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

                                   FORM 10-QSB

  (Mark One)

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

         For the quarterly period ended March 31, 2003


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

  Commission File Number: 0-21142

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

                                    Michigan
         (State or other jurisdiction of incorporation or organization)

                                   38-2483796
                      (I.R.S. Employer Identification No.)

                 5840 Interface Drive, Ann Arbor, Michigan 48103
                    (Address of principal executive offices)

                                 (734) 214-2000
                           (Issuer's telephone number)


     State the number of shares  outstanding of each of the issuer's  classes of
common  equity,  as of the latest  practicable  date: No par value Common Stock:
15,744,625 outstanding as of May 14, 2003

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

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<PAGE>


                         PART I -- FINANCIAL INFORMATION

Item 1.    Financial Statements

                      Nematron Corporation and Subsidiaries
                      Consolidated Condensed Balance Sheets
                      March 31, 2003 and December 31, 2002

                                                        March 31,
                                                          2003      December 31,
                                                       (Unaudited)      2002
                                                       -----------      ----
                               Assets
                               ------
Current assets:
  Cash                                                     $97,959     $103,802
  Accounts receivable, net of allowance for
    doubtful accounts of $83,000 at March 31, 2003,
    and $75,000 at December 31, 2002                     2,507,514    2,342,400
  Inventories (Note 2)                                   1,644,291    1,653,844
  Prepaid expenses and other current assets                192,082      172,550
                                                       -----------  -----------
    Total current assets                                 4,441,846    4,272,596
Property and equipment, net of accumulated
  depreciation of $7,627,418 at March 31, 2003 and
  $7,563,474 at December 31, 2002                        1,777,740    1,850,392
Goodwill, net of amortization (Note 3)                   2,922,122    2,922,122
Software and related development costs, net of
  amortization (Note 4)                                    545,633      574,407
Other intangible assets, net of amortization (Note 5)      356,632      404,159
                                                       -----------  -----------
    Total assets                                       $10,043,973  $10,023,676
                                                       ===========  ===========

                      Liabilities and Stockholders' Deficit
Current liabilities:
  Notes payable to banks (Note 6)                       $1,427,684   $1,397,317
  Accounts payable                                       1,753,685    1,582,958
  Deferred revenue and other accrued expenses            1,806,460    1,748,594
  Subordinated debt (Note 7)                             3,804,000    3,179,000
  Current maturities of long-term debt (Note 8)            169,934      169,255
                                                       -----------  -----------
    Total current liabilities                            8,961,763    8,077,124
Long-term debt, less current maturities (Note 8)         2,477,188    2,522,740
                                                       -----------  -----------
    Total liabilities                                   11,438,951   10,599,864
Stockholders' deficit:
  Common stock, no par value, 30,000,000 shares
    authorized, 15,744,625 shares outstanding           33,246,346   33,246,346
  Accumulated comprehensive income                           6,408       25,645
  Accumulated deficit                                  (34,647,732) (33,848,179)
                                                       -----------  -----------
    Total shareholders' deficit                         (1,394,978)    (576,188)
                                                       -----------  -----------
    Total liabilities and shareholders' deficit        $10,043,973  $10,023,676
                                                       ===========  ===========

                                       2
<PAGE>


                      Nematron Corporation and Subsidiaries
                 Consolidated Condensed Statements of Operations
                 For The Quarters Ended March 31, 2003 and 2002

                                                         Quarter Ended March 31,
                                                        ------------------------
                                                           2003         2002
                                                        (Unaudited)  (Unaudited)
                                                        -----------  -----------

Net revenues                                            $3,334,223   $4,519,111
Cost of revenues                                         2,684,527    3,082,772
                                                       -----------  -----------
  Gross profit                                             649,696    1,436,339
Operating expenses:
  Product development costs - software                      44,894      190,438
  Selling, general and administrative expenses           1,203,378    1,286,303
                                                       -----------  -----------
  Total operating expenses                               1,248,272    1,476,741
                                                       -----------  -----------
  Operating loss                                          (598,576)     (40,402)
Other income (expense):
  Interest expense                                        (205,595)    (163,000)
  Sundry income, net of sundry expense                       4,618       10,482
                                                       -----------  -----------
  Total other income (expense)                            (200,977)    (152,518)
                                                       -----------  -----------
Loss before income tax benefit                            (799,553)    (192,920)
Income tax benefit (Note 9)                                    --           --
                                                       -----------  -----------
Net loss                                                 $(799,553)   $(192,920)
                                                       ===========  ===========

Loss per share (Note 11):
  Basic and diluted                                         $(0.05)      $(0.01)
                                                       ===========  ===========
Weighted average shares outstanding:
  Basic and diluted                                     15,744,625   15,744,625
                                                       ===========  ===========



