105
                          UNITED STATES
               SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C.  20549
                                
                            FORM 10-K

     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
          OF THE SECURITIES EXCHANGE ACT OF 1934

          For the period ended     December 31, 1998
                               OR
     [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934

          For the transition period from ______ to ______
                                
                 Commission file Number 0-12965
                                
                          NESTOR, INC.
     (Exact name of registrant as specified in its charter)

      DELAWARE                                 13-3163744
(State of incorporation)                     (I.R.S. Employer
                                             Identification No.)
                                
       One Richmond Square, Providence, Rhode Island 02906
       (Address of principal executive offices) (Zip Code)
                                
                         (401) 331-9640
      (Registrant's Telephone Number, Including Area Code)
                                
   Securities registered pursuant to Section 12(b) of the Act:
                              NONE
                                
   Securities registered pursuant to Section 12(g) of the Act:
                  Common Stock, $.01 Par Value
                        (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period than the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                
                     Yes        X        No

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.          X

                                    Exhibit Index is on Page:

The  aggregate  market value of the voting  stock  held  by  non-
affiliates of the registrant, based on the average bid and  asked
prices  of  such  stock on March 12, 1999  was  $5,412,000.   The
number of shares outstanding of the Registrant's Common Stock  at
March 12, 1999 was 17,499,327.

DOCUMENTS INCORPORATED BY REFERENCE.

Information  to be included in registrant's definitive  proxy  or
information statement to be filed with the Commission  not  later
than  120 days following the end of registrant's fiscal  year  is
incorporated by reference in Part III of the Form 10-K.





ITEM 1.    Business

Prospective Statements

The   following   discussion  contains   prospective   statements
regarding  Nestor,  Inc. and its subsidiaries ("Nestor"  or  "the
Company"),  its business, outlook and results of operations  that
are subject to certain risks and uncertainties and to events that
could  cause the Company's actual business, prospects and results
of  operations  to  differ materially  from  those  that  may  be
anticipated  by, or inferred from, such prospective   statements.
Factors that may affect the Company's prospects  include, without
limitation:,  the Company's ability to successfully  develop  new
contracts  for technology development; the impact of  competition
on  the  Company's  revenues  or  market  share;  delays  in  the
Company's  introduction  of  new products;  and  failure  by  the
Company to keep pace with emerging technologies.

Readers  are  cautioned  not to place  undue  reliance  on  these
prospective statements, which speak only as of the date  of  this
report.   The  Company  undertakes no obligation  to  revise  any
forward-looking  statements  in  order  to  reflect   events   or
circumstances that may subsequently arise.  Readers are urged  to
carefully review and consider the various disclosures made by the
Company  in  this report and in the Company's reports filed  with
the Securities and Exchange Commission.

General

Nestor, Inc. designs, develops, markets, and supports intelligent
software solutions for mission-critical decision applications  in
real-time   environments.   Nestor  employs  proprietary   neural
network  predictive models to convert existing data and  business
experiences  into  meaningful recommendations and  actions.   The
Company  has  leveraged its neural-network software  architecture
across  a  wide range of markets, including financial-institution
credit/debit card fraud, database marketing and real-time traffic-
control  systems.   In addition, the Company  believes  that  its
technology   and  software  architecture  are  well  suited   for
intelligent decision applications addressing a variety  of  other
markets,  including health care payments and  long  distance  and
mobile phone fraud applications.

Background

The  Company  was  incorporated under the laws of  the  State  of
Delaware  on  March  21, 1983, in order to exploit,  develop  and
succeed  to  certain patent rights and know-how relating  to  the
Nestor  Learning System(Tm) ("NLS"), which the Company  acquired  in
1983   from   its  predecessor  Nestor  Associates,   a   limited
partnership.   NLS  is  an  adaptive or self-organizing  software
system, commonly referred to as a neural network, that is capable
of  extracting  the  salient features of input  patterns  without
being  told  what  features  to  look  for  and  of  subsequently
recognizing similar patterns identified by such features.   Thus,
NLS can be said to learn from its experience.

On   January  1,  1997,  Nestor,  Inc.  formed  two  wholly-owned
subsidiaries:  Nestor  Traffic Systems, Inc.  (Traffic  Systems),
formerly   Nestor   Intelligent   Sensors,   Inc.,   and   Nestor
Interactive,  Inc. (Interactive).  Traffic Systems  develops  and
markets  the  TrafficVision(R), CrossingGuard(R) and  the  Ni1000
product  lines while Interactive developed InterSite, an internet
commerce solution.

Nestor   offers  complete  application-software  solutions   that
include  adaptive  decision  models,  implementation,  education,
training,   consulting,   processing  and   engineering   support
services.   Current Nestor software products detect  credit/debit
card,  merchant  and  other  forms of fraud  (PRISM(R)),  provide
remote   traffic  management  of  freeways  (TrafficVision)   and
intersections (CrossingGuard), provide intelligent, organization-
wide  marketing  campaign  management (CampaignOne(TM)),  provide
responsive  on-line  information to internet  Web  site  visitors
(InterSite)  and  provide much greater efficiencies  in  document
processing   and  fax  distribution  environments  (NestorReader,
OmniTools  and N'Route, which were licensed to National  Computer
Systems  in June 1996).  Nestor's software solutions are designed
for  client-server implementation and flexible  integration  with
customers' existing computing infrastructures.  Installation time
periods  for  the  Company's software solutions depend  upon  the
particular product involved, and can take as little as three days
or  as  long  as  six  months. The Company  believes  that  PRISM
customer  payback  periods for license, installation,  and  first
year user fees are typically less than one year.

The  Company  designs and develops specialized software  products
utilizing  its  proprietary  software and  information-management
knowledge,  and, to a lesser degree, designs hardware  components
that will enhance the performance of its software products.   The
Company's  products  comprise  the  following  categories:  Fraud
Detection  and  Risk  Assessment  Systems   -  are  designed   to
effectively  detect  and  control  fraudulent  transactions   for
financial  institutions  that  issue  credit,  debit,  or   other
financial use cards.  CampaignOne was introduced in 1998  to  the
financial  services  customers of the Company  as  a  back-office
marketing  solution that can manage programs  ranging  from  risk
evaluation  (bankruptcy) to marketing strategies. The Company  is
evaluating  the  expansion  of these  product  technologies  into
additional  applications  such  as  health-care  payments,  long-
distance telephone fraud and mobile-phone service theft.  Traffic
Management  Systems  - are a combination of internally  developed
software   and  internally  and  externally  developed   hardware
components that perform as a traffic management system  for  open
road and intersection applications.  The products enable dual use
of  video  networks  to  support both  traffic/roadway  data  and
surveillance.   Internet Web Server Systems  -  are  designed  to
synthesize  information  from multiple  data  sources  within  an
organization and provide content to present to Web site  visitors
based   on  the  current  state  of  the  visitor's  information.
Intersite's purpose is to provide scores of site visitors,  which
are  useful  in predicting the purchasing behavior  of  visitors.
Intelligent Character Recognition Systems   - include packages of
software  applications  such  as  OmniTools,   NestorReader,  and
N'Route  which  increase productivity in document processing  and
fax distribution environments.

Fraud Detection and Risk-Assessment Systems

The  Company's  PRISM  product line  includes  the  Nestor  Fraud
Detection  System  (FDS(TM)) and the flagship product,  Proactive
Risk Management (PRISM) system which have been licensed to twelve
financial-services  clients  as  of  December  31,  1998.   These
systems  can detect bank-card or credit-card fraud,  and  can  be
readily  updated  by  clients to adapt to  changing  patterns  of
fraudulent   transactions.   By  monitoring   each   cardholder's
historical   and  current  transactions,  PRISM  is  capable   of
detecting unusual patterns of card use and of rapidly detecting a
significant  proportion  of  fraudulent  transactions   with   an
extremely low error rate.  Customers have reported a reduction of
more  than  50% in their credit-card fraud loss experience within
30 days of installation.

In  March 1993, the Company completed the installation of its FDS
product at Mellon Bank.   The success of the FDS installation  at
Mellon  has been instrumental in obtaining additional orders  for
FDS  and PRISM.  Like many other credit-card issuers, Mellon Bank
had  been using a rule-based system for fraud detection.   Mellon
has  reported  to  the Company that FDS found 20  times  as  many
instances  of  fraud as their rule-based system, while  requiring
reviews of only one-third as many accounts.

In   December   1994,  the  Company  installed  a  merchant-fraud
detection  system at Europay International S.A.,  a  Master  Card
affiliated  association  of 700 banks that  settle  international
bank-card  transactions involving currency exchange.   Experience
with  United  Kingdom and Belgium banks indicates  a  counterfeit
detection rate of up to 50%.

In  February 1995, the Company announced PRISM.  PRISM   enhances
the  fraud-detection  capabilities of  FDS  to  include  workflow
management  and  other  PC-based  productivity  tools  that   are
designed  to enable the fraud manager and fraud-control  team  to
efficiently  identify and track frauds detected  by  the  system.
The  initial PRISM system was an upgrade to FDS installed at G.E.
Capital  Consumer  Financial Services; the  upgrade  incorporated
PRISM in 1995.

During 1997, the Company expanded its PRISM product line with the
introduction   of   PRISM   Debit   (Debit),   PRISM   Bankruptcy
(Bankruptcy), and PRISM Credit (Credit).  Debit is an intelligent
risk  management system that detects, monitors, responds  to  and
prevents  off-line debit card fraud.  Bankruptcy is a  bankruptcy
decision-support system that provides transaction-level  analysis
of  each  account and enables card issuers to better manage  risk
while  increasing portfolio profitability.  Credit  is  a  multi-
faceted  fraud detection system that dramatically reduces  losses
associated with credit and retail card application fraud.

The  following are the primary attributes of the Fraud  Detection
and Proactive Risk Management Systems:

Flexible  neural-network decision engine.  The Company's software
implements  a  powerful, patented neural-network  technology  for
adaptive  fraud detection that is accurate, fast, field-trainable
and operates in real-time.  The neural-network and rule-bases are
provided  through software that allows the Company's products  to
be  customized  to  fit the customers needs and profiles  without
extensive  custom programming.  Unlike other rule-based  systems,
the  Company's products learn from the experience of the specific
customer  accounts instead of applying "industry"  experience  to
the  customer's  environment.   The  Company's  software  can  be
rapidly trained to look for customer-specific fraud potential  by
requiring  as  few as three training passes through a  customer's
data.    The  system  automatically  adapts  itself  for  problem
complexity  and  maximizes the detection of  actual  fraud  while
minimizing false positive indications.

Automatic  and ongoing learning ability.  The Company's  software
is   trained  to  detect  fraudulent  patterns  based  upon   the
customer's own historical data.  Subsequent to installation,  the
software continues to update its records for current patterns and
automatically modifies its predictive model to respond  to  fraud
pattern  changes  in  the customer's user base  and  environment.
Other  competitive systems may require extensive updating of  the
software to reflect current industry or customer experience.  The
Company's  software allows the client to operate  with  the  most
current  and  customer-specific database  possible,  with  simple
updates entirely under client control.

Quick return on initial investment to customers.  Due in part  to
customizing  the  PRISM software to react based upon  a  client's
specific fraud experience, the product has resulted in fraud loss
savings  of  greater than 50% at G.E. Capital Consumer  Financial
Services  and  over  50%  in  counterfeit  detection  at  Europay
International  S.A..  Performance at this level would  provide  a
customer experiencing average industry fraud losses a payback  on
their first year installation and use fees of approximately  four
to six months.

On-line,  transaction-based capability.   Nestor's  software  can
provide   an  immediate,  situation-specific  response  to   each
customer   transaction.   For  example,  the  PRISM  system   can
immediately  detect  and report fraudulent  activity  within  the
first one or two transactions, rather than within one or two days
of transactions.

Flexible   client-server  and  operating   solutions.    Nestor's
solutions   can   be   integrated  into  a  customer's   existing
environment  or architecture.  The Company's products  are  based
upon  a  distributed  client-server  architecture  consisting  of
operating  components that operate on a wide  range  of  industry
standard,  client-server platforms, including the IBM,  MVS/CICS,
Tandem's proprietary, fault tolerant Non Stop Kernel (NSK),  UNIX
and  Windows  NT  operating platforms.  PRISM  also  provides  an
analysis  environment consisting of: a user-friendly, MS Windows-
compatible    graphical   user   interface,   an   "open-systems"
architecture  that  is  easily  adapted  to  a  client's  working
environment,  fully  integrated  work  flow  tools  for  enhanced
productivity,  customizable reporting tools, and  in-depth  fraud
analysis and system maintenance tools.


Nestor's Fraud Detection and Risk Assessment Strategy

The  Company's  objectives are: to deliver high quality  products
and  services using proprietary neural-network technology to  the
banking,  retail,  telecommunications and health-care  management
industries, and to accrete a growing revenue stream from  ongoing
product  usage fees.  The Company's strategy for achieving  these
objectives includes the following key elements:

Expand current distribution network.  The Company plans to expand
its worldwide direct sales, distribution and service forces.  The
Company  intends  to continue developing domestic  markets  while
augmenting  its  international growth.  Nestor  executed  a  non-
exclusive PRISM reseller agreement with CSK Corporation in  Japan
during  1996  (See  "Licensing,  Joint  Venture  and  Development
Agreements).   The Company also intends to increase direct  sales
efforts in North America through expansion of direct sales  staff
and  through  marketing and service agreements  with  established
providers  of  products and services to its target  markets.   On
April  18,  1997, the Company expanded its non-exclusive  license
agreement  with Applied Communications, Inc. (ACI), a  subsidiary
of  Transaction  Systems Architects, Inc.,  by  allowing  ACI  to
distribute the newly developed PRISM products and other  products
of  the  Company  throughout  its  worldwide  sales  and  support
network.    (See   "Licensing,  Joint  Venture  and   Development
Agreements".)

Earn  recurring revenues through on-going fees based upon product
usage.   The  Company's  products provide immediate  and  ongoing
savings  to  the client through a reduction in the occurrence  of
undetected  fraud losses.  The Company has priced its product  to
include  upfront  fees  for licensing and  installation,  thereby
providing  an  attractive  payback  of  the  customer's   initial
investment as discussed above, and including an ongoing usage fee
based  upon the number of customer transactions or accounts being
reviewed  by  the  software.   This  ongoing  revenue  stream  is
expected  to  grow as new customers install the product.   Future
growth  may also result from the customer's  internal  growth  in
the  number  of  transactions or accounts being reviewed  by  the
software.

Apply  PRISM  products to other markets.   The  Company  believes
that  many markets exist which are experiencing fraud type losses
and   possess  data  characteristics  similar  to  the  financial
institution industry.  The Company plans to extend the  successes
of  the  PRISM  product in credit-card fraud detection  to  other
areas with a high level of  transactions and a history of similar
fraud-type  loss experience.  Some of these market  opportunities
may  include  internet  market fraud  losses,  health-care  claim
payments and long-distance telephone fraud.  Nestor's strategy is
to  broaden  its  product offerings to address these  markets  in
conjunction  with  development funding from strategic  government
and industry sources.

Offer   new   products  leveraging  current  services,   customer
knowledge and relationships.  During 1998, the Company introduced
CampaignOne, a comprehensive customer relationship and  marketing
campaign   management   solution   designed   to   maximize   the
effectiveness  and  efficiency of  marketing  campaigns  for  all
aspects  of  financial  opportunity from:  customer  acquisition,
retention   cultivation   and  overall  customer   profitability.
CampaignOne  can be basic decision tree models delivered  by  the
customer  or  utilize  the  Company's  customized  neural-network
models.


Traffic Management Systems

TrafficVision  and CrossingGuard products are  a  combination  of
Company-developed software and modular hardware  components  that
provide  for remote monitoring to support traffic data collection
and control of traffic flows.  The product is flexible and can be
configured to a wide range of road configurations, including open
roads   and   intersections.   Features  include   remote   video
monitoring, real-time vehicle classification, individual  vehicle
tracking,  simultaneous communication of video and  traffic  data
over a single communication network, detection and enforcement of
red-light violators, and generation and logging to a database  of
a variety of traffic-information measurements.

Historically,  traffic sensing and control has  been  handled  by
wire induction loops buried beneath the road surface.  The system
provides basic information such as vehicle counts and speed (with
multiple  loop  configurations), in support of  the  function  of
controlling traffic light signals when traffic is present.   Such
loops  experience nearly a 100% failure rate within the first  10
years of operation.  Replacement/repair is often not performed or
performed long after loop failure due to the high cost of digging
up the roadway.

TrafficVision provides all the benefits currently offered by loop
systems  and  substantial additional options  that  increase  the
traffic    controller's   effectiveness   in   managing   traffic
congestion,   infractions,   and  accidents.    The   fact   that
TrafficVision operates completely above ground aids in  effective
maintenance.     CrossingGuard    applies    the    TrafficVision
technologies to make intersections safer and to enforce red-light
running  statues.  Using video, the system predicts if a  vehicle
will  or  will not stop at an intersection before a yellow  light
turns  red.   If  the system determines that a vehicle  will  not
stop,  the  system records the violation for ticket issuance  and
sends  a signal to the traffic light controller unit recommending
a delay in the change of light to green for cross traffic.

TrafficVision  is  designed to incorporate the  Company's  Ni1000
Recognition  Accelerator(R)  hardware  chip  (See  "Ni1000  Chip"
below).

Development of a working TrafficVision prototype model  commenced
on  September  1,  1995, in conjunction with a funding  agreement
with California Institute of Technology Jet Propulsion Laboratory
(see  "Licensing,  Joint  Venture, and Development  Agreements").
The project was completed in December 1996.  The Company began  a
Phase II contract for field testing of the prototype in 1997  and
expects to complete this work in the second quarter of 1998.

In  February  1998, the Rhode Island Department of Transportation
(RIDOT)  formally  opened  its  new  Operations  Center.   As  an
integral part of that facility, TrafficVision is providing  real-
time  traffic  management  capabilities  which  assist  RIDOT  in
improving  safety,  monitoring traffic flow, managing  congestion
and planning for maximum highway efficiency.

The first CrossingGuard application commenced in Vienna, Virginia
in 1998 and is expected to be operational in April 1999.

The following are the primary attributes of the Company's Traffic
Management Systems:

Accurate, real-time interpretation of traffic video images.   The
Company has leveraged its patented neural-network decision engine
discussed  above in Fraud Detection to the application  of  real-
time  processing  and  learning in the  context  of  video  image
interpretation   for  traffic  management  and  control.    Prior
industry  attempts  to provide video-based detection  of  traffic
have  not  proven  effective due to the difficulty  of  designing
robust  detection  algorithms under a  variety  of  illumination,
visibility  and  traffic  conditions, as  well  as  the  need  to
implement  such algorithms on cost-effective computing  platforms
that  provide  real-time operation.  The Company's neural-network
technology,  combined with its Ni1000 chip, discussed  below,  is
able  to interpret video images accurately and respond in a real-
time environment.

Rapid  deployment  and  increased services  for  customers.   The
Company's  software solutions are designed for  rapid  deployment
and  to  provide additional information to customers beyond  that
delivered   by   current   loop   systems.    TrafficVision   and
CrossingGuard are designed to be installed entirely above  ground
and  to  tie  into existing customer hardware where  appropriate.
Maintenance  becomes  more efficient than with  underground  loop
systems.   These  systems allow the customer to obtain  the  same
information and accuracy as is available through loop  technology
(e.g.  vehicle  count  and  detection for  signal  control),  and
additional benefits such as remote real-time video monitoring for
traffic  flow,  vehicle tracking, incidence response  video-based
red-light enforcement, and intersection safety.

Leverages  customer  investment in video  infrastructure.   State
traffic  departments  are  deploying roadside  video  cameras  to
provide  images of road and traffic conditions to  better  manage
traffic flows and incident response.  Nestor's Traffic Monitoring
Systems  are  designed  to support "dual  use"  of  pan-tilt-zoom
equipped  cameras  for  surveillance and  traffic  detection  and
monitoring, thus leveraging the customer's investment in existing
video   equipment.   Additionally,  Nestor's  solution   supports
simultaneous  video and data communication over  a  single  video
communication  network,  thus further leveraging  the  customer's
video infrastructure investment.

Compatibility with industry standard platforms.  Nestor's traffic
monitoring  solutions are architected around  dominant  industry-
standard  platforms: namely, the Windows 95/NT operating  system,
tools  and communication support components and general  "WinTel"
hardware  specifications.  This facilitates  integration  into  a
customer's existing computing environment, leverages PC economics
to  offer  a  compelling price/performance advantage  and  lowers
product   engineering  development  costs.    Additionally,   the
Company's Traffic Monitoring Systems are designed to support  the
emerging  NTCIP  communications standards being mandated  in  the
traffic  detector industry.  Further, roadside detector  stations
will  be  compatible  with existing and  new  traffic  controller
hardware, such as the CALTRANS 2070 controller standard.

Nestor's Traffic Management System Strategy

The  Company's objectives are to be the high-quality supplier  of
intelligent  video-based traffic monitoring  systems  to  replace
loop  detectors  at  those sites where video  has  advantages  in
either   functionality  or  cost  and  to  capture  new   traffic
monitoring  applications beyond the capability of  loop  detector
systems.   The Company's strategy for achieving these  objectives
contains the following key elements:

Expand national and worldwide distribution.  The Company plans to
target   leading  transportation  departments  (DOTs)   initially
through direct sales to provide convincing demonstrations of  the
products'  superior performance, to create performance  standards
based  upon enhanced functionality and to generate a market  pull
that  will  lead to volume distribution agreements  with  traffic
integrators and traffic equipment suppliers.  The Company intends
to  establish distribution agreements with domestic  and  foreign
traffic integrators and installers.

Maintain technology leadership and patent protection in developed
solutions.   As  noted  above, the Company  has  obtained  patent
protection  for  its  proprietary neural  networks  and  hardware
systems (see "Patents") which the Company believes to be uniquely
suited to applications that require field trainability  or  self-
modification  to adapt to new or changing patterns in  the  data.
The  Ni1000  chip allows for high-speed processing  applications,
such  as video-image processing, on a personal computer platform.
The   Company  continues  to  maintain  and  explore  new  patent
protection rights for its proprietary software applications.  The
Company  was  issued a new patent in fiscal  1996,  and  has  two
applications  pending  relating  to  its  work  in  the  traffic-
management areas.

