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


                                  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 [FEE REQUIRED]
     For the fiscal year ended SEPTEMBER 30, 1996
                                       or
     [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [No Fee Required]
     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)

                                 (313) 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:  $20,923,613

         The aggregate market value of the voting stock held by non-affiliates
as of December 20, 1996, computed by reference to the closing price of such
stock on such date as quoted on the Nasdaq Stock Market National Market, was
approximately $23,965,000.

The number of shares outstanding of the issuer's Common Stock on December 20, 
1996 was 4,564,692

         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, 1996 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 on the Consolidated Financial Statements as of and
    for the year ended September 30, 1996                                                                   3

Independent Auditors' Report on the Consolidated Financial Statements as of and
    for the year ended September 30, 1995                                                                   4

Consolidated Balance Sheet as of September 30, 1996                                                         5

Consolidated Statements of Income for the years ended September 30,
    1995 and 1996                                                                                           6

Consolidated Statements of Stockholders' Equity for the years ended
    September 30, 1995 and 1996                                                                             7

Consolidated Statements of Cash Flows for the years ended September 30,
    1995 and 1996                                                                                           8

Notes to Consolidated Financial Statements                                                                9-25
</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, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
the year then ended. 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 audit 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 audit provides 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, 1996, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.


/s/ Grant Thornton LLP
                                                         

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





                                      3
<PAGE>   4




                         Independent Auditors' Report


The Board of Directors
Nematron Corporation:

We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Nematron Corporation and subsidiaries
for the year ended September 30, 1995.  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
audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Nematron Corporation and subsidiaries for the year ended September 30, 1995 in
conformity with generally accepted accounting principles.


                                        KPMG Peat Marwick LLP


Detroit, Michigan
December 15, 1995
<PAGE>   5


                      NEMATRON CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheet
                               September 30, 1996



<TABLE>
<S>                                                                                             <C>          
                               Assets (Notes 6 and 7)
Current assets:
    Cash and cash equivalents                                                                   $   3,942,963
    Accounts receivable, net of allowance for doubtful accounts of $115,000                         5,989,708
    Inventories (note 5)                                                                            4,520,937
    Prepaid expenses and other current assets                                                         750,995
                                                                                                -------------

                  Total current assets                                                             15,204,603

Property and equipment:
    Land                                                                                              117,000
    Building and improvements                                                                       2,264,906
    Equipment                                                                                       4,141,939
                                                                                                -------------

                                                                                                    6,523,845

Less accumulated depreciation                                                                      (3,139,560)
                                                                                                -------------

                  Net property and equipment                                                        3,384,285

Other assets:
    Software and related development costs, net of accumulated amortization of $611,022             4,426,257
    Other intangible assets, net of accumulated amortization of $580,954                            1,199,200
                                                                                                -------------

                  Net other assets                                                                  5,625,457
                                                                                                -------------
                  Total assets                                                                  $  24,214,345
                                                                                                =============

                         Liabilities and Stockholders' Equity

Current liabilities:
    Current maturities of long-term debt (note 7)                                               $     158,340
    Accounts payable                                                                                1,661,120
    Other accrued liabilities                                                                         671,678
                                                                                                -------------

                  Total current liabilities                                                         2,491,138

Long-term debt, less current maturities (note 7)                                                    3,993,309
                                                                                                -------------

                  Total liabilities                                                                 6,484,447

Stockholders' equity:
    Common stock, no par value; 15,000,000 shares authorized, 4,558,248 shares issued
       and outstanding (note 10)                                                                   17,572,814
    Foreign currency translation adjustment                                                           (85,518)
    Retained earnings                                                                                 242,602
                                                                                                -------------

                  Total stockholders' equity                                                       17,729,898
                                                                                                -------------
Commitments and contingencies (note 11)

                  Total liabilities and stockholders' equity                                    $  24,214,345
                                                                                                =============
</TABLE>




                                      5
<PAGE>   6


                      NEMATRON CORPORATION AND SUBSIDIARIES
                        Consolidated Statements of Income
                 For the years ended September 30, 1995 and 1996


<TABLE>
<CAPTION>

                                                                                      1995                  1996
                                                                                      ----                  ----

<S>                                                                               <C>                   <C>          
Net revenues                                                                      $  17,576,305         $  20,923,613
Cost of revenues                                                                     11,382,064            12,190,759
                                                                                  -------------         -------------