                      Nematron Corporation and Subsidiaries
             Consolidated Condensed Statements of Comprehensive Loss
                 For The Quarters Ended March 31, 2003 and 2002

                                                         Quarter Ended March 31,
                                                         -----------------------
                                                           2003          2002
                                                        (Unaudited)  (Unaudited)
                                                        -----------  -----------

Net loss                                                $(799,553)    $(192,920)
Other comprehensive loss - foreign currency
  translation adjustment                                  (19,237)       (5,271)
                                                       ----------   -----------
Comprehensive loss                                      $(818,790)    $(198,191)
                                                       ===========  ===========


                                       3
<PAGE>


                      Nematron Corporation and Subsidiaries
                 Consolidated Condensed Statements of Cash Flows
                 For The Quarters Ended March 31, 2003 and 2002

                                                         Quarter Ended March 31,
                                                         -----------------------
                                                           2003           2002
                                                       (Unaudited)   (Unaudited)
                                                       -----------   -----------
Cash flows from operating activities:
  Net loss                                              $(799,553)    $(192,920)
Adjustments to reconcile net loss to net cash flows
  used in operating activities:
    Depreciation                                           75,726       117,142
    Amortization (Notes 4 and 5)                           76,301       125,723
    Non-cash interest for beneficial conversion
      feature of warrants                                     --            796
    Loss (gain) on disposal of property                    (3,890)       18,891
    Changes in assets and liabilities that provided
    (used) cash:
      Accounts receivable                                (165,114)     (350,567)
      Inventories                                           9,553        33,037
      Prepaid expenses and other current assets           (19,532)      (87,781)
      Accounts payable                                    170,727       426,801
      Deferred revenue and accrued expenses                57,867      (434,365)
                                                       ----------   -----------
      Net cash used in operating activities              (597,915)     (343,243)

Cash flows from investing activities:
  Additions to property and equipment                      (2,010)      (32,098)
  Proceeds from disposals of property and equipment         2,824           --
                                                       ----------   -----------
      Net cash provided by (used in) investing
      activities                                              815       (32,098)

Cash flows from financing activities:
  Proceeds from issuance of subordinated notes
    and warrants (Note 7)                                 625,000       285,000
  Payments of long-term debt                              (44,873)     (238,620)
  Increase in notes payable to banks                       30,367       196,883
                                                       ----------   -----------
      Net cash provided by financing activities           610,494       243,263

Foreign currency translation effect on cash               (19,237)       (5,271)
                                                       ----------   -----------
Net decrease in cash                                       (5,843)     (137,349)
Cash at beginning of period                               103,802       291,726
                                                       ----------   -----------
Cash at end of period                                    $ 97,959      $154,377
                                                       ==========   ===========


Supplemental disclosures of cash flow information:
  Cash paid for interest                                 $188,403     $ 118,140
  Cash paid for income taxes                                  --            --


                                       4
<PAGE>


                      Nematron Corporation and Subsidiaries
              Notes To Consolidated Condensed Financial Statements
               For The Three Months Ended March 31, 2003 and 2002

Note 1 - Basis of Presentation

The  accompanying  consolidated  financial  statements  include the  accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries, Nematron
Limited,  a  United  Kingdom  corporation,  Nematron  Canada  Inc.,  a  Canadian
corporation,  A-OK Controls  Engineering,  Inc.  ("A-OK  Controls"),  a Michigan
corporation,  and Optimation, Inc. ("Optimation"),  an Alabama corporation.  All
significant  intercompany  transactions  and balances  have been  eliminated  in
consolidation.

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

The results of operations for the  three-month  periods ended March 31, 2003 and
2002 are not  necessarily  indicative of the results to be expected for the full
year.

Note 2 - Inventories

Inventories consist of the following at March 31, 2003 and December 31, 2002:

                                                          March 31, December 31,
                                                           2003         2002
                                                           ----         ----
  Purchased parts and accessories                       $1,062,440   $1,085,811
  Work in process                                          263,304      247,730
  Finished goods, demo units and service stock             318,547      320,303
                                                        ----------   ----------
          Total Inventory                               $1,644,291   $1,653,844
                                                        ==========   ==========

Note 3 - Goodwill

Goodwill was recorded in  connection  with the  Company's  acquisition  of other
entities  during the years 1995 through 2001,  and prior to January 1, 2002, the
Company was  amortizing  goodwill  over  periods  ranging from fifteen to twenty
years. Effective with the adoption of FASB Statement No. 142, Goodwill and Other
Intangible  Assets,  that the  Company  adopted on January 1, 2002,  the Company
ceased amortizing  goodwill in accordance with provisions of the  pronouncement.
However, goodwill is subject to certain impairment tests at least annually.

