NEMATRON CORP, 424B4, 1996-06-06

NEMATRON CORP
424B4, 1996-06-06
COMPUTER & OFFICE EQUIPMENT

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<PAGE> 1
Pursuant to Rule 424B4
Registration No. 333-4036
PROSPECTUS Registration No. 333-05297

1,200,000 SHARES

[NEMATRON LOGO]

COMMON STOCK

The common stock (the "Common Stock") of Nematron Corporation (the
"Company") is quoted on The Nasdaq Stock Market's SmallCap Market (the "SmallCap
Market") under the symbol NEMA. On June 5, 1996, the last reported sale price
for the Common Stock was $9.00. See "Price Range of Common Shares". The Common
Stock has been approved for listing on The Nasdaq Stock Market's National Market
upon the effectiveness of this offering.

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 5.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
Per Share...................... $9.00 $.64125 $8.35875
- -------------------------------------------------------------------------------------------------
Total(3)....................... $10,800,000 $769,500 $10,030,500
- -------------------------------------------------------------------------------------------------
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</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). In addition, upon consummation of the
offering, the Company will grant to First of Michigan Corporation (the
"Representative") a warrant to purchase 40,000 shares of the Common Stock at
120% of the public offering price (the "Warrant"). See "Underwriting".

(2) Before deducting estimated offering expenses of $300,000 payable by the
Company.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 180,000 additional shares, solely to cover
over-allotments (the "Over-allotment Option"), if any. If all such shares
are purchased, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $12,420,000, $884,925 and $11,535,075, respectively. See
"Underwriting".
------------------------

The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them. The Underwriters reserve the right to reject
orders in whole or in part. It is expected that delivery of the certificates for
the shares of Common Stock will be made against payment therefor at the offices
of First of Michigan Corporation, Detroit, Michigan on or about June 11, 1996.

FIRST OF MICHIGAN CORPORATION

The date of this Prospectus is June 5, 1996
<PAGE> 2
NEMATRON(R)
Open minds. Open systems. Real solutions.

Open Solutions for PC-based Automation

[PHOTO]
Industrial Control Computers

[PHOTO]
System Solutions

[PHOTO]
FloPro(R)
Softlogic Control

[PHOTO]
POWER VIEW(TM)

[PHOTO]
AUTONET(TM)
DATA ACQUISITION &
CONTROL SOFTWARE

OPEN ARCHITECTURE SYSTEMS

HARDWARE

INDUSTRIAL CONTROL COMPUTERS(TM) (ICCs)
The ICC opens the door to plantwide connectivity. Nematron designed these
industrial computer systems for control in plant floor environments.

SYSTEM SOLUTIONS
Replace PLCs with a high-performance solution. Nematron's integrated hardware
and software machine control platform fits well into existing systems. The
tough, compact ICC-5000 includes many state-of-the-art features, like a
patent-pending hinged rear chassis. FloPro(R) software, bundled on our
ICC-5000, delivers 32-bit, Pentium processing power to the plant floor for
increased productivity and reduced costs.

SOFTWARE

FLOPRO(R)
Nematron offers a new concept in machine automation: flowchart-based
programming and control for industrial automation. Currently, FloPro(R) runs
two entire automotive powertrain plants.

POWERVIEW(TM)
With Windows-NT(R)-based PowerVIEW(TM), operators can point-and-click to
control panel replacement. PowerVIEW(TM) runs in a 32-bit preemptive
multitasking runtime, so it scans data faster than many other systems.

AUTONET(TM)
With fast graphics and many tools to view and analyze data, AutoNet(TM) meets
demanding monitoring and control requirements.

<PAGE> 3
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------

TABLE OF CONTENTS

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PAGE
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Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 5
Use of Proceeds....................................................................... 9
Price Range of Common Shares.......................................................... 9
Dividend Policy....................................................................... 10
Capitalization........................................................................ 10
Selected Consolidated Financial Data.................................................. 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 12
Business.............................................................................. 18
Management............................................................................ 29
Description of Capital Stock.......................................................... 30
Shares Eligible for Future Sale....................................................... 31
Underwriting.......................................................................... 33
Legal Matters......................................................................... 34
Experts............................................................................... 34
Available Information................................................................. 35
Incorporation of Certain Documents by Reference....................................... 36
Index to Consolidated Financial Statements............................................ F-1
</TABLE>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON NASDAQ OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING".

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and the notes thereto
appearing elsewhere in this Prospectus. Unless the context indicates otherwise,
Nematron Corporation and its consolidated subsidiaries are collectively referred
to as the "Company". Except as otherwise noted, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
Investors should carefully consider the information set forth under the heading
"Risk Factors".

THE COMPANY

The Company is a designer, manufacturer and marketer of personal computer
("PC")-based industrial automation solutions on a worldwide basis. These
solutions include proprietary software for direct machine control, process
visualization and data acquisition. Additionally, the Company is a long-standing
and well-recognized producer of related hardware products, such as Industrial
Workstations(TM) and industrial control computers ("ICCs"), and has an installed
base of more than 60,000 operator interface installations which the Company
believes has resulted in brand name recognition and greater customer awareness
of the Company's products. The Company is well positioned because of its
combination of proprietary software and installed hardware base to capitalize on
the industrial automation trend from higher cost, closed architecture
programmable logic controllers ("PLCs") to lower cost, open architecture
PC-based solutions.

The Company's recently developed or acquired software products, marketed
under the trademarks FloPro(R), PowerVIEW(TM) and AutoNet(TM), are used in the
industrial and factory automation workplace. FloPro(R) is a flowchart
programming and direct machine control software product used to create, debug,
document and execute control applications in a PC-based open architecture
environment. The Company's PowerVIEW(TM) product is a powerful and comprehensive
32-bit Windows NT and Windows 95-based application development system for
factory floor panel replacement applications. The Company's test and measurement
software, AutoNet(TM), allows for data acquisition and real-time processing of
data and the performance of multiple functions at a high rate of speed and the
graphic display of such real-time information through a wide variety of
configurable graphic instruments, trends and Cartesian plots.

The Company also produces a wide range of related hardware products, such
as Industrial Workstations(TM), which are "ruggedized" computers with built-in
displays, keyboards or other forms of operator input and are used by operators
in industrial processing and factory floor environments to monitor and control
machine and cell level operations. The primary focus is on applications where
the extremes of temperature, shock and vibration, high humidity, airborne
contaminants and physical abuse or hard use require the use of equipment that
has been specially designed to operate more reliably than commercial grade
equivalents.

The Company sells its products through both a direct sales force and a
broad distribution network. A majority of the Company's revenue is generated
through its extensive network of more than 100 distributors located in 37
countries. The Company believes that the size and breadth of its distribution
network is a significant competitive advantage for the Company.

The Company's strategy is to lead the industrial automation market
migration from higher cost, closed architecture PLCs to lower cost, open
architecture PC-based solutions. Key elements of the Company's strategy include
(i) continuing to shift its focus from providing primarily hardware products to
providing integrated software and hardware solutions, (ii) rapidly developing
application software products that execute with Microsoft Windows NT and Windows
95, (iii) leveraging its direct sales force and distribution network, (iv)
creating and maintaining high levels of customer satisfaction, and (v) utilizing
its existing installed base, worldwide distribution network and direct customer
contacts to identify emerging market needs and future growth opportunities.

The Company was incorporated in Michigan in 1983. Its principal executive
offices are located at 5840 Interface Drive, Ann Arbor, Michigan 48103 and its
telephone number at that address is (313) 994-0591. The Company also maintains a
software development and software manufacturing facility in Virginia Beach,
Virginia and a European sales and service office near Amsterdam, the
Netherlands.

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THE OFFERING

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Common Stock offered........................... 1,200,000 shares
Common Stock to be outstanding after the
offering..................................... 4,245,168 shares(1)
Use of proceeds................................ To repay bank debt and for general corporate
purposes. See "Use of Proceeds".
SmallCap Market symbol......................... NEMA
</TABLE>

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(1) Excludes (i) 344,150 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options and 445,250 shares available for
option grants under the Company's stock option plans; (ii) an additional
695,270 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants; and (iii) 40,000 shares of Common Stock that the
Representative will be able to acquire upon exercise of the Warrant.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
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SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------- -----------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -----------
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STATEMENT OF OPERATIONS DATA:
Net revenues........................... $12,242 $15,287 $17,576 $ 8,595 $10,071
Gross profit........................... 3,073 3,243 6,194 2,716 4,424
Operating income (loss)................ (1,355) (2,698) 607 118 470
Net income (loss)...................... (1,409) (2,797) 303 35 131
Earnings (loss) per share.............. (1.01) (1.75) 0.14 0.02 0.04
Supplemental earnings per share(1)..... 0.17 0.06
Weighted average shares outstanding.... 1,409 1,600 2,180 1,754 3,429
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
AS OF SEPTEMBER 30, -----------------------
------------------------------- AS
1993 1994 1995 ACTUAL ADJUSTED(2)
------- ------- ------- ------- -----------
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BALANCE SHEET DATA:
Working capital........................ $ 2,917 $ 1,131 $ 1,270 $ 2,902 $12,633
Total assets........................... 9,677 9,700 15,204 16,705 23,576
Long term debt (less current
maturities).......................... 1,351 1,848 2,306 3,626 3,626
Total liabilities...................... 4,063 6,602 8,668 9,631 6,771
Stockholders' equity................... 5,614 3,098 6,536 7,074 16,805
</TABLE>

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(1) Supplemental earnings per share reflects: (i) the issuance of a sufficient
number of shares of Common Stock necessary to repay the average debt
outstanding under the revolving line of credit for the respective periods;
and (ii) the elimination of interest expense, net of income taxes, related
to such borrowings.

(2) Adjusted to give effect to the sale of 1,200,000 shares of Common Stock
offered hereby at a price of $9.00 per share, less applicable underwriting
discounts and estimated offering expenses payable by the Company. See "Use
of Proceeds" and "Capitalization".

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<PAGE> 6

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be carefully considered.

UNPROFITABLE HISTORY

The Company generated net income in fiscal 1995 and the first six months of
fiscal 1996 after incurring net losses for each of the five fiscal years ended
September 30, 1990 through 1994, including net losses of approximately
$2,797,000 and $1,409,000 for the fiscal years ended September 30, 1994 and
1993, respectively. As a result of such losses, the Company has an accumulated
deficit of $78,000 and total stockholders' equity of $7,074,000 at March 31,
1996. Although the Company generated net income of $303,000 for the year ended
September 30, 1995, $74,000 was attributable to foreign currency gains. See
"Risk Factors -- Exposure to Foreign Currency Exchange Risk".

The independent auditors' report for the fiscal year ended September 30,
1994 (which is included elsewhere in this Prospectus) contains an explanatory
paragraph to the effect that the related financial statements had been prepared
assuming that the Company would continue as a going concern but stated that
there were matters that raised substantial doubt about the Company's ability to
continue as a going concern. The Company's financial statements for such year
indicated that the Company's continuation as a going concern was dependent upon
the Company's ability to generate sufficient cash flow to meet its obligations
on a timely basis, to comply with the terms and covenants of its short-term
borrowing agreement, to renew its bank credit agreement or obtain alternative
financing and, ultimately, to attain profitability. See the Company's
Consolidated Financial Statements contained elsewhere in this Prospectus.
Although the Company has recently been profitable, is currently in compliance
with the covenants in its loan documents, and has obtained a significant amount
of additional debt and equity financing to address its short term cash needs,
there can be no assurance that the Company will continue to be profitable, will
continue to be in compliance with the covenants in its loan documents or will be
able to generate sufficient cash flow in the future.

FLUCTUATIONS IN OPERATING RESULTS

The Company may in the future experience fluctuations in revenue and
operating results from period to period as a result of several factors
including, without limitation, the demand for the Company's existing products;
the mix of products sold; the ability to develop, introduce and ship new
products; market acceptance of or defects in the Company's existing, new or
enhanced products; new product introductions and announcements by the Company,
the Company's competitors or the Company's customers; accounting charges due to
obsolete products or inventory; changes in Company strategy; increased
competition and pricing pressures; and changes in economic conditions generally.
In addition, because the Company receives a substantial amount of its net
revenues from a limited number of relatively significant purchase orders, the
size, timing and recognition of revenue from such orders may materially affect
the Company's results of operations in a given period. As a result of these
factors, there can be no assurance that the Company will be profitable in the
future on a quarterly or annual basis. It is possible that in some future
quarter the Company's operating results will be below the expectations of public
market analysts and investors. In such event, or in the event that adverse
conditions prevail or are perceived to prevail generally or with respect to the
Company's business, the price of the Common Stock would likely be materially
adversely affected. See "Risk Factors -- Stock Price Volatility", "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

NEW PRODUCTS AND TECHNOLOGICAL CHANGE

The industrial operator workstation and industrial software markets in
which the Company competes are characterized by rapid and significant
technological advances, evolving industry standards, changes in customer
requirements and the introduction of new products and services using new
technologies. The Company's future success will depend on, among other things,
its ability to anticipate and adapt to its customers' changing needs and to
provide, on a continuing basis, the most effective solutions permitted by the
available technology. In addition, new and enhanced products and solutions
affecting the Company's markets are continually being introduced by the
Company's competitors which may have a material adverse effect on the Company's
ability to sell its products. There can be no assurance that the Company will be
able to bring sufficient funds and talent to bear to meet the changes faced by
firms competing in markets driven by high

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technology. The Company's failure to successfully keep pace with technological
advances may have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the failure of the Company's
software products to achieve and sustain market acceptance, and the increased
pace at which the Company may be required to introduce new products in response
to technological advances, evolving industry standards, changing customer
requirements and introductions and enhancements of competitive products, could
result in the write-off of capitalized software costs, which could have a
material adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

Software products as internally complex as those offered by the Company
frequently contain errors or defects, especially when first introduced or when
new versions or enhancements are released. Despite extensive product testing by
the Company and by current and potential customers, there can be no assurance
that defects or errors will not be found in the Company's new software products
or in new versions or enhancements after commencement of commercial shipments.
Such defects or errors could result in damage to the Company's reputation, loss
of revenue, delay in market acceptance, diversion of resources and increased
warranty costs, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

The success of the Company's business strategy depends primarily on the
continued progression of the trend away from PLCs to PC-based solutions for
discrete logic control applications in the industrial automation industry. If
the progression to PC-based solutions is slower than expected by the Company or
fails to occur as the Company expects, or if the Company's estimate of the
market size is smaller than anticipated, the Company's business, financial
condition and results of operations could be materially and adversely affected.
See "Business -- The Industrial Automation Industry".

DEPENDENCE ON PROPRIETARY TECHNOLOGY; PENDING LITIGATION

The Company has one registered patent and relies principally on trade
secret and other common law protection of its intellectual property. There is no
assurance that the Company will be able to protect its proprietary technology or
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's proprietary
technology. There is no assurance that foreign intellectual property laws will
protect the Company's intellectual property rights with respect to its products
sold abroad. In addition, the computer industry is characterized by frequent
litigation regarding patents and other intellectual property rights. Litigation
may be necessary to enforce the Company's proprietary rights, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of patent infringement. If an infringement claim is asserted against the
Company, the Company may seek to obtain a license under the other party's
intellectual property rights. There is no assurance that a license would be
available on reasonable terms or at all.

The Company is currently involved in certain litigation relating to the
acquisition of Universal Automation, Inc. and the ownership of the FloPro(R)
patent. While the Company believes that the litigation is without merit and
intends to defend its position vigorously, there can be no assurance that the
outcome of the litigation will not have a material adverse effect on the
Company's business, financial condition or results of operations. In addition,
such litigation, as well as any other possible future litigation with respect to
the Company's patents or other intellectual property, could result in
substantial cost to the Company and diversion of management time and other
Company resources and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Legal
Proceedings".

COMPETITION

The industrial automation solutions industry is highly competitive. The
Company competes directly with many firms that supply industrial automation
equipment, systems and software that are alternatives to those of the Company.
Many of these competitors have substantially greater resources than the Company.
As a result, they may be able to devote substantially greater resources to the
development, promotion and sale of products

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than are available to the Company. There can be no assurance that the Company
will be able to compete successfully against current and future competitors or
that competitive pressures faced by the Company will not materially and
adversely affect its business, financial condition and results of operations.
See "Business -- Competition".

