48
               SECURITIES AND EXCHANGE COMMISSION
                                
                     Washington, D.C.  20549
                                
                            FORM 10-K

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

          For the period ended     December 31, 1996

     [X]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934
                    
                    For the transition period from
               July 1, 1996    to   December 31, 1996
                                
                 Commission file Number 0-12965
                                
                          NESTOR, INC.
     (Exact name of registrant as specified in its charter)

      DELAWARE                               13-3163744
(State of incorporation)                     (I.R.S. Employer
                                             Identification No.)

      One Richmond Square, Providence, Rhode Island    02906
         (Address of principal executive offices)(Zip Code)
                                
                         (401) 331-9640
      (Registrant's Telephone Number, Including Area Code)
                                
   Securities registered pursuant to Section 12(b) of the Act:
                              NONE
                                
   Securities registered pursuant to Section 12(g) of the Act:
                  Common Stock, $.01 Par Value
                        (Title of Class)

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

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



                         Exhibit Index is on Page _________


The  aggregate  market value of the voting  stock  held  by  non-
affiliates of the registrant, based on the average bid and  asked
prices  of  such  stock on March 21, 1997 was  $11,229,203.   The
number of shares outstanding of the Registrant's Common Stock  at
March 21, 1997 was 8,915,741.

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.  Forms
8-K   dated  September  19,  1996  and  December  10,  1996   are
incorporated by reference.





ITEM 1.    Business

Prospective Statements

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

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

General

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

On  December  10,  1996, the Company changed its fiscal  year-end
from  June  30  to December 31 to better reflect  the  underlying
nature and timing of the Company's product lines.  The change  in
fiscal  year-end was effective for the six months ended  December
31, 1996 ("transition period").

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 SystemT ("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.


Nestor Products

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

The  Company  designs and develops specialized software  products
utilizing  its  proprietary  software and  information-management
knowledge,  and, to a lesser degree, designs hardware  components
that will enhance the performance of its software products.   The
Company's  products  comprise  the  following  categories:  Fraud
Detection  and  Risk  Assessment  Systems   -  are  designed   to
effectively  detect  and  control  fraudulent  transactions   for
financial  institutions  that  issue  credit,  debit,  or   other
financial use cards.  The Company is evaluating the expansion  of
these  product technologies into additional applications such  as
health-care payments, long-distance telephone fraud, mobile-phone
service   theft,  and  database  marketing.   Traffic  Management
Systems  - are a combination of internally developed software and
internally  and  externally developed  hardware  components  that
perform  as  a  traffic  management  system  for  open  road  and
intersection applications.  The products enable dual use of video
networks  to support both traffic/roadway.  Internet Web  Server0
Systems  -  are designed to synthesize information from  multiple
data  sources  within  an  organization and  provide  content  to
present  to Web site visitors based on the current state  of  the
visitor's information.  Intersite's purpose is to provide  scores
of  site  visitors which are useful in predicting the  purchasing
behavior of visitors.  Intelligent Character Recognition  Systems
-  include  packages of software applications such as  OmniTools,
NestorReader, and N'Route which increase productivity in document
processing and fax distribution environments.

Fraud Detection and Risk-Assessment Systems

Custom  software  packages  developed  by  the  Company  are  the
Proactive Risk Management (PRISMT) and the Nestor Fraud Detection
(FDST)  systems,  which  have been licensed  to   six  financial-
services  clients  as of December 31, 1996.   These  systems  can
detect bank-card or credit-card fraud, and can be readily updated
by   clients   to  adapt  to   changing  patterns  of  fraudulent
transactions.   By  monitoring each cardholder's  historical  and
current  transactions,  PRISM  is capable  of  detecting  unusual
patterns  of  card  use  and of rapidly detecting  a  significant
proportion of fraudulent transactions with an extremely low error
rate.   Customers have reported a reduction of more than  50%  in
their  credit-card  fraud  loss  experience  within  30  days  of
installation.

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

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

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

PRISM  is  currently  being  marketed to  financial  institutions
expanding  the  company's presence into the  retail  credit  card
market and international markets.

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

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

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

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

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

Flexible   client-server  and  operating   solutions.    Nestor's
solutions   can   be   integrated  into  a  customer's   existing
environment  or architecture.  The Company's products  are  based
upon  a  distributed  client-server  architecture  consisting  of
operating  components that operate on a wide  range  of  industry
standard,  client-server platforms, including the IBM,  MVS/CICS,
Tandem's proprietary, fault tolerant Non Stop Kernel (NSK),  UNIX
and  Windows  NT operating platforms.  The Company believes  that
its  product is the only one available today that is  adapted  to
Tandem's  NSK operating system, over which the Company  estimates
more  than  65%  of the world-wide volume of ATM  and  Debit-card
transactions  are  processed.  PRISM also  provides  an  analysis
environment consisting of: a user-friendly, MS Windows-compatible
graphical user interface, an "open-systems" architecture that  is
easily   adapted   to  a  client's  working  environment,   fully
integrated   work   flow   tools   for   enhanced   productivity,
customizable  reporting tools, and in-depth  fraud  analysis  and
system maintenance tools.


Nestor's Fraud Detection and Risk Assessment Strategy

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

Expand current distribution network.  The Company plans to expand
its worldwide direct sales, distribution and service forces.  The
Company  intends  to continue developing domestic  markets  while
augmenting  its  international growth.   Nestor  has  executed  a
nonexclusive  PRISM  reseller agreement with CSK  Corporation  in
Japan  during 1996 (See "Licensing, Joint Venture and Development
Agreements"), and is negotiating marketing agreements  in  Europe
and  South America.  The Company also intends to increase  direct
sales  efforts in North America through expansion of direct sales
staff   and   through  marketing  and  service  agreements   with
established  providers  of products and services  to  its  target
markets.   On  September  19, 1996, the  Company  signed  a  non-
exclusive  license  agreement with Applied  Communications,  Inc.
(ACI),  a  subsidiary  of Transaction Systems  Architects,  Inc.,
under  which ACI agreed to distribute PRISM throughout the world.
(See "Licensing, Joint Venture and Development Agreements".)

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

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


Traffic Management Systems

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

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

TrafficVision provides all the benefits currently offered by loop
systems  and  substantial additional options  that  increase  the
traffic    controller's   effectiveness   in   managing   traffic
congestion,   infractions,   and  accidents.    The   fact   that
TrafficVision operates completely above ground aids in  effective
maintenance.   Additionally,  the  Company  believes   that   the
technology will prove to be cost effective in comparison to  loop
technology in applications of multiple-lane  intersections.

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

Development  of a working prototype model commenced on  September
1,  1995, in conjunction with a funding agreement with California
Institute   of   Technology   Jet  Propulsion   Laboratory   (see
"Licensing,  Joint  Venture, and Development  Agreements").   The
project was completed in December 1996 and phase II field testing
is expected to be ordered and completed in fiscal 1997.

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

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

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

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

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

Nestor's Traffic Management System Strategy

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

Expand national and worldwide distribution.  The Company plans to
target  leading transportation departments (DOTs) through  direct
sales  to  provide  convincing demonstrations of  TrafficVision's
superior performance, to create performance standards based  upon
TrafficVision  functionality and to generate a market  pull  that
will   lead  to  volume  distribution  agreements  with   traffic
integrators and traffic equipment suppliers.  The Company intends
to   establish  distribution  agreements  with  foreign   traffic
integrators,  concentrating initially in the Far East  where  the
Company   believes  large  investments  are  being   planned   in
transportation infrastructure.

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

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

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

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

Continued   development  work  in  neural-network  hardware   was
centered  on  the  development  of a PC-compatible  circuit-board
incorporating  multiple  Ni1000  Recognition  Accelerators,   and
associated development-environment software.  Development of  the
circuit  board and software were funded, in part, by  a  contract
dated  August 26, 1993, between the Company and Office  of  Naval
Research  and  administered  by the  Advanced  Projects  Research
Agency of the Department of Defense ("ARPA").  In connection with
such  development  work, the Company entered  into  a  Technology
Development  Subcontract  with  Alta  Technology  Corporation  on
December  20, 1994 (see "Licensing, Joint Venture and Development
Agreements",  below).

PCI 4000 Recognition Accelerator Board

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

IBM ZISCT Chip

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

Internet Web Server Systems

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

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

The  growth  of  commerce  on  the Internet  is  just  beginning.
However,  the Company believes several industries are  poised  to
rapidly  expand their sales through this channel.  Most prominent
among these is the financial services industry, which is expected
to rapidly adopt the internet as a viable business medium.

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



The following are the primary attributes of Nestor InterSite:

Neural  Network Scoring Models: Nestor InterSite employs multiple
models  by  which to score visitors, producing scores in  several
basic categories:
  Attitudinal: analyze visitors into psychographic categories
according to their answers to information source preferences and
produce  a  probability  of affiliation  with  one  attitudinal
segment.
  Conceptual: analysis of full-text within visited Web pages,
call center logs, and chat and news groups enables the extraction
of semantic interests.  Nestor InterSite produces the top 10
conceptual categories for each visitor.
  Sales Receptivity: models the correlation between source
data and purchasing behavior.  The purchasing behavior which is
scored includes the probability of interest in an up-sell, a
cross-sell, or a promotion.

Data  Acquisition: Nestor InterSite stores a visitor profile  for
all  registered  visitors.  The system  collects  data  from  all
available  sources  which  are  relevant  for  scoring   customer
interests.  Supported data sources include legacy databases, call
center logs, Web page forms, and Web site text.  Nestor InterSite
combines  data from these sources into a set of SQL tables  which
are stored locally on the Nestor InterSite server.

Control  Center: Site visitors' scores are matched  to  available
content  through a powerful user interface.  The  Control  Center
enables the analysis of the visitor community according to  model
measures along with the assignment of content based on scores.

Nestor's Internet Web Server System Strategy

The  Company's objective is to deliver high quality products  and
services  coupling  proprietary  neural-network  technology  with
industry-standard  Unix and Microsoft platforms.   The  financial
services industry will be the first industry the Company targets.
The  Company's strategy for achieving its objective includes  the
following key elements:

Complete initial installations.  The Company will concentrate  on
completing and installing beta versions of InterSite by mid 1997.
These  installations will become the references for full product-
rollout in late 1997.

Develop  sales  channels.  Nestor InterSite will  be  sold  as  a
complete backoffice solution to automate marketing communications
through  the  Web.  A sale will include integration  with  legacy
systems, development of custom models, training of webmasters and
business  managers and annual maintenance.  This type of  product
dictates  a  consultative sales strategy.  The Company's  initial
approach  will  be through direct sales.  These efforts  will  be
augmented  by  teaming  with  partners  who  can  complement  the
productivity   improvements   provided   by   Nestor   InterSite.
Internationally,  Nestor  will  initially  employ  direct   sales
efforts,  leveraging  off of the Company's international  success
with the Prism product.

Intelligent Character Recognition Products

On  June 11, 1996, the Company licensed the exclusive 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  expects  to receive royalties from the  sales  of  these
products  and  any  enhanced versions of these  products  by  the
licensee.  The following are the principal ICR products developed
and  marketed by the Company through June 11, 1996, and  marketed
by NCS since then:

NestorReader(TM)

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

OmniTools(TM)

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

N'Route

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

Sales, Marketing and Methods of Distribution

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

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

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

In financial services, the Company has in the past created custom
applications  including  risk  assessment  for  bank-card   fraud
detection,  mortgage origination and insurance,  consumer  credit
and  securities trading.  Nestor's FDS and PRISM products are  an
outgrowth of such development projects.  In the United States and
Canada  the Company markets FDS and PRISM directly.  The  Company
has  worldwide  licenses  with Total  Systems,  Inc.  (Total)  to
provide  its PRISM product to customers for which Total  provides
card  processing services, and ACI who packages  PRISM  with  its
BASE24  and  TRANS24  products for  worldwide  distribution.   In
Japan,  custom  financial applications are marketed  through  its
licensee,  CSK  Corporation.   FDS  and  Prism  are  licensed  to
applications developers in Europe and Japan under a standard, non-
transferable, non-exclusive software license limited to a  single
computer.  Developers of applications may not make, use  or  sell
multiple  copies  of  such  applications  without  entering  into
additional  licensing arrangements with the Company.   Management
of  the  Company believes that the success of the PRISM  and  FDS
products  will  create a valuable franchise in each  institution,
leading to extensions of the Company's technology to other  risk-
assessment applications.

During  the transition period, the Jet Propulsion Laboratory,  GE
Consumer  Credit  Financial Services, BankOne,  Mellon  Bank  and
Customer Services, Inc. accounted for 19%, 18%, 15%, 13% and 11%,
of the Company's revenues respectively.  In fiscal 1996, National
Computer Systems and Europay International accounted for 30%  and
13%  of  the  Company's revenues, respectively.  In fiscal  1995,
Europay   International  accounted  for  16%  of  the   Company's
revenues.   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.   At
December  31,  1996, the Company had a backlog  of  approximately
$209,000  in  undelivered development and installation  contracts
and  approximately $582,000 in prepaid royalties.  As of June 30,
1996,  the  Company  had a backlog of approximately  $408,000  in
undelivered  development and installation contracts and  $431,000
of  prepaid royalties and fees.  As of June 30, 1995, the Company
had   a   backlog   of  approximately  $101,000  in   undelivered
development  and installation contracts and $439,000  of  prepaid
royalties and fees.

Technology

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

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

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

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

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



Research and Development Activities of the Company

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

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

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

The  Company expended, in the six months ended December 31, 1996,
and  in  the  fiscal years ended June 30, 1996,  1995,  and  1994
respectively,  $294,000, $823,000, $2,093,000 and  $1,160,000  in
support of the various aspects of Company-sponsored research  and
development.

