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

                                  FORM 10-QSB

(Mark One)

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

        For the quarterly period ended June 30, 2002


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

Commission File Number: 0-21142


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

                Michigan                                38-2483796
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 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 July 31, 2002

Transitional Small Business Disclosure Format:  [  ] YES    [X] NO
                                    1
<PAGE>

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

                     Nematron Corporation and Subsidiaries
                     Consolidated Condensed Balance Sheets
                      June 30, 2002 and December 31, 2001

                                                       June 30,
                                                         2002       December 31,
                                                      (Unaudited)       2001
                                                     ------------  ------------
                      Assets
                      ------
Current assets:
  Cash and cash equivalents                           $  120,232   $  291,726
  Accounts receivable, net of allowance for
   doubtful accounts of $86,000 at June 30, 2002
   and $70,000 at December 31, 2001                    2,700,090    3,284,376
  Inventories (Note3)                                  1,890,317    1,916,235
  Prepaid expenses and other current assets              268,217      190,010
                                                     -----------  -----------
                Total current assets                   4,978,856    5,682,347
Property and equipment, net of accumulated
 depreciation of $7,385,592 at June 30, 2002
 and $7,192,705 at December 31, 2001                   2,015,942    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                                    730,346      886,286
 Other intangible assets, net of amortization            469,153      564,658
                                                     -----------  -----------
Total assets                                         $11,266,419  $12,395,517
                                                     ===========  ===========

         Liabilities and Shareholders' Equity
Current liabilities:
  Notes payable to banks (Note 6)                     $1,708,658 $  2,262,475
  Accounts payable                                     1,780,335    1,452,658
  Deferred revenue and other accrued expenses          1,396,432    1,851,956
  Subordinated debt (Note 7)                           2,446,160    1,500,000
  Current maturities of long-term debt (Note 8)        2,568,039    2,962,536
                  Total current liabilities            9,899,624   10,029,625
Long-term debt, less current maturities (Note 8)          12,498       28,940
                                                     -----------  -----------
                  Total liabilities                    9,912,122   10,058,565
Shareholders' equity:
  Common stock, no par value, 30,000,000 shares authorized,
    15,744,625 shares outstanding                     33,211,046   33,054,089
  Accumulated comprehensive income                        32,592       18,096
  Accumulated deficit                                (31,889,341) (30,735,233)
                                                     -----------  -----------
                  Total shareholders' equity           1,354,297    2,336,952
                                                     -----------  -----------
Total liabilities and shareholders' equity          $ 11,266,419 $ 12,395,517
                                                     ===========  ===========

                                       2
<PAGE>

                     Nematron Corporation and Subsidiaries
                Consolidated Condensed Statements of Operations
                   For The Three-and Six-Month Periods Ended
                             June 30, 2002 and 2001

                                Three Months Ended          Six Months Ended
                                      June 30,                  June 30,
                             ------------------------  -------------------------
                                 2002         2001         2002          2001
                             (Unaudited)  (Unaudited)  (Unaudited)   (Unaudited)
                             -----------   ----------  -----------   -----------

Net revenues                  $3,616,826   $4,764,477   $8,136,438   $9,549,827
Cost of revenues               2,835,348    3,755,279    5,916,308    7,717,992
                              ----------   ----------   ----------   ----------
        Gross profit             781,478     1,009,19    2,220,130    1,831,835
Operating expenses:
  Product development costs      170,336      123,764      356,516      238,120
  Selling, general,
  administrative               1,251,990    1,733,400    2,545,051    3,289,842
                              ----------   ----------   ----------   ----------
  Total operating expenses     1,422,326    1,857,164    2,901,567    3,527,962
                              ----------   ----------   ----------   ----------
Operating loss                  (640,848)    (847,966)    (681,437)  (1,696,127)
Other income (expense):
  Interest expense              (334,778)    (397,392)    (497,779)    (567,518)
  Sundry income (expense)         14,437        7,164       25,106        7,690
                              ----------   ----------   ----------   ----------
  Total other income (expense)  (320,341)    (390,228)    (472,673)    (559,828)
                              ----------   ----------   ----------   ----------
Loss before income taxes        (961,189)  (1,238,194)  (1,154,110)  (2,255,955)
Income taxes (Note 7)                -0-          -0-          -0-        -0-
                              ----------   ----------   ----------   ----------
Net loss                       $(961,189) ($1,238,194) $(1,154,110) $(2,255,955)
                              ==========  ===========  ===========  ===========
Per share amounts (Note 8):
  Basic and diluted            $   (0.06)  $    (0.08) $     (0.07) $     (0.15)
                              ==========   ==========  ===========  ===========
Weighted average shares
  outstanding (Note 8):
  Basic and diluted           15,744,625   15,520,749   15,744,625   14,765,862
                              ==========   ==========   ==========   ==========

