+===============================================================================

                                  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, 2003


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

Commission File Number: 0-21142


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

           Michigan                                        38-2483796
 (State or other jurisdiction 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: 15,744,472 outstanding as of August 14, 2003

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, 2003 and December 31, 2002

                                                      June 30,
                                                       2003         December 31,
                                                    (Unaudited)         2002
                                                    -----------         ----
                   Assets
                   ------
Current assets:
     Cash and cash equivalents                         $92,727         $103,802
     Accounts receivable, net of allowance
     for doubtful accounts of $75,000 at
     June 30, 2003 and December 31, 2002             2,753,498        2,342,400
     Inventories (Note3)                             1,634,311        1,653,844
     Prepaid expenses and other current assets         192,084          172,550
                                                   ------------      ----------
              Total current assets                   4,672,620        4,272,596
Property and equipment, net of accumulated
  depreciation of $7,701,806 at June 30, 2003
  and $7,563,474 at December 31, 2002                1,709,781        1,850,392
Goodwill, net of amortization (Note 4)               2,922,122        2,922,122
Intangible assets (Note 5):
     Software and related development costs,
     net of amortization                               516,861          574,407
     Other intangible assets, net of amortization      309,106          404,159
                                                   -----------      -----------
              Total assets                         $10,130,490      $10,023,676
                                                   ===========      ===========

                      Liabilities and Shareholders' Deficit
                      -------------------------------------
Current liabilities:
     Notes payable to banks (Note 6)                $1,466,710       $1,397,317
     Accounts payable                                1,755,768        1,582,958
     Deferred revenue and other accrued expenses     2,024,315        1,748,594
     Subordinated debt (Note 7)                      4,312,500        3,179,000
     Current maturities of long-term debt (Note 8)     171,221          169,255
                                                   -----------      -----------
              Total current liabilities              9,730,514        8,077,124
Long-term debt, less current maturities (Note 8)     2,431,230        2,522,740
                                                   -----------      -----------
              Total liabilities                     12,161,744       10,599,864
Shareholders' deficit:
     Common stock, no par value, 30,000,000 shares
     authorized, 15,744,472 shares outstanding      33,283,166       33,246,346
     Accumulated comprehensive income                    4,488           25,645
     Accumulated deficit                           (35,318,908)     (33,848,179)
                                                   -----------      -----------
              Total shareholders' deficit           (2,031,254)        (576,188)
                                                   -----------      -----------

              Total liabilities and
              shareholders' deficit                $10,130,490      $10,023,676
                                                   ===========      ===========


                                       2
<PAGE>

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

                                          Three Months Ended June 30,         Six Months Ended June 30,
                                          ---------------------------         -------------------------
                                              2003           2002                2003           2002
                                           (Unaudited)    (Unaudited)         (Unaudited)    (Unaudited)
                                           ----------     ----------          ----------      ---------
<S>                                        <C>             <C>                <C>             <C>

Net revenues                               $3,088,658      $3,616,826         $6,422,881      $8,136,438
Cost of revenues                            2,335,101       2,835,348          5,019,629       5,916,308
                                           ----------      ----------         ----------      ----------
              Gross profit                    753,557         781,478          1,403,252       2,220,130
Operating expenses:
     Software development costs                91,914         170,336            136,807         356,516
     Selling, general, administrative       1,068,597       1,251,990          2,271,975       2,545,051
                                           ----------      ----------         ----------      ----------
     Total operating expenses               1,160,511       1,422,326          2,408,782       2,901,567
                                           ----------      ----------         ----------      ----------
Operating loss                               (406,954)       (640,848)        (1,005,530)       (681,437)
Other income (expense):
     Interest expense                        (270,503)       (334,778)          (476,098)       (497,779)
     Sundry income                              6,276          14,437             10,899          25,106
                                           ----------      ----------         ----------      ----------
     Total other income (expense)            (264,227)       (320,341)          (465,199)       (472,673)
                                           ----------      ----------         ----------      ----------
Loss before income taxes                     (671,181)       (961,189)        (1,470,729)     (1,154,110)
Income taxes (Note 7)                              -0-             -0-                -0-             -0-
                                           ----------      ----------         ----------      ----------
Net loss                                    $(671,181)      $(961,189)       $(1,470,729)    $(1,154,110)
                                           ==========      ==========         ==========      ==========
Per share amounts (Note 8):
     Basic and diluted                $         (0.04)$        (0.06)     $        (0.09) $       (0.07)
Weighted average shares
    outstanding (Note 8):
     Basic and diluted                     15,744,472      15,744,472         15,744,472      15,744,472