Patents

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

The  Company  owns  ten  United States patents  and  twenty-three
foreign  patents issued in eleven countries.  In addition,  there
is  one  application pending in the United States, and there  are
five  applications pending in various foreign  countries,  as  of
December  31,  1996.  The foreign patents and patent applications
correspond to one or more of the United States patents.

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

The Company believes that seven of its United States patents, and
eleven  corresponding  foreign  patents,  are  material  to   its
business.   These United States patents expire at  various  times
from  1998 to 2008.  The corresponding foreign patents expire  at
various  times from 1995 to 2008.  The following table lists  the
Company's material United States patents:



<TABLE>

<CAPTION

                 Patent                                                               Year of
                 Number                                    Title               Date of Issue
                 Expiration
<S>              <C>                                       <C>                 <C>
4,254,474        An Information Processing
                 System Using Threshold
                 Passive Modification                      March 3, 1981          1998

4,326,259        Self-organizing General
                 Pattern Class Separator and
                 Identifier                                April 20, 1982         1999

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

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

4,958,375        Parallel, Multi-unit,
                 Adaptive Pattern
                 Classification System Using
                 Inter-unit Correlations And
                 An Intra-class Separator
                 Methodology                               September 18, 1991     2008

5,054,093        Parallel, Multi-unit,
                 Adaptive, Nonlinear Pattern
                 Class Separator and
                 Identifier                                October 1, 1991        2008

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

</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, NeuralTech Inc., Neuralware, Inc., Visa
International and others.  The Company's fraud detection  product
also  competes  against  other methods of preventing  credit-card
fraud,  such  as  card-activation  programs,  credit  cards  that
contain  the cardholder's photograph, smart cards and other  card
authorization  techniques.  The introduction of these  and  other
new  technologies  will result in increased competition  for  the
Company and its products.

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

In  the  field  of  high-speed processing, the  Company's  Ni1000
Recognition    Accelerator   product   (see    "Recent    Product
Developments", above) faces competition primarily  from  Adaptive
Solutions, Inc., whose CNAPS board contains proprietary parallel-
processing  integrated circuits.  The Company believes  that  the
CNAPS  board is a general-purpose parallel processor that is  not
optimized  for  pattern  classification.   The  Company   further
believes that the CNAPS board and associated software have a list
price   that   is   approximately   50%   higher   than   similar
configurations  of the Company's Ni1000 products,  and  that  the
Company's hardware products typically operate at speeds 10 to  50
times  faster  than  the  CNAPS product in pattern-classification
applications.

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, 1996, the Company had 37 full-time employees,
including  23  in product development, 7  in sales and  marketing
and  7  in  finance and administration.  Three of these employees
have   earned  Ph.D.  degrees.   One  of  the  Company's  current
directors (and a founder of Nestor Associates) received the Nobel
Prize in Physics in 1972.  All of these employees are located  in
the   United   States.   None  of  the  Company's  employees   is
represented  by  a labor union.  The Company has  experienced  no
work  stoppages  and  believes  its  employee  relationships  are
generally good.

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

Licensing, Joint Venture and Development Agreements

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

Total Systems, Inc.

During  the six month period ended December 31, 1996, the Company
designed  and  installed  a  fraud  detection  system  for  Total
Systems,  Inc., a major provider of card processing services  for
financial  institutions.  Total Systems will provide PRISM  fraud
detection  services  to  its  customers  along  with  the   other
transaction  processing services.  The Company will receive  fees
based  upon the number of transactions that are scored  by  PRISM
and expects revenues to commence in the second quarter of 1997.

Applied Communications, Inc. (ACI)

On  September  19, 1996, the Company entered into a non-exclusive
license  agreement  with ACI which grants to  ACI  the  right  to
integrate PRISM with ACI's products and distribute on a worldwide
basis.   ACI  provides  authorization and transaction  processing
software  to more than 475 customers throughout the  world.   The
Company   will   receive  royalties  based  on   PRISM   license,
engineering and ongoing use fees received from ACI sublicenses.

National Computer Systems, Inc. (NCS)

On June 11, 1996, the Company entered into an exclusive Licensing
Agreement  and an Asset Purchase Agreement with NCS  transferring
the   development,  production,  and  marketing  rights  of   the
Company's  Intelligent Character Recognition  (ICR)  products  to
NCS.   The Company received $1,400,000 as an initial license  fee
pursuant  to  the  Licensing Agreement, and  expects  to  receive
royalties on future sales of the product by NCS.  Minimum  annual
royalties  range from $160,000 in 1997 to $350,000  in  2001  and
beyond.   If  NCS  terminates  its  exclusive  rights  under  the
contract,   minimum  royalty  payments  would  not  be   required
subsequent to such termination.

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

IBM ZISC (TM)

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

California  Institute  of  Technology Jet  Propulsion  Laboratory
(JPL)

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

The  total   value of the contract is $597,000, all of which  had
been recognized as revenue by December 31, 1996.

DARPA/ARPA

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

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

CSK

On  June  13,  1996,  the Company executed a  nonexclusive  PRISM
Reseller  Agreement  with  CSK Corporation  to  market,  install,
maintain,  train  and support the PRISM product  in  Japan.   The
agreement  is for a term of two years.  As of December 31,  1996,
CSK   had   received   orders  from  three   Japanese   financial
institutions for PRISM feasibility studies.

Intel Corporation

On  October  15,  1993,  the Company and  Intel  Corporation  had
entered  into  a  license  agreement,  pursuant  to  which  Intel
acquired  a  non-exclusive  right to develop  and  sell  products
incorporating the Company's technology.  On April  7,  1994,  the
license  agreement was amended to grant to the Company  exclusive
marketing  rights  to  the Ni1000 Recognition  Accelerator  Chip,
which  Intel will manufacture and sell to the Company subject  to
the Company's meeting certain minimum purchase requirements.   If
such  minimum  purchase requirements are not met by the  Company,
the  Company's right to market the Ni1000 Recognition Accelerator
Chip  will  become non-exclusive.  The Company placed  the  first
required  minimum purchase order in June 1995 and has  maintained
minimum order requirements.

Alta Technology

On  December  20,  1994, the Company entered  into  a  Technology
Development Subcontract ("the Subcontract") with Alta  Technology
Corporation ("Alta") relating to the development of a  multi-chip
Ni1000  circuit board.  Pursuant to the Subcontract, the  Company
and  Alta granted to each other licenses to use certain of  their
respective   proprietary  technologies  that  are  required   for
manufacturing  the Ni1000 circuit board, including Ni1000  boards
to  be delivered to ARPA under a contract between the Company and
the  Office of Naval Research.  The Subcontract is in the  amount
of  $154,200 payable by the Company to Alta, upon receipt by  the
Company  of  payments by ARPA, during the period ending  May  31,
1995.   As  of June 30, 1995, the Alta subcontract had  been  re-
negotiated  to $194,200, and Alta had billed the Company  in  the
aggregate  amount  of $198,000.  Of the total  ARPA  contract  of
$776,167,  the Company had billed $765,841 to ARPA  at  June  30,
1995, and the remainder in 1996.

Recent Financing

On  August  4,  1994,  Wand  Partners, Inc.  purchased  from  the
Company, for an aggregate purchase price of $1,500,000, (i) 1,500
shares  of  Series C Convertible Preferred Stock of  the  Company
which  are presently convertible into 1,000,000 shares of  Common
Stock  of  the Company, and (ii) a warrant to purchase  1,000,000
shares  of  Common Stock of the Company at a price of  $1.50  per
share ("Wand Warrants").  The net proceeds to the Company of this
transaction, after expenses, were $1,470,000.

Pursuant  to  a  Standby Financing and Purchase  Agreement  dated
March  16, 1995, Wand loaned to the Company the sum of $1,200,000
evidenced by a  promissory note (the "Note") which bears interest
at the rate of 10% per annum payable in shares of Common Stock of
the  Company valued at $1.00 per share until September  15,  1995
when  the  Note matures.  On June 30, 1995, the Company and  Wand
entered  into a First Amended and Restated Standby Financing  and
Purchase  Agreement, pursuant to which Wand  made  an  additional
loan to the Company bringing the principal amount of the Note  to
$1,700,000 and extended the term of the note to October 15, 1995.
The  Note  is  callable  by the holder at  any  time  up  to  the
commencement of  the rights offering in the event of  a  material
adverse  change  in the condition or prospects  of  the  Company.
Wand  has agreed to waive the Rights that it otherwise would have
been  entitled to receive in the rights offering to  shareholders
described  below.   Instead, upon the conclusion  of  the  rights
offering, Wand has agreed to cancel and surrender the Note to the
Company  and  to apply the principal amount of the Note,  and  an
additional  $300,000 first to the purchase of up to a maximum  of
220,000  Unregistered Units (in proportion to the Units purchased
by  other  stockholders of the Company pursuant to this offering)
and  then  to  the  purchase of additional  shares  of  Series  C
Convertible  Preferred Stock.  The terms and conditions  of  such
Series  C  Convertible Preferred Stock are the same as the  1,500
shares  of Series C Convertible Preferred Stock previously  owned
by   Wand.  Concurrently  with  the  purchase  by  Wand  of  such
additional  shares of Series C Convertible Preferred  Stock,  the
Company  reduced  the exercise price of the  Wand  Warrants  from
$1.50  per share to $0.65 per share.  The Company will record  an
expense  as  a  result  of the reduction in exercise  price  upon
exercise  of warrants.  The expense will represent the difference
between  the  market  value of the Company's Common  Stock  being
acquired and the aggregate reduced exercise price of the warrants
on  the  date  of  exercise, but not more than the  reduction  in
exercise price. The maximum such expense to be recorded  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.

As  consideration for this commitment, the Company has issued  to
Wand  as  a commitment fee 100,000 shares of the Common Stock  of
the  Company, the market value of which was charged to  operating
expenses  in  1995.   Upon completion of  the  offering  and  the
conversion of the Note as described above, the Company has agreed
to  issue to Wand 700,000 ten-year warrants to purchase shares of
the  Common  Stock  of the Company at $1.00 per  share,  and  the
difference  between  the market value of  the  underlying  Common
Stock  of  the Company and the aggregate exercise price  of  such
warrants  was  charged  to  operating expenses  at  the  time  of
issuance of such warrants in the amount of $131,250 during fiscal
1996.

On August 16, 1995, a registration statement filed by the Company
with  the  Securities and Exchange Commission  became  effective.
The  registration statement related to the shares  received  upon
the exercise of warrants in April 1994 as described above, and to
the  shares  underlying certain warrants issued  to  the  Selling
Agent  of  the  first  private placement  described  above.   The
registration statement was filed principally to effect  a  rights
offering to shareholders of the Company, each of whom was granted
the  right  to purchase one Unit for each five shares  of  Common
Stock  owned  or  into  which  convertible  preferred  stock  was
convertible.   A  Unit  consisted  of  one  share  of  Series   D
Convertible  Preferred  Stock, which is convertible  into  Common
Stock  at  any  time  after January 1, 1996,  and  a  warrant  to
purchase  one-half share of Common Stock at a purchase  price  of
$2.00  per share.  Such warrants are exercisable immediately  and
for  a  term  of  three  years after the effective  date  of  the
registration statement.

At June 30, 1995, there were outstanding 1,500 shares of Series C
Convertible  Preferred  Stock.   In  early  October  1995,   Wand
exchanged certain Notes payable for an additional 1,970 shares of
Series  C  Preferred Stock.  On January 31, 1996, Wand  exchanged
all  of its Series C Convertible Preferred Stock for 1,444 shares
of  Series  E  Convertible Preferred Stock and  2,026  shares  of
Series  G  Convertible Preferred Stock.  In addition, on  January
31,  1996,  Wand  purchased 599 shares of  Series  F  Convertible
Preferred Stock for a total of $599,000.  On March 7, 1996,  Wand
purchased 777 shares of Series G Convertible Preferred Stock  for
a   total  of  $777,000.   See  below  and  Item  III,  Financial
Statements and Footnotes.

Series E, F,G and H Convertible Preferred Stock

Each  share  of Series F and G Preferred Stock is convertible  at
the  option  of the holder at any time after June 30,  1996  into
shares  of  Common  Stock at the conversion price  of  $1.25  per
share,  subject  to adjustment.  Each share of  Series  E  and  H
Preferred Stock is convertible at the option of the holder at any
time  and  from time to time into shares of Common Stock  at  the
conversion  price  of (a) $1.50 per share subject  to  adjustment
prior  to August 1, 2004 or (b) on or after August 1, 2004  at  a
conversion  price which is the lower of $1.00 or  the  conversion
price in effect pursuant to (a).

Except as provided herein, any holder of Series E and G Preferred
Stock  that  is subject to the Bank Holding Company Act  of  1956
("BHCA  Holder"), as amended, shall have no voting rights.   Each
holder  of  Series E and G Preferred Stock that  is  not  a  BHCA
Holder  shall  be  entitled to vote on all matters  as  to  which
stockholders of the Company are entitled to vote, and  each  such
holder  shall be entitled to cast a number of votes equal to  the
greatest  number of whole shares of Common Stock into which  such
holder's  shares  of  Series E and G  Preferred  Stock  could  be
converted.   The  holders  of  the Series  F  and  H  Convertible
Preferred Stock are entitled to one vote for each share of Common
Stock into which the shares are convertible.

