UNITED STATES
               SECURITIES AND EXCHANGE COMMISSION

                     Washington, D.C.  20549

                            FORM 10-K

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

          For the period ended     December 31, 1997

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

                    For the transition period from
               ________________    to   ________________

                 Commission file Number 0-12965

                          NESTOR, INC.
     (Exact name of registrant as specified in its charter)

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

      One Richmond Square, Providence, Rhode Island    02906
         (Address of principal executive offices)(Zip Code)

                         (401) 331-9640
      (Registrant's Telephone Number, Including Area Code)

   Securities registered pursuant to Section 12(b) of the Act:
                              NONE

   Securities registered pursuant to Section 12(g) of the Act:
                  Common Stock, $.01 Par Value
                        (Title of Class)

Indicate  by check mark whether the Registrant (1) has filed  all
reports  required  to be filed by Section  13  or  15(d)  of  the
Securities  Exchange Act of 1934 during the preceding  12  months
(or  for such shorter period than the Registrant was required  to
file  such  reports),  and (2) has been subject  to  such  filing
requirements for the past 90 days.

                     Yes        X        No

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



                         Exhibit Index is on Page _________


The  aggregate  market value of the voting  stock  held  by  non-
affiliates of the registrant, based on the average bid and  asked
prices  of  such  stock on March 25, 1998 was  $13,847,772.   The
number of shares outstanding of the Registrant's Common Stock  at
March 25, 1998 was 9,466,237.

DOCUMENTS INCORPORATED BY REFERENCE.

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


ITEM 1.    Business

Prospective Statements

The   following   discussion  contains   prospective   statements
regarding Nestor, Inc. ("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.

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.

On  January  1,  1997,  Nestor,  Inc.  formed  two  wholly  owned
subsidiaries:  Nestor Intelligent Sensors, Inc. (IS)  and  Nestor
Interactive,  Inc. (Interactive).  IS develops  and  markets  the
TrafficVision  and  Ni1000  product lines  while  Interactive  is
developing InterSite, an internet commerce solution.


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 PRISM(R),
provide  remote traffic management of freeways and  intersections
TrafficVision(R),  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  Server
Systems  -  are designed to synthesize information from  multiple
data  sources  within  an  organization and  provide  content  to
present  to Web site visitors based on the current state  of  the
visitor's information.  Intersite's purpose is to provide  scores
of  site  visitors which are useful in predicting the  purchasing
behavior of visitors.  Intelligent Character Recognition  Systems
-  include  packages of software applications such as  OmniTools,
NestorReader, and N'Route which increase productivity in document
processing and fax distribution environments.

Fraud Detection and Risk-Assessment Systems

The  Company's  PRISM  product line  includes  the  Nestor  Fraud
Detection  System(FDS) and the flagship product,  Proactive  Risk
Management  (PRISM)  system  which  have  been  licensed  to  ten
financial-services  clients  as  of  December  31,  1997.   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 PRISM.  PRISM  enhances
the  fraud-detection  capabilities of  FDS  to  include  workflow
management  and  other  PC-based  productivity  tools  that   are
designed  to enable the fraud manager and fraud-control  team  to
efficiently  identify and track frauds detected  by  the  system.
The  initial  PRISM system was an FDS installed at  G.E.  Capital
Consumer  Financial Services, which was upgraded  to  incorporate
PRISM in 1995.

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

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

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

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

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

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

Flexible   client-server  and  operating   solutions.    Nestor's
solutions   can   be   integrated  into  a  customer's   existing
environment  or architecture.  The Company's products  are  based
upon  a  distributed  client-server  architecture  consisting  of
operating  components that operate on a wide  range  of  industry
standard,  client-server platforms, including the IBM,  MVS/CICS,
Tandem's proprietary, fault tolerant Non Stop Kernel (NSK),  UNIX
and  Windows  NT operating platforms.  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  executed  a  non-
exclusive 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  April  18,  1997, the Company  expanded  its  non-
exclusive  license  agreement with Applied  Communications,  Inc.
(ACI),  a subsidiary of Transaction Systems Architects,  Inc.  by
allowing  ACI  to distribute the newly developed  PRISM  products
(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.  The  Company  began  a
Phase II contract for field testing of the prototype in 1997  and
expects to complete this work in the second quarter of 1998.

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

The 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 ZISC(TM) Chip

Neural  networks are inherently parallel systems whose operation,
until recently, has only been simulated on serial computers.  The
relative slowness of serial simulation has prohibited the use  of
neural networks in many high-value applications that require high-
speed   learning   and   recognition.   The  Ni1000   Recognition
Accelerator(TM) 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").

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 ZISC Chip

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

Internet Web Server Systems

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

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

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

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

The 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  in  early
1998.   These installations will become the references  for  full
product-rollout in mid 1998.

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 System Services, 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  1997, ACI and Europay accounted for 39% and  16%  of  the
Company's  revenues, respectively.  During the six  months  ended
December  31,  1996, the Jet Propulsion Laboratory,  GE  Consumer
Credit  Financial  Services, BankOne, Mellon  Bank  and  Customer
Services, Inc. accounted for 19%, 18%, 15%, 13% and 11%,  of  the
Company's  revenues  respectively.   In  fiscal  1996,   National
Computer Systems and Europay International accounted for 30%  and
13%  of  the  Company's revenues, respectively.  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,  1997, the Company had a backlog  of  approximately
$248,000  in  undelivered development and installation  contracts
and  $259,000  in prepaid royalties.  At December 31,  1996,  the
Company had a backlog of $209,000 in undelivered development  and
installation contracts and $582,000 in prepaid royalties.  As  of
June  30,  1996,  the  Company  had  a  backlog  of  $408,000  in
undelivered  development and installation contracts and  $431,000
of  prepaid royalties and fees.  As of June 30, 1995, the Company
had   a  backlog  of  $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 year ended December 31, 1997, in the
six months ended December 31, 1996, and in the fiscal years ended
June  30,  1996  and  1995, respectively,  $1,498,000,  $294,000,
$823,000  and  $2,093,000 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,  1997.  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 eight 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 2014.  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

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

</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,  1997, the Company  had  43  full-time
employees, including 28  in product development, 8  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 System Services, Inc.

During  the  six month period ended December 31,  1996,  the
Company designed and installed a fraud detection system  for
Total  System  Services, Inc. (Total), a major  provider  of
card  processing services for financial institutions.  Total
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 1998.

