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, 2000
                                -----------------------------------

                                       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:   40


The  aggregate  market  value of the  8,044,936  shares of voting  stock held by
non-affiliates  of the registrant,  based on the average bid and asked prices of
such stock on February 28, 2001 was $5,908,201. The number of shares outstanding
of the Registrant's Common Stock at February 28, 2001 was 17,688,449.

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.


<PAGE>

ITEM 1.  Business

General

The Company designs,  develops,  markets, installs and supports technologies and
intelligent  software  solutions for decision and  data-mining  applications  in
real-time  environments.  The Company products employ proprietary neural network
predictive  technologies to convert existing data and business  experiences into
meaningful  recommendations  and  actions.  The  Company  designs  and  develops
high-value  software  products that can bring  additional  value to customers by
utilizing its proprietary technology and  information-management  knowledge. The
Company has leveraged its  neural-network  software  architecture  across a wide
range of markets, including e-Commerce Profitability,  Risk Management, Customer
Relationship   Management  and,  through  license  to  third  parties,   Traffic
Management and Intelligent Character Recognition Systems.

e-Commerce  Profitability  Solutions  - Products in this  market  represent  the
Company's newest solutions, and comprise the PRISM(R) eFraud(TM)and  eCLIPSE(TM)
e-business decision-support solutions. Targeted at on-line retailers,  financial
services   companies,   commerce  service  providers  and  application   service
providers,  PRISM eFraud detects fraudulent  on-line  transactions in real-time,
and  enables  organizations  to take  immediate  and  informed  loss  prevention
actions. The eCLIPSE CRM product discussed below, also targeted at this core set
of  e-businesses,  enables  companies to  dynamically  personalize  websites and
off-line communications using each organization's unique customer information.

Risk  Management  - Products  in this market  represent  the  Company's  largest
product line and its most established applications.  These products are designed
to  effectively  detect  and  control  fraudulent   transactions  for  financial
institutions  and  retailers  that  issue or  process  credit,  debit,  or other
financial  use cards and  retailers  that accept card payments over the phone or
Internet and are exposed to charge-back losses from fraud or liability for other
schemes,  such as  money-laundering.  These  applications  include PRISM Credit,
PRISM Debit, PRISM Money-Laundering and PRISM Merchant products. Products in the
Risk Management group represent approximately 94% of the Company's 2000 revenue.

Customer Relationship  Management - are designed to synthesize  information from
multiple data sources within an organization and provide personalized content to
individual customers, including web site visitors, based on the current state of
the customer's  information.  In 2000, the Company unveiled its eCLIPSE product,
which is a combination of two product initiatives in intelligent personalization
(CampaignOne and InterSite) into a product capable of providing  intelligent and
consistent  marketing  campaigns  across all  channels  within an  organization.
eCLIPSE,   provides  a  comprehensive  solution  for  effective  enterprise-wide
customer marketing.  eCLIPSE accumulates customer data from all customer contact
points  within  an  organization,   allows  the  development  of  comprehensive,
personalized  marketing campaigns on segments or all of a population,  including
champion-challenger  and  budget  considerations,   and  deploys  the  developed
campaigns to the appropriate channel, including the Internet. eCLIPSE allows for
consistent  personalization across all communication channels.  Campaigns can be
further enhanced by the use of the Company's proprietary models in areas such as
customer  profitability,  retention,  and cross selling.  Products in this group
represent approximately 3% of the Company's 2000 revenue.

Traffic  Management - These  products,  developed and marketed by Nestor Traffic
Systems,  Inc. ("NTS"),  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.  Through an exclusive  licensing  agreement with NTS, a 34.6%
owned affiliate of the Company (formerly a wholly-owned subsidiary), the Company
applies   its   image-understanding   technologies   and  other   patent-pending
technologies  to  the  field  of  intelligent  traffic-management  systems.  NTS
products include  CrossingGuard,  Rail CrossingGuard,  and TrafficVision.  Using
standard  video  equipment,  NTS  software is capable of  understanding  traffic
patterns in real-time allowing for red-light  enforcement and safety features at
intersections  and rail  crossings,  and also  data  collection,  analysis,  and
real-time exception alarms for open roads. As NTS is now accounted for under the
equity method of accounting,  it did not contribute to revenues in 2000 or 1999.
In  fiscal  1998,  this  group  represented  approximately  10% of  consolidated
revenues.  In January 2001, an agreement in principle was reached to combine the
Company and NTS by merging NTS into a  wholly-owned  subsidiary  of the Company,
with Nestor,  Inc.,  in effect,  becoming the surviving  entity.  For a detailed
description  of the  proposed  merger,  see Note 16 of the  Company's  financial
statements.

Intelligent  Character Recognition Systems - Currently marketed through National
Computer  Systems,  Inc.,  this  product  line  includes  packages  of  software
applications  such  as  OmniTools,  NestorReader,  and  N'Route  which  increase
productivity in document processing and fax distribution environments. Royalties
from this group represent less than 1% of the Company's fiscal 2000 revenues.

<PAGE>
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, the Company  formed two  wholly-owned  subsidiaries:  Nestor
Traffic Systems, Inc. and Nestor Interactive, Inc. ("Interactive"). NTS develops
and markets the TrafficVision, CrossingGuard, and the Rail CrossingGuard product
lines.  The Company now owns a 34.6% interest in NTS and uses equity  accounting
to account for the investment.  As discussed above, see Note 16 of the Company's
financial  statements for details of a proposed  merger of NTS into the Company.
Interactive developed InterSite, an Internet personalization  solution, but this
subsidiary has been inactive since November 1998.

The Company offers complete application-software solutions that include adaptive
decision models, implementation, education, training, consulting, processing and
engineering support services.  Current Company software products detect bankcard
(credit/debit)  and  private-label  (retail)  card,  merchant and other forms of
fraud  (PRISM),   provide   intelligent,   enterprise-wide   marketing  campaign
management  and  real-time  targeted  information  to Internet Web site visitors
(eCLIPSE),  provide traffic management and safety (through its affiliate NTS) of
freeways (TrafficVision), rail crossings (Rail CrossingGuard), and intersections
(CrossingGuard),  and provide much greater  efficiencies in document  processing
and fax  distribution  environments  (NestorReader,  OmniTools and N'Route which
products were licensed to National Computer Systems in June 1996). The Company'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 twelve
months.  The Company  believes that PRISM customer  payback periods for license,
installation, and first year user fees are typically less than one year.

Fraud Detection and Risk-Assessment Systems

The  Company's  fraud  detection  and  risk  assessment  solutions  include  the
Proactive Risk Management (PRISM) system which has been licensed to more than 40
financial-services and retail clients as of December 31, 2000. These systems can
detect bankcard 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.

In 1993, the Company  completed the  installation  of the Nestor Fraud Detection
System (FDS), the predecessor of the PRISM products, at Mellon Bank. The success
of the FDS installation at Mellon has been instrumental in obtaining  additional
orders for 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 February  1995,  the  Company  announced  PRISM.  PRISM  enhanced  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.
<PAGE>
During 1999, 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.

In 1999,  the Company  released  version  5.0 of PRISM.  This  enhanced  version
features an open  software  framework  that allows  users to  customize  PRISM's
graphical user interface to meet their specific  processing and customer service
requirements.   Additionally,  PRISM  5.0  facilitates  the  user's  ability  to
interface the PRISM software with their card  processing  authorization  system,
charge-back  recovery  systems and other  external  applications  to enhance the
organization's overall risk management operations.

Also in 1999,  PRISM was expanded to include  e-commerce risk management  (PRISM
eFraud) and money laundering detection (PRISM Money Laundering Detection). These
solutions   detect   fraudulent   on-line   transactions  and  money  laundering
activities, respectively.

The following are the primary attributes of the PRISM Risk Management Systems:

Comprehensive  Graphical  User  Interface  and  Case  Management  System.  PRISM
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.

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 clients' needs and profiles without extensive custom
programming.  Unlike competitive  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.  The Company'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.  The Company'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
components  that  operate on a wide range of  industry  standard,  client-server
platforms, including the IBM, MVS/CICS, Compaq's proprietary, fault tolerant Non
Stop Kernel (NSK), UNIX and Windows NT operating platforms.
<PAGE>
Nestor's Fraud Detection and Risk Assessment Strategy

The  Company's  objectives  are: to deliver high  quality  products and services
including  proprietary   neural-network   technology  to  the  banking,  retail,
Internet,  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
sales,  distribution and service forces through the appointment of partners with
expertise in various  product  channels  (i.e.  telecommunications  and internet
transaction  processing).  The Company intends to continue  developing  domestic
markets while  augmenting  its  international  growth.  On February 1, 2001, the
Company  entered  into  a  new  non-exclusive  license  agreement  with  Applied
Communications,  Inc. ("ACI"), a subsidiary of Transaction  Systems  Architects,
Inc.  Pursuant  to the  license  agreement,  ACI has been  granted  the right to
integrate and distribute all of the Company's PRISM and fraud detection products
throughout  ACI's  worldwide  sales and  support  network.  ACI made an  initial
payment of $1.1 million to the Company upon execution of the  agreement,  and is
required to make guaranteed minimum royalty payments during the first year in an
amount of  approximately  $500,000.  The license  requires  the payment of a 15%
royalty starting on February 1, 2002, but no further  guaranteed minimum royalty
payments will be required.  This agreement replaces the license agreement signed
with  ACI  on  April  18,   1997.   See  "Certain   Relationships   and  Related
Transactions."  The Company  executed a non-exclusive  PRISM reseller  agreement
with CSK  Corporation  in Japan in 1996.  The Company  also  intends to increase
sales  efforts  through  marketing  and  service   agreements  with  established
providers of products and services to its target markets.

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 up front 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 posses data  characteristics
similar to the financial institution  industry.  The Company plans to extend the
successes  of the PRISM  product in 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  health-care claim payments and
long-distance telephone fraud.

Customer Relationship Management Systems

During  2000,  the  Company  introduced   eCLIPSE,   a  comprehensive   customer
relationship and marketing campaign management solution designed to maximize the
effectiveness and efficiency of on-line and off-line marketing campaigns for all
aspects  of  financial  opportunity  from:  customer   acquisition,   retention,
cultivation and overall customer  profitability.  eCLIPSE can utilize customers'
internal  models  along with the  Company's  customized  neural-network  models.
eCLIPSE  combines  and improves on previous  products  developed by the Company:
CampaignOne and InterSite.

