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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, 2002


          [ ] 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                              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: 15,744,625
outstanding as of May 13, 2002

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, 2002 and December 31, 2001
<TABLE>
<CAPTION>
                                                                                March 31,
                                                                                  2002            December 31,
                                                                               Unaudited              2001
                                                                               ---------              ----
<S>                                                                          <C>                 <C>
                                  Assets
                                  ------
Current assets:
     Cash                                                                       $154,377            $291,726
     Accounts receivable, net of allowance for doubtful accounts of
         $62,000 at March 31, 2002, and $70,000 at December 31, 2001           3,634,943           3,284,376
     Inventories (Note3)                                                       1,883,198           1,916,235
     Prepaid expenses and other current assets                                   277,791             190,010
                                                                             -----------         -----------
              Total current assets                                             5,950,309           5,682,347
Property and equipment, net of accumulated depreciation of $7,298,495
         at March 31, 2002 and $7,192,705 at December 31, 2001                 2,086,169           2,190,104
Goodwill, net of amortization (Note 4)                                         3,072,122           3,072,122
Intangible assets (Note 5):
     Software and related development costs, net of amortization                 808,316             886,286
     Other intangible assets, net of amortization                                516,905             564,658
                                                                             -----------         -----------
              Total assets                                                   $12,433,821         $12,395,517
                                                                             ===========         ===========

                      Liabilities and Stockholders' Equity
                      ------------------------------------

Current liabilities:
     Notes payable to banks (Note 6)                                          $2,459,358          $2,262,475
     Accounts payable                                                          1,879,459           1,452,658
     Deferred revenue and other accrued expenses                               1,417,591           1,851,956
     Subordinated debt (Note 7)                                                1,780,227           1,500,000
     Current maturities of long-term debt (Note 8)                             2,726,832           2,962,536
                                                                              -----------         -----------
              Total current liabilities                                       10,263,467          10,029,625
Long-term debt, less current maturities (Note 8)                                  26,024              28,940
                                                                             -----------         -----------
              Total liabilities                                               10,289,491          10,058,565
Stockholders' equity:
     Common stock, no par value, 30,000,000 shares authorized,
         15,744,625 shares outstanding                                        33,059,658          33,054,089
     Accumulated comprehensive income                                             12,825              18,096
     Accumulated deficit                                                     (30,928,153)        (30,735,233)
                                                                             -----------         -----------
              Total shareholders' equity                                       2,144,330           2,336,952
                                                                             -----------         -----------
              Total liabilities and shareholders' equity                     $12,433,821         $12,395,517
                                                                             ===========         ===========
</TABLE>
<PAGE>

                      Nematron Corporation and Subsidiaries
                 Consolidated Condensed Statements of Operations
                 For The Quarters Ended March 31, 2002 and 2001

                                                       Quarter Ended March 31,
                                                     --------------------------
                                                        2002           2001
                                                     (Unaudited)    (Unaudited)
                                                     -----------    -----------
Net revenues                                         $4,519,111     $4,785,350
Cost of revenues                                      3,082,772      3,962,713
                                                     ----------    -----------
              Gross profit                            1,436,339        822,637
Operating expenses:
     Product development costs - software               190,438        114,356
     Selling, general and administrative expenses     1,286,303      1,556,442
                                                     ----------    -----------
              Total operating expenses                1,476,741      1,670,798
                                                     ----------    -----------
              Operating loss                            (40,402)      (848,161)
Other income (expense):
     Interest expense                                  (163,000)      (170,126)
     Sundry income, net of sundry expense                10,482            524
                                                     ----------    -----------
              Total other income (expense)             (152,518)      (169,603)
                                                     ----------    -----------
Loss before income tax benefit                         (192,920)    (1,017,763)
Income tax benefit (Note 9)                                 --             --
                                                     ----------    -----------
Net loss                                              $(192,920)   $(1,017,763)
                                                     ==========    ===========

Loss per share (Note 10):
     Basic and diluted                                   $(0.01)        $(0.07)
                                                     ==========    ===========
Weighted average shares outstanding:
     Basic and diluted                               15,744,625     14,002,587
                                                     ==========    ===========




                      Nematron Corporation and Subsidiaries
             Consolidated Condensed Statements of Comprehensive Loss
                 For The Quarters Ended March 31, 2002 and 2001

                                                       Quarter Ended March 31,
                                                     --------------------------
                                                        2002           2001
                                                     (Unaudited)    (Unaudited)
                                                     -----------    -----------

Net loss                                             $(192,920)    $(1,017,763)
Other comprehensive loss -
   foreign currency translation adjustment              (5,271)         (4,387)
                                                     ----------    -----------
Comprehensive loss                                   $(198,191)    $(1,022,150)
                                                     ==========    ===========
<PAGE>
                      Nematron Corporation and Subsidiaries
                 Consolidated Condensed Statements of Cash Flows
                 For The Quarters Ended March 31, 2002 and 2001

                                                       Quarter Ended March 31,
                                                     --------------------------
                                                        2002           2001
                                                     (Unaudited)    (Unaudited)
                                                     -----------    -----------
Cash flows from operating activities:
  Net loss                                              $(192,920)  $(1,017,761)
  Adjustments to reconcile net loss to net
  cash flows provided by operating activities:
    Depreciation                                          117,142       134,695
    Amortization (Notes 4 and 5)                          125,723       374,649
    Non-cash interest for beneficial
     conversion feature of warrants                           796           --
    Loss on disposal of property                           18,891         2,291
    Changes in assets and liabilities that
     provided (used) cash:
      Accounts receivable                                (350,567)      212,983
      Inventories                                          33,037       442,139
      Prepaid expenses and other current assets           (87,781)      (10,660)
      Accounts payable                                    426,801       (66,914)
      Deferred revenue and accrued expenses              (434,365)      (33,312)
                                                         --------       -------
      Net cash provided by (used in)
        operating activities                             (343,243)       38,110
Cash flows from investing activities:
  Acquisition of Optimation, Inc., net of cash acquired       --       (278,877)
  Additions to capitalized software development costs         --       (183,353)
  Additions to property and equipment                     (32,098)      (16,591)
  Proceeds from disposals of property and equipment           --             50
                                                         --------       -------
      Net cash used in investing activities               (32,098)     (478,771)
Cash flows from financing activities:
  Proceeds from issuance of subordinated notes
   and warrants (Note 7)                                  285,000     1,100,000
  Payments of long-term debt                             (238,620)     (261,076)
  Increase (decrease) in notes payable to bank            196,883      (403,527)
                                                         --------       -------
      Net cash provided by financing activities           243,263       435,397

Foreign currency translation effect on cash                (5,271)       (4,387)
                                                         --------       -------
Net decrease in cash                                     (137,349)       (9,651)
Cash at beginning of period                               297,726        74,712
                                                         --------       -------
Cash and cash equivalents at end of period               $154,377       $65,061
                                                         ========       =======
Non-cash financing and investing activities:
 Fair value of assets acquired from Optimation, Inc.,
   including goodwill                                                $2,459,727
 Less fair value of liabilities assumed                              (1,180,850)
 Less Common Stock issued                                            (1,000,000)
                                                                     ----------
   Net cash paid for Optimation, Inc. (Note 2)                         $278,877

Supplemental disclosures of cash flow information:
   Cash paid for interest                                $118,140      $180,159
   Cash paid for income taxes                                 --            --
<PAGE>

                      Nematron Corporation and Subsidiaries
              Notes To Consolidated Condensed Financial Statements
               For The Three Months Ended March 31, 2002 and 2001

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.  The Company acquired 100% of the equity of Optimation  effective
at the  close of  business  on March 30,  2001.  Accordingly,  the  consolidated
statement of  operations  for the three months ended March 31, 2002 includes the
operations of Optimation, while the consolidated statements of operation for the
three months ended March 31, 2001 excludes the operations of Optimation.

