and better selling welding products. Other products, including
         those related to compact disc production, and certain other products
         that were selling poorly or at low margins or which were no longer
         supportable in the software configurations in use were identified for
         phase out or abandonment. These products had unamortized software
         development costs totaling $5.3 million that was charged to operations.
         In addition, reserves and other accruals totaling $1.7 million to
         reduce the cost of inventory related to these products to estimated
         realizable value and provide for other expenses were established.

         The charges related to inventory ($1.4 million) were recorded as part
         of direct cost of sales and the charges related to software development
         costs and the building reserve (totaling $5.6 million) were reflected
         as product restructuring charges with other costs and expenses in the
         Consolidated Statements of Operations in the first quarter of 1998.

         Interest expense increased to $2.5 million from $2.3 million and as a
         percentage of net revenues from 5.6% to 7.1%. This increase resulted
         from higher average levels of net borrowings during the year and the
         fact that the 12.95% debentures were outstanding for the entire year as
         opposed to only the second half of 1997.

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 resulted 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.




                                       11
<PAGE>   12

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CON'T

         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.

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, 1998. 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
--------------------------------------------------------------------------------------------------------------------------------
                                              1998                                                 1997
--------------------------------------------------------------------------------------------------------------------------------
                          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              $10,407      $  8,947      $ 8,832      $  6,627    $  8,358      $ 10,970     $  10,985      $ 10,211
Gross margin                3,811         2,570        3,600          (910)      1,667         3,672         3,331         2,777
Net earnings (loss)          (302)       (1,055)         102        (9,929)       (991)          420           401            26
================================================================================================================================
Basic and diluted                                                                                                               
earnings (loss) per       $  (.03)     $   (.12)     $   .01      $  (1.10)   $   (.11)     $    .05     $     .04      $      0   
share
================================================================================================================================
</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.




                                       12
<PAGE>   13

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CON'T

Liquidity and Capital Resources

         At December 31, 1998, the Company had a revolving note payable to the
         bank, subordinated debentures due 2000 through 2005 and various term
         notes. Levels of advances under the revolving notes are based on levels
         of acceptable account receivable and inventory. At December 31, 1998,
         the Company had fully drawn the $10,000,000 limit of the revolving note
         (See Note D of the Consolidated Financial Statements - Part II - Item
         8).

         The revolving note is governed by an agreement that provides for the
         continuation of the agreement through June 7, 1999. There is no
         assurance that the bank will extend the note beyond that date.
         Management believes that as long as the Company remains profitable and
         shows no deterioration in its balance sheet the bank will favorably
         consider these factors in making decisions with respect to further
         extensions of credit. In addition, Management believes that it has
         other alternatives to refinance all or part of this debt with another
         lender should the bank elect to no longer provide financing at current
         levels or at all. The Company is prohibited from paying dividends under
         terms of the agreement.

         The Company has been in violation of tangible net worth and net worth
         ratio covenants in an agreement related to the $7.0 million of
         subordinated debentures since December 31, 1997. Early in 1999, an
         agreement was reached with the agent for the bondholders that provides
         for waiver of past violations and adjustment of the covenants to a
         level with which the Company is in compliance and with which Management
         believes it can remain in compliance in the future. In exchange for
         these concessions by the bondholders the Company agreed to adjust the
         strike price of warrants held by the bondholders based on the
         occurrence of certain future events.

         The Company generated $4.6 million of cash from operations in 1998.
         This cash plus cash on hand at the beginning of the year was used to
         fund additions to capitalized software and property and equipment
         totaling $2.3 million and for reductions of debt totaling $2.6 million.
         Management believes that many of the investment activities are
         discretionary and can be deferred or eliminated. However, it is
         Management's intention to continue to make investments in product
         developments that it believes will best enhance the Company's
         competitive position. Management carefully evaluates opportunities in
         light of the Company's available and projected financial resources. The
         Company has no material commitments for the purchase of property and
         equipment or software development costs. The amount of software
         development costs incurred and capitalized in 1999 will be dependent on
         determinations throughout the year on long and short-term revenue
         opportunities for products in both of the Company's divisions.

         Management believes that its current financial resources and
         potentially available resources, together with cash generated from
         operations, will be adequate to meet cash needs through 1999.