In  the  event  the  Company is in default with  respect  to  the
payment   of  (i)  two  consecutive  cash  dividends  after   the
"Restricted Period" as hereinafter defined or (ii) two  dividends
within  any six consecutive dividend periods the holders  of  the
Series F and G Preferred Stock shall have the right to elect  two
directors  and the holders of the Series E and H Preferred  Stock
shall  have the right to elect four directors for so long as  the
default  continues.  In the event the Company is in default  with
respect  to  the  payment of (i) four consecutive cash  dividends
after  the Restricted Period as hereinafter defined or (ii)  four
dividend payments within any eight consecutive quarterly dividend
periods,  the holders of the Series F and G shall have the  right
to  elect four directors and the holders of the Series  E  and  H
Preferred Stock shall have the right to elect eight directors for
so long as the default continues.

In  the  event the Company violates the provision of,  or  is  in
default  under the terms of any loan agreement or in the event  a
judgment is entered against the Company or any subsidiary in  the
amount  of  $50,000 or more, the holders of the Series  F  and  G
Convertible  Preferred Stock shall have the right to  elect  four
directors  and the holders of the Series E and H Preferred  Stock
shall have the right to elect eight directors for so long as  the
default continues.

The  holders of the Series F and G Preferred Stock, except during
the  Restricted Period, are entitled to receive out of  funds  of
the  Company  legally  available for such  purpose  as  and  when
declared  by  the  Board  of Directors of the  Company  quarterly
dividends in cash at a rate of nine percent (9%) compounded daily
per  annum of the stated par value per share ($1,000 on  original
issuance)  of  Series F and G Preferred Stocks.  Dividends  shall
accrue,  be accumulated and added to the stated value whether  or
not  declared.  So long as any shares of Series F and G Preferred
Stock  are outstanding, the Company shall not declare or pay  any
dividends  on  any outstanding Common or Preferred  Stock,  other
than  the  Series  D,  F and G Preferred Stock.   The  Restricted
Period as it relates to the payment of dividends on the Series  F
and  G  Preferred Stock means a period beginning on the  date  of
issuance  of  the Series F and G Preferred Stock  and  ending  on
September  30, 1997.  While no dividends are payable  during  the
Restricted  Period,  they will accrue and accumulate  during  the
Restricted Period.

The  holders of the Series E and H Preferred Stock, except during
the  Restricted Period, are entitled to receive out of  funds  of
the  Company  legally  available for such  purpose  as  and  when
declared  by  the  Board  of Directors of the  Company  quarterly
dividends  in  cash  at a rate of seven percent  (7%)  compounded
daily  per  annum  of the stated par value per share  ($1,000  on
original issuance) of Series E and H Preferred Stocks.  Dividends
shall  accrue,  be  accumulated and added  to  the  stated  value
whether or not declared.  So long as any shares of Series E and H
Preferred Stock are outstanding, the Company shall not declare or
pay  any dividends on any outstanding Common or Preferred  Stock,
other than the Series D, F and G Preferred Stock.  The Restricted
Period as it relates to the payment of dividends on the Series  E
and  H  Preferred Stock means a period beginning on the  date  of
issuance of the Series E and H Preferred Stock and ending on  the
earlier of (a) the first day of the calendar quarter in which the
Company first pays cash dividends on its Common Stock or (b) June
30,  1998.   While no dividends are payable during the Restricted
Period,  they  will accrue and accumulate during  the  Restricted
Period.

The  Company  is  obligated to redeem all outstanding  shares  of
Series  E,  F, G and H Preferred Stock outstanding at the  stated
value  plus accrued dividends on August 1, 2004.  The holders  of
the  Series  E,  F,  G and H Preferred Stock have  the  right  to
require  that the Company redeem, to the extent the  Company  may
lawfully  do so, all or a portion of the then outstanding  shares
of Series E, F, G and H Convertible Preferred Stock at the stated
value plus accrued interest and unpaid dividends in the event  of
a  merger, reorganization, transfer of the majority of the voting
securities of the Company, or sale of more than 25% of the assets
of the Company.


ITEM 2.   Properties.

The   Company   leases  offices  and  research  and   development
facilities,  consisting  of  approximately  10,000  square  feet,
located  at One Richmond Square, Providence, Rhode Island  02906,
for  which  the  annual  base rental is  $141,742.   The  Company
believes these facilities will be adequate to serve its needs  in
the foreseeable future.


ITEM 3.  Legal Proceedings.

There are no material pending legal proceedings as of the date of
this filing.


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

No  matters  were submitted to a vote of security holders  during
the second quarter of the period ended December 31, 1996.


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

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


                          Low Bid         High Ask

Period Ended December 31, 1996
     1st Quarter          1 11/16          3 1/4
     2nd Quarter           2 1/8             3

Year Ended June 30, 1996
     1st Quarter          1 1/4              1 11/16
     2nd  Quarter          9/16              1 3/8
     3rd  Quarter         23/32              2 3/16
     4th  Quarter         1 3/8              3 3/16

Year Ended June 30, 1995
     1st  Quarter             1              2-3/8
     2nd  Quarter           5/8              1-1/4
     3rd  Quarter           1/2              3-3/8
     4th  Quarter         1-1/4              2-1/2

As  at  March  21, 1997, the number of holders of record  of  the
issued and outstanding common stock of the Company was 415.

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


ITEM 6.          Selected Financial Data
<TABLE>
<CAPTION
                  Six Months Ended
                    December 31,                         Years Ended June 30,
                        1996       1996            1995         1994         1993          1992

<S>                 <C>            <C>         <C>          <C>          <C>           <C>
Operating
revenue         $    1,195,904 $  5,461,580  $  3,195,563  $  2,230,474   $  1,849,104  $ 2,219,425
Other income
 (expense)      $    26,280    $     39,950  $   (221,024) $   (282,418)  $    (27,459) $     3,137
Net income
 (loss)         $  (935,337)   $     12,690  $ (3,457,422) $ (1,758,584)  $ (1,613,565) $(1,814,856)
Earnings per share
   Weighted
   number of
   outstanding
   shares         8,689,031       7,847,510     7,411,502     6,840,407      6,801,929    6,788,006
  (Loss)
   per share    $      (.13)   $       (.03) $       (.48)  $      (.26)  $       (.22)  $     (.27)

SELECTED BALANCE SHEET DATA:
Total assets    $ 2,817,944    $  3,351,871  $  1,812,495   $  1,096,314  $    935,337  $ 1,793,782
Working
 capital        $  1,243,577$     1,983,661  $ (1,882,875)  $    220,243  $    131,827  $   535,126
Long-term
  Redeemable
   Preferred
   Stock        $ 5,398,908    $  5,207,538  $  1,600,328   $        ---  $        ---  $       ---
  Capital
   leases       $     9,455    $      9,455  $        ---   $      3,363  $      5,413  $       ---
   Deferred
   income       $   430,899    $    430,899  $    438,896   $    954,491  $    954,491  $   954,491

Prior period Selected Financial Data has been reclassified to conform to 1996
classifications.



ITEM 7:   Management's Discussion and Analysis

Liquidity and Capital Resources

Cash Position and Working Capital

The  Company had cash and short term investments of approximately
$774,000  at  December 31, 1996; $2,013,000  at  June  30,  1996;
$452,000  at  June 30, 1995; and $416,000 at June 30,  1994.   At
December 31, 1996, the Company had working capital of $1,244,000,
as  compared  with $1,983,000 at June 30, 1996,  and  a  working-
capital  deficiency of $1,882,000 at June 30, 1995.  The decrease
in  working  capital  from June 1996 to  December  1996  reflects
primarily  the  loss for the period reduced by the proceeds  from
the sale of common stock.

The  Company  had a negative net worth of $4,332,000 at  December
31,  1996,  as compared with negative net worth of $3,433,000  at
June  30, 1996, and negative net worth of $3,663,000 at June  30,
1995.

Management  believes  that the Company's revenues  will  generate
sufficient liquidity, when combined with its liquid assets as  at
December  31,  1996,  to  meet  the  Company's  anticipated  cash
requirements  through  the end of the year  ending  December  31,
1997.   If  the  Company does not realize revenues sufficient  to
maintain  its operation at the current level, management  of  the
Company  would curtail certain of the Company's operations  until
additional funds become available through investment or revenues.

Deferred Income

Operations  of the Company have been partly funded by prepayments
under   engineering  contracts  and  licenses  of  the  Company's
technology.  Such prepayments are recognized as revenue under the
percentage-of-completion method as engineering  is  completed  or
delivery  obligations  are  fulfilled.   The  Company  bases  its
estimate  of the percentage of completion on the amount of  labor
applied  to  a  given project, compared with the estimated  total
amount  of labor required.  The remainder of such prepaid revenue
is  reflected on the Company's balance sheet as deferred  income,
and  is  treated  as  a  liability.  Total  deferred  income  was
$769,000 at December 31, 1996, as compared with $517,000 at  June
30, 1996 and $516,000 at June 30, 1995.

Future Commitments

The  Company purchased additional computers and related equipment
during  the  six months ended December 31, 1996, and  the  fiscal
years ended June 30, 1996 and 1995, and valued its investments in
computers and related equipment (net of depreciation) at $255,590
at  December  31, 1996.  The Company has no material  commitments
for  capital  expenditures although management expects  that  the
Company   may  make  future  commitments  for  the  purchase   of
additional  computing and related equipment, for  development  of
hardware,  for  consulting  and  for  promotional  and  marketing
expenses.

The  company has no material commitments other than a  commitment
to purchase from Intel Corporation a supply of Ni1000 Recognition
Accelerator  chips.  The Company placed a purchase order  in  the
amount  of  $195,000 with Intel Corporation  in  June  1996,  and
expects  to take delivery of this order during the second quarter
of 1997.

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

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

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


Revenues

The  following table compares revenues for the transition  period
with  revenues  for the comparable period of the preceding  year,
including  and excluding revenues from ICR operations transferred
to NCS:
                                             Total
                                            Revenues
 Total             Total                   Six-Month
Revenues          Revenues                   Period
Six-Month        Six-Month                   Ended
Period             Period                Dec. 31, 1995
Ended              Ended                   Excluding
Dec. 31, 1996  Dec. 31, 1995   Change         ICR         Change

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


The  Company's  revenues arise from licensing  of  the  Company's
products and technology, from the sale of tangible products,  and
from  contract engineering services and are discussed  separately
below.   During the six months ended December 31, 1996,  revenues
decreased   $953,000  to  $1,196,000  from  $2,149,000   in   the
corresponding period of the prior fiscal year.  Revenues  in  the
year-earlier period included $954,000 of revenues associated with
the ICR products that were licensed to NCS in June 1996.

Software Licensing

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

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

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

Engineering Services

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

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

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

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

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

Sales of Tangible Products

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

Operating Expenses

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

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

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

Engineering Services

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

Research and Development

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

Selling and Marketing

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

General and Administrative

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

Expenditures on Product Development and Marketing

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

The largest investment made by the Company was in its Intelligent
Sensors  Division, which is responsible for the  development  and
marketing  of  the TrafficVision products, an outgrowth  of  work
under  the JPL contract.  The Company expects commercial products
will  be  available in the second quarter of 1997.  For  the  six
months  ended December 31, 1996, expenses of this group  exceeded
revenues by $437,000.

The  Company began development in July 1996 of a product for  use
in  internet applications.  Nestor InterSite enables customers to
understand individual on-line customers as they visit  Web  sites
and   to  dynamically  present  personalized  content  to   those
visitors.  The Company expects beta products will be available in
the second quarter of 1997.



Net Income Per Share

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

Analysis of Years Ended June 30, 1996, 1995 and 1994

For  its fiscal year ended June 30, 1996, the Company realized  a
71%  increase  in  revenues  over the  prior  fiscal  year  while
expenses decreased 15% from the prior year, resulting in a profit
of $12,690 after taxes.

Included  in  Total Revenues for the fiscal year ended  June  30,
1996  is  an  initial license fee of $1,400,000 that the  Company
received pursuant to its License Agreement with NCS.  In addition
to the initial license fee, the Company will receive royalties on
future  sales  of the products by NCS.  Minimum annual  royalties
range from $160,000 in 1997 to $350,000 in 2001 and beyond.

The  Company also signed in June 1996 an Asset Purchase Agreement
which transferred tangible and intangible assets used exclusively
in  the  ICR business to NCS for $300,000.  The net gain  on  the
sale of these assets was approximately $213,000 and is recognized
as "Other income" in the quarter ended June 30, 1996.

Revenues

The  Company  realized  revenues from  operations  of  $5,461,000
during  the  fiscal  year  ended June  30,  1996,  including  the
$1,400,000  license  fee  from NCS, as compared  with  $3,195,000
realized  during  fiscal  1995, and  $2,230,000  realized  during
fiscal 1994.

Total  revenues for the fiscal year ended June 30, 1994  included
$300,000 of revenue received pursuant to an agreement with  Intel
Corporation  relating  to  the  acquisition  by  the  Company  of
exclusive marketing rights to the Ni1000 Recognition Accelerator.
As part of this agreement, the Company agreed to a price increase
for the Ni1000 Recognition Accelerator and agreed to make minimum
purchases over a two-year period in order to retain its exclusive
marketing  rights.   Intel  delivered  to  the  Company   certain
marketing  materials;  assigned to the Company  its  interest  in
future  accounts receivable under the beta program for the Ni1000
Recognition Accelerator; and, as additional consideration for the
Company's  entering into the agreement, paid to the  Company  the
sum   of   $300,000.   As  there  were  no  specific  performance
requirements  or identifiable costs associated with this  payment
and  the  Company  had no liability to return any  part  of  such
payment,  the  Company recorded this payment  as  revenue,  which
revenue is non-recurring.