Ni1000 Chip, PCI 4000 Recognition Accelerator Board and IBM ZISC
Chip

Neural  networks are inherently parallel systems whose operation,
until recently, has only been simulated on serial computers.  The
relative slowness of serial simulation has prohibited the use  of
neural networks in many high-value applications that require high-
speed   learning   and   recognition.   The  Ni1000   Recognition
Accelerator  chip  is  an embodiment of the Company's  technology
that increases typical processing speeds by hundreds of times and
is  expected to open these previously untapped markets to neural-
network solutions.  Manufactured by Intel and introduced  by  the
Company in June 1994,  the Ni1000 chip was developed with funding
by  the  Defense  Advanced  Projects Research  Agency  ("DARPA").
Commercial  delivery  of  Ni1000  chips  and  Ni1000  Development
Systems began in June 1994.  In April 1994, the Company and Intel
Corporation  signed an agreement that provided the  Company  with
exclusive marketing rights to the Ni1000 Recognition Accelerator,
subject  to  certain minimum purchases of the Ni1000  Recognition
Accelerator  by the Company.  (See "Licensing, Joint Venture  and
Development Agreements.")

In  connection  with  the development of the  Ni1000  Recognition
Accelerator, the Company and Intel were jointly named  as  winner
of  the 1994 Discover Awards for Technological Innovation in  the
category   of  Computer  Hardware  &  Electronics.   The   Ni1000
Recognition Accelerator was selected by the editors of Electronic
Design News as a finalist in their 1994 "Innovation of The  Year"
contest.

Continued   development  work  in  neural-network  hardware   was
centered  on  the  development  of a PC-compatible  circuit-board
incorporating  multiple  Ni1000  Recognition  Accelerators,   and
associated development-environment software.  Development of  the
circuit  board and software were funded, in part, by  a  contract
dated  August 26, 1993, between the Company and Office  of  Naval
Research  and  administered  by  the  Defense  Advanced  Projects
Research Agency of the Department of Defense ("DARPA").

PCI 4000 Recognition Accelerator Board

An  outgrowth of the Company's DARPA-funded development  work  is
the   PCI  4000  Recognition  Accelerator,  which  was  developed
cooperatively with Alta Technology Corporation.  The PCI 4000  is
a   circuit  board  containing  up  to  four  Ni1000  Recognition
Accelerators  and a Pentium controller, which is compatible  with
any  PC  or  workstation that provides PCI (Peripheral  Component
Interconnect) support.

IBM ZISCT Chip

On  January  31, 1996, the Company signed a technology  licensing
agreement   with   IBM  to  use  Nestor's  pattern    recognition
technology  in  an  IBM  developed  neural-network  semiconductor
device  called  the  ZISC  (see "Licensing,  Joint  Venture  and
Development Agreements").  The Company believes that the entry of
IBM  into the field of neural-network applications may assist the
Company in the marketing of its own hardware components.

Internet Web Server Systems

During 1996, the Company began development of an internet product
incorporating   the  neural-network  technology   called   Nestor
InterSite.  Nestor InterSite is server-side software that enables
the  Web  host  to  understand individual on-line  customers  and
dynamically present personalized content.

To  date, the Internet has largely been used as a medium for  the
broadcast  of  static  information.   Its  potential  for   truly
interactive   dialogs  has  not  been  realized.   However,   the
Internet,  or more specifically the World Wide Web, is undergoing
a  revolution.  New technologies are being introduced which  will
cause Internet web sites to become dynamic and personalized.

Nestor   InterSite will allow vendors to learn  about  their  web
visitor community, permitting the web host to tailor its products
and  services accordingly.  Vendors should retain more customers,
sell more products to those customers and identify customers  who
are interested in premium products and services.

In 1997, two customers selected InterSite for beta installations.
Lycos,  Inc. is a free, global Internet navigation and  community
network  which experiences millions of hits each day, and  Edward
Jones  is  the largest financial-services firm in the  nation  in
terms  of  offices  and is the only firm that  serves  individual
investors  exclusively.  The firm traces its roots to  1871,  and
today serves more than 2.5 million customers.

The Company has currently suspended further direct involvement in
marketing  and developing this product.  Product development  may
resume  if funded projects are requested by our current customers
or distributors.

Intelligent Character Recognition Products

On  June  11,  1996,  the Company licensed  the  development  and
marketing rights in its Intelligent Character-Recognition ("ICR")
products  (NestorReader,  OmniTools,  and  N'Route)  to  National
Computer  Systems,  Inc. ("NCS"), and is no  longer  involved  in
developing,   packaging  and  marketing   these   products   (see
"Licensing,  Joint  Venture  and Development  Agreements").   The
Company  receives royalties from the sales of these products  and
any  enhanced  versions of these products by the  licensee.   The
following  are the principal ICR products developed and  marketed
by  the Company through June 11, 1996, and marketed by NCS  since
then:

NestorReaderT

NestorReader  is a software product that is designed  to  perform
character  recognition from images of hand-printed  and  machine-
printed  characters in intelligent character recognition systems.
A  principal application of NestorReader has been to replace  the
human  process of reading data from forms and entering  the  data
into  computers by means of a keyboard.  NestorReader is licensed
to  original  equipment manufacturers, value-added resellers  and
systems   integrators   for  integration  into   image-processing
systems.   NestorReader extends the range  of  optical  character
recognition  to  include hand print and  faxed  characters  at  a
price/performance ratio that the Company believes is unequaled by
competitive  technologies.   In  optical  character  recognition,
existing  techniques  have successfully  solved  the  problem  of
reading    conventional,   clean,   machine-printed   characters.
Management  believes that hand printed characters -   with  their
high  degree  of variability - and faxed characters,  with  their
high  noise  level,  can  only  be read  satisfactorily  by  more
powerful technologies like NestorReader.

OmniTools(R)

OmniTools   is   a   software  product  that  enables   corporate
applications   developers   to  access   the   functionality   of
NestorReader  from within Windows applications without  the  need
for  C  programming. Developers need only use such familiar tools
as  Visual Basic or applications macro languages including Visual
Basic  for  Applications.  ICR  solutions can thus  be  developed
from  Access, Excel, Foxpro, Lotus 123, Paradox and other Windows
applications.  The Company began marketing OmniTools   in  fiscal
1994.

N'Route(R)

N'Route  is  a  Windows end-user application  that  automatically
routes  incoming  faxes  and scanned  images  directly  to  their
intended  recipients.  N'Route does this by recognizing the  name
or  other  identifier written on a document and then routing  the
document to its destination "mailbox" on Lotus Notes, cc:Mail  or
Windows  for  Workgroups users with Microsoft Mail.  Installation
and maintenance by a network administrator is by dialog boxes and
menus   and  requires  no  programming  or  character-recognition
expertise.   In  February 1995, N'Route was awarded  the  Imaging
Magazine "Product of The Year" award for 1994.

Sales, Marketing and Methods of Distribution

The  Company sells and markets its software and services in North
America  through a direct sales organization and  through  third-
party  licensing  agreements.   Outside  of  North  America,  the
Company  negotiates  marketing agreements with  various  industry
service providers.

The  Company's product lines are targeted toward large commercial
users  (e.g.,  banks  for  the PRISM, CampaignOne  and  InterSite
products),  or  federal  and  state  government  agencies  (e.g.,
Departments  of  Transportation for the  TrafficVision  product).
The  products require technical assistance through the sales  and
installation processes.  Accordingly, the Company maintains an in-
house staff of engineers to support the sales, installation,  and
customer-service functions.

The Company's FDS and PRISM products are licensed directly by the
Company  to  financial  institutions. The TrafficVision  products
will  be  marketed  directly to governmental  traffic  management
departments or their chosen integrators.   The Ni1000 Recognition
Accelerator  and  the  Ni1000  Development  System  are  marketed
directly by the Company to developers of high-speed applications,
and  are  used  in internally developed products.  The  Company's
Intelligent   Character   Recognition   products   are   marketed
exclusively  by NCS.  The Company obtains product inquiries  from
product  mailings, attendance at trade shows, media  advertising,
trade-press coverage and its internet site.

In financial services, the Company has in the past created custom
applications  including  risk  assessment  for  bank-card   fraud
detection,  mortgage origination and insurance,  consumer  credit
and  securities trading.  Nestor's FDS and PRISM products are  an
outgrowth of such development projects.  In the United States and
Canada  the  Company markets FDS PRISM and CampaignOne  directly.
ACI is the Company's largest reseller, with offices and employees
around  the  world.   ACI  has reseller  rights  to  all  of  the
Company's products on a stand-alone basis or packaged with  their
proprietary  products.  The Company has a worldwide license  with
Total  System Services, Inc. (Total) to provide its PRISM product
to  customers  for which Total provides card processing  services
(provided  in  North  and  Central America).   In  Japan,  custom
financial  applications are marketed through  its  licensee,  CSK
Corporation.    FDS  and  PRISM  are  licensed  to   applications
developers   in   Europe  and  Japan  under  a   standard,   non-
transferable, non-exclusive software license limited to a  single
computer.  Developers of applications may not make, use  or  sell
multiple  copies  of  such  applications  without  entering  into
additional  licensing arrangements with the Company.   Management
of  the  Company believes that the success of the PRISM  and  FDS
products  will  create a valuable franchise in each  institution,
leading to extensions of the Company's technology to other  risk-
assessment applications.

During  1998,  ACI,  GE  Consumer Credit Financial  Services  and
Mellon  Bank  accounted for 28%, 20% and  14%  of  the  Company's
revenues,  respectively.  During 1997, ACI and Europay  accounted
for  39% and 16% of the Company's revenues, respectively.  During
the  six  months  ended  December 31, 1996,  the  Jet  Propulsion
Laboratory,  GE  Consumer  Credit  Financial  Services,  BankOne,
Mellon  Bank and Customer Services, Inc. accounted for 19%,  18%,
15%,  13%  and  11%, of the Company's revenues respectively.   In
fiscal  1996, National Computer Systems and Europay International
accounted   for   30%   and  13%  of  the   Company's   revenues,
respectively.  The loss of any of these customers for any  reason
could  have a material adverse effect on the Company's  business,
financial condition and results of operations.

The  Company  is not required to maintain significant inventories
in order to deliver its products.  The Company does not generally
grant  payment terms to customers in excess of 90  days.   As  of
December  31,  1998, the Company had a backlog  of  approximately
$1,492,000 in undelivered development and installation  contracts
and  $192,000  in prepaid royalties.  At December 31,  1997,  the
Company  had  a backlog of approximately $248,000 in  undelivered
development  and installation contracts and $259,000  in  prepaid
royalties.   At December 31, 1996, the Company had a  backlog  of
$209,000  in  undelivered development and installation  contracts
and  $582,000  in prepaid royalties.  As of June  30,  1996,  the
Company had a backlog of $408,000 in undelivered development  and
installation  contracts  and $431,000 of  prepaid  royalties  and
fees.

Technology

The  Company's  technology  deals with  the  problem  of  pattern
recognition.   When presented with a pattern of  information,  it
can be valuable to identify that pattern, whether it is a pattern
of  fraudulent  credit card use, fraudulent health  care  claims,
handwritten characters, vehicles in a traffic flow,  and  so  on.
Several  methods  currently  exist  to  address  the  problem  of
processing  information in order to recognize a  pattern  in  the
information.  Included among these are "expert" systems of rules,
and  neural  networks.  The Company's products  combine  both  of
these methods to optimize pattern recognition capabilities.

Rule-Based  Technology.  The Company's systems employ  expert  or
rule-based  technology to define customer  strategy,  policy  and
procedures in its products.  Rule-based systems contain  decision
trees   of   conclusions  based  on  the  existence  of   various
conditions.   For  example, a credit card  transaction  has  been
authorized.  To determine if that transaction was fraudulent  and
whether  or not an account should be investigated, the  following
set of questions may be asked: has the card been reported lost or
stolen since the transaction occurred?  If "yes", the transaction
equals  "fraud"; if no, did the purchase amount exceed the credit
limit?  If "yes", did the purchase occur less than one hour after
the  previous  purchase?   If "yes, and  so  on.   It  is  almost
impossible   to  cover  all  possibilities  of  combinations   of
circumstances  even with the most comprehensive suite  of  rules.
So,  while  allowing the implementation of select  rules  may  be
beneficial,  a decision based solely on rules may not  always  be
correct or practical.

Neural-Network  Technology.  Neural-networks simulate  a  virtual
network of interconnected units, processing data in parallel, and
communicating  with each other at lightning  speeds.   A  trained
neural-network expects input and then outputs a response:  either
"unrecognized",  "recognized",  or  "not  sure".   Exceeding  the
capability  of if-then-else conditional rules, the power  of  the
neural-networks  is  in  their ability  to  accurately  recognize
input,  such as attempting to recognize characters from a scanned
handwritten  sample, which is ill-defined (i.e. written  in  very
light  pencil), affected by "noise" (i.e. smudged), or  blatantly
unusual  (i.e.  overly  large  or  small,  or  containing  skewed
characters).   Nestor, as the result of extensive  research,  has
created  a proprietary neural-network technology referred  to  as
the Restricted Coulomb Energy ModelT (RCE) which has been granted
five patents.

The  RCE  model  has many unique features.  It  has  the  fastest
learning  and processing speed of any neural-network system.   It
has  been  demonstrated  that the RCE  will  learn  to  recognize
patterns orders of magnitude faster than a typical public  domain
neural-network  such  as  Back Propagation  (BP).   RCE  has  the
ability  to  add  new  features or classes without  the  need  to
retrain and re-engineer the complete system.  For example,  using
BP,  experts must re-engineer and completely retrain  the  entire
system if new features or classes are added.  Re-engineering  and
retraining is impractical for many real-world applications.   RCE
is  a  dynamic configuration of the network so that it can  scale
and  configure itself to accommodate the complexity of a  problem
and  make the most efficient use of available hardware.  With BP,
one  must  precisely  engineer  the  number  of  neurons  through
experimentation  in  order to use the technology,  and  a  stable
solution is not guaranteed.

Nestor  has  also  been granted a sixth patent for  a  multi-unit
system referred to as the Nestor Learning SystemT (NLS) which  is
ideally   suited   for   many  real-world   pattern   recognition
applications.  The NLS has a patented hierarchical, multi-network
system  for  better  control  and  accuracy.   This  approach  is
analogous  to  the way the human neural-network  is  believed  to
function.   The Company believes that the rapid model development
and operational flexibility afforded by its technology provides a
competitive  advantage in the development of intelligent-decision
software solutions.


Research and Development Activities of the Company

The Company believes that its future depends upon its ability  to
improve its current technologies and products and to develop  new
technologies and products. The Company intends to pursue new  and
enhanced  technologies  and products.  The  Company  attempts  to
locate  external resources to assist in the costs  of  developing
new  technologies or products, but may bear all or a  portion  of
such costs internally.

The  Company's  research  is  almost  entirely  applied  research
intended  to  develop  solutions to specific  pattern-recognition
problems.  This research has resulted in various patents relating
to   improvements   to  the  Company's  basic   technology   (see
"Patents").   The Company received one new patent in fiscal  1996
and  one  new  patent  in fiscal 1997 and  has  two  applications
pending  as  of  December  31,  1998.   These  improvements   are
incorporated into the Company's products.

The market for the Company's products may be impacted by changing
technologies.  The Company's success will depend upon its ability
to  maintain  and  enhance its current products and  develop  new
products  in  a  timely  and  cost-effective  manner  that  meets
changing  market conditions.  There can be no assurance that  the
Company will be able to develop and market on a timely basis,  if
at  all,  product  enhancements or new products that  respond  to
changing market conditions or that will be accepted by customers.
Any failure by the Company to anticipate or to respond adequately
to  changing  market  conditions, or any  significant  delays  in
product development or introduction could have a material adverse
effect on the Company's business, financial condition and results
of operations.

The  Company  expended in the years ended December 31,  1998  and
1997,  in  the  six months ended December 31, 1996,  and  in  the
fiscal  year  ended  June  30,  1996,  respectively,  $2,112,000,
$1,498,000,  $294,000  and $823,000 in  support  of  the  various
aspects of Company-sponsored research and development.

Patents

The Company has continually sought and obtained patent protection
for its proprietary neural networks and systems, which have as  a
principal  feature rapid learning from a relatively small  number
of examples.  The Company believes that this capability makes the
Company's technology uniquely suited to applications that require
field  trainability  or self-modification  to  adapt  to  new  or
changing patterns in the data.  The Company's patents also  cover
multiple-neural-network  systems, which  enable  the  company  to
develop  products that combine high accuracy with high processing
speeds;  and  the  Company's RCE neural network,  which  exhibits
rapid learning and minimizes the internal connections needed  for
its  functioning.   This  sparse  connectivity  has  enabled  the
Company  to  develop,  with Intel Corporation,  a  neural-network
integrated  circuit  (the  Ni1000 Recognition  Accelerator  chip)
containing  many  more nodes than has been  possible  with  other
designs.

The Company owns eight United States patents and eighteen foreign
patents  issued in eleven countries.  In addition, there are  two
applications  pending in the United States, and  one  application
pending  in  Japan as of December 31, 1998.  The foreign  patents
and  patent  application correspond to one or more of the  United
States patents.

The Company believes that seven of its United States patents, and
eleven  corresponding  foreign  patents,  are  material  to   its
business.   These United States patents expire at  various  times
from  1999 to 2014.  The corresponding foreign patents expire  at
various  times  through  2007.  The  following  table  lists  the
Company's material United States patents:

 
                                                        Year of
 Patent                                      Date of      Expira-
 Number     Title                            Issue         tion
 
 4,326,259  Self-organizing General
            Pattern Class Separator and
            Identifier                    April 20, 1982   1999
 
 4,760,604  Parallel, Multi-unit,
            Adaptive, Nonlinear Pattern
            Class Separator and
            Identifier                    July 26, 1988    2005
 
 4,897,811  N-Dimensional Coulomb Neural
            Network Which Provides for
            Cumulative Learning of
            Internal Representations      Jan. 30, 1990    2007
 
 4,958,375  Parallel, Multi-unit,
            Adaptive Pattern
            Classification System Using
            Inter-unit Correlations And
            An Intra-class Separator
            Methodology                   Sept. 18, 1990   2007
 
 5,054,093  Parallel, Multi-unit,
            Adaptive, Nonlinear Pattern
            Class Separator and
            Identifier                    Oct. 1, 1991     2008
 
 5,479,574  Method and Apparatus for
            Adaptive Classification       Dec. 26, 1995    2012
 
 5,701,398  Adaptive Classifier Having
            Multiple Subnetworks          Dec. 23, 1997    2014


Competition

In  the field of fraud-detection and risk-assessment systems, the
Company   encounters  competition  from  a  number  of   sources,
including  (a) other software companies, (b) companies'  internal
MIS  departments,  (c)  network and service  providers,  and  (d)
neural-network  tool  suppliers.  In the fraud-detection  market,
the  Company has experienced competition from Fair, Isaac &  Co.,
HNC Software, Inc., IBM, MasterCard Corporation, NeuralTech Inc.,
Neuralware,  Inc., Visa International and others.  The  Company's
fraud  detection product also competes against other  methods  of
preventing  credit-card fraud, such as card-activation  programs,
credit  cards  that  contain the cardholder's  photograph,  smart
cards  and other card authorization techniques.  The introduction
of  these  and  other new technologies will result  in  increased
competition for the Company and its products.

In  the  field  of  traffic  management  systems,  the  Company's
TrafficVision  and  CrossingGuard products (see  "Recent  Product
Developments") face competition primarily from standard providers
of  existing loop system products.  Other technologies exist from
various sources that provide some of the basic traffic management
functions  provided  by  the  loop  system,  such  as  Microwave,
Ultrasonic,  Infrared, and Acoustic.  The Company  believes  that
these  technologies have limitations and do not provide the  full
range  of  options available through TrafficVision.   Video-based
systems  are  also  available through  other  companies  such  as
Econolite,  Lockheed  Martin,  Peek Traffic,  Odetics,  Traficon,
Siemens   and  Rockwell  International.   However,  the   Company
believes  that the platforms on which these video-based  products
operate   do   not  provide  the  image  processing  capabilities
possessed   by  TrafficVision,  CrossingGuard  and   the   Ni1000
Recognition Accelerator Chip.  Red-light enforcement products are
also available using loops and wet-film cameras through companies
such as EDS, Lockheed Martin, Tellis and Red Flex.

In the field of web server systems, the Company faces competition
from a number of sources, including commodity-software providers,
traditional  database vendors, and vertical  solution  providers.
The  first  two  groups  include  such  companies  as  Microsoft,
Netscape  and  Oracle.   Companies providing  vertical  solutions
include BroadVision, Inc. and HNC Software, Inc.  The market  for
internet-oriented  products  is intensely  competitive  with  new
competitors emerging frequently.

Most  of  the  Company's  competitors have significantly  greater
financial, marketing and other resources than the Company.  As  a
result,  they  may  be able to respond more  quickly  to  new  or
emerging  technologies  or  to devote greater  resources  to  the
development,  promotion  and  sale of  their  products  than  the
Company.    Competitive  pressures  faced  by  the  Company   may
materially adversely affect its business, financial condition and
results of operations.


Employees

As  of December 31, 1998, the Company had 45 full-time employees,
including  28  in product development, 8  in sales and  marketing
and  9  in  finance  and administration.  One  of  the  Company's
current  directors (and a founder of Nestor Associates)  received
the  Nobel Prize in Physics in 1972.  All of these employees  are
located in the United States.  None of the Company's employees is
represented  by  a labor union.  The Company has  experienced  no
work  stoppages  and  believes  its  employee  relationships  are
generally good.

The  Company's success depends to a significant degree  upon  the
continued    employment   of   the   Company's   key   personnel.
Accordingly, the loss of any of the Company's key personnel could
have  a  materially  adverse effect on  the  Company's  business,
financial  condition  and  results of  operations.   No  employee
currently  has an employment contract in place with the  Company.
The  Company  believes its future success will  depend  upon  its
ability   to  attract  and  retain  industry-skilled  managerial,
engineering, software development and sales personnel,  for  whom
the  competition  is  intense.  In  the  past,  the  Company  has
experienced  difficulty  in recruiting  a  sufficient  number  of
qualified sales people.  In addition, competitors may attempt  to
recruit  the Company's key employees.  There can be no  assurance
that  the  Company will be successful in attracting, assimilating
and  retaining  such  qualified personnel,  and  the  failure  to
attract,  assimilate  and  retain  key  personnel  could  have  a
materially  adverse  effect on the Company's business,  financial
condition and results of operations.


Licensing, Joint Venture and Development Agreements

The  Company seeks to enter into license agreements and  research
and  development  contracts in order  to  obtain  greater  market
penetration  and  additional funding of the  development  of  its
technology in specific fields of use.

Total System Services, Inc.

During  the six month period ended December 31, 1996, the Company
designed and installed a fraud detection system for Total  System
Services,  Inc.  (Total),  a major provider  of  card  processing
services for financial institutions.  Total provides PRISM  fraud
detection  services  to  its  customers  along  with  the   other
transaction processing services.  The Company receives fees based
upon the number of transactions that are scored by PRISM.