                  Gross profit                                                        6,194,241             8,732,854

Operating expenses:
    Product development costs                                                           893,926             1,448,540
    Selling, general, and administrative expenses                                     4,692,918             6,379,718
                                                                                  -------------         -------------

                  Total operating expenses                                            5,586,844             7,828,258
                                                                                  -------------         -------------

Operating income                                                                        607,397               904,596

Other income (expense):
    Interest and other income, net                                                        2,704                70,189
    Interest expense                                                                   (380,738)             (512,896)
    Foreign currency gain (loss)                                                         73,706               (10,199)
                                                                                  -------------         -------------

                  Total other expense                                                  (304,328)             (452,906)
                                                                                  -------------         -------------

Income before taxes on income                                                           303,069               451,690

Taxes on income (note 8)                                                                      0                     0
                                                                                  -------------         -------------

                  Net income                                                      $     303,069         $     451,690
                                                                                  =============         =============

Earnings per share:
    Primary                                                                              $ 0.14                $ 0.13
                                                                                         ======                ======
                                                                                                                     
    Fully Diluted                                                                                              $ 0.12
                                                                                                               ======
                                                                                                                     
Weighted average shares outstanding - primary                                         2,179,939             3,580,057
                                                                                      =========             =========
                                                                                                                     
Weighted average shares outstanding - fully diluted                                                         3,797,490
                                                                                                            =========

</TABLE>

                                    6
<PAGE>   7


                      NEMATRON CORPORATION AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity
                 For the years ended September 30, 1995 and 1996


<TABLE>
<CAPTION>


                                                                                                                         
                                                                                                Retained                 
                                                     Common Stock              Foreign          Earnings                 
                                              -------------------------       Currency       (Accumulated                
                                              Shares             Amount      Translation        Deficit)           Total 
                                              ------             ------      -----------     -------------         ----- 
<S>                                        <C>            <C>               <C>               <C>             <C>           
Balance, October 1, 1994                    1,612,773      $   3,643,223     $  (33,022)       $  (512,157)    $    3,098,044


Shares issued pursuant to merger with
    Imagination Systems, Inc. (note 3)        970,526          1,699,078                                            1,699,078
Shares issued pursuant to merger with
    Universal Automation, Inc. (note
    3)                                        200,000          1,112,000                                            1,112,000
Grant of stock in connection with
    separation agreement                        9,000             16,313                                               16,313
Shares issued in connection with
    conversion of convertible
    subordinated note to common stock
    (note 4)                                  102,564            200,000                                              200,000
Forfeiture of restricted stock upon
    termination of employment                 (25,250)                 0                                                    0
Compensation related to Restricted
    Stock Plan (note 9)                                          125,579                                              125,579
Net income for the year ended
    September 30, 1995                                                                             303,069            303,069
Foreign currency translation                                                    (17,925)                              (17,925)
                                            ---------      -------------     ----------        -----------     --------------

Balance, September 30, 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
                                            =========      =============     ==========        ===========     ==============
</TABLE>





                                      7
<PAGE>   8


                      NEMATRON CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                 For the years ended September 30, 1995 and 1996
<TABLE>
<CAPTION>


                                                                                                1995               1996
                                                                                                ----               ----
<S>                                                                                      <C>               <C>          
Cash flows from operating activities:
    Net income                                                                           $      303,069    $     451,690
    Adjustments to reconcile net income to net cash used in operating activities:
       Depreciation and amortization                                                            730,717          837,666
       Noncash compensation related to restricted stock                                         125,579                0
       Changes in assets and liabilities that provided (used) cash:
          Accounts receivable                                                                  (676,457)      (2,828,082)
          Inventories                                                                          (597,345)        (397,915)
          Prepaid expenses and other current assets                                            (265,206)        (481,638)
          Accounts payable                                                                      592,625       (1,083,280)
          Other accrued liabilities                                                            (487,363)        (376,418)
                                                                                         --------------    -------------

                  Net cash used in operating activities                                        (274,381)      (3,877,977)
                                                                                         --------------    -------------