</TABLE>

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

<TABLE>
<CAPTION>

                                          Three Months Ended June 30,         Six Months Ended June 30,
                                          ---------------------------         -------------------------
                                              2003           2002                2003           2002
                                           (Unaudited)    (Unaudited)         (Unaudited)    (Unaudited)
                                           ----------     ----------          ----------      ---------
<S>                                        <C>             <C>                <C>             <C>


Net loss                                   $(671,181)      $(961,189)         $(1,470,729)    $(1,154,110)
Other comprehensive income (loss) -
    equity adjustment from foreign
    translation                               (1,920)         19,767              (21,157)         14,496
                                           ---------       ---------          -----------     -----------
Comprehensive loss                         $(673,101)      $(941,422)         $(1,491,886)    $(1,139,614)
                                           ==========      ==========         ==========      ===========
</TABLE>

                                       3
<PAGE>


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

                                                      Six Months Ended June 30,
                                                      -------------------------
                                                        2003             2002
                                                    (Unaudited)      (Unaudited)
                                                    -----------      -----------
Cash flows from operating activities:
     Net loss                                      $(1,470,729)     $(1,154,110)
     Adjustments to reconcile net loss to net
     cash flows used in operating activities:
         Depreciation                                  146,624          228,309
         Amortization (Notes 4 and 5)                  152,600          251,446
         Non-cash interest expense for beneficial
         conversion feature (Note 7)                    36,820          154,117
         Loss (gain) on disposal of equipment             (833)          18,503
         Changes in assets and liabilities that
         provided (used) cash:
              Accounts receivable                     (411,098)         584,286
              Inventories                               19,533           25,918
              Prepaid expenses and other
              current assets                           (19,534)         (78,207)
              Accounts payable                         172,812          426,955
              Deferred revenue and accrued expenses    275,725         (554,801)
                                                    ----------         --------
              Net cash used in operating activities (1,098,080)         (97,584)

Cash flows from investing activities:
     Additions to property and equipment                (8,010)         (73,742)
     Proceeds from disposals of property and
     equipment                                           2,824            1,094
                                                    ----------         --------
              Net cash used in investing activities     (5,186)         (72,648)

Cash flows from financing activities:
     Proceeds from issuance of subordinated notes
     and warrants (Note 7)                           1,133,500          949,000
     Payments of long-term debt                        (89,545)        (410,941)
     Increase (decrease) in notes payable to bank       69,393         (553,817)
                                                    ----------         --------
              Net cash provided by (used in)
              financing activities                   1,113,348          (15,758)

Foreign currency translation effect                    (21,157)          14,496

Net decrease in cash and cash equivalents              (11,075)        (171,494)
Cash at beginning of period                            103,802          291,726
                                                    ----------         --------
Cash at end of period                               $   92,727         $120,232
                                                    ==========         ========


Supplemental disclosures of cash flow information:
     Cash paid for interest                           $179,158         $391,746
     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, 2003 and 2002

Note 1 - Basis of Presentation

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

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

The results of operations for the three-month and six month periods ended June
30, 2003 and 2002 are not necessarily indicative of the results to be expected
for the full year.


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



Note 2 - Inventories

Inventories consist of the following at June 30, 2003 and December 31, 2002:

                                                        June 30,    December 31,
                                                          2003          2002
                                                          ----          ----
      Purchased parts and accessories                  $1,045,769    $1,085,811
      Work in process                                     317,093       247,730
      Finished goods, demo units and service stock        271,449       320,303
                                                       ----------    ----------
          Total Inventories                            $1,634,311    $1,653,844
                                                       ==========    ==========

                                       5
<PAGE>


Note 3 - Goodwill

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


Note 4 - Software and Related Development Costs

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

Amortization of capitalized computer software development costs is provided on a
product-by-product basis using the greater of the amount computed using (a) the
ratio that current gross revenues for each product bear to the total of current
and anticipated future gross revenues for that product, or (b) the straight-line
method over the remaining estimated economic lives of the respective products,
ranging from two to five years.