Applied Communications, Inc. (ACI)

On April 18, 1997, the Company expanded its non-exclusive license
agreement with ACI.  The expanded license grants to ACI the right
throughout the world to integrate and distribute all of the PRISM
products.   ACI provides authorization and transaction processing
software  to more than 500 customers throughout the  world.   The
Company  will receive royalties based on PRISM and other  product
license,  engineering and ongoing use fees received by  ACI  from
ACI sublicenses.

In   April  1998,  ACI's  parent  company,  Transaction   Systems
Architects,  Inc. (TSAI) entered into a Stock Purchase  Agreement
with  the  Company.  TSAI purchased 2.5 million shares of  common
stock   for  $5,000,000  and  obtained  a  warrant  purchase   an
additional  2,500,000 common shares for $7,500,000  shares  which
expires on March 1, 2002.

National Computer Systems, Inc. (NCS)

On June 11, 1996, the Company entered into an exclusive Licensing
Agreement  and an Asset Purchase Agreement with NCS  transferring
the   development,  production,  and  marketing  rights  of   the
Company's  Intelligent Character Recognition  (ICR)  products  to
NCS.   The Company received $1,400,000 as an initial license  fee
pursuant  to  the  Licensing Agreement, and  expects  to  receive
royalties  on  future sales of the product by NCS.   To  maintain
exclusive rights, minimum annual royalties range from $160,000 in
1997  to $350,000 in 2001 and beyond.  In June 1998, NCS did  not
meet  its  minimum  royalty for the license  year  and  forfeited
exclusive rights.

The  Asset Purchase Agreement transferred tangible and intangible
assets  used exclusively in the ICR business to NCS for $300,000.
The  initial license fee and asset sale proceeds were  recognized
as revenues in Fiscal 1996.

IBM ZISC(tm)

On  January  31, 1996, the Company signed a technology  licensing
agreement with IBM to use Nestor's pattern recognition technology
in an IBM developed neural network semiconductor device.  IBM has
the right to use the technology in the IBM ZISC (zero instruction
set  computing)  digital integrated Neural Network  chip  and  in
future  versions  of  the chip and related product  enhancements.
The  IBM  ZISC  chip is expected to enable such complex  mission-
critical   applications  as  image  recognition  for   satellite,
military  and  medical operations, financial data management  and
risk  assessment,  automotive applications,  as  well  as  highly
sensitive identification systems such as sonar and fingerprinting
and  other  crime-scene  type  analysis.   The  Company  receives
royalties from the sales by IBM of the chip and related products.

California  Institute  of  Technology Jet  Propulsion  Laboratory
(JPL)

On  September  1, 1995, the Company commenced a partially  funded
development  agreement with JPL to design a Traffic  Surveillance
and  Detection  Technology capable of directly measuring  desired
traffic  parameters simultaneously, combined with higher accuracy
and  at a lower cost than available with current technology.  The
Company  is  applying its expertise in rapid pattern  recognition
and  neural  network designs to the project.  The  prototype  and
initial  program  was completed in December  1996.   The  Company
began  a Phase II contract for field testing of the prototype  in
1997  and  expects to complete this work in the first quarter  of
1999.

The  total value of the expanded contract is $730,000,  of  which
$726,000 had been recognized as revenue by December 31, 1998.

DARPA

The  Company entered into a development agreement dated March 13,
1990  with  DARPA  for  the development of a neural-network  chip
prototype  embodying  the Company's proprietary  technology.   On
April  21,  1992  the Company and DARPA agreed  to  increase  the
contract  to  approximately $1,630,000 and extended the  expected
completion date to May 1993.  In May 1990, the Company  signed  a
Technology  Development Agreement with Intel  Corporation,  under
which  Intel  agreed  to  provide the  design  and  manufacturing
capabilities  to  satisfy the requirements of the  contract  with
DARPA.   The  total  cost to the Company of the subcontract  with
Intel  is  $750,000.   On  April  30,  1992,  the  cost  of   the
subcontract was increased to $1,050,000.  During the  year  ended
June  30,  1993  the  Company included in  revenue  approximately
$436,000 relating to its work under the DARPA contract.

On  August 26, 1993, the Company entered into a follow-on program
with  DARPA  to  design  and produce a PC compatible  application
design and development environment, comprising both hardware  and
software, which will enable users to incorporate the Ni1000  into
products.   The total value of this contract, which was completed
in  December 1995, was $776,167, of which approximately  $423,000
was realized in fiscal 1994.

CSK

On  June  13,  1996,  the Company executed a  nonexclusive  PRISM
Reseller  Agreement  with  CSK Corporation  to  market,  install,
maintain,  train  and support the PRISM product  in  Japan.   The
agreement  was  for  an initial term of two years  and  is  being
renewed  annually.   As of December 31, 1997, CSK  had  installed
PRISM  at  Nippon Shinpan Company (NICOS), a leading credit  card
issuer in Japan.

Intel Corporation

On  October  15, 1993, the Company and Intel Corporation  entered
into a license agreement, pursuant to which Intel acquired a non-
exclusive  right  to develop and sell products incorporating  the
Company's  technology.  On April 7, 1994, the  license  agreement
was amended to grant to the Company exclusive marketing rights to
the   Ni1000  Recognition  Accelerator  Chip,  which  Intel  will
manufacture  and  sell to the Company.  In  accordance  with  the
license agreement, Intel notified the Company of its intention to
phase out manufacturing of chips based on the .8 micron geometry.

The Company placed a purchase order in 1997 and took delivery  of
an  order  for  1,000 units in early 1999.  Given the  number  of
chips  the  Company  has  in inventory  and  potential  alternate
development options, management does not believe there will be  a
material  adverse impact on its operations as  a  result  of  the
termination  of the manufacturing of the current version  of  the
Ni1000 chips.

ITEM 2.  Properties.

The   Company   leases  offices  and  research  and   development
facilities,  consisting  of  approximately  13,000  square  feet,
located  at One Richmond Square, Providence, Rhode Island  02906,
for  which  the  annual  base rental is  $195,000.   The  Company
believes these facilities will be adequate to serve its needs  in
the foreseeable future.



ITEM 3.  Legal Proceedings.

On  October  6,  1998, HNC Software Corp. ("HNC"), a  significant
competitor  of the Company's in the field of Financial  Services,
obtained  a  patent  entitled "Fraud Detection  Using  Predictive
Modeling" and began advising prospective customers of the Company
of  the  patent.  Upon review of the patent and consideration  of
prior  actions  taken  by HNC, the Company  initiated  a  lawsuit
against  HNC  in Providence, RI on November 25, 1998  alleging  a
number of claims including; violation of Sections 1 and 2 of  the
Sherman  Act (antitrust), violation of the Rhode Island Antitrust
Act  patent invalidity, and infringement of Nestor's patent.  The
suit  seeks  various damages, including lost profits  and  treble
damages.   Costs associated with the suit are being  expensed  as
incurred.   No  estimate  of  the outcome  of  this  suit,  or  a
potential countersuit, if any, can currently be made.




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

No  matters  were submitted to a vote of security holders  during
the fourth quarter of the year ended December 31, 1998.




ITEM 5.   Market for Registrant's Common Stock
          and Related Securityholder Matters

The  Company's  common stock was first offered to the  public  in
December,  1983.   The  principal market in which  the  Company's
common  stock  is  traded  is the over-the-counter  market.   The
quotations below reflect inter-dealers prices, and do not include
retail  markups, markdown or commissions and may not  necessarily
represent  actual transactions.  The shares of common  stock  are
traded in the over-the-counter market and bear the symbol "NEST".

                          Low Bid         High Ask
Year Ended 12/31/98
     1st  Quarter         1-3/4              2-35/64
     2nd  Quarter       1-57/64              3-1/8
     3rd  Quarter           7/8              2-33/64
     4th  Quarter          5/16              1-7/16

Year Ended 12/31/97
     1st Quarter          1-21/32          2-9/16
     2nd Quarter           1-3/4           2-9/16
     3rd Quarter           1-1/4           2-9/32
     4th Quarter           1-1/4           3-1/16

Period Ended 12/31/96
     1st Quarter          1-11/16          3-1/4
     2nd Quarter           2-1/8             3
Year Ended 6/30/96
     1st Quarter          1-1/4              1-11/16
     2nd  Quarter          9/16              1-3/8
     3rd  Quarter         23/32              2-3/16
     4th  Quarter         1-3/8              3-3/16

As  at  March  12, 1999, the number of holders of record  of  the
issued and outstanding common stock of the Company was 424, which
includes   brokers  who  hold  shares  for  approximately   1,546
beneficial holders.

The  Company has not declared any cash dividends with respect  to
its common stock since its formation.


<TABLE>
ITEM 6.   Selected Financial Data
<CAPTION>                                          Six Months
                              Years Ended            Ended
                              December 31,         December 31,          Years Ended June 30,

                           1998           1997        1996        1996          1995            1994
<S>                      <C>            <C>           <C>         <C>          <C>           <C>
Operating revenue        $ 2,241,376    $ 5,681,076   $1,195,904  $5,461,580   $ 3,195,563   $  2,230,474
Other income (expense)   $   (26,178)   $    31,321   $ (16,220)  $   39,950   $  (221,024)   $   (282,418)
Net income (loss)        $(5,263,153)   $  (294,664)  $(935,337)  $   12,690   $(3,457,422)  $ (1,758,584)
Earnings per share
  Weighted
  number of
  outstanding shares--
     basic and diluted   15,249,932      9,243,508    8,689,031   7,847,510     7,411,502       6,840,407
     (Loss) per share   $     (0.36)   $     (0.08)  $     (.13) $    (0.03)  $      (.48)  $        (.26)

SELECTED BALANCE SHEET DATA:
Total assets            $ 2,591,589    $ 2,613,031   $2,817,944  $3,351,871   $ 1,812,495   $   1,096,314
Working capital         $   551,461    $   146,081   $  879,172  $1,983,661   $(1,882,875)  $     220,243
Long-term
 Redeemable Preferred
      Stock             $       ---    $ 5,792,787   $5,398,908  $5,207,538   $ 1,600,328   $         ---
Capital leases          $    22,618    $    10,220   $    9,455  $    9,455   $       ---   $       3,363
Deferred income         $       ---    $       ---   $  430,899  $  430,899   $   438,896   $     954,491
</TABLE>



ITEM 7:   Management's Discussion and Analysis


Prospective Statements

The   following   discussion  contains   prospective   statements
regarding  Nestor,  Inc., its business  outlook  and  results  of
operations,  all  of  which  are subject  to  certain  risks  and
uncertainties and to events that could cause the Company's actual
business,   prospects  and  results  of  operations   to   differ
materially  from  those that may be anticipated by,  or  inferred
from,  such prospective statements.  Factors that may affect  the
Company's  prospects include, without limitation:  the  Company's
ability  to  successfully  develop new contracts  for  technology
development; the impact of competition on the Company's  revenues
or  market  share;  delays in the Company's introduction  of  new
products;  and failure by the Company to keep pace with  emerging
technologies.

Readers  are  cautioned  not to place  undue  reliance  on  these
prospective statements, which speak only as of the date  of  this
report.   The  Company  undertakes no obligation  to  revise  any
forward-looking  statements  in  order  to  reflect   events   or
circumstances that may subsequently arise.  Readers are urged  to
carefully review and consider the various disclosures made by the
Company  in  this report and in the Company's reports filed  with
the Securities and Exchange Commission.

Liquidity and Capital Resources

Cash Position and Working Capital

The  Company had cash and short-term investments of approximately
$1,175,000  at  December 31, 1998, as compared with  $387,000  at
December 31, 1997.  At December 31, 1998, the Company had working
capital  of  $551,000, as compared with $146,000 at December  31,
1997.  The increase in working capital from 1997 to 1998 reflects
primarily  the  proceeds from the sale of  $5,000,000  in  common
stock  during  the  year  offset by cash used  by  current-period
operating  activities  of $3,899,000 and equipment  purchases  of
$132,000.

The Company had a net worth of $984,000 at December 31, 1998,  as
compared with a negative net worth of $4,519,000 at December  31,
1997.   The  increase in net worth resulted from the issuance  of
$5,000,000  of  common stock and the conversion of $5,793,000  in
redeemable preferred stock to common stock, offset by the current
period operating loss of $5,263,000.

As a result of its financial performance during 1998, the Company
ceased  further investments in development and marketing  of  its
Internet product "InterSite".  The net investment incurred by the
Company in this product in 1998 was $1,383,000.

Additional  capital  will be required to enable  the  Company  to
carry  out  needed  marketing campaigns  for  its  products,  for
continued  development  and upgrading of  its  products  and  for
customer support.  On March 24, 1999, the Company entered into  a
$1,000,000  Line  of  Credit agreement with  Transaction  Systems
Architect,  Inc. ("TSAI").  The loan is secured  by  the  royalty
stream   and  other  fees  produced  by  the  Company's   License
Agreements with Financial Services Division customers.  Principal
payments are due in twelve equal installments beginning March  1,
2001.   Interest  on  the loan is equal to  the  effective  prime
interest  rate plus 1% and payments are due quarterly in  arrears
beginning July 10, 1999.  The line may be reduced to $500,000  if
the  Company's  equity  becomes  negative  or  increased  up   to
$4,000,000 if certain financial requirements are attained.

On  March 25, 1999, Nestor Traffic Systems, Inc., a subsidiary of
the  Company,  sold  a 37.5% common-stock interest  in  it  to  a
private  group of investors for $2,350,000 in cash and issued  an
option   for  an  additional  17.5%  of  its  common  stock   for
$1,750,000.   The investor group includes three officers  of  the
Company  and  the  subsidiary, who in the  aggregate  contributed
$600,000 of the initial cash invested on the same basis as third-
party  investors.  The option expires on January 31,  2000.   The
proceeds  will  be used by the subsidiary to fund  traffic-system
product  development and marketing efforts in 1999.  In addition,
to  the  extent that facility and administrative services of  the
Company  are  used by the subsidiary, reimbursement of  allocated
costs  will be provided.  The subsidiary has an exclusive license
from  the Company to apply the Company's proprietary technologies
in  the area of traffic-management systems.  The license provides
for  royalties to the Company of 5% of related revenues,  net  of
direct  cost of third party goods sold, in 2000 and 10%  in  2001
and  beyond.  The capital invested in the subsidiary will be used
to fund the expenses of Traffic Systems incurred after January 1,
1999, which were funded by the Company in previous years.

Management  believes  that the Company's revenues  will  generate
sufficient liquidity, when combined with its liquid assets as  of
December 31, 1998 and the financings described above, to meet the
Company's  anticipated cash requirements from current  operations
through  the  end of the year ending December 31, 1999.   If  the
Company  does  not realize revenues sufficient  to  maintain  its
operations at the current level, management of the Company  would
curtail  certain  of  the Company's operations  until  additional
funds become available through investment or revenues.

Litigation

On  October  6,  1998, HNC Software Corp. ("HNC"), a  significant
competitor  of  the  Company in the field of Financial  Services,
obtained  a  patent  titled  "Fraud  Detection  Using  Predictive
Modeling" and began advising prospective customers of the Company
of  the  patent.  Upon review of the patent and consideration  of
prior  actions  taken  by HNC, the Company  initiated  a  lawsuit
against HNC in the United States District Court in Providence, RI
on  November 25, 1998 alleging violation of Sections 1 and  2  of
the  Sherman  Act  (antitrust), violation  of  the  Rhode  Island
Antitrust  Act, patent invalidity, and infringement  of  Nestor's
patent.   The suit seeks various damages, including lost  profits
and  treble  damages.  Costs associated with the suit  are  being
expensed  as incurred.  No estimate of the outcome of this  suit,
or a potential countersuit, if any, can currently be made.


Deferred Income

Operations  of the Company have been partly funded by prepayments
under   engineering  contracts  and  licenses  of  the  Company's
technology.   Such  prepayments are recognized  as  revenue  upon
delivery of the product and completion of related engineering  or
other  services  necessary  under  the  contract,  or  under  the
percentage-of-completion method as engineering  is  completed  or
delivery  obligations  are  fulfilled.   The  Company  bases  its
estimate  of the percentage of completion on the amount of  labor
applied  to  a  given project compared with the  estimated  total
amount  of labor required.  The remainder of such prepaid revenue
is  reflected on the Company's balance sheet as deferred  income.
Total  deferred  income  was $434,000 at December  31,  1998,  as
compared with $408,000 at December 31, 1997.

In  June  1997,  the  Company and Sligos, S.A.  terminated  their
license  agreement dated October 26, 1990.  The Company  paid  to
Sligos  $225,000 in July 1997 in full settlement of  its  current
liability  due to Sligos and of the repurchase of 452,064  shares
of  the  Company's  Series A Preferred Stock.  The  Company  also
eliminated  $431,000  of  long-term deferred  income  related  to
Sligos  prepayments received in 1990, which had  not  been  taken
into income.  (See "Results of Operations" below.)

Future Commitments

During  the  year  ended December 31, 1998, the Company  acquired
additional  property  and  equipment  (primarily  computers   and
related equipment) at a cost of $132,000.  The Company valued its
investments   in   computers  and  related  equipment   (net   of
depreciation) at $369,000 at December 31, 1998.  The Company  has
no   material  commitments  for  capital  expenditures   although
management  expects that the Company may make future  commitments
for  the  purchase of additional computers and related  computing
equipment,  for  furniture  and  fixtures,  for  development   of
hardware,  for  consulting  and  for  promotional  and  marketing
expenses.   The  Company  maintains  a  lease  for  office  space
totaling  approximately 13,000 square feet.  The  lease  provides
for  monthly rent, including utilities except electricity, in the
amount  of  $16,250  and expires in February 2000.   The  Company
believes the facilities are adequate for its 1999 needs.

The  Company  had placed purchase orders totaling  $877,500  with
Intel   Corporation  for  a  supply  of  the  Ni1000  Recognition
Accelerator Chips.  The Company received delivery of $195,000  of
the  chips  during  February  1999.   The  Company  canceled  its
outstanding  purchase order for the remaining chips  in  February
1999.

The  Company's subsidiary, Nestor Traffic Systems, Inc.,  entered
into an agreement on September 25, 1997, for the modification  of
one  of  the  components  of the TrafficVision  product.   Nestor
agreed  to  pay  Zeller Research, Ltd. $75,000  for  engineering,
which  is  expected to be completed during the first  quarter  of
1999,  and to purchase 100 units of the modified component  at  a
total  cost  of up to $53,000.  Additional orders may  be  placed
with  this vendor to supply components of traffic-system products
based upon third party orders received.

Year 2000

Year  2000 problems may arise in computer equipment and software,
as  well as embedded electronic systems, because of the way these
systems are programmed to interpret certain dates that will occur
around  and  after  the  change  in  century.   In  the  computer
industry, this is primarily the result of computer programs being
designed and developed using or reserving only two digits in year
fields (rather than four digits) to identify the century, without
considering  the  ability of the program to properly  distinguish
the  upcoming century change in the Year 2000.  In addition,  the
Year 2000 is a special-case leap year, and some programs may drop
February 29, 2000 from their internal calendars. Other dates  may
present  problems because of the way the digits are  interpreted.
Because  the  Company's business is based  on  the  licensing  of
application  software, the Company's business would be  adversely
impacted  if  its  products  or its internal  systems  experience
problems  associated with the century change.   This  issue  also
potentially affects the software programs and systems used by the
Company in its operations.

In  1998, the Company initiated a company-wide program to analyze
three  specific categories of systems; (1) software developed  by
the Company which is licensed to customers, (2) software utilized
by  the Company consisting of applications developed in-house and
purchased  from  third  party  suppliers,  and  (3)  systems  and
embedded  technology  which  are  integral  components   of   the
infrastructure  of  the  Company.   The  Company  developed   and
acquired  tools,  which  were  utilized  during  the  testing  of
software  and systems.  The Company believes that its remediation
efforts with respect to its licensed software will be successful.
The  Company's belief is based upon its own testing by simulating
dates  and  upon testing by many of the customers of the  Company
who  have  in  turn completed their own Year 2000  testing.   The
Company continues to actively monitor the status and progress  of
customers  and distributors and to assess the risk associated  in
those  cases  where the customer has not taken  delivery  of  the
compliant  version or may not have made satisfactory progress  in
their own Year 2000 testing.

Following analysis, remediation and testing efforts, the  Company
began  shipping  Year  2000 compliant versions  of  all  licensed
software applications in November 1998.  As of December 31, 1998,
all of the Company's currently licensed software applications are
Year 2000 compliant and available to customers.  With respect  to
its  own   systems, testing, remediation, and/or  replacement  is
underway  and  has  been  substantially  completed  in  the  most
critical  areas.   The Company anticipates it will  complete  its
Year 2000 compliance efforts by the third quarter of 1999.

The  Company  expects  to  incur project costs  of  approximately
$250,000  over  the life of the Year 2000 project.   These  costs
consist  of: (i) internal staff costs related to licensed product
remediation  and  testing; (ii) internal staff costs  related  to
internal  software  and  system compliance;  (iii)  hardware  and
software  costs  for  replacement of  software;  and  (iv)  costs
related to compliance involving embedded systems.  Costs incurred
from  the beginning of the project in 1997 through December  1998
have  totaled  approximately $150,000.  The  Company  expects  to
incur  an  additional  $100,000 over the remaining  life  of  the
project.   All costs of the Year 2000 project are being  expensed
as  incurred.   The  estimated remaining  costs  are  based  upon
currently  known circumstances and various assumptions  regarding
future events.  There can be no assurance that this estimate will
be achieved and actual results could differ materially from those
anticipated.

Except  for  statements  of  existing or  historical  facts,  the
foregoing  discussion consists of forward-looking statements  and
assumptions  relating  to forward-looking  statements,  including
without  limitation the statements relating to the timetable  for
completion  of  the Year 2000 compliance efforts,  future  costs,
potential problems relating to Year 2000, the Company's state  of
readiness,  third-party representations, and the Company's  plans
and  objective  for  addressing the Year 2000 problems.   Certain
factors could cause actual results to differ materially from  the
Company's  expectations,  including without  limitation  (i)  the
failure  of  existing or future customers to  achieve  Year  2000
compliance;   (ii)  the  failure  of  computer  hardware   system
providers on which the Company and its customers rely,  or  other
vendors or service providers of the Company or its customers,  to
timely  achieve Year 2000 compliance; (iii) the Company's product
and  systems not containing all necessary data code changes; (iv)
the  failure  of  the Company's analysis and  testing  to  detect
operational  problems in software utilized by the Company  or  in
the  Company's products or services, whether such failure results
from  the  technical inadequacy of the Company's  validation  and
testing  efforts, the technical unfeasibility of testing  certain
software,  and  the unavailability of customers  or  other  third
parties  to  participate  in testing;  (v)  potential  litigation
arising  out  of  Year 2000 issues with respect to  providers  of
software  and related technical and consulting services  such  as
the  Company generally provides, and particularly in light of the
numerous interfaces between Company products and the products and
services  of  third parties, which are required  to  successfully
utilize  the Company's products, which could involve the  Company
in  expensive, multiple-party litigation even though the  Company
may  have no responsibility for the alleged problem; and (vi) the
failure to timely implement a contingency plan to the extent that
Year 2000 compliance is not achieved.


