<PAGE>   1
================================================================================

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

                                   FORM 10-QSB

(Mark One)

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


                  For the quarterly period ended JUNE 30, 1999


          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the transition period from        to
                                                --------   ---------

Commission File Number: 0-21142


                              NEMATRON CORPORATION
        (Exact name of small business issuer as specified in its charter)

            MICHIGAN                                38-2483796
(State or other jurisdiction of         (I.R.S. Employer Identification No.)
 incorporation or organization)



                 5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
               (Address of principal executive offices) (Zip Code)

                                 (734) 214-2000
                (Issuer's telephone number, including area code)


         Check whether the issuer (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
        [ X ] YES     [  ] No

         State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:


 No par value Common Stock: 12,605,430 SHARES OUTSTANDING AS OF AUGUST 10, 1999


Transitional Small Business Disclosure Format:  [  ] YES    [X] NO

================================================================================
<PAGE>   2


                         PART I -- FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                      NEMATRON CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                       JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>

                                                                                    JUNE 30,     DECEMBER 31,
                                                                                      1999          1998
                                                                                   (UNAUDITED)   (UNAUDITED)
                                     ASSETS
<S>                                                                             <C>             <C>
Current Assets:
     Cash and cash equivalents                                                  $     90,074    $    106,730
     Accounts receivable, net of allowance for doubtful
         accounts of $142,000 at June 30, 1999, and
         $368,000 at December 31, 1998                                             3,151,572       1,999,900
     Inventories (Note 2)                                                          1,699,337       1,884,335
     Prepaid expenses and other current assets                                       336,696         305,310
                                                                                ------------    ------------
              Total Current Assets                                                 5,277,679       4,296,275
Property and Equipment, net of accumulated depreciation
         of $5,889,994 at June 30, 1999 and $5,685,402 at
         December 31, 1998                                                         2,868,412       3,344,140
Other Assets:
     Software and related development costs, net of amortization
         of  $3,034,225 at June 30,1999, and $2,557,639 at
         December 31, 1998                                                         3,597,204       3,880,284
     Other intangible assets, net of amortization of $2,291,464 at
         June 30, 1999 and $2,225,842 at December 31,1998                            845,862         942,158
                                                                                ------------    ------------
              Net Other Assets                                                     4,443,066       4,822,442
                                                                                ------------    ------------
              Total Assets                                                      $ 12,589,157    $ 12,462,857
                                                                                ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Note payable to bank (Note 4)                                              $      2,032    $  2,715,457
     Accounts payable                                                              1,996,645       1,409,645
     Trade notes payable                                                             217,067       1,123,956
     Other accrued expenses                                                        1,427,153       1,387,403
     Convertible promissory notes payable (Note 3)                                       -0-       1,000,000
     Current maturities of long-term debt (Note 4)                                 1,564,185       1,576,492
                                                                                ------------    ------------
              Total Current Liabilities                                            5,207,082       9,212,953
Long-Term Debt, less current maturities (Note 4)                                   1,807,067       2,182,783
Deferred Tax Liability                                                               156,600         178,200
                                                                                ------------    ------------
              Total Liabilities                                                    7,170,749      11,573,936
Stockholders' Equity:
     Common stock, no par value, 30,000,000 shares authorized; 12,525,430 and
         5,353,316 shares issued and outstanding at June 30, 1999 and at
         December 31, 1998,
         respectively (Notes 3 and 8)                                             28,707,838      24,664,809
     Foreign currency translation adjustment                                          (9,817)         (7,134)
     Accumulated deficit                                                         (23,279,613)    (23,768,754)
                                                                                ------------    ------------
              Total Stockholders' Equity                                           5,418,408         888,921
                                                                                ------------    ------------
              Total Liabilities and Stockholders' Equity                        $ 12,589,157    $ 12,462,857
                                                                                ============    ============
</TABLE>

                                       1
<PAGE>   3






ITEM 1.  FINANCIAL STATEMENTS - CONTINUED

                      NEMATRON CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                       FOR THE THREE-AND SIX-MONTH PERIODS
                          ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>

                                    THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                    ---------------------------       -------------------------

                                      1999              1998            1999             1998
                                   (UNAUDITED)       (UNAUDITED)     (UNAUDITED)      (UNAUDITED)

<S>                                 <C>             <C>             <C>             <C>
Net Revenues                        $  5,948,709    $  3,767,727    $ 11,755,035    $  8,711,178

Cost of Revenues                       4,105,463       3,228,892       8,041,688       6,635,385
                                    ------------    ------------    ------------    ------------

              Gross Profit             1,843,246         538,832       3,713,347       2,075,793
Operating Expenses:
     Product development costs           192,094         268,225         383,445         501,962
     Selling, general and
     administrative expenses           1,318,085       2,491,062       2,542,606       4,851,702
                                    ------------    ------------    ------------    ------------
     Total Operating Expenses          1,510,179       2,759,287       2,926,052       5,353,034
                                    ------------    ------------    ------------    ------------
Operating Income (Loss)                  333,067      (2,220,455)        787,295      (3,277,241)
Other Income (Expense):
     Interest expense                    (67,516)       (179,522)       (317,366)       (339,648)
     Sundry income (expense)                  -0-         20,829          (2,388)         35,153
                                     -----------    ------------    ------------     -----------
     Total Other Income (Expense)        (67,516)       (158,693)       (319,754)       (304,495)
                                     -----------    ------------    ------------    ------------
Income (Loss) Before Taxes               265,351      (2,379,148)        467,541      (3,581,736)
Income Tax Benefit (Note 5)               10,800          35,715          21,600         107,144
                                    ------------    ------------    ------------    ------------