A summary of capitalized software and related development costs as of June 30,
2003 is as follows:

      Balance, January 1, 2003                                        $574,407
      Additions                                                            --
      Amortization                                                     (57,546)
                                                                      --------
          Total Capitalized software                                  $516,861
                                                                      ========

Note 5 - Other Intangible Assets

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

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

A summary of activity in the intangible asset account as of June 30, 2003 is as
follows:

      Balance, January 1, 2003                                        $404,159
      Additions                                                            --
      Amortization                                                     (95,053)
                                                                      --------
          Total Other Intangible Assets                               $309,106
                                                                      ========

                                       6
<PAGE>

Note 6 - Notes Payable to Banks

The Company and its subsidiary, A-OK Controls, are parties to two loan and
security agreements (the "Agreements") with LaSalle Business Credit, Inc. a
Wisconsin-based bank ("LBCI"). The Agreements, as amended through July 15 2003,
provided for a total of $1,225,000 as of June 30, 2003 and $900,000 beginning
July 15 through July 31, 2003 when the facility was terminated. The Agreements
provided for credit facilities through August 15, 2003 but further provide that
in the event that the Company shall fail to repay to LBCI all amounts borrowed
as of July 31, 2003, Nematron shall pay LBCI a fee of $10,000. As a condition of
LBCI extending the Agreements beyond their previously set expiration date of
July 15, 2003, Nematron was required, and did, repay a total of $500,000 of the
amounts it had borrowed under the line of credit facilities as of July 15, 2003.
These funds were borrowed under a credit agreement from North Coast Technology
Investors, LLP (the "North Coast Credit Facility"). Additionally, the Company
repaid the LBCI lines of credit in their entirety on July 31, 2003 with funds
borrowed under the North Coast Credit Facility. Mr. Hugo Braun, a former
director of the Company, is a partner of North Coast Technology Investors, LLP.

The amount available under the LBCI lines of credit were limited by a borrowing
formula that allowed for advances up to a maximum of a specified percentage of
eligible accounts receivable, less the amount, if any, of outstanding letters of
credit issued by the Company. Amounts borrowed under the line of credit facility
totaled $1,312,960 at June 30, 2003. Borrowings under the LBCI line of credit
carried an interest rate of prime plus 4.50% (8.50 % effective rate at June 30,
2003). The LBCI line of credit was collateralized by substantially all assets of
the Company and a second position on the mortgage on the Company's Ann Arbor
facility. The LBCI Agreements contained several financial covenants, including
specified levels of tangible net worth, interest coverage and debt service
coverage. The terms of the Agreement also prohibited the payment of dividends,
limited the amount of annual capital expenditures and included other restrictive
covenants. The Company had not been in compliance with the tangible net worth,
interest coverage and debt service coverage covenants since June 2001. The bank
had issued forbearance letters to the Company concerning these covenant
violations. In such letters the bank had specifically reserved its right to take
any action permitted under the Agreements in the future without any notice to
the Company. LBCI had agreed not to require immediate repayment of the amounts
borrowed until further notice through August 15, 2003 under the conditions that
there occurs no additional defaults or material adverse change in the Company or
its business, that the Company use its best efforts to refinance its liabilities
with another lender as soon as practicable, and that the Agreements be changed
to reflect an August 15, 2003 repayment date.

Terms of the North Coast Credit Facility, under which the Company began
borrowing on July 15, 2003 and proceeds of which were used to pay off the LBCI
lines of credit, have not been fully negotiated nor set forth in a written
agreement as of August 14, 2003. However, the interest rate has been established
at the prime rate plus 5% and borrowings are limited to a maximum of a specified
percentage of eligible billed and unbilled accounts receivables. Borrowings
under the North Coast Credit Facility are collateralized by substantially all
assets of the Company and a second position on the mortgage on the Company's Ann
Arbor facility. Management anticipates that all other terms and conditions of
the borrowing arrangement will be agreed to in the third quarter.

