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                                                                    EXHIBIT 10.3

                       NONQUALIFIED STOCK OPTION AGREEMENT
                              NEMATRON CORPORATION


         THIS AGREEMENT is entered into effective as of December 3, 1998 by and
between Nematron Corporation ("Corporation") and Matthew S. Galvez ("Optionee").
The Corporation hereby grants to the Optionee a stock option to purchase shares
of the Corporation's common stock, no par value (the "Common Stock"), subject to
the terms and conditions hereinafter provided below (the "Option"). The Option
is not an incentive stock option as defined in Section 422 of the Internal
Revenue Code of 1986.

         1.   Option Grant. Optionee is hereby granted an option to purchase
460,000 shares of Common Stock at $0.75 per share. The Option shall be
exercisable on the later of (a) approval by shareholders of the Corporation of
the issuance of shares of Common Stock pursuant to the payment or conversion of
the convertible promissory notes of the Corporation issued as of December 1,
1998 and the issuance of the shares of Common Stock pursuant to the
Corporation's April 1999 private placement or (b) Optionee's execution of this
Agreement.

         2.   Terms of Exercise.

              (a) Exercise. The Option may be exercised at any time, or from
time to time, in whole or in part, from the time it first becomes exercisable as
provided in Section 1 hereof until the Expiration Date (as defined in Section
2(b) hereof) unless such Option is earlier terminated pursuant to Section 3
hereof. Upon proper exercise of the Option, the Corporation shall promptly cause
to be issued to the Optionee certificates for the Common Stock purchased upon
such exercise, subject to Section 8 of this Agreement.

              (b) Expiration. Any provision of this Agreement to the contrary
notwithstanding, the Option shall expire and no longer be exercisable after the
date which is the tenth (10th) anniversary of the date of this Agreement (the
"Expiration Date").

              (c) Notice. The Option shall be exercisable by delivery to the
Secretary of the Corporation of a written and duly executed notice in the form
attached hereto.

              (d) Payment Terms. Payment of the full purchase price of any
shares with respect to which the Option is being exercised shall accompany the
notice of exercise of the Option. Payment shall be made (i) in cash, (ii) by
certified check, bank draft or money order, (iii) by tendering to the
Corporation shares of Common Stock then owned by Optionee, duly endorsed for
transfer or with duly executed stock power attached, which shares shall be
valued at their "Fair Market Value" ", or by directing the Corporation to
withhold shares having a "Fair Market Value" equal to the aggregate exercise
price from the number of shares which otherwise would be acquired upon exercise
and deeming the Option to have been exercised with respect to such withheld
shares as well as the shares actually acquired upon such exercise, or (iv) by
delivery to the Corporation of a properly executed exercise notice, acceptable
to the Corporation, together with irrevocable instructions to Optionee's broker
to deliver to the Corporation a sufficient amount of cash to pay the exercise
price and any applicable income and employment withholding taxes in accordance
with a written agreement


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between the Corporation and the brokerage firm if, at the time of exercise, the
Corporation has entered into such an agreement. "Fair Market Value" shall mean
the average of the high and low sale prices per share of the Common Stock
reported in the Wall Street Journal (or if high and low sale prices are not
reported, the last sale price reported in the Wall Street Journal or, if the
last sale price is not reported, the last reported bid price per share) for the
last preceding day on which the Common Stock was traded prior to the date with
respect to which the Fair Market Value is to be determined, as determined by the
Committee in its sole and reasonable discretion; provided that in the event the
last preceding day on which the Common Stock was traded is greater than 10
trading days prior to the date with respect to which the Fair Market Value is to
be determined, the Committee, in its good faith reasonable discretion, shall
determine the Fair Market Value of the Common Stock.

         3.   Termination of Employment.

              (a) Termination Prior to Option Becoming Exercisable. If, prior to
the date that the Option shall first become exercisable, the Optionee's
employment with the Corporation and its subsidiaries shall be terminated, with
or without cause, or by the act, death or Disability (as defined in Section
22(e) of the Internal Revenue Code of 1986, as amended) of the Optionee, the
Optionee's right to exercise the Option shall terminate and all rights hereunder
shall cease.