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, 2002 and
2001 are not  necessarily  indicative of the results to be expected for the full
year.

Note 2 - Acquisition of Optimation

On March 30, 2001,  the Company  completed  its  acquisition  of  Optimation,  a
Huntsville, Alabama-based company that develops, produces and markets industrial
communications  and display  products  for  industrial  automation.  The Company
recorded this transaction using the purchase method of accounting.

The  purchase  price  was  approximately   $1,660,000,   including  expenses  of
approximately  $60,000. Under the terms of the related Stock Purchase Agreement,
the Company issued 1,483,680 shares of its Common Stock to the former Optimation
shareholders  in  exchange  for 100% of the  outstanding  equity of  Optimation.
Additionally,  the Company paid the former Optimation  shareholders $300,000 and
agreed to pay the former Optimation  shareholders $300,000 ninety days after the
acquisition.  In connection with the Stock Purchase Agreement,  the Company also
entered into three-year  employment  agreements and three-year agreements not to
compete  with  Optimation's  president  and  vice-president,  both of whom  were
Optimation shareholders.

The allocation of the purchase price to assets acquired and liabilities  assumed
at the acquisition date are as follows:
   Cash                                                                $21,000
   Other current assets                                              1,605,000
   Equipment                                                            19,000
   Intangible assets, including goodwill                               835,000
   Current notes payable                                              (640,000)
   Other current liabilities                                          (137,000)
   Long-term debt                                                      (43,000)
                                                                    ----------
   Total purchase price                                             $1,660,000
                                                                    ==========
<PAGE>

The following  unaudited pro forma summary presents the consolidated  results of
operations  for the three months ended March 31, 2001 as if the  acquisition  of
Optimation  had occurred on January 1, 2001,  the earliest  period  presented in
this Form 10-QSB.  The pro forma  summary does not purport to be  indicative  of
either what would have occurred had the acquisition of Optimation  actually been
consummated at that date or the Company's future results of operations:

                                                              Three Months Ended
                                                                 March 31, 2001
                                                                 --------------

   Revenues                                                         $5,196,000
   Net loss                                                        $(1,019,000)
   Loss per share - basic and diluted                                   $(0.07)

Note 3 - Inventories

Inventories consist of the following at March 31, 2002 and December 31, 2001:

                                                       March 31,    December 31,
                                                         2002            2001
                                                         ----            ----

   Purchased parts and accessories                   $1,286,693      $1,402,209
   Work in process                                      262,846         219,765
   Finished goods, demo units and service stock         333,659         294,260
                                                     ----------      ----------
          Total Inventory                            $1,883,198      $1,916,235
                                                     ==========      ==========

Note 4 - Goodwill

Effective  January 1, 2002, the Company  adopted the provisions of Statement No.
142, Goodwill and Other Intangible  Assets,  issued by the Financial  Accounting
Standards  Board in July 2001  ("FASB-142").  FASB-142,  which is effective  for
years  beginning after December 15, 2001,  addresses how intangible  assets that
are acquired  individually  or with a group of other assets  should be accounted
for in financial statements upon their acquisition. FASB-142 also specifies that
intangible  assets must be  amortized  over their useful lives unless such lives
are  indefinite,  in  which  case  the  intangible  assets  are not  subject  to
amortization.  FASB-142  further  specifies  that  goodwill  is not  subject  to
amortization but is subject to certain impairment tests at least annually.

The Company  recorded  goodwill in connection with its acquisition A-OK Controls
in June 2000 and its acquisition of Optimation in March 2001. In connection with
the Company's  acquisition  of Intec  Controls  Corp. in March 1997, the Company
recorded  intangible assets related to an acquired  workforce and a distribution
network that,  pursuant to FASB-142,  have been  reclassified  to goodwill as of
January 1, 2002 and which are no longer subject to periodic amortization.  After
the  reclassification,  recorded  goodwill  totals  $5,469,356  and  accumulated
amortization  is $2,397,234  as of January 1, 2002.  The net amount of goodwill,
$3,072,122  as of  January  1,  2002,  will not be  amortized  but is subject to
certain impairment tests at least annually.

A reconciliation of loss reported in the consolidated statement of operations to
the loss  adjusted  for the  effect of  goodwill  amortization  for all  periods
presented is as follows:
                                                    Three Months Ended March 31,
                                                     --------------------------
                                                        2002           2001
                                                        ----           ----
   Net loss:
     Reported net loss                                $(192,920)   $(1,017,763)
     Goodwill amortization                                  --          30,602
     Workforce and distribution network amortization        --          23,052
                                                      ---------      ---------
        Adjusted net loss                             $(192,920)     $(964,109)
                                                      =========      =========
<PAGE>
                                                    Three Months Ended March 31,
                                                     --------------------------
                                                        2002           2001
                                                        ----           ----
   Basic and diluted loss per share:
     Reported net loss                                 $(0.01)         $(0.07)
     Goodwill amortization                                --             --
     Workforce and distribution network amortization      --             --
                                                       ------          ------
        Adjusted net loss                              $(0.01)         $(0.07)
                                                       ======          ======
Note 5 - Other Intangible Assets

Other intangible assets consists of the following at March 31, 2002:

                                Amortization   Gross                       Net
                                  Period     Carrying    Accumulated   Carrying
                                  (Years)     Amount     Amortization    Amount
                                  -------     ------     ------------    ------
Amortizable intangible assets:
 Software development costs          5.7   $6,661,735    (5,853,419)   $808,316
 Other:
  Acquired non-compete agreement     5.0      300,000      (105,000)    195,000
  Acquired patent costs             10.0      590,000      (383,500)    206,500
  Internally developed patent costs  6.0       75,589       (51,316)     24,273
  Deferred financing fees            4.0      263,612      (172,480)     91,132
                                           ----------     ---------    --------
    Total other intangible assets          $1,229,201     $(712,296)   $516,905
                                           ==========     =========    ========

Amortization  expense for other intangible  assets for the periods presented are
as follows:
                                                    Three Months Ended March 31,
                                                     --------------------------
                                                        2002             2001
                                                        ----             ----

  Software development costs                          $77,970          $216,970
  Other amortizable assets                             47,753           104,025
                                                       ------           -------
          Total                                      $125,723          $320,995
                                                     ========          ========