Cash flows from investing activities:
    Additions to capitalized software development costs and other intangible assets            (469,672)      (1,171,827)
    Additions to property and equipment                                                        (244,690)        (929,730)
    Acquisitions, net of cash acquired                                                         (104,709)               0
                                                                                         --------------    -------------

                  Net cash used in investing activities                                        (819,071)      (2,101,557)
                                                                                         --------------    -------------

Cash flows from financing activities:
    Borrowings under long-term debt                                                           2,100,000        2,266,081
    Net proceeds (repayments) of notes payable to bank                                          730,000       (2,450,000)
    Payments of long-term debt                                                               (1,695,953)        (540,245)
    Proceeds from sale of common stock                                                                0       10,776,621
    Additions to deferred financing fees                                                        (22,896)        (173,647)
                                                                                         --------------    -------------

                  Net cash provided by financing activities                                   1,111,151        9,878,810
                                                                                         --------------    -------------

Foreign currency translation effect on cash                                                        (532)         (34,571)
                                                                                         --------------    -------------

Net increase in cash and cash equivalents                                                        17,167        3,864,705

Cash and cash equivalents at beginning of year                                                   61,091           78,258
                                                                                         --------------    -------------

Cash and cash equivalents at end of year                                                 $       78,258    $   3,942,963
                                                                                         ==============    =============

Supplemental disclosures of cash flow information:
    Cash paid for interest                                                               $      456,984    $     519,456
    Cash paid for income taxes                                                                        0                0

Supplemental disclosures of noncash financing and investing activities:
    Additions to various assets and liabilities in connection with the acquisition
       of Imagination Systems, Inc., for common stock (note 3)                                1,497,891
    Additions to various assets and liabilities in connection with the acquisition
       of Universal Automation, Inc., for common stock (note 3)                               1,112,000
    Issuance of common stock in exchange for noncompete agreement (note 3)                      217,500
    Issuance of common stock in connection with conversion of a subordinated note
       (note 4)                                                                                 200,000
    Acquisition of equipment under capital lease obligations                                     78,579

</TABLE>





                                       8
<PAGE>   9

                      NEMATRON CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                               September 30, 1996



(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), a Netherlands corporation formed in 1990, and NemaSoft, Inc.
       (NemaSoft), and Imagination Systems, Inc., 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, 1995, the Company acquired two
       software design and manufacturing companies. Imagination Systems, Inc.
       ("ISI"), a Virginia corporation, was acquired on March 3, 1995, and
       Universal Automation, Inc. ("UAI"), was acquired on September 20, 1995.
       The consolidated operations of Nematron for 1995 include the results of
       ISI and UAI 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 to net realizable value for excess and/or obsolete
       inventories based upon an item-by-item review of quantities on hand
       compared to estimated usage for sales and service.







                                       9
<PAGE>   10


                      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.

       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 capital costs.

       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 amounted to approximately $166,000 and $47,000
       for the years ended September 30, 1995 and 1996, respectively, and is
       included in cost of revenues in the accompanying consolidated statements
       of operations.




                                       10
<PAGE>   11


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       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 $100,500 for the year ended September 30, 1996.

       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 subsidiary, Nematron Europa BV, 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.

       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.




                                       11
<PAGE>   12


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       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 income as a component of product development costs.
       Research and development costs expensed were approximately $705,000 and
       $1,087,000 for the years ended September 30, 1995 and 1996, respectively.

       Reserve for Self-Insurance

       Through September 30, 1996, the Company had elected to retain a
       significant portion of expected medical claims for Ann Arbor-based
       personnel expenses through the use of deductibles which total $30,000 per
       employee and $1,000,000 aggregate. Provisions for losses under the
       employee medical benefit program are recorded based upon the Company's
       estimates of claims incurred but not reported, as provided by its
       third-party administrator. The total estimated liability for medical
       claim expenses, both reported as well as for incurred but not reported,
       at September 30, 1996, was approximately $26,000 and is included in other
       accrued liabilities. Effective October 1, 1996, the Company has purchased
       commercial medical insurance in order to provide this employee benefit.

       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.

       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.






                                       12
<PAGE>   13


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       Earnings Per Share

       Earnings 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. In computing the per
       share effect of assumed conversion, 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. During fiscal
       year 1995 the average conversion price of options and warrants exceeded
       the average market price and, therefore, the options and warrants are not
       dilutive and are not reflected 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.