Net Income (Loss)                   $    276,351    $ (2,343,433)   $    489,141    $ (3,474,592)
                                    ============    ============    ============    ============

Per Share Amounts (Note 6):
     Basic                          $       0.02    $      (0.44)   $       0.06    $      (0.65)
                                    ============    ============    ============    ============
     Diluted                        $       0.02    $      (0.44)   $       0.04    $      (0.65)
                                    ============    ============    ============    ============
Weighted Average Shares
  Outstanding (Note 6):
     Basic                            12,097,342       5,352,767       8,874,221       5,347,583
                                    ============    ============    ============    ============
     Diluted                          13,159,568       5,352,767      11,867,751       5,347,583
                                    ============    ============    ============    ============
</TABLE>

                      NEMATRON CORPORATION AND SUBSIDIARIES
        CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
        FOR THE THREE-AND SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>

                               THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,
                               ---------------------------     -------------------------
                                 1999             1998           1999             1998
                              (UNAUDITED)      (UNAUDITED)    (UNAUDITED)      (UNAUDITED)

<S>                            <C>            <C>            <C>            <C>
Net income (loss)              $   276,351    $(2,343,433)   $   489,141    $(3,474,592)
Other comprehensive income -
    equity adjustment from
    foreign translation             (5,565)        (7,575)        (2,683)           (94)
                               -----------    -----------    -----------    -----------
Comprehensive income (loss)    $   270,786    $(2,351,008)   $   486,458    $(3,474,686)
                               ===========    ===========    ===========    ===========
</TABLE>

                                       2
<PAGE>   4
ITEM 1.       FINANCIAL STATEMENTS - CONTINUED

                      NEMATRON CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
             FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>

                                                                          SIX MONTHS ENDED JUNE 30,
                                                                          -------------------------
                                                                           1999              1998
                                                                       (UNAUDITED)       (UNAUDITED)
<S>                                                                     <C>            <C>
Cash Flows From Operating Activities:
     Net income (loss)                                                  $   489,141    $(3,474,592)
     Adjustments to reconcile net income (loss)  to net cash flows
     used in operating activities:
         Depreciation and amortization                                    1,134,248      1,256,868
         Deferred income tax benefit                                        (21,600)      (107,143)
         Loss on disposal of property                                        15,200            -0-
         Changes in assets and liabilities that provided (used) cash:
              Accounts receivable                                        (1,151,672)     1,003,831
              Inventories                                                   184,998        820,462
              Prepaid expenses and other current assets                     (31,386)       (10,508)
              Accounts payable                                              587,000      1,512,014
              Accrued expenses                                               54,445         64,208
                                                                        -----------    -----------
              Net Cash Provided By Operating Activities                   1,260,374      1,065,140
                                                                        -----------    -----------
Cash Flows From Investing Activities:
     Additions to capitalized software development costs                   (202,506)      (941,968)
     Additions to property and equipment, net of minor disposals            (74,528)      (138,037)
     Proceeds from disposals of property and equipment                       12,490            -0-
                                                                        -----------    -----------
              Net Cash Used In Investing Activities                        (264,544)    (1,080,005)
                                                                        -----------    -----------
Cash Flows From Financing Activities:
     Net proceeds from stock subscriptions                                1,520,000            -0-
     Proceeds from common stock subscriptions                             1,500,000            -0-
     Increase (decrease) in note payable to bank                         (2,713,425)       637,000
     Payment of trade notes payable                                        (906,889)           -0-
     Payments of long-term debt                                            (332,489)      (367,508)
     Payment of deferred financing fees                                     (77,000)           -0-
     Proceeds from exercise of options and warrants                             -0-         33,905
                                                                        -----------    -----------
              Net Cash Provided By (Used In) Financing Activities        (1,009,803)       303,397
                                                                        -----------    -----------
Foreign Currency Translation Effect                                          (2,683)           (94)
                                                                        -----------    -----------
Net Increase (Decrease) In Cash and Cash Equivalents                        (16,656)       288,438
Cash and Cash Equivalents at Beginning of Period                            106,730        454,765
                                                                        -----------    -----------
Cash and Cash Equivalents at End of Period                              $    90,074    $   743,203
                                                                        ===========    ===========

Non-Cash Financing and Investing Activities:
     Conversion of stock subscriptions to common stock                  $ 1,500,000            -0-
     Increase in common stock from conversion of
         convertible promissory notes (Note 3)                          $ 1,023,029            -0-
     Decrease in long-term debt and property resulting from
         adjustment of purchase price                                   $    55,534            -0-

Supplemental Disclosures of Cash Flow Information:
     Cash paid for interest                                             $   295,616    $   340,673
     Cash paid for income taxes                                                 -0-            -0-
</TABLE>

                                       3
<PAGE>   5





ITEM 1.       FINANCIAL STATEMENTS - CONTINUED

                      NEMATRON CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
        FOR THE THREE-AND SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998

NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries, Nematron
Ltd., a United Kingdom corporation, and NemaSoft, Inc. ("NemaSoft") and
Imagination Systems, Inc., ("ISI") both Michigan corporations. All significant
intercompany transactions and balances have been eliminated in consolidation.