                     Nematron Corporation and Subsidiaries
            Consolidated Condensed Statements of Comprehensive Loss
        For The Three-and Six-Month Periods Ended June 30, 2002 and 2001

                                 Three Months Ended         Six Months Ended
                                       June 30,                 June 30,
                              ------------------------ -------------------------
                                  2002         2001        2002          2001
                              (Unaudited)  (Unaudited) (Unaudited)   (Unaudited)
                              -----------  ----------- -----------  ------------

Net loss                       $(961,189) $(1,238,194) $(1,154,110) $(2,255,955)
Other comprehensive
 income (loss) - equity
 adjustment from foreign
 translation                      19,767         (118)      14,496       (4,507)
                               ---------  -----------  -----------  -----------
Comprehensive loss             $(941,422) $(1,238,312) $(1,139,614) $(2,260,462)
                               =========  ===========  ===========  ===========

                                       3
<PAGE>

                     Nematron Corporation and Subsidiaries
                Consolidated Condensed Statements of Cash Flows
                        For The Six-Month Periods Ended
                             June 30, 2002 and 2001

                                                      Six Months Ended June 30,
                                                         2002            2001
                                                     (Unaudited)     (Unaudited)
                                                     -----------     -----------
Cash flows from operating activities:
 Net loss                                            $(1,154,110)   $(2,255,955)
Adjustments to reconcile net loss to net cash
flows provided by operating activities:
 Depreciation                                            228,309        267,688
 Amortization (Notes 4 and 5)                            251,446        766,141
 Non-cash interest expense for
 beneficial conversion feature (Note 7)                  154,117        205,200
 Loss on disposal of equipment                            18,503          2,308
 Changes in assets and liabilities that
 provided (used) cash:
  Accounts receivable                                    584,286        846,592
  Inventories                                             25,918        773,652
  Prepaid expenses and other current assets              (78,207)        28,333
  Accounts payable                                       426,955        (82,407)
  Deferred revenue and accrued expenses                 (554,801)      (276,002)
                                                       ---------      ---------

  Net cash provided by (used in) operating activities    (97,584)       275,550
Cash flows from investing activities:
 Acquisition of Optimation, Inc., net of
 cash acquired (Note 2)                                     --         (287,877)
 Additions to capitalized software development costs        --         (317,946)
 Additions to property and equipment                     (73,742)       (84,147)
 Proceeds from disposals of property and equipment         1,094          1,983
                                                       ---------      ---------
  Net cash used in investing activities                  (72,648)      (678,987)
Cash flows from financing activities:
 Proceeds from issuance of subordinated notes
 and warrants (Note 7)                                   949,000      1,200,000
 Proceeds from issuance of common stock                     --          278,000
 Payments of long-term debt                             (410,941)      (558,814)
 Increase (decrease) in notes payable to bank           (553,817)      (373,850)
 Payments of deferred financing fees                        --          (61,440)
                                                       ---------      ---------
Net cash provided by (used in) financing activities      (15,758)       483,896
Foreign currency translation effect                       14,496         (4,507)
                                                       ---------      ---------
Net increase (decrease) in cash and cash equivalents    (171,494)        75,952
Cash and cash equivalents at beginning of period         291,726         74,712
                                                       ---------      ---------
Cash and cash equivalents at end of period           $   120,232    $   150,664
                                                     ===========    ===========

Non-cash financing and investing activities:
 Fair value of assets acquired from
 Optimation, Inc., including goodwill                               $ 2,459,727
 Less 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                              $   391,746    $   334,429
 Cash paid for income taxes                                 --             --

                                       4
<PAGE>

                     Nematron Corporation and Subsidiaries
              Notes To Consolidated Condensed Financial Statements
                   For The Three- and Six-Month Periods Ended
                             June 30, 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 financial
statements include the operations of Optimation since the date of its
acquisition.