Nestor  eCLIPSE 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.

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.
<PAGE>
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  and its  affiliates  product  lines are  targeted  toward  large
commercial users (e.g., banks for the PRISM and eCLIPSE  products),  or federal,
state and local government agencies (e.g., Departments of Transportation for the
CrossingGuard  and  TrafficVision  products).  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  PRISM and eCLIPSE  products are licensed  directly by the Company
and through  select  distributors,  primarily  to  financial  institutions.  The
Traffic  Management  products  are being  marketed  directly  by NTS and through
distributors  to  governmental  traffic  management  departments or their chosen
integrators.  The  Company's  Intelligent  Character  Recognition  products  are
marketed 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.  The Company's FDS and
PRISM  products  are an outgrowth of such  development  projects.  In the United
States and  Canada,  the  Company  markets  PRISM and  eCLIPSE  through  ACI and
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 PRISM 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.  Management of the Company
believes  that the  success  of the PRISM and  eCLIPSE  products  will  create a
valuable  franchise in each institution,  leading to extensions of the Company's
technology to other risk-assessment and marketing applications.

During 2000, ACI accounted for 65% of the Company's  revenues.  During 1999, ACI
and CSK  accounted  for 61%, and 14% of the  Company's  revenues,  respectively.
During  1998,  ACI,  GE  Consumer  Credit  Financial  Services  and Mellon  Bank
accounted for 28%, 20% and 14% of the Company's revenues,  respectively.  During
1999,  GE Consumer  Credit  Financial  Services  and Mellon Bank  accounts  were
acquired  by other  banks and the  annual  use fees  being  realized  from PRISM
ceased.  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, 2000 and 1999 the Company had
a  backlog  of  approximately  $1,046,000  and  $1,208,000,   respectively,   in
undelivered  license,  development and installation  contracts.  At December 31,
1998,  the  Company  had a backlog  of  approximately  $578,000  in  undelivered
development and installation  contracts,  in addition to $914,000 in NTS backlog
as of December 31, 1998.  NTS backlog is not included in the  Company's  2000 or
1999 figures.

Neural-network Technology

The Company's  technology deals with the problem of pattern  recognition  within
complex data. 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,
customer buying behavior, handwritten characters, vehicles in a traffic flow, or
others.  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,  statistical analysis, and neural networks.
The  Company's  products  may combine all of these  methods to optimize  pattern
recognition capabilities.

Neural-networks  simulate a virtual network of interconnected units,  processing
data in parallel,  and  communicating  with each other at high speeds. A trained
neural-network   receives   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 patterns in multi-dimensional non- linear input,
such as attempting to recognize  characters from a scanned  handwritten  sample,
which is ill-defined,  affected by "noise",  or blatantly  unusual (i.e.  overly
large or small, or containing skewed characters).  The Company, as the result of
extensive research, has created a proprietary neural-network technology referred
to as the Restricted  Coulomb Energy Model(TM) (RCE) which has been granted five
patents.
<PAGE>
The RCE model has many unique  features.  It has rapid learning from sparse data
and fast processing  speeds. 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
in order to use the technology, and a stable solution is not guaranteed.

The  Company  has also  been  granted a sixth  patent  for a  multi-unit  system
referred to as the Nestor Learning System(TM)  ("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  continues to develop and improve its  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 funding  the costs of  developing  new  technologies  or
products, but may bear all 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 and patents pending relating to improvements to The Company's
basic technology (see "Patents"). The Company has six applications pending as of
December  31,  2000,  primarily  in  the  area  of  traffic  management.   These
improvements are incorporated into the Company's products where applicable.

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,  2000,  1999,  and 1998,
respectively,  $1,247,000,  $921,000, and $2,113,000,  in support of the various
aspects of Company-sponsored research and development.  Expenses in 1998 include
$860,000 from NTS operations which are not consolidated in 2000 and 1999.

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's RCE neural
network  exhibits rapid learning and minimizes the internal  connections  needed
for its  functioning.  The Company  believes  that these  capabilities  make 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.

The Company owns seven United States patents and seven foreign patents issued in
four  countries  and Europe.  In  addition,  the  Company has five  applications
pending in the United States, is a joint owner of one United States  application
and has three foreign applications pending, as of December 31, 2000. The foreign
patents and patent  applications  correspond to one or more of the United States
patents.

The Company  believes that seven of its United States  patents,  and four of the
corresponding  foreign patents, are material to its and its affiliates business.
These  United  States  patents  expire at various  times from 2005 to 2019.  The
corresponding  foreign  patents  expire  at  various  times  through  2007.  The
following table lists the Company's material United States patents:
<PAGE>
<TABLE>
<CAPTION>

Patent No.     Title                                                      Date of Issue           Expiration
----------     -----                                                      -------------           ----------

<S>                                                                       <C>                     <C>
4,760,604      Parallel, Multi-unit, Adaptive, Nonlinear Pattern Class    July 26, 1988           2005
               Separator and Identifier

4,897,811      N-Dimensional Coulomb Neural Network Which Provides for    January 30, 1990        2007
               Cumulative Learning of Internal Representations

4,958,375      Parallel, Multi-unit, Adaptive Pattern Classification      September 18, 1990      2007
               System Using Inter-unit Correlations And An Intra-class
               Separator Methodology

5,054,083      Parallel, Multi-unit, Adaptive, Nonlinear Pattern Class    October 1, 1991         2008
               Separator and Identifier

5,479,574      Method and Apparatus for Adaptive Classification           December 26, 1995       2012

5,701,398      Adaptive Classifier Having Multiple Sub Networks           December 23, 1997       2014

6,188,329      Integrated Traffic Light Violation Citation Generation     February 13, 2001       2019
               and Court Date Scheduling System

</TABLE>

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 customer  relationship  management  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, IBM and Oracle. Companies
providing   vertical   solutions   include  Acxiom,   Experian,   Harte-  Hanks,
BroadVision, Cyber Dialogue, Engage Technologies, Net Perceptions, Vignette, and
HNC  Software  and others.  The market for  Internet-  oriented  personalization
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,  2000,  the  Company had  forty-four  full-time  employees,
including twenty-three in software engineering and product development, eight in
sales and marketing and thirteen in management,  finance and support. 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 are 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 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
engineering  and 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.
<PAGE>
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.

Applied Communications, Inc. (ACI) On February 1, 2001, the Company entered into
a new  non-exclusive  license  agreement  with Applied  Communications,  Inc., a
subsidiary  of  Transaction  Systems  Architects,  Inc.  Pursuant to the license
agreement, ACI has been granted the right to integrate and distribute all of the
Company's PRISM and fraud detection  products  throughout  ACI's worldwide sales
and  support  network.  ACI will pay $1.1  million to the  Company in four equal
installments over the four months following February 1, 2001, and is required to
make guaranteed  minimum royalty  payments during the first year in an amount of
approximately  $500,000.  The  license  requires  the  payment of a 15%  royalty
starting on February 1, 2002, but no further guaranteed minimum royalty payments
will be required.  This agreement replaces the license agreement signed with ACI
on April 18, 1997. Additionally,  ACI hired twelve of the Company's engineering,
modeling,  and customer support employees and assumes responsibility for product
enhancements, installation, modeling, and support for ACI licensees.

On April 18, 1997, the Company expanded its non-exclusive  original 1996 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,  transaction  processing,  and other  software to more than 2,300
customers in 79 countries  throughout the world. The Company receives  royalties
based on PRISM and other  product  licensing,  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 to purchase an additional 2,500,000 common
shares for $7,500,000. The warrant expires on March 1, 2002. Additionally,  TSAI
provided a $1,000,000  Line of Credit at the prime  interest rate plus 1%, which
matured on March 1, 2001.  As of December  31,  2000,  the Company had  advances
against the line  totaling  $425,000.  This balance is being repaid  evenly over
twelve months commencing March 1, 2001.

Total System  Services,  Inc. During 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 for Total's customers by PRISM.

CSK  Corporation  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.

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. In June 1998, NCS did
not meet its  minimum  royalty  for the  license  year and  forfeited  exclusive
rights. NCS continues to market the ICR products on a non-exclusive basis.

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.  A portion of this  facility is  subleased  to NTS, on a  month-to-month
basis, for approximately $12,000 per month,  including telephone,  utilities and
other facilities related expenses.

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 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 the Company's
patents  (infringement  claims  withdrawn  January  10,  2000).  The suit seeked
various  damages,  including lost profits and treble damages.  On June 15, 1999,
HNC  answered  the lawsuit  denying  the  allegations,  bringing a  counterclaim
alleging  infringement of the above described patent by the Company, and seeking
a  declaration  of  invalidity  and  unenforceability  of one  of the  Company's
patents.  On the same day,  HNC brought  suit in San Diego,  CA against  Applied
Communications, Inc. (ACI) and its parent TSAI alleging various causes of action
including  patent  infringement of the above  described  patent by the Company's
PRISM product which ACI markets.  In April 2000,  HNC, ACI and its parent agreed
to dismiss the California  lawsuit.  ACI has requested that the Company  provide
indemnification  for approximately  $850,000 of its legal counsel costs pursuant
to the PRISM License  Agreement then in effect between ACI and the Company.  The
Company  is  disputing  the  indemnification  claim and does not  believe  it is
obligated to reimburse these costs.

On January 17, 2001,  HNC and the Company agreed to settle the case. The Company
agreed to drop  their  claims in return  for HNC  agreeing  not to  enforce,  or
threaten to enforce, the their patent against the Company or its customers.


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, 2000.


ITEM 5.  Market for Registrant's Common Stock and Related
         Security Holder Matters.
         ------------------------------------------------

The Company's common stock was first offered to the public in December 1983 and
is traded on the Nasdaq OTC Bulletin Board under the symbol "NEST."

                                      Low Bid         High Ask
                                      -------         --------
Year Ended December 31, 2000
----------------------------
         1st  Quarter                   11/16           5-3/4
         2nd  Quarter                   1-1/2           4-1/4
         3rd  Quarter                 1-14/16          2-5/16
         4th  Quarter                   17/64               2

Year Ended December 31, 1999
----------------------------
         1st  Quarter                    7/16          1-3/32
         2nd  Quarter                     3/4          1-1/16
         3rd  Quarter                   25/32               1
         4th  Quarter                   23/32         1-63/64

As at  February  28,  2001,  the  number of  holders of record of the issued and
outstanding common stock of the Company was 394, which includes brokers who hold
shares for approximately 1493 beneficial holders.