              (b) Termination Other Than Because of Death or Disability After
Option Becomes Exercisable. If, on or after the date that the Option shall first
become exercisable, the Optionee's employment with the Corporation and its
subsidiaries shall be terminated for any reason other than death or Disability,
the Optionee shall have the right, until the Expiration Date, to exercise the
Option to the extent that it was exercisable and is unexercised on the date of
such termination of employment, subject to any other limitation on the exercise
of the Option in effect at the date of exercise. The Option shall thereafter
terminate and no longer be of any effect.

              (c) Termination Because of Death or Disability After Option
Becomes Exercisable. If, on or after the date that the Option shall have become
exercisable, the Optionee shall die or become Disabled while an employee of the
Corporation or any of its subsidiaries and while the Option remains exercisable,
the Optionee or the executor or administrator of the estate of the Optionee (as
the case may be), or the person or persons to whom the Option shall have been
transferred (if such transfer was made in compliance with Section 7 of this
Agreement), shall have the right, until the Expiration Date, to exercise the
Option to the extent that it was exercisable and unexercised on the date of
death or termination, subject to any other limitation on exercise in effect at
the date of exercise. The Option shall thereafter terminate and no longer be of
any effect.

         4.   Authority. The Corporation represents and warrants that the person
signing this Agreement on its behalf has the requisite authority to execute this
Agreement.

         5.   Withholding. The Optionee consents to withholding from his
compensation of all applicable payroll and income taxes with respect to the
Option. If the Optionee is no longer employed by the Corporation or its
subsidiaries at the time any applicable taxes with respect to the Option are due
and must be remitted by the Corporation, the Optionee agrees to pay applicable
taxes to the Corporation, and the Corporation may delay issuance of a
certificate until proper payment of such taxes has been made by the Optionee.



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         6.   Rights as Shareholder. The Optionee shall have no rights as a
shareholder of the Corporation with respect to any of the shares covered by the
Option until the issuance of a stock certificate or certificates upon the
exercise of the Option, and then only with respect to the shares represented by
such certificate or certificates. No adjustment shall be made for dividends or
other rights with respect to such shares for which the record date is prior to
the date the option with respect to such shares is exercised.

         7.   Non-Transferability of Option. The Option shall not be transferred
in any manner other than by will or the laws of descent and distribution. During
the lifetime of the Optionee, the Option shall be exercised only by the
Optionee. No transfer of the Option shall be effective to bind the Corporation
unless the Corporation shall have been furnished with written notice thereof and
such evidence as the Corporation may deem necessary to establish the validity of
the transfer and the acceptance by the transferee of the terms and conditions of
the Option.

         8.   Compliance with Securities, Tax and Other Laws.

              (a) Anything to the contrary herein notwithstanding, the
Corporation's obligation to sell and deliver Common Stock pursuant to the
exercise of the Option is subject to such compliance with federal and state
laws, rules and regulations applying to the authorization, issuance or sale of
securities as the Corporation reasonably deems necessary or advisable. The
Corporation shall not be required to sell and deliver Common Stock if counsel
for the Corporation reasonably determines (i) that the issuance or transfer of
such shares will violate any of the provisions of the Securities Act of 1933 or
the Securities Exchange Act of 1934, or the rules and regulations promulgated
thereunder or those of the Nasdaq Stock Market or any stock exchange on which
the Common Stock may be listed, or the provisions of any state laws governing
the sale of securities, or (ii) that there has not been compliance with the
provisions of such acts, rules, regulations and laws. As a condition to exercise
of the Option, the Corporation may require the Optionee, or any person acquiring
the right to exercise the Option, to make any representation or warranty that
the Corporation reasonably deems to be necessary under any applicable
securities, tax, or other law or regulation. The Corporation shall promptly take
all actions necessary to bring itself into compliance with such laws and
regulations.

              (b) The Compensation Committee of the Corporation's Board of
Directors (the "Committee") may impose such restrictions on any shares of Common
Stock acquired pursuant to the exercise of the Option as it may deem reasonably
advisable, including, without limitation, restrictions (i) under applicable
federal securities laws, (ii) under the requirements of the Nasdaq Stock Market
or any stock exchange or other recognized trading market upon which such shares
of Common Stock are then listed or traded, and (iii) under any blue sky or state
securities laws applicable to such shares. No shares shall be issued if counsel
for the Corporation determines that the Corporation has not complied with all
requirements under appropriate securities laws.