In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-KSB and amendments
thereto, and in the transition report for the three months ended December 31,
1998.

Certain reclassifications have been made to the fiscal 1998 presentation to
conform to classifications used in fiscal 1999.

The Company has changed its fiscal year end from September 30 to December 31,
and filed a transition report for the three month period ended December 31,
1998.

The results of operations for the three- and six-month periods ended June 30,
1999 and 1998 are not necessarily indicative of the results to be expected for
the full year.


NOTE 2 - INVENTORIES

Inventories consist of the following at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>


                                                    JUNE 30, 1999   DECEMBER 31, 1998

<S>                                                    <C>            <C>
Purchased parts and accessories                        $1,279,845     $1,142,431
Work in process                                           151,319        307,762
Finished goods, demo units and service stock              268,173        434,142
                                                       ----------     ----------

    Total Inventory                                    $1,699,337     $1,884,335
                                                       ==========     ==========
</TABLE>


NOTE 3 - CONVERTIBLE PROMISSORY NOTES

         In December 1998, the Company issued convertible promissory notes (the
"Notes") in the aggregate principal amount of $1 million with 18 investors in a
private placement (collectively, the "Note Holders") as the first stage of a
capital transaction, under which the Company raised a total of approximately $4
million of equity. The Notes bore interest at the rate of seven percent (7%) per
annum, were due and payable, with accrued interest, on the later of March 31,
1999 or 5 days following the date of shareholder approval of the capital
transaction. The Notes were not transferable without the Company's consent. The
Notes and accrued interest thereon were convertible by

                                       4
<PAGE>   6




the Note Holders into Common Stock at $0.25 per share (the "Conversion Price").
In February and March 1999, certain Note Holders converted $169,863 of Notes and
received 679,450 shares of Common Stock. On April 7, 1999, following shareholder
approval of the capital transaction on April 6, 1999, the remaining $830,137 of
Notes and $23,029 of accrued interest thereon were converted into 3,412,664
shares Common Stock.


NOTE 4 - SHORT-TERM AND LONG-TERM DEBT


The Company has entered into various amendments, through April 23, 1999, to the
September 1998 loan agreements with its primary bank lender which provide, among
other things, for a modification of certain terms of the Term Note, two
Equipment Notes and a Revolving Credit Note (the "Bank Agreements").

Under the terms of the Bank Agreements, the amount available under the Revolving
Credit Note was reduced from $5,000,000 to $4,000,000 on April 7, 1999,
following the private placement of common stock on the same date. The credit
availability is limited by a borrowing formula which allows for advances up to a
maximum of the sum of 80% of eligible domestic and foreign accounts receivable,
plus 35% of inventory, less the amount of letters of credit issued by the
Company. Prior to the private placement, the formula also included a Permitted
Overadvance of $1,100,000. The interest rate on the credit line borrowings is at
the bank's prime interest rate plus 2.0% (9.75% effective rate at June 30,
1999). Amounts borrowed under the line of credit are due in full on October 31,
1999. The Company intends to replace the current Bank Agreements with a
borrowing arrangement, on terms no less restrictive than the current Bank
Agreements, with a different senior bank lender prior to October 31, 1999.

Long-term debt includes the following debt instruments at June 30, 1999, and
December 31, 1998:
<TABLE>
<CAPTION>

                                                    JUNE 30, 1999  DECEMBER 31, 1998

<S>                                                  <C>            <C>
Mortgage loan payable to bank                        $ 1,869,318    $ 1,956,474
Term note payable                                      1,020,000      1,170,000
Capitalized lease obligations and other notes            476,564        632,801
                                                     -----------    -----------

    Total long-term debt                               3,364,882      3,759,275

Less current maturities                               (1,564,185)    (1,576,492)
                                                     -----------    -----------

Long-term debt, less current maturities              $ 1,807,067    $ 2,182,783
                                                     ===========    ===========
</TABLE>

The mortgage loan agreement contains covenants that require the Company to
maintain a minimum tangible net worth and a minimum debt-to-equity ratio. The
Company is not in compliance with these covenants; however, the Company's
mortgage lender has waived these defaults through October 1, 1999.

The Bank Agreements include various affirmative and negative covenants, the most
restrictive of which are the prohibition of dividend payments and a requirement
to maintain a specified level of adjusted net income, as defined. The Company is
in compliance with these restrictive covenants. The borrowings under the Bank
Agreements are due October 31, 1999. All borrowings under the Bank Agreements,
totaling $1,269,420 and $1,487,017 at June 30, 1999 and December 31, 1998,
respectively, are included in current maturities of long-term debt. The Company
intends to replace these borrowings with a new lender prior to the expiration
date of the Bank Agreements.


