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

                                 FORM 10-KSB/A-2
(Mark One)
     [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
     For the fiscal year ended SEPTEMBER 30, 1997
                                       or
     [  ] 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
                 (Name of small business issuer in its charter)

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

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

                                 (734) 994-0501
                           (Issuer's telephone number)

                  Securities registered under Section 12(b) of
                            the Exchange Act: NONE
         Securities registered under Section 12(g) of the Exchange Act:
                           COMMON STOCK, NO PAR VALUE
                                (Title of class)

         Check whether the issuer (1) 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 (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

         Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

         Issuer's revenues for its most recent fiscal year:  $20,875,397

         The aggregate market value of the voting stock held by non-affiliates
as of December 20, 1997, computed by reference to the closing price of such
stock on such date as quoted on the Nasdaq Stock Market National Market, was
approximately $17,220,000. For purposes of this computation only, all executive
officers, directors and beneficial owners of more than 5% of the outstanding
Common Stock are assumed to be affiliates.

         The number of shares outstanding of the issuer's Common Stock on 
December 20, 1997 was 5,339,538.


         TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT [ ] Yes [ X ] No
================================================================================
<PAGE>   2

The Registrant hereby amends its Form 10-KSB for the fiscal year ended September
30, 1997 to change Item 7 as set forth below:

ITEM 7          FINANCIAL STATEMENTS.



                      NEMATRON CORPORATION AND SUBSIDIARIES

                                Table of Contents



<TABLE>
<CAPTION>
                                                                            Page(s)
                                                                            -------
<S>                                                                          <C>
Independent Auditors' Report                                                   1

Consolidated Balance Sheet as of September 30, 1997                            2

Consolidated Statements of Operations for the years ended
     September 30, 1996 and 1997                                               3

Consolidated Statements of Stockholders' Equity for the years ended
     September 30, 1996 and 1997                                               4

Consolidated Statements of Cash Flows for the years ended
     September 30, 1996 and 1997                                               5

Notes to Consolidated Financial Statements                                     6-25

</TABLE>



                                       2
<PAGE>   3
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS




The Board of Directors
Nematron Corporation 


We have audited the accompanying consolidated balance sheet of Nematron
Corporation and subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 1996 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nematron Corporation
and subsidiaries as of September 30, 1997, and the results of their operations
and their cash flows for the years ended September 30, 1996 and 1997, in
conformity with generally accepted accounting principles.



/s/ Grant Thornton LLP

July 13, 1998
(except for Note 14, as to
which the date is July 31, 1998)
Detroit, Michigan


                                       3
<PAGE>   4


                      NEMATRON CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheet
                               September 30, 1997


<TABLE>
<S>                                                                                                      <C>          
                                  Assets (Notes 7 and 8)
Current assets:
    Cash and cash equivalents                                                                            $   1,142,988
    Accounts receivable, net of allowance for doubtful accounts of $410,000                                  4,205,196
    Inventories (note 6)                                                                                     4,399,426
    Prepaid expenses and other current assets                                                                  528,471
                                                                                                         -------------
                  Total current assets                                                                      10,276,081

Property and equipment:
    Land                                                                                                       117,000
    Building and improvements                                                                                2,279,598
    Equipment                                                                                                5,732,795
                                                                                                         -------------
                                                                                                             8,129,393
Less accumulated depreciation                                                                               (3,865,092)
                                                                                                         -------------
                  Net property and equipment                                                                 4,264,301

Other assets:
    Software and related development costs, net of accumulated amortization of $1,619,919 (note 4)           2,724,819
    Other intangible assets, net of accumulated amortization of $516,168 (note 4)                            3,008,547
                                                                                                         -------------
                  Net other assets                                                                           5,733,366
                                                                                                         -------------
 
                  Total assets                                                                           $  20,273,748
                                                                                                         =============

                          Liabilities and Stockholders' Equity

Current liabilities:
    Note payable to bank (note 7)                                                                        $   1,141,000
    Current maturities of long-term debt (note 8)                                                              681,231
    Accounts payable                                                                                         1,711,936
    Other accrued liabilities                                                                                1,818,138
                                                                                                         -------------
                  Total current liabilities                                                                  5,352,305

Long-term debt, less current maturities (note 8)                                                             3,595,378
Deferred tax liability                                                                                       1,000,000
                                                                                                         -------------

                  Total liabilities                                                                          9,947,683

Stockholders' equity:
    Common stock, no par value; 15,000,000 shares authorized, 5,329,938 shares issued and
       outstanding (notes 10 and 11)                                                                        21,589,413
    Foreign currency translation adjustment                                                                     (7,571)
    Accumulated deficit                                                                                    (11,255,777)
                                                                                                         -------------
                  Total stockholders' equity                                                                10,326,065
                                                                                                         -------------

Commitments and contingencies (note 12)

                  Total liabilities and stockholders' equity                                             $  20,273,748
                                                                                                         =============
</TABLE>

See accompanying notes to consolidated financial statements.



                                       4
<PAGE>   5


                      NEMATRON CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Operations
                 For the years ended September 30, 1996 and 1997

<TABLE>
<CAPTION>
                                                                                         1996               1997
                                                                                         ----               ----
<S>                                                                                 <C>                <C>           
Net revenues                                                                        $  20,923,613      $   20,875,397
Cost of revenues, including non-recurring charges of $4,768,687
      in 1997 (note 4)                                                                 12,190,759          17,668,774
                                                                                    -------------      --------------

                  Gross profit                                                          8,732,854           3,206,623

Operating expenses:
    Product development costs                                                           1,448,540           2,151,698
    Selling, general, and administrative expenses                                       6,379,718           9,357,460
    Non-recurring charges (note 4)                                                                            727,582
    Write-off of in-process research and development costs relating to the
       Intec Controls Corp. acquisition (note 3)                                                            1,655,000
    Write-off of in-process research and development costs relating to the
       Virtual-Time Software, Inc., acquisition (note 3)                                                      400,000
                                                                                    -------------      --------------

                  Total operating expenses                                              7,828,258          14,291,740
                                                                                    -------------      --------------

Operating income (loss)                                                                   904,596         (11,085,117)
                                                                                    -------------      --------------

Other income (expense):
    Interest and other income, net                                                         70,189             103,659
    Interest expense                                                                     (512,896)           (361,894)
    Foreign currency loss                                                                 (10,199)           (155,027)
                                                                                    -------------      --------------

                  Total other expense                                                    (452,906)           (413,262)
                                                                                    -------------      --------------

Income (loss) before income taxes                                                         451,690         (11,498,379)

Income taxes (note 9)                                                                           0                   0
                                                                                    -------------      --------------

                  Net income (loss)                                                 $     451,690      $  (11,498,379)
                                                                                    =============      ==============

Income (loss) per share:
    Primary                                                                         $        0.13      $        (2.33)
                                                                                    =============      ==============

    Fully diluted                                                                   $        0.12
                                                                                    =============

Weighted average shares outstanding - primary                                           3,580,057           4,933,939
                                                                                    =============      ==============

Weighted average shares outstanding - fully diluted                                     3,797,490
                                                                                    =============
</TABLE>


See accompanying notes to consolidated financial statements.