Inflation

Management  believes that the rate of inflation in  recent  years
has not had a material effect on the Company's operations.


Results of Operations

Analysis of the Years Ended December 31, 1998 and 1997

In  the year ended December 31, 1998, the Company realized a  61%
decrease  in  revenues  compared  to  the  prior  calendar  year.
Expenses increased 25% in 1998 resulting in a 1,690% increase  in
the operating loss when compared with the prior year.

During  1998,  the  Company determined that  it  would  not  have
adequate  financial  resources to continue  the  development  and
marketing   efforts  required  to  commercialize   the   Internet
marketing  product  InterSite.  After  unsuccessful  attempts  to
obtain  independent financing for the product  line,  during  the
fourth  quarter  of 1998, the Company decided  to  eliminate  all
current costs associated with the product and transferred  it  to
the  Financial  Services division.  Intangible assets  associated
with  this  product  line totaling $295,000 were  written-off  in
1998.

The Company executed a license agreement on March 28, 1997 for  a
customized  copy  of its PRISM Fraud Detection  System,  and  had
capitalized $575,000 of costs associated with the installation of
the  system as of December 31, 1997.  Since the installation, the
Company  has  continued to modify and improve the software.   The
system  was deployed in December of 1998 to a limited  number  of
initial  customers,  and began generating  monthly  revenue.   In
consideration of the delays in implementation, estimated  ongoing
support  costs  in relation to current revenue  levels,  and  the
remaining term of the license, the Company recorded an adjustment
to  the carrying value of the system of approximately $400,000 in
the  fourth quarter of 1998, reducing capitalized deferred  costs
to  $80,000.  These costs are being amortized over the  remaining
life of the associated license.

Revenues

The  Company's  revenues arise from licensing  of  the  Company's
products and technology, from the sale of tangible products,  and
from  contract engineering services and are discussed  separately
below.   During  the  year  ended  December  31,  1998,  revenues
decreased  $3,440,000 to $2,241,000 from $5,681,000 in the  prior
calendar year.  Non-recurring revenues in the year-earlier period
included  $2,000,000  of  revenues  associated  with  a   license
agreement  with  Applied Communications, Inc.  ("ACI")  in  April
1997,  and $480,000 recognized upon the termination of a  license
agreement with Sligos in June 1997.

Software Licensing

Product-licensing  revenues  totaled  $4,390,000  in   1997,   as
compared with $1,352,000 in 1998.  The decrease in these revenues
reflects a decrease in license fees realized from PRISM products.

PRISM  licensing  revenues  amounted to  $1,318,000  in  1998,  a
decrease  of $2,945,000 from year-earlier revenues of $4,263,000.
The  decrease  in PRISM-related licensing revenues reflects  non-
recurring  revenues in 1997 of $2,000,000 from ACI  and  $480,000
from Sligos. The remainder of the decrease reflects a decrease in
new initial licenses realized in 1998.

During  the  year  ended December 31, 1997, the Company  realized
$120,000 of royalty revenue from National Computer Systems,  Inc.
("NCS"),  as  compared with $32,000 in 1998.  In June  1998,  NCS
elected  not to meet its minimum royalty requirement to  maintain
an  exclusive  right  to  the marketing of  the  Company's  image
character  recognition products.  The license with NCS  continues
on a non-exclusive basis.

Engineering Services

Engineering  revenues totaled $746,000 in 1998, as compared  with
$1,055,000   in   1997.   Revenues  relating   to   new   license
installations and customer-funded modifications of Nestor's PRISM
product  totaled  $613,000 in 1998, a decrease of  $356,000  from
$969,000  of such revenues in 1997.  The decrease is  related  to
the  drop  in new PRISM licenses, and the associated installation
work, noted in "Software Licensing" above.

On  September 1, 1995, the Company signed a contract with the Jet
Propulsion Laboratory (JPL) to develop a prototype sensor  system
designed  for vehicular-traffic surveillance and detection.   The
contract  was  valued at approximately $597,000.   On  March  31,
1997,  the Company extended its contract with JPL to include  in-
field  evaluation  of  the prototype system developed  under  the
original  JPL  contract,  and  the  value  of  the  contract  was
increased to $730,000, of which approximately $726,000  had  been
earned  as of December 31, 1998,.  The terms of the JPL  contract
call  for delivery of prototype products, but do not specify  any
subsequent purchasing or licensing provisions.

During  the  year ended December 31, 1998, the Company recognized
revenues totaling $89,000 under its government contracts.  In the
year-earlier period such revenues totaled $86,000.

During 1998, the Company realized $44,000 of revenues related  to
engineering work on its InterSite product.  No such revenues were
realized in 1997.

Sales of Tangible Products

The  tangible  products currently sold by the Company  are  based
upon  the Company's Ni1000 Recognition Accelerator Chip which  is
incorporated into the Traffic Systems product line or is licensed
with development software that enables customers to develop their
own  high-speed  recognition  applications.   Revenues  from  the
Company's Ni1000 Development System totaled $70,000 in  the  year
ended December 1998, as compared with $111,000 in the prior year.

The  Company  is continuing its development of the  TrafficVision
and   CrossingGuard  products,  which  incorporate   the   Ni1000
Recognition   Accelerator  Chip  (see  "Investment   in   Product
Development  and Marketing," below). Revenues from the  Company's
Traffic  Systems  products  totaled $73,000  in  the  year  ended
December 1998, as compared with $130,000 in the prior year.

Operating Expenses

Total  operating  expenses - consisting of engineering,  research
and   development,  selling  and  marketing,  and   general   and
administrative  expenses - amounted to  $7,478,000  in  the  year
ended  December  31, 1998, an increase of $1,501,000  over  total
operating costs of $5,977,000 in the prior year.

Included  in  operating  expenses  in  1998  are  write-downs  of
Deferred Development Costs and other intangibles of approximately
$400,000 in the financial services division and $295,000  in  the
InterSite product line.

Engineering Services

Costs related to engineering services totaled $2,067,000 in 1998,
as compared with $1,151,000 in 1997.  The increase in these costs
reflects the write-offs totaling approximately $695,000 discussed
above.   The remaining increase is due primarily to general  cost
increases incurred in 1998.

Research and Development

Research and development expenses totaled $2,112,000 in the  year
ended  December 31, 1998 as compared with $1,498,000 in the prior
year.   The  increase in such costs reflects the net of increased
investment in product development in all of the Company's product
lines  in the current year, including PRISM V3.0 shipped  in  the
fourth  quarter  of 1998, development of CrossingGuard  which  is
being  delivered to Vienna, VA in the first quarter of 1999,  and
development  of InterSite through November of 1998.   Development
costs  should decrease substantially in 1999 as a result  of  the
termination  of  further InterSite development in November  1998;
additionally, in view of its independent financing,  the  Company
will  share the development costs associated with Nestor  Traffic
Systems, Inc.

Selling and Marketing

Selling  and marketing costs decreased $155,000 to $1,832,000  in
the  year  ended December 31, 1997, from $1,986,000 in the  prior
year.

The  decrease  in selling costs in the year reflects,  primarily,
reduced   commissions  incurred  in  conjunction   with   reduced
revenues.  Selling costs relating to the Company's PRISM  product
line  totaled  $1,103,000 in 1998, as compared to  $1,360,000  in
1997.   The  decrease is due to a $174,000 decrease in commission
expense  and  reduced Advertising and Meeting expenses  resulting
from  charging  an  attendance fee to  the  1998  Risk  Symposium
meeting.  Selling costs relating to the Company's Traffic Systems
product  and Ni1000 Development System totaled $536,000 in  1998,
as compared with $552,000 in 1997.  Selling costs associated with
InterSite,   in  which  the  Company  ceased  further  investment
effective  November 1998, totaled $192,000 in  1998,   which  was
unchanged from the prior year.

General and Administrative

General  and administrative expenses totaled $1,413,000 in  1998,
as  compared  with $1,207,000 in the previous year.  General  and
administrative  costs  for the year ended December  1998  reflect
increased legal expenses related to the lawsuit initiated against
a competitor in November 1998 and increased accounting fees.

Other Income (Expense)

For  1998,  net other expense was $26,000, as compared  with  net
other  income  of  $31,000 in the year-earlier period.   In  June
1997, the Company recorded other income of $100,000 as a discount
on  the  payment  relating  to  the termination  of  the  License
Agreement  with  Sligos.  In 1998, other  expense  was  comprised
primarily  of  $106,000 of amortization expense  related  to  the
assigned  value  of  warrants outstanding offset  by  $73,000  of
interest income.

Investment in Product Development and Marketing

With   the  exception  of  $80,000  related  to  a  custom  PRISM
installation   at  December  31,  1998,  the  Company   has   not
capitalized any expenses relating to the development or marketing
of  its  products.  The following information details the amounts
by  which the Company's expenses in connection with each  of  its
major product lines exceeded revenues for such product lines.

The largest net investment made by the Company was in its Traffic
Systems subsidiary, which is responsible for the development  and
marketing  of the TrafficVision and CrossingGuard products.   The
Company  delivered a few TrafficVision products during 1998,  but
concentrated  most  of  its efforts on  the  development  of  the
CrossingGuard product of which a first beta version was delivered
in  the  first quarter of 1999.  For the year ended December  31,
1998,   expenses   of  this  subsidiary  exceeded   revenues   by
$1,933,000.

The Company began development in July 1996 of products for use in
Internet  and intranet environments.  Costs associated with  this
effort  totaled  $628,000  in 1997.  The  Company  continued  its
investment  in this subsidiary in 1998 and initiated  efforts  to
locate independent third party financing.  These efforts were not
successful,   and  the  Company  ceased  further  investment   in
development  of  this  product line in November  1998.   The  net
investment in this subsidiary during 1998 was $1,383,000.

The  Company  made  a  net investment in its PRISM  product  line
during 1998 of $1,954,000.

 Net Income

During  1998,  the Company experienced a loss of  $5,263,000,  as
compared with a loss of $295,000 in the prior year.  For the year
ended  December  31,  1998, loss per share available  for  common
stock  was $0.36 per share, as compared with a loss per share  of
$0.08 in the corresponding period of the prior fiscal year.   For
the  year  ended  December  31, 1998,  there  was  outstanding  a
weighted average of 15,249,932 shares, as compared with 9,243,508
in the year-earlier period.



Analysis of the Years Ended December 31, 1997 and 1996

In  the year ended December 31, 1997, the Company realized a  26%
increase  in  revenues  compared  to  the  prior  calendar  year.
Expenses increased 22% in 1997 resulting in a 27% decrease in the
operating loss when compared with the prior year.

On June 11, 1996, the Company entered into an exclusive Licensing
Agreement with NCS transferring the development, production,  and
marketing   rights   of   the  Company's  Intelligent   Character
Recognition  (ICR)  products to NCS.   Pursuant  to  the  License
Agreement,  NCS  paid  the  Company an  initial  license  fee  of
$1,400,000,  and has paid a ten percent royalty on  revenues  NCS
has  realized from the ICR products since their transfer to  NCS.
Such  revenues, including the initial license fee, accounted  for
47%  of  revenues in calendar 1996, including the initial license
fee, as compared to 2% in 1997.

In  the  quarter  ended September 30, 1996, the Company  began  a
project  to  customize  its PRISM Fraud Detection  System  for  a
customer.   Because  the  terms of the  agreement  had  not  been
finalized,  the  Company accounted for the development  costs  in
accordance   with  SOP  81-1,  "Accounting  for  Performance   of
Construction-Type  and Certain Production-Type Contracts,"  which
provides that costs be deferred until delivery is made under  the
terms  of  an enforceable agreement.  For the year ended December
31,  1996, the Company deferred $364,000 of costs associated with
this project.

The  Company executed a license agreement on March 28, 1997, made
required  deliveries, and recognized in the quarter  ended  March
31,  1997,  $550,000 of revenues under this contract.  Since  the
installation, the Company has continued to modify and improve the
software  although the customer has not yet deployed  it.   While
management  expects that the customer will deploy  the  software,
management  is  not  able to forecast when it will  be  deployed.
Accordingly,  the  revenues associated with  this  contract  were
reversed in the fourth quarter of 1997 and $575,000 of costs were
capitalized as Deferred Development Costs at December  31,  1997.
The  deferred  development  costs  will  be  amortized  over  the
remaining  life of the license upon deployment by  the  customer.
(See 1998 developments previously discussed.)

Revenues

The  following  table compares revenues for  calendar  1997  with
calendar   1996  including  and  excluding  revenues   from   ICR
operations transferred to NCS:

                                             Total
  Total          Total                      Revenues
 Revenues       Revenues                   Yr. Ended
Yr. Ended      Yr. Ended                    12/31/96
 12/31/97       12/31/96     Change      Excluding ICR     Change

$5,681,000     $4,508,000     +26%         $2,379,000       +138%

The  Company's  revenues arise from licensing  of  the  Company's
products and technology, from the sale of tangible products,  and
from  contract engineering services and are discussed  separately
below.   During  the  year  ended  December  31,  1997,  revenues
increased  $1,173,000 to $5,681,000 from $4,508,000 in the  prior
calendar  year.   Revenues  in the year-earlier  period  included
$2,129,000 of revenues associated with the ICR products that were
licensed exclusively to NCS in June 1996.

Software Licensing

Product-licensing  revenues  totaled  $4,396,000  in   1997,   as
compared with $2,450,000 in 1996.  The increase in these revenues
reflects the net of an increase in license fees realized from the
PRISM  products and the decrease in licensing revenues  from  the
ICR products transferred to NCS.

PRISM  licensing  revenues amounted to  $4,263,000  in  1997,  an
increase  of  $3,366,000 from year-earlier revenues of  $416,000.
The increase in PRISM-related licensing revenues results from  an
increase in unit volume through the Company's resellers,  Applied
Communications,  Inc. ("ACI"), Europay International,  S.A.,  and
CSK Corporation ("CSK").

During  the  year  ended December 31, 1997, the Company  realized
$120,000 of royalty revenue from NCS, as compared with $1,958,000
of  ICR licensing revenues, the initial license fee from NCS, and
subsequent royalties from NCS realized in 1996.

Engineering Services

Engineering revenues totaled $1,055,000 in 1997, as compared with
$1,908,000  in  calendar 1996.  Revenues  relating  to  customer-
funded  modifications of Nestor's PRISM product totaled  $969,000
in  1997, a decrease of $260,000 from $1,229,000 of such revenues
in 1996.

The   Company's  contract  with  the  Defense  Advanced  Research
Projects Agency (DARPA) requires engineering services rendered by
the  Company to develop a circuit board for use with  the  Ni1000
Recognition  Accelerator Chip.  The contract, signed  August  26,
1993,  is  in  the amount of $776,000; as of December  31,  1997,
approximately $773,000 had been earned.

On  September 1, 1995, the Company signed a contract with the Jet
Propulsion Laboratory (JPL) to develop a prototype sensor  system
designed  for vehicular-traffic surveillance and detection.   The
contract  was  valued at approximately $597,000.   On  March  31,
1997,  the Company extended its contract with JPL to include  in-
field  evaluation  of  the prototype system developed  under  the
original  JPL contract.  The value of the contract was  increased
to  $730,000; as of December 31, 1997, approximately $657,000 had
been earned.

The  terms  of the DARPA and JPL contracts call for  delivery  of
prototype  products, but do not specify any subsequent purchasing
or licensing provisions.

During  the  year ended December 31, 1997, the Company recognized
revenues totaling $67,000 under its government contracts.  In the
year-earlier period such revenues totaled $507,000.

Sales of Tangible Products

The  tangible  products currently sold by the Company  are  based
upon the Company's Ni1000 Recognition Accelerator Chip, which  is
marketed  along with development software that enables  customers
to  develop  high-speed recognition applications.  Revenues  from
the  Company's Ni1000 Development System totaled $105,000 in  the
year  ended December 1997, as compared with $149,000 in the prior
year.

The  Company  is continuing its development of the  TrafficVision
product,   which   will   incorporate  the   Ni1000   Recognition
Accelerator  Chip  (see  "Investment in Product  Development  and
Marketing," below).  During the year ended December 1997, initial
commercial shipments of TrafficVision totaled $130,000.

Operating Expenses

Total  operating  expenses - consisting of engineering,  research
and   development,  selling  and  marketing,  and   general   and
administrative  expenses - amounted to  $5,977,000  in  the  year
ended  December  31, 1997, an increase of $1,065,000  over  total
operating costs of $4,912,000 in the prior year.

Included  in the year ended December 31, 1997 and 1996,  were  $0
and  $972,000, respectively, of expenses attributable to the  ICR
products,  which  were  licensed to NCS in  June  1996.  Expenses
associated  with the ICR products are no longer incurred  by  the
Company  as  NCS  hired most of the Company's staff  assigned  to
development, sales, and support of the ICR products.

Engineering Services

Costs related to engineering services totaled $1,151,000 in 1997,
as compared with $1,927,000 in 1996.  The decrease in these costs
reflects  the  decrease in engineering-services revenues.   As  a
percentage  of such revenues, engineering costs totaled  109%  of
related  revenues  in  1997, as compared  with  101%  of  similar
revenues in the year-earlier period.

Research and Development

Research and development expenses totaled $1,498,000 in the  year
ended  December 31, 1997, as compared with $628,000 in the  prior
year.   The  increase in such costs reflects the net of increased
investment in product development in all of the Company's product
lines  in the current year and the absence of product development
relating to the ICR products.  Investment in the ICR products  in
the year ended December 31, 1996 totaled $295,000.

Selling and Marketing

Selling  and marketing costs increased $662,000 to $1,986,000  in
the  year  ended December 31, 1997, from $1,324,000 in the  prior
year.

The  increase  in selling costs in the year reflects,  primarily,
the  net of two effects: an increase in sales and marketing costs
in each of the Company's product lines and the absence of selling
costs  relating to the ICR products.  PRISM selling costs totaled
$1,279,000  in  the year ended December 1997,  as  compared  with
$406,000  prior  year.  Selling costs relating to  the  Company's
TrafficVision  product  and  Ni1000  Development  System  totaled
$514,000  in  1997, as compared with $279,000 in  1996.   Selling
costs  associated  with InterSite, which  the  Company  began  to
develop in July 1996, totaled $195,000 in 1997, as compared  with
$31,000  in the prior year.  Selling and marketing costs relating
to  the  ICR products totaled $0 and $605,000 in 1997  and  1996,
respectively.

General and Administrative

General  and administrative expenses totaled $1,207,000 in  1997,
as  compared  with  $975,000 in the previous  year.  General  and
administrative costs for the year ended December 1996 reflect the
capitalization  of  $76,000 of costs associated  with  the  PRISM
development  project.   Apart from that  item,  the  increase  in
general  and  administrative costs reflects  the  growth  of  the
Company's three businesses.

Other Income (Expense)

For  1997,  net  other income was $31,000, as compared  with  net
other  income  of $204,000 in the year-earlier period.   In  June
1997, the Company recorded other income of $100,000 as a discount
on  the  payment   relating  to the termination  of  the  License
Agreement with Sligos.  In June 1996, the Company recorded  other
income  of $213,000 as a gain on the sale of intangibles relating
to the sale of the ICR products to NCS.

Investment in Product Development and Marketing

In  1996  and  1997, the Company had not capitalized any  expense
relating  to  development  or marketing  of  its  products.   The
following  information details the amounts by which the Company's
expenses  in connection with each of its major product  lines  in
those years exceeded early-stage revenues for such product lines.

The largest investment made by the Company was in its Intelligent
Sensors subsidiary, which is responsible for the development  and
marketing  of  the TrafficVision products, an outgrowth  of  work
under  the JPL contract.  The Company extended its contract  with
JPL  and made initial commercial deliveries in the September 1997
quarter.  For the year ended December 31, 1997, expenses of  this
group exceeded revenues by $1,127,000.

The Company began development in July 1996 of products for use in
internet  and intranet environments.  Costs associated with  this
effort  totaled $628,000 in 1997.  In October 1997  Lycos,  Inc.,
which  hosts  one of the most active Web sites on-line,  selected
Nestor's InterSite product to provide intelligent personalization
for Lycos' global Internet navigation center.

The  Company did not make any net investment in its PRISM product
line or in its Fraud Detection System.  Revenues relating to  the
Company's  PRISM  Fraud  Detection System  exceeded  expenses  by
$2,544,000  in  1997,  including  $480,000  of  license   revenue
relating to the termination of the License Agreement with Sligos.


Net Income

During  1997,  the  Company experienced a loss  of  $295,000,  as
compared with a loss of $199,000 in the prior year.  For the year
ended  December  31,  1997, loss per share available  for  common
stock  was $0.08 per share, as compared with a loss per share  of
$0.09 in the corresponding period of the prior fiscal year.   For
the  year  ended  December  31, 1997, there  were  outstanding  a
weighted  average of 9,243,508 shares, as compared with 8,376,345
in the year-earlier period.



Analysis  of Six Months Ended December 31, 1996 Compared  to  Six
Months Ended December 31, 1995

On June 11, 1996, the Company entered into an exclusive Licensing
Agreement with National Computer Systems, Inc. (NCS) transferring
the   development,  production,  and  marketing  rights  of   the
Company's  Intelligent Character Recognition  (ICR)  products  to
NCS.   Largely  as a result of the transfer of ICR operations  to
NCS,  for  the  transition  period the  Company  realized  a  26%
decrease in revenues compared to the corresponding period of  the
prior  fiscal year.  Expenses in the transition period  decreased
8%  and  the operating loss increased 62% when compared with  the
corresponding period of the prior year.

The  Company  began, in the quarter ended September 30,  1996,  a
project  to  customize  its PRISM Fraud Detection  System  for  a
customer.   Because  the  terms of the agreement  have  not  been
finalized, the Company is accounting for the development costs in
accordance   with  SOP  81-1,  "Accounting  for  Performance   of
Construction-Type  and Certain Production-Type Contracts,"  which
provides that costs be deferred until delivery is made under  the
terms  of  an  enforceable agreement.  The Company  executed  its
agreement  on  March 28, 1997 and made required deliveries.   For
the  six  months  ended December 31, 1996, the  Company  deferred
$364,000 of costs associated with this project.