Software Licensing

The  Company's software licensing revenues in fiscal 1996 derived
primarily  from  licenses  of its ICR  products.   Licensing  fee
revenues  totaled $2,825,000 in the fiscal year ending  June  30,
1996,  including the $1,400,000 license fee from NCS, as compared
with  $1,714,000 in the prior fiscal year and $1,349,000  in  the
fiscal  year ended June 30, 1994.  The increase in revenues  from
1994  to  1995  was  driven by an increase in unit  volume.   The
increase  in  revenues from 1995 to 1996 is attributable  to  the
initial  license  fee  paid by NCS; excluding  that  transaction,
license  fee revenues decreased from 1995 to 1996 as a result  of
lower unit volume.

For  1997,  the Company will not receive ICR licensing  fees  but
expects to receive  royalties from NCS on future sales of the ICR
products  by  NCS under the Licensing Agreement  signed  in  June
1996.  The  minimum  annual royalty for 1997  is  $160,000.  (See
Expenses,  below, for a discussion of the effect on the Company's
expenses of this licensing arrangement.)

Engineering Services

Revenues from engineering contracts totaled $2,378,000 in  fiscal
1996,  as compared with $1,195,000 in the prior year and $641,000
in  fiscal 1994.  The components of these revenues are separately
analyzed below.

During  the fiscal year ended June 30, 1996, the Company realized
revenues   from   engineering  contracts  with   industrial   and
commercial customers of approximately $324,000, as compared  with
$81,000 during the preceding year and $24,000 during fiscal 1994.
The increase in these revenues from 1995 to 1996 reflects a shift
in  the  allocation of engineering efforts from internally funded
product-development efforts to customer-funded projects, in  part
intended to offset reduced ICR licensing revenues.

During  fiscal  1996,  customizing the Company's  fraud-detection
system produced engineering revenues of approximately $1,593,000,
as  compared with $771,000 in fiscal 1995 and $236,000 in  fiscal
1994.

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

On  September 1, 1995, the Company signed a contract with the Jet
Propulsion Laboratory (JPL) to develop a prototype sensor  system
designed  for vehicular-traffic surveillance and detection.   The
contract,  valued at approximately $597,000, is expected  to  run
for 13 months from September 1995.  The terms of the ARPA and JPL
contracts  call for delivery of prototype products,  but  do  not
specify any subsequent purchasing or licensing provisions.

During  the  fiscal year ended June 30, 1996, revenues  from  the
Company's government contracts totaled $378,000, as compared with
such  revenues of $342,000 in the prior year and $423,000 of such
revenues in the fiscal year ended June 30, 1994.

Tangible Product Sales

The  tangible  products currently sold by the Company  are  based
upon the Company's Ni1000 Recognition Accelerator Chip, which  is
marketed  along with development software that enables  customers
to  develop  high-speed recognition applications.  Revenues  from
the  Company's Ni1000 Development System totaled $257,000 in  the
fiscal year ended June 30, 1996, as compared with $286,000 in the
preceding  year and $239,000 in fiscal 1994.  In April 1994,  the
Company  and Intel Corporation signed an agreement which provided
the  Company  with  exclusive  marketing  rights  to  the  Ni1000
Recognition Accelerator, subject to the Company's being obligated
to  make  minimum purchases of the Ni1000 Recognition Accelerator
in  the  amount  of $97,500 to be ordered by June 30,  1995,  and
$195,000 to be ordered by June 30, 1996.  The Company has  placed
orders for the required minimum purchases.

Expenses

Total operating expenses - consisting of operations, selling  and
marketing, and general and administrative expenses - amounted  to
$5,488,000  for the fiscal year ended June 30, 1996, as  compared
with $6,431,000 in the prior year, and $3,706,000 in 1994.

Expenses in fiscal 1995 and 1994 reflect the reclassification  of
$210,500 and $287,969, respectively, to "Other income (expense)".
These amounts represent non-cash charges relating to the issuance
of stock or exercise of warrants at below-market prices.

Included in fiscal 1996 expenses are approximately $1,997,000  of
expenses attributable to the ICR products, which were licensed to
NCS  in  June 1996. Most of the expenses associated with the  ICR
products  will no longer be incurred by the Company as NCS  hired
most of the staff assigned to development, sales, and support  of
the ICR products.

Management expects expenses to decrease initially in fiscal  1997
reflecting  the License of the ICR products to NCS.  However,  as
the  Company  invests in existing and new product  opportunities,
management expects expenses to increase.

The  decrease in expenses from 1995 to 1996 reflects  both  staff
attrition  and  management's efforts  to  reduce  expenses.   The
majority of the decrease in total expenses derived from decreases
in   promotion,   salaries   and   consulting,   recruiting   and
subcontracting.

Labor  costs continue to be the Company's single greatest expense
category.   During fiscal 1996, the Company paid  $3,103,000  for
wages  and  consulting fees, as compared with $3,302,000  in  the
prior year and $1,955,000 in fiscal 1994.  The decrease from 1995
to  1996  reflects  a  decrease in staffing: full-time  employees
totaled 33 at June 30, 1996, as compared with 53 at June 30 1995,
and  31  at June 30, 1994.  In mid-June 1996, NCS hired 14  full-
time  employees  who had been employed by the  Company  prior  to
signing the License agreement with NCS.  Immediately prior to the
transfer of these employees, the Company had 47 employees.

Operating Expenses

Operating  expenses, which are primarily labor costs  related  to
product development, engineering and sales totaled $5,488,000 for
the  fiscal year ended June 30, 1996, as compared with $6,431,000
in the prior year and $3,706,000 in fiscal 1994.

Operating  costs  and  expenses  related  to  the  production  of
revenues from software licensing totaled $686,000 in fiscal 1996,
as  compared with $1,979,000 in the preceding year and $1,159,000
in  fiscal  1994.  The decrease in such costs from 1995  to  1996
reflects  management's  decision to shift  engineering  resources
from  internally funded product-development efforts to  customer-
funded engineering projects.

Costs  related to engineering services totaled $1,833,000 in  the
fiscal year ended June 1995, as compared to $665,000 in the prior
year  and  $628,000 in fiscal 1994.  The increase of these  costs
reflects the increase in engineering services revenues.

The  Company's  expenditures for research  and  development  were
$2,639,000  in  fiscal  1996;  $2,759,000  in  fiscal  1995;  and
$1,788,000 in fiscal 1994.

Selling  and marketing expenses represented the largest  decrease
in  expenses from 1995 to 1996.  Such expenses totaled $1,764,000
in  the  fiscal  year  ending June 30,  1996,  as  compared  with
$2,547,000 in the preceding year and $951,000 in fiscal 1994. The
decrease  in  expenses  from 1995 to 1996 reflected  management's
decision in the fourth quarter of 1995 to terminate an aggressive
marketing plan for the Company's ICR products, which had begun in
the  second  quarter  of  fiscal 1995.  That  plan  had  entailed
increases  in  sales  staff, promotional  expenditures,  and  the
staffing  of  a customer-support group dedicated to  ICR  product
support.

Sales  and marketing compensation, consisting of salaries, fringe
benefits,  and commissions, totaled $999,000 in fiscal  1996,  as
compared  with $1,030,000 in the prior year and $431,000  in  the
fiscal  year  ending June 1994.  Related consulting decreased  to
$69,000 in fiscal 1996 from $195,000 in 1995 and $31,000 in 1994.

Promotional  expenses,  comprising  advertising,  promotion,  and
conventions  and  meetings, decreased  $513,000  to  $232,000  in
fiscal  1996 from $745,000 in the prior year.  Such costs totaled
$226,000 in the fiscal year ended June 30, 1994.

General  and administrative expenses totaled $828,000  in  fiscal
1996,  as  compared  with  $843,000 in  the  preceding  year  and
$782,000   in   fiscal  1994.   As  noted  above,   general   and
administrative  expenses  in fiscal 1995  and  1994  reflect  the
reclassification  of  $210,500  and  $287,969,  respectively,  to
"Other  income  (expense)".   These  amounts  represent  non-cash
charges relating to the issuance of stock or exercise of warrants
at below-market prices.

Other Income (Expense)

In   fiscal   1996,  the  Company  recorded  "Other  income"   of
approximately $40,000, net of "Other expense".  Included in  this
amount  is a gain on the sale of intangibles of $213,000 relating
to  the  Asset Purchase Agreement with NCS signed in  June  1996.
The  Company  recorded interest expense, net of interest  income,
totaling  $39,000.  Additionally, the Company recorded a non-cash
expense  of $131,000 relating to the reduction of exercise  price
of  outstanding  warrants in connection with the Rights  Offering
completed in the second fiscal quarter.

In  the  fiscal  year ended June 30, 1995, the  Company  recorded
"Other  expense" of $221,000.  Non-cash charges relating  to  the
issuance  of stock at below-market prices  totaled $210,000,  and
the Company recorded net interest expense of $11,000.

In  fiscal  1994,  "Other expense" totaled  $282,000,  reflecting
primarily  non-cash charges relating to the exercise of  warrants
at below-market prices, of $288,000.

Investment in Product Development and Marketing.

The largest investment made by the Company was in its Intelligent
Character  Recognition group.  During the fiscal year ended  June
1996,   product-development  and  marketing   expenses   exceeded
revenues  (excluding  the initial license fee  paid  by  NCS)  by
approximately  $436,000.   As noted  above,  on  June  11,  1996,
National Computer Systems, Inc. signed a License Agreement  which
transferred  to  them  the  right to  develop  and  market  these
products.   NCS  is required to pay minimum annual  royalties  to
maintain its exclusive license.  The Company has since terminated
most of the costs associated with these products.

Expenses   of   the  Company's  generic  products   (the   Ni1000
Recognition  Accelerator and the Company's proprietary  software-
development tools) exceeded revenues by approximately $212,000 in
fiscal  1996.   In September 1995, the Company began  work  on  a
contract  with  the  Jet  Propulsion  Laboratory  to  develop   a
prototype    sensor   system   designed   for   vehicular-traffic
surveillance and detection.

Revenues  relating  to the Company's PRISM  and  Fraud  Detection
System  exceeded  expenses by approximately  $256,000  in  fiscal
1996.   The Company has license agreements with Mellon  Bank,  GE
Consumer   Credit   Financial   Services,   Bank   One,   Europay
International (an association of 700 banks in Europe), and with a
European   financial-services  company  for  the  use  of   these
products.

Net Income Per Share

For  the  fiscal year ended June 1996, the Company experienced  a
gain  of  $12,690, as compared with a loss of $3,457,422  in  the
prior  year  and a loss of $1,758,584 in fiscal  1994.   For  the
fiscal  year ended June 1996, loss per share available for common
stock  was $0.03 per share, as compared with a loss per share  of
$0.48  in  fiscal  1995 and a loss per share of $0.26  in  fiscal
1994.   For  the  fiscal  year ended June 30,  1996,  there  were
outstanding  a weighted average of 7,847,510 shares, as  compared
with 7,411,502 in the prior year and 6,840,407 in the fiscal year
ended June 30, 1994.
<\PAGE>


<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, 1997

     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
                                
  Signatures                    Title                 Date

/s/Leon N Cooper      Co-Chairman of the Board    March 31, 1997
                      and Director

/s/Charles Elbaum     Co-Chairman of the Board    March 31, 1997
                      and Director

/s/David L. Fox       President, Chief Executive  March 31, 1997
                      Officer and Director

/s/Herbert S. Meeker  Secretary and Director      March 31, 1997

/s/Sam Albert         Director                    March 31, 1997

/s/Jeffrey Harvey     Director                    March 31, 1997

/s/Thomas F. Hill     Director                    March 31, 1997

/s/Bruce Schnitzer    Director                    March 31, 1997




                                









               CONSOLIDATED FINANCIAL STATEMENTS




                            FORM 10-K




                         JUNE 30, 1996



                          NESTOR, INC.                    Part II
                                                           Item 8
                            CONTENTS




Independent Auditor's Report



                                                    Statement No.




Consolidated Balance Sheets                               1


Consolidated Statements of Operations -
 For the Six Months Ended December 31, 1996 and
 For the Years Ended June 30, 1996, 1995 and 1994         2


Consolidated Statements of Cash Flows -
 For the Six Months Ended December 31, 1996 and
 For the Years Ended June 30, 1996, 1995 and 1994         3


Consolidated Statements of Stockholders' Equity -
 For the Six Months Ended December 31, 1996 and
 For the Years Ended June 30, 1996, 1995 and 1994         4


Notes to Consolidated Financial Statements







                                                          Part II
                                                           Item 8


                 REPORT OF INDEPENDENT AUDITORS




The Board of Directors and Stockholders
 of Nestor, Inc.


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

We  conducted  our  audit in accordance with  generally  accepted
auditing  standards.  Those standards require that  we  plan  and
perform  the  audit to obtain reasonable assurance about  whether
the  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 audit provides a reasonable basis for our opinion.