                                       5
<PAGE>   6
               NEMATRON CORPORATION AND SUBSIDIARIES Consolidated
             Statements of Stockholders' Equity For the years ended
                           September 30, 1996 and 1997

<TABLE>
<CAPTION>
                                                                                                 Retained
                                                       Common Stock             Foreign          Earnings
                                                 -------------------------      Currency        (Accumulated
                                                 Shares             Amount    Translation        Deficit)            Total
                                                 ------             ------    -----------        --------            -----

<S>                                            <C>           <C>              <C>             <C>                <C>           
 Balance, October 1, 1995                      2,869,613     $   6,796,193    $  (50,947)     $     (209,088)    $    6,536,158

 Net income for the year ended
    September 30, 1996                                                                               451,690            451,690
 Foreign currency translation effect                                             (34,571)                               (34,571)
 Shares issued pursuant to secondary
    stock offering, net of expenses            1,200,000         9,551,604                                            9,551,604
 Exercise of options                              13,416            36,968                                               36,968
 Exercise of warrants                            475,219         1,188,049                                            1,188,049
                                               ---------     -------------    ----------      --------------     --------------

 Balance, September 30, 1996                   4,558,248        17,572,814       (85,518)            242,602         17,729,898

 Net loss for the year ended
    September 30, 1997                                                                           (11,498,379)       (11,498,379)
 Foreign currency translation effect                                              77,947                                 77,947
 Shares issued pursuant to merger with
    Intec Controls Corp. (note 3)                587,594         3,305,205                                            3,305,205
 Shares issued pursuant to merger with
    Virtual-Time Software, Inc.
    (note 3)                                      67,301           403,806                                              403,806
 Exercise of options, net of 13,083
    shares redeemed                               72,148           136,667                                              136,667
 Exercise of warrants                             44,647           170,921                                              170,921
                                               ---------     -------------    ----------      --------------     --------------

Balance, September 30, 1997                    5,329,938     $  21,589,413    $   (7,571)     $  (11,255,777)    $   10,326,065
                                               =========     =============    ==========      ==============     ==============
</TABLE>






See accompanying notes to consolidated financial statements.

                                       6

<PAGE>   7

                      NEMATRON CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                 For the years ended September 30, 1996 and 1997

<TABLE>
<CAPTION>
                                                                                          1996                      1997
                                                                                          ----                      ----
<S>                                                                                   <C>                      <C>            
Cash flows from operating activities:
    Net income (loss)                                                                 $      451,690           $  (11,498,379)
    Adjustments to reconcile net income (loss) to net cash used in operating
          activities:
       Depreciation and amortization                                                         837,666                6,179,918
       Write-off of in-process research and development costs (note 3)                                              2,055,000
       Debt retirement expense                                                                                        122,340
       Changes in assets and liabilities that provided (used) cash:
          Accounts receivable                                                             (2,828,082)               2,535,869
          Inventories                                                                       (397,915)                 143,617
          Prepaid expenses and other current assets                                         (481,638)                 248,403
          Accounts payable                                                                (1,083,280)                (157,326)
          Other accrued liabilities                                                         (376,418)                (224,832)
                                                                                      --------------           --------------

                  Net cash used in operating activities                                   (3,877,977)                (595,390)
                                                                                      --------------           --------------

Cash flows from investing activities:
    Acquisition of Intec Controls Corp. (note 3)                                                                      281,058
    Acquisition of Virtual-Time Software, Inc., net of $6,327 cash acquired
       (note 3)                                                                                                       (93,673)
    Additions to capitalized software development costs and other intangible
       assets                                                                             (1,171,827)              (2,512,111)
    Additions to property and equipment                                                     (929,730)                (827,861)
                                                                                      --------------           --------------

                  Net cash used in investing activities                                   (2,101,557)              (3,152,587)
                                                                                      --------------           --------------

Cash flows from financing activities:
    Borrowings under long-term debt agreements                                             2,266,081                1,800,000
    Net proceeds (repayments) of note payable to bank                                     (2,450,000)               1,141,000
    Proceeds from sale of common stock and exercise of options and warrants               10,776,621                  307,588
    Repayments of long-term debt                                                            (540,245)              (2,264,350)
    Additions to deferred financing fees                                                    (173,647)                 (39,211)
                                                                                      --------------           --------------

                  Net cash provided by financing activities                                9,878,810                  945,027
                                                                                      --------------           --------------

Foreign currency translation effect on cash                                                  (34,571)                   2,975
                                                                                      --------------           --------------

Net increase (decrease) in cash and cash equivalents                                       3,864,705               (2,799,975)

Cash and cash equivalents at beginning of year                                                78,258                3,942,963
                                                                                      --------------           --------------

Cash and cash equivalents at end of year                                              $    3,942,963           $    1,142,988
                                                                                      ==============           ==============

Supplemental disclosures of cash flow information:
    Cash paid for interest, net of amounts capitalized                                $      519,456           $      344,551
    Cash paid for income taxes                                                                     0                        0

Supplemental disclosures of noncash financing and investing activities:
    Acquisition of equipment under capital lease obligations (notes 8 and 12)                                  $      544,014
</TABLE>

See accompanying notes to consolidated financial statements.

                                       7
<PAGE>   8
                      NEMATRON CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           September 30, 1996 and 1997



(1)    BUSINESS
       --------

       Nematron Corporation (the "Company") designs, manufactures, and markets
       environmentally ruggedized computers and computer displays known as
       industrial workstations, and designs, develops, and markets software for
       worldwide use in factory automation and control and in test and
       measurement environments.

(2)    SUMMARY OF ACCOUNTING PRINCIPLES
       --------------------------------

       Principles of Consolidation

       The accompanying consolidated financial statements include the accounts
       of the Company and its wholly owned subsidiaries--Nematron Europa BV
       ("NEBV"), an inactive Netherlands corporation; Nematron Ltd., a United
       Kingdom corporation acquired in the Intec acquisition; and NemaSoft, Inc.
       ("NemaSoft"), and Imagination Systems, Inc. ("ISI"), Michigan
       corporations formed in 1995 and 1996, respectively. All significant
       intercompany transactions and balances have been eliminated in
       consolidation.