       New Accounting Pronouncements

       In March 1995, the Financial Accounting Standards Board issued Statement
       of Financial Accounting Standards No. 121, Accounting for the Impairment
       of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. The
       Company intends to adopt this standard during the first quarter of fiscal
       1997. The adoption of this standard is not expected to have a material
       effect on the Company's financial position or results of operations.




                                       13
<PAGE>   14


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       In October 1995, the Financial Accounting Standards Board issued
       Statement of Financial Accounting Standards No. 123, Accounting for
       Stock-Based Compensation. The Company intends to adopt this standard in
       fiscal 1997 by making the required note disclosures only. Therefore, the
       adoption of this standard is not expected to have an effect on the
       Company's financial position or results of operations.

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

       Merger with Imagination Systems, Inc.

       On March 3, 1995, the Company purchased all of the outstanding shares of
       Imagination Systems, Inc., a Virginia Beach, Virginia-based developer of
       industrial data acquisition, networking, and other software, and recorded
       this transaction using the purchase method. The total purchase price was
       approximately $1,886,000, including expenses of approximately $300,000.
       Under terms of the merger agreement, the Company issued 825,526 shares of
       its common stock to the former ISI shareholders in exchange for
       100 percent of the outstanding common stock of ISI. The ISI stock was
       retired, and the Company is the surviving entity. In connection with the
       merger, the Company also issued 120,000 shares of its common stock in
       return for a noncompetition agreement with ISI's president, who became
       the Company's president, and 25,000 shares of its common stock to certain
       employees of ISI who became employees of the Company as a result of the
       merger. A total of 970,526 shares of Company common stock were issued in
       this transaction.

       In addition to the common stock issued, the Company issued warrants to
       purchase Company common stock at $2.50 per share for every two shares
       issued in the merger. The warrants expire three years from the date of
       the merger (see note 10).

       Merger with Universal Automation, Inc.

       On September 20, 1995, the Company completed its merger of its wholly
       owned subsidiary, NemaSoft, with Universal Automation, Inc., a Hudson,
       New Hampshire-based developer of industrial software for machine control
       that executes on Intel-based personal computers, and recorded this
       transaction using the purchase method. UAI is the holder of a patent for
       a continuous flow chart, improved data format, and debugging system for
       the programming and operation of machines. The total purchase price was
       approximately $1,530,000, including expenses of approximately $400,000.





                                       14
<PAGE>   15


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       Under terms of the merger agreement, the Company issued 200,000 shares of
       its common stock and $100,000 to the former UAI shareholders in exchange
       for 100 percent of the outstanding common stock of UAI. The UAI stock was
       retired, and NemaSoft is the surviving entity. In connection with the
       merger, NemaSoft also entered into two-year employment and noncompetition
       agreements with UAI's president and vice president, who became employees
       of NemaSoft as a result of the merger.

       In addition to the common stock issued, the Company also issued 137,000
       warrants to purchase Nematron common stock at $4.81 per share. The
       warrants expire November 20, 1997 (see note 10).

       Merger with Universal Automation, Inc.

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

<TABLE>
<CAPTION>
                                                                        ISI                    UAI
                                                                        ---                    ---
<S>                                                            <C>                     <C>           
       Current assets                                          $       268,000         $            0
       Software and related development costs                        2,196,000                617,000
       Other intangible assets                                         218,000              1,005,000
       Property and equipment                                           81,000                  5,000
       Liabilities                                                    (877,000)               (97,000)
                                                               ---------------         --------------

                         Total purchase price                  $     1,886,000         $    1,530,000
                                                               ===============         ==============
</TABLE>

       As of September 30, 1995, the total purchase price and the allocation
       among the fair value of the acquired assets and liabilities was subject
       to adjustment until estimates were finalized.

       Finalization of such estimates resulted in an increase of approximately
       $56,000 in the software and related development costs and the total
       purchase price of ISI. Finalization of estimates related to the UAI
       merger resulted in a re-allocation of approximately $1,005,000 from
       software and related development costs to other intangible assets.