Applied Communications, Inc. (ACI)

On  April  18,  1997, the Company expanded its non-exclusive
license agreement with ACI.  The expanded license grants  to
ACI  the  right  to integrate and distribute throughout  the
world all of the PRISM products.  ACI provides authorization
and   transaction  processing  software  to  more  than  500
customers  throughout the world.  The Company  will  receive
royalties  based on PRISM 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 were recognized as revenues in Fiscal 1996.



IBM ZISC

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 began a
Phase II contract for field testing of the prototype in 1997
and  expects to complete this work in the second quarter  of
1998.

The  total  value of the expanded contract is  $730,000,  of
which  $675,000 had been recognized as revenue  by  December
31, 1997.

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,
1997,  CSK  had  installed PRISM at Nippon  Shinpan  Company
(NICOS), a leading credit card issuer in Japan.

Intel Corporation

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

The  Company placed a purchase order in 1997 and expects  to
take  delivery of the order in several increments  with  the
last delivery scheduled for after December 1999.  Given  the
number  of chips the Company has in inventory together  with
the  chips it has ordered, management does not believe there
will  be  a material adverse impact on its operations  as  a
result  of  the  termination of  the  manufacturing  of  the
current version of the Ni1000 chips.




ITEM 2.   Properties.

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


ITEM 3.   Legal Proceedings.

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  fourth quarter of the year ended  December  31,
1997.


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

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


                                   Low Bid   High Ask

Year Ended December 31, 1997
     1st Quarter                   1-21/32   2-9/16
     2nd  Quarter                  1-3/4     2-9/16
     3rd  Quarter                  1-1/4     2-9/32
     4th  Quarter                  1-1/4     3-1/16

Period Ended 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 25, 1998, the number of holders of record of the
issued and outstanding common stock of the Company was 399.

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
                     Year Ended       Ended
                    December 31,  December 31,                 Years Ended June 30,
                        1996          1996         1995         1994         1993          1992

<S>                 <C>            <C>         <C>          <C>          <C>           <C>
Operating
revenue             $5,681,076     $1,195,904  $5,461,580   $ 3,195,563  $ 2,230,474   $ 1,849,104
Other income
 (expense)          $    31,321    $ (16,220)  $    39,950  $ (221,024)  $  (282,418)  $   (27,459)
Net income
 (loss)             $ (294,664)    $(935,337)  $    12,690  $(3,457,422) $(1,758,584)  $(1,613,565)
Earnings per share
   Weighted
   number of
   outstanding
   shares             9,243,508     8,689,031    7,847,510    7,411,502     6,840,407    6,801,929
  (Loss)
   per share        $     (0.08)   $     (.13) $      (.03) $      (.48) $       (.26) $      (.22)

SELECTED BALANCE SHEET DATA:
Total assets        $ 2,613,031    $2,817,944  $ 3,351,871  $ 1,812,495  $  1,096,314  $   935,337
Working
 capital            $   146,081    $  879,172  $ 1,983,661  $(1,882,875) $    220,243  $   131,827
Long-term
  Redeemable
   Preferred
   Stock            $ 5,792,787    $5,398,908  $ 5,207,538  $ 1,600,328  $        ---  $       ---
   Capital
   leases           $    10,220    $    9,455  $     9,455  $       ---  $      3,363  $     5,413
   Deferred
   income           $       ---    $  430,899  $   430,899  $   438,896  $    954,491  $   954,491

Prior period Selected Financial Data has been reclassified to conform to 1997
classifications.
</TABLE>



ITEM 7:   Management's Discussion and Analysis

Prospective Statements

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

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

Liquidity and Capital Resources

Cash Position and Working Capital

The   Company   had  cash  and  short-term  investments   of
approximately  $387,000 at December 31,  1997,  as  compared
with  $774,000 at December 31, 1996.  At December 31,  1997,
the  Company  had working capital of $146,000,  as  compared
with $879,000 at December 31, 1996.  The decrease in working
capital  from 1996 to 1997 reflects primarily the  loss  for
the  period and the investment in deferred development costs
reduced by the proceeds from the sale of common stock.

The  Company  had  a  negative net worth  of  $4,519,000  at
December 31, 1997, as compared with a negative net worth  of
$4,332,000 at December 31, 1996.

Additional capital will be required to enable the Company to
carry  out needed marketing campaigns for its products,  for
continued development and upgrading of its present products,
and  for  customer support.  On March 25, 1998, the  Company
entered  into  a  $1,500,000 Line of Credit  agreement  with
Transaction  Systems  Architect,  Inc.  ("TSAI")   The  loan
matures  one year from the date of execution and is  secured
by  the  royalty  stream produced by the  Company's  License
Agreement with Applied Communications, Inc., a subsidiary of
TSAI.  Interest on the loan is equal to the prime rate.

Management   believes  that  the  Company's  revenues   will
generate sufficient liquidity, when combined with its liquid
assets  as  of December 31, 1997 and the financing described
above,  to  meet the Company's anticipated cash requirements
through  the end of the year ending December 31,  1998.   If
the Company does not realize revenues sufficient to maintain
its  operations  at  the current level,  management  of  the
Company  would  curtail certain of the Company's  operations
until  additional funds become available through  investment
or revenues.

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.
Total deferred income was $408,000 at December 31, 1997,  as
compared with $769,000 at December 31, 1996.

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

Future Commitments

During  the  year  ended  December  31,  1997,  the  Company
acquired   additional  property  and  equipment   (primarily
computers and related equipment) at a cost of $88,000.   The
Company  valued  its  investments in computers  and  related
equipment (net of depreciation) at $261,000 at December  31,
1997.   The Company has no material commitments for  capital
expenditures  although management expects that  the  Company
may  make  future commitments for the purchase of additional
computers and related computing equipment, for furniture and
fixtures,  for  development of hardware, for consulting  and
for promotional and marketing expenses.

The  Company  has  placed purchase orders totaling  $877,500
with   Intel   Corporation  for  a  supply  of  the   Ni1000
Recognition Accelerator Chips.  The Company expects to  take
delivery  of  $195,000  of the chips during  1998;  $292,500
after December 1998; and $390,000 after December 1999.

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

Year 2000 Issue

The Year 2000 Issue is the result of computer programs being
written  using  two digits rather than four  to  define  the
applicable  year.   Any computer programs  that  have  time-
sensitive  software may recognize a date using "00"  as  the
year 1900 rather than the year 2000.  This could result in a
system  failure  or miscalculations causing  disruptions  of
operations,  including,  among  other  things,  a  temporary
inability to process transactions, send invoices, or  engage
in similar normal business activities.

The  Company  believes  it  has no significant  exposure  to
contingencies related to the Year 2000 Issue for either  the
products it has sold or the software used internally.