The Company has not paid any cash dividends with respect to its Common Stock
since formation.


ITEM 6. Selected Financial Data.
        ------------------------

The following data includes the accounts of Nestor, Inc. and Interactive in 1999
and 2000 and Nestor, Inc., NTS and Interactive in prior years.

<TABLE>
<CAPTION>
                                                                                                      Six Months
                                                                                                        Ended         Year Ended
                                                    Years Ended December 31,                         December 31,       June 30,
                                    -------------------------------------------------------------    ------------     -----------

                                         2000             1999           1998            1997           1996              1996
                                         ----             ----           ----            ----           ----              ----

<S>                                 <C>               <C>             <C>             <C>            <C>            <C>
Operating revenue                   $ 3,652,422       $ 5,114,779     $ 2,241,376     $5,681,076     $1,195,904     $  5,461,580

Operating income (loss)             $(1,548,777)      $   742,451     $(5,236,975)    $ (295,985)    $ (919,117)    $    (27,260)

Other income (expense)              $  (106,675)      $   (97,386)    $   (26,178)    $   31,321     $  (16,220)    $     39,950

Net income (loss)                   $(2,994,574)      $  (836,824)    $(5,263,153)    $ (294,664)    $ (935,337)    $     12,690

Earnings per share
 Weighted number of
 outstanding shares -
 basic and diluted                   17,901,602        17,844,327      15,249,932      9,243,508      8,689,031        7,847,510

Loss per share                      $     (0.17)      $     (0.05)    $     (0.36)    $    (0.08)    $    (0.13)    $      (0.03)

SELECTED BALANCE SHEET DATA:
Total assets                        $ 4,922,703       $ 6,773,905     $ 3,250,089     $2,613,031     $2,817,944     $  3,351,871
Working capital                     $  (199,775)      $ 1,211,257     $   535,806     $  146,081     $  879,172     $  1,983,661
Long-term
 Redeemable Preferred
  Stock                             $      --         $      --       $      --       $5,792,787     $5,398,908     $  5,207,538
 Capital leases                     $      --         $      --       $      --       $   10,220     $    9,455     $      9,455
 Deferred income                    $ 2,036,896       $ 1,965,532     $   440,400     $     --       $  430,899     $    430,899

</TABLE>

<PAGE>


ITEM 7.  Management's Discussion and Analysis
         ------------------------------------

Prospective Statements

The following discussion contains prospective  statements regarding the Company,
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  (see  further  discussion  in Exhibit  99.1) 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  $150,000 at
December 31, 2000 as compared with  $1,049,000 at December 31, 1999. At December
31, 2000,  the Company had a working  capital  deficit of $200,000,  as compared
with working capital of $1,211,000 at December 31, 1999. The decrease in working
capital in 2000 reflects primarily the working capital used in operations in the
current year.

The Company had a net worth of $168,000 at December 31, 2000, as compared with a
net worth of $2,304,000 at December 31, 1999. The decrease in net worth resulted
from net operating  losses realized by the Company of $1,549,000 in 2000 and the
net effect of the  Company's  portion of equity raised by its  subsidiary,  NTS,
totaling  $666,000 in 2000 offset by the Company's  equity  portion if NTS's net
loss in 2000 of $1,339,000.

Additional  capital  may 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 February 1, 2001, the Company entered
into a source code  license  agreement  with Applied  Communications  Worldwide,
Inc., a subsidiary  of  Transaction  Systems,  Architects,  Inc.  ("TSAI").  The
license  included an initial and guaranteed  minimum fees in 2001 of $1,577,000,
and an ongoing  license fee equal to 15% of future  revenues.  In addition,  ACI
hired  twelve   employees  of  the  Company  thereby   assuming  future  product
enhancement,  installation,  modeling, and support services.  Additionally,  the
Company  has reached an  agreement  to merger  with NTS by  reacquiring  the 65%
common  stock  ownership  it  currently  does not own in exchange  for shares to
Nestor,  Inc.,  and for additional  shares,  convert a $4,000,000 NTS note along
with an additional $4,000,000 cash contribution from a new investor group.

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.  The loan matured on
February 29, 2001, and 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%.  The  outstanding  principal  balance  on the loan was
$420,000 at December 31, 2000 and  February  28, 2001 when it matured.  The loan
has not been replaced by the Company.

Management  believes  that the  Company's  revenues,  new license  agreement and
expense reduction realized on February 1, 2001, and the proposed merger with NTS
will generate sufficient  liquidity,  when combined with its liquid assets as of
December 31, 2000,  to meet the Company's  anticipated  cash  requirements  from
current  operations  through the year ending  December 31, 2001.  If the Company
does not realize the merger or revenues sufficient to maintain its operations at
the current level,  management of the Company would modify  certain  initiatives
until additional funds become available through investment or revenues.
<PAGE>
Litigation

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 the United
States  District Court in Providence,  RI on November 25, 1998 alleging a number
of  claims  including;  violation  of  Sections  1  and  2 of  the  Sherman  Act
(antitrust),  and  violation  of the Rhode  Island  Antitrust  Act,  and  patent
invalidity.  The suit seeks various  damages,  including lost profits and treble
damages.  On June 15, 1999,  HNC answered the lawsuit  denying the  allegations,
bringing a counterclaim  alleging  infringement of the above described patent by
the Company, and seeking a declaration of invalidity and unenforceability of one
of the  Company's  patents.  On the same day, HNC brought suit in San Diego,  CA
against Applied Communications,  Inc. (ACI) and its parent TSAI alleging various
causes of action including patent  infringement of the above described patent by
the Company's  PRISM product which ACI markets.  In April 2000, HNC, ACI and its
parent agreed to dismiss the San Diego suit.  ACI has requested that the Company
provide  indemnification  for approximately  $900,000 of its legal counsel costs
pursuant  to the PRISM  licensing  agreement  between ACI and the  Company.  The
Company has denied and is disputing the indemnification claim.

The Company and HNC reached a mutually agreeable settlement on January 16, 2001,
the terms of which are  confidential.  All  claims  have been  dismissed.  Costs
associated  with  the  suit  were  being  expensed  as  incurred,   and  totaled
approximately $600,000 and $356,000 in 2000 and 1999.

Future Commitments

During 2000, the Company entered into a three year operating lease for computers
and  related  equipment  valued at $97,000.  The  Company has no other  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  approximately  $17,000 per month and  expires in March 2003.  The
Company believes the facilities are adequate for its 2000 needs.

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, 2000 and 1999

In the year ended  December  31,  2000,  the Company  realized a 40% decrease in
revenues  compared to the prior  calendar year.  Expenses  increased 19% in 2000
resulting  in an  operating  loss of  $1,549,000  when  compared to an operating
profit of $742,000 in the prior year.  Revenues from our distribution  partners,
ACI and CSK, were down in 2000 as were revenues from direct sales efforts.

Revenues

The  Company's  revenues  arise from  licensing  of the  Company's  products and
technology and from contract  engineering  services and are discussed separately
below. During the year ended December 31, 2000, revenues decreased $1,463,000 to
$3,652,000  from  $5,115,000  in the prior  calendar  year.  Customers  held off
committing to new software  integration  projects in 2000 in part resulting from
the effects of the millennium change and perceived software issues.

Software Licensing

Product-licensing   revenues  totaled  $2,537,000  in  2000,  as  compared  with
$3,872,000  in 1999.  The  decrease  in these  revenues  reflects a decrease  in
initial  license fees realized  from new PRISM  products of $900,000 as thirteen
new license were  realized in 1999 as compared to eight in 2000,  and a decrease
in monthly use fees of $360,000  resulting from licenses sold or terminated that
were not fully offset by the new licenses coming on-line in 2000.
<PAGE>
Engineering Services

Engineering  revenues totaled $1,115,000 in 2000, as compared with $1,243,000 in
1999.  These revenues relate to new license  installations  and  customer-funded
modifications  of the Company's PRISM  products.  The decrease is related to the
drop in new PRISM  licenses,  and the  associated  installation  work,  noted in
"Software Licensing" above, offset in part by modeling and customization work in
2000 from 1999 licenses.

Operating Expenses

Total operating expenses - consisting of engineering,  research and development,
selling and  marketing,  and general and  administrative  expenses - amounted to
$5,201,000  in the year ended  December 31, 2000,  an increase of $829,000  over
total operating costs of $4,372,000 in the prior year.

Engineering Services

Costs related to engineering services totaled $967,000 in 2000, as compared with
$1,023,000 in 1999.  The decrease in these costs  reflects  related  decrease in
engineering revenues realized in 2000.

Research and Development

Research and development  expenses totaled $1,247,000 in the year ended December
31, 2000 as compared with $921,000 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 V6.0 shipped in the
fourth quarter of 2000,  development of eCLIPSE, and development of PRISM eFraud
during 2000.

Selling and Marketing

Selling and marketing costs  increased  $276,000 to $1,494,000 in the year ended
December 31, 2000,  from  $1,218,000 in the prior year.  The increase in selling
costs  in the  year  reflects,  primarily,  an  increase  in  staffing  for  the
development  and support of partner and direct  customer  relationships  for the
licensing of the PRISM products.

General and Administrative

General and administrative expenses totaled $1,493,000 in 2000, as compared with
$1,210,000 in the previous year. General and  administrative  costs for the year
ended  December 2000 reflect  increased  legal  expenses  related to the lawsuit
initiated against a competitor in November 1998, settled in January 2001.

Other Expense

For 2000, net other expense was $107,000,  as compared with net other expense of
$97,000  in the  year-earlier  period.  In 2000,  other  expense  was  comprised
primarily of $106,000 of  amortization  expense related to the assigned value of
warrants outstanding and being amortized over their remaining life.

Loss from Investment in Affiliate

During 2000, the Company's  affiliate NTS sold additional common stock interests
reducing the Company's  equity interest in the affiliate to 34.6%. The Company's
interests in NTS are accounted for under the equity method of accounting in 2000
and 1999.  As a result of the  Company's  equity  interest  in NTS,  the Company
reported a loss from investment in affiliate of $1,339,000 in 2000, representing
34.6% of NTS's actual net loss in 2000 of $3,513,000,  and the Company  reported
$1,482,000  in  1999,  representing  49% of  NTS's  actual  net  loss in 1999 of
$2,453,000  reflecting varying ownership  percentages during 1999. NTS continues
to be a development stage company,  incurring costs of raising capital, research
and development,  establishing supplies and production processes,  and sales and
marketing.  During 1998, NTS was included in the consolidated  financial results
of the Company and reported a net loss of $1,934,000.