Note 4 - Software and Related Development Costs

Certain computer software development costs, primarily salaries, wages and other
payroll costs, and purchased  software  technology had been capitalized prior to
January 1, 2002.  Capitalization  of computer  software  development costs began
upon   establishment  of  technological   feasibility.   The   establishment  of
technological  feasibility  and the  ongoing  assessment  of  recoverability  of
capitalized computer software development costs required  considerable  judgment
by  management  with respect to certain  external  factors,  including,  but not
limited to,  anticipated  future gross  revenues,  estimated  economic life, and
changes in software and hardware  technology.  The Company  annually reviews the
recoverability  of  capitalized  software  costs based on estimated  cash flows.
Software  costs are written off at the time a  determination  has been made that
the amounts are not recoverable.

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


                                       5
<PAGE>

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.

A summary of capitalized software and related development costs as of
March 31, 2003 is as follows:

  Balance at beginning of period                                       $574,407
  Additions                                                                 --
  Amortization                                                          (28,774)
                                                                       --------
    Total Capitalized software                                         $545,633
                                                                       ========

Note 5 - Other Intangible Assets

Intangible assets, which consist primarily of acquired intangible assets, patent
costs and  deferred  financing  charges,  are  carried at cost less  accumulated
amortization,  which is calculated on a  straight-line  basis over the estimated
useful lives of the assets.  The estimated useful lives of the assets range from
three to ten years.

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

A summary of activity in the intangible asset account as of
March 31, 2003 is as follows:

  Balance at beginning of period                                       $404,159
  Additions                                                                 --
  Amortization                                                          (47,527)
                                                                       --------
    Total Other Intangible Assets                                      $356,632
                                                                       ========

Note 6 - Notes Payable to Banks

The  Company  and its  subsidiary,  A-OK  Controls,  are parties to two loan and
security  agreements  (the  "Agreements")  with  a  Wisconsin-based   bank.  The
Agreements,  as amended through April 2003, provide for a total of $1,575,000 in
two lines of credit.  The Agreements  provide for credit facilities through July
15, 2003,  and the lender has notified the Company that the facility will not be
renewed at that date. The Agreements  further provide that in the event that the
Company has not  secured at least three  financing  proposals  from  alternative
lenders by May 15, 2003, the lines of credit will be reduced by $175,000 at that
date, and if the Company has not secured at least one financing  commitment from
an  alternative  lender by June 15,  2003,  the lines of credit  will be further
reduced by $175,000 at that date.

The amount available under the line of credit is limited by a borrowing  formula
that allows for advances up to a maximum of a specified  percentage  of eligible
accounts  receivable,  less the amount, if any, of outstanding letters of credit
issued by the Company. Based upon such borrowing formula,  approximately $77,000
of the  available  line is  eligible  for  advance  at March 31,  2003.  Amounts
borrowed under the line of credit  facility total  $1,202,684 at March 31, 2003,
and such borrowings bear interest at the prime rate plus 4.50% (9.25 % effective
rate at March 31, 2003). The line of credit is  collateralized  by substantially
all assets of the Company and a second position on the mortgage on the Company's
Ann Arbor facility.

The Agreements contain several financial  covenants,  including specified levels
of tangible net worth, interest coverage and debt service coverage. The terms of
the Agreement also prohibit the payment of dividends, limit the amount of annual
capital expenditures and include other restrictive covenants. The Company is not
in compliance  with the tangible net worth,  interest  coverage and debt service
coverage  covenants  as of March 31,  2003.  The bank has  issued a  forbearance
letter to the Company in October 2002 concerning these covenant  violations.  In
such  letter,  the bank has  specifically  reserved its right to take any action
permitted  under the Agreements in the future without any notice to the Company.
The  bank  and  management  are in  discussion  to  revise  the  Agreements  and
management is pursuing other solutions to the violations,  including the private
placement of additional capital.

                                       6
<PAGE>

The  Company's  wholly  owned  subsidiary,  Optimation,  is  party to a loan and
security agreement with an Alabama-based bank (the "Optimation Loan Agreement").
The Optimation Loan Agreement has been renewed on a 90-day revolving basis since
the Company  acquired  Optimation in March 2001. The Optimation  Loan Agreement,
amended  through April 4, 2003,  provides for a total line of credit of $225,000
that  reduces in amount  with all  principal  repayments  made (the  "Optimation
credit facility").  The amount available under the Optimation credit facility is
limited by a borrowing  formula  that allows for advances up to a maximum of the
sum of a specified  percentage of eligible  accounts  receivable and a specified
amount  of  inventory.  Amounts  borrowed  under the  Optimation  line of credit
facility total $225,000 at March 31, 2003, and such  borrowings bear interest at
the prime rate plus .50% (5.25%  effective rate at March 31, 2003), but not less
than 5.0% per annum.  The  Optimation  Loan  Agreement  provides  for the credit
facility  through July 3, 2003, and  management  expects that it will renewed on
that  date  for an  additional  90-day  period  in the  amount  of  $180,000  on
substantially  the same  terms  and  conditions  as the  current  facility.  The
Optimation  Loan  Agreement  requires  monthly  repayments of $15,000 during its
90-day period,  and further,  prohibits the transfer of funds from Optimation to
the parent company except for customary  inter-company cost reimbursements.  The
Optimation  line of credit is  collateralized  by  substantially  all  assets of
Optimation,  a guaranty  by  Nematron  and a partial  guaranty  by  Optimation's
president.  The Company  expects  that the  Optimation  Loan  Agreement  will be
renewed on successive 90-day periods until the balance of the line is reduced to
zero.