The Company's wholly owned subsidiary, Optimation, is party to a loan and
security agreement with Compass Bank, an Alabama-based bank (the "Optimation
Loan Agreement"). The Company and Compass Bank have been renewing the Optimation
Loan Agreement on consecutive 90 to 180 day revolving bases since the Company
acquired Optimation in March 2001. The Optimation Loan Agreement, last amended
as of April 3, 2003, provides for a total line of credit of $225,000 that
reduces in amount with all principal repayments made (the "Optimation credit
facility"). The amount available under the Optimation credit facility is limited
by a borrowing formula that allows for advances up to a maximum of the sum of a
specified percentage of eligible accounts receivable and a specified amount of
inventory. Amounts borrowed under the Optimation line of credit facility total
$153,750 at June 30, 2003, and such borrowings bear interest at the prime rate
plus .50% (5.0% effective rate at June 30, 2003), but not less than 5.0% per
annum. The Optimation Loan Agreement requires monthly repayments of $15,000

                                       7
<PAGE>

during its term now extending to October 3, 2003, and prohibits the transfer of
funds from Optimation to the parent company except for customary inter-company
cost reimbursements. The Optimation line of credit is collateralized by
substantially all assets of Optimation and a guaranty by Nematron. Management
expects that the facility will be renewed on or about October 3, 2003 on
substantially the same terms and conditions as the current facility until the
balance of the line is repaid in full.


Note 7 -Subordinated Debt

Subordinated debt consists of the following:
                                                        June 30,    December 31,
                                                          2003          2002
                                                          ----          ----
       Convertible subordinated promissory notes,
       interest at 10% per annum, due August 31, 2001.
       Accrued interest and the principal of the note
       may be converted into common stock at the lower
       of $0.09 per share or the lowest price of the
       underlying common stock during the period
       the notes are outstanding.                      $1,200,000    $1,200,000

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

       Convertible subordinated promissory notes,
       interest at 14% per annum, due on demand. The
       notes may be converted into preferred stock
       during the period the notes are outstanding,
       and the terms of the preferred stock, if issued,
       would allow the holders to convert the
       preferred stock into common stock on a
       one-for-one basis.                               2,732,500     1,779,000
                                                       ----------    ----------
       Total                                           $4,312,500    $3,179,000
                                                       ==========    ==========

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

The 14% Subordinated Promissory Notes
-------------------------------------
The 14% subordinated promissory notes due on demand (the "14% Notes") were
issued pursuant to an agreement initially dated in October 2001 and modified in
March and October 2002. The modified agreement allows the Company to draw up to
$3 million upon request and upon approval by the 14% Note holder upon its sole
discretion. In the event of any equity financing by the Company, the 14% Note
holder may convert any or all of the outstanding principal of the 14% Note and
accrued interest thereon into the securities offered in such financing at the
offering price per share. The modified agreement further provides that the
principal and accrued interest payable under the 14% Note may be converted in
whole or part into either shares of Common Stock or shares of Series A Preferred
Shares beginning on September 1, 2002 at $0.10 per share. Provisions of the


                                       8
<PAGE>

Series A Preferred Shares include: a) participation in dividends, if any, with
the Common Stock shareholders; b) a liquidation preference up to the initial
purchase price of the Series A Preferred Shares; c) a conversion feature
allowing conversion into Common Stock on a one-to-one basis; d) full voting
powers; e) the right to elect one person to the Board of Directors; f) the
consent of a majority in interest of the Series A Preferred will be required to
(i) purchase or redeem any Common or Preferred Stock, (ii) authorize or issue
any senior or parity securities, (iii) declare or pay dividends on or make any
distribution on account of the Common Stock, (iv) merge, consolidate or sell or
assign all or substantially all of the Company's assets, (v) increase or
decrease authorized Preferred Stock and (vi) amend Articles or Incorporation to
change the rights, preferences, privileges or limitations of any Preferred
Stock; g) the conversion price for the Series A Preferred shall be subject to
proportional antidilution protection for stock splits, stock dividends, etc. and
in the event that the Company issues additional shares of Common Stock or Common
Stock equivalents (other than shares issues to officers or employees of the
Company pursuant to plans approved by the Company's board of directors) at a
purchase price less than the applicable Series A Preferred conversion price, the
Series A Preferred Stock conversion price shall be adjusted to that same lower
purchase price; and h) each holder of Series A Preferred Stock shall have the
right to participate in any Company financing up to its pro-rata ownership.