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.
<PAGE>
Net Income

During 2000, the Company  experienced a loss of  $2,995,000,  as compared with a
loss of $1,289,000 in the prior year. For the year ended December 31, 2000, loss
per share  available  for common stock was $0.17 per share,  as compared  with a
loss per share of $0.05 in the  corresponding  period of the prior  fiscal year.
For the year ended December 31, 2000,  there was outstanding a weighted  average
of  17,901,602  shares,  as compared to  17,844,327  shares in the  year-earlier
period.

Analysis of the Years Ended December 31, 1999 and 1998

During 1999, NTS (a wholly-owned subsidiary of the Company on December 31, 1998)
sold an aggregate 58% common stock equity  interest to third parties through two
transactions.   This  resulted  in  the  Company  reporting  the  subsidiary  in
accordance with the equity method of accounting beginning in 1999. The operating
results  of the  subsidiary  for the year  ended  December  31,  1998 are  still
reported  on  the  consolidation  basis  of  accounting.   For  the  purpose  of
comparison,  the following  table  compares the results of operations for fiscal
years  1999 and 1998 as if the  subsidiary  was  accounted  for under the equity
method of accounting  in both periods with the 1998 results  being  reclassified
accordingly.
                                                    December 31,
                                         ------------------------------------
                                              1999                  1998
                                          (As Reported)        (Reclassified)
                                          -------------        --------------
Software licensing revenues              $   3,872,016         $   1,349,962
Engineering services revenues                1,242,763               656,890
                                         -------------         -------------
Total revenues                               5,114,779             2,006,852
                                         -------------         -------------
Engineering services expense                 1,023,046             1,799,629
Research and development expense               920,918             1,252,726
Selling and marketing expense                1,218,476             1,295,539
General and administrative expense           1,209,888               962,001
                                         -------------         -------------
Total operating expenses                     4,372,328             5,309,895
                                         -------------         -------------
Income (loss) from operations                  742,451            (3,303,043)
Other expenses                                 (97,386)              (26,178)
                                         --------------        --------------
Income (loss) before taxes and loss
   from investment in affiliate                645,065            (3,329,221)
Loss from investment in affiliate           (1,481,889)           (1,933,932)
                                         --------------        -------------
Net Loss                                 $    (836,824)        $  (5,263,153)
                                         ==============        ==============

The MD&A  discussion that follows for the years ended December 31, 1999 and 1998
addresses  the  variances  noted in the  above  table.  The  differences  in the
December  31, 1998  financial  statement  accounts  as reported in the  enclosed
financial  statements and those above are solely due to  reclassification of the
results of NTS to a single line entry "Loss from investment in affiliate".

In the year ended December 31, 1999, the Company  realized a 154.9%  increase in
revenues compared to the prior calendar year.  Expenses  increased 17.7% in 1999
resulting in an operating profit of $742,000 in 1999 as compared to an operating
loss of $3,303,000 in the prior year.

Revenues

The  Company's  revenues  arise from  licensing  of the  Company's  products and
technology and from contract  engineering  services and are discussed separately
below. During the year ended December 31, 1999, revenues increased to $5,115,000
from  $2,007,000  in the prior  calendar  year  (excluding  $235,000 in NTS 1998
revenues).

Software Licensing

Product-licensing   revenues  totaled  $3,872,000  in  1999,  as  compared  with
$1,350,000  in 1998.  The  increase  in these  revenues  reflects an increase in
license fees realized from PRISM products.

PRISM  licensing  revenues  amounted  to  $3,837,000  in 1999,  an  increase  of
$2,519,000 from year-earlier  revenues of $1,318,000.  The increase results from
the increase in new licenses  delivered  in 1999 versus  1998,  fourteen  versus
three,  respectively,  and the  increase  in use fee based  revenues of $885,000
(101%  versus  1998) in 1999.  Included in the 1999 use fee revenues is $423,000
related to the sale of a PRISM  license to Applied  Communications,  Inc. in the
fourth quarter of 1999.
<PAGE>
Engineering Services

Engineering  revenues  totaled  $1,243,000 in 1999, as compared with $657,000 in
1998. The increase relates to additional engineering fees related to new license
installations,   associated  customer-specific  model  development,  and  custom
enhancement work contracted and delivered during 1999.

During 1998,  the Company  realized  $44,000 of revenues  related to engineering
work on its InterSite product. No such revenues were realized in 1999.

Operating Expenses

Total operating expenses - consisting of engineering,  research and development,
selling and  marketing,  and general and  administrative  expenses - amounted to
$4,372,000  in the year ended  December 31,  1999,  a decrease of $938,000  over
total operating  costs of $5,310,000 in the prior year (excluding  $2,168,000 in
NTS 1998 operating expenses).

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  $1,023,000 in 1999, as compared
with  $1,799,000 in 1998. The decrease in these costs reflects the write-offs in
1998 totaling approximately $695,000 discussed above.

Research and Development

Research and development  expenses  totaled  $921,000 in the year ended December
31, 1999 as compared  with  $1,253,000  in the prior year.  The decrease in such
costs  reflects the  termination  of further  InterSite  development in November
1998. Research and development  expenses related to the development of InterSite
in 1998 were  approximately  $630,000 and the reduction was partially  offset by
additional salary expense relative to new hiring in financial services and other
financial services staff salary increases.

Selling and Marketing

Selling and marketing  costs  decreased  $78,000 to $1,218,000 in the year ended
December 31, 1999, from $1,296,000 in the prior year.

Selling costs  associated  with  InterSite,  in which the Company ceased further
investment  effective  November 1998,  totaled  $192,000 in 1998,  which was not
incurred in 1999. In addition,  other marketing related expenses were reduced by
approximately  $70,000  resulting from more focused  advertising  and trade show
activities.  These decreases were partially  offset by increases from additional
commissions  relative to the  increased  revenues  ($105,000)  and foreign sales
taxes ($61,000).

General and Administrative

General and administrative expenses totaled $1,210,000 in 1999, as compared with
$962,000 in the previous  year.  General and  administrative  costs for the year
ended December 1999 reflect  primarily the increased  legal expenses  related to
the lawsuit initiated against a competitor in November 1998.

Other Expense

For 1999,  net other  expense was $97,000 as compared  with net other expense of
$26,000  in the  year-earlier  period.  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.  During 1999,  net
interest income recorded amounted to $9,000.

Loss from Investment in Affiliate

During 1999, the Company's  subsidiary NTS sold common stock interests  totaling
58% of its equity. As a result, the Company's interests in NTS are accounted for
under the equity  method of  accounting  in 1999.  As a result of the  Company's
equity interest in NTS, the Company reported a loss from investment in affiliate
of  $1,482,000  in 1999,  representing  49% of NTS's  actual net loss in 1999 of
$2,455,000  reflecting  varying ownership  percentages during 1999. During 1998,
NTS was  included  in the  consolidated  financial  results of the  Company  and
reported a net loss of $1,934,000.

<PAGE>
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 Company's PRISM product line was profitable during 1999.

The Company began  development  in July 1996 of products for use in Internet and
intranet  environments.  Costs associated with this effort totaled $1,383,000 in
1998.  The Company  ceased  further  direct  investment in  development  of this
product line in November 1998. The net investment in this subsidiary during 1998
was  $1,383,000.  The net  investment in the NTS product line was  $1,933,000 in
1998. The net investment in the PRISM product line was $1,954,000 in 1998.

Net Income

During 1999, the Company experienced a net loss of $837,000,  as compared with a
net loss of $5,263,000 in the prior year.  For the year ended December 31, 1999,
loss per share  available for common stock was $0.05 per share, as compared with
a loss per share of $0.36 in the corresponding  period of the prior fiscal year.
For the year ended December 31, 1999,  there was outstanding a weighted  average
of 17,844,327 shares, as compared with 15,249,932 in the year-earlier period.


ITEM 7(a)   Quantitative and Qualitative Disclosure about Market Risk.
            ----------------------------------------------------------

Management assesses their exposure to these risks as immaterial.


<PAGE>


                                    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:  March 31, 2001



      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 and Director     March 31, 2001
--------------------

/s/Charles Elbaum       Co-Chairman of the Board and Director     March 31, 2001
--------------------

/s/David L. Fox         President, Chief Executive Officer        March 31, 2001
--------------------      and Director


/s/Herbert S. Meeker    Secretary and Director                    March 31, 2001
--------------------

/s/Sam Albert           Director                                  March 31, 2001
--------------------

/s/Thomas H. Boje       Director                                  March 31, 2001
--------------------

/s/Jeffrey Harvey       Director                                  March 31, 2001
--------------------

/s/Thomas F. Hill       Director                                  March 31, 2001
--------------------

/s/Bruce Schnitzer      Director                                  March 31, 2001
--------------------





<PAGE>













                        CONSOLIDATED FINANCIAL STATEMENTS
                        ---------------------------------




                                    FORM 10-K
                                    ---------




                                December 31, 2000
                                -----------------


<PAGE>





                            NESTOR, INC.                    Part II
                            ------------
                                                             Item 8
                              CONTENTS








                                                                Page No.