       During the fiscal year ended September 30, 1997, the Company acquired two
       software design and manufacturing companies. Intec Controls Corp.
       ("Intec"), a Massachusetts corporation, was acquired on March 31, 1997,
       and Virtual-Time Software, Inc. ("VTS"), a California corporation, was
       acquired on June 20, 1997. The consolidated operations of the Company for
       1997 include the results of Intec and VTS since the dates of their
       respective acquisitions (see note 3).

       Cash Equivalents

       The Company considers all highly liquid debt instruments with original
       maturities of three months or less at the date of purchase to be cash
       equivalents.

       Inventories

       Inventories are carried at the lower of cost or market. Cost is
       determined by the first in, first out method. Provision is made to reduce
       inventories (including demonstration units) to net realizable value for
       excess and/or obsolete inventories based upon an item-by-item review of
       quantities on hand compared to estimated future usage for sales and
       service.

                                       8
<PAGE>   9
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(2)    SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
       -------------------------------------------

       Property and Equipment

       Property and equipment are stated at cost. Capital leases are recorded at
       the present value of future minimum lease payments and are amortized over
       their primary term. Depreciation is provided over the estimated useful
       lives of the assets, ranging from 3 years for certain factory and office
       equipment to 33 years for the Company's manufacturing facility.
       Depreciation is computed using the straight-line method for financial
       reporting purposes and accelerated methods as promulgated by the IRS for
       tax reporting purposes.

       Software and Related Development Costs

       In accordance with Statement of Financial Accounting Standards No. 86,
       Accounting for the Costs of Computer Software To Be Sold, Leased or
       Otherwise Marketed, certain computer software development costs and
       purchased software technology have been capitalized. Capitalization of
       computer software development costs begins upon establishment of
       technological feasibility. The establishment of technological feasibility
       and the ongoing assessment of recoverability of capitalized computer
       software development costs requires considerable judgment by management
       with respect to certain external factors, including, but not limited to,
       anticipated future gross revenues, estimated economic life, and changes
       in software and hardware technology. The Company continually reviews the
       recoverability of capitalized software costs based on estimated cash
       flows. Software costs are written off, as amortization expense, at the
       time a determination has been made that the amounts are not recoverable.

       During the year ended September 30, 1996, capitalized software and
       related development costs, net of amortization, increased by
       approximately $1,125,000, primarily relating to salaries and other costs
       incurred during the year, offset by approximately $47,000 of amortization
       of capitalized costs. During the year ended September 30, 1997,
       capitalized software and related development costs, net of amortization,
       decreased by approximately $1,701,000. The decrease was due to the
       capitalization of approximately $2,435,000 of salaries and other costs
       incurred during the year, the acquisition of approximately $478,000 of
       costs pursuant to the Intec and VTS acquisitions, offset by approximately
       $553,000 of amortization of capital costs, and the write-off of
       approximately $4,061,000 related to abandoned software projects (see
       notes 3 and 4).

                                       9
<PAGE>   10
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(2)    SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
       -------------------------------------------

       Software and Related Development Costs, Continued

       Amortization of capitalized computer software development costs is
       provided on a product-by-product basis using the greater of the amount
       computed using (a) the ratio that current gross revenues for each product
       bear to the total of current and anticipated future gross revenues for
       that product, or (b) the straight-line method over the remaining
       estimated economic lives of the respective products, ranging from two to
       five years. Amortization for ongoing software projects amounted to
       approximately $47,000 and $553,000 for the years ended September 30, 1996
       and 1997, respectively, and is included in cost of revenues in the
       accompanying consolidated statements of operations.

       Intangible Assets

       Other intangible assets are carried at cost less accumulated
       amortization, which is calculated on a straight-line basis over the
       estimated useful lives of the assets, ranging from five to ten years.
       Amortization was approximately $100,500 and $636,900 for the years ended
       September 30, 1996 and 1997, respectively.

       The carrying value of intangible assets is periodically reviewed, and
       impairments are recognized when the expected future cash flows derived
       from such intangible assets are less than their carrying value.

       Stock Option Plan

       Prior to October 1, 1996, the Company accounted for its stock option plan
       in accordance with the provisions of Accounting Principles Board ("APB")
       Opinion No. 25, Accounting for Stock Issued to Employees, and related
       interpretations. As such, compensation expense was recorded on the date
       of grant only if the current market price of the underlying stock
       exceeded the exercise price. On October 1, 1996, the Company adopted
       Statement of Financial Accounting Standards No. 123, Accounting for
       Stock-Based Compensation ("SFAS 123"), which permits entities to
       recognize as expense over the vesting period the fair value of all
       stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
       allows entities to continue to apply the provisions of APB Opinion No. 25
       and provide pro forma net income and pro forma earnings per share
       disclosures for employee stock option grants as if the fair-value-based
       method defined in SFAS No. 123 had been applied. The Company has elected
       to continue to apply the provisions of APB Opinion No. 25 and provide the
       pro forma disclosure provisions of SFAS No. 123.

                                       10
<PAGE>   11
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(2)    SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
       -------------------------------------------

       Foreign Currency Translation

       In accordance with Statement of Financial Accounting Standards No. 52,
       Foreign Currency Translation, the assets and liabilities of the Company's
       foreign subsidiaries, NEBV and Nematron Ltd., denominated in foreign
       currency, are translated at exchange rates in effect on the balance sheet
       date, and revenue and expenses are translated using a weighted average
       exchange rate during the year. Gains or losses resulting from translating
       foreign currency financial statements are recorded in a separate
       component of stockholders' equity. Gains or losses resulting from foreign
       currency transactions are included in net income (loss).

       Revenue Recognition

       Revenues from product sales are recognized upon shipment. Revenues from
       service and repair of computers are recognized as the services are
       performed. Revenues from software and engineering development are
       recognized as the Company performs the services, in accordance with the
       contract terms. Revenues from extended warranty agreements covering
       software are recognized ratably over the terms of the agreement with the
       customer. Revenues from license agreements are recognized upon delivery
       of the software and performance of all obligations under the applicable
       agreement. The Company has established programs which, under specified
       terms and limited conditions, enable its distributors to return limited
       amounts of product. The effect of these programs is estimated, and
       current-period revenues and cost of revenues are reduced accordingly.

