<PAGE>   1







                                                                    EXHIBIT 10.1


                              NEMATRON CORPORATION


                              EMPLOYMENT AGREEMENT


         THIS EMPLOYMENT AGREEMENT (this "Agreement"), entered into effective as
of October 1, 1998, by and between MATTHEW S. GALVEZ (hereinafter referred to as
"Executive") and NEMATRON CORPORATION, a Michigan corporation (hereinafter
referred to as the "Company").


                              W I T N E S S E T H :

         WHEREAS, the Company is duly organized and operated under the laws of
the State of Michigan and is engaged in the business of developing computer
hardware and software; and

         WHEREAS, Executive is currently employed by the Company and performs
the duties and responsibilities described herein; and

         WHEREAS, the Company desires to continue the retention of Executive for
the position and to perform the duties and responsibilities described herein;
and

         WHEREAS, parties desire to evidence the existing employment arrangement
of Executive and to enter into certain additional agreements as set for the
herein.

         NOW THEREFORE, in consideration of the mutual covenants and conditions
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

         1. SCOPE OF EMPLOYMENT. The Company agrees to continue to employ the
Executive and he agrees to continue employment with the Company for the term of
employment hereinafter defined. The duties of the Executive during the term of
the employment shall be that of President and Chief Executive Officer of the
Company, reporting directly to the Board of Directors of the Company. During the
term of employment, the Executive shall have the title of President and Chief
Executive Officer of the Company, and in such capacity shall have general charge
and supervision of the business and affairs of the Company, subject to the
directions of the Board of Directors of the Company.

         2. TERM. "Term of Employment" as used herein shall mean the period from
October 1, 1998 (the "Commencement Date") through the Expiration Date. For
purposes of this Agreement, the "Expiration Date" shall mean December 31, 2001.
Notwithstanding anything to the contrary stated elsewhere herein, this Agreement
may be earlier terminated, as hereinafter set forth, in which event the term of
employment shall mean the period from the Commencement Date through the
effective date of such earlier termination. The term of employment shall be
terminated earlier upon: (i) the death of the Executive in the manner provided
in Section 6(a) hereof; (ii) the Executive becoming disabled in the manner
provided in Section 6(b) hereof; (iii) upon the Executive being discharged for
Cause in the manner provided in Section 6(c); (iv) upon the Executive
terminating his employment as provided in Section 6(d) hereof; or (v) upon the
Executive being discharged without Cause in the manner provided in Section 6(e).

         3.  COMPENSATION.

         (a) SALARY. From the Commencement Date until April 15, 1999, the
Executive shall receive a salary at an annual rate of One Hundred Thirty-Two
Thousand Dollars ($132,000), payable in substantially equal semi-monthly
installments on the regular payroll dates of the Company. From April 16,

                                        1
<PAGE>   2
1999 through the Expiration Date, the Executive's salary shall be increased to
the rate of Two Hundred Thousand Dollars ($200,000) per annum.

         (b) PERFORMANCE BONUS. The Executive shall be entitled to a one-time
performance bonus of Fifty Thousand Dollars ($50,000) at such time as the
Company shall have first achieved any three consecutive months of positive net
income before taxes as determined pursuant to generally accepted accounting
principles. The Executive shall be entitled to additional Performance Bonuses
along with other executives based on the achievement of targeted return on net
investment goals at times and in amounts determined by the Board of Directors.

         (c) COMMON STOCK BENEFIT PLANS. The Executive shall be eligible to
participate in the Company's stock compensation plans to the same extent as the
Company's other officers.