Independent Auditor's Report                                      20

Consolidated Balance Sheets -                                     21
 December 31, 2000 and 1999

Consolidated Statements of Operations -                           22
 For the Years Ended December 31, 2000, 1999 and 1998

Consolidated Statements of Stockholders' Equity -                 23
 For the Years Ended December 31, 2000, 1999 and 1998

Consolidated Statements of Cash Flows -                           24
 For the Years Ended December 31, 2000, 1999 and 1998

Notes to Consolidated Financial Statements                        25


<PAGE>



                                                                         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,  2000 and 1999,  and the related  consolidated  statements  of
operations,  stockholders'  equity and cash flows for each of the three years in
the period  ended  December  31, 2000.  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 auditing standards generally accepted
in the United States. 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 2000 and 1999 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Nestor,
Inc.  at  December  31,  2000 and  1999,  and the  consolidated  results  of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United  States.  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 26, 2001




<PAGE>


                                  NESTOR, INC.
                           Consolidated Balance Sheets
                           ---------------------------

                                                            DECEMBER 31,
            ASSETS                                       2000          1999
                                                    ---------------------------

CURRENT ASSETS:
  Cash and cash equivalents ......................  $    150,035   $  1,048,802
  Accounts receivable, net of allowance
    for doubtful accounts ........................       693,555        984,318
  Unbilled contract revenue ......................     1,260,884      1,200,484
  Due from affiliate .............................       322,952        320,459
  Other current assets ...........................        91,042        161,809
                                                    ------------   ------------
    Total current assets .........................     2,518,468      3,715,872

Long term unbilled contract revenue ..............     2,036,896      1,965,532
Investment in affiliate ..........................        81,100        710,690
Property and equipment at cost,
  net of accumulated depreciation ................       177,377        269,917
Deferred development costs .......................        32,000         56,000
Patent development costs .........................        76,862         55,894
                                                    ------------   ------------
TOTAL ASSETS .....................................  $  4,922,703   $  6,773,905
                                                    ============   ============


       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Line of credit .................................  $    419,769    $      --
  Accounts payable ...............................       253,696        271,397
  Accrued employee compensation ..................       265,779        314,202
  Accrued liabilities ............................       472,983        547,799
  Deferred income ................................     1,306,016      1,371,217
                                                    ------------   ------------
    Total current liabilities ....................     2,718,243      2,504,615

NONCURRENT LIABILITIES:
  Long term deferred income ......................     2,036,896      1,965,532
                                                    ------------   ------------
    Total liabilities ............................     4,755,139      4,470,147
                                                    ------------   ------------

  Commitments and contingencies ..................          --             --

STOCKHOLDERS' EQUITY:
  Preferred stock, $1.00 par value,
    authorized 10,000,000 shares; issued and
    outstanding: Series B - 235,000 shares at
    December 31, 2000 and 345,000 shares at
    December 31, 1999 ............................       235,000        345,000
  Common stock, $.01 par value, authorized
    30,000,000 shares; issued and outstanding:
    17,688,449 shares at December 31, 2000 and
    17,499,327 shares at December 31, 1999 .......       176,884        174,993
  Warrants and options ...........................       843,434        736,951
  Additional paid-in capital .....................    27,434,129     26,574,123
  Retained deficit ...............................   (28,521,883)   (25,527,309)
                                                    ------------   ------------
    Total stockholders' equity ...................       167,564      2,303,758
                                                    ------------   ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......  $  4,922,703    $ 6,773,905
                                                    ============    ===========

Significant related party transactions are described in Note 13.
The Notes to the Financial Statements are an integral part of this statement.
<PAGE>

<TABLE>

                                        NESTOR, INC.
                            Consolidated Statements of Operations
                            -------------------------------------

<CAPTION>

                                                          YEARS ENDED DECEMBER 31,
                                                     2000           1999           1998
                                              ---------------------------------------------

<S>                                           <C>              <C>             <C>
Revenue (Note 13):
   Software licensing ......................  $   2,537,511    $  3,872,016    $  1,352,071
   Engineering services ....................      1,114,911       1,242,763         746,007
   Tangible product sales ..................           --              --           143,298
                                              -------------    ------------    ------------

      Total revenue ........................      3,652,422       5,114,779       2,241,376
                                              -------------    ------------    ------------

Operating expenses:
   Engineering services ....................        966,681       1,023,046       2,066,558
   Tangible product costs ..................           --              --            54,010
   Research and development ................      1,247,205         920,918       2,112,746
   Selling and marketing ...................      1,493,968       1,218,476       1,831,697
   General and administrative ..............      1,493,345       1,209,888       1,413,340
                                              -------------    ------------    ------------
      Total operating expenses .............      5,201,199       4,372,328       7,478,351
                                              -------------    ------------    ------------

Income (loss) from operations ..............     (1,548,777)        742,451      (5,236,975)

Other  expense - net .......................       (106,675)        (97,386)        (26,178)
                                              -------------    ------------    ------------
Income (loss) before income taxes
  and investment loss ......................     (1,655,452)        645,065      (5,263,153)

Income taxes ...............................           --              --              --
Loss from investment in affiliate ..........     (1,339,122)     (1,481,889)           --
                                              -------------    ------------    ------------

Net loss ...................................  $  (2,994,574)   $   (836,824)   $ (5,263,153)
                                              =============    ============    ============

Loss Per Share:
Net loss ...................................  $  (2,994,574)   $   (836,824)   $ (5,263,153)
Dividends accrued on preferred stock .......           --              --           151,396
                                               ------------    ------------    ------------
Net loss available for common stock ........  $  (2,994,574)   $   (836,824)   $ (5,414,549)
                                              =============    ============    ============
Loss per share, basic and diluted ..........  $       (0.17)   $      (0.05)   $      (0.36)
                                              =============    ============    ============

Shares used in computing loss per share:
   Basic and diluted .......................     17,901,602      17,844,327      15,249,932
                                              =============    ============    ============

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

</TABLE>



<PAGE>
<TABLE>
                                                            Nestor, Inc.
                                           Consolidated Statement of Stockholders' Equity
                                           ----------------------------------------------
<CAPTION>

                                     Common Stock         Preferred Stock        Additional                   Warrants
                                 --------------------  ----------------------     Paid-in         Retained      and
                                    Shares    Amount      Shares       Amount     Capital         (Deficit)   Options      Total
                                    ------    ------      ------       ------    ----------       ---------   --------     -----

<S>                             <C>         <C>        <C>         <C>          <C>           <C>             <C>       <C>

Balance at December 31, 1997     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 December 31, 1998    17,479,327  $174,793     365,000   $  365,000   $24,504,556   $(24,690,485)   $630,467  $   984,331

Conversion of Preferred Stock
  to Common Stock                   20,000       200     (20,000)     (20,000)       19,800           --          --           --
Issuance of equity
  by subsidiary                       --        --          --           --       2,049,767           --          --      2,049,767
Accretion value of warrants           --        --          --           --            --             --       106,484      106,484
Loss for the year ended
  December 31, 1999                   --        --          --           --            --         (836,824)       --       (836,824)
                                ----------  --------  ----------   ----------- ------------   ------------    --------  -----------
Balance at December 31, 1999    17,499,327  $174,993     345,000   $  345,000   $26,574,123   $(25,527,309)   $736,951  $ 2,303,758


Issuance of Common Stock            79,122       791        --           --          84,846           --          --         85,637
Conversion of Preferred Stock
  to Common Stock                  110,000     1,100    (110,000)    (110,000)      108,900           --          --           --
Issuance of equity by
  subsidiary                          --        --          --           --         666,260           --          --        666,260
Accretion value of warrants           --        --          --           --            --             --       106,483      106,483
Loss for the year ended
  December 31, 2000                   --        --          --           --            --       (2,994,574)       --     (2,994,574)
                                ----------  --------  ----------   ----------- ------------   ------------    --------  -----------

Balance at December 31, 2000    17,688,449  $176,884     235,000   $  235,000   $27,434,129   $(28,521,883)   $843,434  $   167,564
                                ==========  ========  ==========   ==========   ===========   ============    ========  ===========

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

</TABLE>

<PAGE>



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

                                                                     YEARS ENDED DECEMBER 31,
                                                             2000               1999             1998
                                                        --------------------------------------------------
<S>                                                     <C>                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss ...........................................   $ (2,994,574)       $  (836,824)      $ (5,263,153)
  Adjustments to reconcile net loss
    to net cash used by operating activities:
    Write-down for impairment loss ..................           --                 --              790,641
    Depreciation and amortization ...................        116,540            120,257            114,810
    Loss from investment in affiliate ...............      1,339,122          1,481,889               --
    Expenses charged to operations relating to
     options, warrants and capital transactions .....        106,483            106,484            106,483
    Changes in assets and liabilities:
     (Increase) decrease  in accounts receivable ....        290,763           (471,570)            44,464
     (Increase) in unbilled contract revenue ........       (131,764)        (2,397,648)          (477,906)
     (Increase) decrease in other assets ............         70,767           (168,053)           (98,649)
     (Decrease) increase in accounts payable
       and accrued expenses .........................       (124,624)           279,101            199,750
     (Decrease) increase in deferred income .........          6,163          2,244,213            684,304
                                                        -------------       -----------       ------------

     Net cash provided (used) by operating activities     (1,321,124)           357,849         (3,899,256)
                                                        -------------       -----------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Advances to affiliate - net ........................        (45,764)          (320,459)              --
 Purchase of property and equipment .................           --              (61,337)          (132,209)
 Patent development costs ...........................        (20,968)           (55,894)              --
                                                        ------------        -----------       ------------

                Net cash used by investing activities        (66,732)          (437,690)          (132,209)
                                                        ------------        -----------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Repayment of obligations under capital leases ......        (16,317)           (46,540)           (47,246)
 Proceeds from notes payable/line of credit .........        419,769               --              250,000
 Repayment of notes payable .........................           --                 --             (250,000)
 Redemption of Preferred Series D Stock .............           --                 --              (41,424)
 Proceeds from issuance of common stock - net .......         85,637               --            4,977,749
 Payments of dividends on preferred stock ...........           --                 --              (69,070)
                                                        ------------        -----------       ------------
    Net cash provided (used) by financing activities         489,089            (46,540)         4,820,009
                                                        -------------       -----------       ------------

Net change in cash and cash equivalents .............       (898,767)          (126,381)           788,544

Cash and cash equivalents - beginning of year .......      1,048,802          1,175,183            386,639
                                                        ------------        -----------       ------------

Cash and cash equivalents - end of year .............   $    150,035        $ 1,048,802       $  1,175,183
                                                        ============        ===========       ============


SUPPLEMENTAL CASH FLOWS INFORMATION:
 Interest paid ......................................   $     10,603        $    13,054       $     20,350
                                                        ============        ===========       ============

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


Significant non-cash transactions are described in Notes 3, 5, 7, 8 and 12
The Notes to the Financial Statements are an integral part of this statement.

</TABLE>

<PAGE>


                        NOTES TO THE FINANCIAL STATEMENTS

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.
     in 1999 and 2000 and Nestor, Inc., Nestor Traffic Systems, Inc. ("NTS") and
     Nestor Interactive,  Inc. ("Interactive") in 1998. NTS and Interactive were
     organized  effective  January  1, 1997 as two  wholly  owned  subsidiaries.
     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.