The Company will commence a formal communication program  in
1998 with its large customers and financial institutions  to
determine  the  extent  to  which  the  Company's  interface
systems  are vulnerable to those third parties'  failure  to
remediate their own Year 2000 Issues.  There is no guarantee
that  the  systems of other companies on which the Company's
systems rely will be timely converted and would not have  an
adverse effect on the Company's systems.

Inflation

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


Results of Operations

Analysis of the Years Ended December 31, 1997 and 1996

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

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

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 had  not  been
finalized,  the Company accounted for the development  costs
in  accordance with SOP 81-1, "Accounting for Performance of
Construction-Type  and  Certain Production-Type  Contracts,"
which provides that costs be deferred until delivery is made
under  the terms of an enforceable agreement.  For the  year
ended  December 31, 1996, the Company deferred  $364,000  of
costs associated with this project.

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

Revenues

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

   Total          Total                Total Revenues
  Revenues       Revenues                Year Ended
 Year Ended     Year Ended             Dec. 31, 1996
Dec. 31,1997  Dec. 31, 1996   Change   Excluding ICR   Change

 $5,681,000     $4,508,000     +26%      $2,409,000    +136%

The Company's revenues arise from licensing of the Company's
products and technology, from the sale of tangible products,
and  from  contract engineering services and  are  discussed
separately below.  During the year ended December 31,  1997,
revenues  increased $1,173,000 to $5,681,000 from $4,508,000
in  the  prior  calendar year.  Revenues in the year-earlier
period  included $2,099,000 of revenues associated with  the
ICR  products that were licensed exclusively to NCS in  June
1996.

Software Licensing

Product-licensing revenues totaled $4,390,000  in  1997,  as
compared  with  $2,450,000 in 1996.  The increase  in  these
revenues  reflects the net of an increase  in  license  fees
realized  from  the  PRISM  products  and  the  decrease  in
licensing revenues from the ICR products transferred to NCS.

PRISM licensing revenues amounted to $4,263,000 in 1997,  an
increase   of  $3,847,000  from  year-earlier  revenues   of
$416,000.  The increase in PRISM-related licensing  revenues
results  from  an  increase  in  unit  volume  through   the
Company's  resellers, Applied Communications, Inc.  ("ACI"),
Europay International, S.A., and CSK Corporation ("CSK").

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

Engineering Services

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

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

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

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

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

Sales of Tangible Products

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

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

Operating Expenses

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

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

Engineering Services

Costs related to engineering services totaled $1,151,000  in
1997, as compared with $1,927,000 in 1996.  The decrease  in
these  costs  reflects  the decrease in engineering-services
revenues.   As  a  percentage of such revenues,  engineering
costs  totaled 109% of related revenues in 1997, as compared
with  101%  of similar revenues in the year-earlier  period.
Management  expects that engineering costs, as a percent  of
engineering revenues, will remain high in 1998 as two of the
Company's   product  groups  make  initial   deliveries   to
customers requiring higher engineering support.

Research and Development

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

Selling and Marketing

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

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

General and Administrative

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

Other Income (Expense)

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

Investment in Product Development and Marketing

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

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

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

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


Net Income

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


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

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

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

Revenues

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

                                           Total
                                          Revenues
   Total          Total                  Six-Month
  Revenues       Revenues               Period Ended
 Six-Month      Six-Month              Dec. 31, 1995
Period Ended   Period Ended              Excluding
Dec. 31, 1996 Dec. 31, 1995   Change        ICR       Change

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


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

Software Licensing

In the transition period, product-licensing revenues totaled
$526,000,  as  compared with $902,000  in  the  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   $288,000
compared  with the corresponding period of the prior  fiscal
year.

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

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

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

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

Sales of Tangible Products

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

Operating Expenses

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

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

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

Engineering Services

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

Research and Development

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

Selling and Marketing

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

General and Administrative

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

Expenditures on Product Development and Marketing

Revenues  relating  to the Company's PRISM  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.

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 and 1995

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's
agreement  with NCS provides for  royalties on future  sales
of  the  products  by  NCS.   Minimum  annual  royalties  to
maintain  exclusive rights range from $160,000 in  the  year
ending  June 30, 1997, to $350,000 in the years ending  June
30, 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.

Software Licensing

The  Company's  software licensing revenues in  fiscal  1996
were  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.   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 did not receive ICR licensing fees but
instead received royalties from NCS on the sales of the  ICR
products by NCS under the Licensing Agreement signed in June
1996.   The  minimum  annual royalty for the  license  year-
ending June 1997 was $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.
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.   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.

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.

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 prior year.

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.

Expenses  in  fiscal  1995 reflect the  reclassification  of
$210,500   to  "Other  income  (expense)".   These   amounts
represent non-cash charges relating to the issuance of stock
or 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  are  no  longer
incurred  by  the  Company as NCS hired most  of  the  staff
assigned  to  development, sales, and  support  of  the  ICR
products.

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  were  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.  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.  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.

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 prior year.   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 1996, as compared to $665,000  in
the  prior  year.  The increase of these costs reflects  the
increase in engineering services revenues.

The Company's expenditures for research and development were
$823,000 in fiscal 1996 and $2,093,000 in fiscal 1995.

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  $2,661,000 in the preceding  year.   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.
Related consulting decreased to $69,000 in fiscal 1996  from
$195,000 in 1995.

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.

General  and  administrative expenses totaled $1,035,000  in
fiscal  1996,  as  compared with $997,000 in  the  preceding
year.   As  noted above, general and administrative expenses
in  fiscal 1995 reflect the reclassification of $210,500  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.

Investment in Product Development and Marketing

The  largest  investment made by the Company in fiscal  1996
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 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  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, and Europay
International  (an association of 700 banks in  Europe)  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.  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.  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.
                            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, 1998

     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, 1998
                      and Director

/s/Charles Elbaum     Co-Chairman of the Board    March 31, 1998
                      and Director

/s/David L. Fox       President, Chief Executive  March 31, 1998
                      Officer and Director

/s/Herbert S. Meeker  Secretary and Director      March 31, 1998

/s/Sam Albert         Director                    March 31, 1998

/s/Jeffrey Harvey     Director                    March 31, 1998

/s/Thomas F. Hill     Director                    March 31, 1998

/s/Bruce Schnitzer    Director                    March 31, 1998












               CONSOLIDATED FINANCIAL STATEMENTS




                            FORM 10-K




                       December 31, 1997



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

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

In  our  opinion,  the  financial statements  referred  to  above
present  fairly,  in  all  material  respects,  the  consolidated
financial position of Nestor, Inc. at December 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows
for  the year ended December 31, 1997 and the period July 1, 1996
to  December  31,  1996,  in conformity with  generally  accepted
accounting  principles.   Also,  in  our  opinion,  the   related
financial statement schedules, 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 26, 1998