         (d) OTHER BENEFITS. The Executive shall be entitled to participate in
any pension, group insurance, medical, hospitalization or other benefit plan
hereafter adopted by the Company applicable to officers or employees or, at the
Executive's option with respect to any or all such benefits, cash payments in
lieu thereof equal to the Company's cost for such benefit. In addition, the
Company shall maintain transferable term life insurance with a beneficiary named
by Executive in an amount equal to the difference between the benefits under the
Company's group insurance policy and twice the Executive's $200,000 annual base
salary. The obligation of the Company to obtain such life insurance shall be
contingent upon Executive successfully completing any physical examination
required by the provider of such life insurance. Upon termination of the
Executive's employment, ownership of such life insurance policy shall be
transferred to the Executive and the Executive shall thereafter be responsible
for all premium payments. The Executive shall be entitled to receive four (4)
weeks of paid vacation during each calendar year of the term of this Agreement.
All vacation must be taken during the calendar year for which it is awarded. The
Executive shall be entitled to receive reimbursement of actual automobile
expenses of up to Six Hundred Dollars ($600) per month and, for so long as
Executive's salary continues at the $132,000 base level described in Section
3(a) above, the Executive shall receive reimbursement of reasonable living and
commuting travel expenses, pursuant to expense reports filed monthly on a timely
basis for approval by the Chairman of the Compensation Committee of the Board of
Directors.

         4. REIMBURSEMENT FOR EXPENSES; INDEMNIFICATION. The Company shall
reimburse the Executive for reasonable expenses incurred in carrying out his
duties under this Agreement and promoting the business of the Company. The
Company shall make reimbursement no later than the last day of each month for
all such expenses incurred by the Executive during the preceding month, pursuant
to expense reports filed monthly with the Company and approved by another
Company officer. The Company agrees to defend, indemnify and hold harmless the
Executive from and against any and all costs, expenses, judgments, awards,
settlements, or other adverse financial results, including the cost of defense
and appeal thereof, arising out of or in connection with any claims or
threatened claims against the Executive arising from his conduct or duties on
behalf of the Company, to the full extent permitted by law and the Company's
bylaws.

 5. CONFIDENTIALITY; NON-COMPETITION; NON-SOLICITATION.

         (a) The Executive agrees that any and all confidential knowledge or
information concerning the Company, its affiliates, its subsidiaries, and their
affairs' obtained by him in the course of his employment will be held inviolate
and confidential by him and that he will not disclose the same to any and all
other persons, including but not limited to, competitors and potential
competitors, unless required to do so by law or by legal process.

         (b) The Executive agrees that upon termination of his employment, he
will immediately surrender and turn over to the Company all books, forms,
records, customer lists and all other papers, writings and all other property
belonging to the Company.

         (c) For a period of two (2) years following termination of this
Agreement pursuant to sections 6(b), 6(c) or 6(d), Executive shall not seek or
otherwise obtain employment as an employee, officer, director, consultant or
otherwise, with any business enterprise that is or seeks to be in the business
of development or sale of computer hardware or software products or services in
direct competition with the Company. This provision shall not survive a Change
in Control of the Company, where "Change in Control" shall mean the sale or
merger of the Company or substantially all of the

                                       2
<PAGE>   3
Company's assets to any entity not controlled at least 50% by the
shareholders of the Company prior to such sale or merger, provided that Change
in Control shall in no event be deemed to include the private placement
transactions that occurred in December 1998 and April 1999, nor to increases in
capitalization of the business through subsequent private placements or
secondary public offerings of the Company's capital stock, unless directly
related to such sale or merger.

         (d) For a period of two (2) years following termination of this
Agreement pursuant to sections 6(b), 6(c) or 6(d), Executive shall not seek,
directly or indirectly, the employment of any person employed by the Company at
the time of termination or expiration or for the one-year period thereafter, or
cause any such employee to terminate his/her employment with the Company. The
provisions of this Section 5 shall survive the termination of this Agreement.

6.     DEATH; DISABILITY; TERMINATION. The Executive's employment hereunder
may be terminated without any breach of this Agreement only under the following
circumstances:

       (a) DEATH. The Executive's employment hereunder shall terminate
immediately upon his death.