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





                                               /s/Ernst & Young LLP
Providence, Rhode Island
March 14, 1997






Consolidated Balance Sheets


</TABLE>
<TABLE>
<CAPTION>
          ASSETS                December 31,    June 30,    June 30,
                                    1996          1996         1995
<S>                             <C>           <C>         <C>
Current assets:
 Cash and cash equivalents      $   774,457   $2,013,317  $    452,588
 Accounts receivable,
   net of allowance for
   doubtful accounts              1,009,149      594,310       661,734
 Unbilled contract revenue          126,945      282,936       208,352
 Deferred development costs         364,405          ---           ---
 Other current assets               276,615      230,738       131,163
   Total current assets           2,551,571    3,121,301     1,453,837
Property and equipment at
   cost - net of accumulated
   depreciation                     255,590      219,787       347,325
Other assets                         10,783       10,783        11,333
Total Assets                    $ 2,817,944   $3,351,871  $  1,812,495

<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S>                             <C>           <C>         <C>
Current liabilities:
 Notes payable                  $       ---   $     ----  $  1,700,000
 Accounts payable and
   accrued expenses                 670,742      724,727     1,294,123
 Other current liabilities          298,848      326,809       265,278
 Deferred income                    338,404       86,104        77,311
   Total current liabilities      1,307,994    1,137,640     3,336,712

Noncurrent liabilities:
 Long term obligations
   under capital leases              12,212        9,455           ---
 Other noncurrent liabilities           ---          ---       100,000
   Total liabilities              1,320,206    1,147,095     3,436,712
 Long term portion of
   deferred income                  430,899      430,899       438,896
 Series C, E, F, G and H
   redeemable convertible
   preferred stock 4,846 shares
   at December 31, 1996 and
   June 30, 1996 and 1,500
   shares at  June 30, 1995
   (liquidation value $1,000
   per share plus accrued
   dividends)                     5,398,908    5,207,538     1,600,328

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

Stockholders' deficit:
 Preferred stock, $1.00 par value,
   authorized 10,000,000 shares;
   issued and outstanding:
   Series A - 452,064 shares at
   December 31, 1996,
   June 30, 1996 and 1995           452,064      452,064       452,064
   Series B - 1,635,000 shares
   at December 31, 1996,
   2,075,000 shares at
   June 30, 1996 and
   2,540,000 shares at
   June 30, 1995                  1,635,000    2,075,000     2,540,000
   Series D - 179,671 shares
   at December 31, 1996,
   184,671 shares at
   June 30, 1996 and none
   at June 30, 1995                 279,230      277,007           ---
 Common stock, $.01 par value,
   authorized 30,000,000 shares;
   issued and outstanding:
   8,916,141 shares at
   December 31, 1996,
   8,280,941 shares at
   June 30, 1996 and
   7,606,710 shares at
   June 30, 1995                     89,161       82,809        76,067
 Warrants and options               417,500      375,000       375,000
 Additional paid-in capital      11,927,644   11,501,790    11,103,449
 Retained (deficit)             (19,132,668) (18,197,331)  (18,210,021)
   Total stockholders' deficit   (4,332,069)  (3,433,661)   (3,663,441)

Total Liabilities and
Stockholders' Deficit           $ 2,817,944   $3,351,871  $  1,812,495

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

</TABLE>




Consolidated Statements of Operations
<TABLE>
<CAPTION>
                      Six Months
                        Ended
                     December 31,    For the Years Ended June 30,
                         1996         1996        1995         1994
<S>                      <C>          <C>         <C>          <C>
Revenue:
 Software licensing     $   526,353  $ 2,825,600  $ 1,713,897   $ 1,349,470
 Engineering services       605,776    2,378,135    1,195,201       641,579
 Tangible product sales      63,775      257,845      286,465       239,425
   Total revenue          1,195,904    5,461,580    3,195,563     2,230,474

Operating Expenses:
 Engineering services       922,325    1,833,531      665,421       628,448
 Tangible product sales       8,978       32,189       13,838        89,775
 Research and development   294,136      823,000    2,093,616     1,159,920
 Selling and marketing      457,281    1,764,585    2,661,453       951,426
 General and admin.         432,301    1,035,535      997,633       877,071
   Total operating
   expenses               2,115,021    5,488,840    6,431,961     3,706,640

     (Loss) from
      operations           (919,117)     (27,260)  (3,236,398)   (1,476,166)

     Other income
      (expense) - net       (16,220)      39,950     (221,024)     (282,418)

     Net Income (Loss)  $  (935,337)  $   12,690  $(3,457,422)  $(1,758,584)

     Dividends accrued on
      preferred stock       201,094      261,210      100,328           ---

     Net Loss Available for
      Common Stock      $(1,136,431)  $ (248,520) $(3,557,750)  $(1,758,584)

     Loss per share
     (Note 3)           $     (0.13)  $    (0.03) $     (0.48)$       (0.26)

     Weighted Average
      Number of shares
      Outstanding         8,689,031    7,847,510     7,411,502    6,840,407

The Notes to the Financial Statements are an integral part of this
statement.
</TABLE>




Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                          Six Months
                                            Ended                For the Years Ended
                                        December 31,                   June 30,
                                            1996       1996           1995          1994
<S>                                      <C>        <C>           <C>           <C>
Cash flows from operating activities:
 Net income (loss)                      $ (935,337) $   12,690    $(3,457,422)  $(1,758,584)
    Adjustments to reconcile
    net income (loss) to net
    cash used by operating
    activities:
      Depreciation and
      amortization                          45,328       104,559      113,562       200,460

      Loss on disposal
      of fixed assets                          ---         4,346          ---           106

      Expenses charged to
      operations relating to
      options, warrants and
      capital transactions                   42,500      178,375      210,500       287,969

      Changes in assets
      and liabilities:

        (Increase) decrease
        in accounts receivable             (414,839)      67,424     (340,651)      (69,791)

        (Increase) decrease
        in unbilled contract
        revenue                             155,991      (74,584)     (87,674)      (60,274)

        Increase in deferred
        development costs                  (364,405)         ---          ---           ---

        (Increase) in other
        current assets                      (45,877)     (99,575)    (110,721)       (8,193)

        (Increase) decrease
        in other assets                         ---          550       (5,000)          ---

        (Decrease) increase
        in accounts payable,
        accrued expenses and
        other liabilities                   (83,593)    (568,309)     786,010       144,294

        (Decrease) increase
        in deferred income                  252,300          796      (15,630)       44,746
        Net cash (used) by            
        operating activities             (1,347,932)    (373,728)  (2,907,026)   (1,219,267)


Cash flows from investing activities:
 Purchase of property
 and equipment                              (71,390)     (57,531)    (249,319)      (66,292)

 Proceeds from the
 disposal of fixed
 assets                                         ---       85,000          ---         1,900
      Net cash provided
      (used) by investing
      activities                            (71,390)      27,469     (249,319)      (64,392)

Cash flows from financing activities:
 Repayment of obligations
 under capital leases                        (5,338)      (7,924)     (10,796)       (5,998)

 Proceeds from notes
 payable                                        ---      300,000    1,700,000           ---

 Rights offering expense                        ---     (136,421)     (39,769)          ---

 Proceeds from issuance
 of common stock                            185,800       99,510       73,288       625,125

 Proceeds from issuance
 of preferred stock - net                       ---    1,651,823    1,470,000       811,608
      Net cash provided
      by financing
      activities                            180,462    1,906,988    3,192,723     1,430,735

Net change in cash
and cash equivalents                     (1,238,860)   1,560,729       36,378       147,076
Cash and cash equivalents
 - beginning of year                      2,013,317      452,588      416,210       269,134
Cash and cash equivalents
 - End of Year                          $   774,457 $  2,013,317  $   452,588   $   416,210

Supplemental cash flows information:
 Interest paid                          $     3,227 $      4,372  $     3,728   $     1,685
 Income taxes paid                      $      ---  $        ---  $       ---   $       ---

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

</TABLE>




Nestor, Inc. Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
                      Common Stock        Preferred Stock       Additional       Retained      Stock
                    Shares     Amount   Shares        Amount    Paid-in Capital (Deficit)     Warrants      Total
<S>                <C>        <C>       <C>         <C>         <C>           <C>            <C>       <C>                   
Balance at
June 30, 1993      6,802,710  $ 68,027  2,407,064   $2,407,064  $10,033,105   $(12,994,015)  $    ---  $   (485,819)

Issuance of
 Capital Stock       332,625     3,326    815,000      815,000      906,367            ---        ---     1,724,693
Conversion of
 Preferred Stock
 to Common Stock      95,000       950    (95,000)     (95,000)      94,050            ---        ---           ---
(Loss) for the
 year ended
 June 30, 1994           ---       ---        ---          ---          ---     (1,758,584)       ---    (1,758,584)
Balance at
June 30, 1994      7,230,335  $ 72,303  3,127,064   $3,127,064  $11,033,522   $(14,752,599)       ---  $   (519,710)

Issuance of
 Capital Stock       141,375     1,414        ---          ---      282,374            ---        ---       283,788
Issuance of
 Preferred Stock         ---       ---    100,000      100,000      100,000            ---        ---       200,000
Cost of rights
 offering                ---       ---        ---          ---      (39,769)           ---        ---       (39,769)
Conversion of
 Preferred Stock
 to Common Stock     235,000     2,350   (235,000)    (235,000)     232,650            ---        ---           ---
Dividends accrued
 on Redeemable
 Convertible
 Preferred Stock
 Series C                ---       ---        ---          ---     (100,328)           ---        ---      (100,328)
Reclassification
 of Series C
 Redeemable
 Convertible
 Preferred Stock
 from capital            ---       ---        ---          ---     (405,000)           ---    375,000       (30,000)
(Loss) for the
 year ended
 June 30, 1995           ---       ---        ---          ---          ---     (3,457,422)       ---    (3,457,422)

Balance at
June 30, 1995      7,606,710  $ 76,067  2,992,064   $2,992,064  $11,103,449   $(18,210,021)  $375,000   $(3,663,441)

Issuance of
 Common Stock        177,998     1,780        ---          ---      175,928            ---        ---       177,708
Issuance of
 Preferred Stock         ---       ---    210,549      315,824      (10,000)           ---        ---       305,824
Conversion of
 Preferred Stock
 to Common Stock     490,878     4,909   (490,878)    (503,817)     498,908            ---        ---           ---
Dividends on
 Preferred Stock
 Series D paid in
 Common Stock          5,355        53        ---          ---       13,495            ---        ---        13,548
Dividends accrued
 on Preferred Stock      ---       ---        ---          ---     (274,819)           ---        ---      (274,819)
Expenses incurred
 in reduction of
 exercise price of
 outstanding
 warrants                ---       ---        ---          ---      131,250            ---        ---       131,250
Costs incurred in
 connection with
 August 1995
 securities
 registration            ---       ---        ---          ---     (136,421)           ---        ---      (136,421)
Income for the
 year ended
 June 30, 1996           ---       ---        ---          ---          ---         12,690        ---        12,690

Balance at
June 30, 1996      8,280,941  $ 82,809  2,711,735   $2,804,071  $11,501,790   $(18,197,331)  $375,000  $ (3,433,661)

Issuance of
 Common Stock        190,200     1,902         ---         ---      183,898            ---        ---       185,800
Conversion of
 Preferred Stock
 to Common Stock     445,000     4,450   (445,000)    (447,500)     443,050            ---        ---           ---
Dividends accrued
 on Preferred
 Stock Series D          ---       ---         ---       9,723       (9,723)           ---        ---           ---
Accural of value
 of warrants
(Note 7)                 ---       ---         ---         ---          ---            ---     42,500        42,500
Dividends accrued
 on Redeemable
 Convertible
 Preferred Stock         ---       ---         ---         ---     (191,371)           ---        ---      (191,371)
(Loss) for the
 six months ended
 December 31, 1996       ---       ---         ---         ---          ---       (935,337)       ---      (935,337)

Balance at
December 31, 1996  8,916,141 $  89,161    2,266,735 $2,366,294  $11,927,644   $(19,132,668)  $417,500   $(4,332,069)

The Notes to the Financial Statements are an integral part of this statement.
</TABLE>


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

             The  accompanying financial statements  include  the
          accounts  of Nestor, Inc. and Nestor Financial Services
          Group,  a  joint venture (organized in December,  1986,
          and  dissolved effective December 31, 1995  - See  Note
          9).   All  intercompany transactions and balances  have
          been eliminated.

            B. Product and patent development costs
             The  costs of development of the Company's  software
          which consist primarily of labor and outside consulting
          and  which  are  an  inherent  cost  of  the  Company's
          business   and  costs of research and  development  are
          expensed  until  technological  feasibility  has   been
          established for the product.  Thereafter, all  software
          production  costs would be capitalized and subsequently
          reported  at  the  lower  of unamortized  cost  or  net
          realizable  value.  At December 31, 1996,  the  Company
          had  no  capitalized software development costs because
          the  products  developed were simultaneously  available
          for  general  release to customers  when  technological
          feasibility  was  established.  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  similarly  treated.
          Their  amortization  would be on a straight-line  basis
          over  the  shorter of the estimated economic  life,  or
          statutory life, of the patent.

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

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

            D. Revenue recognition
              The  Company  recognizes  revenue  based  upon  the
          following methods:

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

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

                  b)    Engineering contract revenue  from  long-
            term  contracts  is recognized on the  percentage-of-
            completion method, based upon the pattern  of  actual
            performance  under the agreement with  the  customer.
            Management  records expected losses on  contracts  in
            the period in which such losses become foreseeable.

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

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

          F.    Accounting for issuance and exercise of  warrants
          and options to purchase Common Stock
             The Company records no expense upon the issuance  of
          warrants and options issued at fair market value.   For
          employee  warrants and options issued  at  an  exercise
          price  below fair market value, the Company records  an
          expense  equal  to  the difference between  the  market
          value of the underlying shares of Common Stock and  the
          exercise price of such options or warrants.  For  other
          options  and warrants issued after December  31,  1995,
          the Company records options and warrants at fair market
          value.

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

          H.   Inventory
            Inventory, consisting primarily of finished goods, is
          valued  at the lower of cost or market on the first-in,
          first-out  basis.  Inventories are included  as  "Other
          current assets" on the Consolidated Balance Sheets.

