================================================================================

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

                                   FORM 10-QSB
(Mark One)
               [X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                      SECURITIES EXCHANGE ACT OF 1934

                      For the quarterly period ended September 30, 2003

               [  ]   TRANSITION REPORT UNDER 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                                     38-2483796
 (State or other jurisdiction               (I.R.S. Employer Identification No.)
of incorporation or organization)

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

                                 (734) 214-2000
                (Issuer's telephone number, including area code)

     Check whether the issuer (1) has filed all reports  required to be filed by
section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
     [ X ] YES     [   ] No

     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:
15,744,472 outstanding as of November 12, 2003

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

================================================================================


<PAGE>


                         PART I -- FINANCIAL INFORMATION

Item 1.       Financial Statements

                      Nematron Corporation and Subsidiaries
                      Consolidated Condensed Balance Sheets
                    September 30, 2003 and December 31, 2002

                                                   September 30,
                                                      2003          December 31,
                                                    (Unaudited)          2002
                                                   -----------      ------------
                            Assets
                            ------
Current assets:
     Cash and cash equivalents                        $123,835         $103,802
     Accounts receivable, net
       of allowance for doubtful accounts
       of $80,000 at September 30, 2003 and
       $75,000 at at December 31, 2002               2,739,952        2,342,400
     Inventories (Note3)                             1,528,500        1,653,844
     Prepaid expenses and other current assets         223,260          172,550
                                                    ----------      -----------
              Total current assets                   4,615,547        4,272,596
Property and equipment, net of accumulated
     depreciation of $7,768,202 at September 30,
     2003 and $7,563,474 at December 31, 2002        1,647,320        1,850,392
Goodwill, net of amortization (Note 4)               2,922,122        2,922,122
Intangible assets (Note 5):
     Software and related development costs,
     net of amortization                               488,088          574,407
     Other intangible assets, net of amortization      254,539          404,159
                                                    ----------      -----------
              Total assets                          $9,927,616      $10,023,676
                                                    ==========      ===========
                      Liabilities and Shareholders' Deficit
Current liabilities:
     Notes payable under lines of credit (Note 6) $  1,625,426     $  1,397,317
     Accounts payable                                1,547,156        1,582,958
     Deferred revenue and other accrued expenses     2,371,802        1,748,594
     Subordinated debt (Note 7)                      4,511,500        3,179,000
     Current maturities of long-term debt (Note 8)     172,479          169,255
                                                    ----------      -----------
              Total current liabilities             10,228,363        8,077,124
Long-term debt, less current maturities (Note 8)     2,382,659        2,522,740
                                                    ----------      -----------
              Total liabilities                     12,611,022       10,599,864
Shareholders' deficit:
     Common stock, no par value, 30,000,000 shares
     authorized, 15,744,472 shares outstanding      33,343,288       33,246,346
     Accumulated comprehensive income                   (1,013)          25,645
     Accumulated deficit                           (36,025,681)     (33,848,179)
                                                    ----------      -----------
              Total shareholders' deficit           (2,683,406)        (576,188)
                                                    ----------      -----------
              Total liabilities and
              shareholders deficit                  $9,927,616      $10,023,676
                                                    ==========      ===========

                                       2
<PAGE>

                                      Nematron Corporation and Subsidiaries
                                 Consolidated Condensed Statements of Operations
                                    For The Three-and Nine-Month Periods Ended
                                            September 30, 2003 and 2002
<TABLE>
<CAPTION>

                                         Three Months Ended Sept. 30,   Nine Months Ended Sept. 30,
                                         ----------------------------   ---------------------------
                                              2003         2002              2003          2002
                                          (Unaudited)  (Unaudited)       (Unaudited)   (Unaudited)
                                          -----------  -----------       -----------   -----------
<S>                                        <C>         <C>              <C>           <C>