     On March 25 and  November  30,  1999,  NTS  sold in the  aggregate  a 58.1%
     common-stock  interest  to a  private  group of  investors  (Note  12).  In
     accordance   with  Company   policy,   no  gain  was  recognized  on  these
     transactions, and the Company  recorded an increase in the equity  value of
     its investment in affiliate. As a result of these transactions, the Company
     changed from  consolidation to equity accounting for its remaining interest
     in NTS for the  year  ended  December  31,  1999.  In June  2000,  NTS sold
     additional  shares of its common stock to private  investors,  bringing the
     Company's  ownership of NTS to 34.62%.  As discussed in Note 16, in January
     2001,  an agreement in principle was reached to combine the Company and NTS
     by merging NTS into a  wholly-owned  subsidiary of the Company with Nestor,
     Inc., in effect, becoming the surviving entity.

     B. CASH EQUIVALENTS

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

     C. UNBILLED CONTRACT REVENUES

     Unbilled contract revenues  represent  primarily minimum guaranteed monthly
     license  fees (See F and G below)  where a  customer  pays a portion of the
     license fees over the software license term (usually five years) based on a
     contractually predetermined minimum volume of transactions.

     D. DEPRECIATION AND AMORITIZATION

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

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

     E. PRODUCT AND PATENT DEVELOPMENT COSTS

     The  costs  of  development  of the  Company's  software  -  which  consist
     primarily of labor and outside  consulting  and 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 is on a  straight-line  basis over the
     shorter of the estimated economic life, or statutory life, of the patent.

     F. DEFERRED INCOME

     Corresponding with unbilled contract  revenues,  deferred income represents
     primarily minimum guaranteed monthly license fees (see C above and G below)
     where a  customer  pays a portion  of the  license  fees over the  software
     license term  (usually five years) based on a  contractually  predetermined
     minimum volume of transactions.
<PAGE>
     Additionally,  in certain  instances,  the Company  bills  and/or  collects
     payment from  customers  prior to the  delivery of the software  product or
     performance of contracted  maintenance  or services,  resulting in deferred
     income.


     G. 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. 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  is  recognized  as
     follows:

     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.

     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.

     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  based  upon  costs  incurred  to  date in
     relation to estimated total costs.

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

     H. REVENUE CONCENTRATION

     The  Company  realizes  a  significant  volume  of  business  from  Applied
     Communications,  Inc.  (ACI).  In 2000,  1999 and 1998,  revenues  from ACI
     constituted 63%, 61% and 28%, respectively, of total revenues.
<PAGE>
     I. 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
     result, 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.


     J. 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.


     K. EARNINGS (LOSS) PER SHARE

     The Company  reports its earnings  (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.  Diluted EPS is computed giving
     effect to common stock  equivalents and other dilutive  securities,  unless
     the computation results in anti-dilution.



NOTE 2 - ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS:

                                                          December 31,
                                                  --------------------------
                                                     2000            1999
                                                     ----            ----

      Trade accounts receivable                   $ 697,700       $ 988,463
      Allowance for doubtful accounts                (4,145)         (4,145)
                                                  ---------       ---------
      Accounts receivable, net of allowance
        for doubtful accounts                     $ 693,555       $ 984,318
                                                  =========       =========



NOTE 3 - 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.  By the end of
     1997,  the  Company  had  deferred  $575,000  of costs in  connection  with
     engineering and installation of the project. Management believed that these
     costs would be fully recovered over the five year term of the contract.

     In view of the level of revenue generated by this contract, at December 31,
     1998,  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  with an  offsetting  charge to  engineering
     services.   The  residual   deferred   costs  are  being   amortized  on  a
     straight-line basis over the remaining term of the contract.

<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT AT COST - NET:

                                                                     Useful Life
                                                                     in Years or
                                                  December 31,        Lease Term
                                           ------------------------  -----------
                                               2000         1999
                                               ----         ----
      Office furniture and equipment      $  234,706     $  234,706      5 - 7
      Leased computer equipment under
       capital leases                        113,893        113,893        5
      Computer equipment                   1,268,855      1,268,855      3 - 5
                                          ----------     ----------
                                           1,617,454      1,617,454
      Less:  Accumulated depreciation
             and amortization              1,440,077      1,347,537
                                          ----------     ----------
                                          $  177,377     $  269,917
                                          ==========     ==========

     Depreciation  and  amortization  expense  on the above  assets of  $92,540,
     $96,257 and $114,810,  was recorded for the years ended  December 31, 2000,
     1999, and 1998,  respectively.  Accumulated  depreciation  and amortization
     includes  $63,741,  $40,963 and $18,184 of  amortization  related to leased
     equipment  under  capital  leases  at  December  31,  2000,  1999 and 1998,
     respectively.

NOTE 5 - 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 ceased further  investment in the Interactive  subsidiary
     (see  Note 1) and  future  realization  of the  asset  was  uncertain,  the
     remaining value of this asset was written off in November 1998.

NOTE 6 - LINE OF CREDIT:

     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.  As of
     December 31, 2000, $419,769 had been advanced against the loan. The Company
     did not require additional advances through February 28, 2001 when the loan
     matured.  Principal  payments are due in twelve equal monthly  installments
     ($34,981)  beginning March 1, 2001. Interest is based on the prime interest
     rate plus 1% and is due quarterly in arrears.  Included in accrued expenses
     at December 31, 2000 is $4,296 of interest due to TSAI.

NOTE 7 - COMMON AND PREFERRED 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 (Note 8).  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 into common stock.  The redeemable
     convertible preferred stock originally accrued and accumulated dividends at
     rates of seven to nine  percent,  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 on the redeemable
     convertible preferred stock.

     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 $1.00 in liquidation before any distribution
     is made to holders of the Common Stock.  The liquidation  value of Series B
     Preferred  was  $235,000  and  $345,000  at  December  31,  2000 and  1999,
     respectively.
<PAGE>
     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 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 and, as a result, 143,155 common shares were
     issued.  After paying  dividends  of $17,941 on June 30, 1998,  the Company
     reclassified  the  unconverted  Series D balance to accrued  expenses where
     approximately $36,000 remains unpaid at December 31, 2000 and 1999.

NOTE 8 - 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 generally vest over three years and 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
     vest over three years and are exercisable for up to ten years from the date
     of grant,  although most 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").  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, 2000, 1999 and 1998:

<TABLE>
<CAPTION>


                                                                          Years Ended December 31,
                                              ------------------------------------------------------------------------------
                                                        2000                       1999                        1998
                                                        ----                       ----                        ----
                                                            Weighted                    Weighted                    Weighted
                                                             Av. Ex.                     Av. Ex.                     Av. Ex.
                                                 Shares       Price          Shares       Price          Shares       Price
                                                 ------       -----          ------       -----          ------       -----


      <S>                                      <C>           <C>           <C>           <C>           <C>           <C>
      Outstanding beginning  of year           1,628,316     $1.20         1,579,124     $1.22         2,214,000     $1.58
      Granted                                    270,500       .94            62,500       .72           454,124       .99
      Exercised                                   79,122      1.08              --         --             31,250      1.09
      Canceled                                   714,873       .99            13,308      1.08         1,057,750      1.88
                                               ---------                   ---------                   ---------
      Outstanding end  of year                 1,104,821     $1.28         1,628,316     $1.20         1,579,124     $1.22
                                               =========                   =========                   =========

      Options exercisable  at year end           805,928     $1.42         1,322,786     $1.24         1,102,846     $1.22
                                               =========                   =========                   =========
      Weighted average fair value of
       options granted during the year         $    0.75                   $    0.42                   $    0.71
                                               =========                   =========                   =========
</TABLE>

<PAGE>
     The following table presents  weighted  average price and life  information
     about significant option groups outstanding at December 31, 2000.
<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 12/31/00      Life (Years)      Price         at 12/31/00      Price
      ---------------      -----------      ------------      -----         -----------      -----
       <S>                  <C>                 <C>            <C>          <C>                <C>

       $ .31                   15,000           3.00           $0.31          7,500            $0.31
       $ .69 - $ .94          582,571           3.26            0.74        324,428             0.73
       $1.38 - $1.94          283,750           2.01            1.54        274,000             1.55
       $2.09 - $2.32          138,000           4.05            2.26        136,625             2.26
       $2.50 - $2.91           85,500           5.08            2.69         63,375             2.75
                            ---------           ----            ----      ---------            -----
                            1,104,821           3.18           $1.28        805,928            $1.42
                            =========           ====           =====      =========            =====
</TABLE>

     The  following  are the pro  forma  net loss and net loss per share for the
     years ended December 31, 2000, 1999 and 1998, as if the  compensation  cost
     for the  option  had been  determined  based on the fair value at the grant
     date for grants in those periods and reflected in the financial statements:

                                            Years Ended December 31,
                                 ---------------------------------------------
                                    2000               1999            1998
                                    ----               ----            ----

      Net loss:
        As Reported            $(2,994,574)      $  (836,824)      $(5,263,153)
        Pro Forma              $(2,573,487)      $(1,022,488)      $(4,710,218)

      Net loss per share:
        As Reported            $     (0.17)      $     (0.05)      $     (0.36)
        Pro Forma              $     (0.14)      $     (0.06)      $     (0.32)


     The effects on the years ended  December 31, 2000,  1999 and 1998 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, 2000 and the Company expects to grant additional options in
     future years.

     The fair value of each option grant was estimated  using the  Black-Scholes
     model with risk-free interest rates on the date of grant, which 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 1.009 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:

                                                       December 31,
                                          ------------------------------------
                                              2000         1999        1998
                                              ----         ----        ----

      Eligible, end of year for exercise
       currently                           4,999,040    5,000,580    5,000,580
                                           =========    =========    =========

      Warrants issued                           --           --      2,500,000
       Low exercise price                 $     --     $     --     $     3.00
       High exercise price                $     --     $     --     $     3.00

     The warrants outstanding as of December 31, 2000 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;  however,  upon
     completion of the transactions contemplated by the merger agreement and the
     secured  note  agreement  (Note 16),  the  current  exercise  price will be
     reduced in accordance with the terms and conditions of the warrant.
<PAGE>
     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 annually in 2000, 1999 and 1998.