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 and six month periods ended June
30, 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 who 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
                                                                     ==========

                                       5
<PAGE>

The following  unaudited pro forma summary presents the consolidated  results of
operations  for the three and six month  periods  ended June 30,  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    Six Months
                                                       Ended           Ended
                                                   June 30, 2001   June 30, 2001
                                                   -------------   -------------

Revenues                                            $ 4,764,000     $ 9,961,000
Net loss                                            $(1,238,000)    $(2,261,000)
Loss per share - basic and diluted                       $(0.08)         $(0.15)

Note 3 - Inventories

Inventories consist of the following at June 30, 2002 and December 31, 2001:
                                                       June 30,     December 31,
                                                         2002            2001
                                                         ----            ----

Purchased parts and accessories                      $1,298,261      $1,402,209
Work in process                                         241,094         219,765
Finished goods, demo units and service stock            350,962         294,260
                                                     ----------      ----------
        Total Inventory                              $1,890,317      $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  impairment  tests  at least  annually.  Under
FASB-142,  the Company was required to test all existing goodwill for impairment
as of January 1, 2002,  on a  "reporting  unit" basis.  A reporting  unit is the
operating  segment unless,  at businesses one level below that operating segment
(the  "component"  level),   discrete  financial  information  is  prepared  and
regularly reviewed by management,  in which case such component is the reporting
unit.  A fair  value  approach  is used  to test  goodwill  for  impairment.  An
impairment  charge is recognized  for the amount,  if any, by which the carrying
amount of goodwill exceeds its fair value.  Fair values were  established  using
discounted  cash  flows.  The  result of  testing  goodwill  for  impairment  in
accordance with FASB-142, as of January 1, 2002, resulted in no impairment.  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:

                                       6
<PAGE>

                               Three Months Ended           Six Months Ended
                                    June 30,                     June 30,
                                    --------                     --------
                               2002           2001         2002          2001
                               ----           ----         ----          ----
Net loss:
Reported net loss          $(961,189)   $(1,238,194)  $(1,154,110)  $(2,255,955)
Goodwill amortization            --          42,657           --         73,259
Workforce and distribution
  network amortization           --          23,052           --         46,104
                           ---------    -----------   -----------   -----------
   Adjusted net loss       $(961,189)   $(1,172,485)  $(1,154,110)  $(2,136,592)
                           =========    ===========   ===========   ===========

Basic and diluted loss per share:
Reported net loss             $(0.06)        $(0.08)       $(0.07)       $(0.15)
Goodwill amortization            --             --            --            .01
Workforce and distribution
  network amortization           --             --            --            --
                              ------         ------        ------        ------
        Adjusted net loss     $(0.06)        $(0.08)       $(0.07)       $(0.14)
                              ======         ======        ======        ======

Note 5 - Other Intangible Assets

Other intangible assets consists of the following at June 30, 2002:

                            Amortization  Gross                           Net
                               Period     Carrying     Accumulated      Carrying
                              (Years)     Amount       Amortization      Amount
                              -------     ------       ------------      ------
Amortizable intangible assets:
 Software development costs     5.7     $6,661,735      $(5,931,389)    $730,346
                                        ==========      ===========     ========
Other:
  Acquired non-compete
   agreement                    5.0        300,000         (120,000)     180,000
  Acquired patent costs        10.0        590,000         (398,250)     191,750
  Internally developed
  patent costs                  6.0         75,589          (54,318)      21,271
  Deferred financing fees       4.0        263,612         (187,480)      76,132
                                        ----------        ---------     --------
  Total other intangible assets         $1,229,201        $(760,048)    $469,153
                                        ==========        =========     ========
Amortization expense for other intangible assets for the periods presented are
as follows:
                                Three Months Ended           Six Months Ended
                                      June 30,                   June 30,
                                      --------                   --------
                                  2002        2001          2002           2001
                                  ----        ----          ----           ----

Software development costs      $77,970    $267,711      $155,940       $484,681
Other amortizable assets         47,753      58,072        95,506        162,097
                               --------    --------      --------       --------
        Total                  $125,723    $325,783      $251,446       $646,778
                               ========    ========      ========       ========

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      263,396
        2005                                 139,502         74,604      214,106
        2006                                 139,503           --        139,503

                                        7
<PAGE>

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.

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 $40,000 of the available lines are eligible for advance
at June 30, 2002. Amounts borrowed under the lines of credit facility total
$1,343,658 at June 30, 2002, and such borrowings bear interest at the prime rate
plus 4.5% (9.25% effective rate at June 30, 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, as amended
through July 2002, provides for a total line of credit of $365,000 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 $365,000 at June 30, 2002, and
such borrowings bear interest at the prime rate plus .50% (5.25% effective rate
at June 30, 2002), but not less than 5.25% per annum. The agreement requires
monthly line reductions of $10,000 through its expiration date. 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
October 5, 2002, at which time the Company expects to renew the facility on
essentially the same terms and conditions for another ninety-day period.