                  INDEPENDENT AUDITOR'S REPORT

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

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

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

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


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





Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                            December 31,
          ASSETS                        1997            1996
<S>                                         <C>              <C>
Current assets:
 Cash and cash equivalents          $   386,639     $    774,457
 Accounts receivable,
   net of allowance
   for doubtful accounts                557,212        1,009,149
 Unbilled contract revenue              298,803          126,945
 Other current assets                   232,492          276,615
   Total current assets               1,475,146        2,187,166
Property and equipment at cost -
 net of accumulated depreciation        261,463          255,590
Deferred development costs              574,752          364,405
Intangible assets - net of
 accumulated amortization               295,887              ---
Other assets                              5,783           10,783
Total Assets                        $ 2,613,031     $  2,817,944


LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
 Accounts payable and
   accrued expenses                 $   906,494     $    670,742
 Other current liabilities               14,339          298,848
 Deferred income                        408,232          338,404
   Total current liabilities          1,329,065        1,307,994

Noncurrent liabilities:
 Long term obligations under
   capital leases                        10,220           12,212
   Total liabilities                  1,339,285        1,320,206
 Long term portion of
   deferred income                          ---          430,899
 Series E, F, G and H redeemable
   convertible preferred stock
   4,846 shares at
   December 31, 1997 and 1996
   (liquidation value $1,000 per
   share plus accrued dividends)      5,792,787        5,398,908

 Commitments and contingencies              ---              ---

Stockholders' deficit:
 Preferred stock, $1.00 par value,
   authorized 10,000,000 shares;
   issued and outstanding:
   Series A - 0 shares at
   December 31, 1997 and
   452,064 shares at
   December 31, 1996                        ---          452,064
   Series B - 1,445,000 shares at
   December 31, 1997 and
   1,635,000 shares at
   December 31, 1996                  1,445,000        1,635,000
   Series D - 170,871 shares at
   December 31, 1997 and
   179,671 shares at
   December 31, 1996                    265,347          279,230
 Common stock, $.01 par value,
   authorized 30,000,000 shares;
   issued and outstanding:
   9,403,987 shares at
   December 31, 1997 and
   8,916,141 shares at
   December 31, 1996                     94,040           89,161
 Warrants and options                   523,984          417,500
 Additional paid-in capital          12,579,920       11,927,644
 Retained (deficit)                 (19,427,332)     (19,132,668)
   Total stockholders' deficit       (4,519,041)      (4,332,069)

Total Liabilities and
Stockholders' Deficit               $ 2,613,031     $  2,817,944

</TABLE>




Consolidated Statements of Operations
<TABLE>
<CAPTION>

                               Six
                  Year        Months
                 Ended         Ended      Years Ended June 30
                12/31/97     12/31/96      1996          1995

<S>                 <C>         <C>          <C>          <C>
Revenue:

 Software licensing $4,390,479  $    526,353 $ 2,825,600  $ 1,713,897

 Engineering
  services           1,055,459       605,776   2,378,135    1,195,201

 Tangible product
  sales                235,138        63,775     257,845      286,465

  Total revenue      5,681,076     1,195,904   5,461,580    3,195,563


Operating Expenses:

 Engineering
  services           1,151,147       922,325   1,833,531      665,421

 Tangible product
  sales                134,305         8,978      32,189       13,838

 Research and
  development        1,498,181       294,136     823,000    2,093,616

 Selling and
  marketing          1,986,340       457,281   1,764,585    2,661,453

 General and
  administrative     1,207,088       432,301   1,035,535      997,633

  Total operating
  expenses           5,977,061     2,115,021   5,488,840    6,431,961


Loss from operations  (295,985)     (919,117)    (27,260)  (3,236,398)

Other income
  (expense) - net       31,321       (16,220)     39,950     (221,024)

Income (loss)
  before income
  taxes               (264,664)     (935,337)     12,690   (3,457,422)

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

Net Income (Loss)    $ (294,664)  $  (935,337) $   12,690  $(3,457,422)


Loss Per Share:
Net Income (Loss)    $ (294,664)  $  (935,337) $   12,690  $(3,457,422)

Dividends accrued
 on preferred stock     447,191       201,094     261,210      100,328

Net Loss Available
 for Common Stock   $  (741,855)  $(1,136,431) $ (248,520) $(3,557,750)

Loss Per Share:
 Basic and diluted  $     (0.08)  $     (0.13) $    (0.03) $     (0.48)

Shares Used in
Computing
Loss Per Share:
 Basic and diluted    9,243,508     8,689,031   7,847,510    7,411,502

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




Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                            Six
                                Year       Months
                               Ended       Ended          Year Ended
                              Dec. 31     Dec. 31          June 30
                                1997        1996        1996        1995
<S>                        <C>          <C>         <C>         <C>
Cash flows from
operating activities:
Net income (loss)          $(294,664)   $(935,337)  $  12,690   $(3,457,422)
 Adjustments to reconcile
  net income (loss) to
   net cash used by
  operating activities:

  Depreciation and
   amortization               194,311       45,328    104,559       113,562

  Loss on disposal of
   fixed assets                 3,573          ---      4,346           ---

  Expenses charged to
   operations relating
   to options, warrants and
   capital transactions       161,684       42,500    178,375       210,500

  Discount on payment of
   vendor obligation         (100,000)         ---        ---           ---

  Changes in assets and
   liabilities:
  (Increase) decrease  in
   accounts receivable        451,937     (414,839)     67,424     (340,651)
  (Increase) decrease in
   unbilled contract
   revenue                   (171,858)     155,991     (74,584)     (87,674)
  (Increase) in deferred
   development costs         (210,347)    (364,405)        ---          ---
  (Increase) decrease in
   other assets                41,635      (45,877)    (99,025)    (115,721)
  (Decrease) increase in
   accounts payable,
   accrued expenses and
   other liabilities          (63,845)     (83,593)   (568,309)     786,010
  (Decrease) increase in
   deferred income          ( 361,071)     252,300         796      (15,630)

  Net cash used by
   operating activities      (348,645)  (1,347,932)   (373,728)  (2,907,026)

Cash flows from
investing activities:
Purchase of property
 and equipment                (88,622)     (71,390)    (57,531)    (249,319)

Proceeds from the
 disposal of
 fixed assets                     ---          ---      85,000          ---

  Net cash provided
   (used) by
   investing activities       (88,622)     (71,390)     27,469     (249,319)