DEPENDENCE ON THIRD PARTY SUPPLIERS

The Company is dependent on third parties for a continuing supply of the
components it uses for the manufacture of its hardware products. As part of the
Company's turnaround plan initiated in fiscal 1995, the Company altered its
purchasing practices and purchased raw materials and components in smaller
quantities and more on a "just in time" basis than in previous years. Although
substantially all of the components used in the Company's products are available
from multiple sources, the Company may experience shortages in supply from its
suppliers due to various factors, including increases in market demand for
certain components which occur from time to time and the limited capacity of
certain suppliers. While the Company believes that it has arranged for an
adequate supply of components to meet its requirements, the Company has no
long-term contract with any suppliers of components and there is no assurance
that the Company will continue to be able to obtain all of the components it
requires. The Company believes that the partial or complete loss of one or more
suppliers is not likely to have a material long-term impact on its operations
but, due to the Company's purchasing practices and attempts to minimize the
inventory it maintains, such a loss could cause significant production delays
which could have a material adverse effect on the Company's business, financial
condition and results of operations in the short term. See "Business --
Manufacturing and Supply".

EXPOSURE TO FOREIGN CURRENCY EXCHANGE RISK

The Company's international operations expose the Company to constantly
fluctuating currency rates. Currency fluctuations have in the past adversely
affected, and may in the future adversely affect, the Company's reported
revenue, expenses and stockholders' equity. A majority of the Company's
international sales are denominated in foreign currencies. As a result, an
increase in the value of the U.S. dollar relative to foreign currencies may have
the effect of reducing the Company's reported revenue and profits from
international sales denominated in such currencies. If the Company were to
increase its prices in certain markets in response to such fluctuations, its
products may be less competitive in those markets. As the Company increases
emphasis on foreign sales, it may increase the amount of foreign sales
denominated in currencies other than U.S. dollars. While the Company intends to
enter into forward exchange contracts to hedge exposures related to foreign
currency fluctuations, there can be no assurance that the Company will not incur
losses as a result of such fluctuations which could have a material adverse
effect on the Company's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

EFFECT OF RECENT ACQUISITIONS ON OPERATIONS

On March 3, 1995, the Company consummated a merger with Imagination
Systems, Inc. and, on September 20, 1995, acquired Universal Automation, Inc.
through the Company's wholly owned subsidiary, NemaSoft, Inc. The Company
believes that these transactions will result in more effective new product
development, particularly software, and contribute to its efforts to achieve
consistent profitability. There can be no assurance, however, that these
transactions can assist the Company in achieving consistently profitable
operations. See "Risk Factors -- New Products and Technological Change",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Corporate History".

DEPENDENCE ON KEY PERSONNEL

The Company's future performance will depend to a significant degree upon
the continuing contributions of its key management, sales, marketing, customer
support and product development personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be able to retain
such personnel or that it will be able to attract, assimilate or retain such
highly qualified personnel as may be required in the future. If the Company is
unable to retain its key management personnel, particularly Frank G. Logan, III,
the President and Chief Executive Officer, and David P. Gienapp, the Vice
President -- Finance

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and Administration, Treasurer and Chief Financial Officer, or attract,
assimilate and retain additional qualified personnel as needed, or if a
significant number of its sales, marketing, customer service or product
development personnel should no longer be active in the Company's business, the
Company's business, financial condition and results of operations could be
materially and adversely affected. See "Business -- The Nematron Strategy" and
"Management".

SUBSTANTIAL INFLUENCE BY EXISTING SHAREHOLDERS

Upon completion of this offering, the Company's officers, directors,
principal shareholders and their affiliates will own approximately 30.0% of the
outstanding Common Stock of the Company. As a result, they will be able to
substantially influence all matters requiring approval by the shareholders of
the Company, including the election of directors.

POTENTIAL DILUTION OF INTEREST

The Company currently has outstanding warrants and options to purchase
approximately 1,040,000 shares of Common Stock (approximately 24.5% of the
shares of Common Stock outstanding after the issuance of shares in the offering
being made by this Prospectus) at prices which are less than the price per share
at which shares of Common Stock are being offered pursuant to this Prospectus.
See Note 9 of Notes to Consolidated Financial Statements. The exercise of all or
a substantial portion of such warrants and options would result in substantial
dilution of the ownership interests of purchasers in this offering. In addition,
945,526 restricted shares of Common Stock, issued by the Company in connection
with the merger with Imagination Systems, Inc., were recently registered by the
Company on behalf of the holders of such shares for resale in the market at any
time, as required in the related merger agreement. A total of 521,246, or 55.1%,
of such shares may not be sold for 120 days after the date of this Prospectus
without the consent of the Representative. If the holders of such shares or the
shares underlying such warrants and options cause a large number of shares to be
sold in the public market, such sales could have a material adverse effect on
the market price for the Common Stock. See "Underwriting".

STOCK PRICE VOLATILITY

The trading price of the Company's Common Stock has been, and in the future
could be, subject to wide fluctuations in response to public announcements of
technological innovations or new products by the Company or its competitors, the
Company's results of operations, changes in earnings estimates for the Company
by securities analysts, general conditions in the industrial automation industry
and other events or factors. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations that have particularly
affected the market price of the stock of many high technology companies and
that have often been unrelated or disproportionate to the operating results of
these companies. These broad market fluctuations may adversely affect the market
price of the Common Stock. The market prices of the shares of these companies,
including the Company, are at or near their historical highs and reflect
price-to-earnings ratios substantially above historical norms. There can be no
assurance that the trading price of the Common Stock will remain at or near its
current level. See "Price Range of Common Shares".

RESTRICTIONS ON ABILITY TO PAY DIVIDENDS

Substantially all of the assets of the Company are pledged as collateral
under the Company's credit facilities. The Company is restricted under these
credit facilities from declaring or paying cash dividends. Accordingly, the
Company's shareholders should not anticipate dividend income from shares of the
Common Stock. See "Dividend Policy".

ANTI-TAKEOVER PROVISIONS

Certain provisions of Michigan law and the Company's Articles of
Incorporation and Bylaws may have the effect of preventing, discouraging or
delaying any change in control of the Company. These provisions include a
classified board of directors and a requirement that shareholders provide
advance notice of nominations to be made and business to be proposed at meetings
of shareholders. The Michigan Business Corporation Act also contains provisions
which will impede a potential change of control of the Company not approved by
the Board of Directors. See "Description of Capital Stock".

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USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the shares
of Common Stock offered hereby are estimated to be $9,730,500 ($11,235,075 if
the Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and estimated offering expenses.

The Company intends to use the net proceeds of the offering to repay all of
the outstanding indebtedness under its revolving line of credit facility, which
was incurred for working capital purposes. As of June 5, 1996, there was
$3,170,000 outstanding under this facility. The resulting available credit under
such facility, as well as the remaining net proceeds from the offering of Common
Stock being made hereby, will be used for working capital and other general
corporate purposes. Pending such uses, the net proceeds may be invested in
general obligations issued by the U.S. Government or issued or guaranteed by
agencies or instrumentalities of the U.S. Government, obligations of certain
U.S. commercial banks, certain highly rated commercial paper or short-term
corporate obligations, or certain bank money market funds investing in such
instruments. Although the Company reviews potential acquisition opportunities
from time to time, the Company has no current agreements or understandings with
respect to, and is not engaged in negotiations concerning, any acquisitions.

The revolving line of credit facility bears interest at a rate equal to
1.5% over the prime rate (10.25% on March 31, 1996). Outstanding indebtedness
under the revolving line of credit facility is due on demand and expires January
31, 1997. See Note 6 of Notes to Consolidated Financial Statements.

PRICE RANGE OF COMMON SHARES

Since October 5, 1995, the Common Stock has been traded on the SmallCap
Market under the symbol NEMA. Prior to October 5, 1995, the Common Stock was
traded in the over-the-counter market and was quoted on the NASD OTC Bulletin
BoardSM. The following table sets forth, for the period October 1, 1993 through
October 4, 1995, the high and low bid as quoted by the National Association of
Securities Dealers through the NASD OTC Bulletin BoardSMand, for the period
October 5, 1995 through June 5, 1996, the high and low sales prices for the
Common Stock as reported on the SmallCap Market. The quotations for the period
October 1, 1993 through October 4, 1995 reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.

<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL 1994
First Quarter......................................................... $ 1.75 $0.87
Second Quarter........................................................ 2.00 1.12
Third Quarter......................................................... 2.00 1.62
Fourth Quarter........................................................ 2.00 1.62
FISCAL 1995
First Quarter......................................................... $ 1.75 $0.87
Second Quarter........................................................ 2.00 1.37
Third Quarter......................................................... 2.12 1.62
Fourth Quarter........................................................ 6.50 1.75
FISCAL 1996
First Quarter (Oct. 1 - Oct. 4)....................................... $ 5.50 $5.12
First Quarter (Oct. 5 - Dec. 31)...................................... 5.50 4.25
Second Quarter........................................................ 10.50 4.50
Third Quarter (through June 5)........................................ 10.75 7.25
</TABLE>

On June 5, 1996, the last reported sale price of Common Stock as reported
on the SmallCap Market was $9.00 per share. There are approximately 950 holders
of record of the Company's Common Stock, based upon the records of the Company's
transfer agent.

9
<PAGE> 11

DIVIDEND POLICY

The Company has not declared or paid any cash dividends on the Common
Stock, and it does not intend to pay any cash dividends on the Common Stock in
the foreseeable future. The Company currently anticipates that it will retain
all of its earnings for use in the operation and expansion of its business. A
covenant contained in the Company's Term Loan and Warrant Purchase Agreement
prohibits the payment of dividends.

CAPITALIZATION

The following table sets forth the short-term debt and capitalization of
the Company at March 31, 1996, and as adjusted to reflect the receipt by the
Company of $9,730,500 of estimated net proceeds from the sale of the shares
offered hereby and the application of the net proceeds therefrom. See "Use of
Proceeds". This table should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt................................... $ 110 $ 110
Notes payable to bank(1)............................................... 2,860 0
-------- --------
Total short-term debt............................................. $ 2,970 $ 110
======== ========
Long-term debt, less current maturities................................ $ 3,626 $ 3,626
Stockholders' equity:
Common Stock, no par; 15,000,000 shares authorized; 3,037,710 issued
and outstanding(2)................................................ 7,216 16,947
Foreign currency translation adjustment.............................. (64) (64)
Accumulated deficit.................................................. (78) (78)
-------- --------
Total stockholders' equity........................................ 7,074 16,805
-------- --------
Total capitalization......................................... $10,700 $20,431
======== ========
</TABLE>

- ---------------

(1) Represents borrowings due on demand under the revolving line of credit
facility, which expires January 31, 1997. These borrowings are
collateralized by substantially all of the Company's assets. All of the
borrowings under the revolving line of credit are to be repaid with a
portion of the net proceeds of this offering. See "Use of Proceeds".

(2) Does not include (i) 344,150 shares reserved for issuance at June 5, 1996
upon exercise of outstanding options and 445,250 shares available for option
grants under the Company's stock option plans; (ii) 695,270 shares reserved
for issuance pursuant to the exercise of outstanding warrants; and (iii)
40,000 shares of Common Stock that the Representative will be able to
acquire upon exercise of the Warrant.

10
<PAGE> 12

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for and as of each
of the five years ended September 30, 1995 are derived from the Company's
audited consolidated financial statements. The selected consolidated financial
data as of September 30, 1995 and for the years ended September 30, 1994 and
1995 should be read in conjunction with the Company's audited Consolidated
Financial Statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus. The selected consolidated financial data as of March 31, 1996 and
for the six months ended March 31, 1995 and 1996 are derived from the Company's
unaudited consolidated financial statements included elsewhere in this
Prospectus. In the opinion of management, such unaudited consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the consolidated financial position and
results of operations for such periods and as of such dates. The consolidated
results of operations for the six months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the entire fiscal year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $16,453 $14,070 $12,242 $15,287 $17,576 $ 8,595 $10,071
Cost of revenues..................... 10,610 9,251 9,169 12,044 11,382 5,879 5,647
------- ------- ------- ------- ------- ------- -------
Gross profit............... 5,843 4,819 3,073 3,243 6,194 2,716 4,424
Operating expenses:
Product development costs.......... 1,261 1,479 552 1,645 894 459 603
Selling, general and administrative
expenses........................ 4,559 3,421 3,876 4,296 4,693 2,139 3,351
------- ------- ------- ------- ------- ------- -------
Total operating expenses... 5,820 4,900 4,428 5,941 5,587 2,598 3,954
------- ------- ------- ------- ------- ------- -------
Operating income (loss).............. 23 (81) (1,355) (2,698) 607 118 470
Other income (expense), net.......... (318) (175) (250) (99) (304) (83) (339)
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes on
income............................. (295) (256) (1,605) (2,797) 303 35 131
Taxes on income...................... (130) (135) (196) 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $ (165) $ (121) $(1,409) $(2,797) $ 303 $ 35 $ 131
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per share............ $ (0.12) $ (0.09) $ (1.01) $ (1.75) $ 0.14 $ 0.02 $ 0.04
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding........................ 1,400 1,378 1,409 1,600 2,180 1,754 3,429
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA:
(at end of period)
Working capital...................... $ 4,012 $ 4,610 $ 2,917 $ 1,131 $ 1,270 $ 2,902
Total assets......................... 12,012 11,660 9,677 9,700 15,204 16,705
Long term debt (less current
maturities)........................ 1,742 1,555 1,351 1,848 2,306 3,626
Stockholders' equity(1).............. 6,331 7,050 5,614 3,098 6,536 7,074
</TABLE>

- ---------------

(1) The Company has paid no dividends on Common Stock during the periods
presented.

11
<PAGE> 13

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company generated net income in fiscal 1995 after incurring net losses
for each of the five fiscal years ended September 30, 1990 through 1994. The
return to profitable operations in fiscal 1995 was due to the successful
implementation, beginning in October 1994, of a turnaround plan that affected
virtually all areas of the Company. Due to cash required to fund losses
generated in the immediately preceding two years, by October 1994, the Company's
working capital had been eroded and the Company was generally unable to generate
sufficient funds with which to purchase required inventories and to keep current
with its vendor payments. A key component of the turnaround plan was to obtain
additional funds through an expansion of the Company's bank line of credit and
the incurrence of subordinated debt through a private placement. The Company's
turnaround plan also included, among other things, a reduction of staff by over
20%, a wage freeze and/or salary decreases for all personnel, implementation of
improved financial and operating controls, entering into extended payment terms
with certain key vendors, strengthening its sales and distribution network,
upgrading its financial, engineering and marketing staffs and realigning
corporate responsibilities. Later in fiscal 1995, the Company replaced certain
members of management, continued to improve operating and financial controls,
and implemented its corporate strategy to reduce unprofitable product offerings,
control its discounting policies, introduce higher margin computers and hardware
products and shift its focus from relying exclusively on computers and other
hardware factory automation products to increasing its revenues from sales of
integrated hardware and software solutions. In order to increase its revenues
from sales of integrated hardware and software solutions, the Company merged
with ISI in March 1995 and acquired UAI in September 1995, both of which develop
and market software products. The turnaround plan described above has been
substantially completed, although adjustments of such actions will continue to
occur in the normal course of business. The Company intends to place additional
emphasis on foreign sales in fiscal 1996. See "Business -- Corporate History"
and "Business -- The Nematron Strategy".

Management's continuing strategy is to incorporate software products
developed by ISI and UAI into the Company's product offerings and to vertically
integrate its product offerings to include both hardware and software products
related to industrial automation. The Company's marketing and sales efforts to
existing and new customers include stand-alone computers, software products and
bundled products. The Company intends to continue its shift of business away
from dominance by computer hardware sales, and will pursue the development of
existing and new software products. Additionally, the Company has identified new
markets for both hardware and software products, and will pursue new business
from customers which offer the greatest likelihood of large hardware unit volume
and/or large dollar volume from software products and licenses. Management
anticipates significant growth in the industrial software marketplace and
intends, through concentrated development and aggressive marketing and sales
efforts, to capture an increasing percentage of that market.

The Company and its wholly owned subsidiary, NemaSoft, Inc., are defendants
in a lawsuit brought by one of its competitors, Xycom, Inc., seeking unspecified
damages based on allegations of, among other things, disclosure of trade secrets
and tortious interference with contractual relations. The suit also seeks to
enjoin the use of certain marketing, business and other non-technical
information which it alleges constitutes trade secrets and to unwind the merger
of UAI into NemaSoft. Although the Company cannot predict the likely outcome of
the lawsuit at this preliminary stage of the proceedings, management believes
that, even if the Company does not prevail, the ultimate disposition of these
matters will not have a material adverse effect on the Company's business,
financial condition or results of operations. There can be no assurance,
however, that the outcome of the litigation will not have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business -- Legal Proceedings".

