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, 2002
                                 -----------------------------------------

                                 OR

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

            For the transition period from               to
                                           --------------    --------------

                         Commission file Number 0-12965

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

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

      400 Massasoit Avenue; Suite 200, East Providence, Rhode Island 02914
      --------------------------------------------------------------------
       (Address of principal executive offices)                (Zip Code)

                                 (401) 434-5522
              ----------------------------------------------------
              (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:     55
                                                                      ----------







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The  aggregate  market  value of the  24,034,535  shares of voting stock held by
non-affiliates  of the  registrant,  based on the closing price of such stock on
February  28,  2003 was  $2,163,108.  The  number of shares  outstanding  of the
Registrant's Common Stock at February 28, 2003 was 99,241,112.




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                                                                         PART I

ITEM 1.     Business
            --------

GENERAL

Nestor,  Inc., and its  wholly-owned  subsidiary  Nestor Traffic  Systems,  Inc.
(together the "Company"),  licenses its patented  intelligent software solutions
for decision and  data-mining  applications  in real-time  environments.  Nestor
products  employ   proprietary   neural  network  predictive  models  and  other
algorithms to convert  existing data and business  experiences  into  meaningful
recommendations and actions. Nestor has designed and developed software products
that can bring  additional value through  proprietary  software and information-
management  knowledge.  Nestor,  through its subsidiary  Nestor Traffic Systems,
Inc. ("NTS"), offers products in intelligent traffic-management systems ("ITS").
Nestor,  through its resellers  Applied  Communications,  Inc.  ("ACI"),  Retail
Decisions,  Inc. ("ReD"),  National Computer Systems, Inc. ("NCS"), licenses its
technologies  and offers products in the following  categories:  Risk Management
Systems;  Customer  Relationship  Management  Systems  ("CRM");  and Intelligent
Charter  Recognition  Systems  ("ICR").  Nestor  products and  services  include
application-software   solutions,  adaptive  decision  models,   implementation,
training, consulting, and engineering support services. The Company is currently
devoting its resources to its ITS products.

Exclusive  rights in the field of  traffic-management  solutions were granted to
the  Company's  wholly-owned  subsidiary  NTS on January  1, 1997;  co-exclusive
rights in the field of Risk Management and non-exclusive  rights in the field of
CRM are held by Applied  Communications,  Inc. (ACI) and Retail Decisions,  Inc.
(ReD); and non-exclusive rights in the field of ICR are held by NCS.

NTS is an  emerging  leader  in  providing  innovative,  video-based  monitoring
systems  and  services  for traffic  management  and  safety.  NTS  incorporates
patented pattern-recognition technologies into intelligent,  real-time solutions
that promote traffic efficiency, intersection safety, and railway grade crossing
monitoring   and  safety.   In  the  past,   NTS  has   developed  and  marketed
CrossingGuard(R),  Rail CrossingGuard(R),  and TrafficVision(R).  These products
are a combination of  Nestor-developed  software and modular hardware components
that provide monitoring for traffic-data  collection,  control of traffic flows,
enforcement  and  emergency  response.  These  products  are flexible and can be
configured  to a wide  range of road  configurations,  including  open roads and
intersections.

RECENT DEVELOPMENTS

In June 2002,  the  Company  underwent  a  significant  restructuring  involving
management  changes and cost control to lower personnel and facilities  expenses
as the Company  refocused its efforts solely on its red-light video  enforcement
contracts  for  CrossingGuard(R)   installations.   The  Company  terminated  19
full-time  employees,  affecting all departments,  and offices were consolidated
into smaller facilities.

PRODUCTS

The Company's traffic  enforcement  products use high speed image processing and
target-tracking  technology  applied to real-time video scenes. The products use
software  and video  cameras to detect a range of  traffic-related  elements  at
highways, intersections, and grade crossings.

CrossingGuard(R).  CrossingGuard is an automated,  video-based monitoring system
that predicts and records the occurrence of a red light violation. The software,
through a video camera,  tracks vehicles  approaching an intersection.  Based on
the  vehicle's  speed,  acceleration,  and distance from the  intersection,  the
system  predicts  whether a red light  violation  will occur.  If a violation is
expected  to occur,  the system can send a signal to the traffic  controller  to
request a brief extension of the red phase for cross traffic. This helps prevent
a collision between the violator and vehicles in the cross traffic  accelerating
on a green signal.  The system  simultaneously  records the violation  sequence,
including  a close-up of the vehicle and  license  plate,  and  transmits  video
evidence  electronically to the police  department,  which reviews the violation
and issues a citation.  Citation  mailing  and other  back-office  services  are
provided by the Company.



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The Company provides a complete turnkey  solution,  offering  violation  review,
citation preparation and processing,  billing and collection,  court scheduling,
evidence, and resolution.  In addition, the Company provides direct, remote, and
online  equipment  monitoring and  maintenance  primarily  through its field and
office personnel and through local contractors as necessary.

The  CrossingGuard  system  consists  of a video  camera  installed  on top of a
roadside  pole or mast arm. A personal  computer  is  installed  in the  traffic
controller cabinet or in an enclosure by the wayside.  High-speed communications
transmit  video and data from the  intersection  to a  designated  facility  for
processing.  The  facility  is  equipped  with a  CrossingGuard  Server  PC that
receives and stores violation data and supports  authorized viewing of violation
video sequences.

CrossingGuard is built upon standard PC hardware and software  components.  This
design provides the reliability and performance  benefits of PC hardware and the
ability to upgrade and add  functionalities  as needed.  The  Company  purchases
components  from  third  party  vendors,   built  in  accordance  with  Nestor's
specifications, and the systems are installed by local contractors.

CrossingGuard VIP. The CrossingGuard Video Intersection  Profiling (VIP) program
is a  proprietary  tool that the Company has  developed  to help  municipalities
pre-qualify intersections.  Since intersection violation rates can range from an
average  of a few  per  day to  over  fifty  per  hour,  the  system  helps  the
municipality  develop an estimate of safety issues at a given  intersection  and
the  long-term  ticket  volume by  counting  and  profiling  violations  for all
directions at a particular intersection.

CrossingGuard  Services.  CrossingGuard  Services  is the  complete  package  of
services and support that can be customized to a client's  needs. It consists of
site planning and equipment installation,  equipment maintenance,  user training
and support,  violation  review,  citation  preparation and processing,  account
management, toll free hotline support, public education, and expert testimony.

The economics of the CrossingGuard  product are tied to the number of violations
processed  by the  systems  and the  number of  operating  systems in the field.
Generally,  but not in all cases,  the contracts  require a monthly  minimum fee
designed to allow NTS to recover the value of the system delivered,  including a
finance factor and maintenance costs, over the term of the contract.

As of December 31, 2002, NTS had forty-two  approaches  installed and generating
citations,   including   two  pilot  program   approaches,   and  an  additional
ninety-seven  approaches under contract and in various stages of delivery. As of
December  31,  2001,  NTS  had  fourteen  approaches  installed  and  generating
citations,  and an  additional  sixty-eight  approaches  contracted  for  and in
various stages of delivery. No assurances can be given that all approaches under
contract will ultimately be installed.  The Company realizes from $25 to $97 per
citation issued or paid for system delivery,  maintenance,  software  licensing,
and processing  services,  depending upon state statutes regarding driver versus
registered owner liability for a violation.  Driver  liability  statutes require
the driver be identified in the  photographic  evidence and the citation be sent
to the identified driver. Registered owner statutes identify the vehicles owner,
through DMV  records,  as the  responsible  party for a  violation.  As only the
license plate is required for identification, program operating efficiencies are
much higher  resulting in lower per citation fees to cities.  Current  trends in
the industry are towards  compensating  red-light program vendors on a fixed fee
basis  instead of a variable fee basis tied to ticket  volumes.  Actual  results
from deployment of CrossingGuard systems are expected to fluctuate substantially
depending upon  intersection  selection and  configuration,  driver  response to
installed systems, and many other factors. Minimum monthly fee and fixed monthly
fees would reduce the risk of fluctuations in citation issuance rates.

During 2002, NTS realized $844,000 in CrossingGuard  related revenues,  which is
included in the Company's  consolidated  financial results in 2002. During 2001,
NTS realized  $226,000 in CrossingGuard  related  revenues,  of which $80,000 is
included in the Company's consolidated financial results in 2001.

Status of the CrossingGuard market.  Ineffective red-light safety enforcement is
a costly and growing problem that until recently has been largely unaddressed by
technology solutions.  There are an estimated 300,000 intersections with traffic
signals in the United States where  approximately  106,000  collisions  and over
1,000 deaths  occurred as a result of red-light  running as per Federal  Highway
Administration 2000 statistics. First-generation Red-Light Camera Systems gained




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early  acceptance  as a means of  automated  traffic  enforcement.  While  these
systems have validated the market  opportunity,  they generally continue to rely
on in-ground  vehicle  sensors  ("loops") and still  photography and have become
inferior solutions because of their (i) significant roadbed installation issues,
(ii) high maintenance  requirements,  (iii) inherently low level of performance,
and (iv) general lack of functionality.


Rail CrossingGuard.  NTS is developing Rail  CrossingGuard,  a system to monitor
grade-crossing vehicle and train traffic, as well as signalization  activity, to
provide   grade-crossing-integrity   measurement,   real-time   crossing   alert
capabilities and crossing violation enforcement.  This product has the potential
to greatly enhance  rail-crossing  safety by improving  signal and crossing gate
performance,  alerting personnel to dangerous crossing situations, and enforcing
train and vehicle safety regulations.  Rail CrossingGuard may also be integrated
with train  communications  systems to  provide a method of  alerting  trains to
dangerous rail crossing conditions.

On April 1, 2001,  NTS completed its first Rail  CrossingGuard  installation  in
DuPage  County,  Illinois and had  completed  design work  necessary to commence
construction  on the delivery of five Rail  CrossingGuard  units in Florida.  In
addition,  NTS has received a contract from the Federal Railroad  Administration
("FRA") to develop a portable Rail  CrossingGuard  unit for  non-permanent  data
gathering  capabilities.  Also,  NTS,  working  with  GeoFocus,  Inc., a Florida
company, won a contract to expand two of the Rail CrossingGuard units in Florida
to incorporate  remote  communication  capabilities  between Rail  CrossingGuard
units  and  train  operators.   During  2002,  NTS  realized  $426,000  in  Rail
CrossingGuard related revenues,  which is included in the Company's consolidated
financial   results  in  2002.  During  2001,  NTS  realized  $828,000  in  Rail
CrossingGuard  related revenues,  of which $322,000 is included in the Company's
consolidated  financial  results in 2001.  During 2002, the Company  reduced its
marketing  and sales  efforts in this product line to focus its resources on the
CrossingGuard red-light enforcement market.

Status  of the Rail  CrossingGuard  Market.  About  every 100  minutes,  a train
collides  with  a  vehicle  or  person  at one of  the  United  States'  261,000
highway-rail  crossings.  In an average  year,  more people die in  highway-rail
crossing accidents than in commercial airline crashes. Grade crossing collisions
are usually  severe,  and chances of survival  slim.  In 2001 alone,  there were
3,219 incidents at highway/rail  grade  crossings,  resulting in 471 fatalities.
According to the FRA, most crossing  collisions  occur simply because  motorists
chose to ignore warnings signs, signals or safety gates.  Improperly functioning
gate arms and  signals  can  increase  motorist  tendency  to ignore and violate
crossing signals.  State  Departments of  Transportation  need the capability to
routinely  monitor the integrity of  grade-crossing  signalization as well as to
receive  real-time alerts of hazardous  crossing  conditions,  such as a vehicle
that may be stopped or stuck at a crossing.  Further,  state regulatory agencies
currently have no means of effectively monitoring train activity at crossings to
ensure that train travel is compliant with stated regulations,  nor do they have
a method of automatically  enforcing train and vehicle  compliance with crossing
signals. Such are the potential roles for Rail CrossingGuard.