Cash flows from
financing activities:
Repayment of obligations
 under capital leases         (11,913)      (5,338)     (7,924)     (10,796)

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

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

Proceeds from issuance
 of common stock               96,975      185,800      99,510       73,288

Proceeds from issuance
 of preferred stock - net         ---          ---   1,651,823    1,470,000

Payments of dividends
 on preferred stock           (35,613)         ---         ---          ---

  Net cash provided
   by financing activities     49,449      180,462   1,906,988    3,192,723

Net change in cash and
 cash equivalents            (387,818)  (1,238,860)  1,560,729       36,378

Cash and cash equivalents -
 beginning of period          774,457    2,013,317     452,588      416,210

Cash and cash equivalents -
 end of period              $ 386,639   $  774,457  $2,013,317  $   452,588

Supplemental cash flows
information:
Interest paid              $    3,598   $    3,227  $    4,372   $    3,728

Income taxes paid          $      ---   $      ---  $      ---   $      ---

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


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)             ---          ---            ---
Accretion of value
 of warrants                ---       ---           ---          ---            ---              ---       42,500         42,500
Dividends accrued
 on Redeemable
 Convertible
 Preferred Stock            ---       ---           ---          ---       (191,371)             ---          ---       (191,371)
(Loss) for the
 six months ended
 December 31, 1996          ---       ---           ---          ---            ---         (935,337)         ---       (935,337)

Balance at
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)

Issuance of
 Common Stock           279,592     2,796           ---          ---        472,769              ---          ---        475,565
Conversion of
 Preferred Stock
 to Common Stock        198,800     1,988      (198,800)    (203,200)       201,212              ---          ---            ---
Dividends on
 Preferred Stock
 Series D paid in
 Common Stock
 and cash                 9,454        95            ---     (18,381)        18,222              ---          ---            (64)
Repurchase of
 Preferred Stock
 Series A                   ---       ---       (452,064)   (452,064)       352,063              ---          ---        (100,001)
Dividend accrued on
 Preferred Stock
 Series D                   ---       ---            ---      17,698        (17,698)             ---          ---             ---
Dividends accrued
 on Redeemable
 Convertible
 Preferred Stock            ---       ---            ---         ---       (429,492)             ---          ---        (429,492)
Issuance of non-
 qualified options          ---       ---            ---         ---         55,200              ---          ---          55,200
Accretion of value
 of warrants                ---       ---            ---         ---            ---              ---      106,484         106,484
(Loss) for the
 year ended
 December 31, 1997          ---       ---            ---         ---            ---         (294,664)         ---        (294,664)
Balance at
 December 31, 1997    9,403,987  $ 94,040      1,615,871  $1,710,347    $12,579,920     $(19,427,332)    $523,984     $(4,519,041)



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

</TABLE>




NOTES TO THE FINANCIAL STATEMENTS

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

                  The    accompanying   financial   statements   include    the
          accounts    of    Nestor,    Inc.,   Nestor    IS,    Inc.    ("IS"),
          Nestor     Interactive,    Inc.    ("Interactive"),    and     Nestor
          Financial   Services   Group,   a   joint   venture   (organized   in
          December,    1986,    and    dissolved   effective    December    31,
          1995.    IS   and   Interactive   are   wholly   owned   subsidiaries
          formed    January    1,   1997.    All   intercompany    transactions
          and balances have been eliminated.

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

                    Patent-development     costs      are      expensed      or
          capitalized,       as       appropriate.        Amortization       of
          capitalized    costs    would   be   on   a    straight-line    basis
          over    the   shorter   of   the   estimated   economic   life,    or
          statutory   life,   of   the   patent.    At   December   31,    1997
          and    1996,    there    were   no   capitalized   patent-development
          costs.

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

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

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

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

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

                    b)      Engineering    contract    revenue    from    long-
            and    short-term    contracts   and   from    modeling    services
            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    warrants   and   options   issued   at   an   exercise   price
          below   fair   market   value,  the  Company   records   an   expense
          equal   to   the   difference  between  the  market  value   of   the
          underlying    shares    of   Common   Stock    and    the    exercise
          price    of   such   options   or   warrants.    When   the   Company
          induces    warrant   or   option   holders   to   exercise    at    a
          price    lower    than    the   original    exercise    price,    the
          Company   recognizes   an   expense   equal   to   the   fair   value
          of   the   securities   issued  less  the   proceeds   received   for
          the   securities,   but   not  more  than  the   reduction   in   the
          exercise price.

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

          H.   Inventory
                  Inventory,   consisting   primarily   of   finished    goods,
          is   valued   at  the  lower  of  cost  or  market  on   the   first-
          in,     first-out    basis.     Inventories    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,   1997
          presentation,    certain    balances   at    December    31,    1996,
          have been reclassified.


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

                               Year-Ended    Six Months Ended
                             Dec. 31, 1996    Dec. 31, 1995
                              (Unaudited)      (Unaudited)

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


Note 3 -  Income (loss) per share:
          The    Company    has   adopted   on   December   31,    1997,    the
          provisions    of    the   Financial   Accounting   Standards    Board
          Statement    No.    128,    Earnings   Per   Share    ("FAS    128").
          Pursuant    to    this   Statement,   the   Company   has    replaced
          the    reporting   of   "primary"   earnings   per   share    ("EPS")
          with   "basic"   EPS.    Basic   EPS  is   calculated   by   dividing
          the    income    available   to   common    stockholders    by    the
          weighted    average    number    of   common    shares    outstanding
          for    the   period,   without   consideration   for   common   stock
          equivalents.    "Fully   diluted"   EPS   has   been   replaced    by
          "diluted"    EPS.    Diluted   EPS   is   computed    similarly    to
          fully    diluted   EPS   under   the   provision   of   APB   Opinion
          No.   15.    There   was  no  effect  on  current   or   prior   year
          EPS computations from the adoption of FAS 128.


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

                                             December 31,
                                         1997           1996

          Trade accounts receivable   $  711,766    $ 1,154,384
          Allowance for doubtful
          accounts                      (154,554)      (145,235)
          Accounts receivable,
          net of allowance
          for doubtful accounts       $  557,212    $ 1,009,149


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

          During    the   quarter   ended   March   31,   1997,   the   Company
          recorded   a   sale   in   the   amount  of  approximately   $550,000
          based    upon    its   delivery   of   a   PRISM   fraud    detection
          system   for   a   customer.   As  a  result   of   new   information
          (much   of   which   was   learned  by   management   subsequent   to
          December    31,   1997   when   it   was   evaluating   the    fourth
          quarter,   1997,   performance   of   the   product)   as   to    the
          customer's    intention    to    delay   implementation    management
          has   re-evaluated   its   decision   to   recognize   the   revenues
          on   this   contract   and   reversed   the   record   revenue.    In
          addition,   the   Company   has   deferred   the   associated   costs
          and    will   amortize   those   costs   against   future   revenues,
          as     earned.      This     change,    which    reduced     recorded
          revenues     and     costs    by    approximately    $550,000     and
          $575,000,    respectively,   had   an   insignificant    effect    on
          net loss per share.