NOTE 5 - TAXES ON INCOME

The current tax benefit computed for the three- and six-month periods ended June
30, 1999 and 1998 reflect the tax benefit associated with the amortization of
non-deductible goodwill and other intangible assets during the same periods.

                                       5
<PAGE>   7

The Company has net operating loss carryforwards ("NOLs") of approximately
$19,400,000, which may be applied against future taxable income. The NOLs expire
beginning 2003 and run through 2013. Utilization of these NOLs is subject to
annual limitations under current Internal Revenue Service regulations. The
Company has established a valuation allowance for the estimated amount of the
total limitation on the utilization of the NOLs.


NOTE 6 - EARNINGS PER SHARE

Earnings per share ("EPS") for the three- and six-month periods ended June 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>

                                                   FOR THE THREE-MONTH PERIOD ENDED JUNE 30,
                                                  -----------------------------------------
                                                 1999                                   1998
                                 ----------------------------------------------------------------------------------
                                    Income                       Per        Income                          Per
                                    (Loss)        Shares        Share       (Loss)         Shares          Share
                                  (Numerator)  (Denominator)    Amount    (Numerator)   (Denominator)     Amount
                                   ---------    -----------     ------     ---------     -----------      ------
<S>                              <C>            <C>          <C>          <C>              <C>         <C>
BASIC EPS:
Net income (loss)                $   276,351    12,097,342   $   0.02     $(2,343,433)     5,352,797   $    (0.44)
EFFECT OF DILUTIVE SECURITIES:
Convertible promissory
notes                                  2,106       318,954       0.00
Options                                            743,272       0.00              -0-            -0-        0.00
                                 -----------   -----------   --------     -----------    -----------   ----------

DILUTED EPS:
Net income available
to common shareholders           $   278,457    13,159,568   $   0.02     $(2,343,433)     5,352,797   $    (0.44)
                                 ===========   ===========   ========     ===========    ===========   ==========

</TABLE>

<TABLE>
<CAPTION>

                                                   FOR THE SIX-MONTH PERIOD ENDED JUNE 30,
                                                   ---------------------------------------
                                                 1999                                 1998
                                 ----------------------------------------------------------------------------------
                                     Income                       Per          Income                      Per
                                     (Loss)        Shares        Share         (Loss)       Shares        Share
                                   (Numerator)  (Denominator)    Amount       (Numerator) (Denominator)   Amount
                                    ---------    -----------     ------        ---------   -----------    ------
<S>                              <C>             <C>         <C>            <C>           <C>            <C>
BASIC EPS:
Net income (loss)                $   489,141     8,874,221   $      0.06    $(3,474,592)    5,347,583    $  (0.65)

EFFECT OF DILUTIVE SECURITIES:
Convertible promissory
notes                                 24,946     2,513,815         (0.01)
Options                                  -0-       479,715         (0.01)           -0-           -0-        0.00
                                 -----------   -----------   -----------    -----------     ---------    --------

DILUTED EPS:
Net income available
to common shareholders           $   514,087    11,867,751   $      0.04    $(3,474,592)    5,347,583    $  (0.65)
                                 ===========   ===========   ===========    ===========     =========    ========



</TABLE>

                                       6
<PAGE>   8

For the three-month period ended June 30, 1999, 478,856 options and 322,676
warrants were outstanding but were not included in the computation of diluted
EPS because the exercise prices of the excluded options and warrants were
greater than the average market price of the common shares during the period.
These options expire on various dates between 2003 and 2009, and the warrants
expire between February 2000 and October 2002. For the three month period ended
June 30, 1998, 860,754 options and 322,676 warrants were outstanding but were
not included in the computation of diluted EPS because the inclusion of these
securities would have an antidilutive effect on loss per share during the
three-month period ended June 30, 1998. These options expire on various dates
between 2003 and 2009, and these warrants expire between February 2000 and
October 2002.

For the six-month period ended June 30, 1999, 865,747 options and 322,676
warrants were outstanding but were not included in the computation of diluted
EPS because the exercise prices of the excluded options and warrants were
greater than the average market price of the common shares during the period.
These options expire on various dates between 2003 and 2009, and the warrants
expire between February 2000 and October 2002. For the six- month period ended
June 30, 1998, 860,754 options and 322,676 warrants were outstanding but were
not included in the computation of diluted EPS because the inclusion of these
securities would have an antidilutive effect on loss per share during the
six-month period ended June 30, 1998. These options expire on various dates
between 2003 and 2009, and these warrants expire between February 2000 and
October 2002.

In July 1999, the Company issued a total of 80,000 shares of Common Stock in
connection with the exercise of outstanding options, all of which have been
accounted for in the diluted EPS computation for the three- and six-month
periods ended June 30, 1999. Additionally, in July 1999, the Company issued a
total of 615,850 options and option holders forfeited a total of 203,000
options. None of the newly issued options or the forfeited options would have
been included in the diluted EPS computation for the three- or six-month periods
ended June 30, 1999.