       Research and Development Costs

       Research and development costs are expensed when incurred. These costs,
       representing engineering salaries, fringe benefits, and a portion of the
       Company's overhead, are included in the accompanying consolidated
       statements of operations as a component of product development costs.
       Research and development costs expensed were approximately $1,087,000 and
       $1,615,000 for the years ended September 30, 1996 and 1997, respectively.

       Warranty Costs

       The Company provides for estimated warranty costs as products are
       shipped. Estimated warranty reserves are adjusted currently based upon
       projected levels of warranty repairs and estimated costs of materials,
       labor, and overhead costs to be incurred in meeting warranty obligations.

                                       11
<PAGE>   12


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(2)    SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
       -------------------------------------------

       Income Taxes

       Income taxes are accounted for under the asset-and-liability method.
       Deferred income tax assets and liabilities are computed annually for
       differences between the financial statement and tax bases of assets and
       liabilities that will result in taxable or deductible amounts in the
       future. Such deferred income tax asset-and-liability computations are
       based on enacted tax laws and rates. A valuation allowance is established
       when necessary to reduce deferred income tax assets to the amount
       expected to be realized.

       Earnings (Loss) Per Share

       Earnings (loss) per share are calculated using the weighted average
       number of common shares outstanding during the year, adjusted for the
       assumed conversion of dilutive stock options and warrants. Since a net
       loss was incurred in 1997, no conversion of dilutive stock options and
       warrants was assumed in the loss per share calculation in 1997. In
       computing the per-share effect of assumed conversion in 1996, funds which
       would have been received from the exercise of options and warrants are
       considered to have been used to purchase common shares at an average
       market price for primary earnings per share and at the year-end market
       price for fully diluted earnings per share. The resulting net additional
       common shares are included in the calculation of average shares
       outstanding.

       Fair Value

       Financial instruments of the Company, consisting principally of cash,
       accounts receivable, accounts payable, and debt, are recorded at
       estimated fair value. The estimated fair value amounts have been
       determined by the Company, using available market information and
       available valuation methodologies.

       Use of Estimates

       Management of the Company has made a number of estimates and assumptions
       relating to the reporting of assets and liabilities and the disclosure of
       contingent assets and liabilities to prepare these consolidated financial
       statements in conformity with generally accepted accounting principles.
       Actual results could differ from those estimates. Estimates are used in
       the determination of allowance for doubtful accounts, obsolete and slow
       moving inventory, capitalized software and related development costs,
       intangible assets, and warranty costs.


                                       12

<PAGE>   13


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(2)    SUMMARY OF ACCOUNTING PRINCIPLES, CONTINUED
       -------------------------------------------

       Other Recent Pronouncements

       In 1997, Statement of Financial Accounting Standards No. 128 ("SFAS
       128"), Earnings Per Share, was issued, and is effective for fiscal years
       commencing after December 15, 1997. The future adoption of SFAS 128 is
       not expected to have a material effect on the Company's reported earnings
       per share.

       In 1997, Statement of Financial Accounting Standards No. 130 ("SFAS
       130"), Reporting Comprehensive Income, was issued, and is effective for
       fiscal years commencing after December 15, 1997. The Company will comply
       with the requirements of SFAS 130 in fiscal year 1999.

       In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS
       131"), Disclosures About Segments of an Enterprise and Related
       Information, was issued, and is effective for fiscal years commencing
       after December 15, 1997. The Company will comply with the requirements of
       SFAS 131 in fiscal year 1999.

       On October 27, 1997, the AICPA Accounting Standards Executive Committee
       issued Statement of Position 97-2 (SOP 97-2), Software Revenue
       Recognition. SOP 97-2 is effective for fiscal years commencing after
       December 15, 1997, and is not expected to impact the Company's financial
       position or results of operations.

(3)    ACQUISITIONS
       ------------

       Merger with Intec Controls Corp.

       On March 31, 1997, the Company completed a merger of its wholly owned
       subsidiary, NemaSoft, Inc., with Intec Controls Corp. ("Intec"), a
       Walpole, Massachusetts-based developer of high-performance regulatory
       control software solutions used primarily by process industries. The
       Company recorded this transaction using the purchase method. The total
       purchase price was approximately $3,735,000, including expenses of
       approximately $430,000. Under terms of the merger agreement, the Company
       issued 587,594 shares of its common stock to the former Intec
       shareholders in exchange for 100 percent of the outstanding common stock
       of Intec. The Intec stock was retired, and NemaSoft is the surviving
       entity.

       In addition to the common stock issued, the Company issued warrants to
       the former Intec shareholders to purchase an additional 124,998 shares of
       Company common stock at $6.73 per share. The warrants expire February 20,
       2000.

                                       13
<PAGE>   14
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(3)    ACQUISITIONS, CONTINUED
       -----------------------

       Merger with Virtual-Time Software, Inc.

       On June 20, 1997, the Company completed a merger of its wholly owned
       subsidiary, Imagination Systems, Inc., with Virtual-Time Software, Inc.
       ("VTS"), a Santa Clara, California-based developer of real-time operating
       system products which provide high-speed deterministic performance to
       MicroSoft's Windows (R) operating systems. The Company recorded this
       transaction using the purchase method. The total purchase price was
       approximately $694,000, including expenses of approximately $190,000.
       Under terms of the merger agreement, the Company issued 67,301 shares of
       its common stock and $100,000 to the former VTS shareholders in exchange
       for 100 percent of the outstanding common stock of VTS. The VTS stock was
       retired, and ISI is the surviving entity. In connection with the merger,
       ISI also entered into two-year employment and noncompetition agreements
       with VTS's president, who became an employee of ISI as a result of the
       merger.

       The allocation of total purchase price to assets acquired and liabilities
       assumed as of the respective purchase dates was as follows:

<TABLE>
<CAPTION>
                                                                         Intec                 VTS
                                                                         -----                 ---
<S>                                                                 <C>                  <C>          
               Current assets                                       $     1,005,000      $       6,000
               Software and related development costs                     2,058,000            475,000
               Other intangible assets                                    2,352,000            216,000
               Property and equipment                                       305,000             16,000
               Deferred tax liability                                    (1,000,000)
               Other liabilities                                           (985,000)           (19,000)
                                                                    ---------------      -------------

                          Total purchase price                      $     3,735,000      $     694,000
                                                                    ===============      =============
</TABLE>

       Software and related development costs include acquired in-process
       research and development (R&D). Acquired in-process R&D includes the
       value of products in the development stage and not considered to have
       reached technological feasibility. In accordance with applicable
       accounting rules, acquired in-process R&D is required to be expensed.
       Accordingly, charges of $1,655,000 and $400,000 were recorded at the
       acquisition dates related to the acquisitions of Intec and VTS,
       respectively.