Net revenues                               $3,347,276  $3,450,069        $9,770,157   $11,586,507
Cost of revenues                            2,535,259   2,628,741         7,554,888     8,545,049
                                            ---------   ---------       -----------   -----------
              Gross profit                    812,017     821,328         2,215,269     3,041,458
Operating expenses:
     Software development costs               143,609     190,176           438,033       546,692
     Selling, general and
      administrative                        1,076,424   1,229,776         3,190,783     3,774,827
                                            ---------   ---------       -----------   -----------
     Total operating expenses               1,220,033   1,419,952         3,628,816     4,321,519
                                            ---------   ---------       -----------   -----------
Operating loss                               (408,016)   (598,624)       (1,413,547)   (1,280,061)
Other income (expense):
     Interest expense                        (303,362)   (233,437)         (779,459)     (731,215)
     Sundry income                              4,611      (5,254)           15,510        19,851
                                            ---------   ---------       -----------   -----------
     Total other income (expense)            (298,751)   (238,691)         (763,949)     (711,364)
                                            ---------   ---------       -----------   -----------
Loss before income taxes                     (706,767)   (837,315)       (2,177,496)   (1,991,425)
Income taxes (Note 7)                              -0-         -0-               -0-           -0-
                                            ---------   ---------       -----------   -----------
Net loss                                    $(706,767)  $(837,315)      $(2,177,496)  $(1,991,425)
                                            =========   =========       ===========   ===========
Per share amounts (Note 8):
     Basic and diluted                         $(0.04)     $(0.05)           $(0.14)       $(0.13)
                                            =========   =========       ===========   ===========
Weighted average shares
    outstanding (Note 8):
     Basic and diluted                     15,744,472  15,744,472       15,744,472    15,744,472
                                           ==========  ==========       ==========    ==========
</TABLE>


                          Nematron Corporation and Subsidiaries
                 Consolidated Condensed Statements of Comprehensive Loss
         For The Three-and Nine-Month Periods Ended September 30, 2003 and 2002

<TABLE>
<CAPTION>

                                         Three Months Ended Sept. 30,   Nine Months Ended Sept. 30,
                                         ----------------------------   ---------------------------
                                              2003         2002              2003          2002
                                          (Unaudited)  (Unaudited)       (Unaudited)   (Unaudited)
                                          -----------  -----------       -----------   -----------
<S>                                        <C>         <C>              <C>           <C>

Net loss                                   $(706,767)  $(837,315)       $(2,177,496)  $(1,991,425)
Other comprehensive income (loss) -
    equity adjustment from foreign
    translation                                5,501)      6,046            (26,658)       20,543
                                           ---------   ---------        -----------   -----------
Comprehensive loss                         $(712,268)  $(831,269)       $(2,204,154)  $(1,970,882)
                                           =========   =========        ===========   ===========
</TABLE>

                                       3
<PAGE>


                      Nematron Corporation and Subsidiaries
                 Consolidated Condensed Statements of Cash Flows
                        For The Nine-Month Periods Ended
                           September 30, 2003 and 2002

                                                    Nine Months Ended Sept. 30,
                                                    ---------------------------
                                                        2003             2002
                                                    (Unaudited)      (Unaudited)
                                                    -----------      -----------
Cash flows from operating activities:
  Net loss                                          $(2,177,496)    $(1,991,425)
  Adjustments to reconcile net
    loss to net cash flows used in
    operating activities:
      Depreciation                                      215,241         326,671
      Amortization (Notes 4 and 5)                      235,939         377,169
      Non-cash interest expense for beneficial
        conversion feature (Note 7)                      96,942         192,257
      Loss (gain) on disposal of equipment                 (948)         17,514
      Changes in assets and liabilities that
        provided (used) cash:
        Accounts receivable                            (397,552)        657,155
        Inventories                                     125,344         162,615
        Prepaid expenses and other current assets       (50,710)         (5,982)
        Accounts payable                                (35,798)        147,985
        Deferred revenue and accrued expenses           623,204        (399,858)
                                                      ---------        --------
        Net cash used in operating activities        (1,365,834)       (515,899)

Cash flows from investing activities:
  Additions to property and equipment                   (14,051)        (91,328)
  Proceeds from disposals of property
    and equipment                                         2,824           1,253
                                                      ---------        --------
        Net cash used in investing activities           (11,227)        (90,075)