       (b) DISABILITY. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
hereunder for sixty (60) consecutive business days, or one hundred fifty (150)
days in the aggregate during any twelve (12) month period, and within five (5)
days after written notice of termination is given (which may occur before or
after the end of such sixty (60) day or one hundred fifty (150) day period, as
the case may be) shall not have returned to the performance of his duties
hereunder, the Company may terminate the Executive's employment hereunder.
During any period that the Executive fails to perform his duties hereunder as a
result of incapacity due to physical or mental illness, the Executive shall
continue to receive his full salary, until the Executive returns to his duties
or until the Executive's employment is terminated pursuant to Section 6(b) or
6(d) hereof.

       (c) TERMINATION FOR CAUSE. The Company may terminate the Executive's
employment hereunder for Cause, effective on the date of notice. For purposes of
this Agreement, the Company shall have "Cause" to terminate the Executive's
employment hereunder only in the following events: (i) Executive's fraud, (ii)
Executive's embezzlement from the Company, (iii) Executive's repeated willful
disregard of the business and affairs of the Company after due notice and time
to correct the deficiency which materially and adversely affects the business or
affairs of the Company; and (iv) conviction after final appeal for any felony or
for any criminal act involving fraud or moral turpitude. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to the Executive a copy of the
resolution, duly adopted and authorized by the affirmative vote of shares
representing at least eighty percent (80%) of the common stock of the Company
(excluding Executive's shares) at a meeting of the shareholders duly called and
held for such purpose.

       (d) TERMINATION BY EXECUTIVE. The Executive may terminate his
employment by notice to the Company at any time by Executive giving Company not
less than ninety (90) days written notice, and provided that during such notice
period, Executive shall continue to provide employment services to Company on
the same basis as is contemplated in Section 1. In addition, during such notice
period the Executive shall actively participate in the recruitment and hiring of
a reasonably suitable replacement for the position of President of the Company.
Such termination shall be effective upon the expiration of the time period
specified in the Notice of Termination.

       (e) TERMINATION WITHOUT CAUSE. The Company shall have the right, upon
provision of not less than sixty (60) days notice, to terminate the Executive
without Cause.

       (f) NOTICE OF TERMINATION. Any termination of this Agreement by the
Company or the Executive (other than termination pursuant to (a) above) shall be
communicated by written Notice of Termination to the other party hereto. For
purposes of this Agreement, "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed
upon and shall set forth a basis for termination of the Executive's employment
under the provisions so indicated.

                                       3
<PAGE>   4


         (g) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated by his death, the date of his death, (ii)
if the Executive's employment is terminated pursuant to subsection (b) above,
fifteen (15) days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of his duties on a full
time basis during such fifteen (15) day period), (iii) if the Executive's
employment is terminated pursuant to subsection (c) the date on which a Notice
of Termination is given, and (iv) if the Executive's employment is terminated
pursuant to subsection (d) or (e) above, the date specified in the Notice of
Termination.

         (h) COMPENSATION UPON TERMINATION.

             (i) If the employment of the Executive is terminated pursuant to
Section 6(a) by reason of his death, the Company agrees to pay directly to his
surviving spouse, or if his spouse does not survive him, to the legal
representative of his estate, a lump sum equal to the sum of (i) any payment the
Executive's spouse, beneficiaries, or estate may be entitled to receive pursuant
to any pension or employee benefit plan or life insurance policy then maintained
by the Company on his behalf, (ii) the Executive's full salary through the Date
of Termination at the rate in effect at the time of the Executive's death, plus
compensation at the Executive's then current salary level for any vacation time
accrued but not yet taken, plus expense reimbursements and any other payments to
which he may be entitled pursuant to any retirement plan, health insurance,
and/or disability plan provided by the Company, and (iii) the pro rated amount
of the Performance Bonus based on the Company's annualized performance for the
year up until the Executive's date of death, and provided that such Performance
Bonus is actually earned in accordance with the provisions of this Agreement.
Such payments shall fully discharge the Company's obligations hereunder,
excluding the Executive's rights under any stock options and other stock-based
awards.