The following discussion and analysis contain a number of "forward looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended, with respect to expectations for future periods which are subject to
various uncertainties explained herein.

12
<PAGE> 14

RESULTS OF OPERATIONS

SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995

Net revenues for the six month period ended March 31, 1996 increased
$1,476,000 (17.2%) compared to the same period last year. The increase in net
revenues was due equally to an increase in software revenues resulting from the
Company's acquisitions of ISI and UAI in March 1995 and September 1995,
respectively, and to increases in sales volume and prices of hardware products
in response to increases in the level of marketing and sales efforts during the
current period. Domestic revenues for the six month period ended March 31, 1996
increased $2,386,000 while foreign revenues decreased $909,000 compared to the
same period last year. Domestic revenues reflect the strong demand for new
hardware and software products in North America in response to increased
marketing and sales efforts. Foreign revenues have decreased due to the timing
of planned purchases by certain customers of the Company's new products and the
Company's decreased emphasis and planned phase out of certain older products.
Additionally, international marketing and sales campaigns for ICCs and for
certain of the Company's software products are not planned until later in fiscal
1996.

Gross profit for the six month period ended March 31, 1996 increased
$1,708,000 over the same period last year. Gross profit as a percentage of net
revenues in the current period was 43.9% versus 31.6% in the same period last
year. The improvement is due primarily to the high gross profit margin afforded
by software and applied systems revenue and, to a lesser extent, to price
increases and cost controls in place during the entire current period compared
to most of the year earlier period.

Total operating expenses for the six month period ended March 31, 1996
increased $1,356,000 (52.2%) over the comparable period last year primarily as a
result of higher sales and marketing costs and increased product development
efforts. The average number of employees during the six months ended March 31,
1996 increased by approximately 25% over the comparable period a year ago as
increased emphasis was placed on sales, marketing and product development. The
Company intends to continue to invest in product development efforts.

Interest expenses for the six month period ended March 31, 1996 increased
to $321,000 from $189,000 for the comparable period last year, due primarily to
increased average borrowing levels and higher effective interest rates. Total
debt levels increased due to increased borrowings on the bank line of credit and
increases in the mortgage note and subordinated debt levels.

Foreign currency losses of $14,000 were recorded in the six month period
ended March 31, 1996 compared to foreign currency gains of $105,000 in the
comparable period last year. The foreign currency gains and losses are largely
attributable to the impact of translating Dutch guilder transactions of the
Company's Netherlands-based subsidiary to the Company's functional U.S. dollar
currency.

FISCAL 1995 COMPARED TO FISCAL 1994

Net revenues were $17,576,000 in fiscal 1995 compared to $15,287,000 in
fiscal 1994. This represents an increase of $2,289,000, or 15.0%, compared to
fiscal 1994. Of the increase, $704,000, or 30.8%, was attributable to revenues
from software sales, which were not material in fiscal 1994, and $1,585,000, or
69.2% of the increase, was attributable to increases in sales of Industrial
Workstations(TM) and related parts and service. The increase in sales of
Industrial Workstations(TM) and related parts and service represented an
increase of 10.5% in fiscal 1995 over fiscal 1994, and resulted from both price
increases on several products and a reduction in discounts given to certain
distributors and direct sales accounts. Price increases, ranging from 1% to 20%,
were made on a product by product basis and distributor discount controls were
established for specific accounts where needed. Both of these activities were
undertaken as part of the Company's turnaround plan initiated in fiscal 1995.
Foreign revenues increased in fiscal 1995 by $1,942,000, or 42.5%, over foreign
revenues in fiscal 1994, reflecting the strong demand in Europe and favorable
customer response to increased marketing and sales efforts expended by the
Company over the last several years. Domestic revenues increased in fiscal 1995
by $347,000, or 3.2%, over domestic revenues in fiscal 1994 due almost
exclusively to increased software sales. Management expects that the growth in
revenues experienced in fiscal 1995 will continue at or

13
<PAGE> 15

near the fiscal 1995 rate as the initial response to the Company's new products
has been favorable, and the Company will continue to place increased emphasis on
marketing and sales efforts, especially to new customers which have the greatest
likelihood for large hardware unit volume and/or large dollar volume from
software products and licenses. Also, software revenues from newly developed or
acquired software products will be included in Company revenues for a full year
in fiscal 1996 versus being included for a partial year in fiscal 1995. The
Company's expectation of revenue growth is also based on management's assumption
and belief that the products introduced in late fiscal 1995 and planned for
release in fiscal 1996 are technologically more advanced than certain comparably
priced competing products and that the expansion of the Company's product line
will result in the addition of new distributors to the Company's distribution
network. The actual growth in net revenues for fiscal 1996 is subject to a
number of uncertainties, however. For example, the marketplace may not respond
favorably to the Company's sales and marketing efforts, latent technological
deficiencies in the new products may reduce demand for the products, the
anticipated interest of new distributors in the Company's products may not come
to fruition, or technological advances by competing products may reduce demand
for the Company's products. The occurrence of any of these events could result
in the Company's net revenues growing at a reduced rate or declining.

Cost of revenues include costs related to raw materials and component
parts, direct labor, burden, amortization of capitalized software costs,
provisions for warranty expenses on products sold and provisions for excess and
obsolete inventory. There were no material changes in costs of raw materials,
direct labor or burden, but amortization of capitalized software costs increased
in relation to increases in software-related revenues in fiscal 1995 compared to
fiscal 1994. In fiscal 1994 and 1995, the Company placed a significantly
increased emphasis on improving the overall quality of all products assembled
and shipped through improved manufacturing techniques, placing higher quality
standards on purchased materials, and improving shipping and packaging methods.
Additionally, in late fiscal 1994, the Company followed industry trends and
reduced its warranty period from an average of 30 months to 18 months. As a
result of such actions, warranty expenses have decreased by approximately
$90,000 in fiscal 1995 compared to fiscal 1994, and the year-end warranty
reserve has decreased by approximately $110,000. As part of the turnaround plan
initiated in fiscal 1995, the Company altered its purchasing practices and
purchased raw materials in smaller quantities and more on a "just in time" basis
than in previous years. Also, the Company phased out its product offerings only
when it was economical to do so -- i.e., when component parts inventory for a
potential phase-out product were minimal. As a result of such actions, the need
for a significant addition to the year-end provision for excess and obsolete
inventory was eliminated in fiscal 1995.

Gross profit increased in fiscal 1995 to $6,194,000, or 35.2% of net
revenues, from $3,243,000, or 21.2% of net revenues, in fiscal 1994. The
increase in gross profit in fiscal 1995 was due to implementation of the
Company's turnaround plan through increasing prices and/or decreasing discounts
for certain products and to certain major customers, the elimination of certain
low margin products from the Company's product offerings, and the increase in
sales of higher margin hardware and software products. In fiscal 1995, the
elimination of low margin products had the added benefit of reducing the number
of unique hardware components purchased and maintained in inventory. Further,
higher margin hardware and hardware bundled with software embedded into the
product was emphasized in the Company's sales and marketing efforts. In fiscal
1995 total gross profit improved due to the sales of such bundled products and
certain software products, primarily AutoNet(TM) software and the related
integration services resulting from the Company's merger with Imagination
Systems, Inc. ("ISI") in March 1995. Also, approximately $150,000 of revenue was
recorded from sales of FloPro(R) software licenses resulting from the Company's
acquisition of Universal Automation, Inc. ("UAI") in September 1995, and such
sales of high margin software had a positive impact on overall gross profit. The
lower gross profit in fiscal 1994 was also the result of increased provisions
for warranty costs and for additional reserves for excess and obsolete
inventory; similar increases in provisions and reserves were not required in
fiscal 1995. Management expects that gross profit will continue to improve, but
at a slower rate than the growth rate experienced in fiscal 1995. The expected
increase in gross profit in fiscal 1996 is due to the Company's continued shift
away from lower margin hardware products, the continued elimination of lower
margin products and a favorable response to the Company's marketing and sales
efforts with respect to higher margin hardware and software products. The actual
gross profit growth rate for fiscal 1996 is subject to various uncertainties,
however. For example, the Company may be unable to sustain product price
increases

14
<PAGE> 16

implemented in fiscal 1995 if there is a reduction in customer demand or a
substantial decrease in competitors' prices on comparable products, raw material
prices may increase to an extent that cannot be passed on to customers or the
Company's marketing efforts to boost sales of higher margin products may not be
successful. The occurrence of any of these events would adversely affect the
Company's gross profit.

Product development costs decreased in fiscal 1995 by $751,000, or 45.7%,
over the fiscal 1994 level, primarily due to write-offs of previously
capitalized software costs related to one major and several smaller projects in
fiscal 1994, which write-offs were not required in fiscal 1995. A larger
percentage of the Company's software development efforts were capitalizable
expenditures in fiscal 1995 than in fiscal 1994. The most significant of these
products was the PowerVIEW(TM) product which was released in September 1995.
Approximately $494,000 more software development costs, primarily related to
PowerVIEW(TM), were capitalized in fiscal 1995 than in fiscal 1994. Included in
the fiscal 1994 product development costs of $1,645,000 was a $440,000 write-off
of previously capitalized costs related to the abandonment in the fourth quarter
of fiscal 1994 of in-process software which was being developed in fiscal 1993
and fiscal 1994 and which was to be the basis for the Company's next generation
of industrial workstation products. In the fourth quarter of fiscal 1994 and
prior to the issuance of its financial statements, the Company completed its
review and evaluation of its in-process software. The Company determined that,
although the in-process software would accomplish its designed functions, it
would be more economical and beneficial to base the next generation of Company
products on the software developed by ISI. Consequently, the Company wrote off
in the fourth quarter of fiscal 1994 all costs associated with its internally
developed software project. Product development expenses, which are a function
of new product research and development and existing product enhancement
efforts, are expected to increase over the fiscal 1995 level as a result of
planned efforts to update several existing products and plans to engage in
additional research efforts on new products and technologies. The actual level
of product development expense for fiscal 1996 is subject to various
uncertainties, including the Company's potential inability to attract and/or
retain qualified persons to perform the planned activities and the potential
lack of available cash to fund the planned activities. In addition, it is
possible that research and development efforts could proceed more quickly than
anticipated and require the Company to capitalize (rather than expense) the
costs related to such efforts.

Selling, general and administrative expenses in fiscal 1995 increased by
$397,000, or 9.2%, over the fiscal 1994 level, due principally to increased
marketing and sales efforts in the second half of the fiscal year undertaken to
achieve the sales growth discussed previously, including the sales and marketing
efforts needed for products acquired through the ISI merger and other new
product introductions, and for the expansion of the Company's sales force and
its distribution network. Also, the Company experienced certain increases in
general and administrative expenses due to the merger of the Company with ISI in
March 1995. The acquisition of UAI in September 1995 had an insignificant impact
on selling, general and administrative expenses in fiscal 1995. The Company's
turnaround efforts included reductions early in fiscal 1995 of several selling,
general and administrative personnel, and the realization of certain
efficiencies resulting from a realignment of responsibilities. Additionally, the
salaries of all officers and most middle management personnel were reduced by
between 5% and 20%, other salaries were frozen and, to the extent practical, all
non-essential spending was curtailed. The rate of increase in selling, general
and administrative expenses is expected to approximate the growth rate in fiscal
1995. This expectation is based upon planned increases in support staff and
marketing staff, general cost increases due to expanding marketing, sales and
other activities and inclusion of the cost of maintaining the Virginia facility
for a full year in fiscal 1996 compared to a partial year in fiscal 1995. The
actual rate of growth is subject to various uncertainties, however. These
include the Company's potential inability to attract and retain qualified
personnel as planned and the potential need to curtail planned marketing and
sales efforts and other activities if the necessary funds are not available.

Interest expense in fiscal 1995 increased by $138,000 due to higher
borrowing levels which were necessary to fund fiscal 1994 losses and the
expansion of business in fiscal 1995. Average borrowings under the Company's
bank line of credit increased by $462,000 and the average interest rate on such
borrowings increased by 3.22%. Additionally, the Company increased its
borrowings under convertible subordinated notes by $262,000 for most of fiscal
1995, borrowed $100,000 under a short term loan with a bank, and borrowed
$100,000 from former ISI shareholders for a portion of fiscal 1995. In August
1995, the Company eliminated

15
<PAGE> 17

$200,000 of subordinated debt through conversion of a convertible subordinated
note into Common Stock and entered into a new term note collateralized by a
mortgage. In September 1995, the Company increased the amount of its available
line of credit and utilized a portion of such increase. In November 1995, the
Company repaid $444,000 of convertible subordinated debt with proceeds of
$1,800,000 of new subordinated debt. The net effect of these transactions was an
increase in total debt for fiscal 1995 over fiscal 1994, and an increase in
average debt outstanding for fiscal 1996 is anticipated. Therefore, interest
expense is expected to increase in fiscal 1996.

Foreign currency gain totaled $74,000 in fiscal 1995 compared to $40,000 in
fiscal 1994. The gain resulted in each period primarily from translating the
intercompany balance between the Company and its Netherlands-based wholly owned
subsidiary at year end exchange rates of U.S. dollars to the Dutch guilder. Only
the portion of the intercompany balance planned or anticipated to be settled in
the foreseeable future is subject to foreign exchange gain or loss. The foreign
currency gain has no effect on near-term liquidity. While the foreign currency
gain has been significant to operations in fiscal 1995, management does not
expect the effect of foreign currency transactions to be significant in fiscal
1996 as the intercompany balance which is subject to translation is reduced from
the levels maintained in fiscal 1995.

NEW ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". This statement is effective for fiscal
years beginning after December 15, 1995 and requires long-lived assets and
certain intangible assets to be carried at the lower of cost or fair value less
cost to sell if recoverability is determined to be questionable. The Company
does not believe adoption of this statement will have a material impact on
operations.

In November 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation". This statement is effective for fiscal years
beginning after December 15, 1995. Companies have a choice to include a
reasonable estimate of expense for all stock-based compensation in the operating
statement, or to disclose the effect of adopting the provisions of the statement
on a pro forma basis in a footnote to the financial statements. The Company
anticipates that it will include the effects of the statement in a pro forma
disclosure, and it is unable to estimate the impact of the statement at this
time.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 1995, the Company increased its capital resources by
obtaining a new term note secured by a mortgage, $79,000 of equipment under
capital leases, $262,000 of proceeds under convertible subordinated notes and
$500,000 under terms of an increased bank credit line. Additionally, the Company
has renegotiated the agreement underlying its bank line of credit so that the
maximum borrowings available have increased to $3,250,000, which represents an
$800,000 increase over the amount available during fiscal 1995. Although the
maximum amount that can be drawn is limited by a formula, the Company does not
expect that the formula will materially limit the amount of funds available to
be borrowed under the line of credit during fiscal 1996.

In November 1995, the Company completed a private placement of subordinated
debt. Under the terms of the Term Loan and Warrant Purchase Agreement, the note
holders provided the Company with $1,800,000 of subordinated debt in return for
12% notes which require interest-only payments for three years. The net proceeds
from the sale of the notes of $1,208,000, after payment of expenses and
repayment of $444,000 of convertible subordinated debt to a note holder and the
payment of investment banking fees, were added to working capital.

In March 1996, the Company issued 168,000 shares of Common Stock upon the
exercise of certain stock options and warrants. The Company received cash
proceeds of approximately $420,000, which amount was added to working capital.

The Company's operating activities used $1,224,000 of cash in the six
months ended March 31, 1996, and $274,000 of cash in fiscal 1995. In fiscal
1994, operating activities provided $154,000 of cash. The use of cash

16
<PAGE> 18

in the six months ended March 31, 1996 was primarily the result of increases in
inventory and accounts receivable to fund current growth in business activity,
and the payment of a significant amount of accounts payable and accrued
expenses. The use of cash in fiscal 1995 was primarily the result of increases
in inventory and accounts receivable to fund the growth in business activity,
partially offset by an increase in accounts payable and the Company's net income
for the year. In fiscal 1996, the Company began implementing measures to reduce
its inventory levels and increase inventory turnover, improve its cash
collection procedures, and increase financial controls over its spending. The
Company intends to continue these efforts, although there can be no assurance
that such efforts will be successful. Working capital at March 31, 1996 was
$2,902,000, compared to $1,270,000 at September 30, 1995.

The Company intends to acquire hardware and software to improve its
management information systems in fiscal 1996 at a cost estimated at $400,000,
which the Company may finance through either a capital lease or a term loan from
a local bank. Such expenditure is subject to funding availability and the
availability of suitable hardware and software.