                                       15
<PAGE>   16


                      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 1995 of the Company, ISI,
       and UAI as if the acquisitions had occurred as of the beginning of 1995,
       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, 1995
                                                                                        (Unaudited)
                                                                                    --------------------
<S>                                                                                  <C>              
       Net revenues                                                                     $18,578,000
       Net income                                                                           $37,000
       Net earnings per share                                                                 $0.01
</TABLE>


(4)    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 lease period from March 3, 1995,
       through September 30, 1995, and for the year ended September 30, 1996,
       under the terms of the lease, which commenced on March 3, 1995, were
       $45,262 and $77,592, respectively.

(5)    INVENTORIES
       -----------

       Inventories are summarized as follows:

<TABLE>
<CAPTION>
                                                                                                  September 30, 
                                                                                                      1996
                                                                                               -------------------              
<S>                                                                                            <C>            
        Purchased parts and accessories                                                        $     2,734,974
        Finished goods                                                                                 467,631
        Work-in-process                                                                                349,189
        Demo units                                                                                     627,316
        Service stock                                                                                  341,827
                                                                                               ---------------

                            Total inventories                                                  $     4,520,937
                                                                                               ===============
</TABLE>





                                       16
<PAGE>   17


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(6)    NOTES PAYABLE TO BANK
       ---------------------

       The Company has a credit facility with a bank with a maximum amount
       available of $6,000,000. No amounts are outstanding on this facility at
       September 30, 1996. 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 $1,000,000 of eligible foreign receivables, plus a maximum of
       $1,000,000 against certain inventory categories. Based upon the borrowing
       formula, the entire amount of the available line was eligible for
       advance. 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 (8.25 percent at
       September 30, 1996). The line of credit includes various affirmative and
       negative covenants. The Company was in compliance with all covenants as
       of September 30, 1996.

(7)    LONG-TERM DEBT
       --------------

       Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                                                       September 30, 
                                                                                                           1996
                                                                                                      ---------------
<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                           $ 2,300,000


        Subordinated debt under a term loan and warrant purchase agreement (the "Subordinated
           Note Agreement"), interest at 12% per annum.  Interest-only payments are required
           through September 1997.  Beginning in October 1997, payable in monthly installments
           of $50,000 plus interest.  The notes are collateralized by substantially all
           assets, other than real property, of the Company and a third mortgage on the
           Company's land and building in Ann Arbor, Michigan                                             1,800,000

        Capitalized lease obligations (note 11)                                                              51,649
                                                                                                        -----------

                           Total long-term debt                                                           4,151,649

        Less current maturities                                                                            (158,340)
                                                                                                        -----------
                           Total long-term debt, less current maturities                                $ 3,993,309
                                                                                                        ===========
</TABLE>





                                       17
<PAGE>   18


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued


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

       The mortgage loan payable to a bank contains a covenant that requires the
       Company to maintain a minimum tangible net worth and a minimum
       debt-to-equity ratio. The Subordinated Note Agreement 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 cash flow, and (c) a specified level of tangible
       worth. The Company was in compliance with these covenants at September
       30, 1996. A total of 237,214 warrants were issued under the Subordinated
       Note Agreement to purchase stock at $4 a share which expire October 31,
       2002 (see note 10).

       The aggregate amounts of long-term debt maturities at September 30, 1996,
       are as follows:

<TABLE>
<CAPTION>
                 Year ended September 30:
<S>                                                                                      <C>
                          1997                                                            $ 158,340
                          1998                                                              772,195
                          1999                                                              760,324
                          2000                                                              775,971
                          2001                                                            1,684,819
                                                                                         ----------

                                 Total long-term debt                                    $4,151,649
                                                                                         ==========
</TABLE>

(8)    TAXES ON INCOME
       ---------------

       The provisions for taxes on income in fiscal 1995 and 1996, 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,
                                                                                    -----------------------
                                                                                    1995              1996
                                                                                    ----              ----
<S>                                                                                 <C>               <C>  
        Income tax expense based on the federal statutory rate                      34.0%             34.0%

        Utilization of net operating loss carryforwards                            (34.0)%           (34.0)%
                                                                                    ----              ----

                           Effective tax rate                                        0.0%              0.0%
                                                                                     ===               ===

</TABLE>




                                       18
<PAGE>   19


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued


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

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

<TABLE>
<CAPTION>
                                                                                       Year Ended September 30,
                                                                                       ------------------------
                                                                                         1995           1996
                                                                                         ----           ---- 
<S>                                                                              <C>              <C>
       Domestic                                                                  $     368,057    $     (9,100)
       Foreign                                                                         (64,988)        460,790
                                                                                 -------------    ------------

                          Total income before taxes on income                    $     303,069    $    451,690
                                                                                 =============    ============
</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.