             (ii) If the employment of the Executive is terminated pursuant to
Section 6(b) the Executive shall be paid, in substantially equal monthly
installments, sixty percent (60%) of his then current base salary at the rate
then in effect at the time of the Notice of Termination for a period commencing
on the Date of Termination until the Expiration Date; provided, however, (i) if
the Company has a disability plan for employees in which Executive is eligible
to participate, or (ii) if the Executive is deemed by a competent authority to
be eligible for statutory worker's compensation or disability payments, the
amount of the payments required to be made hereunder shall be reduced by the
aggregate amount of any payments received by the Executive therefrom up to the
end of the term of this Agreement. Additionally, the Executive shall receive his
full salary through the Date of Termination at the rate in effect at the time of
the Notice of Termination is given, plus compensation at the Executive's then
current Salary level for any vacation time accrued but not yet taken, plus
expense reimbursements and any other payments to which he may be entitled
pursuant to any retirement plan, health insurance, and/or disability plan
provided by the Company. The Company shall also pay to the Executive the pro
rated amount of the Performance Bonus, based on the Company's annualized
performance for the year up until the Executive's Notice of Termination,
provided that such Performance Bonus is actually earned in accordance with the
provisions of this Agreement and with the terms and conditions established in
the bonus plan. Such payments shall fully discharge the Company's obligations
hereunder, excluding the Executive's rights under any stock options and other
stock-based awards.

             (iii) If the Company terminates the Executive pursuant to Section
6(c) for Cause, the Company shall pay the Executive his full salary through the
Date of Termination at the rate then in effect at the time of the Notice of
Termination is given, plus compensation at the Executive's then current salary
level for any vacation time accrued but not yet taken, plus expense
reimbursements and similar amounts accrued and unpaid as of the Date of
Termination, and the Company shall have no further obligations to the Executive
under this Agreement, excluding the Executive's rights under any stock options
and other stock-based awards.

             (iv) If the Executive terminates his employment pursuant to Section
6(d), the Company shall pay the Executive his full salary through the Date of
Termination at the rate in effect at the time of the Notice of Termination is
given, plus compensation at the Executive's then current salary level for any
vacation time accrued but not yet taken, plus expense reimbursements and similar
amounts accrued and unpaid as of the Date of Termination, and the Company shall
have no further obligations to the Executive under this Agreement, excluding the
Executive's rights under any stock options and other stock-based awards. At any
time after receipt of a Notice of Termination pursuant to Section 6(d), the
Company may, at its sole discretion, accelerate the Date of Termination,
provided that notwithstanding such acceleration, the Executive shall be entitled
to receive his regular compensation and benefits through the original Date of

                                       4
<PAGE>   5

Termination set forth in the Notice of Termination or until he begins
employment elsewhere, whichever occurs first.

         (v) If the Company terminates the Executive's employment other than
pursuant to Sections 6(a), 6(b) or 6(c) hereof (it being understood that a
purported termination pursuant to Section 6(b) or 6(c) hereof which is disputed
and finally determined not to have been proper shall be a termination in breach
of this Agreement), then the Executive (or his estate or heirs as the case may
be) shall be entitled to receive (i) a lump sum amount equal to all compensation
earned through the Date of Termination, including all accrued and unpaid salary
at the rate then in effect at the time of Notice of Termination, plus
Performance Bonus based on the Company's annualized performance through the Date
of Termination, expense reimbursements and similar amounts accrued and unpaid as
of the Date of Termination, plus compensation at the Executive's then current
salary level for any vacation time accrued but not yet taken, and (ii) in
monthly installments on the first of each month in advance, an amount equal to
his then current monthly base salary for the longer of (a) one year or (b) until
the Expiration Date of this Agreement. The Company shall also pay to the
Executive, in lieu of the Performance Bonus, an amount, payable monthly, equal
to the average of the average of last two quarterly Performance Bonuses paid to
Executive prior to the Notice of Termination. Additionally, the Company shall
also maintain in full force and effect, for the continued benefit of the
Executive for the balance of his term of this Agreement, without giving effect
to his termination, all employee benefit plans, and programs in which the
Executive was entitled to participate immediately prior to the Date of
Termination, provided that the Executive's continued participation is possible
under the general terms and provisions of such plans and programs. The Company
shall have no further obligations to the Executive under this Agreement,
excluding the Company's obligation, if any, under any stock options and other
stock-based awards.