Note 7 - Subordinated Debt

Subordinated debt consists of the following:
                                                         March 31,  December 31,
                                                            2003        2002
                                                            ----        ----
Convertible subordinated promissory notes,
interest at 10% perannum, due August 31, 2001.
Accrued interest and the principal of the note
may be converted into common stock at the lower
of $0.09 per share or the lowest price of the
underlying common stock during the period the
notes are outstanding                                   $1,200,000   $1,200,000

Convertible subordinated promissory notes,
interest at 8% per annum, due October 15, 2002.
The notes may be converted into preferred stock
during the period the notes are outstanding, and
the terms of the preferred stock, if issued,
would allow the holders to convert the preferred
stock into common stock on a one-for-one basis             200,000      200,000

Convertible subordinated promissory notes,
interest at 14% per annum, due on demand.  The
notes may be converted into preferred stock during
the period the notes are outstanding, and the terms
of the preferred stock, if issued, would allow the
holders to convert the preferred stock into common
stock on a one-for-one basis                             2,404,000    1,779,000
                                                        ----------   ----------
  Total                                                 $3,804,000   $3,179,000
                                                        ==========   ==========

The 10% Convertible Subordinated Promissory Notes
-------------------------------------------------
The 10%  convertible  subordinated  notes due August 31, 2001 (the "10%  Notes")
included detachable warrants. The warrants, which are non-assignable,  initially
allowed the holders to purchase  Common Stock at $0.30 per share (the "Per Share
Warrant  Price") at any time until  March 31, 2006 (the  "Warrants").  If at any
time prior to the exercise of the Warrants the daily closing price of the Common
Stock,  as traded on the  American  Stock  Exchange,  falls  below the Per Share
Warrant  Price for five  consecutive  days,  the Per Share Warrant Price will be
adjusted  downward to the lowest price  during such five trading day period.  As
the lowest price per share has been $0.05,  the Per Share Warrant Price has been
adjusted to that amount.

                                       7
<PAGE>

The 14% Subordinated Promissory Notes
-------------------------------------
The 14%  subordinated  promissory  notes due on demand  (the "14%  Notes")  were
issued pursuant to an agreement  initially dated in October 2001 and modified in
March and October 2002. The modified  agreement allows the Company to draw up to
$3 million upon  request and upon  approval by the 14% Note holder upon its sole
discretion.  In the event of any equity  financing by the Company,  the 14% Note
holder may convert any or all of the  outstanding  principal of the 14% Note and
accrued  interest  thereon into the securities  offered in such financing at the
offering  price per share.  The modified  agreement  further  provides  that the
principal  and accrued  interest  payable under the 14% Note may be converted in
whole or part into shares of Series A Preferred Shares beginning on September 1,
2002 at $0.10 per share. Provisions of the Series A Preferred Shares include: a)
participation  in dividends,  if any, with the Common Stock  shareholders;  b) a
liquidation  preference  up to  the  initial  purchase  price  of the  Series  A
Preferred Shares; c) a conversion feature allowing  conversion into Common Stock
on a one-to-one  basis; d) full voting powers;  e) the right to elect one person
to the Board of  Directors;  f) the  consent of a majority  in  interest  of the
Series A  Preferred  will be  required  to (i)  purchase or redeem any Common or
Preferred Stock, (ii) authorize or issue any senior or parity securities,  (iii)
declare or pay  dividends on or make any  distribution  on account of the Common
Stock, (iv) merge, consolidate or sell or assign all or substantially all of the
Company's assets, (v) increase or decrease  authorized  Preferred Stock and (vi)
amend Articles or Incorporation to change the rights, preferences, privileges or
limitations of any Preferred  Stock;  g) the  conversion  price for the Series A
Preferred  shall be subject to  proportional  antidilution  protection for stock
splits,  stock  dividends,  etc.  and in  the  event  that  the  Company  issues
additional shares of Common Stock or Common Stock equivalents (other than shares
issues to officers or employees of the Company pursuant to plans approved by the
Company's  board of  directors)  at a purchase  price  less than the  applicable
Series A Preferred  conversion  price,  the Series A Preferred Stock  conversion
price shall be adjusted to that same lower purchase price; and h) each holder of
Series A  Preferred  Stock  shall have the right to  participate  in any Company
financing up to its pro-rata ownership.