       Temporary differences and carryforwards which give rise to the net
       deferred tax position at September 30, 1996, are as follows:

<TABLE>

       Deferred tax assets:
                                                                                                              
<S>                                                                                              <C>
           Inventories                                                                            $     152,000
           Property and equipment                                                                        90,000
           Other                                                                                        174,000
           Net operating loss carryforwards                                                           1,930,000
                                                                                                  -------------

                          Total deferred tax assets                                                   2,346,000

       Less:  Valuation allowance                                                                      (386,000)
                                                                                                  -------------
                          Net deferred tax assets                                                     1,960,000

       Deferred tax liability - capitalized software development costs and other intangible
           assets                                                                                    (1,960,000)
                                                                                                  -------------
                                                                                                   
                          Net deferred tax position                                               $           0
                                                                                                  =============

</TABLE>





                                       19
<PAGE>   20


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       During the year ended September 30, 1996, the valuation allowance
       decreased by $18,000. At September 30, 1996, the Company has net
       operating loss carryforwards of approximately $5,683,000, which expire at
       various dates between 2003 and 2011. Utilization of these carryforwards
       is subject to annual limitation 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 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.

(9)    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 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.

       During 1995, 42,750 shares of restricted stock became vested, and 25,250
       shares were forfeited due to terminations. Compensation expense in 1995
       related to the Restricted Stock Plan was $125,579.

       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 750,000 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.





                                       20
<PAGE>   21


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       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. Accordingly, 67,150 options became
       immediately exercisable in 1995. 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 1995, the Company granted 239,250 options at exercise
       prices of $2.50 to $3.87 per share, 73,400 options became exercisable,
       and 32,850 options were forfeited. During fiscal 1996, 225,500 options
       were granted at option prices of $4.50 to $9.00 per share, 151,448
       options became exercisable, and 18,300 options were forfeited. As of
       September 30, 1996, an additional 267,700 options may be issued under the
       1993 Plan.

       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 20,000
       shares of common stock. The exercise price for each option granted under
       the Directors Option Plan is equal to 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 each qualified director will be
       granted annually an option to purchase 1,000 shares of common stock.
       Options will be 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 1995, the Company granted options to purchase 4,000 shares
       of common stock at exercise prices of $1.87 to $2.12 per share, and in
       fiscal 1996, the Company granted options to purchase 3,000 shares of
       common stock at an exercise price of $8.75 per share and no options were
       forfeited. As of September 30, 1996, an additional 8,000 options may be
       issued under the Directors Option Plan.





                                       21
<PAGE>   22


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       Special Option Grants

       The board of directors has awarded special option awards to its former
       chairman. These awards total 30,000 options to purchase common stock at
       $2.50 per share and $8.75 per share, and the awards were a grant made
       separate from either of the two qualified plans specified above.

       Information with respect to options under the 1993 Stock Option Plan, the
       1993 Directors Stock Option Plan, and special option grants for the two
       years ended September 30, 1996, is as follows:


<TABLE>
<CAPTION>

                                               Option Price                                             Available
                                                Per Share            Outstanding       Exercisable      for Grant
                                               ------------          -----------       -----------       ---------
<S>                                            <C>                      <C>               <C>              <C>   
        Balance, October 1, 1994               $2.50 - $4.89            84,700            22,900           40,300

        Increase in authorized shares
            under the 1993 Plan                                                                           350,000
        Special option grant                                            10,000
        Granted                                $1.87 - $3.87           243,250                           (243,250)
        Exercisable                            $1.87 - $2.50                              74,400
        Forfeited                                  $2.50               (32,850)                            32,850
                                                                    ----------        ----------       ----------

        Balance, September 30, 1995            $1.87 - $4.89           305,100            97,300          179,900

        Increase in authorized shares
            under the 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
                                                                    ==========        ==========       ==========
</TABLE>




                                       22
<PAGE>   23


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



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

       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, the Company makes
       a basic contribution of 50 percent of each employee's contribution up to
       the first 4 percent contributed by the employee, and it may 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
       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 $38,000
       and $68,000 for the years ended September 30, 1995 and 1996,
       respectively.