Estimated  amortization  expense for other intangible  assets for the five years
ending December 31, 2006 is as follows:
                                   Software            Other
                                  Development       Intangible
 Year Ending December 31,            Costs            Assets             Total
 ------------------------            -----            ------             -----
           2002                     $311,880         $179,012          $490,892
           2003                      155,898          175,150           331,048
           2004                      139,502          123,894           214,106
           2005                      139,502           74,604           214,106
           2006                      139,503              --            139,503

Note 6 - Notes Payable to Banks

The  Company  and its  A-OK  Controls  subsidiary  are  parties  to two loan and
security  agreements (the "Agreements")  with LaSalle Business Credit,  Inc., a
Wisconsin  bank  ("LBCI").  The  Agreements,  which  have been  amended  through
February  2002,  provide for a total of $3.5  million in two lines of credit,  a
$2.9 million term loan and a $1.5 million  special  accommodation  term loan for
the purpose of the Company's  acquisition of A-OK Controls on June 30, 2000. The
Agreements  provide for credit  facilities  through  November  2003,  and may be
extended for an additional one-year period at the option of the Company,  unless
the lender gives prior notice of termination.
<PAGE>

The  amount  available  under the lines of credit  are  limited  by a  borrowing
formula  that  allows  for  advances  up to a  maximum  of the sum of  specified
percentages  of  eligible  accounts  receivable,  less the  amount,  if any,  of
outstanding  letters of credit issued by the Company.  Based upon such borrowing
formula,  approximately $179,000 of the available lines are eligible for advance
at March 31, 2002.  Amounts  borrowed  under the lines of credit  facility total
$2,064,358  at March 31, 2002,  and such  borrowings  bear interest at the prime
rate plus 4.5% (9.25% effective rate at March 31, 2002). The lines of credit and
the term loans (discussed in Note 8) are  collateralized  by  substantially  all
assets of the Company and a 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 bank.  The agreement  provides
for a total line of credit of  $405,000  limited  by a  borrowing  formula  that
allows for  advances  up to a maximum  of the sum of  specified  percentages  of
eligible accounts  receivable and inventory.  Amounts borrowed under the line of
credit  facility  total  $395,000 at March 31, 2002,  and such  borrowings  bear
interest at the prime rate plus .50% (5.25%  effective  rate at March 31, 2002),
but  not  less  than  5.0%  per  annum.   Based  upon  such  borrowing  formula,
approximately  $75,000 of the available  lines are eligible for advance at March
31, 2002. The line of credit is  collateralized  by substantially  all assets of
Optimation.  The credit facility,  which has been on a short-term  rolling basis
since June 2001, expires May 5, 2002, at which time the Company expects to renew
the facility on  essentially  the same terms and conditions for another 60 to 90
day period.

Note 7 - Subordinated Debt

Subordinated debt consists of the following:
<TABLE>
<CAPTION>
                                                                                March 31,         December 31,
                                                                                  2002                2001
       <S>                                                                    <C>                 <C>
       Convertible subordinated promissory notes, interest at 10%
       per annum, due August 31, 2001.  Accrued and unpaid interest
       and the principal of the note may be converted into common
       stock at the lower of $0.30 per share or the lowest closing price
       of the underlying common stock during the period the notes are
       outstanding.                                                           $1,200,000          $1,200,000

       Subordinated promissory notes, interest at 10% per
       annum, due on demand.  The notes are callable by the Company
       at any time, and the notes may be converted into common or
       preferred stock if the Company issues such equity during the
       period the notes are outstanding.                                         385,000             300,000

       Subordinated promissory notes, interest at 8% per
       annum, due October 15, 2002.  The notes are callable by the
       Company at any time.  The face amount of the notes is $285,000,
       and $5,569 of the proceeds to the Company was ascribed to the
       detachable warrants sold with the notes, and such amount is being
       charged to interest expense, with a corresponding increase in the
       recorded value amount of the notes, over the term of the notes.           195,227                 --
                                                                              ----------          ----------
       Total                                                                  $1,780,227          $1,500,000
                                                                              ==========          ==========
</TABLE>

The convertible  subordinated  notes due August 31, 2001  ("Convertible  Notes")
included detachable warrants.  The warrants,  which are non-assignable,  allowed
the holders to purchase the Company's  common stock at $0.30 per share (the "Per
Share Warrant Price") at any time until March 31, 2006 (the "2006 Warrants"). If
at any time prior to the exercise of the 2006  Warrants the daily  closing price
of the  Company's  common  stock,  as  traded  on the  American  Stock  Exchange
("AMEX"), 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.  In the event that the  Company  completes  the
proposed equity  offering at less than the Per Share Warrant Price,  the holders
<PAGE>

have the option to exchange the 2006  Warrants for other  warrants to purchase a
greater number of shares based on the  difference  between the Per Share Warrant
Price and the proposed  equity  offering price per share.  Because the Per Share
Warrant Price was less than the closing price of the common stock,  as traded on
the AMEX,  on the dates the notes were sold,  the 2006  Warrants were ascribed a
value of $342,000 and such amount was credited to shareholders  equity,  and the
Convertible Notes were ascribed a value of $858,000. The $342,000 was charged to
interest over the term of the Convertible  Notes,  resulting in a total non-cash
charge to  interest  expense of  $342,000  between  April 1, 2001 and August 31,
2001, with the c Convertible  Notes  increasing in recorded amount to $1,200,000
by August 31, 2001.

The  subordinated  notes due  October  15,  2002 (the "8%  Subordinated  Notes")
included detachable warrants. The warrants, which are non-assignable,  allow the
holders to purchase  the  Company's  common stock at $0.22 per share at any time
until March 31, 2007 (the "2007 Warrants"). Because the $0.22 per share exercise
price was less than the  closing  price of the  common  stock,  as traded on the
American  Stock  Exchange,  on the dates the notes were sold,  the 2007 Warrants
were  ascribed a value of $5,569 and such amount was  credited  to  shareholders
equity,  and the 8%  Subordinated  Notes were ascribed a value of $194,431.  The
$5,569 is being charged to interest over the term of the 8% Subordinated  Notes,
resulting in a total non-cash  charge to interest  expense of $796 for the three
month period ended March 31, 2002.

All of the subordinated  promissory notes in the above table are subordinated to
the  debt  due  to  the  Company's  senior  bank  lender,  and  such  notes  are
collateralized  by a second  mortgage on the Company's Ann Arbor  facility.  The
agreements  underlying the notes provide for detachable  warrants that allow the
Noteholders  to  purchase  common  stock  at  specified  exercise  prices  for a
five-year period from the date of issuance of the notes.

A total of $750,000 of the Convertible  Notes, all of the 10% Subordinated Notes
and all of the 8%  Subordinated  Notes  were  issued to  certain  members of the
Company's Board of Directors or their affiliates. At March 31, 2002 and December
31, 2001,  accrued  interest on  thesubordinated  notes in the above table total
$136,478 and $96,795, respectively, including $91,084 and $62,493, respectively,
due to related parties.