NOTE 7 - CONTINGENCIES

         On May 8, 1998, a lawsuit was filed against the Company in the District
Court for the Southern District of New York, and in December 1998, the case was
transferred to the United States District Court for the Eastern District of
Michigan. The lawsuit named as defendants the Company, certain of its officers
and directors, its former independent auditor and the underwriter for the
Company's initial public offering. Plaintiffs claimed that the defendants
violated securities laws and common law based on allegations that defendants
made untrue statements of material facts and that they omitted material facts
necessary in order to make the statements not misleading. The complaint sought
unspecified damages and costs. In April 1999, the Court granted the Company's
motion to dismiss the suit, and the time period allowed for plaintiffs' appeal
has expired.


NOTE 8 - CHANGES IN COMMON STOCK AUTHORIZED, ISSUED AND OUTSTANDING

         On April 6, 1999 the Company's shareholders approved a two stage
capital transaction. Stage one included the issuance of $1,000,000 of
Convertible Notes, as described in Note 3 above, and stage two included the
exercise of options included in such Notes and the private placement of
securities. In February and March 1999, certain note holders converted $169,863
of Notes and received 679,450 shares of Common Stock. Following shareholder
approval, the remaining $830,137 of Notes and $23,029 of accrued interest
thereon were converted into 3,412,664 shares of Common Stock. As a result of the
completion of the first stage of the capital transaction, a total of 4,092,114
shares of Common Stock were issued. On April 6, 1999, the Company completed the
second stage of the capital transaction. As a result thereof, the Company issued
a total of 3,080,000 shares of Common Stock at $1.00 per share upon the exercise
of the options and the private placement. (See Note 3).

         On April 6, 1999, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to increase the number of authorized
shares of Common Stock from 15 million to 30 million.

                                       7
<PAGE>   9
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

THREE- AND SIX - MONTH PERIODS ENDED JUNE 30, 1999 COMPARED WITH THE
THREE- AND SIX - MONTH PERIODS ENDED JUNE 30, 1998

         Net revenues for the three- and six-month periods ended June 30, 1999
increased $2,181,000 (57.9%) and $3,044,000 (34.9%), respectively, to $5,949,000
and $11,755,000, respectively, compared to the same periods last year. The
revenue increases are primarily attributable to increases in sales of bundled
Industrial Control Computers under a major supply program with a major
automotive company, partially offset by slightly lower sales of software
products. Management expects that net revenues for the last six months of 1999
will also increase compared to the year earlier period, based on existing
scheduled production releases, expected shipments under the current supply
contract and the current backlog.

         Gross profits for the three- and six-month periods ended June 30, 1999
increased $1,304,000 (242.17%) and $1,638,000 (78.9%), respectively, to
$1,843,000 and $3,713,000, respectively, compared to the same periods last year.
Gross profit as a percentage of net revenues for the three- and six-month
periods ended June 30, 1999 were 31.0% and 31.6%, respectively, compared to
14.3% and 23.8% in the same periods last year. The improvement in gross profit
percentage results from both fixed cost and variable product cost reductions and
from a higher percentage of sales of higher margin bundled hardware/software
products in the current periods compared to the same periods last year.
Management expects that gross profit margins will remain relatively constant
throughout the year as the mix of sales in the remaining quarters of 1999 is
expected to be similar to the sales mix experienced in the first six months of
the year, based on the current backlog.

         Product development expenses for the three- and six-month periods ended
June 30, 1999 decreased $76,000 (28.4%) and $119,000 (23.6%), respectively, to
$192,000 and $383,000, respectively, compared to the same periods last year. The
decrease is attributable to a smaller development staff and reduced development
efforts in the current periods compared to a year ago. Management expects that
product development expenses will increase slightly in the remaining quarters of
1999 as staff and development efforts are planned to increase above current
levels to develop and release new products in 1999 and 2000.

         Selling, general and administrative expenses for the three- and
six-month periods ended June 30, 1999 decreased $1,173,000 (47.1%) and
$2,308,000 (47.6%) to $1,318,000 and 2,543,000, respectively, compared to the
comparable periods last year. Together with product development costs, these
operating expenses decreased as a percentage of net revenue to 25.4% and 24.9%
for three- and six-month periods ended June 30, 1999, compared to 73.2% and
61.5% in the comparable periods last year. The decrease in selling, general and
administrative expenses resulted primarily from lower staff levels, the effects
of closing of satellite offices during the last nine months, and the effects of
cost controls during the current periods. Management expects that selling,
general and administrative expenses will increase in the remaining quarters of
1999 because of expanded marketing and sales activities, but that such expenses
will decrease as a percentage of net revenues as net revenues are expected to
increase by a greater amount than the expense increase for the remaining
quarters of 1999.

         Interest expense for the three- and six-month periods ended June 30,
1999 decreased $112,000 (62.4%) and $22,000 (6.6%), respectively, to $68,000 and
$317,000, respectively, compared to $180,000 and $340,000 for the comparable
periods last year. These decreases result from lower average borrowing levels,
most notably in the three-month period ended June 30, 1999 because of the
paydown of line of credit borrowings following the April 6, 1999 capital
infusion.

         Sundry expenses for the three- and six-month periods ended June 30,
1999 and 1998 were not significant for any period presented.