TrafficVision.  TrafficVision  is a product  that uses video  cameras to monitor
traffic flow and to send traffic data to a central  Traffic  Operations  Center.
Replacing short-life,  high-maintenance,  road-embedded copper-loop technologies
from the 1950's,  TrafficVision  is a  non-intrusive  sensor  system for traffic
management.  TrafficVision uses Nestor's proprietary high-speed image-processing
technology to analyze  video  content to sense and monitor  traffic on highways,
roadways and intersections in real-time. TrafficVision recognizes and classifies
multiple vehicles  continuously so that surveillance and traffic  management are
based upon detailed,  real-time  information.  TrafficVision  is installed at 26
locations  in Rhode  Island and in the state's  centralized  Traffic  Operations
Center in  Providence.  During  2002,  NTS  realized  $187,000 in  TrafficVision
related  revenues,  which is included in the  Company's  consolidated  financial
results in 2002.  During 2001, NTS realized  $183,000 in  TrafficVision  related
revenues, of which $46,000 is included in the Company's  consolidated  financial
results in 2001.  During  2002,  the  Company  reduced its  marketing  and sales
efforts  in this  product  line to  focus  its  resources  on the  CrossingGuard
red-light enforcement market.

The following are the primary attributes of NTS products and services:

Accurate,  real-time  interpretation  of traffic video  images.  NTS has applied
Nestor's high-speed pattern-recognition technologies in real-time processing and
video-image interpretation for traffic management, enforcement and safety. 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




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real-time  operation.   Nestor's  image-understanding   technology  is  able  to
interpret  video images  accurately  and respond in a real-time  environment  at
affordable cost.


Vehicle trajectory analysis for real-time forecasting.  As each frame in a video
sequence is interpreted,  the individual objects in the scene are identified and
located. This information,  passed from frame to frame, enables accurate tracing
of  vehicles'  trajectories.  Unlike  competitive  vision  systems,  which  note
changing  images in a fixed and  static  area of the  image  (so-called  virtual
loops), NTS's proprietary vehicle-centric technology can use the trajectories to
accurately predict vehicle positions. In the CrossingGuard  application,  when a
vehicle  is about to run a red light,  a signal can then be sent to the  traffic
controller  to extend  the  all-red  phase of the  traffic  signal so that cross
traffic   vehicles  can  be  briefly   delayed  before  they  proceed  into  the
intersection. Thus, intersections equipped with CrossingGuard have the potential
to become smarter and safer.

Compatibility with industry standard platforms. NTS traffic monitoring solutions
are built upon dominant industry-standard  platforms:  namely, Microsoft Windows
operating  systems,  tools and  communication  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  traffic  monitoring  systems  are  designed  to support  the
emerging NTCIP communications  standards being mandated in the traffic industry.
Further,  roadside  detector  stations will be compatible  with existing and new
traffic controller hardware, such as the CALTRANS 2070 controller standard.

Description of other products and services:

In 2001,  Nestor ceased  direct  product  development,  sales and support in the
fields of fraud detection,  financial risk management,  and CRM. Through license
agreements  entered  into with ACI on February 1, 2001,  and with ReD on May 18,
2001, co-exclusive  development,  sales and support rights were granted to these
resellers in fraud and risk management; and non-exclusive rights in the field of
CRM were granted to ReD. In addition,  all expenses associated with development,
support and selling these products were transferred to these parties.

Nestor's PRISM(R) fraud detection  solutions help financial  institutions detect
and prevent  fraudulent  payments,  manage  merchant risks and identify  illicit
account usage (money laundering).  The fraud detection products are used by many
of the world's largest financial institutions and represented  approximately 31%
and 87% of Nestor's  2002 and 2001  revenues,  respectively.  Effective  July 1,
2002,  the  Company  assigned  its ACI  royalty  rights  (Note 12) and no longer
receives product royalties.

Nestor's ICR  applications  increase  productivity in document  image-processing
applications.  Royalties  from  the ICR  business  represented  less  than 1% of
Nestor's 2002 and 2001 revenues.

Nestor's   technology  is  licensed  to  IBM  on  a   non-exclusive   basis  for
incorporation into hardware products known as the ZISC family of computer chips.
Royalties  from the IBM business  represented  less than 1% of Nestor's 2002 and
2001 revenues.

SALES, MARKETING AND METHODS OF DISTRIBUTION

The Company distributes and markets its intelligent  traffic-management solution
("ITS")   software  and  services  in  North  America  through  a  direct  sales
organization.  The Company  distributed  its other  software  solutions in North
America and throughout the world through third- party licensing and distribution
agreements.

The Company is in the process of transitioning  itself from a technology  driven
business to a sales and marketing enterprise. Currently, the Company markets its
products  and  services  to  municipalities,   governmental  traffic  management
departments,  or their  integrators  through its  Providence and San Diego based
two-person  direct sales force.  Since the traffic  products  require  technical
assistance  during  the sales  and  installation  processes,  the  Company  also
maintains an in-house  staff of eight  engineers.  The Company  obtains  product
inquiries from product mailings, attendance at trade shows, trade press coverage
and its  Internet  site.  Most  CrossingGuard  contracts  are  obtained  through
competitive proposal processes in response to RFP's issued by municipalities.

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The Company's  Intelligent  Character  Recognition products are marketed by NCS.
The Company's PRISM and eCLIPSE products are licensed through two  distributors,
Applied Communications,  Inc. (ACI) and Retail Decision,  primarily to financial
institutions.  Effective with the sale of the future  royalty  revenues due from
the ACI license to Churchill Lane  Associates,  LLC (CLA) on September 30, 2002,
no future revenues  related to the PRISM business are expected to be realized by
the Company.

During 2002, ACI accounted for 31% of the Company's  revenues.  During 2001, ACI
and ReD  accounted  for 52%, and 24% of the  Company's  revenues,  respectively.
During 2000, ACI accounted for 65% of the Company's revenues. During 2002, Other
Income of  $2,812,000  was  recorded  as a result of the sale of the ACI royalty
rights to CLA.

PATTERN-RECOGNITION TECHNOLOGY

The Company's  technology deals with the problem of pattern  recognition  within
complex data. When presented with complex  high-volume  data, it can be valuable
to identify  target patterns of information  often hidden in that data,  whether
patterns of fraudulent  credit card use,  customer buying behavior,  handwritten
characters,  objects in a video  stream,  vehicles in a traffic flow, or others.
Several methods currently exist to address the problem of processing information
in order to  recognize a pattern in the  information.  Included  among these are
"expert  systems"  of rules,  statistical  analysis,  and neural  networks.  The
Company's  products  may  combine  all of  these  methods  to  optimize  pattern
recognition capabilities.

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

The  Company  has also  been  granted a sixth  patent  for a  multi-unit  system
referred to as the Nestor Learning System(TM)  ("NLS"),  which is ideally suited
for many real-world  pattern  recognition  applications.  The NLS has a patented
hierarchical,  multi-network system for better control and accuracy. 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.

During  2002,  the  Company  received  two  additional  patents  relative to the
CrossingGuard  product line. The first patent recognizes the Company's invention
of  providing  for a  collision  avoidance  feature in a  video-based  red light
enforcement  system. The second patent recognizes the invention of a video-based
red light enforcement  system  integrating a client management system integrated
with a court scheduling system for ticket processing and issuance. In March, the
Company  was  informed  that a third  patent was being  allowed  relating to the
Company's  method of  predicting  and  recording  a red light  violation  with a
video-based system.

RESEARCH AND DEVELOPMENT ACTIVITIES OF THE COMPANY

The Company  continues to develop and improve its  technologies and products and
to develop new technologies and products.  The Company intends to pursue new and
enhanced  technologies  and products.  The Company  attempts to locate  external
resources  to assist in funding  the costs of  developing  new  technologies  or
products, but may bear all of such costs internally.

The Company's  research is almost entirely applied research  intended to develop
solutions to specific  pattern-recognition  problems. This research has resulted
in various patents and patents pending relating to improvements to the Company's
basic technology (see "Patents"). The Company has additional patent applications
pending as of December  31, 2002,  primarily in the area of traffic  management,
enforcement and safety.



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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  $1,604,000,  $1,641,000 and $1,247,000 in the years ended
December 31, 2002, 2001 and 2000 respectively, in support of the various aspects
of Company-sponsored  research and development.  Prior to the September 12, 2001
merger, NTS expended $2,062,000 and $715,000 during 2001 and 2000, respectively,
in support of the various  aspects of  NTS-sponsored  research and  development,
which  were  not  included  in the  December  31,  2002  consolidated  financial
statements of the Company.

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 or the application of video
techniques in traffic management applications.  The Company's RCE neural network
exhibits  rapid learning and minimizes the internal  connections  needed for its
functioning.  The Company  believes that these  capabilities  make the Company's
technology  uniquely suited to applications  that require field  trainability or
self-modification  to  adapt  to new or  changing  patterns  in  the  data.  The
Company's patents also cover  multiple-neural-network  systems, which enable the
company to develop  products  that combine high  accuracy  with high  processing
speeds.

Patents  issued  in  the  traffic  management  field  include  a  patent  for an
integrated traffic light violation citation generation and court date scheduling
system using a video-based  traffic violation  recording unit and a patent for a
video based traffic light collision avoidance system.

The Company owns eight United States patents and three foreign patents issued in
four countries and Europe.  The foreign patents correspond to one or more of the
United States  patents.  The United States  patents expire at various times from
2005 to 2019.

COMPETITION

The Company believes that  CrossingGuard is more  technologically  advanced than
most competing systems for traffic safety enforcement. Its competition generally
consists of first generation "wet film" red light camera systems.  These systems
rely on in-ground  sensor loops and wet film,  or on digital  still cameras that
record  only a few  frames  of  evidence  regarding  a  violation.  For wet film
systems,  there is the added burden of retrieving,  replacing,  developing,  and
scanning the film.

CrossingGuard,  on the other hand,  is installed  above the ground,  on roadside
poles or mast arms. (This helps avoid some of the logistical problems associated
with installing  in-ground  sensors at an  intersection.)  In case of a dispute,
unlike other systems, the violation video sequence has the ability to provide an
instant replay of the event.  Its digital video evidence  consists of both front
and rear  vehicle  images  and is viewed by the  police  who then issue (or give
authorization to issue) a citation. This ensures fairness so that violations may
not be issued out of context (e.g., if the violation occurred to make way for an
emergency  vehicle,  as part of a funeral  procession,  or to avoid a crash). In
addition,  a high  conviction  rate resulting from the extensive  evidence saves
court time and money,  making the  Company's  video  evidence  preferred by city
councils, law enforcement officials, courts, and the general public.

NTS's largest  competitor  in the  intersection  market is  Affiliated  Computer
Services,  Inc. (ACS), which has the greatest number of red-light camera systems
installed.  Among others are EDS,  Laser Craft,  Mulvihill  ICS,  Peek  Traffic,
Perceptics, Poltech, Redflex Traffic Systems, Traffipax, and Transcore. Although
these  companies  use buried  loops,  still or digital  cameras  and/or wet film
systems,  some may pose a  competitive  threat due to their size,  market share,
legacy   customer    relationships,    additional   products   offered,   and/or
citation-processing experience.

                                       8
<PAGE>


NTS's   TrafficVision   and  Rail  products  face  competition   primarily  from
traffic-management-systems  companies such as ISS, Econolite,  Traficon, Iteris,
Peek Traffic,  Odetics,  Computer Recognition Systems,  Siemens,  Sumitomo,  and
Rockwell  International.  Management  believes that the platforms on which these
products operate do not provide the image processing  capabilities  possessed by
TrafficVision  and Rail  CrossingGuard.  However,  the Company is not  currently
investing substantial finances in the marketing or sales of these product lines.