Note 8 - Long-Term Debt

Long-term  debt includes the following  debt  instruments  at March 31, 2002 and
December 31, 2001:
<TABLE>
<CAPTION>
                                                                                March 31,         December  31,
                                                                                  2002                2001
                                                                                  ----                ----
      <S>                                                                     <C>                 <C>

      Term note payable to a bank, interest at prime plus 4.50%
      (9.25% effective rate as of March 31, 2002), payable in monthly
      installments of $62,500 beginning June 2002 through August 2002,
      at which time any remaining principal and interest is due.              $2,561,667          $2,561,667

      Term note payable to a bank, interest at prime plus 6.0%, (10.75%
      effective rate as of March 31, 2002), payable in monthly
      installments of $78,611 through May 2002.                                  153,333             389,166

      Capitalized lease obligations and other notes.                              37,856              40,643

      Total long-term debt                                                     2,752,856           2,991,476
      Less current maturities                                                 (2,726,832)         (2,962,536)
                                                                              ----------          ----------
      Long-term debt, less current maturities                                 $   26,024          $   28,940
                                                                              ==========          ==========
</TABLE>
<PAGE>

The Company has net operating loss  carryforwards  ("NOLs") of approximately $24
million as of  December  31,  2001 that may be applied  against  future  taxable
income.  The  NOLs  expire  in  varying  amounts  from  2004 and  through  2021.
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 - Earnings Per Share

The weighted  average  shares  outstanding  used in computing loss per share was
15,744,625  and  14,002,587 for the three month periods ended March 31, 2002 and
2001, respectively.

For the three  months  ended March 31,  2002,  2,162,942  options and  1,470,910
warrants were  outstanding  but were not included in the  computation of diluted
EPS because the inclusion of these securities would have an antidilutive  effect
on loss per share  during the  three-month  period  ended  March 31,  2002.  The
options expire on various dates between 2003 and 2011,  and the warrants  expire
between October 2002 and March 2007.

For the three  months  ended  March 31,  2001,  2,318,492  options  and  931,011
warrants were  outstanding  but were not included in the  computation of diluted
EPS because the inclusion of these securities would have an antidilutive  effect
on loss per share  during the  three-month  period  ended  March 31,  2001.  The
options expire on various dates between 2003 and 2010,  and the warrants  expire
between October 2002 and March 2006.
<PAGE>


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

Three Months Ended March 31, 2002 Compared
------------------------------------------
With Three Months Ended March 31, 2001
--------------------------------------

     Net revenues for the first  quarter of 2002  decreased  $266,000  (5.6%) to
$4,519,000  compared to  $4,785,000  for the  comparable  period last year.  The
decrease is  attributable to a decrease in sales of bundled  Industrial  Control
Computers  ("ICCs"),  and other hardware control  products,  partially offset by
increased  revenues  from software  licenses,  system  integration  and operator
panels,  including $362,000 attributable to the revenues of Optimation which the
Company acquired on March 30, 2001. Revenues from ICCs and otherhardware control
products  were  below the prior  year  period as  customers  have  continued  to
restrict their capital spending.  Revenues from software  licenses  increased in
the current  period  compared to the prior year period  because of a significant
sale  of  FloPro  software  licenses  to  one  customer.  Revenues  from  system
integration  increased in the current  period  compared to the prior year period
because of application services performed for one customer in 2000 and 2001, the
revenue from which was previously not recorded pending  certainty of collection.
Management  expects  that net  revenues for the last nine months of 2002 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  increased  $613,000  (74.6%) to
$1,436,000  compared  to $823,000  for the  comparable  period last year.  Gross
profit  as a  percentage  of  revenue  in the  first  quarter  of 2002 was 31.8%
compared to 17.2% in the comparable  period last year. The increase in the gross
profit percentage  results from the profit margins on the FloPro license sold in
the current  period and the revenue  from the system  integration  services  for
which the costs  were  incurred  in prior  periods,  as  discussed  in the first
paragraph  above.  Management  expects that gross profit margins will decline to
the level  experienced  in the first  quarter of 2001  because of the absence of
FloPro  license  revenue and the system  integration  revenue  recognized in the
first quarter of 2002 discussed above.

     Product  development  expenses  incurred for software  development  for the
first quarter of 2002 increased $76,000 (66.5%) to $190,000 compared to $114,000
for the comparable period last year. The increase is attributable to the lack of
any  capitalizable  expenditures  in the  current  period  whereas  $183,000  of
software development expenditures were capitalized in the first quarter of 2001.
In the fourth  quarter of 2001,  the Company  wrote down the carrying  amount of
capitalized  software  development  costs, and the  capitalization of additional
costs would have increased the carrying amount of such asset above its estimated
net realizable value.  Management expects that product development expenses will
increase  moderately  in the  remaining  quarters  of  2002 as  development  and
enhancement efforts are planned to increase.

     Selling,  general and administrative expenses for the first quarter of 2002
decreased  $270,000  (17.4%)  to  $1,286,000  compared  to  $1,556,000  for  the
comparable  period last year and  decreased  as a  percentage  of net revenue to
28.5% in the first quarter of 2002 from 32.5% in the comparable  period of 2001.
The  decrease  results  primarily  from  more  efficient   marketing  and  sales
initiatives  during the current quarter  compared to the comparable  period last
year and the effects of cost  reduction  initiatives  implemented  over the last
several quarters.  Management  expects that selling,  general and administrative
expenses will increase  moderately in the remaining  quarters of 2002 because of
an  expansion  of its  marketing  and  sales  initiatives  compared  to  current
activities as management  anticipates  several new product  releases  during the
ramianing months of 2002.

     Interest  expense for the first quarter of 2002 decreased  $7,000 (4.2%) to
$163,000  compared to $170,000 for the comparable period last year. The decrease
results primarily from lower 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 cash generated from operations, short term
subordinated  debt and the  Company's  secured  lines of credit  that total $3.5
million as of March 31,  2002 from  LaSalle  Business  Credit  ("LBCI")  and $.4
million from Compass  Bank.  As of March 31,  2002,  the Company had  $2,459,000
outstanding under the lines of credit and  approximately  $254,000 of additional
<PAGE>

borrowing capacity  available under such credit lines. The Company's  operations
used  $343,000 in cash  during the first  quarter of 2002 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 2002,  the Company used
$32,000 of cash for  purchases of equipment  and $239,000 of cash for  long-term
debt  repayments.  Primary  sources  of cash in the first  quarter  of 2002 were
$197,000  from  borrowings on the lines of credit and $285,000 from the proceeds
from sales of subordinated promissory notes and warrants.

     Based upon current  estimates,  operations  for the next two quarters  will
also result in net cash losses  unless sales improve over  forecasted  levels or
costs and expenditures can be further reduced.

     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 totaling $3.5 million
and two  term  loans.  LBCI has  issued  a  forbearance  letter  to the  Company
concerning  these  covenant  violations.   However,  in  such  letter  LBCI  has
specifically reserved its right to take any action permitted under the agreement
without any notice to the Company.  LBCI and Company  management  are discussing
management plans to cure the defaults,  including, without limitation, a capital
infusion. This capital infusion, if successful,  may cure the tangible net worth
covenant,  but it will not cure operating  covenants that were not met beginning
in 2001. Management is hopeful, however, that a successful capital infusion will
cause LBCI to continue its forbearance.  In view of the continuing default,  the
Company has classified all indebtedness to LBCI as current liabilities.