The Company believes that the combination of the net proceeds from this
offering, internally generated funds from operations, borrowings under the
existing bank credit facilities or replacement facilities and the net proceeds
from the November 1995 subordinated debt placement will be sufficient for the
Company's operating and capital requirements for fiscal 1996.

17
<PAGE> 19

BUSINESS

GENERAL

The Company is a designer, manufacturer and marketer of PC-based industrial
automation solutions on a worldwide basis. These solutions include proprietary
software for direct machine control, process visualization and data acquisition.
Additionally, the Company is a long-standing and well-recognized producer of
related hardware products, such as Industrial Workstations(TM) and ICCs, and has
an installed base of more than 60,000 operator interface installations which the
Company believes has resulted in brand name recognition and greater customer
awareness of the Company's products. The Company is well positioned because of
its combination of proprietary software and installed hardware base to
capitalize on the industrial automation trend from higher cost, closed
architecture PLCs to lower cost, open architecture PC-based solutions.

The Company's recently developed or acquired software products, marketed
under the trademarks FloPro(R), PowerVIEW(TM) and AutoNet(TM), are used in the
industrial and factory automation workplace. FloPro(R) is a flowchart
programming and direct machine control software product developed by UAI used to
create, debug, document and execute control applications in a PC-based open
architecture environment. The Company's PowerVIEW(TM) product is a powerful and
comprehensive 32-bit Windows NT and Windows 95-based application development
system for factory floor panel replacement applications. The Company's test and
measurement software, AutoNet(TM), developed by ISI, allows for data acquisition
and real-time processing of data and the performance of multiple functions at a
high rate of speed and the graphic display of such real-time information through
a wide variety of configurable graphic instruments, trends and Cartesian plots.
All three software products may be run on computers sold by the Company or by
most other manufacturers.

The Company's industrial hardware products are used in industrial
manufacturing and process automation, specifically relating to operator-machine
interface applications. The Company incorporates electronic technology and
proprietary software in its Industrial Workstation(TM) products to satisfy a
broad variety of customer applications. Such applications range from the
replacement of traditional hardwired push buttons, lights and gauges that can be
used with a single machine or local process, to advanced industrial computer-
based systems that provide supervisory control or direct connection to
input/output devices with the Company's FloPro(R) software and networking
capabilities over a large number of machines. Important to nearly all hardware
products is the ability to communicate to the process indirectly through an
intelligent processor, such as a PLC, motion controller, or other form of
specialized process controller.

The Company maintains three primary facilities, located in Ann Arbor,
Michigan, Virginia Beach, Virginia and Maarssenbroek, the Netherlands. The Ann
Arbor facility houses the Company's headquarters and hardware design and
manufacturing operations. The Company's software development and software
manufacturing operations are conducted at the Virginia Beach facility. Software
engineers and others located there are responsible for software product
development, enhancement, maintenance, and reproduction of software. The
Company's European sales, distribution management, application engineering and
customer services are conducted through its office in the Netherlands. While a
significant amount of the Company's

18
<PAGE> 20

foreign sales are shipped directly from Ann Arbor to its European customers, the
Company maintains a small inventory of demonstration equipment and finished
goods to support selected customers and a stock of spare parts in order to
provide billable repair and warranty services. The European facility is
primarily operated as a cost center since gross product margins and operating
expenses cannot be reasonably allocated by region.

CORPORATE HISTORY

The Company was incorporated in Michigan in October 1983. In 1986, the
Company became a wholly-owned subsidiary of Interface Systems, Inc.
("Interface"). In February 1993, the Company became an independent publicly
traded company as a result of the distribution by Interface of 100% of the
shares of the Company on a pro rata basis to Interface's shareholders. In
October 1993, the Company acquired certain business assets of Action
Instruments, Inc. ("Action"), including product rights, tooling and fixtures and
inventory related to Action's industrial computer business, for cash, Common
Stock and a subordinated convertible note.

Realizing the importance of providing both software and hardware solutions
to its customers, the Company made two strategic acquisitions of leading
industrial automation software companies in 1995. In March 1995, the Company
completed its merger with ISI, a Virginia Beach, Virginia-based developer of
industrial data acquisition and networking software, for Common Stock and
warrants. ISI operates as a division of the Company, with its primary business
being the development of software and the sale of AutoNet(TM) software and
related application engineering services. In September 1995, the Company
completed the acquisition of UAI, a Hudson, New Hampshire-based developer of
industrial software for machine control that executes on Intel-based personal
computers, including the FloPro(R) software described below, for Common Stock,
warrants and cash. UAI operates under the name NemaSoft as a wholly-owned
subsidiary of Nematron. The ISI and UAI transactions enabled the Company to
obtain software expertise and software product development experience much more
quickly than such expertise and experience could have been developed internally.

Following the ISI merger, ISI's former president, Frank G. Logan, III,
became President and Chief Executive Officer of the Company and instituted a
turnaround plan for the Company, which plan is described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

THE INDUSTRIAL AUTOMATION INDUSTRY

THE TREND FROM PLCS TO PCS

Since the early 1980s, PLC manufacturers have either developed their own
operator interface capabilities or have bought brand label products from makers
like the Company. The Company believes that there are currently five trends
driving the industry toward a consolidation of operator interface and PLC
functionality:

- cost savings relating to both initial purchase and ongoing operating
costs;

- performance (speed) improvements leading to higher production output;

- desire for open system solutions;

- space savings; and

- desire of customers for sourcing flexibility.

Based on these trends, many experts now believe that the PC will eventually
replace both the PLC and the operator interface for many plant floor control
applications.

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<PAGE> 21

THE INDUSTRY TODAY

The Company believes that the industrial automation marketplace is
undergoing a significant shift in the application of computer technology.
Hardware products are rapidly becoming commodity items and software is playing
an increasingly important role in driving sales. Devices that perform or support
discrete logic control for manufacturing products like automobiles are becoming
more software-focused and dependent. The same is true in the continuous process
industries, such as chemical and petrochemical operations. Generally, products
that are sold to customers in these industries fall into the following
categories:

Manufacturing
Execution Systems
-------------------
Supervisory Control and
Data Acquisition ("SCADA")
--------------------------------
Man Machine Interface/Operator Interface
------------------------------------------
Discrete Logic Control
--------------------------------------------------
Device Networking
--------------------------------------------------------
Sensors, Switches, Pilot Lights and Electrical Wiring Products
----------------------------------------------------------------

The Company offers products within the SCADA, Man Machine Interface/Operator
Interface and Discrete Logic Control layers of this hierarchy.

Manufacturing Execution Systems. This is a relatively new software product
category with the objective of linking timely production and plant floor data,
such as production statistics, to a financial accounting system or material
requirements planning program.

Supervisory Control and Data Acquisition. In order to monitor and act upon
events occurring on a plant-wide basis, PC-based software products are commonly
employed in a centralized "command center" where plant-level monitoring,
supervisory control and data acquisition take place. These systems update fairly
rapidly but are not considered to be real-time. Typically, they are connected
over some form of network to the actual controlling devices that are located on
or near machines on the plant floor. The Company's AutoNet(TM) product operates
in certain niches of this segment.

Man Machine Interface/Operator Interface. In a typical manufacturing
operation, each machine involved requires a variety of sensors, actuators, push
buttons, switches and lights. Many of these components are successfully replaced
by electronic control panels using a CRT or LCD "panel replacement" product.
Such a panel replacement product would then be electrically connected to a
device that actually controls the operation, sequencing and safety features on
the machine. The Company offers a variety of products that typically combine
hardware and embedded software to cost-effectively replace as few as three or
four switches. The Company's ICC and PowerVIEW(TM) products represent PC-based
solutions for this application area. The

20
<PAGE> 22

Company was a pioneer in this area when it introduced its Industrial
Workstations(TM) in 1983 and now has an installed base of more than 60,000 units
in a wide variety of industries and applications.

Discrete Logic Control. Historically, proprietary PLCs that perform direct
machine control are employed at this level. The Company has successfully applied
PCs as a replacement for PLCs in this area, particularly with the FloPro(R)
software product. FloPro(R) is being used in more than 10 plants of a major U.S.
automotive manufacturer to control more than 1,000 machines. Other companies
offering such "soft logic" solutions are generally smaller private or startup
companies.

Device Networking and Motion Control. In recent years, a number of new
approaches to connecting sensors, switches and lights have been introduced in an
effort to reduce wiring complexity and costs while improving reliability through
enhanced diagnostics. These device networks work in conjunction with the
Company's software products and are considered complementary or enabling
products.

Sensors, Switches, and Electrical Wiring Products. This is the lowest layer
in the automation hierarchy. There are numerous companies that manufacture
products of this type.

THE NEMATRON SOLUTION

The Company believes that the industrial automation migration from PLCs to
PCs is imminent and represents a substantial opportunity. To address this
opportunity, the Company has focused on providing complete industrial automation
solutions to industrial users worldwide. The Company combines proprietary
software, proven hardware, and an experienced support and service staff to
create a series of PC-based industrial automation solutions. This approach
provides industrial customers with substantial potential initial purchase and
ongoing operating cost savings, increased productivity and the flexibility of an
open architecture system.

THE NEMATRON STRATEGY

The Company's overall business strategy is to position itself to lead the
industrial automation market migration from higher cost, closed architecture
PLCs to lower cost, open architecture PC-based solutions. The Company's strategy
incorporates the following key elements:

Continuing to shift its focus from providing primarily hardware products to
providing integrated software and hardware solutions. The Company believes that
its customers require integrated software and hardware solutions to their
industrial automation needs. Additionally, the Company believes that the
software portion of the industrial automation market will offer potentially
higher margins in the long run. Therefore, the Company has undertaken several
strategic initiatives recently to shift its product mix towards a higher
percentage of software products. In 1995, the Company merged with ISI and
acquired UAI, industrial automation software companies that specialize in
real-time PC-based control and measurement. These transactions brought
substantial software expertise to the Company and gave rise to the creation of
NemaSoft, a wholly owned subsidiary of the Company.

Rapidly developing application software products that execute with
Microsoft Windows NT and Windows 95. The Company believes that Windows NT and
Windows 95 have certain characteristics that will accelerate the migration from
PLCs to PCs. The Company's PowerVIEW(TM) software is compatible with Windows NT
and Windows 95 and the Company is rapidly developing a Windows NT version of its
FloPro(R) software.

Leveraging its direct sales force and distribution network. The Company has
spent and intends to continue to spend substantial resources on the development
of a worldwide sales and support infrastructure. Such an infrastructure is
critical to meeting the needs of its large worldwide customers. The Company
intends to leverage both its direct sales force and distribution network to
increase sales of its products into new market segments and geographical areas.
See "Risk Factors -- Dependence on Key Personnel".

Creating and maintaining high levels of customer satisfaction. The Company
generally sells its products to large manufacturing organizations that have the
potential to purchase significant amounts of its products

21
<PAGE> 23

over time and serve as a potential benchmark for other customers that are
contemplating the implementation of similar industrial automation applications.
Due to the substantial opportunity that each typical customer represents, the
Company strives to achieve very high levels of customer satisfaction through the
timely delivery of high quality products combined with continued support and
service.

Utilizing its existing installed base, worldwide distribution network and
direct customer contacts to identify emerging market needs and future growth
opportunities. As the industrial automation industry replaces PLCs with PCs, the
Company anticipates that a wide range of new and existing hardware and software
technologies will converge. The Company intends to utilize its installed base
and customer contacts, both direct and through its distribution network, to
identify emerging market needs and future growth opportunities. See "Risk
Factors -- New Products and Technological Change".

PRODUCTS

OVERVIEW

The Company derives its revenues from sales of three software products
which were acquired or developed in 1995, four classes of ruggedized industrial
computer terminals known as Industrial Workstations(TM) and related hardware
service. The following table sets forth the percent relationship to total net
revenues from each of these product classes and the amount of total net revenues
for the periods indicated.

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FOR THE SIX
SEPTEMBER 30, MONTHS ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Software revenues............................... 0% 0% 4% 8%
------- ------- ------- -------
Hardware revenues
Character-based PLC workstations and remote
message units.............................. 14% 14% 16% 15%
Industrial graphics terminals and programmable
operator interfaces........................ 40 29 20 17
Industrial control computers.................. 0 0 0 1
Industrial PCs................................ 37 49 51 49
Hardware service.............................. 9 8 9 10
------- ------- ------- -------
Total hardware revenues.................... 100% 100% 96% 92%
------- ------- ------- -------
Total net revenues.............................. 100% 100% 100% 100%
======= ======= ======= =======
Total net revenues (000)........................ $12,242 $15,287 $17,576 $ 10,071
======= ======= ======= =======
</TABLE>

SOFTWARE PRODUCTS

The software products described below, all of which were acquired or
developed by the Company in 1995, represent the cornerstone of the Company's
strategic shift from being a seller of Industrial Workstation products to
becoming a high value-added provider of industrial hardware and software
solutions. With the addition of the following new products, plus the continued
enhancement of existing products and the development of new software products,
the Company is positioning itself as a leading supplier of industrial automation
software. The Company will use its software and proven reliable PC hardware to
help drive the industry from PLC-based to PC-based control.

The Company's three software products are used in the industrial and
factory automation workplace. All three software products may be run on
computers sold by the Company or by most other manufacturers. Additionally, some
of the hardware products discussed below contain proprietary software embedded
in the products as firmware, and such firmware is not sold separately.

FloPro(R) Software. The Company's soft logic software for direct machine
control is called FloPro(R). FloPro(R) is a PC-based flowchart programming
system developed by UAI, which the Company acquired in September 1995. FloPro(R)
is based upon a patent owned by a wholly-owned subsidiary of the Company and is

22
<PAGE> 24

used to create, debug, document and execute control applications in an open
architecture environment. Its open system architecture interfaces concurrently
with many different input/output systems, motion controllers, message units and
tag/bar code systems. FloPro(R) executes on personal computers and simplifies
machine control system development. The use of multiple flowcharts, each one
handling a relatively simple task, allows for the concurrent development of
applications by a team of control engineers. These flowcharts communicate with
each other in a multi-tasking environment so that the control application is
easy to create and understand. Additionally, FloPro(R) is self-documenting in
that it is a programming language based on the flowcharts. There is no need to
translate the flowcharts to ladder logic or any other computer language, thus
reducing programmer time. FloPro(R) also has the ability to reduce plant
downtime through diagnostic messages and fast execution time. FloPro(R) is in
use at ten manufacturing facilities of a major U.S. automotive manufacturer,
controlling over 1,000 machines used to manufacture engines and transmissions.
See "Business -- Legal Proceedings".

PowerVIEW(TM) Software. The Company began the development of this 32-bit
Windows-based application development and run-time system in fiscal 1994 and
first introduced a version of the product for sale at the end of the fourth
quarter of fiscal 1995. The application development system included in the
PowerVIEW(TM) system was developed to serve as a single point of control for
building graphic display panels and configuring hardware, input/output ("I/O")
connections, process variables, alarms, messages and all other events associated
with the operation of a machine. A high-speed run-time complements the project
manager portion of the system, but operates on a 32-bit, real-time, preemptive,
multi-tasking microkernel more naturally suited to high-speed, real-time machine
or process control. When the application project is downloaded to the run-time
system and the workstation is plugged into a PLC or I/O network, it runs
automatically and scans the I/O network at rates typically much higher than
other commercially available workstations, updating the screens and sending
instructions to the PLC virtually instantaneously.

AutoNet(TM). The Company's test and measurement software for data
acquisition and control, AutoNet(TM), is sold to commercial and industrial
companies primarily for use in a test cell environment. AutoNet(TM) allows for
high speed data acquisition and real-time processing of measurement data while
performing multiple operator display functions. AutoNet(TM) graphically displays
real-time information through a wide variety of configurable graphic
instruments, trends and Cartesian plots. AutoNet(TM) also has the ability to
perform real-time mathematical, statistical and trigonometric calculations for
control, test sequencing, filtering and batch management of data. It features
color-coded annunciation of alarm information, diagnostic files and automatic
time stamps, and presents stored data in reports, historical graphics or in
response to ad hoc queries.

HARDWARE PRODUCTS

The Company designs and manufactures operator terminals for reliable
performance in harsh industrial environments. Each operator terminal provides a
display that shows the status of the process and a keyboard or touch screen that
allows personnel to control the process. These terminals all come in a rugged
package that withstands extremes of temperature, humidity, vibration, shock and
electrical interference.