                                       14
<PAGE>   15

                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(3)    ACQUISITIONS, CONTINUED
       -----------------------

       The following unaudited pro forma information presents a summary of
       consolidated results of operations for fiscal 1996 and 1997 of the
       Company, Intec, and VTS as if the acquisitions had occurred as of the
       beginning of 1996, with pro forma adjustments to give effect to
       amortization of software, interest expense on additional borrowings, and
       certain other adjustments, together with related income tax effects.

<TABLE>
<CAPTION>

                                                                                    Year Ended September 30,
                                                                                    ------------------------
                                                                                  1996                     1997
                                                                                  ----                     ----
                                                                              (Unaudited)               (Unaudited)
<S>                                                                         <C>                     <C>               
                  Net revenues                                              $    25,317,404         $       22,825,183
                  Net loss                                                  $    (2,034,301)        $       (9,200,075)
                  Net loss per share                                           $  (0.51)                 $   (1.74)
</TABLE>


(4)    NON-RECURRING CHARGES
       ---------------------

       Non-recurring charges consist of the following:


<TABLE>
<S>                                                                                   <C>            
         Charged to cost of revenues:
            Write-down of software and related development costs                      $     4,061,304
            Write-down of inventories                                                         707,383
                                                                                      ---------------

                                                                                      $     4,768,687
                                                                                      ===============
         Charged to operating expenses:
            Write-down of other intangible assets                                     $       359,406
            Loss on closing of Netherlands office                                             245,836
            Debt retirement expense                                                           122,340
                                                                                      ---------------

                                                                                      $       727,582
                                                                                      ===============
</TABLE>

       In September 1997, the Company wrote down certain software and related
       development costs, inventories and other intangible assets. In
       conjunction with the Company's strategic planning process, analyses were
       prepared to determine if any asset impairment existed as a result of
       changes to the Company's long-term strategic plan. These analyses
       indicated impairment existed due to lower or no planned revenues from
       certain products, and accordingly, assets related to these products were
       written off.

                                       15
<PAGE>   16


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(4)    NON-RECURRING CHARGES, CONTINUED
       --------------------------------

       In September 1997, the Company wrote down certain purchased parts and
       accessories and finished goods inventories related to discounted product
       models, pursuant to results of the Company's strategic planning process.

       During the second quarter of fiscal 1997, the Company elected to close
       its Netherlands office and incurred closure costs of $245,836. Also in
       the second quarter, the Company obtained bank financing in order to repay
       its higher cost subordinated debt. A noncash charge of $122,340 was
       recorded, which relates to the write-off of deferred financing fees on
       the refinanced subordinated debt.

(5)    RELATED PARTY TRANSACTIONS
       --------------------------

       The Company leases its Virginia Beach, Virginia, office building from a
       partnership in which the president and CEO of the Company is a partner.
       Total lease payments made for the years ended September 30, 1996 and
       1997, under the terms of the lease were $77,600 and $79,600,
       respectively.

(6)    INVENTORIES
       -----------

       Inventories are summarized as follows:

<TABLE>
<CAPTION>
                                                                                                  September 30, 
                                                                                                      1997
                                                                                                      ----
<S>                                                                                            <C>            
         Purchased parts and accessories                                                       $     2,928,277
         Finished goods                                                                                320,671
         Work-in-process                                                                               349,069
         Demonstration units                                                                           532,099
         Service stock                                                                                 269,310
                                                                                               ---------------

                         Total inventories                                                     $     4,399,426
                                                                                               ===============
</TABLE>



                                       16

<PAGE>   17
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(7)    NOTE PAYABLE TO BANK
       --------------------

       The Company has a credit facility with a bank providing for a maximum
       amount available of $6,000,000. A total of $1,141,000 was outstanding on
       this facility as of September 30, 1997. The amount available under this
       facility is limited by a borrowing formula which allows for advances up
       to a maximum of the sum of 80 percent of eligible domestic accounts
       receivable plus a maximum of $2,000,000 of eligible foreign receivables,
       plus a maximum of $2,500,000 against certain inventory categories. Based
       upon the borrowing formula, approximately $3,500,000 of the available
       line was eligible for advance at September 30, 1997. The line of credit
       is secured by substantially all assets of the Company and a second
       mortgage on the Company's Ann Arbor facility. The note bears interest at
       the bank's prime interest rate (8.5 percent at September 30, 1997). The
       line of credit includes various affirmative and negative covenants. The
       Company was in violation of certain covenants as of September 30, 1997,
       and obtained a waiver of such violations from the bank.

(8)    LONG-TERM DEBT
       --------------

       Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                                    September 30, 
                                                                                                        1997
                                                                                                        ----
<S>                                                                                               <C>
         Mortgage loan payable to a bank, interest at 9.5% per annum; payable in
             monthly installments of $29,900 through September 2001, at which
             time the remaining principal and any interest thereon is due. The
             loan is collateralized by a first mortgage of the Company's land
             and building in Ann Arbor, Michigan                                                   $     2,156,481
         Term note payable to a bank, interest at LIBOR plus 2.5% per annum; payable in
             monthly installments of $30,000 plus interest through February 2002.  The note
             is collateralized by substantially all assets, other than real property, and a
             third mortgage on the Company's real estate                                                 1,590,000
         Capitalized lease obligations - computer equipment (note 12)                                      474,265
         Capitalized lease obligations - production equipment (note 12)                                     26,536
         Other notes                                                                                        29,327
                                                                                                   ---------------

                        Total long-term debt                                                             4,276,609

        Less current maturities                                                                           (681,231)
                                                                                                   --------------- 
                        Total long-term debt, less current maturities                              $     3,595,378
                                                                                                   ===============
</TABLE>


                                       17

<PAGE>   18

                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(8)    LONG-TERM DEBT, CONTINUED
       -------------------------

       The mortgage loan agreement contains a covenant that requires the Company
       to maintain a minimum tangible net worth and a minimum debt-to-equity
       ratio. The loan agreement with the bank regarding the term note and two
       equipment notes includes various affirmative and negative covenants, the
       most restrictive of which are (1) the prohibition of dividend payments,
       and (2) requirements to maintain (a) a specified ratio of current assets
       to current liabilities, (b) a specified ratio of liabilities to tangible
       net worth, (c) a specified debt coverage ratio, and (d) a specified level
       of tangible worth. The Company was in violation of certain of these
       covenants at September 30, 1997, and obtained a waiver of such violations
       from the bank.