     In the short term,  in addition  to having to fund its  projected  net cash
losses over the next two quarters,  the Company will be required to repay by May
1, 2002 the remaining $153,000 balance of a special  accommodation  advance from
LBCI, and to make payments other term debt of  approximately  $18,000 per month,
plus interest. Additionally, of the total principal amount of subordinated debt,
$1,585,000  plus accrued  interest  thereon is due  currently  and $200,000 plus
accrued interest thereon will become due October 15, 2002.

     Management  is  attempting  to  complete  as soon as  practical  a  private
placement of preferred stock to accredited  investors  whereby the Company would
raise a minimum of $5  million,  a portion  of the  proceeds  of which  would be
applied  to the  repayment  of current  liabilities,  liabilities  arising  from
operations over the next two quarters and subordinated debt.

     The Company is in the process of raising a bridge financing in the range of
$200,000 to $400,000 in the form of subordinated debt with detachable  warrants,
until such time as it can close a private  placement of preferred  stock.  Based
upon the Company's current projections,  the Company will not generate cash from
operations until the third quarter of 2002,  during which period it will require
approximately  $900,000 to fund operations,  product  development and repay bank
borrowings.  Management has included in these projections an assumption that the
borrowings  from LBCI and Compass Bank will be refinanced  with LBCI and Compass
Bank, respectively, or with other lenders on substantially the same terms as the
current agreements.

     Management  can  offer  no  assurance   that  the  private   placements  of
subordinated  notes  in a  bridge  financing  or  of  preferred  stock  will  be
successful,  or that if the private placement of subordinated notes or preferred
stock should occur, that the funds raised will be sufficient to persuade LBCI to
continue its forbearance on demanding  repayment of the LBCI debt because of the
continuing  covenant  violations.  If the private placements 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 its  operations,
sell product lines or the  operations of  subsidiaries  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:
<PAGE>

- Uncertainties discussed elsewhere in "Management's  Discussion and Analysis or
Plan of  Operation"  and in  "Description  of Business"  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 modify bank  covenants as it may be necessary from
time to time or continue the lender's forbearance exercising its remedies;

- The ability of the Company to effectively integrate the operations of acquired
entities;

- 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 lead
the industrial automation market migration from closed architecture PLCs to open
architecture  PC-based  solutions or changes in corporate strategy to capitalize
on market changes;

- Competitive  factors (including the introduction or enhancement of competitive
products);

- Pricing  decreases and component price increases that may result in materially
reduced selling prices and gross profit margins for the Company's products;

- Software  defects and latent  technological  deficiencies  in existing and new
hardware products;

- Unforeseen  increases in operating expenses or adverse fluctuations in foreign
exchange rates;

- The inability to attract or retain management, sales or engineering talent;

- Evolving industrial automation industry standards.
<PAGE>

                           PART II - OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds

On March 3, 2002, the Company signed a  subordinated  promissory  note agreement
with North Coast Technology  Investors LLP ("North Coast") which  memorialized a
borrowing arrangement between the Company and North Coast which became effective
as of October 1, 2001 (the "North Coast Agreement").  Mr. Hugo Braun, a director
of the  Company,  is a partner  of North  Coast.  Pursuant  to the  North  Coast
Agreement,  the Company may request periodic advances  totaling  $1,000,000 from
time to time in  order  to pay  Company  liabilities  as they  become  due.  All
advances  made  under  the North  Coast  Agreement  are due on  demand  and bear
interest at 10% per annum.  Concurrent  with the Company's  draw down of amounts
under the North Coast Agreement,  North Coast is entitled to receive warrants to
purchase shares of the Company's  common stock in an amount and at a price to be
determined by mutual  agreement  between the parties and under the same terms as
set forth in a certain  Warrant  Agreement  between  the Company and North Coast
dated March 23, 2001. If the parties cannot reach mutual agreement,  the warrant
exercise  price  shall be $0.18  per  share  (the  lowest  closing  price of the
Company's  common  stock as traded on the AMEX since the  effective  date of the
North Coast  Agreement)  and the number of shares  shall equal 20% of the amount
advanced  under this note divided by $0.18.  Advances of $385,000 have been made
and 427,778  Warrants  have been issued as of March 31, 2002.  The  subordinated
notes are due on demand.  In the event of an equity  financing  by the  Company,
North Coast, at its option, may convert any or all of the outstanding  principal
of and interest  accrued on advances  under the North Coast  Agreement  into the
securities  offered in such  financing,  at the offering price per share of such
financing.  The Company issued the securities to accredited  investors,  without
registration  under the  Securities  Act of 1933,  as amended  (the  "Act"),  in
reliance upon Section 4(2) of the Act and  Regulation D promulgated  thereunder.
The  Company  relied  upon  this  exemption  based  upon the  limited  number of
purchasers,  the provision of financial  and other  information  concerning  the
Company to the purchasers,  investment  representations  made by the purchasers,
the lack of general  solicitation,  and actions taken by the Company to restrict
resale of the  securities  without  registration,  including  the  placement  of
restrictive legends on the share certificate.

On March 6, 2002 and March 28, 2002, the Company sold to two purchasers $200,000
principal amount of subordinated  promissory notes, bearing interest at 8.0% per
annum,  and warrants to purchase a total of 318,182  shares of common stock (the
"March 2002  Warrants").  The two purchasers were directors of the Company,  Mr.
Ronald C. Causley and Mr. Joseph J. Fitzsimmons.  The March 2002 Warrants, which
are  non-assignable,  allow the  holders to purchase  Common  Stock at $0.22 per
share (the "Per Share  Warrant  Price") at any time until  March 31,  2007.  The
Warrants  are  exercisable  in  increments  of 45,455 per month for seven months
until all March 2002 Warrants are  exercisable  by October 1, 2002.  The Company
issued the securities to accredited  investors,  without  registration under the
Securities Act of 1933, as amended (the "Act"), in reliance upon Section 4(2) of
the Act and  Regulation D promulgated  thereunder.  The Company relied upon this
exemption  based  upon the  limited  number  of  purchasers,  the  provision  of
financial  and other  information  concerning  the  Company  to the  purchasers,
investment   representations  made  by  the  purchasers,  the  lack  of  general
solicitation,  and  actions  taken by the  Company  to  restrict  resale  of the
securities without registration,  including the placement of restrictive legends
on the share certificate.

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,  2002,  the Company  filed no reports on
Form 8-K.

