Sandston Corp – ‘424A’ on 5/20/96

As of:  Monday, 5/20/96   ·   Accession #:  950124-96-2286   ·   File #:  333-04036

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Prospectus   —   Rule 424(a)
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 1: 424A        Prospectus                                            58    342K 

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                                                     Filed Pursuant to Rule 424a
                                           File No. 333-4036

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A 
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
  SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
    MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
  THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
    SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
   UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.                                                    

SUBJECT TO COMPLETION, DATED MAY 20, 1996 

1,000,000 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 May 17, 1996, the last reported sale price   
for the Common Stock was $10.00. See "Price Range of Common Shares". The Company
has applied for inclusion of the Common Stock on The Nasdaq Stock Market's      
National Market.                                                                

     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.                                       

                                                        [Enlarge/Download Table]

-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
                                      PRICE TO            UNDERWRITING           PROCEEDS TO     
                                       PUBLIC              DISCOUNT(1)           COMPANY(2)      
-------------------------------------------------------------------------------------------------
                                                                                                 
Per Share......................           $                     $                     $          
-------------------------------------------------------------------------------------------------
Total(3).......................           $                     $                     $          
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------

(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 150,000 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 $          , $          and $          , 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             ,   
1996.                                                                           

FIRST OF MICHIGAN CORPORATION 

The date of this Prospectus is             , 1996 

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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.                                  

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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 

                                                        [Enlarge/Download Table]

                                                                                       PAGE
                                                                                       ----
                                                                                           
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.................................................................  34 
Incorporation of Certain Documents by Reference.......................................  35 
Index to Consolidated Financial Statements............................................ F-1 

     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

                                                        [Enlarge/Download Table]
                                                                                            
Common Stock offered........................... 1,000,000 shares                            
Common Stock to be outstanding after the                                                    
  offering..................................... 4,044,415 shares(1)                         
Use of proceeds................................ To repay bank debt and for general corporate
                                                purposes. See "Use of Proceeds".            
SmallCap Market symbol......................... NEMA                                        

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

(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) 

                                                        [Enlarge/Download Table]

                                                                            SIX MONTHS ENDED    
                                           YEAR ENDED SEPTEMBER 30,             MARCH 31,       
                                        -------------------------------  -----------------------
                                         1993        1994        1995     1995          1996    
                                        -------     -------     -------  -------     -----------
                                                                                                
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  

                                                        [Enlarge/Download Table]

                                                                          AS OF MARCH 31, 1996  
                                              AS OF SEPTEMBER 30,        -----------------------
                                        -------------------------------                  AS     
                                         1993        1994        1995    ACTUAL      ADJUSTED(2)
                                        -------     -------     -------  -------     -----------
                                                                                                
BALANCE SHEET DATA:                                                                             
Working capital........................ $ 2,917     $ 1,131     $ 1,270  $ 2,902       $11,657  
Total assets...........................   9,677       9,700      15,204   16,705        22,600  
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        15,829  

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

(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 1,000,000 shares of Common Stock     
offered hereby at an estimated price of $9.75 per share, less applicable
underwriting discounts and estimated offering expenses payable by the   
Company. See "Use of Proceeds" and "Capitalization".                    

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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 31.5% 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 1,046,000 shares of Common Stock (approximately 26% 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 $8,755,000 ($10,114,000 if   
the Underwriters' over-allotment option is exercised in full), assuming an      
offering price of $9.75 per share and 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 May 17, 1996, there was        
$3,250,000 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 May 17, 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.                                                                   

                                                        [Enlarge/Download Table]

                                                                          HIGH    LOW 
                                                                         ------  -----
                                                                                      
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 May 17)........................................  10.75   7.25

   On May 17, 1996, the last reported sale price of Common Stock as reported
on the SmallCap Market was $10.00 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.                                                                 

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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 $8,755,000 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.                                                                

                                                        [Enlarge/Download Table]

                                                                            MARCH 31, 1996     
                                                                        -----------------------
                                                                        ACTUAL      AS ADJUSTED
                                                                        -------     -----------
                                                                        (DOLLARS IN THOUSANDS) 
                                                                                               
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        15,971  
  Foreign currency translation adjustment..............................     (64)          (64) 
  Accumulated deficit..................................................     (78)          (78) 
                                                                        --------     --------  
     Total stockholders' equity........................................   7,074        15,829  
                                                                        --------     --------  
          Total capitalization......................................... $10,700       $19,455  
                                                                        ========     ========  

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

(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 May 17, 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.                                   

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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.