The 14%  Notes  sold  included  detachable  warrants.  The  warrants,  which are
non-assignable,  initially allowed the holders to purchase Common Stock at $0.10
per share (the "Per Share  Warrant  Price") in an amount of 20% of the principal
of the 14% Notes and  accrued  interest  thereon for a period of five years from
the date of the advance (the  "Warrants").  In connection  with the October 2002
modification  the  securities  into which the Warrants  could be converted  were
changed to Series A Preferred Stock as described above.

The 8% Subordinated Promissory Notes
------------------------------------
The 8%  subordinated  promissory  notes due  October  15,  2002 (the "8% Notes")
included detachable warrants. The warrants, which are non-assignable,  initially
allowed the 8% Notes  holders to purchase  Common  Stock at $0.22 per share (the
"Per Share  Warrant  Price") at any time until March 31, 2007 (the  "Warrants").
The  Company  did not repay  the 8% Notes  when due and in  connection  with the
noteholders'   forbearance,   the  conversion  feature  was  modified  to  allow
conversion  into the same  securities and at the same price as that set forth in
the 14% Notes described above.

A total of  $750,000 of the 10% Notes and all of the 8% Notes and 14% Notes were
issued to Board  members  or their  affiliates.  At March 31,  2003,  a total of
$473,979 of interest has been accrued for  convertible  subordinated  promissory
notes, including $383,582 related to notes due to related parties.

                                       8
<PAGE>

Note 8 - Long-Term Debt

Long-term debt includes the following debt instruments at March 31, 2003 and
December 31, 2002:

                                                         March 31,  December 31,
                                                           2003        2002
                                                           ----        ----
  Variable rate term loan payable to a bank,
  interest at prime plus 3.5% per annum (8.25%
  effective rate at March 31, 2003), payable in
  monthly installments of $31,000 through October
  2005, at which time the remaining principal and
  interest is due.  The term loan is collateralized
  by a mortgage on the Ann Arbor facility.              $2,621,354   $2,663,056

  Other notes, secured by equipment                         25,768       28,939

    Total long-term debt                                 2,647,122    2,691,995
  Less current maturities                                 (169,934)    (169,255)
                                                        ----------   ----------
    Long-term debt, less current maturities             $2,477,188   $2,522,740
                                                        ==========   ==========

Note 9 - Taxes on Income

The Company has net operating loss carryforwards ("NOLs") of approximately $26.9
million as of  December  31,  2002 that may be applied  against  future  taxable
income.  The  NOLs  expire  in  varying  amounts  from  2004 and  through  2022.
Utilization  of certain of these  NOLs is  subject to annual  limitations  under
current  Internal  Revenue  Service  regulations.  The Company has established a
valuation  allowance  for the  estimated  amount of the total  limitation on the
utilization of the NOLs.  Realization of net deferred tax assets associated with
the NOLs is dependent upon generating  sufficient  taxable income prior to their
expiration.

Note 10 - Stock Based Compensation

At  March  31,  2003,  the  Company  has   stock-based   employee  and  director
compensation  plans,  which are described more fully in Note 11 to the Company's
December 31, 2002  financial  statements.  The Company  accounts for those plans
under  the  recognition  and  measurement  principles  of APB  Opinion  No.  25,
Accounting  for Stock  Issued to  Employees,  and  related  Interpretations.  No
stock-based employee  compensation cost is reflected in net loss, as all options
granted  under those plans had an exercise  price  greater  than or equal to the
market value of the underlying  common stock on the date of grant. The following
table  illustrates  the effect on net loss and loss per share if the Company had
applied  the fair  value  recognition  provisions  of FASB  Statement  No.  123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.

                                                          Three Months Ended
                                                                March 31,
                                                          ------------------
                                                            2003         2002
                                                            ----         ----
  Net loss, as reported                                  $(799,553)   $(192,920)
  Deduct:  Total stock-based employee compensation
    expense determined under fair value-based method
    for all awards, net of tax                             (54,787)     (66,566)
                                                         ---------    ---------
      Pro forma net loss                                 $(854,340)   $(259,486)
                                                         =========    =========

 Loss per share:
    Basic and diluted, as reported                          $(0.05)      $(0.01)
    Basic and diluted, pro forma                            $(0.05)      $(0.02)


                                       9
<PAGE>

Note 11 - Earnings Per Share

The weighted  average shares  outstanding  used in computing loss per share were
15,744,625 for the three-month periods ended March 31, 2003 and 2002.