Cash flows from financing activities:
  Proceeds from long-term debt agreement                    -         2,700,000
  Proceeds from issuance of subordinated
    notes and warrants (Note 7)                       1,332,500       1,424,000
  Increase (decrease) in notes payable under
    lines of credit                                     228,109        (680,446)
  Payments of long-term debt                           (136,857)     (2,959,469)
  Payment of deferred financing fees                        -           (33,287)
                                                      ---------        --------
        Net cash provided by (used in)
        financing activities                          1,423,752         450,798

Foreign currency translation effect                     (26,658)         20,543
                                                      ---------        --------
Net increase (decrease) in cash                          20,033        (134,633)
Cash at beginning of period                             103,802         291,726
                                                      ---------        --------
Cash at end of period                                 $ 123,835        $157,093
                                                      =========        ========


Supplemental disclosures of cash flow information:
  Cash paid for interest                               $272,811        $341,973
  Cash paid for income taxes                                 -              -


                                       4
<PAGE>

                      Nematron Corporation and Subsidiaries
              Notes To Consolidated Condensed Financial Statements
                   For The Three- and Nine-Month Periods Ended
                           September 30, 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
Commissio'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 and nine month periods ended
September 30, 2003 and 2002 are not necessarily  indicative of the results to be
expected for the full year.

Recent Accounting Pronouncements
--------------------------------
     In May  2003,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement   150,   "Accounting   for   Certain   Financial    Instruments   with
Characteristics  of Both  Liabilities  and Equity".  This Statement  establishes
standards  for  how  an  issuer   classifies  and  measures  certain   financial
instruments with  characteristics  of both  liabilities and equity.  It requires
that an issuer  classify a  financial  instrument  that is within its scope as a
liability (or an asset in some  circumstances).  This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period  beginning  after June
15, 2003. The adoption of this statement did not impact the Company's  financial
position.


Note 2 - Inventories

Inventories consist of the following at September 30, 2003
and December 31, 2002:
                                                 September 30,      December 31,
                                                     2003               2002
                                                 -----------        -----------
  Purchased parts and accessories                 $1,012,654         $1,085,811
  Work in process                                    243,873            247,730
  Finished goods, demo units and service stock       271,973            320,303
                                                  ----------         ----------
      Total Inventories                           $1,528,500         $1,653,844
                                                  ==========         ==========


                                       5
<PAGE>

Note 3 - Goodwill

     Goodwill was recorded in connection with the Companys 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 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
September 30, 2003 is as follows:

  Balance, January 1, 2003                                           $574,407
  Additions                                                               --
  Amortization                                                        (86,319)
                                                                     --------
      Total Capitalized Software                                     $488,088
                                                                     ========

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 September 30,
2003 is as follows:

  Balance, January 1, 2003                                           $404,159
  Additions                                                               --
  Amortization                                                       (149,620)
                                                                     --------
      Total Other Intangible Assets                                  $254,539
                                                                     ========

                                       6
<PAGE>

Note 6 - Notes Payable Under Credit Lines

     The Company and its subsidiary, A-OK Controls, were parties to two loan and
security  agreements (the  "Agreements")  with LaSalle Business  Credit,  Inc. a
Wisconsin-based bank ("LBCI"). The Agreements,  as amended through July 15 2003,
provided for a total of  $1,225,000  as of June 30, 2003 and $900,000  beginning
July 15 through July 31, 2003 when the facility was terminated.  Nematron repaid
a total of  $500,000  of the  amounts it had  borrowed  under the line of credit
facilities  as of July 15,  2003 and  repaid the  remaining  amounts on July 31,
2003.  These  funds were  borrowed  under a  promissory  note from  North  Coast
Technology  Investors,  LLP (the  "Promissory  Note").  Mr. Hugo Braun, a former
director of the Company, is a partner of North Coast.
     Terms of the Promissory  Note,  under which the Company began  borrowing on
July 15, 2003,  provide for a maximum facility of $1,700,000  payable on demand.
The interest rate on amounts borrowed funds is 9.0% per annum.  Borrowings under
the  Promissory  Note,  which total  $1,516,676  as of September  30, 2003,  are
collateralized  by substantially all assets of the Company and a second position
on the mortgage on the Company's Ann Arbor facility.
     The Company's wholly owned subsidiary,  Optimation,  is party to a loan and
security  agreement with Compass Bank, an  Alabama-based  bank (the  "Optimation
Loan Agreement"). The Company and Compass Bank have been renewing the Optimation
Loan Agreement on  consecutive  90 to 180 day revolving  bases since the Company
acquired  Optimation in March 2001. The Optimation Loan Agreement,  last amended
as of October  3, 2003,  provides  for a total line of credit of  $108,750  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
$108,750 at September 30, 2003, and such  borrowings  bear interest at the prime
rate plus .50% (5.0%  effective  rate at September 30, 2003),  but not less than
5.0% per annum.  The Optimation Loan Agreement  requires  monthly  repayments of
$15,000 from October 2003 to March 2004 and a final  payment of $18,750 on April
30, 2004 at which time the loan will be repaid in its entirety.  The  Optimation
Loan  Agreement  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 and a
guaranty by Nematron.