                                                        [Enlarge/Download Table]

                                                                                         SIX MONTHS ENDED  
                                                  YEAR ENDED SEPTEMBER 30,                   MARCH 31,     
                                       -----------------------------------------------   ----------------- 
                                        1991      1992      1993      1994      1995      1995      1996   
                                       -------   -------   -------   -------   -------   -------   ------- 
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)                
                                                                                                           
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 

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

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

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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.                                         

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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                         

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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                                                                       

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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                                                    

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$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           

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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.                   

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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 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. Certain of the Company's Industrial Workstations(TM) contain       
proprietary software embedded in the products as firmware, and such firmware is 
not sold separately.                                                            

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 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 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                                             

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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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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                                        

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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                       

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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.                                                      

                                                        [Enlarge/Download Table]

                                                     FOR THE FISCAL YEAR ENDED      FOR THE SIX 
                                                           SEPTEMBER 30,            MONTHS ENDED
                                                  -------------------------------    MARCH 31,  
                                                   1993        1994        1995         1996    
                                                  -------     -------     -------   ------------
                                                                                                
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  
                                                  =======     =======     =======      =======  

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)
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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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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.                                                                   

                                                        [Enlarge/Download Table]

    PRODUCT LINE         LIST PRICES                          DESCRIPTION                      
---------------------  ---------------  -------------------------------------------------------
                                                                                               
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.                  

 The Company maintains an inventory of spare parts and service stock and
dedicates approximately 12 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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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-                                            

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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                                       

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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.                

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     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.                                               

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MANAGEMENT

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

                                                                [Download Table]

        NAME          AGE                 POSITION WITH THE COMPANY                
--------------------  ---  --------------------------------------------------------
                                                                                   
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)                         

   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                     

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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 May 17, 1996, there were 3,044,415 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.          

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.                                     

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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 May 17, 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                                       

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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.        

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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.                                      

                                                                [Download Table]

                         UNDERWRITER                           NUMBER OF SHARES
-------------------------------------------------------------  ----------------
                                                                               
First of Michigan Corporation................................                  
                                                                   ---------   
TOTAL........................................................      1,000,000   
                                                                   =========   

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 $          per 
share, and the Underwriters may allow, and such dealers may reallow, a          
concession not in excess of $          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 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 150,000 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 1,000,000 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.                                                                  

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    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 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.                                           

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    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.                                    

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.                                                   

        (c) Quarterly Reports on Form 10-QSB for the quarters ended December
31, 1995 and March 31, 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).                       

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements of Nematron Corporation and Subsidiaries: 

                                                        [Enlarge/Download Table]

                                                                                        PAGE
                                                                                        ----
                                                                                            
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

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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                                                               

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                                                        [Enlarge/Download Table]
                                                                                        
Deloitte & Touche Logo                                                                  
                        ----------------------------------------------------------------

                        6th Floor                         Telephone:  (313) 769-6200    
                        101 North Main Street             Facsimile:  (313) 769-2612 or 
                        Ann Arbor, Michigan 48104-1411                (313) 769-2178    

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                                                                

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NEMATRON CORPORATION AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS 
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]


                                                                     SEPTEMBER 30,   MARCH 31, 
                                                                         1995          1996    
                                                                     -------------  -----------
                                                                                    (UNAUDITED)
                                                                                               
                                      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  
                                                                        =======       =======  

See accompanying notes to consolidated financial statements.

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NEMATRON CORPORATION AND SUBSIDIARIES 

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

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED         SIX MONTHS ENDED  
                                                         SEPTEMBER 30,          MARCH 31,      
                                                      -------------------   ------------------ 
                                                       1994        1995      1995       1996   
                                                      -------     -------   ------     ------- 
                                                                               (UNAUDITED)     
                                                                                               
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 
                                                      =======     =======   ======     ======= 

See accompanying notes to consolidated financial statements.

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NEMATRON CORPORATION AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                 RETAINED             
                                                   COMMON STOCK      FOREIGN     EARNINGS             
                                                  ---------------   CURRENCY    (ACCUMULATED          
                                                  SHARES   AMOUNT  TRANSLATION   DEFICIT)      TOTAL  
                                                  ------   ------  -----------  -----------   ------- 
                                                                                                      
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 
                                                  =====    ======      ====       =======     ======= 

See accompanying notes to consolidated financial statements.

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NEMATRON CORPORATION AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                         YEAR ENDED       SIX MONTHS ENDED  
                                                                        SEPTEMBER 30,         MARCH 31,     
                                                                      -----------------   ----------------- 
                                                                       1994      1995      1995      1996   
                                                                      -------   -------   -------   ------- 
                                                                                             (UNAUDITED)    
                                                                                                            
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        --        -- 

See accompanying notes to consolidated financial statements.

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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.                                  

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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.                           