For the three-month  periods ended March 31, 2003 and 2002,  outstanding options
and  warrants  were not  included in the  computation  of diluted loss per share
because the inclusion of such securities is antidilutive.  Information  relative
to the excluded options and warrants is as follows:

                       Outstanding Options         Outstanding Warrants
                     ------------------------   ---------------------------
                                  Expiration                    Expiration
  Quarter Ended        Amount       Dates          Amount         Dates
 --------------        ------       -----          ------         -----
 March 31, 2003      2,017,528   2003 to 2011    4,791,333     2002 to 2007
 March 31, 2002      2,162,942   2003 to 2011    1,470,910     2002 to 2006


                                       10
<PAGE>

Item 2. Management's Discussion and Analysis of Results of Operations

Three Months Ended March 31, 2003 Compared with
Three Months Ended March 31, 2002
---------------------------------

Net  revenues  for the first  quarter of 2003  decreased  $1,185,000  (26.2%) to
$3,334,000  compared to  $4,519,000  for the  comparable  period last year.  The
decrease is attributable  primarily to a decrease in sales of software licenses,
system integration services and repair services. Revenues from software licenses
decreased in the current  period  compared to the prior year period because of a
significant  sale of  FloPro  software  licenses  to one  customer  in the first
quarter of 2002.  Revenues  from  system  integration  decreased  in the current
period  compared to the prior year period  because of  postponements  of program
work to future  periods by a  significant  customer and the  recognition  in the
first quarter of 2002 of significant  services  revenue for which costs had been
previously incurred;  revenue recognition had been postponed pending realization
due to the  uncertainty  of  collection  of such  revenue.  Revenues from repair
services  decreased  because of spending  declines by the  Company's  customers.
Management  expects  that net  revenues for the last nine months of 2003 will be
comparable  to the year  earlier  period  based on the  current  order  rate and
scheduled deliveries.

Gross  profit  for the first  quarter  of 2002  decreased  $787,000  (54.8%)  to
$650,000  compared to  $1,436,000  for the  comparable  period last year.  Gross
profit  as a  percentage  of  revenue  in the  first  quarter  of 2003 was 19.5%
compared to 31.8% in the comparable  period last year. The decrease in the gross
profit percentage  results from the profit margins on the FloPro license sold in
the first quarter of 2002 and the revenue from the system  integration  services
in the first quarter of 2002 for which the costs were incurred in prior periods,
as discussed in the first paragraph above.  Management expects that gross profit
margins will increase in the remaining quarters of the year as revenues increase
over the revenue rate of the first quarter,  and that the gross profit rates for
the remaining nine months of 2002 will be comparable to the year earlier period.

Product  development  expenses  incurred for software  development for the first
quarter of 2003 decreased  $145,000  (76.4%) to $45,000 compared to $190,000 for
the comparable  period last year. The decrease is attributable to a reduction of
development efforts and an emphasis on software and systems support.  Management
expects  that product  development  expenses  will  increase  moderately  in the
remaining quarters of 2003 as development and enhancement efforts are planned to
increase moderately.

Selling,  general  and  administrative  expenses  for the first  quarter of 2003
decreased $83,000 (6.4%) to $1,203,000 compared to $1,286,000 for the comparable
period last year and  increased as a  percentage  of net revenue to 36.1% in the
first quarter of 2003 from 28.5% in the comparable  period of 2002. The decrease
results primarily from decreases in staff levels and certain sales and marketing
costs in the current  period  compared to the year  earlier  period.  Management
expects  that  selling,   general  and  administrative  expenses  will  increase
moderately  in the  remaining  quarters of 2003  because of an  expansion of its
marketing  and sales  initiatives  compared to current  activities as management
anticipates new product releases and related sales and marketing efforts on such
new products during the remaining months of 2003.

Interest  expense for the first  quarter of 2003  increased  $43,000  (26.1%) to
$206,000  compared to $163,000 for the comparable period last year. The increase
results  primarily  from higher  overall  average  borrowing  levels  during the
current period compared to the year ago period.

Sundry income was not significant in either reported period.

Liquidity and Capital Resources
-------------------------------

Primary sources of liquidity are advances under subordinated debt agreements and
the Company's secured lines of credit that total $1,575,000 as of March 31, 2003
from LaSalle  Business  Credit  ("LBCI") and $225,000  from Compass  Bank. As of
March 31, 2003, the Company had $1,428,000 outstanding under the lines of credit
and approximately  $77,000 of additional borrowing capacity available under such
credit lines.  The Company's  operations  used $598,000 in cash during the first
quarter  of 2003 as a result  of the net  loss and the  effects  of  changes  in
working capital and the noncash  depreciation and amortization  charges.  During
the first quarter of 2003,  the Company also used $15,000 of cash in net line of
credit  and  long-term  debt  repayments.  Primary  sources of cash in the first
quarter  of  2003  were  $625,000  from  proceeds  from  sales  of  subordinated
promissory notes and warrants.