NOTE 9 - SEGMENT INFORMATION:

     A. Description of reportable segments

     In prior years, the Company had three reportable segments. During 1998, the
     Internet  segment  ceased  operations,  and in 1999,  58.1% of the  Traffic
     Systems  segment  was  sold,  leaving  Financial   Solutions  as  the  sole
     reportable segment at December 31, 1999.  Segment  information for 1999 and
     2000 has been omitted since all operations relate to a single segment.

     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
     provided 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.

<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

</TABLE>

     D. Geographic Information

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

                                            Years Ended December 31,
                                    ----------------------------------------
                                        2000          1999           1998
                                        ----          ----           ----

        United States               $2,841,558     $4,196,612     $1,918,951
        Belgium                        276,799        151,200        212,097
        Germany                           --             --           17,460
        Japan                          117,532        685,850         55,333
        Canada                         416,533         81,117         27,000
        Singapore                         --             --           10,535
                                    ----------     ----------     ----------
                                    $3,652,422     $5,114,779     $2,241,376
                                    ==========     ==========     ==========

<PAGE>

   E. Revenues from Major Customers

     All revenues presented are derived from the Company's  Financial  Solutions
     segment  with the  exception  of Customer  E, which  relates to the Traffic
     Systems segment. Customer A is a subsidiary of TSAI (see Notes 6, 7, 13, 15
     and 16).


                                           Years Ended December 31,
                                    --------------------------------------
                                         2000         1999          1998
                                         ----         ----          ----

                Customer A          $2,299,208     $3,106,631     $620,732

                Customer B             285,834           --           --

                Customer C                --          685,850         --

                Customer D                --             --        445,115

                Customer E                --             --        302,979

                Customer F             276,799           --           --

                Customer G             256,876           --           --




NOTE 10 - OTHER EXPENSE - NET:

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


                                             Years Ended December 31,
                                     ---------------------------------------
                                         2000          1999          1998
                                         ----          ----          ----

      Interest income (expense)       $    (192)    $   9,098     $ (20,350)

      Expense relating to
       financing operations            (106,483)     (106,484)     (106,483)

      Other - net                          --            --         100,655
                                      ----------    ---------     ---------

      Other expense - net             $(106,675)    $ (97,386)    $ (26,178)
                                      =========     =========     =========



NOTE 11 - 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 ("FAS 109"). Under FAS 109, deferred tax assets
     and liabilities are determined  based on differences  between the 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.

     Due to operating losses throughout the reporting periods,  no provision for
     income taxes was made in 2000, 1999 or 1998.  Significant components of the
     Company's  deferred tax  liabilities and assets as of December 31, 2000 and
     1999 are as follows:

<PAGE>

                                                           December 31,
                                                 -----------------------------
                                                     2000              1999
                                                     ----              ----
        Deferred tax liabilities:
        -------------------------
          Property and equipment                 $     3,000       $      --
          Deferred development costs                  13,000            22,000
                                                 -----------       -----------
         Total deferred tax liabilities               16,000            22,000

        Deferred tax assets:
        --------------------
          Accounts receivable                          2,000             2,000
          Accrued expenses                           347,000           308,000
          Deferred income                             35,000            32,000
          Tax credits                                 17,000            17,000
          Net operating loss                       6,839,000         5,988,000
                                                 -----------       -----------
        Total deferred tax assets                  7,240,000         6,347,000

        Valuation allowance                       (7,224,000)       (6,325,000)
                                                 -----------       -----------
        Net deferred tax assets                       16,000            22,000
                                                 -----------       -----------
        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.  Realization  is not  assured in future tax
     projections.

     A  reconciliation  of the provision for income taxes to the amount computed
     using the Federal statutory tax rates consists of the following:

                                                Years Ended December 31,
                                     -------------------------------------------
                                         2000            1999           1998
                                         ----            ----           ----
      Income (loss) before taxes
       and investment loss           $(1,655,000)     $ 645,000     $(5,263,000)
                                     ===========      =========     ===========

      Tax at statutory rate of 34%   $  (563,000)     $ 219,000     $(1,789,000)
      State income tax (net of
       federal benefit)                 (110,000)        47,000        (313,000)
      Effect of permanent
       differences                       (54,000)        36,000         101,000
      Valuation allowance                727,000       (302,000)      2,001,000
                                     ------------    ----------     -----------

        Income tax expense           $      --        $    --       $      --
                                     ============     ==========    ===========


     The Company has available at December 31, 2000,  $18,399,000 and $9,829,000
     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 2001.


NOTE 12 - NESTOR TRAFFIC SYSTEMS, INC. AFFILIATE:

     On March 25, 1999,  Nestor  Traffic  Systems,  Inc.,  a  subsidiary  of the
     Company,  sold a 37.5% common stock interest  (540,000  shares at $4.35 per
     share) to a private group of investors for $2,350,000 in cash and issued an
     option to purchase an additional  17.5% of its common stock for $1,750,000.
     The option was  scheduled  to expire on January 31,  2000.  On November 30,
     1999,  the Company,  NTS and the investor  group agreed to  accelerate  the
     exercise of the option and an additional 20.6% interest  (710,000 shares at
     $2.47  per  share)  was sold for  $1,755,000.  On June 23,  2000,  NTS sold
     additional  shares of its common stock to private  investors for $2,025,000
     (450,000  shares at $4.50 per share).  The investor  group  includes  three
     officers  and a director  of the  Company  and the  subsidiary,  who in the
     aggregate,  have contributed $970,085 of cash invested on the same basis as
     third-party  investors.  As  discussed  in Note 16,  in  January  2001,  an
     agreement  in  principle  was  reached to combine  the  Company  and NTS by
     merging NTS into a  wholly-owned  subsidiary  of the Company  with  Nestor,
     Inc., in effect, becoming the surviving entity.
<PAGE>
     As a  result  of the  1999  transactions,  the  Company's  interest  in NTS
     decreased  to 41.9%,  prompting  the change  from  consolidation  to equity
     accounting for the year ended December 31, 1999. The Company owns 34.62% of
     NTS at December 31, 2000. The  investment in affiliate  balances of $81,100
     and  $710,690 at  December  31,  2000 and 1999,  respectively,  reflect the
     Company's interest in NTS's equity.

     Presented  below is summarized  NTS financial  information  at December 31,
     2000 and 1999 and for the years then ended:

                                                December 31,
                                       ------------------------------
                                          2000                1999
                                          ----                ----
             Current assets            $  466,000          $2,124,000
             Noncurrent assets            694,000             298,000
             Current liabilities          925,000             724,000
             Stockholders' equity         234,000           1,698,000

             Total revenues               873,000             167,000
             Operating expenses         4,425,000           2,656,000
             Net loss                   3,513,000           2,453,000

     During the period  January 1, 1999  through  March 31,  1999,  the  Company
     advanced  NTS   financing  to  cover   operating   expenses   amounting  to
     approximately  $550,000. Of this advance,  $275,000 was reimbursed in March
     1999,  and the  balance  was  paid in  January  2001.  Periodically,  other
     advances  are made by the  Company to NTS  primarily  as a result of shared
     accounts.  These  amounts are due as invoiced and are also  included in the
     due from  affiliate  balance.  The amount due from NTS at December 31, 2000
     and 1999 was $322,952 and $320,459, respectively.

     On January 1, 1999, the Company entered into an exclusive  license with NTS
     to apply certain proprietary  technologies in the fields of using video and
     other  sensors to  analyze,  monitor  and respond to movement of persons or
     objects  in  vehicular,  rail,  air or  other  modes of  transportation  or
     supporting  the foregoing.  The license  expires upon the expiration of the
     underlying patents protecting the technologies used in NTS's products.  The
     license  provides for royalties to the Company starting in 2000 equal to 5%
     of the gross margin realized from sales or licensing of products subject to
     the license,  and  increasing to 10% of the gross margin in calendar  years
     2001 and beyond.  The license requires minimum annual royalties of $125,000
     beginning in 2001, increasing to $1,000,000 in 2005 and beyond, in order to
     maintain   exclusive  rights.   This  license  will  be  extinguished  upon
     effectiveness  of the merger  discussed  in Note 16. The  Company  recorded
     royalties  of  $9,548  for 2000 and such  amount  is  included  in due from
     affiliate at December 31, 2000. No royalties were due or payable in 1999.

     NTS uses  facility and  administrative  services of the Company,  including
     office space and  executive,  accounting and other support  personnel.  NTS
     reimburses the Company  monthly for these services at a rate of $39,913 for
     up  to  15  NTS  employees,  and  $47,267  for  above  15  employees.  Such
     reimbursement  will  decrease  as NTS moves into its own  office  space and
     develops  an  independent   executive  and  support  staff.   Facility  and
     administrative  fees  charged to NTS were  $567,000 in 2000 and $479,000 in
     1999.  Included in the due from  affiliate  balance at December 31, 2000 is
     $47,267 for December 2000 fees.


NOTE 13 - 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,  2000,  1999 and 1998,  the Company  recorded an
     expense  for  Baer,   Marks  &  Upham  of  $4,874,   $15,600  and  $15,600,
     respectively.

     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, 2000, 1999
     and 1998,  the  Company  recorded  an expense  for Wand  Partners,  Inc. of
     $43,048, $41,497 and $47,770,  respectively.  During 1998, the Company paid
     Wand Partners dividends totaling $69,046 on the redeemable  preferred stock
     held by Wand.  Included in accrued  liabilities at December 31, 2000,  1999
     and  1998  are  $141,243,  $99,167  and  $63,738,  respectively,  due  Wand
     Partners, Inc.
<PAGE>
     Thomas D. Halket, who became an officer of the Company in January 1993, was
     a partner in the law firm of Hughes  Hubbard & Reed LLP,  which the Company
     used as outside  counsel.  For the years ended December 31, 2000,  1999 and
     1998,  the Company  recorded  an expense  for Hughes  Hubbard & Reed LLP of
     $35,852, $76,106 and $80,039, respectively.

     During  1998,  TSAI,  the parent  company of Applied  Communications,  Inc.
     (ACI), became a significant  shareholder of the Company (Note 7). Thomas H.
     Boje, Vice President,  Corporate  Development of TSAI, became a director of
     the Company in April 2000. For the years ended December 31, 2000,  1999 and
     1998, the Company recorded revenues of $2,299,208, $3,106,631 and $620,730,
     respectively from ACI. At December 31, 2000 and 1999,  accounts  receivable
     included  $639,013 and $489,494 due from ACI and unbilled  were  $3,184,924
     and  $3,141,574.  Also at  December  31,  2000 and  1999,  deferred  income
     included   $3,192,849  and  $2,904,634  from  ACI.  Further  related  party
     transactions with TSAI and ACI are discussed in Notes 6, 7, 8, 15 and 16.