The Company refers to its operator terminals as "workstations," and coined
the name Industrial Workstations(TM) to indicate both the product and its
intended environment. A single Industrial Workstation(TM) can replace dozens of
electromechanical operator displays and controls, such as push buttons,
indicator lights, panel meters, keypads, alarm annunciators and message
displays.

In most applications, Industrial Workstations(TM) connect to intelligent
controllers, such as PLCs, which perform critical high-speed machine control
functions. Industrial Workstations(TM) obtain process information from the
controller through a communications port, and transform that information into
words or pictures that lend themselves to instant comprehension by operating
plant personnel.

The benefits of connecting Industrial Workstations(TM) to intelligent
controllers are three-fold: first, the Industrial Workstation(TM) confines the
controller's processing burden to critical, high-speed control functions;
second, the Industrial Workstation's(TM) full-time attention to operator
interface supports many additional functions; and third, Industrial
Workstations(TM) often cost less than obtaining, installing, and programming
conventional devices that provide only a fraction of the capabilities afforded
by Industrial Workstations(TM).

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<PAGE> 25

The Company offers over forty models of Industrial Workstations(TM),
divided primarily by price into four classes. Each product class, described in
the following table, includes a range of display options, prices and
capabilities.

<TABLE>
<CAPTION>
PRODUCT LINE LIST PRICES DESCRIPTION
- --------------------- --------------- -------------------------------------------------------
<S> <C> <C>
Character-based $500-$2,300 These products replace as few as five
PLC Workstations electro-mechanical push buttons, while also providing
and Remote Message message display and alarm annunciation functions. All
Units PLC and Remote Message Unit products include flat panel
displays and Company-developed proprietary hardware and
software. Most are used with small PLCs for simple
machine control, such as packaging equipment and small
fabricating machines.
Industrial Graphics $1,600-$7,000 Industrial terminal products include both CRT displays
Terminals and and keyboards and utilize Company-developed proprietary
Programmable hardware and software. These products support either
Operator Interfaces remote terminal operation with an intelligent host or
fully programmable operation for PLC operator interface
applications using the Company's proprietary
programming language.
Industrial $2,900-$7,000 The Company's newest hardware product, ICCs offer a
Control Computers 486DX2/66 or P24T Pentium Overdrive processor, a
variety of display options and a single industrial
grade motherboard featuring local bus architecture and
IDE drive control circuits. ICCs are small and
water-tight and include a rugged, front-panel mouse-
simulator for cursor positioning. ICCs may be bundled
with PowerVIEW(TM), AutoNet(TM) or FloPro(R) software
or may be sold without application software.
Industrial PCs $3,500-$15,800 These fully integrated or modular rack-mount or
bench-top PC workstations provide Intel 80X86AT
compatibility with processors ranging from 486SX/25 to
Pentium P5-166mhz and 14" or 19" CRT or flat panel
displays. These products may be bundled with
PowerVIEW(TM), AutoNet(TM) or FloPro(R) software or may
be sold without application software.
</TABLE>

The Company maintains an inventory of spare parts and service stock and
dedicates approximately 15 service technicians whose functions include technical
advice regarding product applications and service and repair of returned
computer and other hardware. With the increasing number of units in service in
the marketplace due to the products' wide acceptance and long life, the shipment
of spare parts and performing repair service on out-of-warranty product
continues to be a significant part of the business.

COMPETITION

The industrial automation solutions industry is highly competitive and
fragmented. There are numerous competitors, including Allen-Bradley Co., Inc.,
Eaton IDT Inc., GE Fanuc Automation North America, Inc., International Business
Machines Corporation and Siemens GMBH, many of which are much larger and have
significantly greater resources than the Company. The Company believes that most
of its competitors for PC-based soft logic control, particularly those whose
focus is on software, are smaller than the Company. The Company competes
primarily on the basis of product features, quality, product capability,
performance and price. The Company believes that the solutions it is able to
provide as a result of the quality of its hardware products and the advanced
features of its software products are, in some niches of the industry, unique
and provide it with a competitive advantage over many of its competitors.

While price and features can be important factors in a customer's purchase
decision, the Company believes that reliability consistently ranks the highest.
As a result, the Company expends significant effort on design verification and
testing of new products and purchased subassemblies. In addition, the Company
believes that it is able to price its products competitively because of their
higher quality (resulting in lower warranty costs), and because the Company has
higher manufacturing volumes than some of its competitors, allowing it to have
lower per unit costs and to amortize product development costs over more units
than its competitors.

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<PAGE> 26

PRODUCT DEVELOPMENT

Since its inception, the Company has maintained an active product
development program and continues to supplement existing research and
development capabilities through active recruiting of technical personnel and
development of proprietary technology.

The Company currently has a total direct product development staff of
approximately 25 persons, including electrical and electronic design engineers,
mechanical design engineers, software design engineers, product managers,
application engineers and directly associated staff members involved in
technical documentation and product support. The Company also employs the
services of unrelated contract engineering companies on an as-needed basis. The
Company employs a separate group which is responsible for assuring the long term
quality and reliability of the Company's products. Within this quality assurance
group are five quality, test, manufacturing and reliability engineers. Software
development activities are concentrated in the Virginia Beach, Virginia
facility, and the hardware development and quality control activities are
concentrated in the Ann Arbor, Michigan facility.

The Company emphasizes product development and quality and the employment
of highly skilled and motivated individuals in the product development and
quality assurance areas. Management believes that its product development staff
is an important factor in the Company's ability to compete in the markets in
which its products are sold. During the fiscal years 1994 and 1995, the Company
expended approximately $1,284,000 and $1,288,000, respectively, for direct
hardware and software product development and product design, including those
costs capitalized under Statement of Financial Accounting Standards No. 86.
These amounts represent 8.4% and 7.3% of total net revenues in fiscal 1994 and
1995, respectively.

INTELLECTUAL PROPERTY

The Company's FloPro(R) software product is based upon the technology
incorporated in Patent Number 4,852,047 for continuous flow chart, improved data
formatting and a debugging system for programming and operations of machines.
This patent was issued in 1989 as a 17 year patent. The Company is currently
involved in litigation relating to the acquisition of the ownership of this
patent. See "Risk Factors -- Dependence on Proprietary Technology; Pending
Litigation" and "Business -- Legal Proceedings". The Company has no patents on
its hardware or computer designs and does not believe that such patents would
provide material protection for its technology.

The Company does business under various tradenames and service marks,
including Imagination Systems, NemaSoft, Nematron and Universal Automation. In
addition, the Company markets certain of its products under various trademarks,
both common law and federally registered, including AutoNet(TM), FloPro(R),
Industrial Workstation(TM), Nematron(R), PowerVIEW(TM), ToolBox(R) and ToolBox
Plus(TM).

The Company's software products are sold under licenses to use the products
as specified in the underlying contract. Certain of the licenses for the use of
the FloPro(R) software product are site licenses for unlimited use of the master
copy of the product in a specified building, plant or group of plants. To date,
the revenue from these site licenses has not been a significant source of
revenue to the Company, but the Company believes that these revenues could
become increasingly more important to the Company if the Company's products gain
in market acceptance and the total market for soft logic products expands as is
anticipated and as evidenced by recent third party industry studies. See "Risk
Factors -- New Products and Technological Change". Also, the Company has
licensed its soft logic technology to several unrelated companies under royalty
arrangements. These arrangements are not currently a significant source of
revenue.

SALES AND MARKETING

The Company utilizes three principal sales channels. A majority of the
Company's net revenues are attributable to a network of high-tech industrial
distributors. In addition, the Company sells its products directly to major
original equipment manufacturers ("OEMs") of industrial processing systems and
machines and to other major end users, which account for approximately 30% of
the Company's net revenues. Private-

25
<PAGE> 27

label accounts that remarket the Company's products primarily through their own
independent channels account for approximately 20% of net revenues.

The Company's distributors are typically independent companies with
non-exclusive geographically specific written agreements that purchase products
manufactured by the Company and resell it to their customers. In addition,
distributors typically provide customer training, application engineering and
support.

The Company's distributors operate in more than 150 locations in 37
countries. The Company has eight regional sales managers covering major
geographic regions of the United States and two sales managers who concentrate
on key accounts nationwide. These managers are located in the United States near
Ann Arbor, Atlanta, Boston, Chicago, Cleveland, Detroit, Los Angeles, and
Norfolk. The Company also has sales managers near Amsterdam, the Netherlands and
Duseldorf, Germany.

In addition, direct sales accounts and private label accounts are handled
by both key account sales managers as well as corporate executive management.

MANUFACTURING AND SUPPLY

The Company performs final assembly and testing for almost all hardware
products. The assembly process encompasses the assembly of sheet metal parts,
keyboards, displays and electronic circuit boards into finished goods. In
addition, the Company has limited capability for circuit board assembly and wave
soldering, as well as the repair and engineering prototype assembly of surface
mount technology components used on various logic boards. The Company
subcontracts the insertion and soldering of components on circuit boards and the
fabrication of sheet metal, keyboards and front panel bezels. The Company uses a
number of independent firms for these subcontracted services and is not
materially dependent upon any third party that performs these services. Selected
models are built entirely to the Company's design by vendors and purchased as
complete products.

A network of mini-computers and personal computer-based engineering
workstations supports accounting, purchasing, production, scheduling and
inventory, as well as the computer-aided design and development of electronic
circuitry, circuit board layout, programming of programmable logic devices,
mechanical design and software development. In addition, the Company has
purchased and designed a variety of assembly and test equipment to reduce the
cost and ensure the quality of the design and manufacturing process. Included in
these purchases is a substantial investment in environmental chambers and
electronic instrumentation that is used to certify that the Company's products
meet the severe industrial environments for which they are intended.

Substantially all of the components used in the Company's products are
available from multiple sources and the Company maintains more than one source
of supply for all material components. As part of the Company's turnaround plan
initiated in fiscal 1995, the Company began purchasing components in smaller
quantities and more on a "just in time" basis than in previous years. See "Risk
Factors -- Dependence on Third Party Suppliers" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

EMPLOYEES

The Company currently employs approximately 105 full time employees. None
of the Company's employees are represented by a collective bargaining unit and
the Company believes its employee relations to be good.

FACILITIES

The Company's headquarters and principal manufacturing facilities are
located in Ann Arbor, Michigan, in a two-story building containing a total of
approximately 51,200 square feet of space. Of this space, approximately 6,400
square feet remain largely unfinished and are available for future office or
manufacturing expansion. This facility, located on approximately five acres of
land, has been designed such that further

26
<PAGE> 28

expansion of up to 20,000 square feet may be accommodated. The Ann Arbor
facility was designed and built to the Company's specifications and is
Company-owned, subject to three mortgages.

The Company's European activities are conducted from a leased building in
Maarssenbroek, the Netherlands, consisting of approximately 5,000 square feet of
leased space. Leasehold improvements consist of certain changes for specific
office, service and warehouse requirements according to the Company's needs. The
operating lease for this facility expires January 31, 2000.

The Company's Virginia Beach, Virginia facility is a leased two story
office building, owned by a partnership in which the Company's President is a
general partner. The facility consists of approximately 5,800 square feet of
space, with leasehold improvements for office, service and warehouse
requirements according to the Company's specifications. The operating lease for
this facility expires in February 1997, and the Company expects that the lease
will be re-negotiated and extended on substantially the same terms as in the
current lease.

The Company believes that its facilities are adequate for its present and
anticipated operations.

LEGAL PROCEEDINGS

On September 20, 1995, Xycom, Inc. filed suit against the Company and UAI
in the Circuit Court for the County of Washtenaw, State of Michigan. The suit
alleges that UAI disclosed confidential information of Xycom to the Company and
failed to notify Xycom of the transfer of certain intellectual property,
including the FloPro(R) patent, to the Company's subsidiary, NemaSoft, Inc. In
the complaint, Xycom contends that, upon receipt of such notice, it would have
been entitled to either negotiate with NemaSoft for a royalty-free license to
use the intellectual property or to exercise a right of first refusal for the
purchase of the intellectual property, including the FloPro(R) patent. The suit
also alleges that the Company interfered with Xycom's contractual relations with
UAI and business expectancies. The suit seeks unspecified damages based on
allegations of, among other things, disclosure of trade secrets and tortious
interference with contractual relations. The suit also seeks to enjoin the use
of certain marketing, business and other non-technical information which it
alleges constitutes trade secrets and to unwind the merger of UAI into NemaSoft.
The Company and NemaSoft have filed answers denying all material allegations
made by Xycom, and NemaSoft filed a countersuit against Xycom. The Company and
NemaSoft believe the allegations made by Xycom are without merit and intend to
defend their position vigorously. Although the Company cannot predict the likely
outcome of the lawsuit at this preliminary stage of the proceedings, management
believes that, even if the Company does not prevail, the ultimate disposition of
these matters will not have a material adverse effect on the Company's business,
financial condition or results of operations. There can be no assurance,
however, that the outcome of the litigation will not have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Risk Factors -- Dependence on Proprietary Technology; Pending Litigation".

The Company is also a party to routine legal proceedings incidental to its
business, and management does not believe that these proceedings will have a
material adverse effect on the business, financial condition or results of
operations of the Company.

CHANGE IN INDEPENDENT AUDITORS

On July 18, 1995, the Audit Committee of the Company's Board of Directors
informed Deloitte & Touche LLP that the Company would not retain it to audit the
Company's financial statements for the year ended September 30, 1995 and engaged
KPMG Peat Marwick LLP as its principal accountants to audit the Company's
financial statements for fiscal 1995. KPMG Peat Marwick LLP had previously been
the independent auditor of ISI's financial statements. During the Company's two
most recently ended fiscal years and subsequent interim period prior to engaging
KPMG Peat Marwick LLP, the Company did not consult KPMG Peat Marwick LLP
regarding any matter relating to the Company's financial statements, and no
written report or oral advice was provided to the Company by KPMG Peat Marwick
LLP regarding any decision of the Company as to any accounting, auditing or
reporting issue, except as disclosed in the following paragraph.

27
<PAGE> 29

Subsequent to September 30, 1994, the Board of Directors of the Company had
given its tentative approval to a merger of the Company with ISI. In connection
with the issuance of its financial statements for the fiscal year ended
September 30, 1994, the Company disclosed in Note 11 to the fiscal 1994
financial statements the terms of the merger and a pro forma balance sheet as of
September 30, 1994 and a pro forma statement of operations for the year then
ended. Since the audit of ISI's financial statements for its fiscal year ended
September 30, 1994 performed by KPMG Peat Marwick LLP had not been completed at
the date of Deloitte & Touche LLP's auditors' report, the Company consulted with
KPMG Peat Marwick LLP concerning the presentation of the unaudited balance sheet
and operating statement amounts in Note 11 to the financial statements. KPMG
Peat Marwick LLP's views of the presentation of such information were that the
information could be presented without modification. Also, the Company filed a
Form 8-K Current Report, received by the Securities and Exchange Commission on
March 20, 1995, concerning its merger with ISI as of March 3, 1995. In
connection with such filing, the Company consulted with KPMG Peat Marwick LLP as
to the presentation of the unaudited pro forma financial information presented
in the Form 8-K. KPMG Peat Marwick LLP's views of the presentation of such
information were that the information could be presented without modification.
Regarding the pro forma information presentation in Note 11 to the fiscal 1994
financial statements and in the Form 8-K as discussed in the preceding
paragraph, Deloitte & Touche LLP was also consulted. Their views of the
presentation of such information were that the information could be presented
without modification. However, Deloitte & Touche LLP neither audited nor
reviewed the pro forma information in the financial statements and on Form 8-K
and expressed no opinion or any other form of assurance regarding the accuracy
or propriety of such information.

28
<PAGE> 30

MANAGEMENT

The Company's directors and executive officers are as follows.

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -------------------- --- --------------------------------------------------------
<S> <C> <C>
Frank G. Logan, III 39 Chairman, President, Chief Executive Officer and
Director (term expires in 1997)
Gregory J. Chandler 41 Vice President -- Design Engineering and Director (term
expires in 1998)
David P. Gienapp 47 Vice President -- Finance and Administration, Chief
Financial Officer, Treasurer, Secretary and Director
(term expires in 1999)
Albert W. Lowery 60 Senior Vice President -- International Operations and
Director (term expires in 1997)
Hugo E. Braun 38 Director (term expires in 1999)
Garnel F. Graber 64 Director (term expires in 1998)
Michael L. Hershey 57 Director (term expires in 1998)
Harry A. Sundblad 50 Director (term expires in 1997)
</TABLE>

FRANK G. LOGAN, III has been the President, Chief Executive Officer and a
director since joining the Company in March 1995 and became Chairman of the
Board in March 1996. Prior to joining the Company in March 1995, Mr. Logan was
the President and Chief Executive Officer of Imagination Systems, Inc., which he
founded in 1983 and which merged with the Company in 1995.