                                       8
<PAGE>   10
YEAR 2000 ISSUE

         The Year 2000 Issue ("Y2K") is the result of certain computer programs
being written using two digits rather than four digits to define the applicable
year. Computer systems with a Y2K problem will be unable to interpret dates
beyond the year 1999, which could cause a system failure or other computer
errors, leading to disruptions in operations. In 1997, the Company began to
assess its Y2K readiness and adopted a three-phase program for Y2K information
systems compliance. Phase I is the identification of systems and products with
which the Company has exposure to Y2K issues. Phase II encompasses the
development and implementation of action plans to be Y2K compliant in all areas
by mid-1999. Phase III includes final testing of each major area of exposure to
ensure compliance. The Company has identified four major areas determined to be
critical for successful Y2K compliance: (1) financial and information system
applications; (2) software products currently sold; (3) third-party
relationships and 4) non-information technology areas such as security,
telephone systems and climate control systems.

         The Company has finished Phase I of its program. The Company has
contacted all significant software suppliers and, because of recent purchases of
its major financial and operational software, believes that its financial and
operational software is Y2K compliant. The Company has also reviewed its
financial and information system applications, as well as its hardware and
software products for Y2K compliance, including the firmware embedded in certain
hardware products. The Company has determined that its major financial and
operational software and the systems used in non-information technology areas,
such as security, telephone systems and climate control systems, are Y2K
compliant. The Company has used its employee engineers and others in its review
and testing procedures.

         The Company has one older software product, used by purchasers of the
product for monitoring and testing in a test cell environment (not related to
machine control) which had to be modified to correct a Y2K problem. The
modification has been completed at a cost of approximately $30,000, all of which
related to the salary and benefits of software development employees of the
Company, and such cost was funded from working capital. The Company has notified
its customers that a solution is currently available for purchase.

         The Company has relationships with, and is to varying degrees dependent
upon, various third parties that provide funds, information, goods and services
to the Company. These include the Company's bank lender, utility providers,
stock transfer agent, and suppliers of components. The Company is attempting,
through informal contacts, to assess the compliance of these third parties.
While not all parties have informed the Company as to their status, the most
significant of these third parties have represented that their systems and
products are Y2K compliant. The Company will continue with this assessment in
the next two quarters of 1999. The Y2K compliance of the systems of these third
parties is outside the Company's control and there can be no assurance that
these third parties will be Y2K compliant.

         Because the Company expects that the systems within its control will be
Y2K compliant before the end of 1999, the Company believes that the most
reasonably likely worst case scenario is a compliance failure by one or more of
the third parties described above. Such a failure would likely have an effect on
the Company's business, financial condition and results of operations. The
magnitude of that effect, however, cannot be quantified at this time because of
variables such as the type and importance of the third party, the possible
effect on the Company's operations and the Company's ability to respond. Thus,
there can be no assurance that there will not be a material adverse effect on
the Company if such third parties do not remediate their systems in a timely
manner and in a way that is compatible with the Company's systems.

         As a result, the Company will develop contingency plans that assume
some estimated level of noncompliance by, or business disruption to, these third
parties. The Company intends to have contingency plans developed by the end of
the third quarter of 1999 for third parties determined to be at high risk of
noncompliance or business disruption or whose noncompliance or disruption, while
not high risk, is considered likely to materially affect the Company. The
contingency plans will be developed on a case-by-case basis, and may include
plans for switching to Y2K compliant suppliers.

                                       9
<PAGE>   11
         Judgments regarding contingency plans are subject to many uncertainties
and there can be no assurance that the Company will correctly anticipate the
level, impact or duration of noncompliance or that its contingency plans will be
sufficient to mitigate the impact of any noncompliance. Some material adverse
effect to the Company may result despite such contingency plans.

         To date, the Company has expended approximately $55,000 in incremental
costs to assess and remediate Y2K problems. Existing engineering and application
support and other Company personnel have expended these efforts. These costs
have been expensed as incurred. The Company estimates additional Y2K remediation
costs of $15,000 incrementally over the next two quarters. Estimates of time,
cost and risks are based on currently available information. Developments that
could affect estimates include, without limitation, the availability of trained
personnel, the ability to locate and correct all noncompliant systems,
cooperation and remediation success of third parties material to the Company,
and the ability to correctly anticipate risks and implement suitable contingency
plans in the event of system failures at the Company or third parties.

LIQUIDITY AND CAPITAL RESOURCES

         The Company is party to a series of agreements with its primary bank
lender under which it has a term note, two equipment notes and a bank line of
credit. The bank line of credit permits borrowing up to $4,000,000, subject to
an availability formula based upon a percentage of eligible accounts receivable
and inventory, reduced by letters of credit issued by the Company. At July 31,
1999, approximately $475,000 was outstanding on the line, $2,000,000 is reserved
in connection with a letter of credit issued to a contract manufacturer, and the
additional line availability was approximately $850,000. The expiration date of
the line of credit has been extended to October 31, 1999. Amounts borrowed under
the facility bear interest at prime plus 2.0% (9.75% effective rate at June 30,
1999).