The 14% Notes sold included detachable warrants. The warrants, which are
non-assignable, initially allowed the holders to purchase Common Stock at $0.10
per share (the "Per Share Warrant Price") in an amount of 20% of the principal
of the 14% Notes and accrued interest thereon for a period of five years from
the date of the advance (the "Warrants"). If at any time prior to the exercise
of the Warrants the daily closing price of the Common Stock, as traded on the
American Stock Exchange, falls below the Per Share Warrant Price for five
consecutive days, the Per Share Warrant Price will be adjusted downward to the
lowest price during such five trading day period. As the lowest price per share
has been $0.05, the Per Share Warrant Price has been adjusted to that amount. In
connection with the October 2002 modification the securities into which the
Warrants could be converted were allowed to be converted into either Series A
Preferred Stock as described above in addition to Common Stock.

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

A total of $750,000 of the 10% Notes and all of the 8% Notes and 14% Notes were
issued to individuals or affiliates who were members of the Board of Directors
at the date of issuance. On July 31, 2003, Mr. Hugo Braun, a partner of North
Coast, resigned as a Board member.  At June 30, 2003, a total of $608,110 of
interest has been accrued for convertible subordinated promissory notes,
including $506,493 related to notes due to related parties.


                                       9
<PAGE>

Note 8 - Long-Term Debt

Long-term debt includes the following debt instruments at June 30, 2003 and
December 31, 2002:

                                                   June 30,         December 31,
                                                     2003              2002
                                                     ----              ----
      Variable rate term loan payable to a
      bank, interest at prime plus 3.5% per
      annum (7.5% effective rate at June 30,
      2003), payable in monthly installments
      of $31,000 through October 2005, at
      which time the remaining principal and
      interest is due. The term loan is
      collateralized by a mortgage on the
      Ann Arbor facility.                         $2,579,964        $2,663,056

      Other notes, secured by equipment               22,487            28,939
                                                  ----------        ----------
      Total long-term debt                         2,602,451         2,691,995
      Less current maturities                       (171,221)         (169,255)
                                                  ----------        ----------
      Long-term debt, less current maturities     $2,431,230        $2,522,740
                                                  ==========        ==========

Note 9 - Income Taxes

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


Note 10 - Stock Based Compensation

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

                                                     Three Months Ended June 30,
                                                     ---------------------------
                                                          2003         2002
                                                          ----         ----
      Net loss, as reported                            $(671,181)    $(961,189)
      Deduct:  Total stock-based employe
        compensation expense determined under
        fair value-based method for all awards,
        net of tax                                       (45,170)      (67,187)
                                                       ---------     ---------
          Pro forma net loss                           $(716,351)  $(1,028,376)
                                                       =========   ===========

      Loss per share:
        Basic and diluted, as reported                    $(0.04)       $(0.06)
        Basic and diluted, pro forma                      $(0.05)       $(0.07)

                                       10
<PAGE>

                                                       Six Months Ended June 30,
                                                       -------------------------
                                                          2003             2002
                                                          ----             ----
      Net loss, as reported                           $(1,470,729)  $(1,154,110)
      Deduct:  Total stock-based employee
        compensation expense determined under
        fair value-based method for all awards,
        net of tax                                        (99,957)     (133,753)
                                                      -----------   -----------
          Pro forma net loss                          $(1,570,686)  $(1,287,863)
                                                      ===========   ===========
      Loss per share:
        Basic and diluted, as reported                     $(0.09)       $(0.07)
        Basic and diluted, pro forma                       $(0.10)       $(0.08)