     See Note 12 for transactions with affiliate.


NOTE 14 - COMMITMENTS AND CONTINGENCIES:

     The Company  maintains 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  $195,000,  $195,000 and $193,953 was
     charged to operations for the years ended December 31, 2000, 1999 and 1998,
     respectively.

     During  2000,  The  Company  began  leasing  computer  equipment  under  an
     operating lease agreement.  The lease provides for monthly rent payments in
     arrears over a three-year  term. At the end of the lease term,  the Company
     may purchase the equipment at fair market  value,  extend the lease term or
     return the equipment. The value of leased equipment was $97,035 at December
     31, 2000 and rent expense was $33,233 for the year.

     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 13 - Related party transactions).

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

                     December 31, 2001       $ 280,000
                     December 31, 2002         287,000
                     December 31, 2003         106,000
                     December 31, 2004          40,000
                     December 31, 2005          40,000
                     Thereafter                 40,000
                                             ---------
                                             $ 793,000
                                             =========

NOTE 15- LITIGATION:

     On October 6, 1998, HNC Software Corp. ("HNC"), a significant competitor of
     the Company's 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  patents  (infringement  claims
     withdrawn January 10, 2000).

     On June 15,  1999,  HNC  answered  the  lawsuit  denying  the  allegations,
     bringing a counterclaim alleging infringement of the above described patent
     by  the   Company,   and   seeking  a   declaration   of   invalidity   and
     unenforceability  of one of the  Company's  patents.  On the same day,  HNC
     brought suit in San Diego, CA against ACI and its parent  alleging  various
     causes of  action  including  patent  infringement  of the above  described
     patent by the Company's  PRISM  product  which ACI markets.  In April 2000,
     HNC, ACI and its parent  agreed to dismiss the lawsuit.  ACI has  requested
     that the Company provide  indemnification for approximately $900,000 of its
     legal counsel costs  pursuant the PRISM license  agreement  between ACI and
     the  Company.  The  Company  is  disputing  the  indemnification  claim and
     therefore, no accrual has been established.
<PAGE>
     The Company and HNC reached a mutually agreeable  settlement on January 16,
     2001, the terms of which are confidential.  All claims have been dismissed.
     Costs associated with the suit have been expensed as incurred.

NOTE 16- SUBSEQUENT EVENTS:

     A. MERGER AND SECURED NOTE AGREEMENT

     In January  2001,  an  agreement  in  principle  was reached to combine the
     Company  and  Nestor  Traffic   Systems,   Inc.,  by  merging  NTS  into  a
     wholly-owned  subsidiary  of the  Company,  with  Nestor,  Inc.  in  effect
     becoming  the  surviving  entity.  The  combination  is  subject to certain
     conditions  including a fairness  opinion of the transaction by a qualified
     investment company and approval by the shareholders of both companies.

     On  January  9, 2001,  the  Company  and NTS  entered  into a secured  note
     agreement  with  NTS  Investors,   LLC  (an  independent  investment  group
     ("Group")).  The Group  loaned NTS  $4,000,000  as of February 1, 2001 with
     principal  and interest at 8% due on December 31, 2001.  The note  contains
     various  covenants  including  restrictions  on  the  use of  proceeds  and
     payments  to Nestor,  Inc.  It is  secured  by NTS assets.

     Upon  consummation of the combination  contemplated  above,  the Group will
     convert the note to equity and increase its total  investment to $8,000,000
     in exchange for approximately  16,756,000  shares (33.34%) of Nestor,  Inc.
     common  stock,  the current NTS  shareholders  will  receive  approximately
     15,580,000  shares (31%) of Nestor,  Inc.  common stock and current Nestor,
     Inc. shareholders would then own approximately 17,922,000 shares (35.66%).

     If the  combination is not  consummated on or before December 31, 2001, the
     Group may elect on or before  January 31, 2002 to convert the note into NTS
     common stock for up to a 25% fully diluted equity interest and reacquire up
     to an additional 25% fully diluted equity interest in NTS for an additional
     $4,000,000.

     In the event that the combination is completed,  the Group will receive the
     right  to  acquire  additional  common  stock  at the  same  price at which
     warrants of Nestor,  Inc. are exercised so as to maintain  their  ownership
     interest  percentage.  In  addition,  the Group will  receive the option to
     acquire up to 1,000,000  shares of the  Company's  common stock at $.75 per
     share for three years as dilution protection against both the Company's and
     NTS's converted employee stock options outstanding.

     B. NEW ACI LICENSE AGREEMENT

     On February 1, 2001, the Company entered into a license  agreement with ACI
     pursuant to which ACI was granted a  worldwide,  perpetual,  non-revocable,
     non-transferable  and  non-exclusive  license  in the field of use of fraud
     detection  (including money laundering  detection) in electronic  payments.
     ACI may brand,  customize,  and extend the software products covered by the
     license  agreement  as well as use the software  programs as a  development
     platform  to  develop  new   functional   and  new  end-user   products  or
     applications subject to the terms and conditions of the license. In return,
     ACI is fully  responsible  and liable for the  provision of services to its
     licensees.  Nestor, Inc. had previously  provided support,  maintenance and
     enhancements for these products.

     ACI has agreed to pay initial and  guaranteed  minimum  license fees during
     the first year in the aggregate of $1,576,650 and, in addition,  an ongoing
     license fee of 15% for source code license rights to the software products.
     The license  granted to ACI is for  products  that  presently  constitute a
     substantial  portion of the  Company's  gross  revenues.  During 2000,  the
     Company  recorded license fees of $1,401,305 under the previous 40% royalty
     rate and $897,903 of  engineeirng  revenues at normal  full-fee rates (Note
     13). Future ACI revenues are expected to decrease  significantly due to the
     decrease in the  royalty  rate from 40% to 15% and the  elimination  of ACI
     engineering revenues.  Future expenses relating to these revenues will also
     decrease  because  ACI  has  hired  twelve  employees  from  Nestor,  Inc.,
     effective February 1, 2001 and is reimbursing the Company $13,000 per month
     for up to six months for the continued use of Nestor,  Inc.  facilities and
     equipment  prior to their office  relocation.  This agreement  replaces the
     April 28, 1998 license agreement with ACI.



<PAGE>

<TABLE>

                                                   NESTOR, INC.                              Part IV
                                                   ------------
                                                                                             Item 14
                                  CONSOLIDATED FINANCIAL STATEMENT SCHEDULE              Schedule II
                                  -----------------------------------------
                                VALUATION AND QUALIFYING ACCOUNTS AND RESERVES



<CAPTION>
                                   Balance at                   Charged to   Deductions    Balance at
                                   Beginning of   Charged to    Other        from          End of
                                   Period         Expense       Accounts     Reserve       Period
                                   ------         -------       --------     -------       ------
<S>                                <C>            <C>           <C>          <C>           <C>
Allowances deducted
from accounts receivable:

Year Ended December 31, 1998       $ 154,554      $ 40,081      $  --        $(163,450)    $ 30,300

Year Ended December 31, 1999       $  30,300      $  5,000      $  --        $ (31,155)    $  4,145

Year Ended December 31, 2000       $   4,145      $ 62,850      $  --        $ (62,850)    $  4,145

</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 and filed herewith.

               21.2 Nestor Traffic Systems,  Inc. audited  financial  statements
               for the year ended December 31, 2000.

               99.1 Safe Harbor for Forward-Looking Statements Under the Private
               Securities Litigation Reform Act of 1995.

          (b)  Reports on Form 8-K:

               On May 7, 1998,  the  Corporation  filed with the  Securities and
               Exchange  Commission a current report on Form 8-K dated April 28,
               1998 which is hereby incorporated by reference.

               On December 3, 1998,  the  Corporation  filed with the Securities
               and  Exchange  Commission  a  current  report  on Form 8-K  dated
               November 25, 1998 which is hereby incorporated by reference.

               On April 23, 1999, the Corporation  filed with the Securities and
               Exchange  Commission a current report on Form 8-K dated March 25,
               1999 which is hereby incorporated by reference.

               On January 18, 2001,  the  Corporation  filed with the Securities
               and  Exchange  Commission  a  current  report  on Form 8-K  dated
               January 11, 2001 which is hereby incorporated by reference.

               On February 9, 2001,  the  Corporation  filed with the Securities
               and  Exchange  Commission  a  current  report  on Form 8-K  dated
               February 1, 2001 which is hereby incorporated by reference.







<PAGE>
INDEX OF EXHIBITS
-----------------

Exhibit
No.       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.

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.

4.2       Securities  Purchase  Agreement dated April 28, 1998 with  Transaction
          Systems  Architects,  Inc. to purchase  2,500,000 common shares of the
          Company and a warrant for an additional 2,500,000 common shares.

4.3       Nestor Traffic  Systems,  Inc., Form of  Subscription  Agreement dated
          March 25, 1999,  to sell a 37.5%  equity  position in its common stock
          and issue a warrant for an additional 17.5% common stock interest.

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     NestorWriter(TM) 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.

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.

10.36     Exclusive License  Agreement  between Nestor,  Inc. and Nestor Traffic
          Systems,  Inc.  dated  January  1,  1999  filed as an  Exhibit  to the
          Company's Current Report on Form 8-K dated March 25, 1999.

10.37     Secured  Note  Agreement by and among  Nestor,  Inc.,  Nestor  Traffic
          Systems, Inc. and NTS Investors LLC dated January 9, 2001 and filed as
          an Exhibit to the Company's  Current Report on Form 8-K on January 18,
          2001 is hereby incorporated by reference.

10.38     License Agreement between Nestor,  Inc. and ACI Worldwide,  Inc. dated
          February 1, 2001, filed as an Exhibit to the Company's  Current Report
          on Form 8-K on February 9, 2001 is hereby incorporated by reference.

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.

21.2      Nestor  Traffic  Systems,  Inc.  financial  statements  for year ended
          December 31, 2000.

99.1      Safe  Harbor  for   Forward-Looking   Statements   under  the  Private
          Securities Litigation Reform Act of 1995.

103       Copy of Complaint  filed on November  25, 1998  against HNC  Software,
          Inc. alleging  anticompetitive,  exclusionary and predatory conduct in
          the Registrant's market.