Note 7 -Subordinated Debt

Subordinated debt consists of the following:
<TABLE>
<CAPTION>
                                                                                    June 30,    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 14% 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. Detachable warrants with an
exercise price of $0.10 -$0.18 per share were sold with the notes                   1,049,000      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 $6,477 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                        197,160         --
                                                                                   ----------   ----------
Total                                                                              $2,446,160   $1,500,000
                                                                                   ==========   ==========
</TABLE>
                                        8
<PAGE>

The convertible subordinated notes due August 31, 2001 (the "10% 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 an
equity offering at less than the Per Share Warrant Price, the holders 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 10%
Convertible Notes were ascribed a value of $858,000. The $342,000 was charged to
interest over the term of the 10% 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 10% Convertible Notes increasing in recorded amount to
$1,200,000 by August 31, 2001.

The 14% Subordinated Notes due on demand (the "14% Subordinated Notes") were
issued pursuant to a $1.5 million master promissory note with North Coast
Technology Investors L.P. ("North Coast"), an affiliate of Mr. Hugo Braun, a
member of the Company's Board of Directors. Requests for advances under the
master promissory note shall be funded at the option of North Coast. In the
event of an equity offering by the Company, North Coast, at its option, may
convert any or all of the outstanding principal of and accrued interest on the
14% Subordinated Notes into securities offered in such financing, at the
offering price per share of such financing. If the Company does not complete an
equity financing pursuant to which it receives proceeds of at least $1.5 million
on or before August 31, 2002, the principal and interest due and payable under
the master promissory note may be converted at the option of North Coast into
shares of common stock of the Company at $0.10 per share. The 14% Subordinated
Notes were issued with immediately exercisable detachable warrants. The
warrants, which are non-assignable, allow the holder to purchase the Company's
common stock at $0.18 per share for 607,777 shares and $0.10 for 1,004,000
shares at any time until October 31, 2007. The detachable warrants have been
ascribed a value of $150,480, and such amount has been charged to interest
expense for the three- and six-month periods ended June 30, 2002.

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
have been ascribed a value of $6,477 and such amount was credited to
shareholders equity, and the 8% Subordinated Notes were ascribed a value of
$193,523. The $6,477 is being charged to interest over the term of the 8%
Subordinated Notes, resulting in a total non-cash charge to interest expense of
$2,841 and $3,636, respectively, for the three- and six-month periods ended June
30, 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 10% Convertible Notes, all of the 14% 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 June 30, 2002 and December
31, 2001, accrued interest on the subordinated notes described above total
$195,306 and $96,795, respectively, including $138,689 and $62,493,
respectively, due to related parties.

                                        9
<PAGE>


Note 8 - Long-Term Debt

Long-term debt includes the following debt instruments at June 30, 2002 and
December 31, 2001:
<TABLE>
<CAPTION>

                                                                                   June 30,   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 June 30, 2002), payable in monthly installments of $62,500 beginning June
2002 through August 2003, at which time any remaining principal and interest is
due. The term loan is collateralized by substantially all assets of the Company
and a mortgage on the Ann Arbor facility.                                         $2,545,556    $2,561,667

Term note payable to a bank, interest at prime plus 6.0%, payable
 in monthly installments of $78,611 through May 2002                                    --         389,166

Capitalized lease obligations and other notes, secured by specific
equipment being financed                                                              34,981        40,643
                                                                                  ----------    ----------
Total long-term debt                                                               2,580,537     2,991,476
Less current maturities                                                           (2,568,039)   (2,962,536)
                                                                                  ----------    ----------

Long-term debt, less current maturities                                           $   12,498    $   28,940
                                                                                  ==========    ==========
</TABLE>

The Agreements, under which the Company has the line of credit with LBCI (see
Note 6) and the term note, contain several financial covenants, including
specified levels of tangible net worth, interest coverage and debt service
coverage. The terms of the Agreement also prohibit the payment of dividends,
limit the amount of annual capital expenditures and include other restrictive
covenants. Although the Company is not in compliance with the tangible net
worth, interest coverage and debt service coverage covenants as of June 30,
2002, the bank issued a forbearance letter to the Company in February 2002
concerning these covenant violations. In such letter, the bank has specifically
reserved its right to take any action permitted under the Agreements in the
future without any notice to the Company. The bank and management are in
discussion to revise the Agreements and management is pursuing other solutions
to the violations, including the private placement of additional capital. The
Company has classified the debt with LBCI as current liabilities.

Note 9 - Taxes on Income

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

Basic earnings per share ("EPS") are based on the weighted average number of
shares outstanding for each period presented because common stock equivalents
are anti-dilutive. Diluted earnings per share is the same as basic earnings per
share for all periods presented because the inclusion of options and warrants
would have an antidilutive effect on loss per share during all periods
presented.