                                       7
<PAGE>


Note 7 - Subordinated Debt

Subordinated debt consists of the following:
<TABLE>
<CAPTION>

                                                                        September 30,       December 31,
                                                                             2003                2002
                                                                             ----                ----
<S>                                                                      <C>                 <C>
  Convertible subordinated promissory notes, interest at 10% per
  annum, 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.               3,111,500           1,779,000
                                                                         ----------          ----------
  Total                                                                  $4,511,500          $3,179,000
                                                                         ==========          ==========
</TABLE>


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.

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 below.

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


                                       8
<PAGE>

principal  and accrued  interest  payable under the 14% Note may be converted in
whole or part into either shares of Common Stock or 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").  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. In
connection  with the October 2002  modification  the  securities  into which the
Warrants  could be converted  were allowed to be converted  into either Series A
Preferred Stock as described above in addition to Common Stock.

Related Party Notes and Accrued Interest
----------------------------------------
     A total of  $750,000 of the 10% Notes and all of the 8% Notes and 14% Notes
were  issued to  individuals  or  affiliates  who were  members  of the Board of
Directors at the date of issuance.  On July 31, 2003,  Mr. Hugo Braun, a partner
of North Coast,  resigned as a Board  member.  At September 30, 2003, a total of
$756,698 of interest has been accrued for  convertible  subordinated  promissory
notes, including $643,739 related to notes due to related parties.

Note 8 - Long-Term Debt

     Long-term  debt includes the following  debt  instruments  at September 30,
2003 and December 31, 2002:
                                               September 30,        December 31,
                                                    2003               2002
                                                    ----               ----
  Variable rate term loan payable to a bank,
  interest at prime plus 3.5% per annum (7.5%
  effective rate at September 30, 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.                                $2,536,044          $2,663,056
  Other notes, secured by equipment                  19,094              28,939
  Total long-term debt                            2,555,138           2,691,995
  Less current maturities                          (172,479)           (169,255)
                                                 ----------          ----------
  Long-term debt, less current maturities        $2,382,659          $2,522,740
                                                 ==========          ==========

                                       9
<PAGE>

Note 9 - Income Taxes

     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

     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 Sept. 30,
                                                 ----------------------------
                                                      2003            2002
                                                      ----            ----
  Net loss, as reported                            $(706,767)      $(837,315)
  Deduct:  Total stock-based employee
    compensation expense determined under
    fair value-based method for all awards,
    net of tax                                       (26,714)        (54,787)
                                                   ---------       ---------
      Pro forma net loss                           $(733,481)      $(892,102)
                                                   =========       =========
  Loss per share:
    Basic and diluted, as reported                    $(0.04)         $(0.05)
    Basic and diluted, pro forma                      $(0.05)         $(0.06)

                                                   Nine Months Ended Sept. 30,
                                                   ---------------------------
                                                      2003            2002
                                                      ----            ----
  Net loss, as reported                          $(2,177,496)    $(1,991,425)
  Deduct:  Total stock-based employee
    compensation expense determined under
   fair value-based method for all awards,
    net of tax                                      (126,671)       (188,540)
                                                 -----------     -----------
      Pro forma net loss                         $(2,304,167)    $(2,179,965)
                                                 ===========     ===========
  Loss per share:
    Basic and diluted, as reported                    $(0.14)         $(0.13)
    Basic and diluted, pro forma                      $(0.15)         $(0.14)


Note 11 - Loss Per Share

     The weighted  average shares  outstanding  used in computing loss per share
were  15,744,472 for the three- and nine-month  periods ended September 30, 2003
and 2002.