<PAGE>


                                   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

                            By:

May 13, 2002                /s/ Matthew S. Galvez
------------                ----------------------------------
Date                        Matthew S. Galvez, President & CEO
                            (Duly Authorized Officer)

May 13, 2002                /s/ David P. Gienapp
------------                ----------------------------------
Date                        David P. Gienapp, Vice President -
                            Finance and Administration
                            (Chief Accounting Officer)


<PAGE>


                                INDEX TO EXHIBITS


Exhibit
Number                      Description of Exhibit
------                      ----------------------

  4.1   Form of Subordinated Promissory Note dated between March 6 and March 28,
        2002, by and between Nematron Corporation and Noteholders, and schedule
        of Noteholders and amounts

  4.2   Form of Warrant Agreement dated between March 6 and March 28, 2002, by
        and between Convertible Subordinated Noteholders and Nematron
        Corporation, and schedule of amounts of Warrants by Warrant holder

<PAGE>

                                                                     EXHIBIT 4.1
                                                                     -----------

             FORM OF SUBORDINATED PROMISSORY NOTE BETWEEN NOTEHOLDER

                            AND NEMATRON CORPORATION



     THIS NOTE HAS NOT BEEN  REGISTERED  UNDER THE  SECURITIES  ACT OF 1933,  AS
AMENDED (THE "SECURITIES  ACT"), OR UNDER ANY OTHER SECURITIES LAWS. IT MAY NOT
BE  SOLD OR  OFFERED  FOR  SALE  IN THE  ABSENCE  OF AN  EFFECTIVE  REGISTRATION
STATEMENT  AS TO THIS NOTE  UNDER THE  SECURITIES  ACT OR AN  OPINION OF COUNSEL
REASONABLY SATISFACTORY TO NEMATRON THAT SUCH REGISTRATION IS NOT REQUIRED.

$____________                                                     March __, 2002

Ann Arbor, Michigan

     FOR VALUE  RECEIVED,  the  undersigned,  Nematron  Corporation,  a Michigan
corporation      ("Nematron'),      hereby      promises      to      pay     to
_____________________________  (the  "Payee"),  at  Payee's  principal  business
address as set forth  below,  or at such other  place or places as the Payee may
designate  from time to time in  writing  to  Nematron,  in lawful  money of the
United  States of America and in  immediately  available  funds,  the  aggregate
principal sum of  $________,  and to pay interest on the  outstanding  principal
balance  at the rate of  eight  percent  (8%)  per  annum.  The  payment  of the
principal and all accrued and unpaid  interest  thereon shall be due and payable
on October  15, 2002 (the  "Maturity  Date").  Interest  shall be charged on the
basis of a year of 365 days. Nematron and Payee acknowledge that all amounts due
and  payable  under  this Note are  hereby  expressly  subordinated  in right of
payment  to the prior  payment  in full of the  indebtedness  referenced  in the
Subordination  Agreement,  dated as of even  date  herewith,  between  Payee and
LaSalle Business Credit, Inc.

     This Note may be prepaid at any time and from time to time,  in whole or in
part, without penalty or premium, upon at least fifteen (15) business days prior
written  notice from  Nematron to the Payee,  unless,  prior to such  repayment,
Payee  provides  notice to  Nematron of its intent to  exercise  its  conversion
rights provided in the fourth  paragraph of this Note.  Payee's notice of intent
to exercise its conversion rights shall be effective notwithstanding  Nematron's
notice of intent to repay.  This Note  shall be  payable  in cash or  equivalent
immediately available funds.

     Nematron  currently  intends  to issue  equity  securities  (Common  and/or
Preferred  Stock) in a private  offering prior to the Maturity Date on terms and
conditions to be determined at the time of such offering (the "Shares"). Subject
to the other terms and  conditions of this Note,  the principal and interest due
and payable under this Note may be converted by Payee, in whole or in part, into
Shares  upon at least  five (5) days  prior  written  notice  from the  Payee to
Nematron  and  prior  to the  earlier  of (i) the  Maturity  Date  or  (ii)  the
prepayment  in whole of this  Note.  The  number  of Shares  issuable  upon such
conversion  shall be equal to (x) the sum of the principal and interest then due
and payable under this Note, divided by (y) the average price per Share required
to be paid by the purchasers of Shares in such private offering, rounded down to
the nearest whole Share. No fractional Shares shall be issued upon conversion of
this Note.

     NEMATRON AND THE PAYEE,  AFTER  CONSULTING OR HAVING HAD THE OPPORTUNITY TO
CONSULT WITH COUNSEL,  KNOWINGLY,  VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT
EITHER  OF THEM  MAY  HAVE TO A TRIAL BY JURY IN ANY  LITIGATION  BASED  UPON OR
ARISING OUT OF THIS NOTE, OR ANY COURSE OF CONDUCT, DEALING,  STATEMENT (WHETHER
ORAL OR WRITTEN) OR ACTIONS OF EITHER OF THEM.  NEITHER  NEMATRON  NOR THE PAYEE
SHALL SEEK TO CONSOLIDATE,  BY COUNTERCLAIM OR OTHERWISE,  ANY ACTION IN WHICH A
JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE
OR HAS NOT BEEN WAIVED.

     Nematron hereby waives demand, presentment, protest, dishonor and notice of
dishonor  in  connection  with this  Note.  In the event any  action is taken to
collect or enforce the indebtedness  evidenced by this Note or any part thereof,
the undersigned agrees to pay, in addition to the principal and interest due and
payable  hereon,  all  reasonable  costs  of  collecting  this  Note,  including
reasonable attorneys' fees and expenses.

     Acceptance  by the Payee of any  payment in an amount  less than the amount
then due and owing  shall be deemed  an  acceptance  on  account  only,  and the
failure to pay the entire  amount  then due and owing  shall  cause  Nematron to
remain in default.
<PAGE>

     This Note may not be sold,  assigned or otherwise  transferred  without the
prior  written  consent of Nematron,  which  consent  shall not be  unreasonably
withheld. If Payee is an individual, a transfer to a revocable living trust with
respect  to which  Payee is the  trustee  and sole  beneficiary  during  Payee's
lifetime shall be allowed after written notice has been provided to Nematron.

     Written  notice  shall be deemed to have duly  given if and when  delivered
personally  or by overnight  courier to the address set forth below,  or sent by
fax with confirmation received to the fax number set forth below.

     This  Note is made  under,  and  shall  be  governed  by and  construed  in
accordance  with,  the  laws of the  State  of  Michigan  as to  notes  made and
performed  entirely within such State and without giving effect to choice of law
principles of such State.

     Notwithstanding any provision in this Note to the contrary,  Nematron shall
not be required to issue any other  securities if such issuance would constitute
a violation of any applicable  Federal or state  securities law or any other law
or regulation.

NEMATRON CORPORATION                   ACCEPTED AND AGREED:

                                                                         (Payee)
--------------------------------       -----------------------------------------
Name:---------------------------
Its: ---------------------------

Principal Business Address and Fax Number:

5840 Interface Drive                   By: -------------------------------------
                                                          [Signature]
Ann Arbor, Michigan 48103              Name:------------------------------------
(734)994-8170 (fax)                    Title:-----------------------------------
(734)214-2128 (telephone)

                                       Principal Business Address, Telephone
                                       and Fax Numbers:

                                       Address: --------------------------------
                                                --------------------------------
                                       Phone:   --------------------------------

                                       Fax:     --------------------------------

                                    --oo0oo-

               Schedule of Subordinated Notes and Warrants Issued
               --------------------------------------------------
Note Date         Payee                     Note Amount         Warrants
---------         -----                     -----------         --------

March 06, 2002    Ronald C. Causley           $125,000           198,864
March 28, 2002    Joseph J. Fitzsimmons         75,000           119,318
                                              --------           -------
Total                                         $200,000           318,182
                                              ========           =======

<PAGE>

                                                                    EXHIBIT 4.2
                                                                    -----------
           FORM OF WARRANT TO PURCHASE SHARES OF COMMON STOCK, NO PAR
                         VALUE, OF NEMATRON CORPORATION
                         ------------------------------


     THIS STOCK PURCHASE  WARRANT HAS NOT BEEN  REGISTERED  UNDER THE SECURITIES
ACT OF 1933, AS AMENDED,  OR ANY STATE  SECURITIES  LAWS. IT MAY NOT BE OFFERED,
SOLD OR TRANSFERRED IN THE ABSENCE OF  REGISTRATION  UNDER THE SECURITIES ACT OF
1933, AS AMENDED,  AND ANY  APPLICABLE  STATE  SECURITIES  LAWS OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS
WARRANT IS ALSO SUBJECT TO THE  RESTRICTIONS  ON TRANSFER SET FORTH IN SECTION 6
HEREOF.