Note 6 -  Property and equipment at cost - net:
<TABLE>
<CAPTION>
                                                    Useful Life
                                                    in Years or
                                December 31,         Lease Term
                             1997         1996

 <S>                      <C>           <C>           <C>
 Leasehold improvements   $   22,945    $   22,945   Lease Term
 Office furniture and
  equipment                  199,254       199,254     5 - 7
 Computer equipment        1,285,643     1,184,981     3 - 5
                           1,507,842    $1,407,180

 Less:  Accumulated
  depreciation and
  amortization             1,246,379     1,151,590
                          $  261,463    $  255,590
</TABLE>

          Depreciation    and    amortization    expense    on    the     above
          assets   of   $95,682,   $45,327,   $104,559,   and   $100,229    was
          recorded   for   the   year  ended  December  31,   1997,   for   the
          six   months   ended   December  31,  1996,   and   for   the   years
          ended June 30, 1996 and 1995, respectively.


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


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

<TABLE>
<CAPTION>
                                     December 31,
                                  1997         1996
       <S>                     <C>          <C>
       Trade accounts payable  $ 316,670    $231,395
       Accrued salaries          333,046     185,842
       Other accrued expenses    256,778     253,505

                                $906,494    $670,742
</TABLE>

Note 9 -  Line of credit:
          On   July   29,   1997   Nestor,  Inc.  entered   into   a   $200,000
          Revolving    Line   of   Credit   with   a   bank.    The    interest
          rate   is   equal  to  the  prime  rate  plus  1.5%,  and  the   Line
          expires   on   July   1,  1998.   The  loan   is   secured   by   the
          tangible   assets   of   Nestor,  Inc.    There   were   no   amounts
          outstanding   at   December   31,   1997.    In   March   1998,   the
          Line    of    Credit    was   increased   to   $500,000    and    the
          expiration date was extended to September 1, 1998.


Note 10 - 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,
                                          1997           1996
       <S>                            <C>           <C>
       Series E, par value $1.00
       per  share, 1,444  shares
       outstanding  at  December
       31,    1997   and   1996.
       $305,577 and $189,226  of
       accumulated dividends  at
       December  31,  1997   and
       1996, respectively.            $ 1,749,577   $1,633,226

       Series F, par value $1.00
       per   share,  599  shares
       outstanding  at  December
       31,    1997   and   1996.
       $95,821  and  $51,313  of
       accumulated dividends  at
       December  31,  1997   and
       1996, respectively.                694,821      650,313

       Series G, par value $1.00
       per   share,  777  shares
       outstanding  at  December
       31,    1997   and   1996.
       $116,650  and $46,875  of
       accumulated dividends  at
       December  31,  1997   and
       1996, respectively.                893,650      823,875

       Series H, par value $1.00
       per  share, 2,026  shares
       outstanding  at  December
       31,    1997   and   1996.
       $428,739 and $265,494  of
       accumulated dividends  at
       December  31,  1997   and
       1996, respectively.              2,454,739    2,291,494

       TOTAL                          $ 5,792,787   $5,398,908

</TABLE>


          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
          $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 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 quarterly  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 ended on  September
          30,  1997.  While no dividends were payable during  the
          Restricted Period, they accrued and accumulated  during
          the  Restricted Period.  The Company paid  on  December
          31,  1997  for  the quarter then ended, cash  dividends
          totaling $35,613 on the Series F and G Preferred Stock.

          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; and (ii) rank prior  to  the
          Series B Preferred Stock, 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 quarterly 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 11 - Convertible Preferred stock:
          In  June 1997 the Company repurchased from Sligos  S.A.
          all of the outstanding shares of the Series A Preferred
          Stock.   See Note 19, Termination of License Agreement.
          Series  A  Preferred Stock was convertible at any  time
          into  one fully paid and non-assessable share of Common
          Stock.  Series A Preferred had the same dividend rights
          as shares of Common Stock but carried no voting rights.
          Each  share  of  Series A Preferred had  the  right  to
          receive  in  liquidation $2.00 before any  distribution
          was made on Common Stock or on any other class of stock
          ranking  junior to Series A.  The liquidation value  of
          Series A Preferred was $0 and $904,128 at December  31,
          1997 and 1996, respectively.

          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 $1,445,000,
          and   $1,635,000,  at  December  31,  1997  and   1996,
          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
          on  a  share-for-share basis.  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,  1997  and 1996, the Company  paid  stock
          dividends  on  the Series D Preferred totaling  $18,381
          and  $13,548, respectively.  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  $265,347
          and   $279,230   at  December  31,   1997   and   1996,
          respectively.

          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  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  have
          the  same voting rights on a share-for-share basis,  as
          the holders of the Common Stock.


Note 12 - Options and warrants:

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

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

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

          The  following  table  presents  the  activity  of  the
          Company's Stock Option Plan for the year ended December
          31,  1997, for the six months ended December  31,  1996
          and for the fiscal years ended June 30, 1996 and 1995:

<TABLE>
<CAPTION>
                              Six Months
               Yr. Ended        Ended                 Year Ended 6/30,
                12/31/97       12/31/96               1996          1995

                   Weighted         Weighted         Weighted        Weighted
                   Av. Ex.          Av. Ex.          Av. Ex.         Av. Ex.
             Shares Price   Shares   Price    Share   Price    Shares Price
<S>         <C>       <C>   <C>       <C>    <C>        <C>   <C>       <C>
Outstanding
beginning
of year    1,781,500  1.50  1,356,000 1.03   1,399,000  1.80 1,141,000  1.90
Granted      484,000  1.81    612,000 2.38   1,406,000  1.04   348,000  1.60
Exercised     46,875  1.00    186,500 0.98     100,500  1.09    13,875  1.52
Canceled       4,625  1.67        ------     1,348,500  1.83    76,125  2.43
Outstanding
end of year2,214,000  1.58  1,781,500 1.50   1,356,000  1.03 1,399,000  1.80

Options
exercisable
at year end1,470,250  1.39  1,101,875 1.22   1,023,500  1.00   950,375  1.88

Weighted
average fair
value of
options
granted
during
the year    $    1.44
</TABLE>


          The   following  table presents weighted average  price
          and  life  information about significant option  groups
          outstanding at December 31, 1997.