         Software is included with nearly all of the Company's major products.
         Following review, management has concluded that it will not have to
         incur any substantial amount of warranty or upgrade costs to this
         software to comply with Year 2000 issues.




                                       13
<PAGE>   14

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CON'T

Impact of Year 2000

         The Company has determined that it will be required to modify or 
         replace certain portions of its software and hardware so that those 
         systems will properly utilize dates beyond December 31, 1999.  The 
         company presently believes that with modifications or replacements of 
         existing software and certain hardware, the Year 2000 Issue can be 
         mitigated.  However, if such modifications and replacements are not 
         made, or are not completed timely, the Year 2000 Issue could have a 
         material impact on the operations of the Company.

         For its information technology exposures, the Company expects to fully 
         complete software replacement, including testing and implementation, no
         later than September 30, 1999.  Once testing is complete, the 
         operating equipment will be ready for immediate use.  The testing and 
         implementation of all software is expected to be fully completed by 
         September 30, 1999.

         The Company will utilize both internal and external resources to 
         reprogram, or replace, test, and implement the software and operating 
         equipment for Year 2000 modifications.  The total cost of the Year 
         2000 project is estimated at $400,000, and is being funded through 
         operating cash flows and capital leases.  To date, the Company has 
         incurred approximately $350,000 ($50,000 expensed and $300,000 
         capitalized for new systems and equipment) related to both its Year 
         2000 project and ordinary business expenditures that also addressed 
         the Year 2000 issue.

         The Company believes it has an effective program in place to resolve 
         the Year 2000 issue in a timely manner.  As noted above, the Company 
         has not yet completed all necessary phases of the Year 2000 program.  
         In the event that the Company does not complete any additional phases, 
         the Company could be unable to effectively manufacture and ship 
         certain products.  In addition, disruptions in the economy generally 
         resulting from Year 2000 issues could also materially adversely affect 
         the Company.  The amount of potential liability and lost revenue 
         cannot be reasonably estimated at this time.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         The Company is exposed to market risk stemming from changes in foreign
         exchange rates, interest rates and prices of inventory purchased for
         assembly into finished products. Changes in these factors could cause
         fluctuations in earnings and cash flows. In the normal course of
         business, exposure to interest rates is managed by fixing the interest
         rates on the Company's long-term debt whenever possible. The Company
         does not generally enter into long-term purchase contracts but instead
         purchases inventory to fill specific sales contracts thereby minimizing
         risks with respect to inventory price fluctuations.

         Foreign Exchange Rates - The Company's locations outside the US are in
         Canada and the United Kingdom. In both cases these are sales offices
         with net non-current assets that are not significant. On a consolidated
         basis the Company denominates sales in the following currencies:

         -    Canadian Dollar
         -    Japanese Yen
         -    Pound Sterling
         -    French Francs

         In management's opinion, as the currencies of Canada, Western Europe
         and the UK are generally stable; there is no significant exposure to
         losses due to currency fluctuations. However, because the Yen has not
         been stable over the past several years, the Company does enter into
         forward sales contracts equal to the future amount of Yen to be
         received at the time the order is accepted. These hedging transactions
         are on an order by order basis and at no time are they speculative in
         nature. At December 31, 1998, the fair market value of market risk
         sensitive instruments or potential for near-term losses of earnings or
         cash flows for such instruments was not material.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLIMENTARY DATA

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

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

         None.




                                       14
<PAGE>   15




                                    Part III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information contained in the Medar, Inc. proxy statement (to be
         filed within 120 days of December 31, 1998), with respect to directors
         and executive officers of the Company, is incorporated herein by
         reference.

ITEM 11.  EXECUTIVE COMPENSATION

         The information contained in the Medar, Inc. proxy statement (to be
         filed within 120 days of December 31, 1998), with respect to directors
         and executive officers of the Company, is incorporated herein by
         reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information contained in the Medar, Inc. proxy statement (to be
         filed within 120 days of December 31, 1998), with respect to directors
         and executive officers of the Company, is incorporated herein by
         reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information contained in the Medar, Inc. proxy statement (to be
         filed within 120 days of December 31, 1998), with respect to directors
         and executive officers of the Company, is incorporated herein by
         reference.