Note 10 - Loss Per Share

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

For the three- and six-month periods ended June 30, 2003 and 2002, outstanding
options and warrants were not included in the computation of diluted loss per
share because the inclusion of such securities is antidilutive. Information
relative to the excluded options and warrants is as follows:

                          Outstanding Options           Outstanding Warrants
                        -------------------------     -------------------------
                                     Expiration                    Expiration
     Quarter Ended       Amount         Dates          Amount         Dates
     -------------      ---------    ------------     ---------    -----------

     June 30, 2003      1,795,850    2005 to 2011     7,025,000    2006 to 2008
     June 30, 2002      2,162,942    2003 to 2011     2,286,882    2002 to 2006


     Six Months Ended
     ----------------
     June 30, 2003      1,795,850    2005 to 2011     7,025,000    2006 to 2008
     June 30, 2002      2,162,942    2003 to 2011     1,887,822    2002 to 2006



                                       11
<PAGE>

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

Three- and Six Month Periods Ended June 30, 2003 Compared With The
------------------------------------------------------------------
Three- and Six-Month Periods Ended June 30, 2002
------------------------------------------------

         Net revenues for the three- and six-month periods ended June 30, 2003
decreased $528,000 (14.6%) and $1,714,000 (21.1%), respectively, to $3,089,000
and $6,423,000, respectively, compared to the same periods last year. The net
revenue decrease in the three- and six-month periods ended June 30, 2003
compared to the prior year period results from lower sales of all product lines
except bundled Industrial Control Computers ("ICCs"), which increased 231% and
142%, respectively. Generally, revenues from non-bundled ICCs and other hardware
control products, system integration services, repair services and software
licenses for the three- and six-month periods ended June 30, 2003 were below the
prior year periods as customers have continued to restrict their capital
spending. In addition, revenues from software licenses in the six-month period
ended June 30, 2002 included a significant sale of software licenses to one
customer/end user pursuant to a program that was not extended by the customer
beyond 2002. Finally, revenues from system integration services in the six-month
period ended June 30, 2002 included revenue recognized from one customer for
certain application services performed in 2001 and 2000, the revenue from which
was previously not recorded pending certainty of collection. Management expects
that net revenues for the last six months of 2003 will 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, 2003
decreased $28,000 (3.6%) and $817,000 (36.8%), respectively, to $754,000 and
$1,403,000, 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, 2003 was 24.4% and 21.8% respectively, compared to 21.6% and 27.3% in the
same periods last year. The increase in gross profit percentage in the
three-month period ended June 30, 2003 results from lower material costs, lower
software amortization costs and lower personnel costs in the current period
compared to the year ago period. The decrease in gross profit percentage in the
six-month period ended June 30, 2003 results from these same factors, offset by
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 2003 as the mix of sales in the remaining two
quarters of 2003 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.

         Software development expenses for the three- and six-month periods
ended June 30, 2003 decreased $78,000 (46.0%) and $220,000 (61.6%),
respectively, to $92,000 and $137,000, respectively, compared to the same
periods last year. The decreases are attributable to smaller development staffs
and lower overhead and other fixed costs. Management expects that product
development expenses will increase moderately in the remaining quarters of 2003
as development and enhancement efforts are planned to increase moderately.

         Selling, general and administrative expenses for the three- and
six-month periods ended June 30, 2003 decreased $183,000 (14.6%) and $273,000
(10.7%) to $1,069,000 and $2,272,000, 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 two years. Management expects that selling, general and administrative
expenses will increase moderately in the remaining quarters of 2003 because of
an expansion of its marketing and sales initiatives compared to current
activities as management anticipates several new product releases during the
remaining months of 2003.