         Prior to the expiration of the line of credit on October 31, 1999, the
Company plans to change senior lenders and establish a line of credit
with a higher borrowing limit. Based on proposals received from interested
potential senior lenders, the Company is confident that a new senior lender
relationship will be established, and the new agreements will be on terms no
less favorable than current terms. However, there is no assurance that the
Company will accept any of the several senior lender proposals, or if it does,
that the borrowing facilities will be established between the Company and any
potential senior lender.

         As of June 30, 1999, the Company has cash of $90,000 and total working
capital of $832,000. Based upon existing working capital, the existing borrowing
arrangements, the opportunities to replace its current senior lender, and
forecasted revenue and expense levels, management believes that it has
sufficient liquidity to satisfy its liabilities as they become due.

UNCERTAINTIES RELATING TO FORWARD LOOKING STATEMENTS

         "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes "forward-looking statements" (as defined in
the federal securities laws) based on current management expectations. Factors
that could cause future results to differ from these expectations include the
failure of the Company to secure a replacement senior lender, the decline of
economic conditions in general and conditions in the automotive manufacturing
industry in particular, a reduction in demand for the Company's products and
services, decreases in orders under existing contracts, the inability of the
Company to successfully implement its strategy to lead the industrial automation
market migration from closed architecture PLCs to open architecture PC-based
solutions, changes in Company strategy, reductions in product life cycles,
competitive factors (including the introduction or enhancement of competitive
products), pricing pressures which result in materially reduced selling prices
for the Company's products, shifts in sales mix to less profitable products, raw
material price increases or unavailability, delays in introduction of planned
hardware and software products, software defects and latent technological
deficiencies in new products, changes in operating expenses, fluctuations in
foreign exchange rates, the inability to attract or retain sales, marketing and
engineering talent, changes in customer requirements, unexpected Y2K issues in
the Company's products or systems, evolving industry standards, and any
additional factors described in the Company's other reports filed with the
Securities and Exchange Commission.

                                       10
<PAGE>   12
                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

         On May 8, 1998, a lawsuit was filed by certain shareholders against the
Company in the District Court for the Southern District of New York, and in
December 1998, the case was transferred to the United States District Court for
the Eastern District of Michigan. The lawsuit named as defendants the Company,
certain of its officers and directors, its former independent auditor and the
underwriter for the Company's initial public offering. Plaintiffs claimed that
the defendants violated securities laws and common law based on allegations that
defendants made untrue statements of material facts and that they omitted
material facts necessary in order to make the statements not misleading. The
complaint sought unspecified damages and costs. In April 1999, the Court granted
the Company's motion to dismiss the suit, and the time period allowed for
plaintiffs appeal has expired.

         On March 3, 1999, the Company filed suit in United State District Court
for the Eastern District of Virginia - Norfolk Division. The suit was filed
against the Company's former president, Mr. Frank Logan, and Chesapeake Bay
Systems ("CBS"), a newly established entity controlled by Mr. Logan, seeking a
preliminary injunction requiring CBS to deliver to Nematron certain software and
other materials owned by Nematron, and seeking damages related to a breach of
contract by CBS, a breach of fiduciary duty by Mr. Logan, and tortious
interference with a contract by Mr. Logan and CBS. On April 8, 1999, Mr. Logan
and CBS filed a counterclaim against the Company and its president in the same
court alleging tortious interference by certain directors and officers of
Nematron with a contract between Mr. Logan, CBS and Nematron, and that Nematron
and the Company's current president committed acts of libel and defamation of
Mr. Logan. The damages and punitive awards sought by Mr. Logan and CBS exceeded
$1 million. Mr. Logan and CBS filed a similar libel and defamation action in the
Circuit Court for the City of Virginia Beach, Virginia on or about April 5,
1999. By March 31, 1999, CBS delivered to Nematron all software and other
materials demanded by Nematron. On June 30, 1999, the parties agreed to settle
all litigation, and the courts dismissed such legal actions in July 1999. The
settlement awards to the parties were insignificant.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)      Following the receipt of shareholder approval on April 6, 1999 of a
         proposal to increase the number of authorized shares of Common Stock,
         the Company filed with the State of Michigan an amendment to its
         Article of Incorporation to increase the authorized shares of Common
         Stock from 15 million to 30 million.

(c)      On April 7, 1999, following the receipt of shareholder approval, the
         Company issued 3,080,000 shares of its Common Stock in a private
         placement transaction for a total of $3,080,000 in cash. The Company
         issued the Common Stock to accredited investors, including investment
         funds, wealthy individuals and directors of the Company, without
         registration under the Securities Act of 1933, as amended (the "Act"),
         in reliance upon Section 4(2) of the Act and Regulation D promulgated
         thereunder. The Company relied upon this exemption based upon the
         limited number of purchasers, the provision of financial and other
         information concerning the Company to the purchasers, investment
         representations made by the purchasers, the lack of general
         solicitation, and actions taken by the Company to restrict resale of
         the securities without registration, including the placement of
         restrictive legends on the share certificates.