Revenues

In  1996, the Company changed its accounting period to a calendar
year  from a fiscal year ending on June 30.  The following  table
compares revenues for the transition period in 1996 with revenues
for  the  comparable period of the preceding year, including  and
excluding revenues from ICR operations transferred to NCS:

                                             Total
  Total           Total                     Revenues
 Revenues        Revenues                  Six-Month
Six-Month       Six-Month                 Period Ended
Period Ended   Period Ended                 12/31/95
 12/31/96        12/31/96       Change   Excluding ICR     Change

1,196,000       $2,149,000       -44%      $1,195,000        0%


During  the  six  months ended December 31, 1996, total  revenues
decreased   $953,000  to  $1,196,000  from  $2,149,000   in   the
corresponding period of the prior fiscal year.  Revenues  in  the
year-earlier period included $954,000 of revenues associated with
the ICR products that were licensed to NCS in June 1996.

Software Licensing

In  the  transition  period, product-licensing  revenues  totaled
$526,000,  as  compared with $902,000 in the prior  period.   The
decrease in software licensing revenues reflects, primarily,  the
net  of two effects: a decrease in ICR licensing revenues and  an
increase  in  licensing revenues relating to the Company's  PRISM
Fraud Detection product.

During  the  transition period royalties paid by NCS relating  to
its  sales  of  ICR products amounted to $68,000, a  decrease  of
$704,000 in ICR revenues the Company recognized in the six months
ended December 31, 1995.

Revenues from the Company's PRISM product totaled $396,000 in the
transition period, as compared with $150,000 in the corresponding
period  of  the  prior fiscal year.  The growth of such  revenues
reflects  additional  PRISM licenses and increased  license  fees
from existing licensees.

Engineering Services

During  the  six  months ended December 31, 1996,  revenues  from
engineering contracts totaled $606,000 as compared to  $1,076,000
in  the  year-earlier period, including $182,000  of  engineering
revenues  relating  to  the ICR products.  Excluding  engineering
revenues  relating  to ICR products, revenues in  the  transition
period  decreased $470,000 compared with the corresponding period
of the prior fiscal year.

Revenues  relating to customer-funded modifications  of  Nestor's
Fraud Detection System totaled $380,000 in the transition period,
as  compared  with $743,000 in the six months ended December  31,
1995.

The  Company's  contracts  with  the  Defense  Advanced  Research
Projects Agency (DARPA) require engineering services rendered  by
the  Company to develop a generic commercial application  of  the
Company's  technology to high-speed pattern  recognition  through
the creation of an integrated circuit, associated circuit boards,
and   supporting  development  software.   The  Company  has  two
contracts  with DARPA.  The first contract, which was  signed  in
April  1990,  is in the amount of $1,630,000; as of December  31,
1996,  approximately  $1,623,000 had  been  earned.   The  second
contract,  signed August 26, 1993, is in the amount of  $776,000;
as of September 30, 1996, approximately $773,000 had been earned.

On  September 1, 1995, the Company signed an agreement  with  the
Jet  Propulsion  Laboratory (JPL) to develop a  prototype  sensor
system designed for vehicular-traffic surveillance and detection.
The contract, valued at approximately $597,000, was completed  in
December 1996.  The terms of the DARPA and JPL contracts call for
delivery of prototype products, but do not specify any subsequent
purchasing or licensing provisions.

During  the  six  months  ended December 31,  1996,  the  Company
recognized   revenues  totaling  $226,000  under  its  government
contracts.   In  the  year-earlier period such  revenues  totaled
$97,000.

Sales of Tangible Products

The  tangible  products currently sold by the Company  are  based
upon  the Company's Ni1000 Recognition Accelerator Chip  and  the
PCI4000  Recognition Accelerator Board, which are marketed  along
with development software that enables customers to develop high-
speed  recognition  applications.  Revenues  from  the  Company's
Ni1000  Development  System  totaled $64,000  in  the  transition
period, as compared with $191,000 in the corresponding period  of
the prior fiscal year.  The decrease in revenues is accounted for
by  a  decrease  in  unit volume as the Company  focused  on  its
TrafficVision product, which incorporates the Ni1000  Recognition
Accelerator  Chip  (see  Investment in  Product  Development  and
Marketing, below).

Operating Expenses

Total  operating  expenses - consisting of engineering,  research
and   development,   sales  and  marketing,   and   general   and
administrative  expenses  - amounted to  $2,115,000  in  the  six
months  ended  December 31, 1996, as compared with $2,691,000  in
the year-earlier period.

Included  in expenses for the six months ended December 31,  1995
are  approximately $1,068,000 of expenses attributable to the ICR
products, which were licensed to NCS in June 1996.  Most  of  the
expenses  associated with the ICR products are no longer incurred
by  the  Company  as  NCS  hired most of the  staff  assigned  to
development, sales, and support of the ICR products.

Offsetting  the decrease in expenses attributable to the  absence
of  the  ICR products is the Company's increased spending on  its
PRISM  Fraud Detection System, on its TrafficVision product,  and
on  its  newest product, Nestor InterSite, which is designed  for
use in internet and intranet environments.  During the transition
period  the  Company increased its spending on  its  PRISM  Fraud
Detection  System by approximately $23,000 as compared  with  the
year-earlier   period.    Spending  on  TrafficVision   increased
$358,000  from  last  year to this year, and  the  Company  spent
$167,000 on InterSite.

Engineering Services

Costs  related  to engineering services totaled $922,000  in  the
transition  period, as compared to $805,000 in the  corresponding
period  of  the prior fiscal year.  As a percentage of  revenues,
these  costs  increased  from 75% last year  to  152%  this  year
reflecting  additional costs incurred on projects that  had  been
expected to conclude in the quarter ended September 30, 1996.

Research and Development

Research  and development expenses totaled $294,000  in  the  six
months ended December 31, 1996, as compared with $472,000 in  the
corresponding period of the prior fiscal year.  The  decrease  in
such  costs  was  due,  primarily, to the  net  of  two  effects:
research  and  development costs relating  to  the  ICR  products
totaled $350,000 in the year-earlier period, while there were  no
such  costs  in  the  transition period; and  the  Company  began
development in July 1996 of its Nestor InterSite product and such
development costs totaled $137,000.

Selling and Marketing

The  largest  decrease in expenses was in selling and  marketing.
In the transition period selling and marketing expenses decreased
$440,000 to $457,000 from $897,000 in the corresponding period of
the  prior  fiscal year.  The decrease in selling costs  reflects
the  net of the absence of selling and marketing costs associated
with the ICR products in the transition period and an increase in
selling   costs  associated  with  the  PRISM  and  TrafficVision
products.   ICR  selling costs in the six months  ended  December
1995 totaled $637,000.

General and Administrative

General  and  administrative expenses  totaled  $432,000  in  the
transition  period, as compared with $493,000 in the year-earlier
period.   The  decrease  in costs from last  year  to  this  year
reflects  the  net of numerous account decreases  and  increases,
with no single expense changing materially.

Expenditures on Product Development and Marketing

Revenues  relating  to the Company's PRISM  and  Fraud  Detection
System  exceeded  expenses by $71,000 in  the  six  months  ended
December  31,  1996,  The Company has installed its  products  at
Mellon  Bank,  GE  Consumer Credit Financial  Services,  BankOne,
Europay  International (an association of 700 banks  in  Europe).
In  September  1996, the Company signed a license agreement  with
Applied Communications, Inc. (ACI) enabling ACI to integrate  and
market  Nestor's  products with certain  products  of  ACI.   ACI
provides  authorization  and transaction-processing  software  to
nearly 500 financial institutions worldwide.

The largest investment made by the Company was in its Intelligent
Sensors  Division, which is responsible for the  development  and
marketing  of  the TrafficVision products, an outgrowth  of  work
under  the  JPL contract.  For the six months ended December  31,
1996, expenses of this group exceeded revenues by $437,000.

The  Company began development in July 1996 of a product for  use
in  internet applications.  Nestor InterSite enables customers to
understand individual on-line customers as they visit  Web  sites
and to dynamically present personalized content to those visitors

Net Income Per Share

During  the transition period, the Company experienced a loss  of
$935,000,   as   compared  with  a  loss  of  $723,000   in   the
corresponding  period  of the prior fiscal  year.   For  the  six
months  ended  December 31, 1996, loss per  share  available  for
common  stock was $0.13 per share, as compared with  a  loss  per
share  of  $0.11 in the corresponding period of the prior  fiscal
year.   For  the six months ended December 31, 1996,  there  were
outstanding  a weighted average of 8,689,031 shares, as  compared
with 7,719,371 in the year-earlier period.

ITEM 7(a):     Not applicable.






                            SIGNATURE

     Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
the report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                NESTOR, INC.
                                (Registrant)


                                /s/David Fox, President and CEO

Date:  April 8, 1999

     Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.

   Signatures                 Title                    Date
/s/Leon N Cooper      Co-Chairman of the Board    April 8, 1999
                      and Director

/s/Charles Elbaum     Co-Chairman of the Board    April 8, 1999
                      and Director

/s/David L. Fox       President, Chief Executive  April 8, 1999
                      Officer and Director

/s/Herbert S. Meeker  Secretary and Director      April 8, 1999

/s/Sam Albert         Director                    April 8, 1999

/s/John Guinan        Director                    April 8, 1999

/s/Jeffrey Harvey     Director                    April 8, 1999

/s/Thomas F. Hill     Director                    April 8, 1999

/s/Bruce Schnitzer    Director                    April 8, 1999

                                










               CONSOLIDATED FINANCIAL STATEMENTS




                            FORM 10-K




                       December 31, 1998



                          NESTOR, INC.                    Part II
                                                           Item 8
                            CONTENTS




Independent Auditor's Report



                                                    Statement No.




Consolidated Balance Sheets                        1
 December 31, 1998 and 1997

Consolidated Statements of Operations -
 For the Years Ended December 31, 1998 and 1997,
 For the Six Months Ended December 31, 1996 and
 For the Years Ended June 30, 1996                 2


Consolidated Statements of Cash Flows -
 For the Years Ended December 31, 1998 and 1997
 For the Six Months Ended December 31, 1996 and
 For the Year Ended June 30, 1996                  3


Consolidated Statements of Stockholders' Equity -
 For the Years Ended December 31, 1998 and 1997
 For the Six Months Ended December 31, 1996 and
 For the Years Ended June 30, 1996                 4


Notes to Consolidated Financial Statements
                                                          Part II
                                                           Item 8
                 Report of Independent Auditors

The Board of Directors and Stockholders of Nestor, Inc.

We  have audited the accompanying consolidated balance sheets  of
Nestor,  Inc. as of December 31, 1998 and 1997, and  the  related
consolidated   statements   of   operations,   cash   flows   and
stockholders' equity for the years ended December  31,  1998  and
1997 and the period July 1, 1996 to December 31, 1996. Our audits
also  included  the financial statement schedule  listed  in  the
index at Item 14(a).  These financial statements and schedule are
the    responsibility   of   the   Company's   management.    Our
responsibility  is  to  express an  opinion  on  these  financial
statements and schedule based on our audits.

We  conducted  our  audits in accordance with generally  accepted
auditing  standards.  Those standards require that  we  plan  and
perform  the  audit to obtain reasonable assurance about  whether
the  financial statements are free of material misstatement.   An
audit  includes  examining, on a test basis, evidence  supporting
the  amounts  and  disclosures in the financial  statements.   An
audit also includes assessing the accounting principles used  and
significant  estimates made by management, as well as  evaluating
the  overall  financial statement presentation.  We believe  that
our audits provide a reasonable basis for our opinion.

In  our  opinion, the 1998 and 1997 financial statements referred
to   above   present  fairly,  in  all  material  respects,   the
consolidated  financial position of Nestor, Inc. at December  31,
1998 and 1997, and the consolidated results of its operations and
its cash flows for the years ended December 31, 1998 and 1997 and
the  period July 1, 1996 to December 31, 1996, in conformity with
generally accepted accounting principles.   Also in our  opinion,
the  related  financial  statement schedule  when  considered  in
relation  to  the basic financial statements taken  as  a  whole,
presents  fairly  in  all material respects the  information  set
forth therein.

ERNST & YOUNG LLP


Providence, Rhode Island
February  17, 1999 (except for Note 23 as to which  the  date  is
March 25, 1999)


                  INDEPENDENT AUDITOR'S REPORT



To the Board of Directors and Stockholders
  of Nestor, Inc.
Providence, Rhode Island

We  have audited the consolidated statements of operations,  cash
flows and stockholders' equity of Nestor, Inc. for the year ended
June  30,  1996.  Our audit also included the financial statement
schedule  listed  in  the index at item 14(a).   These  financial
statements  and schedule are the responsibility of the  Company's
management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We  conducted  our  audit in accordance with  generally  accepted
auditing  standards.  Those standards require that  we  plan  and
perform  the  audit to obtain reasonable assurance about  whether
the   consolidated  statements  of  operations,  cash  flows  and
stockholders equity are free of material misstatement.  An  audit
includes  examining,  on  a test basis, evidence  supporting  the
amounts  and  disclosures  in  the  consolidated  statements   of
operations, cash flows, and stockholders equity.  An  audit  also
includes assessing the accounting principles used and significant
estimates  made by management, as well as evaluating the  overall
presentation  of the consolidated statements of operations,  cash
flows,  and stockholders equity.  We believe that our  audits  of
the   consolidated  statements  of  operations,  cash  flows  and
stockholders equity provide a reasonable basis for our opinion.

In  our opinion, the consolidated statements of operations,  cash
flows,  and stockholder's equity present fairly, in all  material
respects, the results of operations, cash flows, and stockholders
equity  of  Nestor,  Inc. for the year ended June  30,  1996,  in
conformity with generally accepted accounting principles.   Also,
in  our  opinion, the related financial statement schedule,  when
considered in relation to the basic financial statements taken as
a  whole, present fairly in all material respects the information
set forth therein.

GASSMAN, REBHUN & CO., P.C.
New York, New York
September 6, 1996

<TABLE>
                          NESTOR, INC.
                   Consolidated Balance Sheets

<CAPTION>                                                  December 31,
          ASSETS                                   1998            1997

<S>                                                        <C>             <C>
Current assets:
 Cash and cash equivalents                        $  1,175,183   $     386,639
 Accounts receivable, net of allowance
 for doubtful accounts                                 512,748         557,212
 Unbilled contract revenue                             118,209         298,803
 Other current assets                                  329,961         232,492
  Total current assets                               2,136,101       1,475,146
Property and equipment at cost -
net of accumulated depreciation                        368,525         261,463
Deferred development costs                              80,000         574,752
Intangible assets -
net of accumulated amortization                            ---         295,887
Other assets                                             6,963           5,783
Total Assets                                       $ 2,591,589   $   2,613,031


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
 Accounts payable and accrued expenses            $  1,150,604   $     920,833
 Deferred income                                       434,036         408,232
  Total current liabilities                          1,584,640       1,329,065

Noncurrent liabilities:
 Long term obligations under capital leases             22,618          10,220
  Total liabilities                                  1,607,258       1,339,285
 Series E, F, G and H redeemable convertible
  preferred stock 4,846 shares at
  December 31, 1997 (liquidation value $1,000
  per share plus accrued dividends)                        ---       5,792,787

 Commitments and contingencies                             ---             ---

Stockholders' Equity (Deficit):
 Preferred stock, $1.00 par value,
 authorized 10,000,000 shares;
  issued and outstanding:
  Series B - 365,000 shares at December 31, 1998
  And 1,445,000 shares at December 31, 1997            365,000       1,445,000
  Series D - 0 shares at December 31, 1998 and
  170,871 shares at December 31, 1997                      ---         265,347
 Common stock, $.01 par value, authorized
  30,000,000 shares; issued and outstanding:
  17,479,327 shares at December 31, 1998 and
  9,403,987 shares at December 31, 1997                174,793          94,040
 Warrants and options                                  630,467         523,984
 Additional paid-in capital                         24,504,556      12,579,920
 Retained (deficit)                                (24,690,485)    (19,427,332)
  Total stockholders' equity (deficit)                 984,331     (4,519,041)

Total Liabilities and 
Stockholders' Equity (Deficit)                   $   2,591,589   $  2,613,031
                                
                                
                                
  The Notes to the Financial Statements are an integral part of
                         this statement.
</TABLE>

<PAGE>




<TABLE>

                          NESTOR, INC.
              Consolidated Statements of Operations
                                
<CAPTION>
                                                        Six Months
                                                          Ended        Year Ended
                           Years Ended December 31,    December 31,     June 30,
                              1998          1997            1996         1996
<S>                       <C>          <C>            <C>           <C>
Revenue:
Software licensing        $ 1,352,071  $  4,390,479   $    526,353  $  2,825,600
 Engineering services         746,007     1,055,459        605,776     2,378,135
 Tangible product sales       143,298       235,138         63,775       257,845

     Total revenue          2,241,376     5,681,076      1,195,904     5,461,580


Operating Expenses:
 Engineering services       2,066,558     1,151,147        922,325     1,833,531
 Tangible product costs        54,010       134,305          8,978        32,189
 Research and development   2,112,746     1,498,181        294,136       823,000
 Selling and marketing      1,831,697     1,986,340        457,281     1,764,585
 General and
   administrative           1,413,340     1,207,088        432,301     1,035,535

     Total operating
      expenses              7,478,351     5,977,061      2,115,021     5,488,840


Loss from operations       (5,236,975)     (295,985)      (919,117)      (27,260)

Other income
(expense) - net               (26,178)       31,321        (16,220)       39,950

Income (loss)
before income taxes        (5,263,153)     (264,664)      (935,337)       12,690

Income taxes                      ---        30,000            ---           ---

Net Income (Loss)         $(5,263,153) $   (294,664)   $  (935,337)  $    12,690


Loss Per Share:
Net Income (Loss)         $(5,263,153) $   (294,664)   $  (935,337)  $    12,690

Dividends accrued on
preferred stock               151,396       447,191        201,094       261,210

Net Loss Available for
 Common Stock             $(5,414,549) $   (741,855)   $(1,136,431)  $  (248,520)

Loss Per Share:
 Basic and diluted        $     (0.36) $      (0.08)   $     (0.13)  $     (0.03)

Shares Used in Computing
Loss Per Share:
 Basic and diluted         15,249,932     9,243,508      8,689,031     7,847,510

The Notes to the Financial Statements are an integral part of this statement.

</TABLE>

<PAGE>

<TABLE>
                          NESTOR, INC.
              Consolidated Statements of Cash Flows

<CAPTION>
                                                          Six Months
                                                            Ended    Year Ended
                               Years Ended December 31,  December 31, June 30,
                                  1998         1997          1996       1996
<S>                                  <C>         <C>           <C>         <C>
Cash flows from operating activities:
 Net income (loss)           $(5,263,153)  $(294,664)  $  (935,337)  $  12,690
  Adjustments to reconcile
  net income (loss)
  to net cash used by
  operating activities:
   Write-down for
    impairment loss              790,641         ---          ---          ---
     Depreciation and
   amortization                  114,810     194,311       45,328      104,559
   Loss on disposal of
    fixed assets                     ---       3,573          ---        4,346
   Expenses charged to
    operations relating to
    options, warrants and
    capital transactions         106,483     161,684       42,500      178,375
   Discount on payment of
    vendor obligation                ---    (100,000)         ---          ---
   Changes in assets and
    liabilities:
     (Increase) decrease in
      accounts receivable         44,464     451,937     (414,839)      67,424
     (Increase) decrease in
      unbilled contract
      revenue                    180,594    (171,858)     155,991      (74,584)
     (Increase) in deferred
      development costs              ---    (210,347)    (364,405)         ---
     (Increase) decrease in
      other assets              (98,649)      41,635      (45,877)     (99,025)
     (Decrease) increase in
      accounts payable
      and accrued expenses      199,750      (63,845)     (83,593)    (568,309)
     (Decrease) increase in
      deferred income            25,804     (361,071)     252,300          796

     Net cash used by
      operating activities   (3,899,256)    (348,645)  (1,347,932)    (373,728)

Cash flows from investing activities:
 Purchase of property and
  equipment                    (132,209)     (88,622)     (71,390)     (57,531)
 Proceeds from the disposal
  of fixed assets                   ---          ---          ---       85,000

   Net cash provided (used)
    By investing activities    (132,209)     (88,622)     (71,390)      27,469

Cash flows from financing activities:
 Repayment of obligations
  under capital leases          (47,246)     (11,913)      (5,338)      (7,924)
 Proceeds from notes
  payable                       250,000          ---          ---      300,000
 Repayment of notes payable    (250,000)         ---          ---          ---
 Rights offering expense            ---          ---          ---     (136,421)
 Redemption of Preferred
  Series D Stock                (41,424)         ---          ---          ---
 Proceeds from issuance
  of common stock - net       4,977,749       96,975      185,800       99,510
 Proceeds from issuance
  of preferred stock - net          ---          ---          ---    1,651,823
 Payments of dividends
  on preferred stock            (69,070)     (35,613)         ---          ---

   Net cash provided by
    financing activities      4,820,009       49,449      180,462    1,906,988

Net change in cash and
 cash equivalents               788,544     (387,818)  (1,238,860)   1,560,729
Cash and cash equivalents-
 beginning of period            386,639      774,457    2,013,317      452,588

Cash and cash equivalents-
 end of period               $1,175,183   $  386,639   $  774,457  $ 2,013,317

Supplemental cash flows information:
 Interest paid               $   20,350   $    3,598   $    3,227  $     4,372