         (vi) Notwithstanding anything to the contrary contained elsewhere in
this Agreement, any amount of payment which the Company may owe to the Executive
due to his termination shall be reduced by an amount equal to the amount of
money, if any, which the Executive may owe to the Company, including but not
limited to, loans and advances.

         (vii) Absent a breach of this Agreement by the Company, the remedies
provided herein are the sole and exclusive remedies of Executive, and the
Company shall not be liable for any payments other than expressly set forth
herein.

7.       INSURANCE. The Executive agrees that the Company may, although it
has no obligation to do so, procure and/or obtain insurance on his life in such
amounts as the Company may, in its sole and absolute discretion, determine and
name only the Company as the insured or loss payee. The Executive agrees that
upon request by the Company he will submit to a physical examination, will
truthfully answer all questions, provide all relevant information and execute
all applications and other documents which may be required in order to procure
such insurance.

8.       CONDITION AND SURVIVAL OF THE AGREEMENT. In the event that the
Company shall at any time be merged or consolidated with any other corporation
or corporations or shall sell or otherwise transfer a substantial portion of its
assets to another entity, the provisions of this Agreement shall be binding upon
and inure to the benefit of the corporation or entity surviving or resulting
from such merger or consolidation or to which such assets shall be sold or
transferred.

9.       NOTICES. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered mail, postage
prepaid, a recognized nationwide airmail courier service or personal delivery
with a receipt to the last home address given by the Executive to the Company or
if to the Company at the Company's office, along with courtesy copies to Dykema
Gossett PLLC and Hewes, Gelband, Lambert & Dann, P.C., such notice or
communication shall be deemed to have been given as of the earlier of three (3)
business days after the date mailed or upon actual receipt.

10.      CONSTRUCTION. This Agreement was executed in the State of Michigan and
shall be construed in accordance with and under the internal laws of the State
of Michigan.

11.      SEVERABILITY. The conditions and provisions herein set forth shall be
severable, and if any condition or provision or portion thereof shall be held to
be invalid or unenforceable, then said condition or provision shall not in any
manner affect any other condition or provision and the remainder of this

                                       5
<PAGE>   6
Agreement and every paragraph thereof construed without regard to said invalid
condition or provision, shall continue in full force and effect.

12.      ASSIGNMENT. This Agreement shall be binding upon the Executive, his
successors, administrators and assigns, provided however, that neither party
shall have the right to assign the Executive's rights and obligations with
respect to his actual employment duties without the prior written consent of the
other party, and that it may not be modified except in writing signed by both
the parties.

13.      ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties hereto with respect to the subject matter hereof, and this
Agreement supersedes and renders null and void any and all other prior oral and
written agreements, understandings or commitments pertaining to the subject
matter hereof.



         IN WITNESS WHEREOF, the parties hereto have affixed their respective
signatures the day and year first above written.



                                       NEMATRON CORPORATION







                                       By:                /s/ David P. Gienapp
                                                          ----------------------
                                       Print Name:        David P. Gienapp
                                                          ----------------------
                                       Title:             Secretary
                                                          ----------------------


                                       Executive:         /s/ Matthew S. Galvez
                                                          ----------------------
                                                          MATTHEW S. GALVEZ
                                                          ----------------------



                                       6