                                       15
<PAGE>   16




                                    PART IV

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

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

Exhibit

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

3.1        Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
           registrant's Form 10-K for the year ended December 31, 1995, SEC file
           0-12728, and incorporated herein by reference).

3.2        Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the 
           registrant's Form 10-K for the year ended December 31, 1994, SEC 
           file 0-12728, and incorporated herein by reference).

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

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

4.3        Form of Medar, Inc. Common Stock Purchase Warrant Certificate (filed
           as Exhibit 4.3 to registrants Form 8-K dated July 15, 1997, SEC file
           0-12728, and incorporated herein by reference).

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

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

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

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

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

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

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




                                       16
<PAGE>   17




ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
CON'T

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

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

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

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

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

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

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

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

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

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

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

10.24      Amended and Restated Revolving Credit and Loan Agreement dated July
           31, 1998 by and between Medar, Inc. and Integral Vision LTD and NBD
           Bank (filed as Exhibit 10.24 to the registrants Form 10-Q for the
           quarter ended September 30, 1998, SEC file 0-12728, and incorporated
           herein by reference.)

10.25      Amendment and Forebearance Agreement dated December 14, 1998 by and
           between Medar, Inc. and Integral Vision LTD and NBD Bank.

10.26      Amended and Restated Master Demand Business Loan Note dated December
           14, 1998 by and between Medar, Inc. and Integral Vision LTD and NBD
           Bank.




                                       17
<PAGE>   18

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - 
CON'T

10.27      First Amendment to Mortgage (Grand River Mortgage-see 10.12) dated
           December 14, 1998 by and between Medar, Inc. and NBD Bank.

10.28      First Amendment to Mortgage (Crestview Court Mortgage-see 10.13)
           dated December 14, 1998 by and between Medar, Inc. and NBD Bank.

10.29      Second Amended and Restated Master Demand Business Loan Note dated
           December 14, 1998 by and between Medar, Inc. and NBD Bank.

10.30      Amended and Restated Installment Loan Note dated December 14, 1998 by
           and between Medar, Inc. and NBD Bank.

10.31      First Amendment to Amendment and Forebearance Agreement dated March
           5, 1999 by and between Medar, Inc. and Intgeral Vision LTD. and NBD
           Bank.

13         Annual Report on Form 10-K.

21         Subsidiaries of the registrant.

23         Consent of independent auditors.

(b)        There were no reports on Form 8-K filed in the quarter ended December
           31, 1998.

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

(d)        Financial statement schedules - The response to this portion of ITEM
           14 is submitted as a separate section of this report. * The Company
           has been granted confidential treatment with respect to certain
           portions of this exhibit pursuant to Rule 24b-2 under the Securities
           Exchange Act of 1934, as amended.

27         Financial Data Schedule



                                       18
<PAGE>   19

                                   SIGNATURES


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

Date:    March 30, 1999                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






                                       19
<PAGE>   20


     EXHIBIT                    EXHIBIT INDEX DESCRIPTION
     NUMBER

     10.24     Amendment and Forbearance Agreement dated December 14, 1998 by
               and between Medar, Inc. and Integral Vision LTD and NBD Bank.

     10.26     Amended and Restated Master Demand Business Loan Note dated
               December 14, 1998 by and between Medar, Inc, and Integral Vision
               LTD and NBD Bank.

     10.27     First Amendment to Mortgage (Grand -River Mortgage - see 10.12)
               dated December 14, 1998 by and between Medar, Inc. and NBD Bank.

     10.28     First Amendment to Mortgage (Crestview Court Mortgage - see
               10.13) dated December 14, 1998 by and between Medar, Inc. and NBD
               Bank.

     10.29     Second Amended and Restated Master Demand Business Loan dated
               December 14, 11998 by and between Medar, Inc. and NBD Bank.

     10.30     Amended and Restated Installment loan Note dated December 14,
               1998 by and between Medar, Inc. and NBD Bank.

     10.31     First Amendment to Amendment and Forebearance Agreement dated
               March 5, 1999 by and between Medar, Inc. and Integral Vision LTD.
               and NBD Bank.
     
     13        Annual Report on Form 10-K.

     21        Subsidiaries of the Registrant

     23        Consent of Independent Auditors.

     27        Financial Data Schedule