 Income taxes paid           $   37,500   $     ---    $      ---  $       ---

Significant non-cash transactions are described in Notes 7, 10, 12 and 19

</TABLE>


<TABLE>
Nestor, Inc. Consolidated Statement of Stockholders' Equity
<CAPTION>
                               Common Stock            Preferred Stock          Additional       Retained        Stock
                             Shares     Amount        Shares      Amount    Paid-in Capital     (Deficit)       Warrants       Total
<S>                  <C>         <C>         <C>        <C>             <C>             <C>              <C>         <C>
Balance at 6/30/95    7,606,710  $ 76,067     2,992,064 $  2,992,064    $ 11,103,449    $(18,210,021)    $375,000    $(3,663,441)
Issuance of
 Common Stock           177,998     1,780           ---          ---         175,928             ---          ---        177,708
Issuance of
 Preferred Stock            ---       ---       210,549      315,824        (10,000)             ---          ---        305,824
Conversion of
 Preferred Stock
 to Common Stock        490,878     4,909      (490,878)    (503,817)       498,908              ---          ---            ---
Dividends on
 Preferred Stock
 Series D paid in
 Common Stock             5,355        53           ---          ---          13,495             ---          ---         13,548
Dividends accrued
 on Preferred Stock         ---       ---           ---          ---       (274,819)             ---          ---       (274,819)
Expenses incurred in
 reduction of
 exercise price
 of outstanding
 warrants                   ---       ---           ---          ---         131,250             ---          ---        131,250
Costs incurred in
 connection with
 August 1995
 securities
 registration               ---       ---           ---          ---        (136,421)            ---          ---       (136,421)
Income for the year
 ended June 30, 1996        ---       ---           ---          ---             ---          12,690          ---         12,690
Balance at 6/30/96    8,280,941  $ 82,809     2,711,735 $  2,804,071    $ 11,501,790    $(18,197,331)    $375,000    $(3,433,661)
Issuance of
 Common Stock           190,200     1,902           ---          ---         183,898             ---          ---        185,800
Conversion of
 Preferred Stock to
 Common Stock           445,000     4,450      (445,000)    (447,500)        443,050             ---          ---            ---
Dividends accrued
 on Preferred Stock
 Series D                   ---       ---           ---        9,723          (9,723)            ---          ---            ---
Accretion of value
 of warrants                ---       ---           ---          ---             ---             ---       42,500         42,500
Dividends accrued
 on Redeemable
 Convertible
 Preferred Stock            ---       ---           ---          ---       (191,371)             ---          ---       (191,371)
Loss for the six
 months ended
 December 31, 1996          ---       ---           ---          ---            ---         (935,337)         ---       (935,337)
Balance at 12/31/96   8,916,141  $ 89,161     2,266,735 $  2,366,294    $ 11,927,644    $(19,132,668)    $417,500    $(4,332,069)
Issuance of
 Common Stock           279,592     2,796           ---          ---         472,769             ---          ---        475,565
Conversion of
 Preferred Stock to
 Common Stock           198,800     1,988      (198,800)    (203,200)        201,212             ---          ---            ---
Dividends on
 Preferred Stock
 Series D paid in
  Common Stock
   and cash               9,454        95           ---      (18,381)         18,222             ---          ---            (64)
Repurchase of
 Preferred Stock
 Series A                   ---       ---      (452,064)    (452,064)        352,063             ---          ---       (100,001)
Dividend accrued on
 Preferred Stock
 Series D                   ---       ---           ---       17,698        (17,698)             ---          ---            ---
Dividends accrued on
 Redeemable Convertible
 Preferred Stock            ---       ---           ---          ---       (429,492)             ---          ---       (429,492)
Issuance of
 non-qualified options      ---       ---           ---          ---          55,200             ---          ---         55,200
Accretion of value
 of warrants                ---       ---           ---          ---             ---             ---      106,484        106,484
Loss for the
 year ended
 December 31, 1997          ---       ---           ---          ---             ---        (294,664)         ---       (294,664)
Balance at 12/31/97   9,403,987  $ 94,040     1,615,871 $  1,710,347    $ 12,579,920    $(19,427,332)    $523,984    $(4,519,041)
Issuance of
 Common Stock         2,557,104    25,571           ---          ---       5,060,282             ---          ---      5,085,853
Conversion of
 Preferred Stock to
 Common Stock         1,223,255    12,232    (1,223,255)  (1,294,882)      1,282,650             ---          ---            ---
Premium on Conversion
 of Preferred Stock
 Series B to
 Common Stock            19,200       192           ---          ---           (192)             ---          ---            ---
Dividends on
 Preferred Stock
 Series D paid in
 Common Stock
 and cash                 8,889        89           ---     (17,941)          17,827             ---          ---           (25)
Dividend accrued on
 Preferred Stock
 Series D                   ---       ---           ---       8,900           (8,900)            ---          ---            ---
Repurchase of
 Preferred Stock
 Series D                   ---       ---       (27,616)    (41,424)             ---             ---          ---        (41,424)
Conversion of
 Redeemable
 Convertible
 Preferred Stock
 to Common Stock      4,266,892    42,669           ---         ---       5,823,568              ---          ---      5,866,237
Dividends accrued
 on Redeemable
 Convertible
 Preferred Stock            ---       ---           ---         ---       (142,496)             ---          ---        (142,496)
Costs incurred in
 connection with
 Redeemable
 Preferred
 conversion and
 TSAI Common
 Stock purchase             ---       ---           ---          ---       (108,103)             ---          ---      (108,103)
Accretion of value
 of warrants                ---       ---           ---          ---             ---             ---      106,483       106,483
Loss for the
 year ended
 December 31, 1998          ---       ---           ---          ---             ---      (5,263,153)         ---    (5,263,153)
Balance at 12/31/98  17,479,327  $174,793       365,000 $    365,000    $ 24,504,556    $(24,690,485)    $630,467    $  984,331

The Notes to the Financial Statements are an integral part of this statement.

</TABLE>


Note 1 -  Summary of significant accounting policies:
A.   Organization
          Nestor, Inc. (the "Company") was organized on
March  21,  1983  in Delaware to exploit,  develop  and
succeed to certain patent rights and know-how which the
Company   acquired   from   its   predecessor,   Nestor
Associates,  a  limited  partnership.   The   Company's
principal office is located in Providence, RI.

          The accompanying financial statements include
the  accounts of Nestor, Inc., Nestor Traffic  Systems,
Inc.  ("NTS"), formerly known as Nestor IS,  Inc.,  and
Nestor  Interactive,  Inc.  ("Interactive").   NTS  and
Interactive   are  wholly  owned  subsidiaries   formed
January  1,  1997.   Effective November  7,  1998,  the
Company  ceased  further investment in the  Interactive
subsidiary.   Any  future marketing or  development  of
Interactive's product has been transferred  to  Nestor,
Inc.  All  intercompany transactions and balances  have
been eliminated.

B.   Product and patent development costs
           The  costs  of development of the  Company's
software  which consist primarily of labor and  outside
consulting  and  which  are an  inherent  cost  of  the
Company's   business   and  costs   of   research   and
development    are    expensed   until    technological
feasibility  has  been  established  for  the  product.
Thereafter,   all   software   production   costs   are
capitalized and subsequently reported at the  lower  of
unamortized  cost or net realizable value.  Capitalized
costs  are amortized on a straight-line basis over  the
estimated  economic life (three to five years)  of  the
product.

           Patent-development  costs  are  expensed  or
capitalized,    as   appropriate.    Amortization    of
capitalized  costs  would be on a  straight-line  basis
over  the  shorter of the estimated economic  life,  or
statutory  life, of the patent.  At December  31,  1998
and  1997, there were no capitalized patent-development
costs.

C.   Depreciation and amortization
           Depreciable  assets are  recorded  at  cost.
Depreciation  is  provided on the straight-line  method
over  the  estimated  useful lives  of  the  respective
assets.

           Maintenance  and  repairs  are  expensed  as
incurred.    Major   renewals   and   betterments   are
capitalized.

D.   Revenue recognition
           The  Company  derives revenue from  software
licenses  (Initial  License Fees), user  fees  (Monthly
License  fees),  other  postcontract  customer  support
(PCS)  and engineering services.  Postcontract customer
support  includes maintenance agreements.   Engineering
services  range from installation, training, and  basic
consulting  to  modeling,  software  modification   and
customization  to  meet specific  customer  needs.   In
software  arrangements that include multiple  elements,
the  Company allocates the total arrangement fee  among
each  deliverable based on the relative fair  value  of
each  of  the deliverables determined based on  vendor-
specific objective evidence.

           As  of  January 1, 1998, the Company adopted
AICPA  Statement  of Position 97-2 -  Software  Revenue
Recognition  ("SOP  97-2"),  which  is  effective   for
transactions  entered into in 1998.  Prior  years  have
not  been restated.  The most significant impact of SOP
97-2  on  the Company's revenue recognition  accounting
policies  is that for contracts with multiple elements,
revenue,  in  some  instances, may be recognized  later
than under past practices.  Revenue has been recognized
as follows:

Since January 1, 1998:
           Software  Licenses - The Company  recognizes
the   revenue  allocable  to  software  licenses   upon
delivery  of  the  software product to  the  end  user,
unless  the  fee  is  not  fixed  or  determinable   or
collectibility is not probable.  The Company  considers
all  arrangements  with payment terms extending  beyond
twelve months and other arrangements with payment terms
longer than normal not to be fixed or determinable.  If
the  fee  is  not  fixed  or determinable,  revenue  is
recognized  as  payments become due from the  customer.
In   most   situations,  the  Company   considers   its
acceptance  terms  as perfunctory.   Arrangements  that
include   acceptance  terms  that  are  not  considered
perfunctory  are  not recognized until  acceptance  has
occurred.    If   collectibility  is   not   considered
probable,  revenue  is  recognized  when  the  fee   is
collected.  Revenue on arrangements with customers  who
are   not  the  ultimate  users  (distributors,   other
resellers,  etc.) is not recognized until the  software
is delivered to an end user.


Before January 1, 1998:
          Revenue from software licensing is recognized
upon  delivery provided that no significant vendor  and
post-contract  support obligations  remain  outstanding
and  collection of the resulting receivable  is  deemed
probable.   Where there are insignificant post-contract
support obligations and/or warranties remaining at  the
time  of  delivery, the Company recognizes revenue  and
accrues   the   estimated  cost  of   fulfilling   such
obligations or warranties.

           Product returns or exchanges are charged  to
operations  as incurred.  Where the Company anticipates
significant  returns  of  products  sold,  the  Company
establishes  an  allowance for anticipated  returns  or
exchanges  at the time of sale.  If customer acceptance
is  uncertain, revenue is recognized upon  approval  by
the customer.

In all periods:
            Postcontract  Customer  Support  -  Revenue
allocable to PCS is recognized on a straight-line basis
over the period the PCS is provided.

          Software Services - Arrangements that include
software  services  are evaluated to determine  whether
those  services  are essential to the functionality  of
other  elements  of  the  arrangement.   When  software
services  are considered essential, revenue  under  the
arrangement  is  recognized using  contract  accounting
(see  below).   When  the  software  services  are  not
considered  essential,  the revenue  allocable  to  the
software  services is recognized as  the  services  are
performed.

           Contract Accounting - For arrangements  that
include  customization or modification of the software,
or  where  software  services are otherwise  considered
essential,   revenue  is  recognized   using   contract
accounting.   Revenue from these software  arrangements
is recognized on a percentage-of-completion method with
progress-to-completion measured based upon labor  costs
incurred.

           Training  revenue  is  recognized  upon  the
completion of training sessions with the customer.

           Adoption  of  SOP 97-2 had an  insignificant
impact  on  net  loss for the year ended  December  31,
1998.

E.   Cash equivalents
           For  the  purpose of the statement  of  cash
flows,  the  Company considers all highly  liquid  debt
instruments  purchased with a maturity of  90  days  or
less to be cash equivalents.

F.    Accounting  for issuance  and  exercise  of
      warrants and options to purchase Common Stock
           The  Company  records no  expense  upon  the
issuance of warrants and options issued at fair  market
value.   For warrants and options issued at an exercise
price  below fair market value, the Company records  an
expense  equal  to  the difference between  the  market
value of the underlying shares of Common Stock and  the
exercise  price of such options or warrants.  When  the
Company  induces warrant or option holders to  exercise
at  a price lower than the original exercise price, the
Company  recognizes an expense equal to the fair  value
of the securities issued less the proceeds received for
the  securities, but not more than the reduction in the
exercise price.

G.   Concentrations of credit risk
           The Company's financial instruments that are
exposed   to  concentrations  of  credit  risk  consist
primarily  of  cash  and  cash  equivalents  and  trade
accounts  receivable.  The Company places its cash  and
temporary  cash  investments with high  credit  quality
institutions.   At  times such investments  may  be  in
excess  of  the  FDIC  insurance  limit.   The  Company
routinely  assesses  the  financial  strength  of   its
customers  and,  as  a consequence, believes  that  its
trade  accounts  receivable  credit  risk  exposure  is
limited.  The Company does not require collateral  from
its   customers.   Management  believes  the  allowance
carried for doubtful accounts receivable is adequate to
cover  potential  losses associated with  uncollectible
accounts receivable.

H.   Inventory
           Inventory, consisting primarily of  finished
goods, is valued at the lower of cost or market on  the
first-in,  first-out  basis.   Inventories,  valued  at
$231,613  and $144,875 at December 31, 1998  and  1997,
respectively, are included as "Other current assets" on
the Consolidated Balance Sheets.

I.   Estimates
           The  preparation of financial statements  in
conformity    with   generally   accepted    accounting
principles  requires management to make  estimates  and
assumptions that affect the reported amounts of  assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
the  reported  amounts of revenues and expenses  during
the reporting period.  Actual results could differ from
those estimates.

J.   Change in Fiscal Year
          The Company changed its fiscal year from June
30  to  December 31 effective December 31,  1996.   The
results  for  the six month period ended  December  31,
1996  have  been  presented in the  main  body  of  the
financial statements.

K.   Change in Presentation
           In order to conform to the December 31, 1998
presentation,  certain balances at December  31,  1997,
have been reclassified.


Note 2 -  Comparative Financial Information:
     The following financial information for the six months ended
December 31, 1995 and the year ended December 31, 1996, is
unaudited and is being presented for comparative purposes:
                                
                               Year-Ended       Six Months Ended
                           December 31, 1996   December 31, 1995
                              (Unaudited)         (Unaudited)

       Total revenues         $4,508,397         $ 2,149,088
       Loss from operations     (403,741)           (542,385)
       Net loss                 (199,420)           (723,227)
       Net loss per share -
        basic and diluted     $    (0.09)        $     (0.09)


Note 3 -  Income (loss) per share:
      The  Company reports its income (loss) per  share
("EPS")  in  accordance  with  the  provisions  of  the
Financial Accounting Standards Board Statement No. 128,
Earnings Per Share ("FAS 128"). Basic EPS is calculated
by dividing the income available to common stockholders
by   the  weighted  average  number  of  common  shares
outstanding  for the period, without consideration  for
common stock equivalents.  "Fully diluted" EPS has been
replaced  by  "diluted" EPS.  Diluted EPS  is  computed
giving  effect  to common stock equivalents  and  other
dilutive securities, unless the computation results  in
anti-dilution.



Note 4 -  Accounts receivable, net of allowance for doubtful
          accounts:

                                             December 31,
                                         1998          1997

       Trade accounts receivable       $543,048     $ 711,766
       Allowance for doubtful accounts  (30,300)     (154,554)
       Accounts receivable,
        net of allowance
        for doubtful accounts          $512,748     $ 557,212



Note 5 -  Deferred development costs:
      The Company began, in the quarter ended September
30,  1996,  a  project  to customize  its  PRISM  fraud
detection  system for a customer. For  the  six  months
ended  December  31,  1996, the  Company  had  deferred
$364,000 of costs associated with this project.  During
1997,  an  additional  $211,000  of  such  costs   were
capitalized   in   connection  with   engineering   and
installation of the project.  Management believed  that
these  costs,  which are subject to a binding  contract
entered into upon delivery of the software on March 28,
1997, would be fully recovered over the five year  term
of the aforementioned contract.

      Although  revenue had not yet been  earned  under
this  contract,  the  Company  began  to  amortize  the
related deferred costs in June 1998.  In December  1998
initial contract revenues were recognized.  In view  of
the  level  of revenue generated by this contract,  the
Company  evaluated the carrying value of  the  deferred
contract  costs,  utilizing estimated  future  contract
revenues   and   ongoing   customer   support    costs,
appropriately discounted.  In accordance with FAS 121 -
"Impairment  of Long Lived Assets," the Company  wrote-
down  deferred development costs to $80,000 at December
31,   1998.   The  residual  deferred  costs  will   be
amortized  on a straight-line basis over the  remaining
term of the contract.


Note 6 -  Property and equipment at cost - net:

                                                       Useful Life
                                                       in Years or
                                   December 31,         Lease Term
                                  1998        1997

          Leasehold
           improvements       $      ---  $   22,945    Lease Term
          Office furniture
           and equipment         234,706     199,254      5 - 7
          Leased computer
           equipment under
           capital leases        113,893      46,730         5
          Computer equipment   1,344,244   1,238,913      3 - 5
                              $1,692,843  $1,507,842

          Less:  Accumulated
           depreciation and
           amortization        1,324,318   1,246,379
                              $  368,525  $  261,463

     Depreciation and amortization expense on the above
assets of $114,810, $95,682, $45,327, and $104,559  was
recorded  for  the years ended December  31,  1998  and
1997,  for the six months ended December 31, 1996,  and
for the year ended June 30, 1996, respectively.



Note 7 -  Intangible Asset:
      On  March  31,  1997, the Company purchased  from  Cyberiad
Software,   Inc.   ("Cyberiad"),  a  Rhode  Island   corporation,
substantially  all of Cyberiad's assets for use in the  Company's
Interactive subsidiary product.  In this transaction, the Company
issued  200,000 shares of its Common stock to Cyberiad and agreed
to   assume  approximately  $10,500  of  Cyberiad's  liabilities.
Accordingly,  the  Company recorded as an  intangible  asset  the
excess  of  its acquisition cost over the fair value of  the  net
liabilities assumed ($394,517) and began to amortize  this  asset
over  36 months.  Amortization expense recorded in the year ended
December 31, 1997 was $98,629.

      Since  the  Company has ceased further  investment  in  the
Interactive subsidiary (see Note 1) and future realization of the
asset is uncertain, the remaining value of this asset was written
off in November 1998.


Note 8 -  Accounts payable and accrued expenses:
     Accounts payable and accrued expenses consists of the
following:

                                        December 31,
                                      1998         1997

          Trade accounts payable   $  400,900  $  316,670
          Accrued salaries            279,929     333,046
          Other accrued expenses      469,775     271,117

                                   $1,150,604  $  920,833


Note 9 -  Lines of credit:
      On  July  29,  1997 Nestor, Inc. entered  into  a
$200,000 Revolving Line of Credit with a bank. In March
1998, the Line was increased to $500,000.  The interest
rate  was  equal to the prime rate plus 1.5%,  and  the
Line was secured by the tangible assets of Nestor, Inc.
The Line was terminated in September 1998.

      On  March  25, 1998, TSAI granted the  Company  a
short-term  note  in contemplation of  the  TSAI  stock
purchase (Note 12).  This note was surrendered on April
29,  1998. On March 24, 1999, a new Line of Credit  was
established with TSAI (Note 23).


Note 10 - Redeemable convertible preferred stock:
      On March 31, 1998, the Company and Wand Partners,
owners   of   the  outstanding  redeemable  convertible
preferred  stock,  agreed to modify certain  terms  and
conditions  governing the stock.  Wand Partners  agreed
to  release  the Company from mandatory  redemption  in
exchange  for  the Company's agreement to increase  the
dividend  rate  by one percent per annum  beginning  on
July  1,  2000.   On  April  29,  1998,  Wand  Partners
converted  all of its redeemable convertible  preferred
stock into common stock (see Note 12).

The  Company was originally required to redeem  all  of
the following series of convertible preferred stock  on
or  before August 1, 2004.  Accordingly, this preferred
stock  subject  to mandatory redemption  was  presented
separately outside of permanent stockholders' equity in
the accompanying financial statements.
                                              December 31,
                                            1998         1997
        Series E, par value $1.00
       per  share,  1,444  shares
       outstanding  and  $305,577
       of  accumulated  dividends
       at December 31, 1997.            $   ---    $ 1,749,577

        Series F, par value $1.00
       per   share,  599  shares
       outstanding  and  $95,821
       of  accumulated dividends
       at December 31, 1997.                ---        694,821

        Series G, par value $1.00
       per   share,  777   shares
       outstanding  and  $116,650
       of  accumulated  dividends
       at December 31, 1997.                ---        893,650

        Series H, par value $1.00
       per  share, 2,026  shares
       outstanding and  $428,739
       of  accumulated dividends
       at December 31, 1997.                ---      2,454,739

        TOTAL                            $  ---     $5,792,787



       The   redeemable  convertible  preferred   stock
originally accrued and accumulated dividends  at  rates
of  seven percent on Series E and H and nine percent on
Series  F  and  G, compounded quarterly on  the  stated
value  per  share and such dividends not paid  in  cash
increased  the  stated value.  The  Company  paid  cash
dividends totaling $69,046 in 1998 and $35,613 in  1997
on the redeemable convertible preferred stock.


Note 11 - Convertible Preferred stock:
      In  June 1997 the Company repurchased from Sligos
S.A.  all  of  the outstanding shares of the  Series  A
Preferred  Stock.  See Note 19, Termination of  License
Agreement.  Series A Preferred Stock was convertible at
any  time into one fully paid and non-assessable  share
of  Common  Stock.   Series A Preferred  had  the  same
dividend  rights as shares of Common Stock but  carried
no voting rights.  Each share of Series A Preferred had
the  right  to receive in liquidation $2.00 before  any
distribution was made on Common Stock or on  any  other
class of stock ranking junior to Series A.

       Series   B   Convertible  Preferred   Stock   is
convertible  into Common Stock of the  Company  at  any
time  on a share-for-share basis.  Series B Convertible
Preferred  Stock  has the same rights with  respect  to
voting  and dividends as the Common Stock, except  that
each share of Series B Convertible Preferred Stock  has
the  right  to receive in liquidation $1.00 before  any
distribution  is made to holders of the  Common  Stock.
The   liquidation  value  of  Series  B  Preferred  was
$365,000,  and  $1,445,000, at December  31,  1998  and
1997, respectively.

In  May 1998, the Company offered Series B stockholders
a  2% conversion premium payable in common stock for  a
share-for-share  conversion of all  shares  held.   The
conversion  offer,  which expired  on  June  26,  1998,
resulted  in  a  premium  of 19,200  common  shares  as
960,000 Series B shares were converted.  The rights and
benefits   of  remaining  Series  B  stockholders   are
unchanged,   including  ongoing   standard   conversion
rights.

       Series   D   Convertible  Preferred  Stock   was
convertible after January 1, 1996 at the option of  the
holder into one fully paid and non-assessable share  of
Common Stock of the Company on a share-for-share basis.
The  Series D Preferred had the right to receive annual
dividends  at  the rate of seven percent  (7%)  of  the
stated  value  per share ($1.50), paid in  cash  or  in
shares  of  Common Stock at the option of the  Company.
On  June 30, 1997, the Company paid stock dividends  on
the  Series D Preferred totaling $18,381.  The  Company
had  the  right, after June 1, 1996, to redeem in  cash
the  Series D Preferred, in whole or in part from  time
to  time,  at  the stated value per share plus  accrued
dividends.  The liquidation value of Series D Preferred
was $265,347 at December 31, 1997.

The  Company issued a redemption call in May  1998  for
all  of the outstanding Series D shares at a redemption
price of $1.50 plus unpaid dividends payable as of June
30,  1998.   Stockholders had the option of  converting
into   common   shares  under  the   Preferred   Shares
Agreement.  After paying dividends of $17,941  on  June
30,  1998,  the  Company reclassified  the  unconverted
Series  D  balance  to  accounts  payable  and  accrued
expenses  where $36,349 remains unpaid at December  31,
1998.




Note 12-  Common Stock:

      On  April  29,  1998, Nestor sold to  Transaction
Systems Architects, Inc.  ("TSAI") $5 million of  newly
issued  common stock at a price of $2 per share  and  a
warrant to purchase an additional 2.5 million shares at
$3 per share expiring March 1, 2002.  Proceeds from the
sale consisted of $4.5 million in cash and surrender of
a  $500,000  note owed to TSAI.  Concurrent  with  this
transaction,  Wand Partners converted its $5.8  million
of  redeemable  convertible preferred stock  (Note  10)
into common stock.