     THIS STOCK PURCHASE WARRANT ("Warrant') CERTIFIES THAT, for value received,
subject to the provisions  hereinafter set forth,  (the "Holder") is entitled to
purchase from Nematron Corporation,  a Michigan corporation,  and its successors
and assigns (the "Company") up to a maximum of shares (the 'Warrant  Shares") of
common stock of the Company,  no par value (the "Common Stock"), at the price of
$0.22 per share  (the "Per  Share  Warrant  Price") at any time and from time to
time after the date such  Warrant  Shares are earned (as  described  herein) and
until March 31, 2007 (the  "Expiration  Date")  subject to the provisions and on
the terms and  conditions  hereinafter  set forth.  The Per Share Warrant Price,
when multiplied by the number of shares purchasable  hereunder shall be referred
to as the "Aggregate Warrant Price." The number of shares purchasable  hereunder
and the Per Share  Warrant  Price are  subject  to  adjustment,  as  hereinafter
provided. The Company has issued this Warrant in connection with its issuance to
the Holder of a Subordinated Promissory Note on the date of this Warrant.

     The  following  is a statement  of the rights of the Holder of this Warrant
and the terms and  conditions  to which this Warrant is subject,  to which terms
the Holder hereof, by acceptance of this Warrant, assents.

     1. EARNING OF WARRANTS

     The Holder of this Warrant will be awarded an increasing number of Warrants
based upon the passage of time between the date of the  Subordinated  Promissory
Note and the  repayment  of such note by  Nematron.  The Holder  will be awarded
Warrant  Shares in the amount of (a) the Earned  Warrants,  as described  below,
divided by (b) the Per Share Warrant Price.

     The Earned  Warrants shall be computed as an amount obtained by multiplying
(w) the  principal of the  Subordinated  Promissory  Note times (x) five percent
(5%) times (y) the number of Months (as defined  below)  between the date of the
Subordinated  Promissory Note and the date the  Subordinated  Promissory Note is
repaid, up to seven months, divided by (z) the Per Share Warrant Price. "Months"
in the preceding sentence shall mean:

         Days Outstanding                         Months
         From 1 to 30 days                          1
         From 31 to 60 days                         2
         From 61 to 90 days                         3
         From 91 to 120 days                        4
         From 121 to 150 days                       5
         From 151 to 180 days                       6
         181 days or more                           7

     As an example of the  computation  set forth in this section:  Assume,  for
purposes of an example only, the principal of the  Subordinated  Promissory Note
is $10,000 and is dated March 11,  2002.  If the  Subordinated  Promissory  Note
remains  outstanding  through July 5, 2002 and the Warrant Holder  exercises the
Warrant on July 5, 2002, 95 days would have elapsed and the Warrant  Holder will
therefore  have earned  four  months of Warrants at 5% per month,  or 20% of the
face of the  Subordinated  Promissory  Note,  or  $2,000.  The  total  number of
Warrants  earned would be $2,000 divided by the Per Share Warrant Price ($0.22),
or 9,090.  The maximum number of Warrants that may be awarded in this example of
using a face  amount of  $10,000  is 15,909  ([$10,000  times 5% times 7 months]
divided by $0.22).

     2. EXERCISE OF WARRANT

     (a)  Subject  to the  conditions  set forth  herein,  this  Warrant  may be
exercised in whole at any time or in part from time to time by the Holder hereof
by the  surrender of this Warrant at the  principal  office of the Company on or
before the  Expiration  Date and upon  payment to the  Company of the  Aggregate
Warrant Price (or the  proportionate  part thereof if exercised in part) for the
shares so  purchased.  The payment  shall be made by the Holder in the form of a
certified or cashier's  check. If this Warrant is exercised with respect to less
than all of the Warrant  Shares at the time  purchasable  hereunder,  the Holder
retains the right to exercise the unexercised  Warrants at any time prior to the
Expiration Date.

     (b) The Company shall keep a warrant  registry book of the names of all the
holders of its registered  warrants  (including the Holder) and their registered
assigns and record all activity (Earned  Warrants and exercises  thereof) in the
warrant register.

     3. ADJUSTMENTS

     (a) In the event the  Company  shall (i) pay a dividend  to the  holders of
Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of
Common  Stock into a greater  number of shares,  (iii)  combine its  outstanding
shares of Common Stock into a smaller  number of shares,  then (a) the number of
Warrant Shares shall be adjusted so that the Holder shall thereafter be entitled
to receive  upon the  exercise  of this  Warrant  the number of shares of Common
Stock  which he would have owned  immediately  after such event had the  Warrant
been exercised immediately prior to the occurrence of such event and (c) the Per
Share  Warrant Price shall be adjusted to that price  determined by  multiplying
the Per Share  Warrant  Price in  effect  immediately  prior to such  event by a
fraction (x) the numerator of which is the total number of outstanding shares of
Common Stock  immediately  prior to such event, and (y) the denominator of which
shall be the total  number of  outstanding  shares of Common  Stock  immediately
after such event.  Such adjustment shall become effective  immediately after the
opening of business on the day following  such record date or the day upon which
such subdivision, combination or reclassification becomes effective.

     (b) In the event the  Company  shall (i) issue by  reclassification  of its
Common  Stock any shares of the  Company  of any class or series,  (ii) merge or
consolidate  with or into  another  entity  (other  than a merger  in which  the
Company   is  the   surviving   entity   and  which   does  not  result  in  any
reclassification  of the  outstanding  shares of Common  Stock),  (iii)  sell or
otherwise convey to another entity all or substantially all of the assets of the
Company followed by the distribution of the proceeds thereof to the shareholders
of  the  Company,   or  (iv)  engage  in  a  share  exchange  involving  all  or
substantially all of the stock of the Company,  then the Holder shall thereafter
be entitled to receive upon the exercise of this Warrant, instead of the Warrant
Shares, the consideration which he would have owned immediately after such event
had the Warrant  been  exercised  immediately  prior to the  occurrence  of such
event.

     (c) No adjustment shall be required unless such adjustment would require an
increase or decrease of at least  one-tenth  of a share in the number of Warrant
Shares or at least one-tenth of a cent in the Per Share Warrant Price; provided,
however,  that any adjustment  which by reason hereof is not required to be made
shall be carried forward and taken into account in any subsequent adjustment.