                                       10
<PAGE>

     For the three- and  nine-month  periods ended  September 30, 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
  -------------            ------         -----         ------         -----
  September 30, 2003      1,795,850    2005 to 2011    7,423,000    2006 to 2008
  September 30, 2002      2,162,942    2003 to 2011    2,286,882    2002 to 2006


  Nine Months Ended
  -----------------
  September 30, 2003      1,795,850    2005 to 2011    7,423,000    2006 to 2008
  September 30, 2002      2,162,942    2003 to 2011    1,887,822    2002 to 2006



                                       11
<PAGE>


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

Three- and Nine Month Periods Ended September 30, 2003 Compared With The
Three- and Nine-Month Periods Ended September 30, 2002
------------------------------------------------------
     Net revenues for the three- and nine-month periods ended September 30, 2003
decreased $103,000 (3.0%) and $1,816,000  (15.7%),  respectively,  to $3,347,000
and  $9,770,000,  respectively,  compared to the same periods last year. The net
revenue decrease in the three-month  period ended September 30, 2003 compared to
the prior year  period  results  from lower sales of all  product  lines  except
bundled  Industrial  Control  Computers  ("ICCs"),  which  increased  416.6% and
application  services which  increased  12.0%.  The net revenue  decrease in the
nine-month  period ended  September  30, 2003  compared to the prior year period
results  from lower  sales of all  product  lines  except  bundled  ICCs,  which
increased 229.9%.  Generally,  revenues from non-bundled ICCs and other hardware
control  products,  system  integration  services,  repair services and software
licenses for the current  periods ended  September 30, 2003 were below the prior
year periods as customers have continued to restrict their capital spending.  In
addition,  revenues  from  software  licenses  in the  nine-month  period  ended
September  30, 2002  included a  significant  sale of  software  licenses to one
customer/end  user  pursuant to a program  that was not extended by the customer
beyond  2002.  Finally,   revenues  from  system  integration  services  in  the
nine-month period ended September 30, 2002 included revenue  recognized from one
customer  for  certain  application  services  performed  in 2001 and 2000,  the
revenue from which was previously not recorded pending  certainty of collection.
Management  expects  that net revenues for the last three months of 2003 will be
comparable  to the year  earlier  period  based on the  current  order  rate and
scheduled deliveries.

     Gross profit for the three- and nine-month periods ended September 30, 2003
decreased  $9,000  (1.1%) and $826,000  (27.2%),  respectively,  to $812,000 and
$2,215,000,  respectively,  compared to the same periods last year. Gross profit
as a  percentage  of net revenues for the three- and  nine-month  periods  ended
September 30, 2003 was 24.3% and 22.7% respectively, compared to 23.8% and 26.2%
in the same periods last year.  The increase in gross profit  percentage  in the
three-month  period ended  September 30, 2003 results from lower material costs,
lower  software  amortization  costs and lower  personnel  costs in the  current
period compared to the year ago period.  The decrease in gross profit percentage
in the  nine-month  period ended  September 30, 2003 results  primarily from the
effect of the profit  margin on the FloPro  license sold in the 2002  nine-month
period  and the  profit  margin  from  the  revenue  recorded  from  the  system
integration  services  for  which  the  costs  were  incurred  in 2001 and prior
periods,  as discussed in the first  paragraph  above.  Management  expects that
gross profit margins will remain relatively constant with the margin realized in
the third quarter of 2003 as the mix of sales in the  remaining  quarter of 2003
is expected to be similar to the sales mix  experienced in the first nine months
of the year, based on the current backlog and forecasts.

     Software  development  costs for the three- and  nine-month  periods  ended
September 30, 2003 decreased $47,000 (24.5%) and $109,000 (19.9%), respectively,
to $144,000 and $438,000, respectively,  compared to the same periods last year.
The decreases are attributable to smaller  development staffs and lower overhead
and other fixed costs. Management expects that product development expenses will
not increase in the remaining quarter of 2003.