      Additionally,  a  conversion offer  to  Series  B
Preferred  stockholders and call on Series D  preferred
shares,   resulted  in  979,200  and  143,155   shares,
respectively,  of common stock issued as  of  June  30,
1998 (Note 11).


Note 13-  Options and warrants:

     On April 1, 1984, the Company adopted an Incentive
Stock Option Plan providing for the granting of options
to  purchase shares of the Company's common stock at  a
price  equal  to the market price of the stock  at  the
date  of  grant.  The Company's Stock Option  Plan  has
authorized the grant of options to employees for up  to
2,450,000   shares  of  the  Company's  common   stock.
Options are exercisable for five years from the date of
grant.

     On May 6, 1997, the Company adopted the 1997 Stock
Option  Plan providing for the granting of  options  to
purchase  shares  of the Company's common  stock  at  a
price  equal  to the market price of the stock  at  the
date  of  grant.   The  1997  Stock  Option  Plan   has
authorized the grant of options to employees for up  to
1,000,000   shares  of  the  Company's  common   stock.
Options  are exercisable for up to ten years  from  the
date   of   grant,   although  all  options   currently
outstanding expire five years from the date of grant.

       The  Company  has  adopted  the  disclosure-only
provisions  of  Financial  Accounting  Standards  Board
Statement   No.   123,   Accounting   for   Stock-Based
Compensation  ("FAS 123") which is first applicable  to
the  Company's  fiscal year ended June 30,  1996.   The
Company  will continue to account for its stock  option
plans  in  accordance with the provisions  of  APB  25,
Accounting for Stock Issued to Employees.  Accordingly,
no   compensation  cost  has  been  recognized  in  the
financial  statements  for  qualifying  grants   issued
pursuant to the Company's Stock Option Plan.

      On  October  23,  1998, the  Company's  Board  of
Directors  approved a repricing of the Company's  Stock
Option  Plan.  The price of the new options was $.6875,
the  closing  price on October 23, 1998.  Options  were
exchanged at equal value using the Black-Scholes  model
and  acceptance of the repricing offer was optional  on
the   part  of  the  employee.   Employees  surrendered
543,500  options for repricing and the Company  granted
254,085 repriced options in accordance with this offer.
The effect of this repricing is reflected in the tables
below.

      The following table presents the activity of  the
Company's  Stock  Option  Plan  for  the  years   ended
December  31,  1998 and 1997, for the six months  ended
December  31, 1996 and for the fiscal year  ended  June
30, 1996:

<TABLE>
<CAPTION>
                                                             Six Months Ended       Year Ended
                           Years Ended December 31,             December 31,         June 30,
                           1998               1997                  1996               1996

                          Weighted            Weighted            Weighted            Weighted
                          Av. Ex.             Av. Ex.             Av. Ex.             Av. Ex.
                     Shares    Price     Shares    Price      Shares    Price     Shares    Price
 <S>                <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>
 Outstanding
  beginning
  of year            2,214,000   1.58    1,781,500   1.50    1,356,000   1.03    1,399,000  1.80
 Granted               454,124    .99      484,000   1.81      612,000   2.38    1,406,000  1.04
 Exercised              31,250   1.09       46,875   1.00      186,500   0.98      100,500  1.09
 Canceled            1,057,750   1.88        4,625   1.67          ---    ---    1,348,500  1.83
 Outstanding
  end of year        1,579,124   1.22    2,214,000   1.58    1,781,500   1.50    1,356,000  1.03

 Options
 exercisable
 at year end         1,102,846   1.22    1,470,250   1.39    1,101,875   1.22    1,023,500  1.00

 Weighted average
  Fair value of
  Options granted
  During the year   $     0.71          $     1.44
</TABLE>
<PAGE>

      The   following  table presents weighted  average
price  and  life  information about significant  option
groups outstanding at December 31, 1998.

<TABLE>
<CAPTION>                      Options Outstanding              Options Exercisable
                                      Weighted
                                      Average      Weighted                  Weighted
                        Number       Remaining     Average      Number       Averaged
       Range of      Outstanding    Contractual    Exercise  Exercisable   Exercisable
   Exercise Prices   at 12/31/98    Life (Years)     Price   at 12/31/98      Price
  <S>               <C>               <C>          <C>       <C>            <C>
  $   .87-  $1.00    1,086,374         2.79         $0.90      816,034       $0.97
  $  1.50-  $2.00      288,250         3.48          1.55      160,688        1.55
  $  2.09-  $2.44      143,000         3.03          2.26       88,250        2.27
  $  2.81-  $2.94       61,500         3.20          2.76       37,875        2.81
                     1,579,124         2.96         $1.22    1,102,846       $1.22
</TABLE>

      The following are the pro forma net loss and  net
loss  per  share for the years ended December 31,  1998
and  1997, for the six months ended December 31,  1996,
and  for  the  year  ended June 30,  1996,  as  if  the
compensation  cost  for  the  option  plan   had   been
determined  based on the fair value at the  grant  date
for  grants  in  those  periods and  reflected  in  the
financial statements:
       
<TABLE>
<CAPTION>
                                Year Ended                     Year Ended                Six Months Ended                Year Ended
                            December 31, 1998              December 31, 1997            December 31, 1996              June 30, 1996
               As Reported    Pro Forma      As Reported     Pro Forma    As Reported     Pro Forma     As Reported   Pro Forma
<S>          <C>            <C>              <C>          <C>              <C>          <C>              <C>          <C>
Net Income
(loss)       $(5,263,153)   $(4,710,218)     $(294,664)   $  (876,280)     $(935,337)   $(1,277,841)     $   12,690   $(633,262)
Net (loss)
per share    $     (0.36)   $     (0.32)     $   (0.08)   $     (0.14)     $   (0.13)   $     (0.17)     $   (0.03)   $    (0.11)
</TABLE>
<PAGE>


      The  effects on the years ended December 31, 1998
and  1997, the six months ended December 31, 1996,  and
the  year ended June 30, 1996, pro forma loss per share
of  expensing the estimated fair value of stock options
are  not  necessarily representative of the effects  on
reporting  the results of operations for  future  years
because  additional  options will  vest  subsequent  to
December  31,  1998 and the Company  expects  to  grant
additional  options in future years.  Because  FAS  No.
123  is  first applicable to the Company's fiscal  year
ended  June  30, 1996, the full effects  on  pro  forma
earnings will not be felt until 1998.

      The fair value of each option grant was estimated
using  the Black-Scholes model with risk-free  interest
rates  on  the date of grant that ranged from  4.3%  to
6.8%.    The  Company  has  never  declared  nor   paid
dividends on its common stock and does not expect to in
the  foreseeable future.  The volatility factor of  the
expected  market  price of the Company's  common  stock
used  in  estimating the fair value of the  grants  was
 .815 and the expected life of the options was estimated
as five years.

      The  Company, at the discretion of the  Board  of
Directors,  has  granted warrants from  time  to  time,
generally  in  conjunction with the sale  of  equities.
The following table presents warrants outstanding:

  <TABLE>
  <CAPTION>
                                   Dec. 31, 1998   Dec. 31, 1997   Dec. 31, 1996
  <S>                                <C>            <C>            <C>
  Officers                                  ---             ---         10,000
  Others                              5,000,580       2,709,089      2,826,239

  Eligible, End of Year for Exercise
    Currently                         5,000,580       2,709,089      2,836,239

  Warrants issued                     2,500,000             ---            ---
    Low exercise price               $     3.00     $       ---    $       ---
    High exercise price              $     3.00     $       ---    $       ---
  </TABLE>
  <PAGE>


      The warrants outstanding as of December 31, 1998,
are  currently exercisable and expire at various  dates
through  October  5,  2005.  The  outstanding  warrants
entitle the owner to purchase one share of Common Stock
for each warrant, at prices ranging from $0.65 to $3.00
per share.

      During the year ended June 30, 1996, the exercise
price  of  1,000,000 warrants issued in the prior  year
was reduced from $1.50 to $.65.  The maximum cumulative
expense to be recorded by the Company upon exercise  of
these  warrants  will be $850,000.  During  the  period
ended  December 31, 1996, the Company began  recording,
on  a  prorated  basis, the maximum  expense  over  the
remaining  life  of  the  warrants.   Accordingly,  the
Company recognized expenses totaling $106,000, $106,000
and $42,000 for the years and six months ended December
31, 1998, 1997 and 1996, respectively.

Also  during the year ended June 30, 1996, the  Company
issued to Wand Partners, Inc. 700,000 ten-year warrants
to  purchase shares of the Common Stock of the  Company
at  $1.00 per share.  The Company recorded a charge  of
$131,250 representing the difference between the market
value of the underlying Common Stock of the Company and
the  aggregate  exercise price of such warrants  during
the fiscal year ended June 1996.

Note 14 - Segment Information:

     A.   Description of reportable segments
           Nestor,  Inc. has three reportable segments:
Financial  Solutions,  Traffic  Systems  and   Internet
products.   While  the  Company  always  differentiated
these  segments  internally, on  January  1,  1997  the
latter  two  were  separated  from  Nestor,  Inc.  into
distinct  subsidiaries (see Note 1), leaving  Financial
Solutions  within the parent company.   The  reportable
segments  are  each  managed  separately  because  they
design, develop, market and support different products.
The  Financial  Solutions division produces  and  sells
credit  and  debit  card fraud detection  products  and
database  marketing products to financial  institutions
and  processors of financial data.  The Traffic Systems
segment  provides  remote traffic management  products,
mainly   to   municipalities  and  universities.    The
Company's   Internet  segment  was   engaged   in   the
development of an internet commerce solution.

B.   Measurement of segment profit or loss and segment assets
The  Company evaluates performance based on  profit  or
loss   from   operations  before  income  taxes.    The
accounting policies of the reportable segments are  the
same as those described in Note 1.

C.   Segment profit or loss and segment assets
All revenues are from external customers.  There are no
intercompany   sales.    The   "All   Other"   category
represents  general  corporate activity.   "All  Other"
revenues consist primarily of royalties (Note 20)  and,
in  1997,  include $480,000 relating to the termination
of  a license agreement (Note 19).  Segment information
for the year ended June 30, 1996 has not been presented
because  the  Company did not account for the  segments
separately at that time.

<TABLE>
<CAPTION>
                     Financial     Traffic                   All
                     Solutions     Systems     Internet      Other      Totals
 <S>               <C>          <C>         <C>           <C>        <C>
 Year Ended
 Dec. 31, 1998:
 Revenues          $ 1,931,000  $  235,000  $    44,000   $  31,000  $ 2,241,000
 Depreciation and
  amortization
  expense              548,000      25,000      309,000      23,000      905,000
 Segment profit
  (loss)           (1,954,000)  (1,933,000)  (1,383,000)      7,000  (5,263,000)
 Segment assets        788,000     318,000       46,000   1,440,000    2,592,000
 Expenditures for
  long-lived
  assets                29,000      37,000        8,000      58,000      132,000

 Year Ended
 Dec. 31, 1997:
 Revenues          $ 4,752,000  $  328,000  $       ---   $ 601,000  $ 5,681,000
 Depreciation and
   amortization
   expense              50,000      19,000      106,000      19,000      194,000
 Segment profit
  (loss)             1,300,000  (1,492,000)    (784,000)    711,000    (265,000)
 Segment assets      1,520,000     225,000      355,000     513,000    2,613,000
 Expenditures for
  long-lived
  assets                42,000      14,000       31,000       2,000       89,000

 Six Months Ended
 Dec. 31, 1996:
 Revenues          $   776,000  $  335,000  $       ---   $  85,000  $ 1,196,000
 Depreciation and
  amortization
   expense              23,000       8,000        1,000      13,000       45,000
 Segment profit
  (loss)              (194,000)   (638,000)    (214,000)    111,000     (935,000)
 Segment assets      1,722,000     182,000       11,000     903,000    2,818,000
 Expenditures for
  long-lived
  assets                31,000      23,000        8,000       9,000       71,000

</TABLE>



D.   Geographic Information
      Revenues are attributed to countries based on the
location  of  customers.   All  long-lived  assets  are
located in the Unites States.

<TABLE>
<CAPTION>
                                                Six Months Ended    Year Ended
                     Years Ended December 31,     December 31,        June 30,
                        1998           1997            1996             1996
      <S>         <C>            <C>             <C>              <C>
      U.S.A.      $   1,918,951  $   3,391,825   $    1,085,050   $  4,071,781
      France                ---  $     480,899   $       30,000   $     65,085
      Belgium           212,097        903,662           42,000        727,375
      Germany            17,460            ---              ---        173,877
      Japan              55,333        531,590           14,094         36,424
      Canada             27,000        223,000              ---         41,710
      Singapore          10,535            ---              ---         65,530
      All other
       countries            ---        150,100           24,760        279,798
                  $   2,241,376  $   5,681,076   $    1,195,904   $  5,461,580
      </TABLE>

E.   Revenues from Major Customers
All  revenues presented are derived from the  Company's
Financial  Solutions  segment  with  the  exception  of
Customers E and H, which relate to the Traffic  Systems
segment  and  the  "All  Other  Category"  (Note   20),
respectively.
          
<TABLE>
<CAPTION>
                                           Six Months Ended  Year Ended
                Years Ended December 31,     December 31,     June 30,
                  1998           1997             1996            1996
      <S>         <C>            <C>             <C>              <C>
      Customer A  $     620,732  $   2,216,375   $          ---   $        ---
      Customer B            ---        903,662              ---        727,375
      Customer C        445,115            ---          215,400            ---
      Customer D        302,979            ---          153,750            ---
      Customer E            ---            ---          225,994            ---
      Customer F            ---            ---          185,000            ---
      Customer G            ---            ---          132,382            ---
      Customer H            ---            ---              ---      1,614,510
      </TABLE>
          



Note 15- Other income (expense) - net:
       Other  income  (expense)  as  reflected  in  the
consolidated statements of operations consists  of  the
following:

<TABLE>
<CAPTION>
                                                  Six Months      Year
                                                    Ended         Ended
                      Years Ended December 31,    December 31,   June 30,
                          1998          1997         1996         1996
 <S>                  <C>           <C>          <C>           <C>
 Interest expense     $ (20,350)    $  (3,598)   $  (3,227)    $ (51,574)

 Expense relating
  to financing
  operations           (106,483)     (106,484)     (42,500)     (131,250)

 Net gain on sale of
  tangible and
  intangible assets
  (See Note 20)             ---           ---          ---       213,185

 Other - net            100,655       141,403       29,507         9,589

 Other Income
  (Expense) - Net     $ (26,178)    $  31,321   $  (16,220)    $  39,950
 </TABLE>


Note 16-  Income taxes:
        The Company accounts for income taxes using the
deferred  liability  method as  required  by  Financial
Accounting   Standards   Board   Statement   No.   109,
Accounting  for Income Taxes.  Under FAS 109,  deferred
tax  assets  and  liabilities are determined  based  on
differences  between financial reporting  and  the  tax
basis of assets and liabilities, and are measured using
the  enacted rates and laws that will be in effect when
the differences are expected to reverse.

        The  components of the provision (benefit)  for
income taxes are:

                                 December 31,  December 31,
                                      1998          1997

       Current:
       Federal                  $    ---         $ 30,000
       State                         ---              ---

       Deferred:
       Federal                       ---              ---
       State                         ---              ---
                                     ---              ---

       Total Income Taxes       $    ---         $ 30,000

       Significant  components  of  the  Company's  deferred  tax
       liabilities  and assets as of December 31, 1998  and  1997
       are as follows:

                                   December 31,     December 31,
                                       1998             1997
 Deferred tax liabilities:
    Deferred development costs     $    32,000      $       ---
    Accrued expenses                       ---           43,000
  Total deferred tax liabilities   $    32,000           43,000

 Deferred tax assets:
   Accounts receivable                  12,000           62,000
   Accrued expenses                    246,000          205,000
   Deferred income                      16,000           60,000
   Tax credits                          17,000           30,000
   Net Operating Loss                8,619,000        6,563,000
 Total deferred tax assets           8,910,000        6,920,000

 Valuation allowance                (8,878,000)      (6,877,000)
 Net deferred tax assets                32,000           43,000
 Net Deferred Tax Balance          $       ---      $       ---

      In accordance with FAS 109, a valuation allowance
must  be  established until it is more likely than  not
that  future  benefits arising from  net  deferred  tax
assets will be realized.  Management has established an
allowance  equal to the value of the net  deferred  tax
assets due to the Company's history of net losses.  The
realization  of the deferred tax assets is not  assured
because   of  the  potential  for  future  losses   and
potential  limitations  on  the  Company's  ability  to
utilize  its  net operating loss carryforwards  due  to
certain  provisions  contained in Section  382  of  the
Internal Revenue Code.

       A  reconciliation  of the provision  for  income
taxes   to  the  amount  computed  using  the   Federal
statutory tax rates consists of the following:
<TABLE>
<CAPTION>
                                                Six
          Months                                Year
                                               Ended      Ended
                                 Years Ended Dec. 31,
          Dec. 31,  June 30,
                                      1998       1997      1996
          1996
<S>                  <C>             <C>            <C>            <C>
Income (Loss)
Before Taxes         $(5,263,000)    $(265,000)     $ (935,000)    $ 13,000

Tax at statutory
rate of 34%          $(1,789,000)    $(101,000)     $ (303,000)    $  4,000

State income tax
(net of
 federal benefit)       (313,000)      (19,000)        (53,000)       1,000
                   
Effect of permanent
differences              101,000       (36,000)          3,000        7,000

Valuation Allowance    2,001,000       186,000         353,000      (12,000)

Income Tax Expense   $       ---     $  30,000      $      ---    $     ---
</TABLE>


     The Company and its subsidiaries have available at
December 31, 1998, $23,290,000 and $11,792,000  of  net
operating  loss  carryforwards for  federal  and  state
purposes, respectively. These loss carryforwards may be
applied  against  future taxable income  and  begin  to
expire in 1999.


Note 17-  Related party transactions:
     Herbert S. Meeker, a director of the Company, is a
partner  in the law firm of Baer, Marks & Upham,  which
the  Company  uses for legal services.  For  the  years
ended  December 31, 1998 and 1997, the six months ended
December  31,  1996, and for the year  ended  June  30,
1996, the Company recorded an expense for Baer, Marks &
Upham   of   $15,600,  $14,400,  $7,200  and   $14,440,
respectively. Included in Accounts payable and  accrued
expenses at December 31, 1998 and 1997, are $6,726  and
$4,325, respectively, due Baer, Marks & Upham.

      Bruce W. Schnitzer, who became a director of  the
Company  in August 1994, is Chairman of Wand  Partners,
Inc.,  a private investment firm that the Company  uses
for   management  consulting.   For  the  years   ended
December  31,  1998  and 1997,  the  six  months  ended
December  31,  1996, and for the year  ended  June  30,
1996,   the  Company  recorded  an  expense  for   Wand
Partners,  Inc.  of   $47,770,  $49,479,  $25,060   and
$46,076, respectively.  During 1997 the Company granted
Mr.  Schnitzer,  as a director of the Company,  a  non-
qualified stock option for a total of 5,000 shares  and
recognized an expense of $6,900.  Additionally,  during
1998 and 1997, the Company paid Wand Partners dividends
totaling  $69,046  and  $35,613, respectively,  on  the
redeemable  preferred stock held by Wand.  Included  in
Accounts  payable and accrued expenses at December  31,
1998  and  1997  are $63,738 and $23,301, respectively,
due Wand Partners, Inc.

      Thomas  F.  Hill, who became a  director  of  the
Company in August 1994, is President of Thomas F. Hill,
Inc.,  a  consulting  firm that the  Company  uses  for
marketing consulting.  During 1997 the Company  granted
Mr. Hill, as a director of the Company, a non-qualified
stock option for a total of 5,000 shares and recognized
an expense of $6,900.

      Thomas  D. Halket, who became an officer  of  the
Company  in January 1993, is a partner in the law  firm
of  Halket  & Pitegoff LLP, which the Company  uses  as
outside counsel.  For the years ended December 31, 1998
and  1997, the six months ended December 31, 1996,  and
for  the year ended June 30, 1996, the Company recorded
an  expense  for  Halket  & Pitegoff  LLP  of  $80,039,
$100,961,    $65,425,   and   $144,176,   respectively.
Included  in  Accounts payable and accrued expenses  at
December  31,  1998  and  1997  are  $8,328  and   $67,
respectively, due Halket & Pitegoff LLP.

      During  1997  the  Company  issued  non-qualified
options to Mr. Sam Albert, Dr. Leon Cooper,
Dr. Charles Elbaum, and Mr. Jeffrey Harvey as directors
of  the Company.  Each option was for 5,000 shares  and
the Company recognized an expense of $27,600.

      During  1998, TSAI, the parent company of Applied
Communications,  Inc.  (ACI),  became   a   significant
shareholder  of the Company (Note 12).   For  the  year
ended  December 31, 1998, the Company recorded revenues
of  $620,730 from ACI.  At December 31, 1998,  accounts
receivable included $157,808 due from ACI and  unbilled
was  $52,934.   Also  at December  31,  1998,  deferred
income  included  $237,500 from ACI.   Further  related
party transactions with TSAI are discussed in Notes  9,
13 and 23.


Note 18-  Commitments and contingencies:
      The  Company  leases a facility in  Rhode  Island
under  an  operating  lease dated  April  1,  1998,  as
amended.   This  lease provides for annual  rentals  of
$195,000  through  March 2001, $201,500  through  March
2002, and $208,000 through March 2003.

      Rent  expense of $193,953, $188,936, $47,989  and
$171,928 was charged to operations for the years  ended
December  31,  1998 and 1997, for the six months  ended
December 31, 1996 and for the year ended June 30, 1996,
respectively.

On  August  1,  1994,  the Company signed  a  Financial
Advisory Agreement with Wand Partners, Inc.  The  terms
of  the Agreement specify that Wand Partners, Inc. will
provide  consulting services for a fee of  $40,000  per
year, plus out-of-pocket expenses.  The Agreement is in
effect  so  long as Wand Partners, Inc. owns  at  least
500,000  shares  of  Nestor's Common  Stock,  or  other
equities  which  are convertible into  that  number  of
shares  of  Common Stock (See Note 17 -  Related  party
transactions).

The  Company  had placed purchase orders, including  an
end-of-life   order,  totaling  $877,500   with   Intel
Corporation  for  a  supply of the  Ni1000  Recognition
Accelerator  Chips.  During January 1999,  the  Company
took  delivery  of $195,000 of the chips and  cancelled
the  remaining  order  of $682,500  since  the  current
demand  for  the  product no longer  warranted  such  a
purchase and future third-party hardware is expected to
provide  adequate  capacity to  operate  the  Company's
software.