Most of the Company's  competitors in the ITS market 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.

CONTRACTS WITH GOVERNMENTAL ENTITIES

NTS's  CrossingGuard  agreements are generally  service contracts with states or
municipalities  that in most  circumstances may be cancelled by the customer for
various reasons including  non-appropriation of annual program funding. As these
contracts are generally  self-funded  from ticket fees  collected from red-light
violators and some contracts  contain  termination fee provisions,  NTS does not
expect this to be a significant risk in the future. NTS's Rail CrossingGuard and
TrafficVision  contracts  are  generally  fixed-fee  deliverable  contracts  and
termination  rights are generally  limited to  non-performance  conditions.  NTS
retains all patent and other  proprietary  rights from  products  developed  and
delivered under government-supported contracts.

EMPLOYEES

As of  December  31,  2002,  the Company had  thirty-five  full-time  employees,
including  ten  in  software  engineering  and  product  development,   nine  in
processing and system support,  seven in program  management and field services,
two in sales and marketing and seven in management,  finance and office support.
All of these  employees are located in the United States.  None of the Company's
employees are represented by a labor union.  The Company has experienced no work
stoppages and believes its employee relationships are generally good.

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

LICENSING, JOINT VENTURE AND DEVELOPMENT AGREEMENTS

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

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


                                       9
<PAGE>

enhancements, installation, modeling, and support for ACI licensees. The Company
sold the royalty  rights to CLA on July 1, 2002.  The Company does not expect to
receive future revenues from this license.

Retail Decisions,  Inc. On May 18, 2001, Nestor entered into a license agreement
with Retail  Decisions,  Inc.  ("ReD") in which  Nestor  granted to ReD:  (i) an
exclusive  (other than ACI),  perpetual,  fully-paid,  worldwide  license in the
field of use of fraud and money  laundering  detection  and risk  management  in
certain defined  industries;  and (ii) a non-exclusive,  perpetual,  fully-paid,
worldwide  license  solely for use in the field of use of customer  relationship
management in certain defined  industries.  Additionally,  Nestor transferred to
ReD certain assets that were supportive of the technology  licensed  thereunder.
The assets  transferred  to ReD by Nestor  include  all of the right,  title and
interest of Nestor in certain equipment,  license agreements (excluding ACI) and
trademark  rights.  To  support  its  newly  acquired  license,  ReD hired 13 of
Nestor's  employees.  ReD paid $1,800,000 to Nestor under the license agreement,
and Nestor agreed, for certain marketing and transition services, to pay to ReD:
(i) $500,000  which was paid on July 2, 2001;  (ii)  $250,000  which was paid on
October 1, 2001;  and (iii)  $218,000  which was paid on December 31, 2001.  The
Company  recorded  $832,000  as net  license  revenue in the  second  quarter in
connection with this agreement.  No ongoing revenues are expected to be realized
from ReD.

National Computer Systems, Inc. (NCS) On June 11, 1996, the Company entered into
an exclusive Licensing Agreement and an Asset Purchase Agreement with NCS
transferring the development, production, and marketing rights of the Company's
Intelligent Character Recognition (ICR) products to NCS. In June 1998, NCS did
not meet its minimum royalty for the license year and forfeited exclusive
rights. NCS continues to market the ICR products on a non-exclusive basis.

ITEM 2.     Properties.
            ----------

In 2001, NTS entered into a five-year  lease for offices  providing 9,600 square
feet for approximately  $10,800 per month located at 400 Massasoit Avenue,  East
Providence,  Rhode Island 02914.  NTS also maintains a local field office at 737
Pearl Street, La Jolla, CA 92037 on a twelve-month  lease dated August 2002, and
pays  approximately  $1,500 per month.  NTS also  maintains a local field office
6528 Greenleaf Avenue, Suite 104, Whittier,  CA 90601 on a month-to-month basis,
and pays approximately $410 per month. The Company believes these facilities are
adequate to meet its needs in the foreseeable future.

In April 2001,  NTS entered into a forty-six  month  sublease for its California
operations at 10145 Pacific  Heights Blvd.,  San Diego,  CA 92121  providing for
approximately  5,700  square  feet for  $12,050  per  month.  As a result of the
Company's  reorganization  in early 2002,  NTS could no longer use the amount of
space leased. Due to past due lease payments,  the landlord terminated the lease
and notified NTS to leave the premises,  which NTS did in early August 2002. The
Company is  carrying a  reorganization  reserve  related to  projected  costs of
settling this lease obligation,  but has not reached agreement with the landlord
as to termination costs as of this date.

ITEM 3.     Legal Proceedings.
            -----------------

On July 12, 2002,  Baldwin Line  Construction of Maryland,  Inc. filed a lawsuit
against  Nestor  Traffic  Systems,  Inc. in Fairfax  County,  Virginia,  seeking
$117,105 plus interest  related to invoices they claim are owed for construction
work in Falls  Church,  Virginia.  The suit has been  transferred  to  Arlington
County,  Virginia.  On November 15, 2002,  NTS answered by filing its Grounds of
Defense.  Additionally  on November 15, 2002, NTS filed a counterclaim  alleging
breach of contract and breach of warranty,  seeking a $400,000 judgment to cover
NTS's losses in remedying the installation and lost revenues  suffered from late
delivery of the system.  The parties are conducting  depositions and the case is
scheduled for trial in June 2003.

Management believes that all bona-fide invoices for services due to Baldwin have
been paid and intends to defend itself against these additional  claims, but has
accrued $100,000 in the financial  statements for costs related to this lawsuit.
Costs  associated  with the suit are being  expensed as  incurred.  Although NTS
believes  that it will  prevail,  there can be no assurance as to the outcome of
Baldwin's suit and NTS's  counterclaim.  Any conclusion of this  litigation in a
manner adverse to NTS may have an adverse effect on its financial condition.

                                       10
<PAGE>



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, 2002.



                                       11
<PAGE>




                                                                        PART II

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

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

                                     Low Bid      High Ask
                                     -------      --------

Year Ended December 31, 2002
----------------------------
         1st Quarter                 $  .45        $ 1.03

         2nd Quarter                 $  .18        $  .58

         3rd Quarter                 $  .08        $  .28

         4th Quarter                 $  .02        $  .10



Year Ended December 31, 2001
----------------------------
         1st Quarter                 $  .44        $  .97

         2nd Quarter                 $  .75        $ 1.80

         3rd Quarter                 $ 1.00        $ 1.59

         4th Quarter                 $  .77        $ 1.20


As at  February  28,  2003,  the  number of  holders of record of the issued and
outstanding common stock of the Company was 411, which includes brokers who hold
shares for approximately 1,550 beneficial holders.

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

On February 7 and 13, 2003 and on March 6, 2003, the Corporation  filed with the
Securities  and  Exchange  Commission  a Schedule  14C  Preliminary  Information
Statement, which is hereby incorporated by reference.

On March 14,  2003,  the  Corporation  filed with the  Securities  and  Exchange
Commission  a Schedule 14C  Definitive  Information  Statement,  which is hereby
incorporated by reference.

On February 6, 2003,  the  Corporation  filed with the  Securities  and Exchange
Commission a Schedule  13D for Silver Star  Partners I, LLC,  dated  January 15,
2003, which is hereby incorporated by reference.

On January 17, 2003,  the  Corporation  filed with the  Securities  and Exchange
Commission a current report on Form 8-K dated January 15, 2003,  which is hereby
incorporated by reference.

On January 6, 2003,  the  Corporation  filed with the  Securities  and  Exchange
Commission a current  report on Form 8-K dated January 2, 2003,  which is hereby
incorporated by reference.

                                       12
<PAGE>



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

The  following  data  includes  the  accounts  of Nestor,  Inc.  for all periods
presented and NTS for the period  September  13, 2001 through  December 31, 2001
and the years 2002 and 1998.  (From January 1, 1999 through  September 12, 2001,
the  Company's  investment  in NTS was recorded on the equity  method.) The data
reflects the activity of Interactive in 1998.


<TABLE>
<CAPTION>

                                                                 Years Ended December 31,
                                    ----------------------------------------------------------------------------------
                                          2002              2001            2000               1999             1998
                                          ----              ----            ----               ----             ----

<S>                                 <C>              <C>               <C>              <C>               <C>
Revenue                             $   2,121,574    $   3,520,924     $   3,652,422    $   5,114,779     $  2,241,376
Operating income (loss)             $ (15,127,235)   $  (1,297,145)    $  (1,548,777)   $     742,451     $ (5,236,975)
Gain on royalty assignment          $   2,811,590    $         ---     $         ---    $         ---     $        ---
Other expense                       $    (318,618)   $    (186,809)    $    (106,675)   $     (97,386)    $    (26,178)
Net loss                            $ (12,634,263)   $  (1,565,054)    $  (2,994,574)   $    (836,824)    $ (5,263,153)
Earnings per share
   Weighted number of
   outstanding shares -
   basic and diluted                   50,476,112       28,818,768        17,901,602       17,844,327       15,249,932

   Loss per share                   $       (0.25)   $       (0.05)    $       (0.17)   $       (0.05)    $      (0.36)
SELECTED BALANCE SHEET DATA:
Total assets                        $   9,200,964    $  22,035,420     $   4,922,703    $   6,773,905     $  3,250,089
Working capital (deficit)           $  (1,572,209)   $   1,775,401     $    (199,775)   $   1,211,257     $    535,806
Long-term
   Capital lease obligations        $   2,849,126    $   2,409,202     $         ---    $         ---     $        ---
   Deferred income                  $         ---    $     421,399     $   2,036,896    $   1,965,532     $    440,400

</TABLE>


                                       13
<PAGE>




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

PROSPECTIVE STATEMENTS

The  Company  experienced   significant   operating  changes  during  the  first
nine-months  ended  September  30, 2001 and  subsequently,  during the first six
months of 2002.  During  2001,  the  Company  changed its  operating  focus from
financial services products and services, primarily risk management software, to
intelligent  traffic  management  products  and  services,  primarily  red-light
enforcement  services  and  products.  The  Company  entered  into two  separate
source-code  licensing  agreements for its PRISM product line appointing Applied
Communications,  Inc. and Retail  Decisions,  Inc. as co-exclusive  resellers in
industries of transaction processing. Additionally, essentially all engineering,
development,  sales  and  marketing  employees  associated  with  the  financial
solutions  division  were hired by these  resellers.  Royalty  revenues from ACI
continued  through June 2002 when the royalty was assigned to CLA, and no direct
license revenues,  engineering and modeling revenues, or operating expenses will
be realized from this business.  Subsequent to the completion of the merger with
Nestor  Traffic  Systems,  Inc. on September  12, 2001,  the  Company's  primary
operation  is in the  field  of  intelligent  traffic  management  systems.  The
financial  statements  and  management's  discussion and analysis of fiscal 2001
only include NTS results for the three and one-half  month period from September
13, 2001 to December 31, 2001.

In June 2002,  the  Company  underwent  a  significant  restructuring  involving
management  changes and cost control to lower personnel and facilities  expenses
as the  Company  refocused  its  efforts  on  its  red-light  video  enforcement
contracts for CrossingGuard  installations.  The Company terminated 19 full-time
employees, affecting all departments, and offices were consolidated into smaller
facilities.