GREGORY J. CHANDLER is a founder of the Company and has been a director of
the Company since its formation in 1983. Mr. Chandler has been the Vice
President -- Design Engineering of the Company since 1983. Since 1983, Mr.
Chandler has been principally involved in computer and component design and
development, as well as the development of major vendor relationships regarding
critical components and assemblies such as displays, processors and mechanical
packaging.

DAVID P. GIENAPP became a director in March 1995. Mr. Gienapp has been the
Vice President -- Finance and Administration and the Chief Financial Officer of
the Company since joining the Company in September 1994 and has served as
Secretary since March 1996. Prior to joining the Company, Mr. Gienapp spent over
20 years with Deloitte & Touche LLP, a certified public accounting firm.

ALBERT W. LOWERY joined the Company in 1987 as its Senior Vice
President -- International Operations after 28 years with Westinghouse Electric
Corporation. Mr. Lowery became a director in 1993 and served as Secretary from
February 1993 until March 1996.

HUGO E. BRAUN is Vice President and a director of Onset BIDCO, Inc., an
investment fund which participated in the Company's November 1995 private
placement of subordinated notes. Mr. Braun has been employed by Onset BIDCO,
Inc. since 1989. Mr. Braun serves as a director pursuant to a Term Loan and
Warrant Purchase Agreement, dated November 7, 1995, between the Company, Onset
BIDCO, Inc. and certain other noteholders in connection with the Company's 1995
private placement of subordinated notes.

GARNEL F. GRABER became a director in February 1993 and served as Chairman
of the Board from February 1993 until March 1996. Mr. Graber is a retired
executive of, and the current Chairman of the Board of Directors of, Applied
Dynamics International, a computer firm specializing in high speed simulation
applications. Mr. Graber also serves as Chairman of the Board of Interface
Systems, Inc.

MICHAEL L. HERSHEY became a director in March 1995. Mr. Hershey had served
as a member of the Board of Directors and Secretary of Imagination Systems, Inc.
Mr. Hershey has been the President and Chairman of the Board of Directors of
Landis Associates, Inc., an investment management company, since its formation
in 1986.

HARRY A. SUNDBLAD became a director in 1994. Mr. Sundblad has been
self-employed as a consultant since August 1995. Prior to August 1995, Mr.
Sundblad was the Executive Vice President and a director of

29
<PAGE> 31

Action Instruments, Inc., a manufacturer of high-technology electronic
measurement and control instrumentation, where he was employed since 1976.

The Company's Articles of Incorporation divide the board of directors into
three classes. At each annual meeting, the shareholders of the Company will
elect to three-year terms directors to replace those directors whose terms
expire at that annual meeting or until their successors are duly elected and
qualified. The executive officers of the Company serve at the pleasure of the
Board of Directors.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock. As of June 4, 1996, there were 3,045,168 shares of Common Stock
outstanding which were held by approximately 950 record owners. Holders of
Common Stock are entitled to one vote per share on all matters to be voted upon
by the shareholders generally, including the election of directors. Subject to
the rights of holders of any other class of stock outstanding, holders of Common
Stock are entitled to receive such dividends as may be declared by the Board of
Directors from time to time and, in the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock will be entitled to
receive pro rata all of the remaining assets of the Company available for
distribution. Holders of Common Stock do not have preemptive rights. The
transfer agent for the Common Stock is Registrar and Transfer Company. The
shares of Common Stock being offered pursuant to this Prospectus will be, when
issued in the manner described in this Prospectus, validly issued, fully paid
and non-assessable.

ANTI-TAKEOVER PROVISIONS

The Company's Articles of Incorporation and Bylaws contain certain
provisions which might be deemed to have a potential "anti-takeover" effect.
They include, among others, the following provisions.

Election and Removal of Directors. Article VII of the Articles of
Incorporation sets the number of Directors at a minimum of three and a maximum
of 12, and provides for three-year terms of office on a staggered basis. It
would take two elections or two years to gain control of the Board of Directors,
given that nominally one-third of the Directors of the Company are elected per
year. Vacancies on the Board and newly created directorships may be filled only
by a majority vote of the Directors then in office, unless there are no
directors then in office. Directors may only be removed for cause. Article VII
may be amended only by the affirmative vote of the holders of at least 80% of
the shares entitled to vote generally in elections of Directors.

Special Meetings of Shareholders. The Bylaws reserve the right to call a
special meeting of the shareholders only to the Chairman of the Board, President
or the Board of Directors. In addition, the Board of Directors acting by
resolution may postpone and reschedule any previously scheduled meeting of the
shareholders.

Shareholder Nominations and Proposals. The Bylaws require shareholders to
provide advance notice of nominations to be made and business to be proposed at
annual and special meetings of shareholders.

Amendment of Bylaws. The Bylaws provide that they may be amended by a
majority vote of the Board or by an 80% vote of the shareholders.

The anti-takeover provisions are intended to discourage persons seeking to
acquire control of the Company from proceeding without negotiating the terms of
any such acquisition with the Company's Board of Directors. The Board of
Directors of the Company believes that the interests of the shareholders of the
Company will be served best if any change of control results from negotiations
with the Board of Directors. Also, the Board of Directors believes that such
provisions generally will help provide for continuity and stability in the
affairs and business of the Company and discourage certain changes in control in
which shareholders might be treated inequitably. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which the Company's shareholders may deem to be in their
best interests or in which the shareholders may receive a substantial premium
for their shares over then current market prices. As a result, shareholders who
might desire to participate in such a transaction may not have an opportunity to
do so. These provisions will also render the removal of the current Board of
Directors and of management more difficult.

30
<PAGE> 32

The Michigan Business Corporation Act (the "MBCA") contains certain
provisions that may impede the acquisition of a significant ownership position
in the Company unless approved by the Company's Board of Directors. Chapter 7A
of the MBCA provides that business combinations (as defined therein) between a
Michigan corporation which elects to be subject to Chapter 7A and a beneficial
owner of 10% or more of the voting power of such corporation generally require
the approval of 90% of the votes of each class of stock entitled to be cast, and
at least two-thirds of the votes of each class of stock entitled to be cast
other than shares owned by such 10% owner, unless the corporation's board of
directors approves the transaction prior to the time the 10% owner becomes such
or the transaction satisfies certain fairness standards, certain other
conditions are met and the 10% owner has been such for at least five years.
Chapter 7B of the MBCA provides that "control shares" of the Company acquired in
a control share acquisition have no voting rights except as granted by the
shareholders of the Company. Control shares are shares of voting stock that,
when added to shares previously owned by a shareholder, increase such
shareholder's ownership of voting stock to 20% or more, 33 1/3% or more or a
majority of the outstanding voting power of the Company. A control share
acquisition generally must be approved by a majority of the votes cast by
holders of stock entitled to vote excluding shares owned by the acquiror and
certain officers and directors. The Company is currently subject to both Chapter
7A and Chapter 7B.

SHARES ELIGIBLE FOR FUTURE SALE

In general, under Rule 144 as currently in effect, if a period of at least
two years has elapsed between the later of the date "restricted securities" (as
that phrase is defined in Rule 144) were acquired from the Company and the date
they were acquired from an "affiliate" (as that term is defined in Rule 144) of
the Company, then the holder of these restricted securities (including an
affiliate) is entitled to sell a number of shares within any three-month period
that does not exceed the greater of 1% of the then outstanding shares of the
Company's Common Stock (approximately 30,000 shares as of June 4, 1996) or the
average weekly reported trading volume in the Common Stock during the four
calendar weeks preceding the filing of notice of intent to sell and may only
sell these shares through unsolicited broker's transactions. Sales under Rule
144 also are subject to certain requirements pertaining to the manner of these
sales, notice of these sales and the availability of current public information
concerning the Company. Affiliates may sell shares not constituting restricted
securities in accordance with the foregoing volume limitations and other
requirements but without regard to the two-year period.

Under Rule 144(k), if a period of at least three years has elapsed between
the later of the date restricted shares were acquired from the Company and the
date they were acquired from an affiliate of the Company, a holder of restricted
shares who is not an affiliate of the Company at the time of the sale and has
not been an affiliate of the Company for at least three months prior to the sale
would be entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above.

Notwithstanding the foregoing, the Company and its directors and executive
officers have agreed that they will not, without the prior written consent of
the Representative, sell, contract to sell, or otherwise dispose of any shares
of Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of 120 days after the date
of this Prospectus. See "Underwriting".

The Company has reserved (i) a total of 344,150 shares of Common Stock for
issuance upon exercise of stock options to employees and directors and 445,250
shares available for option grants under the Company's stock option plans; (ii)
a total of 695,270 shares for issuance pursuant to the exercise of warrants, and
(iii) 40,000 shares that the Representative will be able to acquire upon
exercise of the Warrant. The holders of such warrants and the Warrant and the
holders of shares of Common Stock issued in connection with the acquisition of
UAI are entitled to have the shares underlying such warrants and Warrant and the
shares issued in such acquisition registered on their behalf for public resale.

A registration statement is pending with respect to 945,526 restricted
shares of Common Stock, issued by the Company in connection with the merger with
ISI, which shares are being registered by the Company on behalf of the holders
of such shares as required in the related merger agreement. Once the
registration statement becomes effective, all of these shares may be sold in the
market or in private transactions without

31
<PAGE> 33

restriction at any time while the related registration statement remains in
effect, although 521,246 of these shares may not be sold for 120 days from the
date of this Prospectus without the consent of the Representative.

The Company can make no prediction as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market, or the perception that these sales are
occurring or may occur, could adversely affect prevailing market prices.

32
<PAGE> 34

UNDERWRITING

The Company has entered into an underwriting agreement (the "Underwriting
Agreement") with the underwriters listed in the table below (the
"Underwriters"), for whom First of Michigan Corporation is acting as
Representative. Subject to the terms and conditions set forth in the
Underwriting Agreement, the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters has severally agreed to purchase from
the Company, the number of shares of Common Stock set forth opposite each
Underwriter's name in the following table.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
------------------------------------------------------------- ----------------
<S> <C>
First of Michigan Corporation................................ 762,000
Advest, Inc. ................................................ 18,000
Amhold & S. Bleichroeder Inc. ............................... 18,000
Cowen & Co. ................................................. 18,000
Fahnestock & Co. Inc. ....................................... 18,000
First Analysis Securities Corporation........................ 18,000
Furman Selz, Incorporated.................................... 18,000
Gruntal & Co., Incorporated.................................. 18,000
J.C. Bradford & Co. ......................................... 18,000
Janney Montgomery Scott Inc. ................................ 18,000
Jefferies & Company Inc. .................................... 18,000
Legg Mason Wood Walker, Inc. ................................ 18,000
McDonald & Company Securities, Inc. ......................... 18,000
The Ohio Company............................................. 18,000
Piper Jaffray Inc. .......................................... 18,000
Roney & Co. ................................................. 18,000
Scott & Stringfellow, Inc. .................................. 18,000
William Blair & Company...................................... 18,000
Brean Murray, Foster Securities Inc. ........................ 12,000
Commonwealth Associates...................................... 12,000
Cruttenden Roth Incorporated................................. 12,000
Dakin Securities Corporation................................. 12,000
Gilford Securities Incorporated.............................. 12,000
Laidlaw Equities, Inc. ...................................... 12,000
M.H. Meyerson & Co., Inc. ................................... 12,000
Ormes Capital Markets, Inc. ................................. 12,000
Parker/Hunter Incorporated................................... 12,000
RAF Financial Corporation.................................... 12,000
Van Kasper & Company......................................... 12,000
---------
TOTAL........................................................ 1,200,000
=========
</TABLE>

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Underwriting Agreement, if any is purchased (excluding shares covered by
the Over-allotment Option granted therein). In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.

The Underwriters propose to offer the shares of Common Stock to the public
at the price per share set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $.37 per share,
and the Underwriters may allow, and such dealers may reallow, a concession not
in excess of $.10 per share to other dealers. After the offering of the Common
Stock, the public offering price and the concession may be changed.

In addition, upon consummation of the offering, the Company will grant the
Warrant to the Representative, which will permit the Representative to purchase
40,000 shares of Common Stock at 120% of the per share price to the public set
forth on the cover page of this Prospectus for a period of four years beginning
one year after the date of the Prospectus. Shares of the Common Stock issued
upon exercise of the Warrant may not be sold unless they are registered under
the Securities Act or sold pursuant to an exemption from

33
<PAGE> 35

registration, including an exemption under Rule 144. The Company has agreed to
give the holders of the Warrant certain rights to have the shares of Common
Stock subject to the Warrant registered under the Securities Act.

The Company has agreed to indemnify each of the several Underwriters and
their controlling persons against certain liabilities which may be incurred in
connection with the offering, including liabilities under the Securities Act, or
to contribute to payments the Underwriters may be required to make in respect
thereof.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 180,000 shares of Common Stock at the same price per share as the
offering price. The Underwriters may exercise such option only to cover
over-allotments in the sale of the shares of Common Stock that the Underwriters
have agreed to purchase. To the extent the Underwriters exercise this option,
each of the Underwriters has a firm commitment, subject to certain conditions,
to purchase the same percentage of the option shares as the number of shares to
be purchased and offered by that Underwriter as shown in the above table bears
to the 1,200,000 shares of Common Stock initially offered hereby.

In the past, First of Michigan Corporation has provided certain financial
advisory services to the Company in the ordinary course of their respective
businesses. In March 1996, the Company engaged First of Michigan Corporation to
act as its exclusive financial advisor for a period of twelve months commencing
April 1, 1996. The Company will pay First of Michigan Corporation a retainer fee
of $30,000 as compensation for its services as financial advisor. Additionally,
the Company has granted First of Michigan Corporation a right of first refusal
to act as lead managing underwriter for any public offering of the Company's
securities during the engagement period.

The Company and its directors and executive officers have agreed that each
of them, without the prior written consent of the Representative, will not sell,
contract to sell, or dispose of any Common Stock for a period of 120 days after
the date of this Prospectus except for (i) issuances pursuant to the exercise of
currently outstanding stock options, warrants or convertible securities; (ii)
the grant of stock options pursuant to the Company's stock option plans in
effect on the date of this Prospectus; (iii) gifts of shares of Common Stock to
a donee who agrees to be bound by such agreement; or (iv) distributions of
shares of Common Stock by a partnership, trust, limited liability company or
corporation to its partners, beneficiaries, members or shareholders,
respectively, if all recipients of such distribution agree to be bound by such
agreement.

In connection with the offering, certain Underwriters and members of the
selling group, if any, may engage in passive market making transactions in the
Common Stock on the Nasdaq in accordance with Rule 10b-6A under the Securities
Exchange Act of 1934 (the "Exchange Act"). Passive market making consists of,
among other things, displaying bids limited by the bid prices of independent
market makers and purchases limited by such prices and effected in response to
order flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified prior period and all possible market
making activity must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.

LEGAL MATTERS

Certain legal matters with respect to the offering made hereby will be
passed upon for the Company by Dykema Gossett PLLC, Detroit, Michigan. Certain
legal matters will be passed upon for the Underwriters by Dickinson, Wright,
Moon, Van Dusen & Freeman, Detroit, Michigan.

EXPERTS

The consolidated balance sheet as of September 30, 1995, and the
consolidated statements of operations, stockholders' equity and cash flows for
the year ended September 30, 1995, included in or incorporated by

34
<PAGE> 36

reference in this Prospectus have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as indicated by their report with
respect thereto, and are included and incorporated herein upon the authority of
said firm as experts in accounting and auditing.

The consolidated statements of operations, stockholders' equity and cash
flows for the year ended September 30, 1994, included in or incorporated by
reference in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report (which expresses an unqualified
opinion and includes an explanatory paragraph relating to substantial doubt
about the Company's ability to continue as a going concern), and are included
and incorporated herein in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy and
information statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following regional offices of the Commission: New York Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048; and Chicago Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. In addition, copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549.

This Prospectus is a part of a Registration Statement filed by the Company
with the Commission under the Securities Act. This Prospectus omits certain of
the information included in such Registration Statement. The Registration
Statement may be inspected by anyone at the office of the Commission without
charge, and copies of all or any part of it may be obtained upon payment of the
Commission's charge for copying. For further information about the Company and
its securities, reference is hereby made to such Registration Statement, and to
the exhibits and financial schedules filed as part thereof or otherwise
incorporated herein. Each summary herein of additional information included in
the Registration Statement or any exhibit thereto is qualified in its entirety
by reference to such information or exhibit.