     Selling,  general and administrative expenses for the three- and nine-month
periods ended September 30, 2003 decreased $153,000 (12.5%) and $584,000 (15.5%)
to $1,076,000 and $3,191,000,  respectively,  compared to the comparable periods
last year. The decreases  result  primarily  from more  efficient  marketing and
sales initiatives  during the current periods compared to the comparable periods
last year and the effects of cost  reduction  initiatives  implemented  over the
last two years.  Management  expects that  selling,  general and  administrative
expenses will increase moderately in the remaining quarter of 2003 because of an
expansion of its marketing and sales initiatives compared to current activities.

     Interest expense for the three- and nine-month  periods ended September 30,
2003 increased $70,000 (30.0%) and $48,000 (6.6%), respectively, to $303,000 and
$779,000,  respectively,  compared to the comparable periods last year. Interest
expense for the three- and nine-month  periods ended September 30, 2003 includes


                                       12
<PAGE>

$60,000 and $97,000,  respectively,  of non-cash interest expense related to the
beneficial  conversion  feature of warrants  sold in 2003  wherein the  exercise
price of the  warrants was below the market price of the common stock into which
the  warrants  may be  converted.  The  sale  of the  warrants  and  convertible
subordinated  debt  raised  $1,322,500.  Interest  expense  for the  three-  and
nine-month  periods  ended  September  30, 2002  includes  $39,000 and $192,000,
respectively,  of non-cash interest expense related to the beneficial conversion
feature of warrants sold in 2002. Absent the non-cash charges for the beneficial
conversion  features  described  above,  interest  expense  for the  three-  and
nine-month  periods ended  September 30, 2003 would have  increased  $49,000 and
$143,000, respectively,  compared to the comparable 2002 periods, resulting from
higher  borrowing  levels in 2003  compared  to 2002.  Management  expects  that
interest  expense  will  increase in the  remaining  quarter of 2003  because of
projected higher borrowing levels.

     Sundry income was not significant in any of the periods reported herein.

Liquidity and Capital Resources
-------------------------------
     Primary  sources  of  liquidity  are  advances  under   subordinated   debt
agreements,  the Optimation line of credit and the North Coast  Promissory Note.
As of September 30, 2003, the Company had borrowed $108,750 under its Optimation
line of credit and  $1,516,676  under the  $1,700,000  Promissory  Note to North
Coast.  Subsequent to the end of the quarter,  the maximum  amount of borrowings
under the North Coast  Promissory Note was increased to $1,800,000.  The Company
has  additional  borrowing  capacity under the North Coast  Promissory  Note, as
amended  through  October 30, 2003,  of  approximately  $283,000.  The Company's
operations  used  $1,366,000  in cash  during the first nine months of 2003 as a
result of the net loss and the  effects of changes  in working  capital  and the
noncash depreciation,  amortization and interest charges.  During the first nine
months of 2003, the Company also used $14,000 for property  additions,  $137,000
for payments of long-term debt and increased its  borrowings  under its lines of
credit by $228,000.  Primary  sources of cash in the period were $1,332,500 from
proceeds from sales of subordinated promissory notes and warrants.

     Management  believes that the Company will incur net cash losses during the
last quarter even if it continues to defer  payment of the  principal  amount of
subordinated debt and the accrued interest thereon.  Based upon this projection,
management  believes that the Company will need to borrow additional  amounts on
its North  Coast line of credit to sustain  operations.  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 term debt of  approximately  $18,000 per
month, plus interest.  Additionally, all of the subordinated debt, $4,311,500 as
of September 30, 2003, plus accrued interest thereon is due currently.