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

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

          K.   Change in Presentation
             In  order  to  conform with the  December  31,  1996
          presentation,  expenses charged to  operating  expenses
          for the fiscal years ended June 30, 1996, 1995 and 1994
          have  been  reclassified in these financial  statements
          from  "Software Licensing" and "Tangible Product Sales"
          and  are presented as "Research and Development" on the
          Consolidated Statements of Operations.


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

       Total revenues         $ 1,195,904       $  2,149,088

       Net Loss                 (935,337)          (723,227)

       Net loss available
       for common stock       (1,136,431)          (813,028)

       Net (loss) per share   $    (0.13)      $      (0.11)



Note 3 -  Income (loss) per share:
          Income  (loss)  per share amounts are based  on  income
          (loss)  available  for  common  stock  divided  by  the
          weighted  average number of common shares  outstanding.
          For the six months ended December 31, 1996, and for the
          years  ended June 30, 1996, 1995 and 1994, the dilutive
          effect  of exercise or conversion of options,  warrants
          and   preferred   stock  were  not  included   in   the
          calculation  as  this  would result  in  anti-dilution.
          During the quarter ended December 31, 1996, the Company
          modified its method for computing earnings per share to
          give  effect  to dividends accrued on preferred  stock.
          The  effect of this change on earnings per share is  as
          follows:

             Period              As Originally            As
             Ended                  Reported           Adjusted

          Quarter ended
          Sept. 30, 1996              (0.03)            (0.04)

          Fiscal year ended
          June 30, 1996                ---              (0.03)

          Fiscal year ended
          June 30, 1995               (0.47)            (0.48)

          The following earnings per share calculations are based
          on  the  Company's reported net income (loss)  for  the
          periods presented.  The reported net income (loss)  has
          been   adjusted   to  reflect  dividends   accrued   on
          convertible preferred stock.



Note 4 -  Income taxes:
          The Company accounts for income taxes from the deferred
          liability method as required by FASB Statement No. 109,
          "Accounting  for  Income Taxes."  Under  Statement  No.
          109, deferred tax assets and liabilities are determined
          based  on  differences between financial reporting  and
          the  tax  basis  of  assets and  liabilities,  and  are
          measured using the enacted rates and laws that will  be
          in effect when the differences are expected to reverse.

          There  was no current federal or state and no  deferred
          federal  or state provision (benefit) for income  taxes
          for the six months ended December 31, 1996, and for the
          fiscal years ended June 30, 1996, 1995, and 1994.

          Significant  components of the Company's  deferred  tax
          liabilities  and assets as of December 31,  1996,  June
          30, 1996 and June 30, 1995 are as follows:

          <TABLE>
          <CAPTION>
                                          December 31,         June 30,        June 30,
                                              1996               1996            1995
          <S>                              <C>               <C>             <C>
          Deferred tax liabilities:
             Accounts receivable           $       ---       $   237,000     $     264,000
             Unbilled contract revenue             ---           113,000            83,000
             Other - net                           ---            33,000            20,000
           Total deferred tax liabilities          ---           383,000           367,000


          Deferred tax assets:
            Accounts receivable                 58,000               ---               ---
            Accrued expenses                   104,000           277,000           507,000
            Deferred income                    173,000           206,000           206,000
            Other - net                          2,000            14,000            13,000
            Net operating loss               6,354,000         6,224,000         5,998,000
          Total deferred tax assets          6,691,000         6,721,000         6,724,000

          Valuation allowance              (6,691,000)       (6,338,000)       (6,357,000)

          Net deferred tax assets                  ---           383,000           367,000

          Net Deferred Tax Balance         $       ---       $       ---               ---

</TABLE>
          The  Company  provides a valuation allowance to reflect  the
          uncertainties  associated  with  the  realization   of   its
          deferred  tax  assets  including  limitations  provided   by
          Section 382 of the Internal Revenue Code.

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


          <TABLE>
          <CAPTION>
                                      Six Months Ended             Years Ended June 30,
                                     December 31, 1996     1996          1995            1994

          <S>                           <C>              <C>          <C>            <C>
          Income (Loss) Before Taxes    $ (892,000)      $  13,000    $(3,457,000)   $(1,759,000)

          Tax at statutory rate of 34%  $ (303,000)      $   4,000    $(1,176,000)   $  (598,000)
          State income tax (net of
            federal benefit)               (53,000)          1,000       (207,000)      (106,000)
          Effect of permanent
            differences                      3,000           7,000          7,000          1,000
          Valuation allowance              353,000         (12,000)     1,376,000        703,000

          Income Tax Expense            $      ---      $      ---    $       ---    $       ---
          </TABLE>


          The  Company has available at December  31,  1996,
          $17,328,000  and $7,863,000 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 1998.
 
     

Note 5 -  Accounts receivable, net of allowance for doubtful
          accounts:


<TABLE>
<CAPTION>
                                                                            June 30,
                                              December 31, 1996        1996        1995
          <S>                                     <C>              <C>          <C>
          Trade accounts receivable               $ 1,154,384      $  760,019   $ 719,710
          Allowance for doubtful accounts            (145,235)       (165,709)   $(57,976)
          Accounts receivable, net of allowance
            for doubtful accounts                 $ 1,009,149      $  594,310   $ 661,734

</TABLE>


Note 6 -  Commitments and contingencies:
          The Company leases a facility in Rhode Island under  an
          operating  lease dated July 1, 1985, as amended.   This
          lease  provides for minimum annual rentals of  $134,993
          until  February 1997 and $141,742 until February  1998.
          The  Company is also obligated to pay its proportionate
          share of increases in real estate taxes and common area
          maintenance  over a base period.  Commencing  March  1,
          1996,  the  base  rent  is  to  be  increased  by   the
          percentage increase in the C.P.I. index over the  prior
          year, but not less than 5%.

          Rent  expense  of  $47,989,  $171,928,  $153,385,   and
          $118,731  was charged to operations for the six  months
          ended  December 31, 1996 and for the years  ended  June
          30, 1996, 1995 and 1994 respectively.

          On  August  1,  1994,  the Company signed  a  Financial
          Advisory Agreement with Wand Partners, Inc.  The  terms
          of  the Agreement specify that Wand Partners, Inc. will
          provide  consulting services for a fee of  $40,000  per
          year, plus out-of-pocket expenses.  The Agreement is in
          effect  so  long as Wand Partners, Inc. owns  at  least
          500,000  shares  of  Nestor's Common  Stock,  or  other
          equities  which  are convertible into  that  number  of
          shares  of  Common Stock (See Note 16 -  Related  party
          transactions).

          The  Company placed a purchase order in the  amount  of
          $195,000  with  Intel Corporation in June  1996  for  a
          supply  of  Ni1000  Recognition Accelerator  chips  and
          expects to take delivery of the chips during the second
          quarter of 1997.

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


                    December 31, 1997     $     404,418
          
                    December 31, 1998            68,424
          
                    December 31, 1999            40,000
          
                    December 31, 2000            40,000
          
                    December 31, 2001            40,000
          
                                          $     592,842
          

Note 7 -  Options and warrants:
          On April 1, 1984, the Company adopted an Incentive
          Stock  Option Plan providing for the  granting  of
          options to purchase shares of the Company's common
          stock at a price equal to the market price of  the
          stock  at the date of grant.  The Company's  Stock
          Option Plan has authorized the grant of options to
          employees  for  up  to  2,450,000  shares  of  the
          Company's  common stock.  Options are  exercisable
          for five years from the date of grant.

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

          The  following table presents the activity of  the
          Company's  Stock Option Plan for  the  six  months
          ended  December 31, 1996, and for the fiscal years
          ended June 30, 1996, 1995, and 1994:


<TABLE>

<CAPTION>
                   Six Months Ended
                     December 31,                             Years Ended June 30,
                         1996                   1996                 1995                  1994
                            Weighted               Weighted             Weighted             Weighted
                             Av. Ex.                Av. Ex.              Av. Ex.              Av. Ex.
                  Shares     Price         Shares    Price      Shares    Price      Shares   Price
<S>              <C>          <C>      <C>          <C>     <C>          <C>      <C>          <C>
Outstanding
 beginning
 of year         1,356,000     1.03    1,399,000     1.80    1,141,000    1.90      795,500     1.85
Granted            612,000     2.38    1,406,000     1.04      348,000    1.60      412,500     1.91
Exercised          186,500     0.98      100,500     1.09       13,875    1.52       37,000     1.19
Canceled               ---      ---    1,348,500     1.83       76,125    2.43       30,000     1.64
Outstanding
end of year      1,781,500     1.50    1,356,000     1.03    1,399,000    1.80    1,141,000     1.90

Options
exercisable
at year end      1,101,875     1.22    1,023,500     1.00      950,375    1.88      730,375     2.00

Weighted
average fair
value of
options
granted
during
the year        $     0.71             $    0.71

</TABLE>


          The   following  table presents weighted average  price
          and  life  information about significant option  groups
          outstanding at December 31, 1996.

<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 12/31/96    Life (Years)     Price         at 12/31/96      Price
      <S>                      <C>              <C>          <C>           <C>              <C>
       $.87 -  $1.00           1,081,500        3.68         $0.99            911,875       $0.99
      $1.50 -  $1.94              84,500        4.35          1.58             21,125        1.58
      $2.00 -  $2.32             503,500        4.49          2.31            140,875        2.31
      $2.41 -  $2.94             112,000        4.66          2.69             28,000        2.69
                               1,781,500        4.00         $1.50          1,101,875       $1.22
</TABLE>


          The  following are the pro forma net loss and net  loss
          per  share for the six months ended December 31,  1996,
          and  for the fiscal year ended June 30, 1996, as if the
          compensation  cost  for  the  option  plan   had   been
          determined  based on the fair value at the  grant  date
          for  grants  in  those  periods,  consistent  with  the
          provisions of SFAS 123:
       

<TABLE>
<CAPTION>
                 Six Months Ended               Fiscal Year Ended
                 December 31, 1996                June 30, 1996
                    As         Pro                As           Pro
                 Reported     Forma             Reported      Forma
  <S>          <C>         <C>                <C>         <C>
  Net income
  (loss)       $(935,337)  $(1,241,072)       $   12,690  $(635,037)
  Net (loss)
  per   share  $   (0.13)        (0.17)            (0.03)     (0.11)
</TABLE>


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

                     The  fair  value  of each option  grant  was
          estimated  using the Black-Scholes model with risk-free
          interest  rates on the date of grant which ranged  from
          5.4%  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
          .858 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.

<TABLE>
<CAPTION>
                                         Dec. 31,                    June 30
                                          1996           1996          1995         1994
  <S>                                 <C>           <C>           <C>           <C>
  Officers                                  10,000       10,000        88,000       198,000

  Others                                 2,826,239    3,126,964     2,329,375     1,284,375

  Eligible, End of Year for Exercise
   Currently (at prices ranging from
   $.65 to $4.62 per share)              2,836,239    3,136,964     2,417,375     1,482,375

  Warrants issued                              ---    1,309,589     1,410,000       407,500
    Low  exercise  price              $        ---   $     0.65    $     1.50    $     3.00
    High  exercise  price             $        ---   $     2.00    $     2.00    $     3.00

</TABLE>


          Of  the warrants outstanding at December 31, 1996,
          210,150  were  issued  in  conjunction  with   the
          issuance  of  the  Series D Convertible  Preferred
          Stock.   These  warrants  entitle  the  registered
          owner  to purchase one-half of one share of Common
          Stock  at  the per-share exercise price of  $2.00.
          All  other outstanding warrants entitle the  owner
          to  purchase  one share of Common Stock  for  each
          warrant, at prices ranging from $0.65 to $2.00 per
          share.

          The  warrants outstanding as of December 31, 1996,
          are  currently exercisable and expire  at  various
          dates through October 5, 2005.

          For the six months ended December 31, 1996, and
          for the fiscal years ended June 30, 1996, 1995 and
          1994, when warrants were issued at market value,
          no expense was recorded by the Company.  When
          warrants were issued below market value, a charge
          against  earnings was recorded.  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 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.



Note 8 -  Major customers:

          In  the  six months ended December 31, 1996,  five
          customers accounted for 19%, 18%, 15%, 13% and 11%
          of  the  Company's revenues.  In the  fiscal  year
          ended  June  30, 1996, one customer accounted  for
          30%  of  the  Company's total  revenues.   Another
          customer   accounted  for  13%  of  the  Company's
          revenues during the year ended June 1996  and  16%
          of  the  Company's revenues during the year  ended
          June 1995.  A third customer accounted for 11%  of
          the  Company's revenues during the year ended June
          1995 and 19% of the Company's revenues during  the
          year ended June 1994.  A fourth customer accounted
          for  17%  of  the  Company's revenues  during  the
          fiscal year ended June 30, 1994.


Note 9 -  Property and equipment at cost - net:


<TABLE>
<CAPTION>                                                                    Useful Life
                                                                             In Years or
                                  December 31,             June 30,           Lease Term
                                      1996            1996        1995
  <S>                              <C>             <C>         <C>            <C>
  Leasehold improvements           $   22,945      $   22,945  $   22,945     Lease Term
  Office furniture and equipment      199,254         199,254     201,942       5 - 7
  Computer equipment                1,184,981       1,103,851   1,200,514       3 - 5
                                    1,407,180      $1,326,050  $1,425,401

  Less:  Accumulated depreciation
         and amortization           1,151,590       1,106,263   1,078,076
                                   $  255,590      $  219,787  $  347,325
</TABLE>


          Depreciation  and  amortization expense  on  the  above
          assets of $45,327, $104,559, $100,229, and $93,777  was
          recorded  for the six months ended December  31,  1996,
          and  for the years ended June 30, 1996, 1995 and  1994,
          respectively.