35
<PAGE> 37

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents (and the amendments thereto) filed by the Company
(file number 0-21142) with the Commission are hereby incorporated by reference
and made a part hereof:

(a) The description of the Common Stock contained in the Registration
Statement on Form 10, No. 0-21142, filed under the Exchange Act.

(b) Annual Report on Form 10-KSB for the year ended September 30,
1995, as amended by Form 10-KSB/A filed February 2, 1996 and Form 10-KSB/A2
filed May 20, 1996.

Any statement contained in a document incorporated by reference or deemed
to be incorporated by reference in this Prospectus shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon written
or oral request of such person, a copy of any and all of the information that
has been incorporated by reference in this Prospectus (other than exhibits to
the information that is incorporated by reference unless such exhibits are
expressly incorporated by reference into the information this Prospectus
incorporates). Requests should be directed to the Company's Secretary at the
Company's principal executive offices, located at 5840 Interface Drive, Ann
Arbor, Michigan 48103 (telephone number: (313) 994-0591).

36
<PAGE> 38

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements of Nematron Corporation and Subsidiaries:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report (KPMG Peat Marwick LLP).................................. F-2
Independent Auditors' Report (Deloitte & Touche LLP).................................. F-3
Consolidated Balance Sheets as of September 30, 1995 and March 31, 1996 (unaudited)... F-4
Consolidated Statements of Operations for the Years Ended September 30, 1994 and 1995
and the Six Months Ended March 31, 1995 and 1996 (unaudited)........................ F-5
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1994
and 1995 and the Six Months Ended March 31, 1996 (unaudited)........................ F-6
Consolidated Statements of Cash Flows for the Years Ended September 30, 1994 and 1995
and the Six Months Ended March 31, 1995 and 1996 (unaudited)........................ F-7
Notes to Consolidated Financial Statements............................................ F-8
Unaudited Pro Forma Financial Statements.............................................. F-20
</TABLE>

F-1
<PAGE> 39

PEAT MARWICK LOGO

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Nematron Corporation:

We have audited the accompanying consolidated balance sheet of Nematron
Corporation as of September 30, 1995, and the related consolidated statements of
operations, 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 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 statements referred to above present
fairly, in all material respects, the financial position of Nematron Corporation
as of September 30, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Detroit, Michigan
December 15, 1995

F-2
<PAGE> 40

Deloitte & Touche Logo
<TABLE>
----------------------------------------------------------------
<S> <C>
6th Floor Telephone: (313) 769-6200
101 North Main Street Facsimile: (313) 769-2612 or
Ann Arbor, Michigan 48104-1411 (313) 769-2178
</TABLE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Nematron Corporation
Ann Arbor, Michigan

We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Nematron Corporation and subsidiary for
the year ended September 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 statements presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Nematron
Corporation and subsidiary for the year ended September 30, 1994 in conformity
with generally accepted accounting principles.

The accompanying financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. The Company
continued to experience significant net losses in 1994, was unable to generate
sufficient cash flows and was not in compliance with the terms and covenants of
its line of credit at September 30, 1994. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are discussed in Notes 3, 6 and 7. The financial
statements referred to above do not include any adjustments that might result
from the outcome of these uncertainties.

DELOITTE & TOUCHE LLP

December 9, 1994

F-3
<PAGE> 41

NEMATRON CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

SEPTEMBER 30, MARCH 31,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS (notes 6 and 7)
Current assets:
Cash............................................................. $ 78 $ 264
Accounts receivable, net of allowance for doubtful accounts of
$74 at September 30, 1995 and $134 at March 31, 1996.......... 3,162 3,370
Inventories (note 5)............................................. 4,123 4,825
Prepaid expenses and other current assets........................ 269 448
------- -------
Total current assets..................................... 7,632 8,907
Property and equipment
Land............................................................. 117 117
Building and improvements........................................ 2,261 2,265
Equipment........................................................ 3,276 3,438
------- -------
5,654 5,820
Less accumulated depreciation.................................... (2,692) (2,918)
------- -------
Net property and equipment............................... 2,962 2,902
Other assets:
Software and related development costs, net of accumulated
amortization of $569 at September 30, 1995 and $724 at March
31, 1996...................................................... 4,327 4,539
Other intangible assets, net of accumulated amortization of $298
at September 30, 1995 and $389 at March 31, 1996.............. 283 357
------- -------
Net other assets......................................... 4,610 4,896
------- -------
Total assets............................................. $15,204 $16,705
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (note 7).................... $ 120 $ 110
Notes payable to bank (note 6)................................... 2,450 2,860
Accounts payable................................................. 2,744 2,078
Other accrued liabilities........................................ 1,048 957
------- -------
Total current liabilities................................ 6,362 6,005
Long-term debt, less current maturities (note 7)................... 2,306 3,626
------- -------
Total liabilities........................................ 8,668 9,631
Stockholders' equity:
Common stock, no par value, 15,000,000 shares authorized
(8,000,000 at September 30, 1995), 3,037,710 shares issued and
outstanding at March 31, 1996 (2,869,613 shares issued and
outstanding at September 30, 1995) (note 12).................. 6,796 7,216
Foreign currency translation adjustment.......................... (51) (64)
Accumulated deficit.............................................. (209) (78)
------- -------
Total stockholders' equity............................... 6,536 7,074
------- -------
Commitments and contingencies (note 10)
Total liabilities and stockholders' equity............... $15,204 $16,705
======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 42

NEMATRON CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------- ------------------
1994 1995 1995 1996
------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues......................................... $15,287 $17,576 $8,595 $10,071
Cost of revenues..................................... 12,044 11,382 5,879 5,647
------- ------- ------ -------
Gross profit.................................... 3,243 6,194 2,716 4,424
Operating expenses:
Product development costs.......................... 1,645 894 459 603
Selling, general and administrative expenses....... 4,296 4,693 2,139 3,351
------- ------- ------ -------
Total operating expenses........................ 5,941 5,587 2,598 3,954
------- ------- ------ -------
Operating income (loss).............................. (2,698) 607 118 470
Other income (expense):
Sale of royalty rights............................. 100 -- -- --
Interest and other net............................. 4 3 1 (4)
Interest expense, net.............................. (243) (381) (189) (321)
Foreign currency gain (loss)....................... 40 74 105 (14)
------- ------- ------ -------
Total other income (expense).................... (99) (304) (83) (339)
------- ------- ------ -------
Income (loss) before taxes on income................. (2,797) 303 35 131
Taxes on income (note 8)............................. -- -- -- --
------- ------- ------ -------
Net income (loss)............................... $(2,797) $ 303 $ 35 $ 131
======= ======= ====== =======
Earnings (loss) per share............................ $ (1.75) $ 0.14 $ 0.02 $ 0.04
======= ======= ====== =======
Weighted average shares outstanding.................. 1,600 2,180 1,754 3,429
======= ======= ====== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 43

NEMATRON CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
RETAINED
COMMON STOCK FOREIGN EARNINGS
--------------- CURRENCY (ACCUMULATED
SHARES AMOUNT TRANSLATION DEFICIT) TOTAL
------ ------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1993........................ 1,453 $3,351 $(22) $ 2,285 $ 5,614
Shares issued pursuant to acquisition of product
line (note 4)................................. 160 276 276
Compensation related to restricted stock plan
(note 9)...................................... 16 16
Net loss for the year ended September 30,
1994.......................................... (2,797) (2,797)
Foreign currency translation.................... (11) (11)
----- ------ ---- ------- -------
Balance, September 30, 1994..................... 1,613 3,643 (33) (512) 3,098
Shares issued pursuant to merger with
Imagination Systems, Inc. (note 3)............ 971 1,699 1,699
Shares issued pursuant to merger with Universal
Automation, Inc. (note 3)..................... 200 1,112 1,112
Grant of stock in connection with separation
agreement..................................... 9 16 16
Shares issued in connection with conversion of
convertible subordinated note to common stock
(note 4)...................................... 102 200 200
Forfeiture of restricted stock upon termination
of employment................................. (25)
Compensation related to restricted stock plan
(note 9)...................................... 126 126
Net income for the year ended September 30,
1995.......................................... 303 303
Foreign currency translation.................... (18) (18)
----- ------ ---- ------- -------
Balance, September 30, 1995..................... 2,870 $6,796 $(51) $ (209) $ 6,536
===== ====== ==== ======= =======
(Unaudited)
Balance, September 30, 1995..................... 2,870 $6,796 $(51) $ (209) $ 6,536
Shares issued in connection with exercise of
warrants...................................... 161 403 403
Shares issued in connection with exercise of
options....................................... 7 17 17
Net income for the six months ended March 31,
1996.......................................... 131 131
Foreign currency translation.................... (13) (13)
----- ------ ---- ------- -------
Balance, March 31, 1996......................... 3,038 $7,216 $(64) $ (78) $ 7,074
===== ====== ==== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 44

NEMATRON CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
----------------- -----------------
1994 1995 1995 1996
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $(2,797) $ 303 $ 35 $ 131
Adjustments to reconcile net income (loss) to net cash flow
provided by (used in) operating activities:
Depreciation and amortization................................... 905 731 338 491
Gain on disposal of property and equipment...................... (5) -- -- --
Sale of royalty rights for note receivable...................... (100) -- -- --
Non-cash compensation related to restricted stock............... 16 125 20 --
Write-off of software projects in process....................... 246 -- -- --
Changes in assets and liabilities that provided (used) cash:
Accounts receivable........................................... (228) (677) (182) (208)
Inventories................................................... 655 (597) (166) (702)
Prepaid expenses and other current assets..................... (37) (265) (167) (179)
Accounts payable.............................................. 1,186 593 (90) (666)
Other accrued liabilities..................................... 313 (487) (197) (91)
------- ------- ------- -------
Net cash provided by (used in) operating activities........ 154 (274) (409) (1,224)
------- ------- ------- -------
Cash flows from investing activities:
Additions to capitalized software development costs............... (76) (469) (164) (371)
Additions to property and equipment............................... (213) (245) (96) (180)
Acquisitions, net of cash acquired................................ -- (105) -- --
Cash portion of purchase price of Action product line............. (290) -- -- --
Proceeds from disposals of property and equipment................. 15 -- -- --
------- ------- ------- -------
Net cash used in investing activities...................... (564) (819) (260) (551)
------- ------- ------- -------
Cash flows from financing activities:
Borrowings under mortgage note.................................... -- 1,900 -- --
Increase in notes payable to bank................................. 500 730 660 410
Proceeds from exercise of common stock options and warrants....... -- -- -- 420
Borrowings under subordinated and other notes..................... -- 200 200 1,818
Payments of long-term debt........................................ (188) (1,696) (170) (508)
Additions to deferred financing fees.............................. -- (23) -- (166)
------- ------- ------- -------
Net cash flows provided by financing activities 312 1,111 690 1,974
------- ------- ------- -------
Foreign currency translation effect on cash......................... 2 (1) (35) (13)
------- ------- ------- -------
Net increase (decrease) in cash..................................... (96) 17 (14) 186
Cash at beginning of year........................................... 157 61 61 78
------- ------- ------- -------
Cash at end of period............................................... $ 61 $ 78 $ 47 $ 264
======= ======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest............................................ $ 210 $ 457 $ 183 $ 342
Cash paid for income taxes........................................ -- -- -- --
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).............................................................. -- 1,498 1,498 --
Additions to various assets and liabilities in connection with the
acquisition of Universal Automation, Inc. for common stock (note
3).............................................................. -- 1,112 -- --
Issuance of common stock in exchange for noncompete agreement
(note 3)........................................................ -- 218 218 --
Issuance of common stock in connection with conversion of a
subordinated note (note 4)...................................... -- 200 -- --
Acquisition of equipment under capital lease obligations.......... 79 -- --
Noncash portion of Action product line purchase of inventories,
product designs, and note payable (note 4)...................... 443 -- -- --
Addition to license fees through issuance of note................. 295 -- -- --
Purchase of inventories through issuance of note.................. 215 62 -- --
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE> 45

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

(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 use worldwide in
factory automation and control and in test and measurement environments.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries -- Nematron Europa BV, a
Netherlands corporation formed in 1990, and NemaSoft, Inc., a Michigan
corporation formed in 1995. 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")
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.)

(2) SUMMARY OF ACCOUNTING PRINCIPLES

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.

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, 1995, capitalized software and related
development costs, net of amortization, increased by approximately $4,066,000,
including approximately $470,000 relating to salaries and other costs incurred
during the year, and approximately $2,140,000 and $1,622,000 relating to the
acquisitions of ISI and UAI, respectively (see note 3), offset by approximately
$166,000 of amortization of capitalized costs.

F-8
<PAGE> 46

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

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
$402,745 and $166,256 for the years ended September 30, 1994 and 1995,
respectively, and is included in cost of revenues in the accompanying
consolidated statements of operations.

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 shareholders' 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.

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 $888,700 and $704,800 for the years ended September 30, 1994
and 1995, respectively.

Reserve for Self-Insurance

The Company has 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 medical 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, 1995, was approximately
$45,000 and is included in other accrued liabilities.

F-9
<PAGE> 47

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

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

The Company accounts for taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"), which requires an asset and liability approach for financial accounting
and reporting of income taxes. Under SFAS No. 109, 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. Income tax expense is the tax payable or refundable for
the period, plus or minus the change during the period in deferred tax assets
and liabilities.

Earnings Per Share

Primary earnings per share are calculated using the weighted average number
of shares of common stock and common stock equivalents outstanding. Fully
diluted earnings per share are calculated using the treasury method, assuming
conversion of convertible subordinated notes and warrants having conversion
prices less than the average market price of the common stock.

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.

Interim Financial Information

In the opinion of management, the condensed financial statements as of
March 31, 1996 and for the six months ended March 31, 1995 and 1996, include all
adjustments, consisting solely of normal recurring adjustments, considered
necessary for a fair presentation of financial position and results of
operations. The results of operations for the six months ended March 31, 1995
and 1996 are not necessarily indicative of the results to be expected for the
full year.

(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 $1,830,000, 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

F-10
<PAGE> 48

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

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 12.)

Merger with Universal Automation, Inc.

On September 20, 1995, the Company completed its merger of its wholly owned
subsidiary, NemaSoft, Inc., 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. 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 12.)

The preliminary allocation of the 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 $ --
Software and related development costs.............. 2,140,000 1,622,000
Other intangible assets............................. 218,000 --
Property and equipment.............................. 81,000 5,000
Liabilities......................................... (877,000) (97,000)
---------- ----------
Total purchase price...................... $1,830,000 $1,530,000
========== ==========
</TABLE>

The allocation of the total purchase price among the fair value of the
acquired assets and liabilities is subject to adjustment as certain estimates
are finalized, but is not expected to materially differ from preliminary
estimates.

F-11
<PAGE> 49

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, ISI and UAI as if the
acquisitions had occurred as of the beginning of 1994, 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>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- -------------------------
1994 1995 1995 1996
----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................... $17,728,000 $18,578,000 $9,452,000 $10,071,000
Net income (loss).............. $(3,061,000) $ 37,000 $ (422,000) $ 131,000
Net earnings (loss) per
share........................ $ (1.10) $ .01 $ (0.12) $ 0.04
</TABLE>

(4) RELATED PARTY TRANSACTIONS

In October 1993, the Company purchased certain inventories, product designs
and equipment from Action Instruments ("Action"). The total cost of such assets
was $743,130, and consideration paid was 160,000 shares of common stock, valued
at closing at $276,000, a subordinated convertible note of $167,000, and cash of
$291,130. During the remainder of fiscal 1994 and in fiscal 1995, the Company
purchased additional inventory from Action in exchange for subordinated notes of
$215,000 and $62,000, respectively. In November 1995, the Company repaid all of
the subordinated notes. See note 7 for a description of the subordinated notes.
Interest expense related to the subordinated notes totaled $14,595 and $37,656
for the years ended September 30, 1994 and 1995, respectively.

On December 8, 1994, the Company issued a convertible subordinated note in
the amount of $200,000, payable to the Company's then-president and board
member. The note required interest-only payments due quarterly for three years,
at which time the note was due in 24 equal monthly installments. Interest was
payable at the prime rate. The note contained terms under which the noteholder
could convert the note into common stock at any time prior to maturity. On
August 16, 1995, the noteholder exercised the conversion feature of the note,
and on that date the note was converted at book value per share into 102,564
shares of common stock. Interest expense on the note was $12,020 for the year
ended September 30, 1995.