         Interest expense for the three- and six-month periods ended June 30,
2003 decreased $64,000 (19.2%) and $21,000 (4.4%), respectively, to $271,000 and


                                       12
<PAGE>

$476,000, respectively, compared to the comparable periods last year. Interest
expense for the three- and six-month periods ended June 30, 2003 includes
$37,000 of non-cash interest expense related to the beneficial conversion
feature of warrants sold in 2003 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 $1,134,000. Interest expense for the three- and six-month
periods ended June 30, 2001 includes $153,000 and $154,000 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. Absent
the non-cash charges for the beneficial conversion features described above,
interest expense for the three- and six-month periods ended June 30, 2003 would
have increased $52,000 and $95,000, respectively, compared to the comparable
2002 periods, resulting from higher borrowing levels in 2003 compared to 2002.
Management expects that interest expense will increase in the remaining quarters
of 2003 because of anticipated higher borrowing levels.

         Sundry income was not significant in either reported period.

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

         Primary sources of liquidity are advances under subordinated debt
agreements and the Company's secured lines of credit. As of June 30, 2003, the
Company had $1,466,710 outstanding under its lines of credit and no additional
borrowing capacity available under those credit lines. However, since June 30,
2003, the Company has repaid all amounts owed to LBCI under its terminated lines
of credit and entered into a new credit facility with North Coast as its senior
lender. The Company's operations used $1,098,000 in cash during the first six
months of 2003 as a result of the net loss and the effects of changes in working
capital and the noncash depreciation and amortization and interest charges.
During the first six months of 2003, the Company also used $8,000 for property
additions, $90,000 for payments of long-term debt and increased its borrowings
under its lines of credit by $69,000. Primary sources of cash in the first
quarter of 2003 were $1,134,000 from proceeds from sales of subordinated
promissory notes and warrants.

         Management believes that the Company will incur net cash losses during
the next two quarters even if it continues to defer payment of the principal
amount of subordinated debt and the accrued interest thereon. Based upon this
projection, the Company will be in a net borrowing position and will need to
sell additional subordinated debt and warrants to sustain operations.

         The Company had not been in compliance with the tangible net worth,
interest coverage and debt service coverage covenants under the LBCI line of
credit Agreements since June 2001. LBCI had issued forbearance letters to the
Company concerning these covenant violations wherein LBCI specifically reserved
its right to take any action permitted under the Agreements in the future
without any notice to the Company. On July 31, 2003, the Company repaid the
lines of credit from LBCI in total and entered into a new credit agreement with
North Coast which has expanded the Company's ability to borrow under a line of
credit arrangement by increasing the maximum line and including un the borrowing
formula the Company's unbilled accounts receivable.

         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 term
debt of approximately $18,000 per month, plus interest. Additionally, all of the
subordinated debt, $4,312,500 plus accrued interest thereon as of June 30, 2003,
is due currently.

         Management is attempting to complete as soon as practical a private
placement of subordinated debt to accredited investors, the proceeds of which
would be applied to reduce the North Coast line of credit debt and other current
liabilities plus any new liabilities arising from operations. Management can
offer no assurance that it can secure sufficient alternative working capital
facilities or that a private placement of subordinated debt will be successful.
Additionally, management can offer no assurance that if the Company is
successful in securing alternative working capital facilities, or if the private
placement of subordinated notes should occur, that the funds raised will be


                                       13
<PAGE>

sufficient to fund future operations. If the efforts to secure alternative or
additional capital are not successful, the Company will not have sufficient
liquidity to satisfy its liabilities and obligations as they become due and it
may be forced to curtail operations, sell product lines or sell the Company to a
third party.

Uncertainties Relating to Forward Looking Statements
----------------------------------------------------

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

-- Uncertainties discussed elsewhere in "Management's Discussion and Analysis of
   Operation" above;
-- The potential inability to raise additional equity or debt financing in a
   sufficient amount to sustain operations and allow management to execute its
   strategies;
-- Continued forbearance by the subordinated debt holders in exercising their
   right to demand immediate payment of all subordinated debt and accrued
   interest thereon;
-- Continued cooperation of the Company's vendors in accepting payment beyond
   such vendors' normal payment terms;
-- A further decline of economic conditions in general and conditions in the
   automotive manufacturing industry in particular;
-- Delays in introduction of planned hardware and software product offerings;
-- Reductions in product life cycles;
-- Changes in customer requirements or reductions in demand for the Company's
   products and services;
-- The inability of the Company to successfully implement its strategy to
   participate effectively in the industrial automation market migration from
   closed architecture PLCs to open architecture PC-based solutions or to
   effectively changes its corporate strategy to capitalize on market changes.