The following discussion contains prospective  statements regarding the Company,
its  business  outlook  and results of  operations,  all of which are subject to
certain  risks and  uncertainties  and to events that could cause the  Company's
actual business,  prospects and results of operations to differ  materially from
those that may be anticipated by, or inferred from, such prospective statements.
Factors that may affect the Company's prospects include, without limitation: the
Company's  limited  liquidity,  the  Company's  ability to finance  delivery  of
current contracts,  the Company's ability to successfully realize new contracts;
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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Nestor's  consolidated  financial  statements  are prepared in  accordance  with
accounting principles generally accepted in the United States, which require the
Company  to make  estimates  and  assumptions  (see  Note 2 to the  Consolidated
Financial  Statements).  The Company believes that of its significant accounting
policies (see Note 2 to the Consolidated  Financial  Statements),  the following
may involve a higher degree of judgment and complexity.

Revenue Recognition

The Company's  CrossingGuard  product generates product licenses and service fee
revenue.  Management  estimates the percentage of citations that are expected to
be collectible and recognizes revenue accordingly. To the extent these estimates
are not  accurate,  the Company's  operating  results may be  significantly  and
negatively affected.

In arrangements,  some of which include software, or where software services are
deemed  essential,   revenue  is  recognized  using  contract  accounting.  This
methodology   involves   a    percentage-of-completion    approach,   based   on
progress-to-completion  measures on estimated  total costs.  If the Company does


                                       14
<PAGE>

not  accurately  estimate  these total  costs,  or the projects are not properly
managed  to  planned  periods  and  expectations,  then  future  margins  may be
significantly and negatively  affected or losses on existing  contracts may need
to be recognized.

Long Term Asset Impairment

In assessing the  recoverability  of the Company's long term assets,  management
must make assumptions regarding estimated future cash flows and other factors to
determine the fair value. If these estimates  change in the future,  the Company
may be required to record impairment charges that were not previously  recorded.
On January 1, 2002,  the  Company  adopted  Statement  of  Financial  Accounting
Standards No. 142,  "Goodwill and Other Intangible Assets" (Note 5) and SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Note 11).

LIQUIDITY AND CAPITAL RESOURCES

Cash Position and Working Capital

The accompanying  financial  statements have been prepared assuming that Nestor,
Inc.  will continue as a going  concern.  As discussed in Note 1, the Company is
currently  expending  cash in  excess  of cash  generated  from  operations,  as
revenues are not yet sufficient to support future  operations.  These conditions
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern  without  additional  financing.  Management's  plans in regard to these
matters are  discussed in Note 1. The  financial  statements  do not include any
adjustments  to reflect the possible  future effects on the  recoverability  and
classification  of assets or the amounts and  classification of liabilities that
may result from the outcome of this uncertainty.

The Company had cash and  short-term  investments of  approximately  $309,000 at
December  31, 2002 as compared  with  approximately  $3,239,000  at December 31,
2001.  At  December  31,  2002,  the Company  had a working  capital  deficit of
$1,572,000, as compared with working capital of $1,775,000 at December 31, 2001.
The decrease in working capital in 2002 reflects  primarily working capital used
by operating activities.

The Company had a net worth of $3,865,000 at December 31, 2002, as compared with
a net worth of  $16,392,000  at December  31,  2001.  The  decrease in net worth
resulted  primarily from the  consolidated  net operating loss of $12,634,000 in
2002, which included an $8.5 million writedown of goodwill.

Additional  capital  will be required to enable the Company to carry out product
delivery  efforts under current  contracts,  to underwrite the delivery costs of
future systems  delivered  under turnkey  agreements  with  municipalities,  for
continued  development  and  upgrading of its  products,  for customer  support,
marketing and sales efforts,  and for other  operating uses. If the Company does
not realize  additional  equity  and/or debt capital and revenues  sufficient to
maintain its operations at the current level, management of the Company would be
required to modify certain initiatives including the cessation of some or all of
its  operating  activities  until  additional  funds  become  available  through
investment or revenues.

In January 2003, the Company raised $2.3 million of additional  capital  through
the  issuance  of its common  stock in the initial  closing of a stock  purchase
agreement.  The second closing of this transaction is expected to occur in April
2003 and will increase the  aggregate  investment to a minimum of $3 million and
up to a maximum of $6 million in exchange for  additional  Nestor,  Inc.  common
shares. The Company is actively pursuing the raising of additional equity,  debt
or lease financing. The possible success of these efforts, and the effect of any
new capital on the current structure of the Company,  cannot be determined as of
the date of this filing.

Future Commitments

During 2002,  the Company  acquired  additional  property  and leased  equipment
(primarily  computers and related equipment) at a cost of $48,000,  and invested
$1,017,000 in capitalized  systems.  At December 31, 2002,  Nestor  recorded its
investments  in  computers  and  related  equipment  (net  of  depreciation)  at
$487,000,  and in  capitalized  systems  (net of  depreciation)  at  $1,937,000.
Management  expects  that NTS will make future  commitments  for the purchase of


                                       15
<PAGE>

additional  computers  and  related  computing  equipment,   for  furniture  and
fixtures,   for  delivery  of  capitalized   systems,  for  consulting  and  for
promotional and marketing expenses.

On June 28, 2001, NTS executed a Master Lease Purchase Agreement with Electronic
Data Systems Corporation  ("EDS"),  whereby EDS would provide lease financing to
support installation of the NTS CrossingGuard(R) product to municipalities under
leasing  terms.  NTS  received  $3,183,180  in  advances,  drawn at $53,053  per
approach  contracted to fund system  equipment,  design and installation  costs.
Advances are  collateralized by equipment  delivered under leased  CrossingGuard
systems and  originally  were being repaid  interest  (20%) only for the first 6
months and  principal  and  interest  over the next 60 months from each  advance
date.

Payments were made as scheduled  through  February 2002, then the Company became
delinquent on payments and fell out of compliance with the lease  agreement.  On
January  10,  2003,  the  lease  agreement  was  amended,  pursuant  to a letter
agreement between NTS and EDS dated July 18, 2002, to provide:  (i) a moratorium
on NTS'  interest  obligations  under the lease for the period from July 1, 2002
through June 30, 2003;  (ii) a moratorium  on all principal  repayments  through
June 30, 2003, at which time regular  monthly  payments  will resume;  (iii) all
lease  payments  in arrears as of June 30,  2002 will be accrued  and payable as
follows,  $150,000 on  September  30, 2003,  $100,000 on December 31, 2003,  and
$37,590 on March 30, 2004;  and (iv)  effective  July 1, 2002, the interest rate
factor upon which the lease payments are based was lowered to 12% per annum. EDS
will not extend additional financing under the Master Lease Purchase Agreement.

The Company does not generally  grant payment terms to customers in excess of 90
days.

The  Company's  future  contractual  obligations  and other  commitments  are as
follows:
<TABLE>
<CAPTION>

                                                              Payment Due Date
        Contractual                  ---------------------------------------------------------------------
        Obligations                Total         < 1 Year         2-3 Years        4-5 Years       Thereafter
        -----------                -----         --------         ---------        ---------       ----------

<S>                            <C>               <C>            <C>               <C>              <C>
Capital lease obligations      $ 4,252,000       $ 669,000      $ 1,714,000       $ 1,676,000      $ 193,000
   including interest

Operating leases               $   356,000       $ 151,000      $   205,000       $       ---      $     ---


</TABLE>


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

During the years ended  December 31, 2002 and 2001,  the Company  reorganized by
(i) eliminating direct investment in its Risk Management products,  transferring
all contracts to a pure royalty basis;  (ii)  reacquiring  all unowned shares of
Nestor Traffic  Systems,  Inc. on September 12, 2001 and reporting the operating
results  of this  subsidiary  after  that  date  and  (iii)  through  a  further
operations   reduction,   focusing  primarily  on  the  CrossingGuard   product.
Accordingly,  comparisons of operating activity between fiscal 2001 and 2000 are
of operations that have changed  materially.  Looking forward,  the consolidated
operating  results  reported during the fourth quarter of 2002 will more clearly
reflect the operating costs associated with the company in early 2003.  Revenues
will come primarily from CrossingGuard  products and services, and growth should
be tied to  growth in the  number  of  CrossingGuard  approaches  installed  and
operational.

ANALYSIS OF THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001

In the quarter ended December 31, 2002,  the Company  realized a 41% decrease in
revenues compared to the prior year same quarter.  Operating  expenses decreased
65% in 2002 resulting in a loss before  investment loss of $662,000  compared to
$2,365,000 in the prior year fourth quarter.  As discussed  below,  there are no
ACI royalty revenues after the September 2002 royalty  assignment as compared to
$227,000 in the prior year fourth quarter.  Operating expense reductions include


                                       16
<PAGE>

payroll and facility  rent costs after the June 2002  restructuring  and reduced
consulting and cost of goods sold expenses associated with the Rail product line
development and deployment effort after spring 2002.

Revenues
--------
The Company's  revenues arose from royalties on product licenses and services as
discussed separately below. During the quarter ended December 31, 2002, revenues
decreased  $233,000 to $334,000  from  $567,000 in the prior  calendar  quarter.
Fiscal  2001  revenues  included  $227,000  in  royalties  from risk  management
products and $340,000 from traffic management products and services. Fiscal 2002
revenues  included  $334,000 of traffic related revenues and no royalty revenues
were realized after the September ACI royalty assignment to CLA.

Operating Expenses
------------------
Total operating  expenses amounted to $974,000 in the quarter ended December 31,
2002,  a  decrease  of  $1,843,000  as  compared  to  total  operating  costs of
$2,817,000 in the prior year same quarter.

Cost of Goods Sold

Cost of goods  sold  (CGS)  totaled  $97,000  in the  fourth  quarter of 2002 as
compared  to $600,000 in 2001.  The 2002 CGS relates to  CrossingGuard  products
while 2001 CGS is primarily higher cost Rail product deployment.

Engineering Services

Costs related to engineering  services totaled $596,000 in the fourth quarter of
2002,  as compared  with  $362,000 in 2001.  These costs include the salaries of
field and office  personnel  as well as  operating  expenses  related to product
design, delivery, configuration, maintenance and service. This expense increased
in  2002,  as there  were  more  customers  to  support,  requiring  some  staff
realignments from R&D to assist in the engineering efforts.

Research and Development

Research and development expenses totaled $31,000 in the quarter ended December
31, 2002 as compared with $1,030,000 in the previous year's quarter. R&D efforts
were significant in 2001 prior to significant rollouts of Rail and CrossingGuard
products, which occurred in 2002. The Company will continue its R&D activities
on a smaller scale and as deemed necessary.

Selling and Marketing

Selling and marketing costs  decreased  $233,000 to $89,000 in the quarter ended
December 31, 2002, from $322,000 in the previous  year's  quarter.  The decrease
reflects a reduction in NTS expenses after the June 2002 reorganization.

General and Administrative

General and  administrative  expenses  totaled $160,000 in the fourth quarter of
2002,  as compared  with $503,000 in the previous  year's  quarter.  General and
administrative  costs  were  lower  in the  current  year due to a  reversal  of
$113,000 of Wand  Partners,  Inc.  fees in  connection  with a  Termination  and
Release   Agreement   and  reduced   payroll   expenses   after  the  June  2002
restructuring.

Restructuring Costs

In June 2002,  the  Company  underwent  a  significant  restructuring  involving
management  changes and cost control to lower personnel and facilities  expenses
as the Company  refocused its efforts solely on its red-light video  enforcement
contracts for CrossingGuard  installations.  The Company terminated 19 full-time
employees, affecting all departments, and offices were consolidated into smaller
facilities.  During  the  quarter  ended June 30,  2002,  the  Company  recorded
restructuring  costs of  $743,000  primarily  comprised  of $332,000 in employee


                                       17
<PAGE>

severance agreements and estimated lease obligations associated with closing its
Providence,  RI and San Diego,  CA offices.  A settlement was reached in 2002 in
connection with the Providence  office lease but no agreement has been finalized
regarding the amount due on the San Diego lease.