The  Company entered into an agreement on September 25,
1997, for the modification of one of the components  of
the TrafficVision product.  Nestor agreed to pay Zeller
Research,  Ltd. $75,000 (of which $30,000 was  paid  in
1998)   for  engineering,  which  is  expected  to   be
completed  in  1999, and to purchase 100 units  of  the
modified component at a total cost of up to $53,000.

The  aggregate minimum payments due over the  remaining
term of the above agreements is as follows:

               December 31, 1999   $   528,000
               December 31, 2000       235,000
               December 31, 2001       239,875
               December 31, 2002       246,375
               December 31, 2003        92,000
               Thereafter               40,000
                                   $ 1,381,250


Note 19-  Termination of license agreement:
       In  December  1994,  Sligos  agreed  to  convert
$200,000 of its prepayment into equity and the  Company
agreed to refund to Sligos its prepayments of royalties
and  engineering fees under its license agreement  with
the  Company,  which was dated October  16,  1990.   At
December  31, 1996, such long-term portion of  deferred
income  remaining on the books of the Company  amounted
to  $430,899 after giving effect to the application  of
$200,000  of deferred income to the purchase by  Sligos
of  100,000 shares of Series A Preferred Stock, $30,000
refunded   by   the   Company  to   Sligos,   and   the
reclassification   of   $275,000   to   Other   current
liabilities.

      In  June  1997 the Company and Sligos  terminated
their  License Agreement.  Pursuant to the  termination
agreement,  the  Company  paid  Sligos  in  July  1997,
$225,000  in  full  settlement  of  its  obligation  to
Sligos,   which  had  been  classified  as  a   current
liability  on the Company's balance sheet, and  of  the
repurchase  from Sligos of 452,000 shares of  Company's
Series   A  Preferred  Stock.   The  Company  allocated
$125,000  of  the  payment to  the  settlement  of  its
current  liability to Sligos and consequently  recorded
other  income of $100,000 as discount on the obligation
to   Sligos.   The  Company  allocated  the   remaining
$100,000 of the payment to the repurchase of its Series
A   Preferred   Stock  and,  accordingly,  reclassified
$352,000  to  additional paid-in capital.  The  Company
also  eliminated the long-term deferred income  related
to  Sligos prepayments (which were received in  October
1990)  and  recorded  software  licensing  revenues  of
$480,000.


Note 20- Significant transactions:
      On  June  11, 1996, the Company entered  into  an
exclusive  Licensing Agreement and  an  Asset  Purchase
Agreement  with National Computer Systems,  Inc.  (NCS)
transferring the development, production, and marketing
rights   of   the   Company's   Intelligent   Character
Recognition   (ICR)  products  to  NCS.   The   Company
received  $1,400,000 as an initial license fee pursuant
to  the  Licensing  Agreement, and  has  the  right  to
receive  royalties on future sales of the  products  by
NCS.   The minimum annual royalty to maintain exclusive
rights  was  $160,000 and $200,000 for the years  ended
June  30,  1997 and 1998, respectively.  NCS  lost  its
exclusive  rights under the contract on June  30,  1998
upon  failure  to  meet  minimum  royalty  obligations.
Royalties are computed as 10% of the ICR product sales.
The  Company recognized $32,000 and $120,000 of revenue
under this license agreement in calendar 1998 and 1997.
The  initial  license  fee  was  included  in  software
licensing revenue in the year-ended June 30, 1996.

      The Asset Purchase Agreement transferred tangible
and  intangible  assets  used exclusively  in  the  ICR
business to NCS for $300,000.  The net gain on the sale
of  these assets was recognized as Other income in  the
year-ended June 30, 1996.


Note 21-  New accounting standards:
Comprehensive  Income:  In 1998,  the  Company  adopted
Financial    Accounting   Standard   130,    "Reporting
Comprehensive   Income"    ("FAS   130").    FAS    130
establishes new rules for the reporting and display  of
comprehensive income and its components;  however,  the
Company's comprehensive income does not differ from net
income.  Therefore, adoption of this Statement has  had
no impact on the Company's results of operations.

Segment  Reporting:  Effective December 31,  1998,  the
Company  adopted  the  Financial  Accounting  Standards
Board's  Statement  of Accounting  Standards  No.  131,
"Disclosures  About  Segments  of  an  Enterprise   and
Related Information" ("Statement 131").  Statement  131
superseded  FASB Statement No. 14, Financial  Reporting
for  Segments of a Business Enterprise.  Statement  131
establishes standards for the way that public  business
enterprises report information about operating segments
in  annual financial statements and requires that those
enterprises report selected information about operating
segments  in interim financial reports.  Statement  131
also  establishes  standards  for  related  disclosures
about  products  and  services, geographic  areas,  and
major customers.  The adoption of Statement 131 did not
affect results of operations or financial position, but
did require the disclosure of segment information.  See
Note 14.

Note 22-  Litigation:
      On October 6, 1998, HNC Software Corp. ("HNC"), a
significant competitor of the Company's in the field of
Financial Services, claimed rights to a patent entitled
"Fraud  Detection Using Predictive Modeling" and  began
advising  prospective customers of the Company  of  the
patent.    Upon  review  of  the  claimed  patent   and
consideration  of  prior  actions  taken  by  HNC,  the
Company initiated a lawsuit to protect its interest  in
the  marketplace.  The suit, filed in the United States
District Court in Providence, RI on November 25,  1998,
makes numerous claims including violation of Sections 1
and  2 of the Sherman Act (antitrust), violation of the
Rhode  Island  Antitrust  Act, patent  invalidity,  and
infringement  of  Nestor's  patents.   The  suit  seeks
various  damages,  including lost  profits  and  treble
damages.   Costs  associated with the  suit  are  being
expensed  as  incurred.  Although the Company  believes
that  it will prevail, there can be no assurance as  to
the outcome of this suit, or any potential countersuit.
Any  conclusion of this litigation in a manner  adverse
to the Company may have an adverse effect on its future
financial condition and results of operations.


Note 23- Subsequent Events:
      On  March  24, 1999, the Company entered  into  a
$1,000,000  Line  of Credit agreement with  Transaction
Systems  Architect, Inc. ("TSAI").  The loan is secured
by  the  royalty stream and other fees produced by  the
Company's  License  Agreements with Financial  Services
Division  customers.   Principal payments  are  due  in
twelve  equal  installments beginning  March  1,  2001.
Interest  on  the loan is based on the  prime  interest
rate  plus 1% and payments are due quarterly in arrears
beginning  July 10, 1999. The line may  be  reduced  to
$500,000  if  the Company's equity becomes negative  or
increased   up  to  $4,000,000  if  certain   financial
requirements are attained.

     On March 25, 1999, Nestor Traffic Systems, Inc., a
subsidiary  of  the Company, sold a 37.5%  common-stock
interest to a private group of investors for $2,350,000
in cash and issued an option for an additional 17.5% of
its  common  stock for $1,750,000.  The investor  group
includes  three  officers  of  the  Company   and   the
subsidiary,  who in the aggregate contributed  $600,000
of the initial cash invested on the same basis as third-
party  investors.  The option expires  on  January  31,
2000.   The proceeds will be used by the subsidiary  to
fund  traffic-system product development and  marketing
efforts  in  1999.   In addition, to  the  extent  that
facility and administrative services of the Company are
used  by  the  subsidiary, reimbursement  of  allocated
costs   will  be  provided.   The  subsidiary  has   an
exclusive  license  from  the  Company  to  apply   the
Company's  proprietary  technologies  in  the  area  of
traffic-management systems.  The license  provides  for
royalties to the Company of 5% of related revenues, net
of  direct cost of third party goods sold, in 2000  and
10% in 2001 and beyond.




                          NESTOR, INC.                   Part IV
                                                         Item 14
                                                     Schedule II

<TABLE>
           CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
         VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                
<CAPTION>
                                     Addition
                     Balance at                 Charged to  Deductions Balance at
                     Beginning      Charged to    Other        from       End
 Description         of Period       Expense     Accounts    Reserve   of Period
<S>                  <C>          <C>           <C>        <C>         <C>
Allowances deducted
 from accounts
 receivable:

Year ended
 June 30, 1996       $ 57,976     $  120,656    $   ---    $(12,923)   $165,709

Six months
 ended
 Dec. 31, 1996       $165,709    $    38,888    $   ---    $(59,362)   $145,235

Year Ended
Dec. 31, 1997        $145,235     $   80,495    $   ---    $(71,176)   $154,554

Year ended
Dec. 31, 1998        $154,554     $   40,081    $   ---   $(163,450)  $  30,300

</TABLE>
<PAGE>
                                

                                

 ITEM 8.  Financial Statement and Supplementary Data

          See annexed financial statements.


ITEM 9.   Changes   in   or  Disagreement  with  Accounting   and
          Financial disclosure

          Not Applicable.


ITEM 10.  Directors and Executive Officers of the Registrant.

                Incorporated  by  reference  from  the  Company's
          definitive proxy or information statement to  be  filed
          with  the  Commission not later than 120 days following
          the end of the Company's fiscal year.


ITEM 11.  Executive Compensation.

                Incorporated  by  reference  from  the  Company's
          definitive proxy or information statement to  be  filed
          with  the  Commission not later than 120 days following
          the end of the Company's fiscal year.


ITEM 12.  Security  Ownership  of Certain Beneficial  Owners  and
          Management.

          Incorporated by reference from the Company's definitive
          proxy  or  information statement to be filed  with  the
          Commission not later than 120 days following the end of
          the Company's fiscal year.


ITEM 13.  Certain Relationships and Related Transactions.

                Incorporated  by  reference  from  the  Company's
          definitive proxy or information statement to  be  filed
          with  the  Commission not later than 120 days following
          the end of the Company's fiscal year.

ITEM 14.  Exhibits, Financial Statement, Schedules and Reports on
          Form 8-K.

          (a)The  following documents are filed as part  of  this
          report:
              (1)   The  financial statements of the Company  and
          accompanying  notes,  as  set  forth  in            the
          contents  to  the financial statements annexed  hereto,
          are included in Part II, Item 8.

          Schedule II:  Valuation and Qualifying Accounts and Reserves

              All  other schedules are omitted  because
          such information
             is not applicable
              (2)  Exhibits numbered in accordance with Item  601
          of Regulation S-K.





 (See Exhibit Index)


          Exhibits filed herewith:
          (None)
               (b)  Reports on Form 8-K:

                On  April 8, 1997, the Corporation filed with the
          Securities and Exchange Commission a current report  on
          Form 8-K dated March 28, 1997 is hereby incorporated by
          reference.

                On April 10, 1997, the Corporation filed with the
          Securities and Exchange Commission a current report  on
          Form 8-K dated March 31, 1997 is hereby incorporated by
          reference.

                On April 30, 1997, the Corporation filed with the
          Securities and Exchange Commission a current report  on
          Form 8-K dated April 18, 1997 is hereby incorporated by
          reference.

                On  May  7, 1997, the Corporation filed with  the
          Securities and Exchange Commission a current report  on
          Form  8-K  dated May 6, 1997 is hereby incorporated  by
          reference.

INDEX OF EXHIBITS

       Exhibit
        Number             Description of Exhibit
          3.1    Certificate of Incorporation of the Company,
                 filed as an Exhibit to the Company's Registration Statement on
                 Form S18, Commission File No. 286182-B, is hereby incorporated
                 herein by reference.
          
          3.2    Amendment to the Certificate of Incorporation
                 of the Company, dated December 5, 1985, filed as an Exhibit to
                 the Company's Form 8 amending the Company's Form 10-K for the
                 fiscal year ended June 30 1987 (the "1987 Form 8"), is hereby
                 incorporated herein by reference.

          
          3.3    Amendment to the Certificate of Incorporation
                 of the Company, dated December 4, 1986, filed as an Exhibit to
                 the 1987 Form 8, is hereby incorporated herein by reference.
          
          3.4    Bylaws of the Company, as amended, filed as
                 Exhibit to the 1987 Form 8, is hereby incorporated herein by
                 reference.

          
                 4     Nestor, Inc. Incentive Stock Option  Plan,
                 as   amended,  filed  as  an  Exhibit   to   the
                 Company's  Registration Statement on  Form  S-8,
                 filed   May  5,  1987,  is  hereby  incorporated
                 herein by reference.

                 10.1    Non-Exclusive    Field-of-Use    License
                 Agreement  dated  June  21,  1988  between   the
                 Company  and  Morgan Stanley & Co. Incorporated,
                 filed  as an Exhibit to the Company's Form  10-K
                 for  the  fiscal year ended June  30,  1988,  is
                 hereby incorporated herein by reference.

                 10.2  Cooperative Marketing Agreement dated  May
                 26,  1988  between  the Company  and  Arthur  D.
                 Little,  Inc.,  filed  as  an  Exhibit  to   the
                 Company's  Form 10-K for the fiscal  year  ended
                 June 30, 1988, is hereby incorporated herein  by
                 reference.

                 10.3  Lease Rider dated February 6, 1985 between
                 Richmond  Square Technology Park Associates  and
                 the   Company,  filed  as  an  Exhibit  to   the
                 Company's  Report on Form 10-K  for  the  fiscal
                 year    ended   June   30,   1986,   is   hereby
                 incorporated herein by reference.

                 10.4  Employment Agreement dated August 4,  1986
                 between the Company and Michael G. Buffa,  filed
                 as  Item  5 of the Company's Report on Form  8-K
                 dated    September   11,   1986,    is    hereby
                 incorporated herein by reference.

                 10.5   Joint   Venture  Agreement  between   the
                 Company  and Oliver, Wyman & Co., dated December
                 4,  1986,  filed as an Exhibit to the 1987  Form
                 10-K,   is   hereby   incorporated   herein   by
                 reference.

                 10.6  Employment Agreement dated as of  July  1,
                 1989 between the Company and David Fox filed  as
                 an  Exhibit  to  the 1989 Form  10-K  is  hereby
                 incorporated by reference.

                 10.7  Employment Agreement dated as of September
                 15,  1988  between the Company  and  Douglas  L.
                 Reilly filed as an Exhibit to the 1989 Form  10-
                 K is hereby incorporated by reference.

                 10.8  Memorandum dated January 1, 1989 regarding
                 stock bonus plan for Douglas L. Reilly filed  as
                 an  Exhibit  to  the 1989 Form  10-K  is  hereby
                 incorporated by reference.

                 10.9  Amendment to Joint Venture Agreement dated
                 May  8,  1990  between the Company  and  Oliver,
                 Wyman  &  Co.  filed as an Exhibit to  the  1992
                 Annual   Report   on   Form   10-K   is   hereby
                 incorporated by reference.

                 10.10      License Agreement dated  October  26,
                 1990  by and between the Company and Sligos,  S.
                 A.  filed  as  an Exhibit to the Company's  1992
                 Annual   Report   on   Form   10-K   is   hereby
                 incorporated by reference.

                 10.11      Supplemental License Agreement  dated
                 September  9,  1991 by and between  the  Company
                 and  Sligos, S. A., filed as an Exhibit  to  the
                 Company's  1992 Annual Report on Form  10-K,  is
                 hereby incorporated by reference.

                 10.12      NestorWriterT License and Development
                 Agreement  dated September 11, 1991 between  the
                 Company and Poqet Computer Corporation.

                 10.13        License   Agreement   for   Product
                 Development  and  Marketing  dated  October  30,
                 1990 between the Company and Lyonnaise des Eaux-
                 Dumez.

                 10.14      Software Development Agreement  dated
                 October   30,  1990  between  the  Company   and
                 Lyonnaise des Eaux-Dumez.

                 10.15      License Agreement dated November  27,
                 1990 between the Company and Atari Corporation.

                 10.16        License   Agreement   for   Product
                 Development and Marketing dated March  18,  1991
                 between the Company and Dassault Electronique.

                 10.17      Agreement of Purchase and Sale  dated
                 August   16,   1991  between  the  Company   and
                 Diversified Research Partners filed  as  Item  5
                 of  the  Company's  report  on  Form  8-K  dated
                 August  21,  1991 is hereby incorporated  herein
                 by reference.

                 10.18      License Agreement dated  October  15,
                 1993,  between the Company and Intel Corporation
                 filed  as  an  Exhibit  to  the  Company's  1994
                 Annual   Report   on   Form   10-K   is   hereby
                 incorporated by reference.

                 10.19      Exclusive  Marketing Agreement  dated
                 April  7,  1994, between the Company  and  Intel
                 Corporation   filed  as  an   Exhibit   to   the
                 Company's  Current  Report  on  Form  8-K  dated
                 April   7,  1994,  is  hereby  incorporated   by
                 reference.

                 10.20      Securities Purchase  Agreement  dated
                 August   1,   1994,  between  the  Company   and
                 Wand/Nestor Investments L.P. ("Wand")  filed  as
                 Item  5  of  the Company's report  on  Form  8-K
                 dated  August  8,  1994, is hereby  incorporated
                 herein by reference.

                 10.21       Standby   Financing   and   Purchase
                 Agreement  dated  as of March 16,  1995  between
                 the  Company  and Wand, filed as an  Exhibit  to
                 the  Company's Current Report on Form 8-K  dated
                 March  16,  1995,  is  hereby  incorporated   by
                 reference.

                 10.22      First  Amended and  Restated  Standby
                 Financing and Purchase Agreement dated June  30,
                 1995  between the Company and Wand, filed as  an
                 Exhibit to the Company's Current Report on  Form
                 8-K  dated  July 7, 1995, is hereby incorporated
                 by reference.

                 10.23      Amendment  Agreement  dated  December
                 20,  1994 between the Company and Sligos,  S.A.,
                 filed   as   an   Exhibit   to   the   Company's
                 Registration  Statement on Form S-2,  Commission
                 File   No.   33-93548,  is  hereby  incorporated
                 herein by reference.

                 10.24       Technology  Development  Subcontract
                 dated  December  20, 1994, between  the  Company
                 and  Alta  Technology Corporation, filed  as  an
                 Exhibit  to the Company's Registration Statement
                 on  Form  S-2, Commission File No. 33-93548,  is
                 hereby incorporated herein by reference.

                 10.25      Agreements between  the  Company  and
                 Europay     International    S.A.    ("Europay")
                 consisting  of: (i) Fraud Study Agreement  dated
                 August  3,  1993, together with  appendices  and
                 exhibits     thereto;    (ii)    Confidentiality
                 Agreement  dated  August 3, 1993;  (iii)  Nestor
                 Fraud   Detection  System  User  License   dated
                 September  21,  1994; (iv) Source Code  Addendum
                 to  Nestor Fraud Detection System User  License,
                 dated September 22, 1994; and (v) Memorandum  of
                 Understanding  dated May 5, 1995,  filed  as  an
                 Exhibit  to the Company's Registration Statement
                 on  Form  S-2, Commission File No. 33-93548,  is
                 hereby incorporated herein by reference.

                 10.26      Lease  of  executive offices  of  the
                 Company,  together  with the most  recent  rider
                 thereto,  filed as an Exhibit to  the  Company's
                 Registration  Statement on Form S-2,  Commission
                 File   No.   33-93548,  is  hereby  incorporated
                 herein by reference.

                 10.27        Non-Exclusive   License   Agreement
                 between  the Company and International  Business
                 Machines  Corporation, filed as  an  Exhibit  to
                 the  Company's Current Report on Form 8-K  dated
                 January  30,  1996,  is hereby  incorporated  by
                 reference.

                 10.28       Securities  Purchase  and   Exchange
                 Agreement  between the Company  and  Wand/Nestor
                 Investments  L.P., filed as an  Exhibit  to  the
                 Company's  Current  Report  on  Form  8-K  dated
                 January  30,  1996,  is hereby  incorporated  by
                 reference.

                 10.29      Securities Purchase Agreement between
                 the  Company  and Wand/Nestor Investments  L.P.,
                 filed  as  an  Exhibit to the Company's  Current
                 Report  on  Form  8-K dated March  7,  1996,  is
                 hereby incorporated by reference.

                 10.30      Asset Purchase Agreement and  License
                 Agreement  between  the  Company  and   National
                 Computer  Systems, Inc., filed as an Exhibit  to
                 the  Company's Current Report on Form 8-K  dated
                 June   11,  1996,  is  hereby  incorporated   by
                 reference.

                 10.31      PRISM Non-Exclusive License Agreement
                 between  the Company and Applied Communications,
                 Inc.,  filed  as  an Exhibit  to  the  Company's
                 Current  Report on Form 8-K dated September  19,
                 1996,   is  hereby  incorporated  by  reference.
                 Portions of the Exhibit omitted, pursuant  to  a
                 grant of confidential treatment.

                 21    Nestor IS, Inc., a wholly-owned subsidiary
                 of  Nestor, Inc. incorporated January  1,  1997,
                 doing business as Nestor Intelligent Sensors.

                 21.1  Nestor  Interactive, Inc.  a  wholly-owned
                 subsidiary of Nestor, Inc. incorporated  January
                 1, 1997

                 4.1   Nestor,  Inc. 1997 Incentive Stock  Option
                 Plan,  as  amended, filed as an Exhibit  to  the
                 Company's  Registration Statement on  Form  S-8,
                 filed  May  16, 1997, is hereby incorporated  by
                 reference.

                 10.32      License Agreement dated as  of  March
                 28,  1997, between Nestor, Inc. and Total System
                 Services,  Inc.  filed  as  an  Exhibit  to  the
                 Company's  Current  report  on  Form  8-K  dated
                 April   8,  1997,  is  hereby  incorporated   by
                 reference.   Portions  of the  Exhibit  omitted,
                 pursuant to a grant of confidential treatment.

                 10.33      Asset Acquisition Purchase  Agreement
                 dated  March  31, 1997 among Nestor Interactive,
                 Inc.,  Cyberiad  Software, Inc., Christopher  L.
                 Scofield  and Jeffrey Pflum filed as an  Exhibit
                 to  the  Company's Current Report  on  Form  8-K
                 dated April 10, 1997, is hereby incorporated  by
                 reference.

                 10.34      Nestor,  Inc.  1997  Incentive  Stock
                 Option Plan, as amended, filed as an Exhibit  to
                 the  Company's Current Report on Form 8-K  dated
                 May   6,   1997   is   hereby  incorporated   by
                 reference.

                 10.35      Amendment to the PRISM  Non-Exclusive
                 License  Agreement dated as of April  18,  1997,
                 between     Nestor,     Inc.     and     Applied
                 Communications, Inc. filed as an Exhibit to  the
                 Company's  Current  Report  on  Form  8-K  dated
                 April   30,  1997  is  hereby  incorporated   by
                 reference.   Portions  of  the  Exhibit  omitted
                 pursuant to a grant of confidential treatment.

                 27    Financial data schedule for the year ended
                 December 31, 1998.