                                       10
<PAGE>

Information as to options and warrants outstanding that have been excluded from
the computation of diluted earnings per share is as follows:

                        Three Months Ended June 30,    Six Months Ended June 30,
                          2002           2001            2002            2001

Options:
  Number               2,162,942       2,230,692       2,162,942       2,230,692
  Expiration dates     2003-2011       2003-2011       2003-2011       2003-2011
  Warrants:
    Number             2,286,882         997,678       1,887,822         997,678
    Expiration dates   2002-2006       2002-2006       2002-2006       2002-2006


                                       11
<PAGE>

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

The Company acquired 100% of the equity of Optimation, Inc. effective at the
close of business on March 30, 2001. The consolidated condensed financial
statements include the results of operations of Optimation since that date.

Three- and Six Month Periods Ended June 30, 2002 Compared With The
Three- and Six-Month Periods Ended June 30, 2001

Net revenues for the three- and six-month periods ended June 30, 2002 decreased
$1,148,000 (24.1%) and $1,413,000 (14.8%), respectively, to $3,617,000 and
$8,136,000, respectively, compared to the same periods last year. The net
revenue decrease in the three-month period ended June 30, 2002 compared to the
prior year period results from lower sales of all product lines except repair
services, which increased 15.9%. The net revenue decrease in the six-month
period ended June 30, 2002 compared to the prior year period results primarily
from decreases in sales of bundled Industrial Control Computers ("ICCs"), other
hardware control products and system engineering services, partially offset by
increased revenues from software licenses and operator panels, including
$362,000 attributable to the revenues of Optimation which the Company acquired
on March 30, 2001. Revenues from ICCs and other hardware control products were
below the prior year periods as customers have continued to restrict their
capital spending. Revenues from software licenses increased in the current
six-month period compared to the prior year period because of a significant sale
of software licenses to one customer. Revenues from system integration in the
current six-month period includes revenue recognized from one customer for
certain application services performed in prior years, the revenue from which
was previously not recorded pending certainty of collection. Management expects
that net revenues for the last six months of 2002 increase compared to the first
six-month period and will be comparable to the year earlier period based on the
current order rate and scheduled deliveries.

Gross profit for the three- and six-month periods ended June 30, 2002 decreased
$228,000 (22.6%) and increased $388,000 (21.2%), respectively, to $781,000 and
$2,220,000, respectively, compared to the same periods last year. Gross profit
as a percentage of net revenues for the three- and six-month periods ended June
30, 2002 was 21.6% and 27.3% respectively, compared to 21.2% and 19.2% in the
same periods last year. The increase in gross profit percentage in the
three-month period ended June 30, 2002 results from lower material costs and
lower software amortization costs in the current period compared to the year ago
period. The increase in gross profit percentage in the six-month period ended
June 30, 2002 results from these same factors, plus 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 remain relatively constant with the margin realized in the second
quarter of 2002 as the mix of sales in the remaining two quarters of 2002 is
expected to be similar to the sales mix experienced in the first six months of
the year, based on the current backlog and forecasts.

Product development expenses incurred for software development for the three-
and six-month periods ended June 30, 2002 increased $47,000 (37.6%) and $118,000
(49.7%), respectively, to $170,000 and $357,000, respectively, compared to the
same periods last year. The increases are attributable to the lack of any
capitalizable expenditures in the current period whereas $135,000 and $318,000
of software development expenditures were capitalized in the three- and
six-month periods ended June 30, 2001. Software development expenditures,
including those expensed in the current period and those capitalized, have
decreased in the current period compared to the prior year periods resulting
from smaller development staffs and lower overhead and other fixed costs.
Management expects that product development expenses will increase moderately in
the remaining quarters of 2002 as development and enhancement efforts are
planned to increase.

                                       12
<PAGE>

Selling, general and administrative expenses for the three- and six-month
periods ended June 30, 2002 decreased $481,000 (27.8%) and $745,000 (22.6%) to
$1,251,000 and $2,545,000, respectively, compared to the comparable periods last
year. The decreases result 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
remaining months of 2002.