Capitalized Systems Costs Impairment

During the quarter ended June 30, 2002,  the Company  determined  that potential
citation revenues from certain  CrossingGuard  installations in two cities would
not exceed the cost of the underlying carrying value of the capitalized systems.
These contracts were signed in the early stages of CrossingGuard development and
the site selection  procedures  and contract terms have since been improved.  In
accordance  with SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of
Long-Lived  Assets",  the Company wrote off capitalized systems cost of $794,000
and recorded a corresponding  impairment charge in operating  expenses.  Ongoing
revenues from these  installations are expected to offset future costs of system
operations.

Goodwill Impairment Loss

As of January 1, 2002,  the Company  adopted SFAS No. 142,  "Goodwill  and Other
Intangible  Assets."  SFAS No.  142 sets  forth  new  financial  accounting  and
reporting standards that require goodwill to be separately  disclosed from other
intangible  assets  in the  statement  of  financial  position,  and  no  longer
amortized,  but tested for impairment on an annual basis, or whenever indicators
of impairment are identified.  The provisions of this  accounting  standard also
require the  completion of a transitional  impairment  test within six months of
adoption, with any impairment identified accounted for as a cumulative effect of
a change  in  accounting  principle.  The  Company  completed  the  transitional
impairment  test during the quarter  ended June 30, 2002 and  concluded  that no
impairment existed on January 1, 2002, when the standard was adopted. Management
considers  the  Company's  quoted  stock price to be the best  indicator of fair
value for purposes of performing these analyses.

Based on the decline of the  Company's  stock price  during the second and third
quarters  however,  the fair value was recomputed using the quoted June 30, 2002
stock  price  of  $.25  and  September  30,  2002  stock  price  of  $.09.  Such
computations   resulted  in  goodwill   impairment  charges  of  $3,000,000  and
$5,500,000  recorded  as  operating  expenses  during the  respective  quarters.
Although  the  Company's  stock price  declined to $.04 at  December  31,  2002,
management  considered  the decline to be temporary in nature as the stock price
rebounded in 2003. If the Company's  fair value declines below the September 30,
2002  measurement  at a future  quarterly  measurement  date and is deemed to be
other  than  temporary,  further  impairment  changes  will be  required  in the
respective  future  period.  The Company will  continue to monitor  goodwill for
potential impairment.

Gain on Royalty Assignment

On July 15, 2002, the Company entered into a Memorandum of Understanding ("MOU")
with  Churchill  Lane  Associates,  LLC  ("CLA"),  assigning  CLA certain of the
Company's  rights to royalty  income  under the  license  agreement  between the
Company and ACI ("ACI License").  CLA is owned and controlled by Alan M. Wiener,
Alvin J.  Siteman  and Robert M.  Carroll,  directors  and  shareholders  of the
Company. The MOU also provided a schedule for advances by CLA to provide interim
financing to the Company during the period prior to the closing. Upon closing on
September  30, 2002,  CLA paid the Company $3.1 million in cash (less  advances)
for the irrevocable  assignment of its royalty rights under the ACI License from
July 1, 2002 and in  perpetuity.  No  obligations or other rights of the Company
were transferred or assigned to CLA.

After  offsetting  $860,000 of ACI unbilled  contract  revenue,  $632,000 of ACI
deferred income and $60,000 in related professional fees, the Company recorded a
$2,812,000  gain  on  this  royalty   assignment  on  September  30,  2002.  The
elimination of ACI unbilled  contract  revenue and deferred income were recorded
as non-cash reductions.

Other Expense
-------------
For 2002,  net other expense was $22,000,  as compared with net other expense of
$115,000 in the  quarter-earlier  period.  In 2001,  other expense was comprised
primarily  of loss on asset  disposals  of  $62,000  and both  periods  included
warrant amortization expense of $26,000.

                                       18
<PAGE>

Net Loss
--------
During the fourth quarter in 2002,  the Company  experienced a loss of $662,000,
as compared with a loss of $2,365,000 in the previous  year's  quarter.  For the
quarter ended December 31, 2002,  loss per share  available for common stock was
$0.01 per share, as compared with a loss per share of $0.05 in the corresponding
period of the prior fiscal quarter. The weighted average shares outstanding were
50,476,112 in both quarters.


ANALYSIS OF THE YEARS ENDED DECEMBER 31, 2002 AND 2001

In the year ended December 31, 2002,  the Company  experienced a 40% decrease in
revenues compared to the prior calendar year.  Operating expenses increased 258%
in 2002.  The Company  experienced a loss of  $12,634,000  in 2002 compared to a
loss of $1,565,000 in the prior year.

Revenues
--------
The Company's revenues arose from royalties and product licenses and services as
discussed  separately below.  During the year ended December 31, 2002,  revenues
decreased  $1,399,000 to $2,122,000  from $3,521,000 in the prior calendar year.
The company granted source-code distribution rights to two companies in 2001 for
up-front  source-code  license fees and, from ACI, ongoing royalties of equal to
15% of future  revenues  realized from the licensed  software.  Beginning in the
fourth  quarter of 2001, the Company's  revenues were  generated  primarily from
sales,   support,  and  services  provided  regarding  its  intelligent  traffic
management  product line. Ongoing revenues from the risk management product line
continued  under  the ACI  distributor  agreement  until  July  2002 when it was
assigned to CLA.

Product Royalties

Product royalties totaled $664,000 in 2002, as compared with $2,997,000 in 2001.
The Company  realized net ReD license revenues of $832,000 in the second quarter
of 2001 (See Note 20 of the financial  statements),  and $1,104,000 from the ACI
license in the first quarter of 2001 (See Note 19 of the financial  statements).
The  Company  continued  to receive  royalties  from ACI until July 1, 2002 when
these royalty rights were assigned to CLA.

Product Licenses and Services

Product  license  and  services  revenues  from  the  traffic  business  totaled
$1,457,000  in 2002,  as compared  with  $524,000 in 2001,  which only  included
post-merger revenue.

Operating Expenses
------------------
Total operating  expenses amounted to $17,249,000 in the year ended December 31,
2002, an increase of $12,431,000 over total operating costs of $4,818,000 in the
prior year. The 2001 operating expenses reflect risk management  operations that
were  transferred  to ACI and ReD in 2001  whereas  the  2002  expenses  reflect
current traffic management  operations,  which include $743,000 in restructuring
costs  and  $9,294,000  of  impairment  charges.   Excluding  restructuring  and
impairment charges, operating expenses in 2002 were $7,212,000.

Costs of Goods Sold

Cost of goods sold  totaled  $1,476,000  in 2002 as  compared to $692,000 in the
prior year,  which included only post September 12, 2001 expenses.  CGS includes
third party goods and services  related to revenues  recorded in the  respective
periods and is high in proportion to revenues  realized due to (i) rail projects
completed  in the  first  quarter  of 2002 that  carried  higher  equipment  and
construction  costs than prior  experience  as NTS acted as prime  contractor on
these  construction  related  projects,  and  (ii)  our  back-office  processing
agreement with EDS required a monthly minimum fee that was proportionately  high
in relation to actual ticket volumes generated. As discussed in Note 17, in July
2002 a letter  agreement  was reached and finalized in January 2003 to eliminate


                                       19
<PAGE>

the monthly  minimum  fee,  reducing  the  per-ticket  processing  fees  charged
retroactive  to January 1,  2002.  In  December  2002,  NTS  recorded a $102,000
reduction in CGS in connection with the modified  terms.  NTS will perform these
services  internally  as of March 31, 2003.  Additionally,  in the quarter ended
September  30,  2002,  NTS  reclassified   customer-related   telecommunications
expenses from various operating expenses to CGS, effective October 1, 2001.

Engineering Services

Costs related to engineering  services  totaled  $2,070,000 in 2002, as compared
with $509,000 in 2001.  The increase in these costs reflects the addition of NTS
engineering expenses effective on the merger completed September 12, 2001.

Research and Development

Research and development  expenses totaled $1,604,000 in the year ended December
31, 2002 as compared with $1,623,000 in the prior year.  These costs reflect the
net  increased  investment  in the NTS  products  included  in the  consolidated
expenses  after the  merger  completed  on  September  12,  2001,  offset by the
transfer  of PRISM  research  and  development  activity to ACI and ReD in early
2001.

Selling and Marketing

Selling and  marketing  costs  decreased  $171,000 to $608,000 in the year ended
December  31,  2002,  from  $779,000 in the prior year.  The decrease in selling
costs in the year  reflects,  primarily,  the  transfer  of sales and  marketing
activity for the PRISM product to ACI and ReD during early 2001.

General and Administrative

General and administrative expenses totaled $1,453,000 in 2002, as compared with
$1,214,000 in the previous  year.  The increase is the net result of a full year
of combined Nestor and NTS expense in 2002,  offset in part by the 2002 reversal
of $113,000 of Wand  Partners,  Inc. fees in connection  with a Termination  and
Release   Agreement   and  reduced   payroll   expenses   after  the  June  2002
restructuring.

Restructuring Costs

In June 2002,  the  Company  underwent  a  significant  restructuring  involving
management  changes and cost control to lower personnel and facilities  expenses
as the Company  refocused its efforts solely on its red-light video  enforcement
contracts for CrossingGuard  installations.  The Company terminated 19 full-time
employees, affecting all departments, and offices were consolidated into smaller
facilities.  During  the  quarter  ended June 30,  2002,  the  Company  recorded
restructuring  costs of  $743,000  primarily  comprised  of $332,000 in employee
severance agreements and estimated lease obligations associated with closing its
Providence,  RI and San Diego,  CA offices.  A settlement was reached in 2002 in
connection with the Providence  office lease but no agreement has been finalized
regarding the amount due on the San Diego lease.

Capitalized Systems Costs Impairment

During the quarter ended June 30, 2002,  the Company  determined  that potential
citation revenues from certain  CrossingGuard  installations in two cities would
not exceed the cost of the underlying carrying value of the capitalized systems.
These contracts were signed in the early stages of CrossingGuard development and
the site selection  procedures  and contract terms have since been improved.  In
accordance  with SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of
Long-Lived  Assets",  the Company wrote off capitalized systems cost of $794,000
and recorded a corresponding  impairment charge in operating  expenses.  Ongoing
revenues from these  installations are expected to offset future costs of system
operations.

                                       20
<PAGE>

Goodwill Impairment Loss

As of January 1, 2002,  the Company  adopted SFAS No. 142,  "Goodwill  and Other
Intangible  Assets."  SFAS No.  142 sets  forth  new  financial  accounting  and
reporting standards that require goodwill to be separately  disclosed from other
intangible  assets  in the  statement  of  financial  position,  and  no  longer
amortized,  but tested for impairment on an annual basis, or whenever indicators
of impairment are identified.  The provisions of this  accounting  standard also
require the  completion of a transitional  impairment  test within six months of
adoption, with any impairment identified accounted for as a cumulative effect of
a change  in  accounting  principle.  The  Company  completed  the  transitional
impairment  test during the quarter  ended June 30, 2002 and  concluded  that no
impairment existed on January 1, 2002, when the standard was adopted. Management
considers  the  Company's  quoted  stock price to be the best  indicator of fair
value for purposes of performing these analyses.

Based on the decline of the  Company's  stock price  during the second and third
quarters  however,  the fair value was recomputed using the quoted June 30, 2002
stock  price  of  $.25  and  September  30,  2002  stock  price  of  $.09.  Such
computations   resulted  in  goodwill   impairment  charges  of  $3,000,000  and
$5,500,000  recorded  as  operating  expenses  during the  respective  quarters.
Although  the  Company's  stock price  declined to $.04 at  December  31,  2002,
management  considered  the decline to be temporary in nature as the stock price
rebounded in January 2003 after the announcement of a capital  infusion.  If the
Company's stock price declines below $.09 at a future quarterly measurement date
and is deemed to be other than  temporary,  further  impairment  changes will be
required in the respective  future period.  The Company will continue to monitor
goodwill for potential impairment.