     (d) No  fractional  shares of Common Stock shall be issued upon exercise of
this  Warrant.  The number of shares issued shall instead be rounded down to the
nearest whole share and any fractional share disregarded.

     (e) The Company shall not, by amendment of its Articles of Incorporation or
through any reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution,  issue or sale of securities or any other voluntary action,
avoid or seek to avoid the  observance or  performance of any of the terms to be
observed or performed  hereunder  by the Company,  but will at all times in good
faith assist in the carrying out of all of the  provisions of this Section 3 and
in the taking of all such action as may be necessary or  appropriate in order to
protect the rights of the Holder against impairment.

     (f) Whenever the Per Share  Warrant  Price or the number of Warrant  Shares
shall be adjusted pursuant to the provisions hereof, the Company shall within 30
days of such  adjustment  deliver a  certificate  signed by its chief  financial
officer to the registered holder hereof setting forth, in reasonable detail, the
event  requiring the  adjustment,  the amount of the  adjustment,  the method by
which such  adjustment  was  calculated,  and the Per Share  Warrant Price after
giving effect to such adjustment.

     4. FULLY PAID STOCK

     The Company agrees that the Warrant Shares  delivered upon exercise of this
Warrant as herein provided  shall,  at the time of such delivery,  be fully paid
and  non-assessable,  and free from all liens and  charges  with  respect to the
purchase thereof.  During the period within which this Warrant may be exercised,
the Company will at all times have authorized,  and hold in reserve for issuance
upon exercise of this Warrant,  a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.

     5. CLOSING OF TRANSFER BOOKS

     The right to exercise this Warrant shall not be suspended during any period
while  the stock  transfer  books of the  Company  for its  Common  Stock may be
closed. The Company shall not be required,  however, to deliver  certificates of
its Common  Stock upon the  exercise of this  Warrant  while such books are duly
closed for any  purpose,  but the  Company  may  postpone  the  delivery  of the
certificates  for such Common  Stock  until the opening of such books,  and they
shall, in such case, be delivered forthwith upon the opening thereof, or as soon
as practicable thereafter.

     6. LOST OR STOLEN WARRANTS

     In case any Warrant shall be  mutilated,  lost,  stolen or  destroyed,  the
Company  shall issue a new Warrant of like date,  tenor,  and  denomination  and
deliver  the  same in  exchange  and  substitution  for and upon  surrender  and
cancellation of any mutilated Warrant, or in lieu of any Warrant lost, stolen or
destroyed,  upon an indemnity  agreement or bond reasonably  satisfactory to the
Company.

     7. ASSIGNMENT

     This Warrant is not assignable or  transferable  except by will or the laws
of descent and distribution and any such attempted  assignment or transfer shall
be null and void. The Company may deem and treat the registered holder hereof as
the absolute owner of this Warrant  (notwithstanding  any notations of ownership
or writing  hereon made by anyone  other than the  Company) for all purposes and
shall not be affected by any notice to the contrary.

     8. SECURITIES MATTERS

     Neither this Warrant nor the Warrant Shares have been registered  under the
Securities Act of 1933 (the "Act'),  as amended,  or any  applicable  "Blue Sky"
laws. By acceptance of this Warrant,  the Holder  represents and warrants to the
Company  that Holder (a) is  receiving  this  Warrant  and,  upon  exercise,  is
acquiring  the  Warrant  Shares for  Holder's  own  account and not on behalf of
others,  and is not taking this Warrant or any of the Warrant Shares with a view
to the "distribution"  thereof (as that term is defined in the Act and the rules
and  regulations of the Securities and Exchange  Commission  thereunder) and (b)
will not offer, distribute,  sell, transfer or otherwise dispose of this Warrant
or the Warrant Shares except pursuant to (i) an effective registration statement
under the Act and any applicable Blue Sky laws with respect thereto,  or (ii) an
opinion,  satisfactory  to the Company,  addressed  to the  Company,  of counsel
satisfactory to the Company, that such offering, distribution, sale, transfer or
disposition is exempt from  registration  under the Act and any applicable  Blue
Sky laws. Each and every certificate representing Warrant Shares to be delivered
upon exercise of this Warrant shall bear the following legend:

     THE  SECURITIES  REPRESENTED  HEREBY  HAVE NOT BEEN  REGISTERED  UNDER  THE
SECURITIES  ACT  OF  1933,  AS  AMENDED,  OR ANY  STATE  SECURITIES  LAWS.  SUCH
SECURITIES  MAY  NOT  BE  OFFERED,   SOLD  OR  TRANSFERRED  IN  THE  ABSENCE  OF
REGISTRATION  UNDER THE SECURITIES  ACT OF 1933, AS AMENDED,  AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL  SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED.

     9. NO RIGHTS AS SHAREHOLDER

     Nothing contained in this Warrant shall be construed as conferring upon the
Holder any rights as a shareholder of the Company.

     10. MISCELLANEOUS

     (a) All  covenants  and  agreements of the Company in this Warrant shall be
binding upon the Company's successors and assigns.

     (b) This Warrant  shall be construed  and enforced in  accordance  with the
laws of the State of Michigan.

     (c) This Warrant may be amended, except as provided in Section 2, only with
the written consent of the Company and the Holder.

     (d) Any notices or other  communications  required or  permitted  hereunder
shall be sufficiently  given if in writing and sent by registered mail,  postage
prepaid,  and if to the Holder,  addressed to the Holder at the Holder's address
appearing on the warrant  registry  book of the Company,  and if to the Company,
addressed to it at 5840 Interface Drive, Ann Arbor,  Michigan 48103,  Attention:
President,  or to such  other  address or  attention  as shall be  furnished  in
writing by the  Company or the Holder,  and any such  notice  shall be deemed to
have been given as of the date received.

     (e) The Company will pay when due and payable any and all federal and state
taxes  which may be  payable  by the  Company  in  respect  of the issue of this
Warrant, or any Common Stock or certificates  therefor upon the exercise of this
Warrant,  pursuant to the provisions thereof. The Company shall not, however, be
required  to pay any tax  which  may be  payable  in  respect  of any  attempted
transfer,  in whole or in part, of this Warrant  (including  the issuance of new
Warrants in  connection  therewith) or the delivery of stock  certificates  in a
name other  than that of the Holder  presented  for  exercise,  and any such tax
shall be paid by the Holder at the time of presentation.

     IN WITNESS WHEREOF, the undersigned has caused this Warrant to be signed by
a duly authorized officer and this Warrant to be dated the date set forth above.

NEMATRON CORPORATION               ACCEPTED AND AGREED:

---------------------------        ---------------------------------------------
David P. Gienapp, Secretary                       (Holder)

                                   By:------------------------------------------
                                                 [Signature]

                                   Name:----------------------------------------

                                   Its: ----------------------------------------


                          --oo0oo-

                          Schedule of Warrants Issued
                          ---------------------------

Note Date                     Payee                 Warrants
---------                     -----                 --------
March 06, 2002        Ronald C. Causley              198,864
March 28, 2002        Joseph J. Fitzsimmons          119,318
                                                     -------
Total                                                318,182
                                                     =======