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, under the terms of the lease, which commenced on March 3, 1995, were
$45,262.

(5) INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- ----------
<S> <C> <C>
Purchased parts and accessories......................... $ 2,622,872 $3,441,577
Finished goods.......................................... 829,465 445,839
Work-in-process......................................... 160,382 186,218
Demo units.............................................. 236,564 465,046
Service stock........................................... 273,739 286,128
----------- ----------
Total inventories............................. $ 4,123,022 $4,824,808
=========== ==========
</TABLE>

F-12
<PAGE> 50

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

(6) NOTES PAYABLE TO BANK

As of September 30, 1995, $2,450,000 was outstanding under a $2,450,000
line of credit agreement which is subject to renewal in February 1996. The
amount available under this facility is limited by a borrowing formula which
allows for advances up to 75 percent of eligible domestic accounts receivable
plus 80 percent of eligible foreign accounts receivable plus a maximum of
$1,000,000 against certain inventory categories plus $400,000. 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 2 percent above the bank's prime interest rate (10.75 percent
at September 30, 1995).

The line of credit includes various affirmative and negative covenants. The
Company was in compliance with all covenants at September 30, 1995.

On March 29, 1996, the Company negotiated an expansion of its credit
facility to a maximum of $3,250,000. 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% 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 1 1/2 percent above the bank's
prime interest rate (10.25 percent at March 31, 1996). The line of credit
includes various affirmative and negative covenants. The Company was in
compliance with all covenants at March 31, 1996.

(7) LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
Mortgage loan payable to a bank, interest at 10.5% per annum,
payable in monthly installments of $23,260 through August
2000, 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............................................ $1,893,919 $1,854,052
Subordinated debt under a term loan and warrant purchase
agreement.................................................. 1,800,000
Convertible subordinated notes payable to Action. The notes
require quarterly interest-only payments for three years,
at which time the notes and interest thereon are due in 24
equal monthly installments. The notes are subordinated to
the notes payable to the bank. In November 1995, the notes
were repaid by the Company in their entirety............... 444,000 --
Other notes, repaid in October 1995.......................... 11,477 --
Other notes, secured by equipment............................ 17,952
Capitalized lease obligations (note 10)...................... 76,417 64,006
---------- ----------
Total long-term debt............................... 2,425,813 3,736,010
Less current maturities...................................... (119,706) (110,288)
---------- ----------
Total long-term debt, less current maturities...... $2,306,107 $3,625,722
========== ==========
</TABLE>

F-13
<PAGE> 51

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

The mortgage loan payable to a bank contains a covenant that requires the
Company to maintain a minimum debt-to-equity ratio. The Company was in
compliance with this covenant at September 30, 1995 and at March 31, 1996.

The aggregate amounts of long-term debt maturities at September 30, 1995,
are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
<S> <C>
1996................... $ 119,706
1997................... 205,589
1998................... 352,437
1999................... 251,850
2000................... 1,496,231
----------
Total long-term debt........ $2,425,813
=========
</TABLE>

In November 1995, the Company obtained a total of $1,800,000 of
subordinated debt under a term loan and warrant purchase agreement (the
"Subordinated Note Agreement") with a consortium of five lenders. All of the
notes are collateralized by substantially all assets, other than real property,
of the Company, and the Company has granted to one note holder, representing
$500,000 of the total subordinated debt, a third mortgage on the Company's Ann
Arbor facility. The subordinated notes bear interest at 12 percent per annum and
require monthly interest-only payments totaling $18,000 for three years and
monthly principal payments of $50,000, plus interest, beginning October 1997.
Total principal due under the subordinated notes is $600,000 in each of the
fiscal years ending September 30, 1998, 1999 and 2000. 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 total liabilities less subordinated debt
to the sum of tangible net worth plus subordinated debt, and (c) a specified
level of tangible net worth. A total of 237,214 warrants were issued to purchase
stock at $4 a share which expire October 31, 2002. (See note 12.)

(8) TAXES ON INCOME

The provisions for taxes on income in fiscal 1994 and 1995, including both
the current and deferred portions, are zero. 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, and employee benefit accruals deductible for tax
purposes when paid.

The following reconciles the statutory federal income tax rate to the
Company's effective tax rate:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------
1994 1995
----- -----
<S> <C> <C>
Income tax expense (benefit) based on the federal statutory
rate....................................................... (34.0)% 34.0%
Increase (decrease) in taxes resulting from generation
(utilization) of net operating losses...................... 34.0% (34.0)%
----- -----
Effective tax rate................................. 0.0% 0.0%
===== =====
</TABLE>

F-14
<PAGE> 52

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

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

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1994 1995
----------- ---------
<S> <C> <C>
Domestic............................................ $(2,592,997) $368,057
Foreign............................................. (203,966) (64,988)
----------- ---------
Total income (loss) before taxes on
income.................................. $(2,796,963) $303,069
=========== =========
</TABLE>

Temporary differences and carryforwards which give rise to the net deferred
tax position at September 30, 1995, are as follows:

<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable........................................... $ 15,000
Inventories................................................... 124,000
Property and equipment........................................ 62,000
Noncompetition agreement...................................... 19,000
Accrued compensation.......................................... 50,000
Accrued self-insurance........................................ 14,000
Accrued warranty.............................................. 31,000
Net operating loss carryforwards.............................. 1,711,000
-----------
Total deferred tax assets............................. 2,026,000
Less: Valuation allowance....................................... (405,000)
-----------
Net deferred tax assets............................... 1,621,000
-----------
Deferred tax liability -- capitalized software development
costs......................................................... (1,621,000)
-----------
Net deferred tax position............................. $ --
===========
</TABLE>

At September 30, 1995, the Company has net operating loss carryforwards of
approximately $4,750,000 which expire at various dates between 2003 and 2010.
Utilization of these carryforwards are subject to annual limitation under
current IRS regulations. The Company has established a valuation allowance for
the deferred tax assets, as it is unlikely that they will be fully utilized.

(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.

Shares of common stock subject to the awards ("Restricted Stock") are
subject to transfer restrictions and forfeiture. Recipients of Restricted Stock
are not required to provide consideration other than the rendering of services.
Subject to the restrictions described below, a participant has, with respect to
all Restricted Stock, all of the rights of a stockholder of the Company,
including the right to vote the shares and the right to receive dividends, if
any.

Restricted Stock is subject to forfeiture and may not be transferred, and a
certificate is not delivered, until certain restrictions lapse. The shares
subject to an award under the Restricted Stock Plan become vested and
transferable at the rate of 10 percent per year, contingent upon continuous
employment with the Company. Recognition of income to the employee and expense
to the Company takes place coincident with the annual

F-15
<PAGE> 53

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

lapse of restrictions, with income and expense determined by the fair market
value of unrestricted shares at that time. Unvested shares are forfeited upon
termination of employment, except termination of employment by reason of death
or disability. Upon a 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 1994 and 1995, 7,000 and 42,750 shares of Restricted Stock,
respectively, became vested, and 25,250 shares were forfeited due to
terminations. Compensation expense in 1994 and 1995 related to the Restricted
Stock plan was $15,968 and $125,579, respectively.

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 455,000 shares, increased 350,000
shares by the shareholders in 1995, 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 to decide the vesting period. Except for the March 4, 1995, grant of
18,750 options which vested one-third immediately and one-third on each
successive anniversary date of the award, all other stock options granted under
the 1993 Plan 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 this term has 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 1994, 43,650 options were granted at an
option price of $2.50 per share, 16,900 exercisable, and 21,100 options
forfeited. As of September 30, 1995, an additional 168,900 options may be issued
under the 1993 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 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 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 1994, the Company granted
options to purchase 3,000 shares of common stock at an exercise price of $4.55
per share and 1,000 options were forfeited. As of September 30, 1995, an
additional 11,000 options may be issued under the Directors Option Plan.

F-16
<PAGE> 54

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

Special Option Grant

In July 1995, the Board of Directors awarded a special option award to the
former chairman of the Board of Directors. This award of 10,000 options to
purchase common stock at $2.50 per share was 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 the special option grant for the two years
ended September 30, 1995, is as follows.

<TABLE>
<CAPTION>
OPTION
PRICE AVAILABLE
PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
-------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, October 1, 1993......................... $2.50 - $4.89 60,150 3,000 64,850
Granted.......................................... $2.50 - $4.55 46,650 -- (46,650)
Exercisable...................................... $2.50 - $4.55 -- 19,900 --
Forfeited........................................ $2.50 - $4.89 (22,100) -- 22,100
------- ------ --------
Balance, September 30, 1994...................... $2.50 - $4.89 84,700 22,900 40,300
Increase in authorized shares.................... -- -- 350,000
Special option grant............................. $2.50 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
======= ====== ========
</TABLE>

In March 1996, the number of shares of stock reserved for options under the
1993 Plan was increased to 750,000 shares. Of the 60,000 options granted during
the six months ended March 31, 1996, all of which were granted at the current
market price at the date of grant, 3,000 were options under the Directors Option
Plan, 37,000 were options under the 1993 Plan, and 20,000 were options granted
as a special award to the former Chairman of the Board of Directors.

<TABLE>
<CAPTION>
OPTION
PRICE EXERCISABLE AVAILABLE
PER SHARE OUTSTANDING (EXERCISED) FOR GRANT
-------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, September 30, 1995...................... $1.87 - $4.89 305,100 97,300 179,900
Increase in authorized shares.................... 295,000
Granted.......................................... $4.50 - $8.75 40,000 -- (40,000)
Special option grant............................. $8.75 20,000 -- --
Exercisable...................................... $2.50 - $8.75 -- 122,250 --
Exercised........................................ $1.87 - $2.50 (6,850) (6,850) --
Forfeited........................................ $2.50 (10,350) (10,350) 10,350
------- ------- -------
Balance, March 31, 1996.......................... $1.87 - $8.75 347,900 202,350 445,250
======= ======= =======
</TABLE>

401(k) Plan and Trust

The Company has established a defined contribution retirement plan for all
eligible employees. Participants may make basic contributions, from 2 percent to
4 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, and it may make
additional contributions as

F-17
<PAGE> 55

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

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. Employees may make additional voluntary contributions of up to 5 percent
of their compensation.

The Company's contributions to the 401(k) plan were approximately $92,000
and $38,000 for the years ended September 30, 1994 and 1995, respectively.

(10) LEASE COMMITMENTS

The Company leases its software development 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 software development 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 $53,243; the other
facilities' lease requires monthly payments of $1,150 through March 1996; the
vehicle leases collectively require lease payments totaling $4,640 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 $76,262 at
September 30, 1995.

A summary of commitments under noncancelable leases as of September 30,
1995 is as follows:

<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES TOTAL
-------------- ---------------- --------
<S> <C> <C> <C>
1996..................................... $ 31,700 $195,200 $226,900
1997..................................... 31,700 132,100 163,800
1998..................................... 28,200 64,300 92,500
1999..................................... -- 53,200 53,200
2000..................................... -- 17,700 17,700
-------- -------- --------
Total minimum obligation................. $ 91,600 $462,500 $554,100
======== ========
Less amounts representing interest....... (15,183)
--------
Present value on minimum lease
payments............................... $ 76,417
========
</TABLE>

Total rental expense in fiscal 1994 and 1995 was $117,900, and $161,300,
respectively.

F-18
<PAGE> 56

NEMATRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

(11) 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 SIX MONTHS
-------------------------- ENDED MARCH 31,
1994 1995 1996
----------- ----------- ---------------
<S> <C> <C> <C>
Foreign:
France............................. $ 1,048,740 $ 2,330,183 $ 727,357
Other European..................... 1,752,214 2,399,158 985,761
Canada............................. 1,040,050 837,543 311,312
South America...................... 257,911 539,209 75,721
Asia and South Pacific............. 436,320 346,244 130,320
Africa............................. 35,541 59,949 6,290
----------- ----------- -----------
Total foreign revenues..... 4,570,776 6,512,286 2,236,761
Domestic revenues.................... 10,716,520 11,064,019 7,834,657
----------- ----------- -----------
Total...................... $15,287,296 $17,576,305 $10,071,418
=========== =========== ===========
</TABLE>

During the years ended September 30, 1994 and 1995, revenues from one
unaffiliated customer totaled 7 percent and 15 percent of total revenues,
respectively.

(12) 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................................... 3/3/98 11/20/97 10/31/02
Balance, September 30, 1994....................... -- -- -- --
Issued in connection with ISI Acquisition....... 485,258 485,258
Issued in connection with UAI Acquisition....... 137,000 137,000
------- ------- ------- --------
Balance, September 30, 1995....................... 485,258 137,000 -- 622,258
======= ======= ======= ========
Balance, September 30, 1995....................... 485,258 137,000 622,258
Issued in connection with subordinated debt..... 237,214 237,214
Exercised....................................... (161,247) -- -- (161,247)
------- ------- ------- --------
Balance, March 31, 1996........................... 324,011 137,000 237,214 698,225
======= ======= ======= ========
</TABLE>

F-19
<PAGE> 57

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The accompanying unaudited pro forma consolidated statement of operations
for the year ended September 30, 1995 has been prepared on the basis of
combining the historical results of operations of Nematron Corporation (the
"Company") Imagination Systems, Inc. ("ISI") and Universal Automation, Inc.
("UAI") as if ISI and UAI had been acquired as of October 1, 1994 and their
results of operations were included in the consolidated results of operations
for all of fiscal 1995. The historical results of the Company, ISI and UAI have
been adjusted to reflect amounts recorded under the purchase method of
accounting as described in the related notes to the unaudited pro forma
consolidated statement of operations.

The unaudited pro forma consolidated statement of operations should be read
in conjunction with the Company's historical consolidated financial statements
and notes thereto which are included elsewhere in this Prospectus for the
comparable periods prior to the acquisitions. See "Index to Consolidated
Financial Statements".

The following unaudited pro forma consolidated statement of operations is
not necessarily indicative of the combined operating results as they may be in
the future or as they might have been for the period indicated had the
acquisitions of ISI and UAI been consummated at the beginning of the period.

F-20
<PAGE> 58

NEMATRON CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
ADJUSTMENTS
AS IMAGINATION UNIVERSAL -------------
REPORTED SYSTEMS, INC. AUTOMATION, INC. AMOUNT NO. PRO FORMA
-------- ------------- ---------------- ------ --- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues....................... $ 17,576 $ 603 $ 499 $(100) 1 $18,578
Cost of revenues................... 11,382 100 217 (59) 2 11,986
30 3
316 4
-------- ----- ------ ----- -------
Gross profit..................... 6,194 503 282 (387) 6,592

Operating expenses:
Product development costs........ 894 -- 35 -- 929
Selling, general and
administrative expenses....... 4,693 498 357 45 5 5,303
(242) 6
(27) 7
(21) 8
-------- ----- ------ ----- -------
Total operating expenses......... 5,587 498 392 (245) 6,232
-------- ----- ------ ----- -------
Operating income (loss)............ 607 5 (110) (142) 360

Other income (expense):
Interest and other income........ 3 10 -- -- 13
Interest expense, net............ (381) (22) (7) -- (410)
Foreign currency gain............ 74 -- -- -- 74
-------- ----- ------ ----- -------
Total other income (expense)..... (304) (12) (7) 0 (323)
-------- ----- ------ ----- -------
Income (loss) before taxes on
income........................... 303 (7) (117) (142) 37

Taxes on income.................... -- -- -- -- --
-------- ----- ------ ----- -------
Net income (loss).................. $ 303 $ (7) $ (117) $(142) $ 37
======== ===== ====== ===== =======
Earnings per share.................
$ 0.14 $ 0.01
======== =======
Weighted average shares
outstanding...................... 2,180 3,973
======== =======
</TABLE>

- -------------------------
(1) Elimination of software development fees paid and capitalized by the Company
and recorded as revenue by ISI.

(2) Elimination of amortization of software development costs related to
AutoNet(TM) recorded by ISI.

(3) Additional amortization of capitalized software regarding ISI's AutoNet(TM)
product for the period from October 1, 1994 to March 2, 1995.

(4) Amortization of capitalized software acquired from UAI for the fiscal year.

(5) Amortization of non-compete agreement acquired in the ISI merger for the
period from October 1, 1994 to March 2, 1995.

(6) Elimination of salary, fringe benefits and other compensation costs for
employees not retained after the UAI and ISI mergers.

(7) Elimination of office rent related to UAI's operations which moved to the
Company's facilities.

(8) Elimination of utilities, auto expense and sundry expenses of UAI which will
not continue after the merger.

F-21
<PAGE> 59

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