Gain on Royalty Assignment

On July 15, 2002, the Company entered into a Memorandum of Understanding ("MOU")
with  Churchill  Lane  Associates,  LLC  ("CLA"),  assigning  CLA certain of the
Company's  rights to royalty  income  under the  license  agreement  between the
Company and ACI ("ACI License").  CLA is owned and controlled by Alan M. Wiener,
Alvin J.  Siteman  and Robert M.  Carroll,  directors  and  shareholders  of the
Company. The MOU also provided a schedule for advances by CLA to provide interim
financing to the Company during the period prior to the closing. Upon closing on
September  30, 2002,  CLA paid the Company $3.1 million in cash (less  advances)
for the irrevocable  assignment of its royalty rights under the ACI License from
July 1, 2002 and in  perpetuity.  No  obligations or other rights of the Company
were transferred or assigned to CLA.

After  offsetting  $860,000 of ACI unbilled  contract  revenue,  $632,000 of ACI
deferred income and $60,000 in related professional fees, the Company recorded a
$2,812,000  gain  on  this  royalty   assignment  on  September  30,  2002.  The
elimination of ACI unbilled  contract  revenue and deferred income were recorded
as non-cash reductions.

Other Expense
-------------
For 2002, net other expense was $319,000;  as compared with net other expense of
$187,000 in the year-earlier  period.  In 2002, other expense included  interest
expense of  $217,000 as  compared  to $65,000 in 2001,  and both years  included
$106,000  of  amortization  expense  related to the  assigned  value of warrants
outstanding and being amortized over their remaining life.  Interest expense was
considerably  higher in 2002 as 2001 only included three and one-half  months of
NTS interest expense.

Loss from Investment in Affiliate
---------------------------------
The  pre-merger  loss from  investment in affiliate  recorded in 2001 of $81,100
reflected  Nestor's  portion of NTS losses  realized  under the equity method of
accounting  prior to the merger,  and limited by Nestor's net  investment in the
subsidiary  as of December 31, 2000.  Effective as of the merger,  NTS operating
results are included in the consolidated financial statements.

Net Loss
--------
During 2002, the Company  experienced a loss of $12,634,000,  as compared with a
loss of $1,565,000 in the prior year. For the year ended December 31, 2002, loss
per share was $0.25 per share, as compared with a loss per share of $0.05 in the


                                       21
<PAGE>

corresponding  period of the prior fiscal year.  For the year ended December 31,
2002, there was outstanding a weighted average of 50,476,112 shares, as compared
to 28,818,768 shares in the year-earlier period.


ANALYSIS OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000

In the year ended  December  31,  2001,  the  Company  realized a 4% decrease in
revenues  compared to the prior  calendar year.  Expenses  decreased 19% in 2001
resulting in a loss of  $1,565,000  when compared to a loss of $2,995,000 in the
prior year.

Revenues
--------
The Company's revenues arose from royalties and product licenses and services as
discussed  separately below.  During the year ended December 31, 2001,  revenues
decreased $131,000 to $3,521,000 from $3,652,000 in the prior calendar year. The
Company  granted  source-code  distribution  rights to two companies in 2001 for
up-front  source-code  license fees and, from ACI, ongoing royalties of equal to
15% of future  revenues  realized from the licensed  software.  Beginning in the
fourth  quarter of 2001, the Company's  revenues were  generated  primarily from
sales,   support,  and  services  provided  regarding  its  intelligent  traffic
management product line.

Product Royalties

Product royalty revenues totaled $2,997,000 in 2001, as compared with $2,537,000
in 2000. The Company realized net ReD license revenues of $832,000 in the second
quarter of 2001 (See Note 20 of the financial  statements),  and $1,104,000 from
the ACI  license  in the first  quarter  of 2001  (See Note 19 of the  financial
statements).

Product Licenses and Services

Product  licenses and services  revenues  totaled  $524,000 in 2001, as compared
with $1,115,000 in 2000. The decrease is primarily the result of the transfer of
engineering  and modeling  services  related to PRISM  licenses to either ACI in
February 2001 or ReD in May 2001.  Fourth quarter product  licenses and services
revenues  in 2001 of  $340,000  relate  primarily  to  traffic  system  revenues
generated after the merger was completed on September 12, 2001.

Operating Expenses
------------------
Total operating  expenses were $4,818,000 in the year ended December 31, 2001, a
decrease of $383,000 over total operating costs of $5,201,000 in the prior year.

Cost of Goods Sold

Cost of goods sold was $692,000 in 2001 as compared to none in 2000.  As NTS was
not consolidated until September 13, 2001, there is no related CGS in 2000.

Engineering Services

Costs related to engineering services totaled $509,000 in 2001, as compared with
$967,000 in 2000.  The  decrease  reflects  the  transfer  of PRISM  engineering
expenses  to ACI and ReD in early  2001,  offset in part by the  addition of NTS
engineering expenses effective on the merger completed September 12, 2001.

Research and Development

Research and development  expenses totaled $1,623,000 in the year ended December
31, 2001 as compared  with  $1,247,000  in the prior year.  The increase in such
costs reflects the net of increased  investment in the NTS products  included in
the consolidated expenses after the merger completed on September 12, 2001.

                                       22
<PAGE>

Selling and Marketing

Selling and  marketing  costs  decreased  $715,000 to $779,000 in the year ended
December 31, 2001,  from  $1,494,000 in the prior year.  The decrease in selling
costs in the year  reflects,  primarily,  the  transfer  of sales and  marketing
activity for the PRISM product to ACI and ReD during early 2001.

General and Administrative

General and administrative expenses totaled $1,214,000 in 2001, as compared with
$1,493,000  in the  previous  year.  The  decrease  reflects a decrease in legal
expenses  related to the Nestor versus HNC Software  lawsuit  settled in January
2001 and the  contribution  to overhead and  facility  cost by ReD and ACI under
sublicense  agreements  during  2001,  offset  in part by the  inclusion  of NTS
expenses after the merger on September 12, 2001.

Other Expense
-------------
For 2001, net other expense was $187,000,  as compared with net other expense of
$107,000 in the  year-earlier  period.  In 2001,  other expense included loss on
asset  disposals of $62,000,  and both years included  $106,000 of  amortization
expense  related  to the  assigned  value  of  warrants  outstanding  and  being
amortized over their remaining life.

Loss from Investment in Affiliate
---------------------------------
During 2000, the Company's  affiliate NTS sold additional common stock interests
reducing the Company's  equity interest in the affiliate to 34.6%. The Company's
interests in NTS were  accounted  for under the equity  method of  accounting in
2000 and 1999. As a result of the Company's  equity interest in NTS, the Company
reported a loss from investment in affiliate of $1,339,000 in 2000, representing
34.6% of NTS's actual net loss in 2000 of $3,513,000.  The pre-merger  loss from
investment in affiliate  recorded in 2001 of $81,100 reflected  Nestor's portion
of NTS  losses  realized  under the  equity  method of  accounting  prior to the
merger,  and limited by Nestor's net investment in the subsidiary as of December
31, 2000.

Net Loss
--------
During 2001, the Company  experienced a loss of  $1,565,000,  as compared with a
loss of $2,995,000 in the prior year. For the year ended December 31, 2001, loss
per share was $0.05 per share, as compared with a loss per share of $0.17 in the
corresponding  period of the prior fiscal year.  For the year ended December 31,
2001, there was outstanding a weighted average of 28,818,768 shares, as compared
to 17,901,602 shares in the year-earlier period.


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

The Company has long term lease obligations, however the interest rate is fixed.
Therefore, management assesses their exposure to these risks as immaterial.


ITEM 8.       Financial Statements and Supplementary Data
              -------------------------------------------

See annexed financial statements.

                                       23
<PAGE>



ITEM 9.       Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure
              ---------------------------------------------

On  January  6,  2003,  the  Company  filed  with the  Securities  and  Exchange
Commission  a current  report on Form 8-K dated  January 2, 2003 to disclose the
change in  Certifying  Accountants.  Ernst & Young  LLP  audited  the  Company's
financial  statements for the year ended December 31, 2001. Their opinion on the
2001 financial  statements  did not contain an adverse  opinion or disclaimer of
opinion  nor was it  qualified  or modified  as to  uncertainty,  audit scope or
accounting  principles except that it included a paragraph indicating that there
was  substantial  doubt  about the  Company's  ability  to  continue  as a going
concern. There have been no disagreements with Ernst & Young LLP relating to any
matters of accounting principles or practices, financial statements, disclosures
or auditing  scope or  procedures  for the year ended  December 31, 2001,  which
disagreements,  if not resolved to the  satisfaction of Ernst & Young LLP, would
have caused it to make a reference to the subject matter of the disagreement(s),
in connection  with its report.  During the year ended December 31, 2001 and the
subsequent period preceding Ernst & Young's resignation,  no event occurred that
is  required to be  disclosed  pursuant to  paragraph  (a)(1)(v)  of Item 304 of
Regulation S-K.

On January 2, 2003,  the  Company's  Audit  Committee  of the Board of Directors
engaged  the  independent  accounting  firm,  Carlin,  Charron & Rosen  LLP,  50
Exchange Terrace, Providence, Rhode Island 02903, a member of the Securities and
Exchange  Commission  practice  section of the AICPA,  to audit the fiscal  year
ended  December  31,  2002.  The  Company  did not during the fiscal  year ended
December 31, 2002 or any subsequent  period consult Carlin,  Charron & Rosen LLP
regarding the application of accounting  principles to a specific transaction or
with  respect  to the type of  audit  opinion  that  might  be  rendered  on the
Company's  financial  statements  or any  matter  to be  disclosed  pursuant  to
paragraph (a)(2) of Item 304 of Regulations S-K.

                                       24
<PAGE>

                                    SIGNATURE

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

                         NESTOR, INC.
                         (Registrant)

                          /s/ William B. Danzell
                          -----------------------------------------------------
                          William B. Danzell, Chief Executive Officer


                          /s/ Nigel P. Hebborn
                          -----------------------------------------------------
                          Nigel P. Hebborn, Chief Financial Officer

Date:  March 28, 2003

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

    Signatures                       Title                            Date
    ----------                       -----                            ----

/s/ Alan M. Wiener
-------------------------
Alan M. Wiener             Chairman of the Board                  March 28, 2003


/s/ William B. Danzell
-------------------------  Chief Executive Officer
William B. Danzell         and Director                           March 28, 2003


/s/ J. Steve Emerson
-------------------------
J. Steven Emerson          Director                               March 28, 2003


/s/ Nigel P. Hebborn
-------------------------  President, Chief Financial Officer
Nigel P. Hebborn           and Director                           March 28, 2003


/s/ Robert M. Krasne
-------------------------
Robert M. Krasne           Director                               March 28, 2003


/s/ Stephen H. Marbut
-------------------------
Stephen H. Marbut          Director                               March 28, 2003


/s/ David A. Polak
-------------------------
David A. Polak             Director                               March 28, 2003


/s/ Douglas L. Reilly
-------------------------
Douglas L. Reilly          Director                               March 28, 2003


/s/ Bruce W. Schnitzer
-------------------------
Bruce W. Schnitzer         Director                               March 28, 2003


                                       25
<PAGE>

                           CERTIFICATIONS PURSUANT TO
                                 SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, William B. Danzell, certify that:

1.   I have reviewed this annual report on Form 10-K of Nestor, Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date: March 28, 2003

/s/ William B. Danzell
------------------------------------------
William B. Danzell Chief Executive Officer


                                       26
<PAGE>


CERTIFICATION

I, Nigel P. Hebborn, certify that:

1.   I have reviewed this annual report on Form 10-K of Nestor, Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date: March 28, 2003




/s/ Nigel P. Hebborn
------------------------
Nigel P. Hebborn
Chief Financial Officer


                                       27
<PAGE>





                                                                        PART II


ITEM 8.