         In addition, on April 7, 1999 the Company issued 3,412,664 shares of
         its Common Stock at $.25 per share upon conversion by the holders of
         $3,320,550 principal amount of its convertible promissory notes issued
         as of December 1, 1998 and $92,114 of accrued interest on such notes.
         The Company issued the Common Stock without registration under the Act
         in reliance upon Section 3(a)(9) of the Act. The Company relied upon
         this exemption because the issuance was an exchange of securities
         exclusively with its existing security holders and no commission or
         other remuneration was paid or given directly or indirectly for
         soliciting the exchange.

         In connection with the private placement of Common Stock and
         convertible promissory notes, the Company issued to its placement
         agent, Gregory J. Schwartz and Company, effective April 6, 1999, an
         option to purchase 80,000 shares of Common Stock at $.25 per share at
         any time prior to April 30, 2009 and an option to purchase 80,000
         shares of Common Stock at $1.00 per share at any time prior to April
         30, 2009. The Company issued the options without registration under the
         Securities Act of 1933, as amended (the "Act"), in reliance upon
         Section 4(2) of the Act. The Company relied upon this exemption based
         upon the limited number of purchasers, the provision of financial and
         other information concerning the Company to the purchaser, investment
         representations made by the purchaser, the lack of general
         solicitation, and actions taken by the Company to restrict resale of
         the options and the shares to be acquired upon exercise thereof,
         including the placement of restrictive legends on the share
         certificates to be issued upon exercise.

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

On April 6, 1999, the Company held its Annual Meeting of Shareholders. There
were five matters voted on, which were the 1) the election of directors; 2)
approval of the potential issuance of approximately 7.3 million shares of Common
Stock pursuant to a capital raising transaction; 3) approval of a proposal to
amend the Articles of Incorporation to increase the number of authorized shares
of Common Stock from 15 million to 30 million; 4) approve a proposal to amend
the Article of Incorporation to declassify the Board of Directors and reduce the
terms for directors from three years to one year; and 5) approve the Nematron
Corporation Long-Term Incentive Plan. All director nominees were elected and
proposals 2, 3 and 5 were approved. Item 4, which required approval of holders

                                       11
<PAGE>   13
of at least 80% of the outstanding shares of Common Stock, was not approved. The
following table sets forth the results of the voting on the matters voted upon.

1.   Election of Directors:
<TABLE>
<CAPTION>

                              Votes            Votes
    Nominees                   For            Against          Total

<S>                          <C>              <C>            <C>
    Hugo E. Braun            4,861,878        253,039        5,114,917
    Matthew S. Galvez        5,071,525         43,392        5,114,917
</TABLE>


<TABLE>
<CAPTION>

                              Votes            Votes                       Broker
                               For            Against        Abstained    Non-Votes         Total
<S>                          <C>               <C>             <C>         <C>            <C>
2. Approval of issuance of additional shares of Common Stock:

                             2,942,863         87,387          12,011      2,072,656      5,114,917

3.   Approval of amendment to the Article of Incorporation to increase number of
     authorized shares of Common Stock:

                             4,946,733        107,234           7,827         53,123      5,114,917

4. Approval of amendment to the Article of Incorporation to declassify the Board
and reduce Board terms:

                             2,828,889        244,166          22,329      2,019,533      5,114,917

5.       Approval of Long-Term Incentive Plan:

                             2,933,775        137,536          23,866      2,019,740      5,114,917
</TABLE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits included herewith are set forth on the Index to Exhibits, which is
incorporated herein.

(b) The Company filed no reports on Form 8-K during the quarter ended June 30,
1999.

                                       12
<PAGE>   14

                                   SIGNATURE


In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                    NEMATRON CORPORATION

                                    BY:

AUGUST 10, 1999                     /S/ MATTHEW S. GALVEZ
-------------------------------     ------------------------------------------
DATE                                MATTHEW S. GALVEZ, PRESIDENT & COO
                                    (DULY AUTHORIZED OFFICER)

AUGUST 10, 1999                     /S/ DAVID P. GIENAPP
-------------------------------     -------------------------------------------
DATE                                DAVID P. GIENAPP, EXECUTIVE VICE PRESIDENT -
                                    FINANCE &ADMINISTRATION
                                    (CHIEF ACCOUNTING OFFICER)

                                       13
<PAGE>   15






                                INDEX TO EXHIBITS


Exhibit Number            Description of Exhibit
--------------            ----------------------


        3.0           Certificate of Amendment to Articles of Incorporation
                      dated June 30, 1999

       10.1           Employment Agreement, entered into effective October 1,
                      1998, by and between Matthew S.Galvez and the Company,
                      dated July 26, 1999

       10.2           Nonqualified Stock Option Agreement between Matthew S.
                      Galvez and the Registrant entered into effective October
                      13, 1998

       10.3           Nonqualified Stock Option Agreement between Matthew S.
                      Galvez and the Registrant entered into effective December
                      3, 1998

       10.4           Third Amendment to Repayment Agreement and Sixth Amendment
                      to Loan Agreement as of April 23, 1999 by and between
                      KeyBank National Association and the Company, filed as
                      Exhibit 10.2 to the Registrant's Form 10-QSB for the
                      quarterly period ended March 31, 1999 and incorporated
                      herein by reference

       27             Financial Data Schedule


                                       14