Interest expense for the three- and six-month periods ended June 30, 2002
decreased $63,000 (15.8%) and $70,000 (12.3%), respectively, to $335,000 and
$498,000, respectively, compared to the comparable periods last year. Interest
expense for the three- and six-month periods ended June 30, 2002 includes
$153,000 and $154,000, respectively of non-cash interest expense related to the
beneficial conversion feature of warrants sold in 2002 wherein the conversion
price of the warrants was below the market price of the common stock into which
the warrants may be converted, on the date of the sale of the warrants and
convertible subordinated debt which raised $949,000. Interest expense for both
the three- and six-month periods ended June 30, 2001 includes $205,000 of
non-cash interest expense related to the beneficial conversion feature of
warrants sold in 2001 wherein the conversion price of the warrants was below the
market price of the common stock into which the warrants may be converted, on
the date of the sale of the warrants and convertible subordinated debt which
raised $1,200,000. Absent the non-cash charges for the beneficial conversion
features described above, interest expense for the three- and six-month periods
ended June 30, 2002 would have decreased $114,000 and $121,000, respectively,
compared to the comparable 2001 periods, and this results from lower borrowing
levels in 2002 compared to 2001 as term debt was repaid in accordance with
scheduled maturities. Management expects that interest expense will decrease in
the remaining quarters of 2002 because of lower borrowing levels as debt is
repaid as scheduled.

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
$3,500,000  as of June 30,  2002  from  LaSalle  Business  Credit  ("LBCI")  and
$365,000  from Compass  Bank.  As of June 30, 2002,  the Company had  $1,709,000
outstanding  under the lines of credit and  approximately  $40,000 of additional
borrowing capacity  available under such credit lines. The Company's  operations
used $98,000 in cash during the six-month period ended June 30, 2002 as a result
of the $1,154,000 net loss, the effects of changes in working capital (providing
$404,000)  and the  noncash  depreciation,  amortization,  loss on  disposal  of
equipment and interest charges (totaling $652,000).  During the six-month period
ended June 30, 2002, the Company used $74,000 of cash for purchases of equipment
and $965,000 of cash for  repayments  of the lines of credit and long term debt.
The  primary  source of cash in the  six-month  period  ended June 30,  2002 was
$949,000  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.  Management  estimates  that it will
require approximately $700,000 through the remainder of 2002 in order to sustain
operations at their current levels. 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.

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

                                       13
<PAGE>

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 make payments on
term debt of approximately $18,000 per month, plus interest. Additionally, of
the total principal amount of subordinated debt, $2,250,000 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 $3,000,000, 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.
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.

Based upon the Company's existing financial position, forecasted revenue and
expense levels and forecasted lines of credit availability, and assuming the
conversion of the subordinated notes to common or preferred stock, the Company
believes it has sufficient liquidity to satisfy its liabilities as they become
due. The Company believes that its long-term liquidity needs will be satisfied
through the proceeds of the private equity offering it expects to complete on or
prior to September 30, 2002.

Management can offer no assurance that the private placement of securities will
be successful, nor if the private placement occurs, that the equity raised will
be sufficient persuade the LBCI to continue its forbearance on calling its debt
because of the continuing covenant violations. If the private placement is 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.

Uncertainties Relating to Forward Looking Statements

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

* Uncertainties discussed elsewhere in "Management's Discussion and Analysis
  or Results of Operation" above;
* The potential inability to raise additional equity or debt financing in a
  sufficient amount to sustain operations and allow management to execute its
  strategies;

                                       14
<PAGE>

* 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;
* A further decline of economic conditions in general and conditions in the
  automotive manufacturing industry in particular;
* Delays in introduction of planned new product offerings and product
  enhancements;
* 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 products by
  the Company's competitors;
* Product pricing decreases and/or component price increases that may result in
  materially reduced selling prices and/or reduced gross profit margins from
  sale of the Company's products;
* Software defects and latent technological deficiencies in existing and new
  hardware products and enhancements thereto;
* Unforeseen increases in operating expenses or adverse fluctuations in foreign
  exchange rates;
* The inability to attract or retain management personnel and sales and
  engineering staff;
* Evolving industrial automation industry standards that may cause the
  Company's current or proposed product portfolio to become obsolete.


                                       15
<PAGE>

PART II - OTHER INFORMATION

Item 4.         Submission of Matters to a Vote of Security Holders

On May 14, 2002, the Company held its Annual Meeting of Shareholders. There was
one matter voted upon, which was the election of Directors. Prior to the
election but subsequent to preparation and mailing of the Proxy Statements, Mr.
James H. Wicker resigned from the Board of Directors and declined to stand for
re-election to the Board of Directors. Pursuant to the terms of the Company's
bylaws, the Board of Directors may select members to fill vacancies on the Board
of Directors. As of the date of this Form 10-QSB, the Board of Directors has not
selected anyone to fill the vacancy created by the resignation of Mr. Wicker.

The following table sets forth the results of the voting on the election of
Directors.