     The Company has filed a preliminary proxy statement with the Securities and
Exchange  Commission seeking  shareholder  approval to sell substantially all of
the assets of the Company to its subordinated debt lenders (the "Purchaser') who
will also assume the Company's liabilities.  The Board of Directors has approved
and is recommending the sale of substantially all of the Company's  tangible and
intangible assets, including its real estate, accounts, equipment,  intellectual
property,  inventory,  goodwill, and other intangibles (the "Net Asset Sale") to
the Purchaser.  The Net Asset Sale will also include the assumption by Purchaser
of all of the Company's  liabilities,  including the Company's subordinated debt
and  convertible  subordinated  notes.  The Net Asset Sale would be completed as
soon  as  practical   after  approval  of  the   transaction  by  the  Company's
shareholders and the negotiation and execution of a satisfactory  Asset Purchase
Agreement,  but in any event, no later than December 31, 2003 (the "Agreement").
The total  consideration for the Net Asset Sale will be equal to or greater than
the total amount of all of the Company's liabilities.  As of September 30, 2003,
the Company's  liabilities  were in the amount of  $12,611,000,  which  includes
$4,511,500 of subordinated  debt. This price would exceed the total value of the
Company's assets,  when valued at book value, by approximately  $2,683,000 which
is equal to the  Company's  shareholder's  deficit as of September  30, 2003. If
consummated,  the Net Asset Sale will result in the  Company  remaining a public
company owned by its existing  shareholders.  The Company will not, however, own
any assets except the $30,000 in cash the Company  expects to retain and certain
intangible  assets  consisting of the Company's net operating loss carry forward
and its value as a public shell entity. The Company will not, however,  have any
liabilities,  all of them will be  assumed  by the  Purchaser.  In  effect,  the


                                       13
<PAGE>

Company  will  become  a  public  shell  with  no  established  business.  It is
anticipated  that all of the Company's  employees will be hired by the Purchaser
to carry on the Company's existing businesses.

     The near term financial  projections prepared by management of the Company,
based on known trends, backlog, order rates and revenue and expense projections,
indicate  that the Company will require  additional  capital  infusions  for the
foreseeable  future until operations become cash positive,  and the Company will
require  continuing  forbearance  by all of its  lenders  to  further  delay the
repayment of the Company's debt. Though management is optimistic that operations
can become cash  positive  within the next twelve  months,  management  does not
believe it is possible to project the exact timing of the Company's  cash needs.
Despite the best efforts of the Company's management,  no lender or investor has
been identified that is willing to fund the Company's  ongoing cash requirements
within the current  structure  of the  Company.  The sole  providers of capital,
other than senior debt, to the Company during the past three years have been the
holders  of the  Company's  subordinated  debt.  The  holders  of the  Company's
subordinated  debt have  indicated  to the Company  that they are not willing to
provide  further  financing to the Company  within the current  structure of the
Company.  To  avoid  dilution  of the  existing  shareholders  and the  possible
foreclosure  on the  Company's  assets,  the  Company  would  have to repay  the
subordinated  debt.  Funds to make this  payment  would be  required  from other
equity or debt sources,  but despite the  Company's  efforts over the last three
years,  management  has been  unable to attract  investor  interest.  All of the
capital that has been raised over the last three years has been  secured  solely
from the subordinated  noteholders.  Management  estimates that the Company will
not generate funds internally  through  operations in the foreseeable  future to
repay the subordinated debt and accrued interest thereon.

     Management  can offer no assurance that the  shareholders  will approve the
Net  Asset  Sale.  If the  efforts  to  finalize  the  Net  Asset  Sale  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:

|X|  Uncertainties discussed elsewhere in "Management's  Discussion and Analysis
     of Operation" above;
|X|  The approval by the  shareholders  of the Net Asset Sale and the ability of
     the Company to finalize the Net Asset Sale;
|X|  The potential  inability to raise additional  equity or debt financing in a
     sufficient amount to sustain operations and allow management to execute its
     strategies;
|X|  Continued  forbearance by the subordinated debt holders in exercising their
     right to demand  immediate  payment of all  subordinated  debt and  accrued
     interest thereon;
|X|  Continued  cooperation of the Company's vendors in accepting payment beyond
     such vendors' normal payment terms;
|X|  A further  decline of economic  conditions in general and conditions in the
     automotive manufacturing industry in particular;
|X|  Delays in introduction of planned hardware and software product offerings;
|X|  Reductions in product life cycles;


                                       14
<PAGE>

|X|  Changes in customer  requirements or reductions in demand for the Company's
     products and services;
|X|  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 change its corporate strategy to capitalize on market changes.