       The aggregate amounts of long-term debt maturities at September 30, 1997,
       are as follows:

<TABLE>
<CAPTION>
            Year ended September 30:
<S>                                                                <C>
                      1998                                           $  681,231
                      1999                                              686,213
                      2000                                              697,804
                      2001                                            2,061,361
                      2002                                              150,000
                                                                     ----------

                        Total long-term debt                         $4,276,609
                                                                     ==========

</TABLE>

                                       18

<PAGE>   19


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(9)    TAXES ON INCOME
       ---------------

       The provisions for taxes on income in fiscal 1996 and 1997, including
       both the current and deferred portions, are zero. The following
       reconciles the statutory federal income tax rate to the Company's
       effective tax rate:

<TABLE>
<CAPTION>

                                                                                        Year Ended September 30,
                                                                                        ------------------------
                                                                                        1996                1997
                                                                                        ----                ----
<S>                                                                                   <C>                <C>
         Income tax expense (benefit) based on the federal statutory     
           rate                                                                         34.0%              (34.0)%

         Generation (utilization) of net operating loss carryforwards                  (34.0)%              34.0%
                                                                                        ----                ----

         Effective tax rate                                                              0.0%                0.0%
                                                                                       =====               =====
</TABLE>

       The domestic and foreign components of income (loss) before taxes on
       income are as follows:

<TABLE>
<CAPTION>
                                                                                      Year Ended September 30,
                                                                                      ------------------------
                                                                                    1996                  1997
                                                                                    ----                  ----
<S>                                                                            <C>                   <C>              
              Domestic                                                         $      (9,100)        $    (11,220,617)
              Foreign                                                                460,790                 (277,762)
                                                                               -------------         ----------------

                          Total income (loss) before taxes on       
                            income                                             $     451,690         $    (11,498,379)
                                                                               =============         ================
</TABLE>


       Deferred income taxes result from temporary differences in the
       recognition of income and expenses for financial and income tax reporting
       purposes. Deferred income taxes are primarily due to the use of
       accelerated methods of depreciation for tax purposes versus principally
       straight-line methods for financial reporting purposes, the
       capitalization of software development costs for financial reporting
       purposes versus the expensing of these items as incurred for tax
       purposes, the required capitalization of certain inventory items for tax
       purposes, inventory reserves deductible for tax purposes when disposed of
       versus directly expensing them for financial reporting purposes, employee
       benefit accruals deductible for tax purposes when paid, and net operating
       loss carryforwards.


                                       19

<PAGE>   20

                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(9)    TAXES ON INCOME, CONTINUED
       --------------------------

       Temporary differences and carryforwards which give rise to the net
       deferred tax position at September 30, 1997, are as follows:

<TABLE>
<CAPTION>
<S>                                                                                           <C>             
         Deferred tax assets:
            Inventories                                                                       $        374,000
            Property and equipment                                                                     101,000
            Other                                                                                      219,000
            Net operating loss carryforwards                                                         3,934,000
                                                                                              ----------------

                          Total deferred tax assets                                                  4,628,000

        Less:  Valuation allowance                                                                  (4,172,000)
                                                                                              ---------------- 
                          Net deferred tax assets                                                      456,000

        Deferred tax liability - capitalized software development costs
            and other intangible assets                                                             (1,456,000)
                                                                                              ----------------

                          Net deferred tax position                                           $     (1,000,000)
                                                                                              ================
</TABLE>
                                                                           

       During the years ended September 30, 1996 and 1997, the valuation
       allowance decreased by $18,000 and increased by $3,786,000, respectively.
       At September 30, 1997, the Company has net operating loss carryforwards
       of approximately $11,570,000, which expire at various dates between 2003
       and 2012. Utilization of these carryforwards is subject to annual
       limitations under current IRS regulations. The Company has established a
       valuation allowance for the estimated amount of the total limitation on
       the utilization of the net operating loss carryforwards. Realization of
       net deferred tax assets associated with the net operating loss
       carryforwards is dependent upon generating sufficient taxable income
       prior to their expiration. Although realization is not assured for the
       net deferred tax assets, management believes it is more likely than not
       that they will be realized through future taxable earnings or alternative
       tax strategies. However, the net deferred tax assets could be reduced in
       the near term if management's estimates of future taxable income are no
       longer viable.


                                       20

<PAGE>   21
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(10)   EMPLOYEE BENEFIT PLANS
       ----------------------

       Restricted Stock Plan

       The Company has a Restricted Stock Plan which provides for the granting
       of up to 75,000 shares of the Company's common stock to key employees. In
       July 1993, all 75,000 shares were granted by action of the Compensation
       Committee of the Board of Directors, and no further grants will be made
       under this plan. Under terms of the plan, upon change in control all
       shares subject to an award shall automatically vest. The merger of the
       Company with ISI in 1995 constituted a change in control. By action of
       the Board of Directors, the restricted stock not previously vested as of
       August 16, 1995, was 100 percent vested as of that date.

       1993 Stock Option Plan

       The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the
       granting of options to purchase a total of 950,000 shares of common stock
       to key employees. The exercise price for each option granted under the
       1993 Plan cannot be less than the fair market value of the common stock
       on the date of the grant.

       The plan gives the Compensation Committee of the Board of Directors
       latitude in deciding the vesting period. Options generally vest one third
       immediately and one third on each successive anniversary date of the
       award, or are exercisable at the rate of one third per year beginning on
       the day after the first anniversary of the date of the award. Under
       provisions of the 1993 Plan, shares subject to an option award will
       become immediately exercisable upon a change in control of the Company. A
       "change in control" has the same definition in the 1993 Stock Option Plan
       as in the Restricted Stock Plan. Options remaining unexercised on the
       tenth anniversary of the date of the grant will expire. No options may be
       granted after February 26, 2003.

       During fiscal 1996, the Company granted 225,500 options at exercise
       prices of $4.50 to $9.00 per share, 151,448 options became exercisable,
       and 18,300 options were forfeited. During fiscal 1997, 412,500 options
       were granted at option prices of $5.00 to $7.12 per share, 101,980
       options became exercisable, and 80,219 options were forfeited. As of
       September 30, 1997, an additional 127,419 options may be issued under the
       1993 Plan.


                                       21

<PAGE>   22
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(10)   EMPLOYEE BENEFIT PLANS, CONTINUED
       ---------------------------------

       Directors Option Plan

       The Company's 1993 Directors Stock Option Plan (the "Directors Option
       Plan") provides for the granting of options to purchase a total of
       120,000 shares of common stock. The exercise price for each option
       granted beginning April 1997 under the Directors Option Plan is equal to
       110 percent of the closing price of the stock on the grant date. The
       exercise price for options granted prior to April 1997 was the greater of
       the fair market value or book value of the Company's common stock on the
       date of the grant.