        Nominees                    Votes For       Votes Withheld  Total Votes
        --------                    ---------       --------------  -----------
        Hugo E. Braun               11,512,508           43,214      11,555,722
        James H. Wicker             11,513,058           42,664      11,555,722


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 June 30, 2002, the Company did not file any
        current reports on Form 8-K.


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:

August 12, 2002                     /s/ Matthew S. Galvez
---------------                     ---------------------
Date                                Matthew S. Galvez, President & CEO
                                    (Duly Authorized Officer)

August 12, 2002                     /s/ David P. Gienapp
---------------                     --------------------
Date                                David P. Gienapp, Executive Vice President -
                                    Finance &Administration
                                    (Chief Accounting Officer)

                                       16
<PAGE>



                               INDEX TO EXHIBITS


Exhibit
Number  Description of Exhibit

 4.0    Modification and Amendment to Loan Documents Regarding the Revolving
        Credit and Security Agreement dated July 9, 1999, by and between
        Optimation, Inc. and Compass Bank, entered into on July 5, 2002.

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

99.2    Chief Financial Officer Certification Pursuant to 18 U.S.C. Section
        1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
        2002.

                                       17
<PAGE>


                                                                     Exhibit 4.0
                                                                     -----------

As of July 5, 2002 (the "Replacement Date"), this Modification Agreement and
Amendment to Loan Documents supersedes and replaces in its entirety that certain
Modification Agreement and Amendment to Loan Documents executed by Borrower and
Bank on July 19, 2000, that certain Modification Agreement executed by Borrower
and Bank on June 8, 2001, that certain Modification Agreement executed by
Borrower and Bank on November 27, 2001, that certain Modification Agreement
executed by Borrower and Bank on February 25, 2002, and that certain
Modification Agreement executed by Borrower and Bank on May 5, 2002, (the
"Former Modification"). The Former Modification shall be of no force or effect
as of the Replacement Date.

MODIFICATION AGREEMENT AND AMENDMENT TO LOAN DOCUMENTS

     THIS MODIFICATION AGREEMENT AND AMENDMENT TO LOAN DOCUMENTS is being
entered into as of the 5th day of July 2002 by and between COMPASS BANK, a state
banking corporation ("Bank") and OPTIMATION, INC., an Alabama corporation
("Borrower").

        PREAMBLE
        On July 9, 1999, Bank and Borrower executed that certain Revolving
Credit and Security Agreement (the "Agreement"), Revolving Credit Commercial
Note in the principal amount of SIX HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS
($650,000.00) (the "Note"), and other Loan Documents, providing for a line of
credit in the maximum aggregate amount of SIX HUNDRED FIFTY THOUSAND AND NO/100
DOLLARS ($650,000.00) (the "Revolving Line"). The Borrower has requested and the
Bank has agreed to, among other things, (i) decrease the aggregate principal
amount available under the Revolving Line to THREE HUNDRED SIXTY FIVE THOUSAND
AND NO/100 DOLLARS ($620,000.00), (ii) extend the due date to October 5, 2002,
and (iii) modify certain covenants.

        Accordingly, the Bank and Borrower have agreed that the Revolving Line
shall be modified and that the documents and instruments evidencing, securing,
relating to, guaranteeing, or executed or delivered in connection with the
Revolving Line (collectively the "Loan Documents") shall be amended as set forth
below.

                                   AGREEMENT
        NOW, THEREFORE, in consideration of the premises, the mutual agreements
of the parties as set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
to induce the Bank to modify the Revolving Line, the parties, intending to be
legally bound hereby, agree as follows:

        1.      AMENDMENT OF LOAN AGREEMENT.  The Loan Agreement shall be and
 the same hereby is amended as follows:

(a) The first paragraph of Page 1 shall be deleted in its entirety and in
place thereof shall be substituted:

"This Revolving Credit and Security Agreement (the "Agreement") is executed and
delivered this 9th day of July, 1999 by and between OPTIMATION, INC., an Alabama
corporation ("Borrower"), with its chief executive office and its principal
place of business at 2800 Bob Wallace Avenue, Suite L-3, Huntsville, Alabama
35805, and COMPASS BANK, an Alabama banking corporation ("Bank"), with its
principal offices at 114 Governors Drive, Huntsville, Alabama 35801. Borrower
has applied to Bank for a revolving line of credit not to exceed an aggregate
principal amount at any one time outstanding the sum of Three Hundred Sixty Five
Thousand and No/100 Dollars ($365,000.00) to be evidenced by a Revolving Credit

                                       18
<PAGE>

Commercial Note (the "Note") in such amount, and to be secured by a security
interest in all of the Collateral (as defined herein) now owned or hereafter
acquired by Borrower on the terms hereinafter set forth."