<TABLE>
<CAPTION>
                     Options Outstanding        Options Exercisable
                             Weighted
                  Number     Average   Weighted              Weighted
               Outstanding  Remaining  Average     Number    Averaged
    Range of        at     Contractual Exercise ExercisableExercisable
Exercise Prices  12/31/97  Life (Years) Price   at 12/31/97   Price
<S>              <C>           <C>       <C>      <C>        <C>
$ .87 - $1.00    1,034,000     2.69      $0.99    976,250    $0.99
$1.50 - $2.00      405,500     4.48       1.59    125,500     1.60
$2.14 - $2.44      707,500     3.73       2.30    335,000     2.31
$2.81 - $2.94       67,000     3.77       2.86     33,500     2.86
                 2,214,000     3.38      $1.58  1,470,250    $1.39
</TABLE>

          The  following are the pro forma net loss and net  loss
          per share for the year ended December 31, 1997, for the
          six  months ended December 31, 1996, and for  the  year
          ended  June 30, 1996, as if the compensation  cost  for
          the  option plan had been determined based on the  fair
          value at the grant date for grants in those periods and
          reflected in the financial statements:

<TABLE>
<CAPTION>
                Year Ended          Six Months Ended         Year Ended
            December 31, 1997      December 31, 1997       June 30, 1996
               As        Pro          As       Pro           As       Pro
            Reported    Forma      Reported   Forma       Reported   Forma
<S>       <C>        <C>         <C>        <C>           <C>      <C>
Net income
 (loss)   $(294,664) $(876,280)  $(935,337) $(1,277,841)  $ 12,690 $(633,262)
Net (loss)
 per
 share    $   (0.08) $   (0.14)  $   (0.13) $     (0.17)  $ (0.03) $   (0.11)
</TABLE>

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

          The fair value of each option grant was estimated using
          the  Black-Scholes model with risk-free interest  rates
          on  the  date of grant 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
          .815 and the expected life of the options was estimated
          as five years.

          The  Company,  at  the  discretion  of  the  Board   of
          Directors,  has  granted warrants from  time  to  time,
          generally  in  conjunction with the sale  of  equities.
          The following table presents warrants outstanding:
<TABLE>
<CAPTION>
                              Dec. 31, 1997     Dec. 31, 1996
<S>                             <C>               <C>
Officers                               ---            10,000
Others                           2,709,089         2,826,239

Eligible, End of Year
for Exercise
 Currently (at prices
 ranging from $.65 to $4.62
 per share)                      2,709,089         2,836,239

Warrants issued                        ---               ---
 Low exercise price             $      ---        $      ---
 High exercise price            $      ---        $      ---
</TABLE>

          Of  the  warrants  outstanding at  December  31,  1997,
          210,050 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, 1997,  are
          currently  exercisable  and  expire  at  various  dates
          through October 5, 2005.

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

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


Note 13 - Major customers:
          In  the  year  ended December 31, 1997,  two  customers
          accounted  for  39% and 16% of the Company's  revenues.
          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,   who
          accounted  for  16%  of  the Company's  1997  revenues,
          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.


Note 14 - 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>
             Year Ended    Six Months      Year Ended June 30,
              12/31/97      12/31/96        1996          1995
<S>        <C>            <C>          <C>           <C>
France     $   480,899    $  30,000    $    65,085   $    98,785
Belgium        903,662       42,000        727,375       507,900
Germany            ---          ---        173,877        81,649
Japan          531,590       14,094         36,424         2,100
Canada         223,000          ---         41,710        27,985
Singapore          ---          ---         65,530        65,315
All other
 countries     150,100       24,760        279,798       289,501
           $ 2,289,251    $ 110,854    $ 1,389,799   $ 1,073,235
</TABLE>

Note 15 - Other income (expense) - net:
          Other income (expense) as reflected in the consolidated
          statements of operations consists of the following:
<TABLE>
<CAPTION>
                                 Six Months
                    Year Ended     Ended       Year Ended 6/30
                     12/31/97     12/31/96     1996        1995
<S>                 <C>         <C>        <C>         <C>
Interest expense    $ (3,598)   $ (3,227)  $ (51,574)  $ (34,801)

Expense relating
 to financing
 operations         (106,484)    (42,500)   (131,250)   (210,500)

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

Other - net           141,403      29,507       9,589      24,277

Other Income
 (Expense) - Net    $  31,321   $(16,220)  $   39,950  $(221,024)
</TABLE>

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

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

                               December 31,    December 31,
                                   1997            1996

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

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

          Total Income Taxes    $  30,000         $    ---
[/TABLE]

          Significant  components of the Company's  deferred  tax
          liabilities and assets as of December 31, 1997 and 1996
          are as follows:

<TABLE>
<CAPTION>
                                  December 31,      December 31,
                                      1997              1996
<S>                              <C>                <C>
Deferred tax liabilities:
  Accounts receivable            $        ---       $       ---
  Unbilled contract revenue               ---               ---
  Accrued expenses                     43,000               ---
  Other - net                             ---               ---
Total deferred tax liabilities         43,000               ---

Deferred tax assets:
  Accounts receivable                  62,000            58,000
  Accrued expenses                    205,000           104,000
  Deferred income                      60,000           173,000
  Other - net                             ---             2,000
  Tax credits                          30,000               ---
  Net Operating Loss                6,563,000         6,354,000
Total deferred tax assets           6,920,000         6,691,000

Valuation allowance               (6,877,000)       (6,691,000)
Net deferred tax assets                43,000               ---
Net Deferred Tax Balance         $        ---       $       ---
</TABLE>

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

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

<TABLE>
<CAPTION>
                      Six         Six
                     Months      Months
                     Ended       Ended
                    Dec. 31     Dec. 31    Year Ended June 30,
                      1997        1996      1995        1994
<S>                <C>         <C>        <C>       <C>
Income (Loss)
  Before Taxes     $(294,664)  $(892,000) $ 13,000  $(3,457,000)

Tax at statutory
  rate of 34%      $(101,000)  $(303,000) $  4,000  $(1,176,000)
State income tax
  (net of
  federal benefit)  (19,000)    (53,000)     1,000    (207,000)
Effect of permanent
 differences        (36,000)       3,000     7,000        7,000
Valuation Allowance            186,000    353,000   (12,000)
1,376,000