                                       11
<PAGE>

Management  estimates  that the  Company  will incur net cash losses in the next
quarter and be cash  neutral in the last two  quarters of 2003.  Based upon this
projection,  the  Company  will be in a net  borrowing  position  in its  second
quarter of 2003 and will need to sell additional  subordinated debt and warrants
to sustain operations.

The  Company  is in  compliance  with the terms of its  Compass  Bank  financing
agreement.  However, since mid-2001, the Company has not been in compliance with
the certain financial  covenants  contained in the financing agreement with LBCI
financing  agreement  under which it has two lines of credit.  LBCI has issued a
forbearance letter to the Company concerning these covenant  violations provided
that the  Company  makes  progress  on  securing  alternate  sources  of  senior
financing.  In the forbearance letter, LBCI has specifically  reserved its right
to take any action  permitted  under the agreement,  including the immediate pay
down of its lines of credit through its lock box  mechanism,  without any notice
to  the  Company.  Pursuant  to the  April  25,  2003  amendment  to the  credit
agreements  between the Company and LBCI, LBCI has stated that in the event that
the Company has not secured at least three financing  proposals from alternative
lenders by May 15, 2003, the lines of credit will be reduced by $175,000 at that
date, and if the Company has not secured at least one financing  commitment from
an  alternative  lender by June 15,  2003,  the lines of credit  will be further
reduced by $175,000 at that date.

In the short term,  in addition to having to fund its  projected net cash losses
over the next  quarter,  the  Company  will be required to repay by term debt of
approximately  $18,000  per  month,  plus  interest.  Additionally,  all  of the
subordinated debt, $3,804,000 plus accrued interest thereon is due currently.

Management is attempting to complete as soon as practical a private placement of
preferred stock or subordinated  debt to accredited  investors,  the proceeds of
which  would  be  applied  to the  repayment  of bank  debt  and  other  current
liabilities  plus new liabilities  arising from  operations.  Management is also
attempting to secure  alternative  working capital  arrangements with commercial
credit  companies in an amount  sufficient to sustain  operations and to replace
the expiring LBCI credit  facilities.  Management can offer no assurance that it
can secure  alternative  working capital facilities or that the proposed private
placements of preferred stock or subordinated will be successful.  Additionally,
management  can offer no assurance that if the Company is successful in securing
alternative  working  capital  facilities,   or  if  the  private  placement  of
subordinated  notes or preferred stock should occur,  that the funds raised will
be sufficient to fund future operations. If the efforts to secure alternative or
additional  capital are not  successful,  the Company  will not have  sufficient
liquidity to satisfy its  liabilities  and obligations as they become due and it
may be forced to curtail operations, sell product lines or sell the Company to a
third party.

Uncertainties Relating to Forward Looking Statements
----------------------------------------------------
"Item 2.  Management's  Discussion and Analysis of Operation" and other parts of
this Form 10-QSB contain certain "forward-looking statements" within the meaning
of the  Securities  Act of 1934,  as  amended.  While the Company  believes  any
forward-looking  statements  it has made are  reasonable,  actual  results could
differ  materially  since  the  statements  are  based  on  current   management
expectations  and are  subject  to risks  and  uncertainties.  These  risks  and
uncertainties include, but are not limited to the following:

- Uncertainties  discussed elsewhere in "Management's Discussion and Analysis of
  Operation" above;
- The  potential inability  to raise  additional  equity or debt  financing in a
  sufficient amount to sustain  operations  and allow  management to execute its
  strategies;
- The  potential inability  to convince  its lead bank,  LBCI,  to continue  its
  forbearance  and exercising its remedies available to LBCI resulting from loan
  covenant violations;
- A further  decline of economic  conditions  in general and  conditions  in the
  automotive manufacturing industry in particular;
- Delays in introduction of planned hardware and software product offerings;
- Reductions in product life cycles;
- Changes in customer requirements  or  reductions  in demand for the  Company's
  products and services;
- The inability  of the  Company  to  successfully  implement  its  strategy  to
  participate effectively in the  industrial  automation  market  migration from
  closed architecture  PLCs  to  open  architecture  PC-based  solutions  or  to
  effectively changes its corporate strategy to capitalize on market changes.

                                       12
<PAGE>


Item 3.  Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their  evaluation  within 90 days of the filing  date of this  report,  that our
disclosure  controls and procedures  are effective for gathering,  analyzing and
disclosing  the  information  we are  required to disclose in our reports  filed
under the  Securities  Exchange  Act of 1934.  There  have  been no  significant
changes in our internal  controls or in other  factors that could  significantly
affect  these  controls  subsequent  to the  date  of the  previously  mentioned
evaluation.