Note 10 - Revenue from sources outside the United States:
          Revenues  from  licenses,  engineering  and  sales   of
          tangible  products sold outside the United States  were
          as follows:

<TABLE>

<CAPTION>
                        Six Months
                          Ended
                       December 31,
                                         Years Ended June 30,
                          1996       1996       1995        1994

          <S>     <C>          <C>         <C>          <C>
          France       $ 30,000     $   65,085   $   98,785   $  35,450
          Belgium        42,000        727,375      507,900     169,000
          Australia         ---         66,590       18,400      63,195
          Germany           ---        173,877       81,649      23,000
          Japan          14,094         36,424        2,100      21,368
          Canada            ---         41,710       27,985      17,145
          Singapore      10,535         65,530       65,315         ---
          All other
           countries     14,225        213,208      271,101     156,935
                       $110,854     $1,389,799   $1,073,235   $ 486,093

</TABLE>


Note 11 - Accounts payable and accrued expenses:
          Accounts payable and accrued expenses consists of the
          following:
<TABLE>
<CAPTION>
                             
                             December 31,          June 30,
                                 1996         1996        1995
     <S>                      <C>            <C>       <C>
     Trade accounts payable   $231,395       $269,320  $  795,692
     Accrued salaries          185,842        276,004     327,812
     Other accrued expenses    253,505        179,403     170,619

                              $670,742       $724,727  $1,294,123
</TABLE>


Note 12 - Preferred stock:
          Series  A  Preferred Stock is convertible at  any  time
          into  one fully paid and non-assessable share of Common
          Stock.  Series A Preferred has the same dividend rights
          as shares of Common Stock but carries no voting rights.
          Each  share  of  Series A Preferred has  the  right  to
          receive in liquidation $2.00 before any distribution is
          made  on  Common Stock or on any other class  of  stock
          ranking  junior to Series A.  The liquidation value  of
          Series  A Preferred was $904,128 at December 31,  1996,
          June 30, 1996 and June 30, 1995.

          Series  B  Convertible Preferred Stock  is  convertible
          into Common Stock of the Company at any time on a share-
          for-share basis.  Series B Convertible Preferred  Stock
          has   the  same  rights  with  respect  to  voting  and
          dividends  as the Common Stock, except that each  share
          of  Series B Convertible Preferred Stock has the  right
          to receive in liquidation $1.00 before any distribution
          is   made   to  holders  of  the  Common  Stock.    The
          liquidation value of Series B Preferred was $1,635,000,
          $2,075,000  and $2,540,000 at December 31,  1996,  June
          30, 1996 and June 30, 1995, respectively.

          Series  D  Convertible Preferred Stock  is  convertible
          after  January 1, 1996 at the option of the  holder  at
          any  time,  and from time to time, into one fully  paid
          and   non-assessable  share  of  Common  Stock  of  the
          Company.   The Series D Preferred shall have the  right
          to  receive  annual  dividends at  the  rate  of  seven
          percent  (7%)  of the stated value per  share  ($1.50),
          which  dividend shall be paid in cash or in  shares  of
          Common Stock at the option of the Company.  On June 30,
          1996, the Company paid a stock dividend on the Series D
          Preferred totaling $13,548.  The Company shall have the
          right, after June 1, 1996, to redeem in cash the Series
          D  Preferred, in whole or in part from time to time, at
          the stated value per share plus accrued dividends.  The
          liquidation  value of Series D Preferred  was  $279,230
          plus  accrued dividends at December 31, 1996;  $277,007
          plus  accrued dividends at June 30, 1996; and  none  at
          June 30, 1995.

          The  Series  D Convertible Preferred Stock ranks  on  a
          parity  with Series B Convertible Preferred Stock  with
          respect to dissolution, liquidation, or winding  up  of
          the  Company and is entitled to receive, out of  assets
          of   the   Company  available  for  distribution   upon
          liquidation, dissolution or winding up of the  Company,
          $1.50  per  share plus an amount equal to all dividends
          on  shares  accrued but unpaid, and is  junior  to  the
          Series A Convertible Preferred Stock and all series  of
          Redeemable Convertible Preferred Stock.  The holders of
          the  Series  D Preferred are entitled to one  vote  for
          each  share  of Common Stock into which  the  Series  D
          Preferred is convertible, and therefore shall have  the
          same  voting rights on a share-for-share basis, as  the
          holders of the Common Stock.  The holders of the Common
          Stock and of the Series D Preferred shall vote together
          as  one  class on all matters submitted to  a  vote  of
          shareholders of the Company.


Note 13 - Redeemable Convertible Preferred Stock:
          The  Company is required to redeem all of the following
          series  of  convertible preferred stock  on  or  before
          August  1,  2004.   Accordingly, this  preferred  stock
          subject  to  mandatory redemption  has  been  presented
          separately outside of permanent stockholders' equity in
          the accompanying financial statements.

<TABLE>
<CAPTION>
                              December 31,    June 30,   June 30,
                                  1996          1996        1995

 <S>                            <C>         <C>          <C>
  Series C, par value $1.00
per    share,   0    shares
outstanding at December 31,
1996 and June 30, 1996, and
1,500  shares  issued   and
outstanding  at  June   30,
1995.   $0, $0 and $100,328
of accumulated dividends at
December 31, 1996, June 30,
1996        and       1995,
respectively.                  $      ---  $      ---   $1,600,328

  Series E, par value $1.00
per   share,  1,444  shares
outstanding at December 31,
1996 and June 30, 1996, and
0    shares   issued    and
outstanding  at  June   30,
1995.   $189,226,  $133,213
and   $0   of   accumulated
dividends  at December  31,
1996,  June  30,  1996  and
1995, respectively.             1,633,226   1,577,213          ---

  Series F, par value $1.00
per   share,   599   shares
outstanding at December 31,
1996 and June 30, 1996, and
0    shares   issued    and
outstanding  at  June   30,
1995.  $51,313, $22,802 and
$0 of accumulated dividends
at  December 31, 1996, June
30,    1996    and    1995,
respectively.                     650,313     621,802          ---

  Series G, par value $1.00
per   share,   777   shares
outstanding at December 31,
1996 and June 30, 1996, and
0    shares   issued    and
outstanding  at  June   30,
1995.  $46,875, $18,619 and
$0 of accumulated dividends
at  December 31, 1996, June
30,    1996    and    1995,
respectively.                     823,875     795,619          ---

  Series H, par value $1.00
per   share,  2,026  shares
outstanding at December 31,
1996 and June 30, 1996, and
0    shares   issued    and
outstanding  at  June   30,
1995.   $265,494,  $186,904
and   $0   of   accumulated
dividends  at December  31,
1996,  June  30,  1996  and
1995, respectively.             2,291,494   2,212,904          ---

 TOTAL                         $5,398,908  $5,207,538   $1,600,328

</TABLE>


            At  June  30, 1995, there were issued and outstanding
          1,500  shares of Series C Convertible Preferred  Stock.
          In  early  October 1995, Wand Partners, Inc.  exchanged
          certain Notes payable for an additional 1,970 shares of
          Series  C  Preferred Stock.  On January 31, 1996,  Wand
          Partners,   Inc.  exchanged  all  of   its   Series   C
          Convertible Preferred Stock for 1,444 shares of  Series
          E  Convertible  Preferred Stock  and  2,026  shares  of
          Series  H Convertible Preferred Stock.  On January  31,
          Wand  Partners, Inc. purchased 599 shares of  Series  F
          Convertible  Preferred Stock for a total  of  $599,000,
          and  on  March  7, 1996, Wand purchased 777  shares  of
          Series  G  Convertible Preferred Stock for a  total  of
          $777,000.   Each of these series of stock is  described
          below.

           Series F and G Convertible Preferred Stock

            Except  as  noted below the Series F and G  Preferred
          Stock  have the same terms and conditions.  Each  share
          of Series F and G Preferred Stock is convertible at the
          option of the holder at any time and from time to  time
          into  shares of Common Stock at a conversion  price  of
          (a)  $1.25 per share, subject to adjustment, after June
          30,  1996.  With respect to dividend rights, redemption
          rights  and  rights  on  liquidation,  winding  up   or
          dissolution,  the Series F Preferred Stock  ranks  pari
          passus  with  the  Series G Preferred Stock  and  ranks
          prior  to the Series A, B, D, E, and H Preferred Stocks
          and the Common Stock of the Company.

            Except  as  provided herein, any holder of  Series  G
          Preferred  Stock  that is subject to the  Bank  Holding
          Company Act of 1956 ("BHCA Holder"), as amended,  shall
          have  no  voting  rights.   Each  holder  of  Series  G
          Preferred  Stock  that is not a BHCA  Holder  shall  be
          entitled   to   vote  on  all  matters  as   to   which
          stockholders of the Company are entitled to  vote,  and
          each such holder shall be entitled to cast a number  of
          votes  equal to the greatest number of whole shares  of
          Common  Stock into which such holder's shares of Series
          G  Preferred Stock could be converted.  The holders  of
          the  Series F Convertible Preferred Stock are  entitled
          to  one vote for each share of Common Stock into  which
          the shares are convertible.

           In the event the Company is in default with respect to
          the payment of (i) two consecutive cash dividends after
          the  "Restricted Period" as hereinafter defined or (ii)
          two  dividends  within  any  six  consecutive  dividend
          periods  the  holders of the Series F and  G  Preferred
          Stock  shall have the right to elect two directors  for
          so  long  as the default continues.  In the  event  the
          Company  is  in default with respect to the payment  of
          (i)   four   consecutive  cash  dividends   after   the
          Restricted Period as hereinafter defined or  (ii)  four
          dividend   payments   within  any   eight   consecutive
          quarterly dividend periods, the holders shall have  the
          right  to  elect  four directors for  so  long  as  the
          default continues.

           In the event the Company violates the provisions of, or
          is  in default under the terms of any loan agreement or
          in  the event a judgment is entered against the Company
          or any subsidiary in the amount of $50,000 or more, the
          holders  of  the  Series F and G Convertible  Preferred
          Stock shall have the right to elect four directors.

            The  holders  of the Series F and G Preferred  Stock,
          except  during the Restricted Period, are  entitled  to
          receive  out of funds of the Company legally  available
          for  such purpose as and when declared by the Board  of
          Directors of the Company quarterly dividends in cash at
          a  rate of nine percent (9%) compounded daily per annum
          of  the  stated value per share ($1,000.00 on  original
          issuance)   of   Series  F  and  G  Preferred   Stocks.
          Dividends shall accrue, be accumulated and added to the
          stated value whether or not declared. So long as any of
          the  shares  of  Series  F and G  Preferred  Stock  are
          outstanding, the Company shall not declare or  pay  any
          dividends on any outstanding Common or Preferred Stock,
          other than the Series D,  F and G Preferred Stock.  The
          Restricted  Period  as it relates  to  the  payment  of
          dividends  on the Series F and G Preferred Stock  means
          the  period  beginning on the date of issuance  of  the
          Series  F  or G Preferred Stock and ending on September
          30,  1997.   While no dividends are payable during  the
          Restricted  Period,  they will  accrue  and  accumulate
          during the Restricted Period.

           The Company is obligated to redeem all the outstanding
          shares of Series F and G Preferred Stock outstanding at
          the  stated value plus accrued dividends on  August  1,
          2004.  The holders of the F and G Preferred Stock  have
          the  right to require that the Company redeem,  to  the
          extent the Company may lawfully do so, all or a portion
          of  the  then  outstanding shares of  Series  F  and  G
          Convertible  Preferred Stock at the stated  value  plus
          accrued  and unpaid dividends in the event of a merger,
          reorganization, transfer of the majority of the  voting
          securities of the Company, or sale of more than 25%  of
          the assets of the Company.

           Series E and Series H Convertible Preferred Stock

            Except  as  noted below, the Series E  and  Series  H
          Preferred  Stock  have the same terms  and  conditions.
          Each  share  of  Series  E and  H  Preferred  Stock  is
          convertible at the option of the holder at any time and
          from  time  to time into shares of Common  Stock  at  a
          conversion  price  of (a) $1.50 per  share  subject  to
          adjustment prior to August 1, 2004 or (b) on  or  after
          August 1, 2004 at a conversion price which is the lower
          of  $1.00 or the conversion price in effect pursuant to
          (a).   With  respect  to  dividend  rights,  redemption
          rights  and  rights  on  liquidation,  winding  up   or
          dissolution, the Series E and H Preferred  Stocks  rank
          (i)  junior  to  the Series F Preferred Stock  and  the
          Series  G  Preferred Stock; (ii) pari passus  with  the
          Series  A Preferred Stock; and (iii) rank prior to  the
          Series  B  Preferred Stock and the Series  D  Preferred
          Stock and the Common Stock of the Company.

            Except  as  provided herein, any holder of  Series  E
          Preferred  Stock  that is subject to the  Bank  Holding
          Company Act of 1956 ("BHCA Holder"), as amended,  shall
          have  no  voting  rights.   Each  holder  of  Series  E
          Preferred  Stock  that is not a BHCA  Holder  shall  be
          entitled   to   vote  on  all  matters  as   to   which
          stockholders of the Company are entitled to  vote,  and
          each such holder shall be entitled to cast a number  of
          votes  equal to the greatest number of whole shares  of
          Common  Stock into which such holder's shares of Series
          E  Preferred Stock could be converted.  The holders  of
          the  Series H Convertible Preferred Stock are  entitled
          to  one vote for each share of Common Stock into  which
          the shares are convertible.