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

          The  Company  and  its subsidiaries have  available  at
          December  31, 1997, $17,857,000 and $8,267,000  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 17 - Related party transactions:
          Herbert  S.  Meeker, a director of the  Company,  is  a
          partner  in the law firm of Baer, Marks & Upham,  which
          the  Company  uses for legal services.   For  the  year
          ended  December 31, 1997, the six months ended December
          31,  1996,  and for the years ended June 30, 1996,  and
          1995, the Company recorded an expense for Baer, Marks &
          Upham   of   $14,400,  $7,200,  $14,440,  and  $14,440,
          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  Accounts payable and accrued expenses  at
          December  31,  1997, and Other current  liabilities  at
          December  31, 1996 are $4,325 and $8,045, 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 year ended December
          31,  1997, 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 $49,479,
          $25,060, $46,076 and 43,530, respectively.  During 1997
          the Company granted Mr. Schnitzer, as a director of the
          Company,  a non-qualified stock option for a  total  of
          5,000  shares  and  recognized an  expense  of  $6,900.
          Additionally, on December 31, 1997, the Company paid to
          Wand Partners a dividend totaling $35,613 on the Series
          F  and  G  preferred  stock held by Wand.  Included  in
          Accounts  payable and accrued expenses at December  31,
          1997 and Other current liabilities at December 31, 1996
          are  $23,301  and $0, respectively, due Wand  Partners,
          Inc.

          Thomas F. Hill, who became a director of the Company in
          August  1994, is President of Thomas F. Hill,  Inc.,  a
          consulting  firm  that the Company uses  for  marketing
          consulting.  During 1997 the Company granted Mr.  Hill,
          as  a  director  of the Company, a non-qualified  stock
          option  for  a total of 5,000 shares and recognized  an
          expense  of $6,900.  For the year ended June 30,  1995,
          the Company recorded an expense for Hill & Partners  of
          $106,679.

          Thomas  D. Halket, who became an officer of the Company
          in January 1993, is a partner in the law firm of Halket
          &  Pitegoff  LLP,  which the Company  uses  as  outside
          counsel.  For the year ended December 31, 1997, the six
          months ended December 31, 1996, and for the years ended
          June 30, 1996 and 1995, the Company recorded an expense
          for   Halket  &  Pitegoff  LLP  of  $100,961,  $65,425,
          $144,176,  and  $103,326,  respectively.   Included  in
          Accounts  payable and accrued expenses at December  31,
          1997 and Other current liabilities at December 31, 1996
          are $67 and $6,864, respectively, due Halket & Pitegoff
          LLP.

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


Note 18 - 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  $141,742
          until   February  1998,  $195,000  until  March   2001,
          $201,500  until  March 2002, and $208,000  until  March
          2003.   Through  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;  after  February  1998  such  costs   are
          included in the base rent.

          Rent  expense  of  $188,936,  $47,989,  $171,928,   and
          $153,385  was charged to operations for the year  ended
          December  31,  1997, for the six months ended  December
          31,  1996  and for the years ended June 30,  1996,  and
          1995, respectively.

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

          The  Company  has placed purchase orders, including  an
          end-of-life   order,  totaling  $877,500   with   Intel
          Corporation  for  a  supply of the  Ni1000  Recognition
          Accelerator  Chips.   The  Company  expects   to   take
          delivery of $195,000 of the chips during 1998; $292,500
          after December 1998; and $390,000 after December 1999.

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

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

          December 31, 1998        $   553,924
          December 31, 1999            527,500
          December 31, 2000            625,000
          December 31, 2001            240,417
          December 31, 2002            246,917
          Thereafter                    74,667
                                   $ 2,268,425


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

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


Note 20 - Significant transactions:
          On June 11, 1996, the Company entered into an exclusive
          Licensing  Agreement  and an Asset  Purchase  Agreement
          with National Computer Systems, Inc. (NCS) transferring
          the  development, production, and marketing  rights  of
          the  Company's Intelligent Character Recognition  (ICR)
          products to NCS.  The Company received $1,400,000 as an
          initial   license   fee  pursuant  to   the   Licensing
          Agreement,  and has the right to receive  royalties  on
          future  sales  of the products by NCS.  Minimum  annual
          royalties  range from $160,000 in the year  ended  June
          30,  1997 to $350,000 in the years ended June 30,  2001
          and beyond.  The Company recognized $120,000 of revenue
          under this license agreement in calendar 1997.  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 21 - New accounting standards:
          In  June 1997, the Financial Accounting Standards Board
          issued two new accounting pronouncements:  Statement of
          Financial  Accounting Standards  Numbers  130  and  131
          ("FAS  130"  and "FAS 131").  Management believes  that
          the adoption of FAS 130, Reporting Comprehensive Income
          and   FAS  131,  Disclosures  About  Segments   of   an
          Enterprise  and Related Information, will  not  have  a
          material effect on the Company's financial statements.

          In  October  1997, the AICPA issued SOP 97-2,  Software
          Revenue Recognition, which changes the requirements for
          revenue recognition effective for transactions that the
          Company will enter into beginning January 1, 1998.  The
          Company  has  not yet determined the effects  SOP  97-2
          will  have on its financial position or the results  of
          its operations.


Note 22 - Subsequent Event:
          On   March  25,  1998,  the  Company  entered  into   a
          $1,500,000  Line  of Credit agreement with  Transaction
          Systems Architect, Inc. ("TSAI").  The loan matures one
          year  from the date of execution and is secured by  the
          royalty   stream  produced  by  the  Company's  License
          Agreement   with   Applied  Communications,   Inc.,   a
          subsidiary of TSAI.  Interest on the loan is  equal  to
          the  prime  rate as published daily in the Wall  Street
          Journal.


                          NESTOR, INC.                   Part IV
                                                         Item 14
                                                     Schedule II
            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, 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

Year ended
 December 31,
 1997            $ 145,235    $ 80,495    $  ---     $(71,176) $ 154,554


</TABLE>


ITEM 8.   Financial Statement and Supplementary Data

          See annexed financial statements.


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

          Not applicable.


ITEM 10.  Directors and Executive Officers of the Registrant.

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


ITEM 11.  Executive Compensation.

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


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

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


ITEM 13.  Certain Relationships and Related Transactions.

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

ITEM 14.  Exhibits, Financial Statement, Schedules and Reports on
          Form 8-K.
          (a)The  following documents are filed as part  of  this
          report:
               (1)   The financial statements of the Company  and
               accompanying notes, as set forth  in           the
               contents  to  the  financial  statements   annexed
               hereto, are included in Part II, Item 8.

          Schedule II:    Valuation and Qualifying Accounts and
          Reserves

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

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

(See Exhibit Index)

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

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

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

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

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



<TABLE>

INDEX OF EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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