(10)   WARRANTS
       --------

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

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

         Issued in connection with the ISI
             acquisition                              485,258                                               485,258
         Issued in connection with the UAI
             acquisition                                             137,000                                137,000
                                                   ----------     ----------          ----------         ----------

         Balance, September 30, 1995                  485,258        137,000                                622,258
         Issued in connection with
             subordinated debt                                                           237,214            237,214
         Exercised                                   (475,219)             0                   0           (475,219)
                                                   ----------     ----------          ----------         ----------

         Balance, September 30, 1996                   10,039        137,000             237,214            384,253
                                                   ==========     ==========          ==========         ==========
</TABLE>





                                       23
<PAGE>   24


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(11)   LEASE COMMITMENTS
       -----------------

       The Company leases its Virginia Beach office, its Netherlands facility,
       other facilities, and certain vehicles and office equipment under
       operating leases, and leases certain office and production equipment
       under capital leases. Terms of the Virginia Beach office lease with a
       partnership which includes the Company's president as a partner include
       monthly rent of $6,466 for a 24-month period ending February 1997. The
       lease for the Netherlands facility requires quarterly payments of
       approximately $48,000; the other facilities' lease requires monthly
       payments of $1,150 through March 1997; the vehicle leases collectively
       require lease payments totaling approximately $2,000 through various
       dates between April 1997 and March 1998; and the office equipment
       operating lease requires monthly payments of $147 through April 1998.

       The Company leases certain computer and test equipment under two capital
       leases which had an initial term of three years and which collectively
       require monthly payments, including interest, of $2,642 through August
       1998. The net book value of equipment leased under the two capital leases
       is approximately $52,000 at September 30, 1996.

       A summary of commitments under noncancelable leases as of September 30,
       1996, is as follows:

<TABLE>
<CAPTION>
                                                        Capital Leases        Operating Leases          Total
                                                        --------------        ----------------          ----- 

        <S>                                               <C>                   <C>                 <C>         
        1997                                              $    31,700           $     128,200       $    159,900
        1998                                                   28,200                  69,100             97,300
        1999                                                        0                  58,700             58,700
        2000                                                        0                  26,800             26,800
        2001                                                        0                   5,400              5,400
                                                          -----------           -------------       ------------

        Total minimum obligation                          $    59,900           $     288,200       $    348,100
                                                                                =============       ============

        Less amounts representing interest                     (8,300)
                                                          -----------

        Present value of minimum lease payments           $    51,600
                                                          ===========
</TABLE>

       Total rental expense in fiscal 1995 and 1996 was $161,300 and $172,500,
       respectively.
 





                                       24
<PAGE>   25


                      NEMATRON CORPORATION AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(12)   FOREIGN REVENUES AND MAJOR CUSTOMER
       -----------------------------------

       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
                                                                          ------------------------
                                                                          1995                1996
                                                                          ----                ----
<S>                                                                 <C>                   <C>      
        Foreign:                                                                        
            France                                                   $  2,330,183         $ 2,019,177
                                                                                                     
            Other Europe                                                2,399,158           1,307,856
                                                                                                     
            Canada                                                        837,543             670,832
                                                                                                     
            South America                                                 539,209             285,892
                                                                                                     
            Asia and South Pacific                                        346,244             471,539
                                                                                                     
            Africa                                                         59,949              22,061
                                                                      -----------         -----------
                                                                                                     
                                                                                                     
                           Total foreign revenues                       6,512,286           4,777,357
                                                                                                     
                                                                                                     
        Domestic revenues                                              11,064,019          16,146,256
                                                                      -----------         -----------
                                                                                                     
                                                                                                     
                           Total                                      $17,576,305         $20,923,613
                                                                      ===========         ===========
</TABLE>

       During the years ended September 30, 1995 and 1996, revenues from one
       unaffiliated customer totaled 15 percent and 10 percent of total
       revenues, respectively. Revenues from a different unaffiliated customer
       totaled 2 percent and 13 percent during the same respective periods.






                                       25
<PAGE>   26




NOTE 13 - 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 such 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. 



                                      26
<PAGE>   27




                                   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,
         Vice President - Finance and Administration
         and Chief Financial Officer
















                                       27