                  (c) The Optionee represents that, unless a registration
statement under the Securities Act of 1933 is in effect with respect to the
shares of Common Stock acquired upon exercise of the Option, all of such shares
will be acquired solely for his own account, for investment purposes and not
with a view to any further sale or distribution thereof. All certificates
representing


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any shares acquired upon exercise of the Option shall have endorsed
thereon the following legends:

                     (i)  "THE SHARES EVIDENCED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY
NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH SUCH LAWS."

                     (ii) Any legend required to be placed thereon under any
applicable state or federal securities law or any other agreement to which the
Optionee and the Corporation may be a party.

              (d) Registration of Shares. The Corporation shall maintain an
effective registration statement on Form S-8 under the Securities Act of 1933,
as amended, with respect to the shares of Common Stock that may be purchased
upon exercise of the Option.

         9.   Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Common Stock, other securities, or other
property), recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange
of Common Stock or other securities of the Corporation, issuance of warrants or
other rights to purchase Common Stock or other securities of the Corporation, or
other similar corporate transaction or event affects the Common Stock such that
an adjustment or expansion is required in order to prevent dilution or
enlargement of the benefits or potential benefits made available by the grant of
the Option, the Company shall adjust, in such manner as is equitable, the number
and type of shares of Common Stock subject to the Option and/or the exercise
prices of the Option, in order to prevent dilution or expansion of such
benefits; provided, however, that any such adjustment shall provide for the
elimination of any fractional share which might otherwise become subject to the
Option.

         10.  No Right to Employment. The granting of the Option does not confer
upon the Optionee any right to be retained as an employee of the Corporation.

         11.  Notices. Every notice relating to this Agreement shall be in
writing and if given by mail shall be given by registered or certified mail with
return receipt requested. All notices to the Corporation shall be sent or
delivered to the Secretary of the Corporation at the Corporation's headquarters.
All notices by the Corporation to the Optionee shall be delivered to the
Optionee personally or addressed to the Optionee at the Optionee's last
residence address as then contained in the records of the Corporation or such
other address as the Optionee may designate. Either party by notice to the other
may designate a different address to which notices shall be addressed. Any
notice given by the Corporation to the Optionee at the Optionee's last
designated address shall be effective to bind any other person who shall acquire
rights hereunder.

         12.  Disputes. Any dispute or disagreement which may arise under or as
a result of this Agreement shall be determined arbitration conducted pursuant to
the rules of the American Arbitration Association in Ann Arbor, Michigan and any
determination by the arbitrator shall be final and binding for all purposes and
on all persons, and shall be enforceable by any court of proper jurisdiction
over the parties.




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         13.  Miscellaneous. The validity, construction and sufficiency of
performance under this Agreement shall be governed by the internal laws of the
State of Michigan. This is the entire agreement between the parties as to the
subject matter herein and this Agreement may not be modified except in writing
signed by both parties hereto.

         IN WITNESS WHEREOF, the Corporation, by its duly authorized officer,
and the Optionee have executed this Agreement effective as of the day and year
first written above.


                                    NEMATRON CORPORATION


                                    By: /s/ David P. Gienapp
                                       ----------------------------------------
                                    Its:  Secretary
                                        ---------------------------------------

                                    OPTIONEE

                                    /s/ Matthew S. Galvez
                                    ------------------------------------------
                                    Matthew S. Galvez



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                 NOTICE OF EXERCISE OF NONQUALIFIED STOCK OPTION



Secretary
Nematron Corporation
5840 Interface Drive
Ann Arbor, Michigan 48103


                An Option was granted to me as of December 3, 1998 to purchase
shares of Common Stock to purchase 460,000 shares of Common Stock at $0.75 per
share.

                I hereby elect to exercise the Option with respect to    shares.
Payment of the $            aggregate exercise price is being made in the form
of cash, certified check, bank draft or money order delivered with this notice.

                I represent that, if a registration statement under the
Securities Act of 1933 is not in effect with respect to the shares of Common
Stock I am acquiring pursuant to this notice of exercise, such shares are being
acquired solely for my own account, for investment purposes and not with a view
to any further sale or distribution thereof.

                The stock certificate for the shares acquired upon exercise
should be issued to:

                         (name)
                               --------------------------------------
                         (address)
                                  -----------------------------------

                         --------------------------------------------
                         (Social Security No.)
                                              -----------------------

Dated:        ,                                 --------------------------------
      --------  ----                            Matthew S. Galvez




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