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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                              

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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:     

                                                                [Download Table]

                                                         ISI            UAI     
                                                      ----------     ---------- 
                                                                                
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 
                                                      ==========     ========== 

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.                                                                      

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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.                                                             

                                                        [Enlarge/Download Table]

                                                                SIX MONTHS ENDED     
                                 YEAR ENDED SEPTEMBER 30,           MARCH 31,        
                                --------------------------  -------------------------
                                   1994           1995         1995          1996    
                                -----------    -----------  ----------    -----------
                                        (UNAUDITED)                                  
                                                                                     
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

(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:                                

                                                                [Download Table]

                                                          SEPTEMBER 30,   MARCH 31,
                                                              1995          1996   
                                                          ------------   ----------
                                                                                   
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
                                                          ===========    ==========

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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:                             

                                                        [Enlarge/Download Table]

                                                               SEPTEMBER 30,    MARCH 31,
                                                                  1995            1996   
                                                               ------------    ----------
                                                                                         
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  
                                                               ==========    ==========  

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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:                                                                 

                                                                [Download Table]

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

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:                                                   

                                                                [Download Table]

                                                                 YEAR ENDED     
                                                                SEPTEMBER 30,   
                                                               ---------------  
                                                               1994      1995   
                                                               -----     -----  
                                                                                
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% 
                                                               =====     =====  

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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:                                                                 

                                                                [Download Table]

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

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

                                                                [Download Table]
                                                                              
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.............................  $        -- 
                                                                  =========== 

    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                           

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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.        

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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.                                        

                                                        [Enlarge/Download Table]

                                                      OPTION                                          
                                                      PRICE                                 AVAILABLE 
                                                    PER SHARE     OUTSTANDING  EXERCISABLE  FOR GRANT 
                                                  --------------  -----------  -----------  --------- 
                                                                                                      
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 
                                                                    =======       ======     ======== 

     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.            

                                                        [Enlarge/Download Table]

                                                      OPTION                                         
                                                      PRICE                    EXERCISABLE  AVAILABLE
                                                    PER SHARE     OUTSTANDING  (EXERCISED)  FOR GRANT
                                                  --------------  -----------  -----------  ---------
                                                                                                     
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 
                                                                    =======      =======     ======= 

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                                                     

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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:                                                             

                                                                [Download Table]

                                          CAPITAL LEASES  OPERATING LEASES   TOTAL  
                                          --------------  ----------------  --------
                                                                                    
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                               
                                             ========                               

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

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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:                                    

                                                                [Download Table]

                                       YEAR ENDED SEPTEMBER 30      SIX MONTHS   
                                      --------------------------  ENDED MARCH 31,
                                         1994           1995           1996      
                                      -----------    -----------  ---------------
                                                                                 
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  
                                      ===========    ===========    ===========  

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:                                                                     

                                                        [Enlarge/Download Table]

                                                       ISI          UAI      SUBORDINATED           
                                                   ACQUISITION  ACQUISITION      DEBT       TOTAL   
                                                   -----------  -----------  ------------  -------- 
                                                                                                    
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 
                                                      =======       =======     =======    ======== 

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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.    

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NEMATRON CORPORATION

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

                                                        [Enlarge/Download Table]

                                                                                 ADJUSTMENTS            
                                       AS       IMAGINATION      UNIVERSAL      -------------           
                                    REPORTED   SYSTEMS, INC.  AUTOMATION, INC.  AMOUNT    NO.  PRO FORMA
                                    --------   -------------  ----------------  ------    ---  ---------
                                                                                                        
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 
                                    ========                                                    ======= 

-------------------------                                                       
(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.                                          

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[Nematron Logo] 

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘424A’ Filing		Date		First		Last			Other Filings
		2/26/03		52					4
		10/31/02		50
		9/30/00		50					10-Q
		1/31/00		28
		9/30/99		50					10QSB
		9/30/98		50					10KSB,  10KSB/A
		11/20/97		47
		1/31/97		10		11
Filed on:		5/20/96		1		36			10KSB/A
		5/17/96		1		32
		4/1/96		34
		3/31/96		5		55
		3/29/96		49
		2/2/96		36
		12/31/95		36
		12/15/95		17		38
		11/7/95		30
		10/5/95		10
		10/4/95		10
		9/30/95		6		57			10KSB/A
		9/20/95		8		47
		8/16/95		48		52
		7/18/95		28
		3/31/95		12		55
		3/20/95		29
		3/4/95		52
		3/3/95		8		48
		3/2/95		57
		12/9/94		39
		12/8/94		48
		10/1/94		56		57
		9/30/94		6		55
		10/1/93		10		53
		9/30/93		6
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