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



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



                               December 31, 2002
                               -----------------


                                       28
<PAGE>







                                  NESTOR, INC.

                                    CONTENTS
                                ----------------






                                                                  Page No.
                                                                  -------

INDEPENDENT AUDITORS' REPORTS                                       30

CONSOLIDATED BALANCE SHEETS -
 December 31, 2002 and 2001                                         32

CONSOLIDATED STATEMENTS OF OPERATIONS -
 For the Years Ended December 31, 2002, 2001 and 2000               33

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
 For the Years Ended December 31, 2002, 2001 and 2000               34

CONSOLIDATED STATEMENTS OF CASH FLOWS -
 For the Years Ended December 31, 2002, 2001 and 2000               35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          36



                                       29
<PAGE>









                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
   of Nestor, Inc.
East Providence, Rhode Island

We have audited the accompanying  consolidated  balance sheet of Nestor, Inc. as
of December 31, 2002,  and the related  consolidated  statements of  operations,
stockholders'  equity and cash flows for the year ended  December 31, 2002.  Our
audit also included the financial statement schedule for the year ended December
31, 2002  listed in the index at Item  15(a).  These  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.

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

In our opinion,  the 2002 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nestor, Inc. at
December 31, 2002 and the  consolidated  results of its  operations and its cash
flows  for the year  ended  December  31,  2002 in  conformity  with  accounting
principles  generally  accepted in the United  States of America.  Also,  in our
opinion, the related financial statement schedule when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

The accompanying  financial  statements have been prepared assuming that Nestor,
Inc. will continue as a going  concern.  As discussed in Note 1, the Company has
incurred  significant losses to date and has an accumulated  deficit at December
31, 2002. These conditions raise  substantial  doubt about the Company's ability
to continue as a going  concern.  Management's  plans in regard to these matters
are discussed in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





                                                  /s/Carlin, Charron & Rosen LLP


Providence, Rhode Island
February 26, 2003



                                       30
<PAGE>











                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
   of Nestor, Inc.


We have audited the accompanying  consolidated  balance sheet of Nestor, Inc. as
of December 31, 2001,  and the related  consolidated  statements of  operations,
stockholders'  equity and cash flows for the years ended  December  31, 2001 and
2000. Our audit also included the financial  statement  schedule  listed for the
years  ended  December  31,  2001 and 2000 in the  index  at Item  15(a).  These
financial  statements  and  schedule  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule based on our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of Nestor,  Inc. at
December 31, 2001, and the  consolidated  results of its operations and its cash
flows  for each of the two  years  in the  period  ended  December  31,  2001 in
conformity with accounting  principles  generally accepted in the United States.
Also, in our opinion,  the related financial  statement schedule when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects the information set forth therein.

The accompanying  financial  statements have been prepared assuming that Nestor,
Inc.  will continue as a going  concern.  As discussed in Note 1, the Company is
currently  expending  cash in  excess  of cash  generated  from  operations,  as
revenues  are not yet  sufficient  to support  operations  and the  Company  has
incurred  significant losses. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.  Management's  plans in regard
to these  matters  are  discussed  in Note 1. The  financial  statements  do not
include  any   adjustments  to  reflect  the  possible  future  effects  on  the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.




                                                            /s/Ernst & Young LLP


Providence, Rhode Island
February 26, 2002



                                       31
<PAGE>




<TABLE>
<CAPTION>

                                                      NESTOR, INC.
                                               Consolidated Balance Sheets
                                               ---------------------------
                                                                                           DECEMBER 31,
                      ASSETS                                                         2002                2001
                                                                                     ----                ----
<S>                                                                             <C>                <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                   $     308,894      $   2,294,987
    Restricted cash                                                                       ---            943,926
    Accounts receivable                                                               141,263            158,206
    Unbilled contract revenue                                                         122,684            595,023
    Inventory                                                                         281,108            375,098
    Other current assets                                                               60,963            220,483
                                                                                -------------      -------------
      Total current assets                                                            914,912          4,587,723

NONCURRENT ASSETS:
    Long term unbilled contract revenue                                                   ---            421,399
    Capitalized system costs, net of accumulated depreciation                       1,936,783          2,079,938
    Property and equipment, net of accumulated depreciation                           486,740            652,644
    Goodwill                                                                        5,580,684         14,080,684
    Patent development costs, net of accumulated amortization                         153,275            135,242
    Other long term assets                                                            128,570             77,790
                                                                                -------------      -------------

TOTAL ASSETS                                                                    $   9,200,964      $  22,035,420
                                                                                =============      =============

       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable                                                            $     616,878      $     601,361
    Accrued employee compensation                                                     354,269            478,444
    Accrued liabilities                                                               795,749            944,298
    Deferred income                                                                       ---            481,892
    Leases payable                                                                    354,286            306,327
    Restructuring reserve                                                             365,939                ---
                                                                                -------------      -------------
      Total current liabilities                                                     2,487,121          2,812,322

NONCURRENT LIABILITIES:
    Long term deferred income                                                             ---            421,399
    Long term leases payable                                                        2,849,126          2,409,202
                                                                                -------------      -------------
      Total liabilities                                                             5,336,247          5,642,923
                                                                                -------------      -------------

    Commitments and contingencies                                                         ---                ---

STOCKHOLDERS' EQUITY:
    Preferred stock, $1.00 par value, authorized 10,000,000 shares;
      issued and outstanding:  Series B - 235,000 shares at
      December 31, 2002 and 2001                                                      235,000            235,000
    Common stock, $.01 par value, authorized 100,000,000 shares;
      issued and outstanding: 50,241,112  shares at December 31, 2002
      and 2001                                                                        502,411            502,411
    Warrants                                                                        1,072,825          2,612,368
    Additional paid-in capital                                                     44,775,681         43,129,655
    Accumulated deficit                                                           (42,721,200)       (30,086,937)
                                                                                -------------      -------------
      Total stockholders' equity                                                    3,864,717         16,392,497
                                                                                -------------      -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $   9,200,964      $  22,035,420
                                                                                =============      =============


SEE INDEPENDENT AUDITORS' REPORTS AND NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>



                                       32
<PAGE>


<TABLE>
<CAPTION>


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


                                                           YEARS ENDED DECEMBER 31,
                                                  2002                2001               2000
                                             ----------------------------------------------------

Revenue:
<S>                                          <C>                 <C>                <C>
     Product royalties                       $     664,401       $   2,996,550      $   2,537,511
     Product licenses and services               1,457,173             524,374          1,114,911
                                             -------------       -------------      -------------

         Total revenue                           2,121,574           3,520,924          3,652,422
                                             -------------       -------------      -------------

Operating expenses:
     Cost of goods sold                          1,475,945             692,418                ---
     Engineering services                        2,070,476             508,955            966,681
     Research and development                    1,604,159           1,623,182          1,247,205
     Selling and marketing                         607,901             779,389          1,493,968
     General and administrative                  1,453,342           1,214,125          1,493,345
     Restructuring costs                           742,705                 ---                ---
     Capitalized system costs impairment           794,281                 ---                ---
     Goodwill impairment loss                    8,500,000                 ---                ---
                                             -------------       -------------      -------------
         Total operating expenses               17,248,809           4,818,069          5,201,199
                                             -------------       -------------      -------------


Loss from operations                           (15,127,235)         (1,297,145)        (1,548,777)

Gain on royalty assignment                       2,811,590                 ---                ---
Other expense - net                               (318,618)           (186,809)          (106,675)
                                             --------------      --------------     --------------

Loss before investment loss                    (12,634,263)         (1,483,954)        (1,655,452)

Loss from investment in affiliate                      ---             (81,100)        (1,339,122)
                                             -------------       --------------     --------------

Net loss                                     $ (12,634,263)      $  (1,565,054)     $  (2,994,574)
                                             ==============      ==============     ==============


Loss Per Share:

Loss per share, basic and diluted            $       (0.25)      $       (0.05)     $       (0.17)
                                             ==============      ==============     ==============

Shares used in computing loss per share:
     Basic and diluted                          50,476,112          28,818,768         17,901,602
                                             ==============      ==============     ==============


SEE INDEPENDENT AUDITORS' REPORTS AND NOTES TO THE FINANCIAL STATEMENTS.

</TABLE>


                                       33
<PAGE>



<TABLE>
<CAPTION>


                                                                  Nestor, Inc.
                                                 Consolidated Statement of Stockholders' Equity

                                              For the Years Ended December 31, 2002, 2001 and 2000
                                              ----------------------------------------------------

                                                                         Additional
                                                                          Paid-in       Accumulated
                         Common Stock              Preferred Stock        Capital        Deficit          Warrants         Total
                     ---------------------     ----------------------    ----------     -----------       --------         -----
                       Shares      Amount       Shares        Amount
                       ------      ------       ------        ------




<S>                  <C>          <C>          <C>       <C>            <C>            <C>              <C>            <C>
Balance at
December 31, 1999    17,499,327   $174,993     345,000   $ 345,000      $26,574,123    $(25,527,309)    $   736,951    $  2,303,758

Issuance of
Common Stock             79,122        791         ---         ---           84,846             ---             ---          85,637

Conversion of
Preferred Stock
to Common Stock         110,000      1,100    (110,000)   (110,000)         108,900             ---             ---             ---

Issuance of equity
by subsidiary               ---        ---         ---         ---          666,260             ---             ---         666,260

Accretion value
of warrants                 ---        ---         ---         ---              ---             ---         106,483         106,483

Loss for the
year ended
December 31, 2000           ---        ---         ---         ---              ---      (2,994,574)            ---      (2,994,574)

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


Issuance of
Common Stock         32,338,558    323,386         ---         ---       17,199,473             ---             ---      17,522,859

Accretion value
of warrants                 ---        ---         ---         ---              ---             ---         106,484         106,484

Variable warrants           ---        ---         ---         ---       (1,662,450)            ---       1,662,450             ---

Options exercised       214,105      2,141         ---         ---          158,503             ---             ---         160,644

Loss for the
year ended
December 31, 2001           ---        ---         ---         ---              ---      (1,565,054)            ---      (1,565,054)
                     ----------   --------     -------    ---------     -----------    ------------     -----------    ------------
Balance at
December 31, 2001    50,241,112   $502,411     235,000   $ 235,000      $43,129,655    $(30,086,937)    $ 2,612,368    $ 16,392,497


Accretion value
of warrants
                            ---        ---         ---         ---              ---             ---         106,483         106,483
Variable warrants
                            ---        ---         ---         ---        1,646,026             ---      (1,646,026)            ---
Loss for the
year ended
December 31, 2002           ---        ---         ---         ---              ---     (12,634,263)            ---     (12,634,263)
                     ----------   --------     -------   ---------      -----------    ------------     -----------    ------------
Balance at
December 31, 2002    50,241,112   $502,411     235,000   $ 235,000      $44,775,681    $(42,721,200)    $ 1,072,825    $  3,864,717
                     ==========   ========     =======   =========      ===========    ============     ===========    ============



SEE INDEPENDENT AUDITORS' REPORTS AND NOTES TO THE FINANCIAL STATEMENTS.