Item 3.      Controls and Procedures

     Our Chief Executive  Officer and Chief  Accounting  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  September 30, 2003, the Company filed a report on
     Form 8-K concerning its press release dated August 19, 2003  concerning its
     second quarter ended June 30, 2003 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


November 13, 2003          /s/ Matthew S. Galvez
-----------------          ------------------------------------------
Date                       Matthew S. Galvez, Chief Executive Officer


November 13, 2003          /s/ Tina M. Raiford
-----------------          ------------------------------------------
Date                       Tina M. Raiford, Controller



                                       15
<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 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
     report;
3.   Based  on my  knowledge,  the  financial  statements  and  other  financial
     information  included  in  this  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 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-15(e) and 15d-15(e) for the registrant and have:
a)   Designed such disclosure controls and procedures, or caused such disclosure
     controls and  procedures to be designed  under our  supervision,  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  report is being
     prepared;
b)   Evaluated the  effectiveness  of the registrant's  disclosure  controls and
     procedures  and  presented  in  this  report  our  conclusions   about  the
     effectiveness of the disclosure  controls and procedures,  as of the end of
     the  period  covered by this  report  based  upon such  evaluation;  and
c)   Disclosed in this report any change in the  registrant's  internal  control
     over financial  reporting that occurred during the registrant's most recent
     fiscal quarter that has  materially  affected,  or is reasonably  likely to
     materially  affect,  the  registrant's   internal  control  over  financial
     reporting;
5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors:
a)   All  significant  deficiencies  and  material  weaknesses  in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely  affect the  registrant's  ability to record,  process,
     summarize and report financial information; 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

Date: November 13, 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 as an exhibit.


                                       16
<PAGE>


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


I, Tina M. Raiford, certify that:

1.   I  have  reviewed  this   quarterly   report  on  Form 10-QSB  of  Nematron
     Corporation;
2.   Based on my knowledge, this 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
     report;
3.   Based  on my  knowledge,  the  financial  statements  and  other  financial
     information  included  in  this  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 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-15(e) and 15d-15(e) for the registrant and have:
a)   Designed such disclosure controls and procedures, or caused such disclosure
     controls and  procedures to be designed  under our  supervision,  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  report is being
     prepared;
b)   Evaluated the  effectiveness  of the registrant's  disclosure  controls and
     procedures  and  presented  in  this  report  our  conclusions   about  the
     effectiveness of the disclosure  controls and procedures,  as of the end of
     the  period  covered by this  report  based  upon such  evaluation;  and
c)   Disclosed in this report any change in the  registrant's  internal  control
     over financial  reporting that occurred during the registrant's most recent
     fiscal quarter that has  materially  affected,  or is reasonably  likely to
     materially  affect,  the  registrant's   internal  control  over  financial
     reporting;
5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors:
a)   All  significant  deficiencies  and  material  weaknesses  in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely  affect the  registrant's  ability to record,  process,
     summarize and report financial information; 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

Date: November 13, 2003


/s/ Tina M. Raiford
---------------------------------------
Tina M. Raiford
Controller and Chief Accounting Officer


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


                                       17
<PAGE>



                                INDEX TO EXHIBITS


Exhibit
Number                             Description of Exhibit
------                             ----------------------
4.1       Loan Modification Agreement and Amendment to Loan Documents between
          Compass Bank and Optimation, Inc. dated October 3, 2003.

4.2       Security Agreement between North Coast Technology Investors, L.P.
          ("NCTI") and Nematron Corporation dated July 31, 2003 pursuant to
          which Nematron grants to NCTI a continuing security interest in
          Collateral to secure payment of the liabilities.

4.3       Mortgage between North Coast Technology Investors, L.P. and
          Nematron Corporation dated July 31, 2003.

4.4       Promissory Note between North Coast Technology Investors, L.P. and
          Nematron Corporation dated July 16, 2003 in the amount of $1,700,000
          payable on demand with interest at 9.0% per annum.

99.1      Certification of Chief Executive Officer and Chief Accounting Officer
          Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
          of the Sarbanes-Oxley Act of 2002.




                                       18
<PAGE>