(b) Section 1.10 shall be deleted in its entirety and in place thereof shall be
substituted:

""Loan Documents" shall mean and include the Note, this Agreement and any other
agreement, document or instrument now or hereafter evidencing, securing,
guaranteeing (including, without limitation, Continuing Limited Guaranty
executed in connection herewith by Dennis and Sheila Sierk (up to $166,250.00)
and Continuing Unlimited Guaranty executed in connection herewith by Nematron
Corporation (such individuals and entities are jointly and severally included
within the term "guarantor" as the same is used in this Agreement)) or relating
to the Revolving Line or any other Liability, obligation or indebtedness of
Borrower to Bank, as the same may be amended."

(c) Section 3.1 shall be deleted in its entirety and in place thereof shall be
substituted:

"From the date hereof until October 5, 2002, or such future date to which the
expiration date of the Revolving Line may be extended, subject to the terms and
conditions of this Agreement and Borrower's and all guarantor's performance of
and compliance with each of the Loan Documents, and so long as no event of
default hereunder or under any of the other Loan Documents shall have occurred
or be continuing, Bank agrees to extend to Borrower an open-end credit line on
the basis of the following advance formula (such advance formula being
hereinafter referred to as the "Borrowing Base"): eighty percent (80%) of the
value of Borrower's Eligible Accounts Receivable, not to exceed $365,000.00 at
any one time outstanding, plus fifty percent (50%) of the value of Borrower's
Eligible Inventory, not to exceed $350,000.00 at any one time, and provided that
in no event shall the aggregate sum of all advances made by Bank to Borrower at
any one time outstanding hereunder exceed the sum of $365,000.00. Within such
limits and subject to the terms of this Agreement, Borrower may borrow, repay
without penalty or premium, and re-borrow hereunder, from the date of this
Agreement until the Maturity Date. It is expressly understood and agreed that
Bank shall have no obligation to make an advance under the Revolving Line if the
amount of such advance together with the amount outstanding under the Revolving
Line exceeds or would exceed the lesser of (i) $365,000.00 or (ii) the Borrowing
Base."

(d) Section 3.3 is hereby amended by deleting the amount "$650,000.00" and
substituting in place thereof the amount "$365,000.00".

(e) Section 7.1 (iii) shall be deleted in its entirety and in place thereof
shall be substituted: "annual personal financial statements of Dennis and Sheila
Sierk and quarterly internally prepared financial statements from Nematron
Corporation".

(f) Section 7.4 shall be deleted in its entirety and in place thereof shall be
 substituted: "Borrower shall maintain a minimum Tangible Net Worth of not less
than $850,000."

(g) Section 14 is hereby amended by deleting the date "June 1, 2000" and
substituting in place thereof "October 5, 2002".

        2.  EFFECT ON LOAN DOCUMENTS.  Each of the Loan Documents shall be
deemed amended as set forth herein to the extent necessary to carry out the
intent of this Agreement; provided, however, all terms, conditions,
representations, warranties and agreements contained in each of the Loan
Documents not amended by this Agreement shall remain in full force and effect
and are hereby reaffirmed.

                                       19
<PAGE>

     IN WITNESS WHEREOF, the parties have caused this Agreement to be fully
executed as of the date first set forth above.

                                                BORROWER:
Attest:                                         OPTIMATION, INC.

By:   /s/ David P. Gienapp                      By: /s/ Dennis A. Sierk
      --------------------                          -------------------
Its:  Secretary                                 Its:  President

                                                BANK:
Witness:                                                COMPASS BANK

/s/ Margaret Henshaw                            By:  /s/ Arlene Stackhouse
--------------------                                 ---------------------
                                                Its:  Senior Vice President

                                       20
<PAGE>


                                                                    Exhibit 99.1
                                                                    ------------
                CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO
         18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
                         THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Nematron Corporation (the "Company")
on Form 10-QSB for the period ended June 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Matthew S. Galvez,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.


/s/ Matthew S. Galvez
---------------------
Matthew S. Galvez
Chief Executive Officer
August 12, 2002


                                       21
<PAGE>

                                                                    Exhibit 99.2
                                                                    ------------

               CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO
         18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
                         THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Nematron Corporation (the "Company")
on Form 10-QSB for the period ended June 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, David P. Gienapp,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

(3) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Act of 1934; and

(4) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.


/s/ David P. Gienapp
--------------------
David P. Gienapp
Chief Financial Officer
August 12, 2002

                                       22
<PAGE>