       The Directors Option Plan provides that beginning April 1997, each
       qualified director will be granted annually an option to purchase 4,500
       shares of common stock. Prior to April 1997, each qualified director was
       granted annually an option to purchase 1,000 shares of common stock.
       Options granted in April 1997 or thereafter will be exercisable in
       one-third increments beginning on the date of the grant. Options granted
       prior to April 1997 are exercisable at any time beginning six months
       after the date of the grant. Options expire five years from the date of
       the grant. During fiscal 1996, the Company granted options to purchase
       3,000 shares of common stock at an exercise price of $8.75 per share, and
       in fiscal 1997, the Company granted options to purchase 84,320 shares of
       common stock at exercise prices of $5.00 to $7.00 per share. As of
       September 30, 1997, an additional 23,680 options may be issued under the
       Directors Option Plan.

       Special Option Grants

       The Board of Directors has awarded special option awards to its former
       chairman and a former Board member. As of September 30, 1997, these
       awards total 34,750 options to purchase common stock at $2.50 to $8.75
       per share, which per share price equaled or exceeded the fair value of
       the common stock at the date of the award. The awards totaled 20,000 and
       4,750 option is in 1996 and 1997, respectively. The awards were made
       separate from either of the two qualified plans specified above.


                                       22

<PAGE>   23
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(10)   EMPLOYEE BENEFIT PLANS, CONTINUED
       ---------------------------------

       Information with respect to options under the 1993 Stock Option Plan, the
       1993 Directors Option Plan, and special option grants for the two years
       ended September 30, 1997, is as follows:

<TABLE>
<CAPTION>
                                                     Option Price                                           Available
                                                       Per Share         Outstanding      Exercisable       for Grant
                                                       ---------         -----------      -----------       ---------
<S>                                                <C>                    <C>              <C>             <C>    
        Balance, October 1, 1996                     $1.87 - $4.89           305,100           97,300           179,900

        Increase in authorized shares - 1993 Plan
                                                                                                                295,000
        Special option grant                             $8.75                20,000
        Granted                                      $4.50 - $9.00           225,500                           (225,500)
        Exercisable                                  $2.50 - $8.75                            187,448
        Exercised                                    $1.87 - $2.50           (13,416)         (13,416)
        Forfeited                                        $2.50               (18,300)         (18,300)           18,300
                                                                             -------          -------        ----------

        Balance, September 30, 1996                  $1.87 - $8.75           518,884          253,032           267,700

        Increase in authorized shares:
           1993 Plan                                                                                            200,000
           Directors option plan                                                                                100,000
        Special option grant                             $4.75                 4,750
        Granted                                      $5.00 - $7.12           496,820                           (496,820)
        Exercisable                                  $2.50 - $9.00                            101,980
        Exercised                                    $2.12 - $5.00           (85,231)         (85,231)
        Forfeited                                    $2.50 - $9.00           (80,219)         (80,219)           80,219
                                                                             -------          -------        ----------

        Balance, September 30, 1997                                          855,004          189,562           151,099
                                                                             =======          =======           =======
</TABLE>


                                       23

<PAGE>   24
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(10)   EMPLOYEE BENEFIT PLANS, CONTINUED
       ---------------------------------

       The Company applies APB Opinion 25 in accounting for its stock option
       plans. Accordingly, no compensation cost has been recognized in the
       Company's financial statements. Had compensation cost been determined
       based on the fair value of such awards at the date of grant consistent
       with the provisions of SFAS No. 123, the Company's total and per share
       net income (loss) would have been as follows:

<TABLE>
<CAPTION>
                                                                        1996                       1997
                                                                        ----                       ----
<S>                                                               <C>                       <C>              
       Net income (loss)
          As reported                                             $  451,690                $ (11,498,379)
          Pro forma                                               $  328,302                $ (12,029,150)
       Net income (loss) per share
          As reported                                                $ 0.13                    $ (2.33)
          Pro forma                                                  $ 0.09                    $ (2.44)
</TABLE>

       The fair values of options granted during 1996 and 1997 were determined
       using the Black-Scholes option-pricing model based on the following
       assumptions:
<TABLE>
<CAPTION>
                                                                        1996                       1997
                                                                        ----                       ----
<S>                                                                  <C>                     <C> 
       Risk-free interest rate                                          6.1%                      6.6%
       Dividend yield                                                    0                          0
       Expected life                                                  6 years                 3 to 6 years
       Expected volatility                                             6.25%                      61.7%
</TABLE>

       401(k) Plan and Trust

       The Company has established a defined-contribution retirement plan for
       all eligible employees. Participants may make basic contributions of up
       to 15 percent of their compensation, pursuant to section 401(k) of the
       Internal Revenue Code. Under terms of the 401(k) plan, effective October
       1, 1996, the Company makes a basic contribution of 100 percent of each
       employee's contribution up to the first 5 percent of the employee's base
       salary contributed by the employee. Prior to October 1, 1996, the Company
       made a basic contribution of 50 percent of each employee's contribution
       up to the first 4 percent of the employee's base salary contributed by
       the employee. The Company may also make additional contributions as
       approved by the Board of Directors. A participant becomes vested in the
       Company's contribution on his or her behalf at a rate of 20 percent for
       each year of service after the effective date of the 401(k) plan.
       Notwithstanding the foregoing, a


                                       24


<PAGE>   25
                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(10)   EMPLOYEE BENEFIT PLANS, CONTINUED
       ---------------------------------

       participating employee will be fully vested in the Company's
       contributions to his or her account in the event of death, or in the
       event of disability or normal retirement, as those terms will be defined
       in the 401(k) plan. The Company's contributions to the 401(k) plan were
       approximately $68,000 and $158,000 for the years ended September 30, 1996
       and 1997, respectively.