                           PART II - OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K

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

(b) During the quarter ended March 31, 2003,  the Company filed a report on Form
    8-K concerning its press release dated March 31, 2003 concerning  its fourth
    quarter and year ended December 31, 2002 operating results.



                                   SIGNATURES

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

                                            Nematron Corporation


May 14, 2003                                /s/ Matthew S. Galvez
------------                                ----------------------------------
Date                                        Matthew S. Galvez, President & CEO



May 14, 2003                                /s/ David P. Gienapp
------------                                ----------------------------------
Date                                        David P. Gienapp, Vice President -
                                            Finance and Administration


                                       13
<PAGE>


                                  CERTIFICATION
            Pursuant to Section 302 of the Sarbanes Oxley Act of 2002




I, Matthew S. Galvez, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Nematron Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
   information included in this quarterly report, fairly present in all material
   respects the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
   a)  designed such internal controls to ensure that material information
       relating to the registrant, including its consolidated subsidiaries, is
       made known to us by others within those entities, particularly during the
       period in which this quarterly report is being prepared;
   b)  evaluated the effectiveness of the registrant's internal controls and
       procedures as of a date within 90 days prior to the filing date of this
       quarterly report (the "Evaluation Date"); and
   c)  presented in this quarterly report our conclusions about the
       effectiveness of the disclosure controls and procedures based on our
       evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
   most recent evaluation, to the registrant's auditors and the audit committee
   of the registrant's board of directors:
   a)  all significant deficiencies in the design or operation of internal
       controls which could adversely affect the registrant's ability to record,
       process, summarize and report financial data and have identified for the
       registrant's auditors any material weaknesses in internal controls; and
   b)  any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       controls; and
6. The registrant's other certifying officer and I have indicated in this
   quarterly report whether or not there were significant changes in internal
   controls or in other factors that could significantly affect internal
   controls subsequent to the date of our most recent evaluation, including any
   corrective actions with regard to significant deficiencies and material
   weaknesses.


Date: May 14, 2003


/s/ Matthew S. Galvez
---------------------
Matthew S. Galvez
Chief Executive Officer


See also the certification pursuant to Section 906 of the Sarbanes Oxley Act of
2002, which is also attached to this report.


                                       14
<PAGE>

                                  CERTIFICATION
            Pursuant to Section 302 of the Sarbanes Oxley Act of 2002




I, David P. Gienapp, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Nematron Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
   information included in this quarterly report, fairly present in all material
   respects the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
   a)  designed such internal controls to ensure that material information
       relating to the registrant, including its consolidated subsidiaries, is
       made known to us by others within those entities, particularly during the
       period in which this quarterly report is being prepared;
   b)  evaluated the effectiveness of the registrant's internal controls and
       procedures as of a date within 90 days prior to the filing date of this
       quarterly report (the "Evaluation Date"); and
   c)  presented in this quarterly report our conclusions about the
       effectiveness of the disclosure controls and procedures based on our
       evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
   most recent evaluation, to the registrant's auditors and the audit committee
   of the registrant's board of directors:
   a)  all significant deficiencies in the design or operation of internal
       controls which could adversely affect the registrant's ability to record,
       process, summarize and report financial data and have identified for the
       registrant's auditors any material weaknesses in internal controls; and
   b)  any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       controls; and
6. The registrant's other certifying officer and I have indicated in this
   quarterly report whether or not there were significant changes in internal
   controls or in other factors that could significantly affect internal
   controls subsequent to the date of our most recent evaluation, including any
   corrective actions with regard to significant deficiencies and material
   weaknesses.


Date: May 14, 2003


/s/ David P. Gienapp
--------------------
David P. Gienapp
Chief Financial Officer


See also the certification pursuant to Section 906 of the Sarbanes Oxley Act of
2002, which is also attached to this report.


                                       15
<PAGE>


                                INDEX TO EXHIBITS

Exhibit
Number                Description of Exhibit

4.1      Amended and Restated Promissory Note in the amount of $225,000 between
         Compass Bank and Optimation, Inc. dated April 3, 2003

4.2      Amended Subordinated Promissory Note between North Coast Technology
         Investors, L.P. and the Registrant dated April 14, 2003

4.3      Amendment dated April 25, 2003, to the Amended and Restated Loan and
         Security Agreement dated as of June 30, 2000 between the A-OK Controls
         Engineering, Inc. and LaSalle Business Credit, Inc.

4.4      Amendment, dated April 25, 2003, to the Amended and Restated Loan and
         Security Agreement dated as of June 30, 2000 between the Company and
         LaSalle Business Credit, Inc.

99.1     Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as
         Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002















                                       16
<PAGE>