Item 3.      Controls and Procedures

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



                                       14
<PAGE>


                           PART II - OTHER INFORMATION


Item 6.    Exhibits and Reports on Form 8-K

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

(b)      During the quarter ended June 30, 2003, the Company filed a report on
         Form 8-K concerning its press release dated May 16, 2003 concerning its
         first quarter ended March 31, 2003 operating results.


                                   SIGNATURES

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


                                            Nematron Corporation


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


August 14, 2003                             /s/ Tina M. Raiford
---------------                             -------------------
Date                                        Tina M. Raiford, Controller


                                       15
<PAGE>




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


I, Matthew S. Galvez, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Nematron Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
   material fact or omit to state a material fact necessary to make the
   statements made, in light of the circumstances under which such statements
   were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
   information included in this report, fairly present in all material respects
   the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
   a)  Designed such disclosure controls and procedures, or caused such
       disclosure controls and procedures to be designed under our supervision,
       to ensure that material information relating to the registrant, including
       its consolidated subsidiaries, is made known to us by others within those
       entities, particularly during the period in which this report is being
       prepared;
   b)  Evaluated the effectiveness of the registrant's disclosure controls and
       procedures and presented in this report our conclusions about the
       effectiveness of the disclosure controls and procedures, as of the end of
       the period covered by this report based upon such evaluation; and
   c)  Disclosed in this report any change in the registrant's internal control
       over financial reporting that occurred during the registrant's most
       recent fiscal quarter that has materially affected, or is reasonably
       likely to materially affect, the registrant's internal control over
       financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our
   most recent evaluation of internal control over financial reporting, to the
   registrant's auditors and the audit committee of the registrant's board of
   directors:
   a)  All significant deficiencies and material weaknesses in the design or
       operation of internal control over financial reporting which are
       reasonably likely to adversely affect the registrant's ability to record,
       process, summarize and report financial information; and
   b)  Any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       controls; and


Date: August 14, 2003


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


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

                                       16
<PAGE>


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


I, Tina M. Raiford, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Nematron Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
   material fact or omit to state a material fact necessary to make the
   statements made, in light of the circumstances under which such statements
   were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
   information included in this report, fairly present in all material respects
   the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
   a)  Designed such disclosure controls and procedures, or caused such
       disclosure controls and procedures to be designed under our supervision,
       to ensure that material information relating to the registrant, including
       its consolidated subsidiaries, is made known to us by others within those
       entities, particularly during the period in which this report is being
       prepared;
   b)  Evaluated the effectiveness of the registrant's disclosure controls and
       procedures and presented in this report our conclusions about the
       effectiveness of the disclosure controls and procedures, as of the end of
       the period covered by this report based upon such evaluation; and
   c)  Disclosed in this report any change in the registrant's internal control
       over financial reporting that occurred during the registrant's most
       recent fiscal quarter that has materially affected, or is reasonably
       likely to materially affect, the registrant's internal control over
       financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our
   most recent evaluation of internal control over financial reporting, to the
   registrant's auditors and the audit committee of the registrant's board of
   directors:
   a)  All significant deficiencies and material weaknesses in the design or
       operation of internal control over financial reporting which are
       reasonably likely to adversely affect the registrant's ability to record,
       process, summarize and report financial information; and
   b)  Any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       controls; and


Date: August 14, 2003


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


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

                                       17
<PAGE>




                               INDEX TO EXHIBITS

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

  4.1      Amendment dated July 15, 2003, to the Amended and Restated Loan and
           Security Agreement dated as of June 30, 2000 between the A-OK
           Controls Engineering, Inc. and LaSalle Business Credit, Inc.

  4.2      Amendment, dated July 15, 2003, to the Amended and Restated Loan and
           Security Agreement dated as of June 30, 2000 between the Company and
           LaSalle Business Credit, Inc.

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




                                       18
<PAGE>