            Except  as hereinafter provided, the holders  of  the
          Series  E  Preferred Stock and the Series  H  Preferred
          Stock  shall  have the right, voting  separately  as  a
          class, to elect two directors to the Board of Directors
          of  the Company.  However, in the event the Company  is
          in  default  with  respect to the payment  of  (i)  two
          consecutive   cash  dividends  after  the   "Restricted
          Period"  as  hereinafter defined or (ii) two  dividends
          within  any six consecutive quarterly dividend periods,
          the   holders  shall  have  the  right  to  elect  four
          directors for so long as the default continues.  In the
          event  the  Company is in default with respect  to  the
          payment  of  (i) four consecutive cash dividends  after
          the  'Restricted Period" as hereinafter defined or (ii)
          four  dividend  payments within any  eight  consecutive
          quarterly dividend periods, the holders shall have  the
          right to elect six directors for so long as the default
          continues.

           In the event the Company violates the provisions of, or
          is  in default under the terms of any loan agreement or
          in  the event a judgment is entered against the Company
          or any subsidiary in the amount of $50,000 or more, the
          holders  of  the  Series E and H Convertible  Preferred
          Stock shall have the right to elect eight directors.

            The  holders of the Series E Preferred Stock and  the
          Series  H Preferred Stock, except during the Restricted
          Period,  are  entitled to receive out of funds  of  the
          Company legally available for such purpose as and  when
          declared  by  the  Board of Directors  of  the  Company
          quarterly dividends in cash at a rate of seven  percent
          (7%) compounded daily per annum of the stated value per
          share ($1,000.00 on original issuance) of Series E  and
          H   Preferred  Stocks.   Dividends  shall  accrue,   be
          accumulated  and added to the stated value  whether  or
          not declared.  So long as any of the shares of Series E
          and  H  Preferred  Stock are outstanding,  the  Company
          shall   not  declare  or  pay  any  dividends  on   any
          outstanding Common or Preferred Stock, other  than  the
          Series  D,  F  and G Preferred Stock.   The  Restricted
          Period as it relates to the payment of dividends on the
          Series  E  and  H  Preferred  Stock  means  the  period
          beginning on the date of issuance of the Series E and H
          Preferred  Stock and ending on the earlier of  (a)  the
          first  day of the calendar quarter in which the Company
          first  pays cash dividends on its Common Stock  or  (b)
          June  30, 1998.  While no dividends are payable  during
          the  Restricted Period, they will accrue and accumulate
          during the Restricted Period.

           The Company is obligated to redeem all the outstanding
          shares of Series E and H Preferred Stock outstanding at
          the  stated value plus accrued dividends on  August  1,
          2004.  The holders of the E and H Preferred Stock  have
          the  right to require that the Company redeem,  to  the
          extent the Company may lawfully do so, all or a portion
          of  the  then  outstanding shares of  Series  E  and  H
          Convertible  Preferred Stock at the stated  value  plus
          accrued  and unpaid dividends in the event of a merger,
          reorganization, transfer of the majority of the  voting
          securities of the Company, or sale of more than 25%  of
          the assets of the Company.


Note 14 -  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 six months ended December  31,
          1996, and for the years ended June 30, 1996, 1995,  and
          1994, the Company recorded an expense for Baer, Marks &
          Upham   of   $7,200,  $14,440,  $14,440  and   $14,000,
          respectively.  In addition, in the year ended June  30,
          1995,  the Company recorded a charge against additional
          paid-in  capital of $26,736 for the work done by  Baer,
          Marks   &  Upham  on  the  Company's  Rights  Offering.
          Included in Other current liabilities  at December  31,
          1996,  June  30, 1996 and 1995 are $8,045,  $8,885  and
          $10,181, respectively, due Baer, Marks & Upham.

          Bruce  W. Schnitzer,
          who became a director of the Company in August 1994, is
          Chairman  of Wand Partners, Inc., a private  investment
          firm  that  the Company uses for management consulting.
          For the six months ended December 31, 1996, and for the
          years  ended  June  30,  1996  and  1995,  the  Company
          recorded an expense for Wand Partners, Inc. of $25,060,
          $46,076  and 43,530, respectively.  Included  in  Other
          current liabilities at December 31, 1996, June 30, 1996
          and  1995  are  $0, $0 and  $32,592, respectively,  due
          Wand Partners, Inc.

          Thomas F. Hill,  who
          became  a  director of the Company in August  1994,  is
          President  of Hill & Partners, a consulting  firm  that
          the  Company  uses for marketing consulting.   For  the
          year  ended  June  30,  1995, the Company  recorded  an
          expense  for Hill & Partners of $106,679.  Included  in
          Other  current liabilities at June 30, 1995 is  $37,661
          due Hill & Partners.

          Thomas D. Halket, who
          became an officer of the Company in January 1993, is an
          outside counsel for the Company.  For six months  ended
          December  31,  1996, and for the years ended  June  30,
          1996,  1995  and 1994, the Company recorded an  expense
          for  Thomas Halket of $65,425, $144,176, $103,326,  and
          $80,196,  respectively.   Included  in  Other   current
          liabilities  at December 31, 1996, June  30,  1996  and
          1995 are $6,864, $34,799 and $6,900, respectively.


Note 15 -  Notes payable:
          On  August  16, 1995, a registration statement  of  the
          Company  relating primarily to rights  granted  to  the
          Company's  shareholders became effective.   Each  right
          enabled the holder to purchase a Unit consisting of one
          share   of   Series  D  Convertible  Preferred   Stock,
          convertible  into  one  share  of  Common  Stock  after
          January  1, 1996, and one warrant to purchase  one-half
          share  of  Common  Stock  for  three  years  after  the
          effective date of the registration statement at a price
          of $2.00 per share.

          Gross proceeds of the rights offering, which closed  on
          September 29, 1995, totaled $285,823.  In early October
          the  Company received the proceeds of the offering  and
          issued  the  stock.  Costs of the offering, which  were
          charged   to   additional  paid-in   capital,   totaled
          approximately $136,000.

          Pursuant  to a Standby Financing and Purchase Agreement
          dated March 16, 1995, as amended on June 30, 1995, Wand
          Partners,  Inc.  loaned  to  the  Company  the  sum  of
          $1,700,000  evidenced by promissory notes,  which  bore
          interest  at  the  rate of 10% per  annum,  payable  in
          shares  of  Common Stock of the Company.  On  September
          12,  1995, Wand Partners, Inc. made an additional  loan
          to  the Company in the amount of $300,000, bringing the
          principal  amount  of  all of the Company's  promissory
          notes  to $2,000,000.  In early October, Wand Partners,
          Inc.  exchanged  these  notes for  20,000  unregistered
          Units  and  1,970  shares of Series C Preferred  Stock.
          The  terms  and conditions of such Series C Convertible
          Preferred  Stock  are the same as the 1,500  shares  of
          Series   C   Convertible  Preferred  Stock   previously
          purchased by Wand Partners, Inc..

          Upon  completion of the offering and the conversion  of
          the  notes described above, the Company issued to  Wand
          Partners,  Inc. 700,000 ten-year warrants  to  purchase
          shares of the Common Stock of the Company at $1.00  per
          share.   The  Company  recorded a  charge  of  $131,250
          representing the difference between the market value of
          the  underlying  Common Stock of the  Company  and  the
          aggregate exercise price of such warrants.


Note 16 -  Long-term portion of deferred income:
                                             In December 1994,  a
          customer  agreed to convert $200,000 of its  prepayment
          into  equity  and the Company agreed to refund  to  the
          customer  its prepayments of royalties and  engineering
          fees under its license agreement with the Company.  The
          amounts to be refunded are equal to the greater of  (a)
          seven  percent  (7%)  of  the Company's  revenues  from
          licensing  of its credit-card risk assessment  products
          in  Europe  or (b) certain minimum payments during  the
          period  ending December 31, 1996. The refunding of  the
          customer's   prepayments  based  upon   the   Company's
          European   risk-assessment  revenues  is  expected   to
          continue  through December 1999, but in no event  shall
          exceed  in  the  aggregate  prepayments  made  by   the
          customer,  reduced by refunds made to the customer  and
          by the amount of prepayments applied to the purchase of
          Series  A  Preferred Stock of the Company.  At December
          31,  1996 and June 30, 1996, such long-term portion  of
          deferred  income remaining on the books of the  Company
          amounted  to  $430,899  after  giving  effect  to   the
          application  of  $200,000 of  deferred  income  to  the
          purchase by the customer of 100,000 shares of Series  A
          Preferred Stock, $30,000 refunded by the Company to the
          customer, and the reclassification of $275,000 to Other
          current liabilities.  At June 30, 1995, $100,000 of the
          amount  owed  by  the  Company was  recorded  as  Other
          noncurrent  liabilities and the balance  was  shown  as
          Other  current  liabilities. There is  no  interest  on
          these amounts due the customer.


Note 17 -  Significant transactions:
          On June 11, 1996, the
          Company  entered into an exclusive Licensing  Agreement
          and  an Asset Purchase Agreement with National Computer
          Systems,   Inc.  (NCS)  transferring  the  development,
          production,  and  marketing  rights  of  the  Company's
          Intelligent  Character Recognition  (ICR)  products  to
          NCS.   The  Company received $1,400,000 as  an  initial
          license  fee  pursuant to the Licensing Agreement,  and
          has  the right to receive royalties on future sales  of
          the  products  by NCS.  Minimum annual royalties  range
          from  $160,000 in 1997 to $350,000 in 2001 and  beyond.
          If  NCS  terminates  its  exclusive  rights  under  the
          contract,  minimum  royalty  payments  would   not   be
          required  subsequent to such termination.  The  initial
          license  fee was included in software licensing revenue
          in the year-ended June 30, 1996.

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


Note 18 -  Other income (expense) - net:
          Other income (expense)
          as   reflected   in  the  consolidated  statements   of
          operations consists of the following:


<TABLE>
<CAPTION>
                     Six Months
                       Ended
                    December 31,      Years Ended June 30,
                        1996       1996       1995        1994

<S>                   <C>        <C>       <C>         <C>
 Interest expense     $(3,227)   $(51,574) $ (34,801)   $ (1,685)

 Expense relating to
  financing operations(42,500)  (131,250)   (210,500)   (287,969)

 Net gain on sale of
  tangible and
  intangible assets
  (See Note 17)            ---    213,185        ---         ---

 Other - net            29,507      9,589     24,277       7,236

 Other Income
  (Expense) - Net     $(16,220)  $ 39,950  $(221,024)  $(282,418)

</TABLE>

Note 19 - 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.  Because  the  terms  of  the
          agreement  have  not  been finalized,  the  Company  is
          accounting for the development costs in accordance with
          SOP  81-1, "Accounting for Performance of Construction-
          Type  and  Certain  Production-Type  Contracts,"  which
          provides that costs be deferred until delivery is  made
          under  the  terms of an enforceable agreement.   During
          the  quarter  ended  December  31,  1996,  the  Company
          recorded  an  adjustment to reverse  revenues  totaling
          $211,000  and  capitalize  related  costs  of  $118,000
          originally recorded in the quarter ended September  30,
          1996.   This  change had the effect of  increasing  net
          loss  per  share  by  $.01.   The  Company  expects  to
          conclude  an agreement and make required deliveries  in
          early  1997.   For  the six months ended  December  31,
          1996, the Company deferred $364,000 of costs associated
          with this project.


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



<TABLE>
<CAPTION>

                 Balance            Addition
                    at                   Charged                Balance
                Beginning     Charged       to                     at
                    of           to       Other      Deductions   End
Description       Period      Expense    Accounts     Reserve  of Period

<S>              <C>          <C>         <C>        <C>        <C>
Allowances
deducted from
accounts
receivable:
 Year ended
 June 30, 1994   $   1,550    $ 21,680    $  ---     $   ---   $  23,230

 Year ended
 June 30, 1995   $  23,230    $ 45,276    $  ---     $(10,530) $  57,976

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

 Six months
 ended
 December 31,
 1996            $ 165,709    $ 38,888    $  ---     $59,362   $ 145,235

</TABLE>

                                
ITEM 8.   Financial Statement and Supplementary Data

          See annexed financial statements.


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

          Information   regarding  changes  in  accountants   was
          previously  filed  under cover of  Form  8-K  which  is
          incorporated herein by reference.


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 IV:    Valuation and Qualifying Accounts and Reserves

           All   other   schedules  are  omitted   because   such
           information is not applicable.

               (2)  Exhibits numbered in accordance with Item 601
               of Regulation S-K.


(See Exhibit Index)

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

                On  October 4, 1996, the Company filed  with  the
Commission    a    Current   Report    on    Form    8-K    dated
September 19, 1996.

                On  December 17, 1996, the Company filed with the
Commission    a    Current   Report    on    Form    8-K    dated
December 10, 1996.



INDEX OF EXHIBITS

Exhibit Number Description of Exhibit
3.1 Certificate of
Incorporation of the Company, filed as an Exhibit to the Company's
Registration Statement on Form S18, Commission File No. 286182-B,
is hereby incorporated herein by reference.

3.2 Amendment to the
Certificate of Incorporation of the Company, dated December 5,
1985, filed as an Exhibit to the Company's Form 8 amending the
Company's Form 10-K for the fiscal year ended June 30  1987 (the
"1987 Form 8"), is hereby incorporated herein by reference.

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

3.4  Bylaws of the
Company, as amended, filed as Exhibit to the 1987 Form 8, is hereby
incorporated herein by reference.

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

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

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

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

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

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

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

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

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

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

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

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

10.12 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.

10.26Lease 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.

22 Subsidiaries of the
Company, filed as an Exhibit to the 1987 Form 10-K, is hereby
incorporated herein by reference.