(11)   WARRANTS
       --------

       The Company has outstanding warrants for the purchase of its common stock
       as follows:

<TABLE>
<CAPTION>
                                           ISI              UAI          Subordinated           Intec
                                       Acquisition      Acquisition          Debt            Acquisition            Total
                                       -----------      -----------          ----            -----------            -----
<S>                                    <C>              <C>              <C>               <C>                 <C>
        Exercise price                    $2.50            $4.81             $4.00              $6.73
        Expiration date                  3/03/98         11/20/97          10/31/02            2/20/00

        Balance, October 1, 1995          485,258         137,000                                                    622,258
        Issued in connection with
            subordinated debt                                                237,214                                 237,214
        Exercised                        (475,219)                                                                  (475,219)
                                          -------         -------           --------           -------               -------

        Balance, September 30, 1996        10,039         137,000            237,214                                 384,253

        Issued in connection with
            the Intec acquisition                                                              124,998               124,998

        Exercised                          (5,111)                           (39,536)                                (44,647)
                                         --------         -------           --------           -------               -------

        Balance September 30, 1997          4,928         137,000            197,678           124,998               464,604
                                         ========         =======           ========           =======               =======
</TABLE>


                                       25
<PAGE>   26

                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(12)   LEASE COMMITMENTS
       -----------------

       The Company leases its Virginia, Massachusetts, Ohio, United Kingdom, and
       certain regional facilities, as well as certain vehicles and office
       equipment, under operating leases, and leases certain computer and
       production equipment under capital leases. The leases on the facilities
       expire at various dates through August 1999, and the equipment operating
       leases expire at various dates through June 2001.

       The Company leases certain production equipment from finance companies
       under two capital leases. The leases had an initial term of three years
       beginning in 1995 and collectively require monthly payments, including
       interest, of $2,642 through August 1998. The unpaid balance of these
       capital leases was $26,536 at September 30, 1997 (note 8). The net book
       value of equipment leased under the two capital leases is approximately
       $26,000 at September 30, 1997.

       The Company leases certain computer equipment under two capital leases
       from a finance company. The leases have an initial term of four years
       beginning March 1997 and collectively require monthly payments, including
       interest, of $13,267 through February 2001. The unpaid balance of these
       capital leases totaled $474,265 at September 30, 1997 (note 8). The net
       book value of equipment leased under the two capital leases is
       approximately $479,000 at September 30, 1997.

       A summary of commitments under noncancelable leases as of September 30,
       1997, is as follows:

<TABLE>
<CAPTION>

                                                      Capital Leases         Operating Leases           Total
                                                      --------------         ----------------           -----
<S>                                                  <C>                      <C>                  <C>             
         1998                                        $      188,000           $     258,400        $        446,400
         1999                                               159,200                 180,700                 340,100
         2000                                               159,200                  15,800                 175,000
         2001                                                69,100                   8,400                  77,300
                                                     --------------           -------------        ----------------

         Total minimum lease obligation              $      575,500           $     463,300        $      1,038,800
                                                                              =============        ================

         Less amounts representing interest                 (74,700)
                                                     --------------
         Present value of minimum lease payments     $      500,800
                                                     ==============
</TABLE>

       Total rental  expense in fiscal 1996 and 1997 was $172,500 and  $308,000,
       respectively.

                                       26


<PAGE>   27

                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(13)   FOREIGN REVENUES AND MAJOR CUSTOMERS
       ------------------------------------

       Net revenues include export sales to various countries. A summary of both
foreign and domestic revenues is as follows:

<TABLE>
<CAPTION>
                                                                                Year Ended September 30,
                                                                                ------------------------
                                                                                1996                1997
                                                                                ----                ----
<S>                                                                      <C>                 <C>              
         Foreign:
            France                                                       $       2,019,177   $       1,687,171
            Other European countries                                             1,307,856           2,395,361
            Canada                                                                 670,832           1,363,529
            South America                                                          285,892             182,442
            Asia and South Pacific                                                 471,539             309,701
            Africa                                                                  22,061              45,172
                                                                         -----------------   -----------------

                        Total foreign revenues                                   4,777,357           5,983,376

         Domestic revenues                                                      16,146,256          14,892,021
                                                                         -----------------   -----------------

                        Total                                            $      20,923,613   $      20,875,397
                                                                         =================   =================
</TABLE>

       Approximately 30 percent and 23 percent of revenues were from three
       unaffiliated customers during the years ended September 30, 1996 and
       1997, respectively. Accounts receivable from these customers were
       approximately $1,700,500 and $1,148,500 at September 30, 1996 and 1997,
       respectively.


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<PAGE>   28




NOTE 14 - SUBSEQUENT EVENTS

CONTRACTS

During April and May 1998, management and representatives of one of its
significant customers finalized certain of the provisions of an existing supply
agreement under which the Company provided certain bundled hardware/software 
products. The result of the finalization of the agreement did not have a 
material impact on the estimates utilized by the Company in the preparation of 
the accompanying consolidated financial statements.

LEGAL PROCEEDING

On May 8, 1998, the Company, certain of its officers and others were named as
defendants in a lawsuit filed by a shareholder in the United States District
Court for the Southern District of New York.  The plaintiff seeks to represent
a class of shareholders, which purchased the Company's common stock in the open
market during the period from January 31, 1996 through April 28, 1998 and seeks
to recover unspecified damages purportedly caused by defendants' alleged
violations of federal securities laws and common law.  The Company denies any
liability in this action and intends to vigorously defend this litigation.

LINE OF CREDIT AGREEMENT

The Company's line of credit facility with a bank, providing for a maximum
available line of credit of $6 million but limited by a borrowing formula,
expired on February 28, 1998.  The facility was initially renewed through 
May 29, 1998 and subsequently renewed through January 15, 1999.  As of June 30,
1998, the Company was in an out-of-formula position under the borrowing
arrangement and expects to be in a similar position until August 31, 1998.  The
bank has agreed not to require that the Company comply with limits set by the
borrowing formula until August 31, 1998.  The bank has also adjusted the
borrowing formula for the period from November 30, 1998 to January 15, 1999. 
Under the adjusted borrowing formula, the amount of credit available to the
Company is expected to be reduced by $40,000 on November 30, 1998 and by an
additional $80,000 on December 31, 1998.

SECURITIES TRADING HALT

Following the Company's announcement that its previous auditors resigned and
withdrew their opinions on the Company's 1996 and 1997 financial statements and
that it had discovered potential adjustments to its fiscal 1996 and 1997
financial statements, The Nasdaq Stock Market ("Nasdaq") halted trading of the
Company's common stock on the Nasdaq National Market System effective April 28,
1998.  The trading has been halted since that date pending Nasdaq's receipt and
review of additional information, including the issuance of audited statements
for the fiscal years ended September 30, 1996 and 1997.  The Company is in the
process of responding to Nasdaq's informational requests.


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<PAGE>   29

                                   SIGNATURES

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

NEMATRON CORPORATION


By:          /s/  DAVID P. GIENAPP                    Dated:  JULY 31, 1998
         ---------------------------------------              -------------
         David P. Gienapp,
         Executive Vice President - Finance and
         Administration, Secretary and Treasurer








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