                                       34
<PAGE>


</TABLE>


<TABLE>
<CAPTION>

                                                   NESTOR, INC.
                                       Consolidated Statements of Cash Flows
                                       -------------------------------------

                                                                             YEARS ENDED DECEMBER 31,
                                                                    2002               2001                2000
                                                              -----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                         <C>                 <C>                <C>
  Net loss                                                  $ (12,634,263)      $  (1,565,054)     $  (2,994,574)
    Adjustments to reconcile net loss
      to net cash used by operating activities:
      Depreciation and amortization                               601,938             239,178            116,540
      Loss on disposal of fixed assets                             17,402              66,666                ---
      Loss from investment in affiliate                               ---              81,100          1,339,122
      Goodwill impairment loss                                  8,500,000                 ---                ---
      Capitalized system costs impairment                         794,281                 ---                ---
      Gain on royalty assignment                               (2,811,590)                ---                ---
      Expenses charged to operations relating to
       options, warrants and capital transactions                 106,483             106,484            106,483
      Increase (decrease) in cash arising from
       changes in assets and liabilities:
        Restricted cash                                           943,926            (943,926)               ---
        Accounts receivable                                        16,943             702,114            290,763
        Unbilled contract revenue                                  32,841             384,068           (131,764)
        Inventory                                                  46,447             126,801                ---
        Other assets                                              108,740              55,208             70,767
        Accounts payable and accrued expenses                    (257,207)           (277,278)          (124,624)
        Deferred income                                          (270,904)           (610,703)             6,163
        Restructuring reserve                                     365,939                 ---                ---
                                                            -------------       -------------      -------------

        Net cash used by operating activities                  (4,439,024)         (1,635,342)        (1,321,124)
                                                            --------------      --------------     --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Payments from (advances to) affiliate - net                         ---             322,952            (45,764)
  Cash of acquired affiliate                                          ---             361,804                ---
  Acquisition costs                                                   ---            (555,269)               ---
  Proceeds from royalty assignment - net                        3,040,100                 ---                ---
  Investment in capitalized systems                            (1,016,985)           (454,778)               ---
  Purchase of property and equipment                              (47,849)            (90,052)               ---
  Proceeds from sale of property and equipment                     11,600                 ---                ---
  Patent development costs                                        (21,818)            (60,335)           (20,968)
                                                            --------------      --------------     --------------

        Net cash provided (used) by investing activities        1,965,048            (475,678)           (66,732)
                                                            -------------       --------------     --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of obligations under capital leases                   (42,647)            (17,124)           (16,317)
  Proceeds from (repayment of) line of credit                         ---            (419,769)           419,769
  Proceeds from leases payable                                    530,530             742,742                ---
  Proceeds from issuance of common stock - net                        ---           3,950,123             85,637
                                                            -------------       -------------      -------------

        Net cash provided by financing activities                 487,883           4,255,972            489,089
                                                            -------------       -------------      -------------

Net change in cash and cash equivalents                        (1,986,093)          2,144,952           (898,767)
Cash and cash equivalents - beginning of year                   2,294,987             150,035          1,048,802
                                                            -------------       -------------      -------------

Cash and cash equivalents - end of year                     $     308,894       $   2,294,987      $     150,035
                                                            =============       =============      =============

SUPPLEMENTAL CASH FLOWS INFORMATION:
  Interest paid                                             $      89,431       $     112,016      $      10,603
                                                            =============       =============      =============

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



SIGNIFICANT NON-CASH TRANSACTIONS ARE DESCRIBED IN NOTES 9, 12, 15 AND 19.
SEE INDEPENDENT AUDITORS' REPORTS AND NOTES TO THE FINANCIAL STATEMENTS.

</TABLE>


                                       35
<PAGE>




                                  NESTOR, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 -  NATURE OF OPERATIONS
     A.   Organization
          Nestor,  Inc.  (the  "Company")  was  organized  on March 21,  1983 in
          Delaware to 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 East
          Providence, RI.

          The  Company's  current  focus is to offer  customers  products  to be
          utilized  in  intelligent  traffic  management  systems.  Its  leading
          product is its CrossingGuard  video-based red light enforcement system
          and services, sold and distributed exclusively by NTS.

          Nestor, Inc. organized two wholly-owned  subsidiaries,  Nestor Traffic
          Systems,  Inc. ("NTS") and Nestor  Interactive,  Inc.  ("Interactive")
          effective  January 1, 1997.  Effective  November 7, 1998,  the Company
          ceased further investment in the Interactive  subsidiary.  In 1999 and
          2000,  NTS sold  shares  of its  common  stock to  private  investors,
          bringing the  Company's  ownership of NTS to 34.62%.  On September 12,
          2001,  NTS was merged into a  wholly-owned  subsidiary of the Company.
          Accordingly, the consolidated financial statements include NTS balance
          sheet  accounts at December 31, 2002 and 2001,  and operating  results
          subsequent to September 12, 2001. All  intercompany  transactions  and
          balances have been eliminated.

          In 2001,  Nestor,  Inc. ceased direct product  development,  sales and
          support in the fields of fraud  detection,  financial risk management,
          and  customer   relationship   management  ("CRM").   Through  license
          agreements entered into with Applied  Communications,  Inc. ("ACI") on
          February 1, 2001, and with Retail  Decisions,  Inc. ("ReD") on May 18,
          2001,  co-exclusive  development,  licensing  and support  rights were
          granted  to  these  resellers  in  fraud  and  risk  management;   and
          non-exclusive  rights  in the  field of CRM were  granted  to ReD.  In
          addition,  all  expenses  associated  with  development,  support  and
          selling  these  products were  transferred  to these  parties.  Nestor
          continued to receive  royalties from ACI licensing  revenues  realized
          from the Company's  products through June 30, 2002.  Effective July 1,
          2002,  the Company  assigned its ACI royalty  rights to Churchill Lane
          Associates.

     B.   Liquidity and management's plans
          The Company has  incurred  significant  losses to date and at December
          31,  2002  has  an  accumulated   deficit.   These   conditions  raise
          substantial  doubt about the Company's  ability to continue as a going
          concern  without  additional  financing to carry out product  delivery
          efforts under current  contracts,  to underwrite the delivery costs of
          future systems delivered under turnkey agreements with municipalities,
          for continued development and upgrading of its products,  for customer
          support, and for other operating uses. If the Company does not realize
          additional  equity  and/or  debt  capital or  revenues  sufficient  to
          maintain  its  operations  at the  current  level,  management  of the
          Company would be required to modify certain initiatives, including the
          cessation of some or all of its operating  activities until additional
          funds become available through investment or revenues.

          In January 2003, the Company raised $2.3 million of additional capital
          through the issuance of  49,000,000  shares of its common stock in the
          initial  closing  of a  stock  purchase  agreement  with  Silver  Star
          Partners  I,  LLC.  Management  expects  the  second  closing  of this
          transaction  to occur in April 2003,  increasing  the  investment to a
          minimum  of $3 million  and up to a maximum of $6 million in  exchange
          for additional Nestor, Inc. common shares. In conjunction with the new
          shares being issued, the Board approved a one-for-ten reverse split of
          the  common  share  capital of the  Company.  On March 14,  2003,  the


                                       36
<PAGE>

          Company filed a Schedule 14C Definitive  Information Statement on this
          Agreement.  The Company is actively pursuing the raising of additional
          equity and debt financing.  There can be no assurance,  however,  that
          the  Company's  operations  will be sustained or be  profitable in the
          future,  that adequate  sources of financing will be available at all,
          when needed or on commercially  acceptable terms or that the Company's
          product development and marketing efforts will be successful.


NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
     A.   Cash equivalents and restricted cash
          The Company  considers  all highly liquid debt  instruments  purchased
          with an original  maturity of 90 days or less to be cash  equivalents.
          Restricted cash represents the unexpended balance of advances received
          under a financing agreement as of December 31, 2001.

     B.   Unbilled  contract  revenues
          At December 31, 2002,  unbilled  contract  revenues  represent revenue
          earned by the  Company  in advance of being  billable  under  customer
          contract terms. Under the terms of some current contracts, the Company
          cannot  bill the  municipality  until  the  court  has  collected  the
          citation fine.  Management  records unbilled contract revenue in these
          situations  at a net  amount,  based  upon  a  historical  pattern  of
          collections  by the  courts  for the  municipalities.  The  pattern of
          collections on these citations is continually  reviewed and updated by
          management.

          Unbilled contract  revenues at December 31, 2001 represents  primarily
          PRISM related minimum guaranteed monthly license fees where a customer
          paid a portion of the  license  fees over the  software  license  term
          (usually five years) based on a  contractually  predetermined  minimum
          volume of transactions.

     C.   Property and equipment & depreciation  and  amortization
          Property  and  equipment  are  recorded  at  cost.   Depreciation  and
          amortization  are calculated using the  straight-line  method at rates
          sufficient  to write off the cost of the assets  over their  estimated
          useful lives.

     D.   Product and patent  development  costs
          The costs of  development  of the  Company's  software - which consist
          primarily of labor and outside  consulting and are an inherent cost of
          the  Company's  business - and costs of research and  development  are
          expensed until technological  feasibility has been established for the
          product. Thereafter, all software production costs are capitalized and
          subsequently  reported  at  the  lower  of  unamortized  cost  or  net
          realizable  value.  Capitalized costs are amortized on a straight-line
          basis over the  estimated  economic  life of the product.  The Company
          currently has no costs eligible for capitalization  under the American
          Institute of Certified Public Accountants Statement of Position 98-1.

          Patent-development costs are expensed or capitalized,  as appropriate.
          Amortization of capitalized costs is on a straight-line basis over the
          shorter of the  estimated  economic  life,  or statutory  life, of the
          patent.

     E.   Deferred Income
          Corresponding  with  December  31, 2001  unbilled  contract  revenues,
          deferred income represents  primarily PRISM related minimum guaranteed
          monthly  license  fees where a customer  paid a portion of the license
          fees over the software  license term  (usually  five years) based on a
          contractually predetermined minimum volume of transactions.

          Additionally,  occasionally  the Company bills and/or collects payment
          from  customers  prior to the  delivery  of the  software  product  or
          performance  of  contracted  maintenance  or  services,  resulting  in
          deferred income.

                                       37
<PAGE>

     F.   Revenue recognition

          Nestor, Inc.:
          During  2001,  revenue was derived  from  software  licenses  (Initial
          License Fees), user fees (Monthly License Fees), postcontract customer
          support (PCS) and engineering  services. In software arrangements that
          included   multiple   elements,   the  Company   allocated  the  total
          arrangement  fee among each  deliverable  based on the  relative  fair
          value of each of the deliverables  determined based on vendor-specific
          objective  evidence as per AICPA Statement of Position 97-2 - Software
          Revenue Recognition.

          Software  Licenses  - During  2001,  the  Company  recognized  revenue
          allocable to software  licenses upon delivery of the software  product
          to the end  user,  unless  the fee was not  fixed or  determinable  or
          collectibility   was  not  probable.   The  Company   considered   all
          arrangements  with payment  terms  extending  beyond twelve months and
          other  arrangements  with  payment  terms longer than normal not to be
          fixed  or  determinable.  If the fee was not  fixed  or  determinable,
          revenue was  recognized as payments  became due from the customer.  In
          most  situations,  the  Company  considered  its  acceptance  terms as
          perfunctory. Arrangements that included acceptance terms that were not
          considered  perfunctory were not recognized until acceptance occurred.
          If collectibility was not considered probable,  revenue was recognized
          when the fee was collected. Revenue on arrangements with customers who
          were not the ultimate users (distributors,  other resellers, etc.) was
          not recognized until the software was delivered to an end user.

          Nestor Traffic Systems, Inc.:
          Revenue is derived mainly from the lease of products which incorporate
          NTS's  software and the delivery of services based upon such products.
          Lease and  service  fees  include  software  licenses  and  processing
          service fees tied to  citations  issued to  red-light  violators.  NTS
          provides equipment (either under sales or operating lease agreements),
          PCS and engineering  services.  In arrangements  that include multiple
          elements, some of which include software, the total arrangement fee is
          allocated among each  deliverable  based on the relative fair value of
          each of the deliverables determined based on vendor-specific objective
          evidence.

          Product  Sales - The  Company  recognizes  the  revenue  allocable  to
          product sales upon delivery of the product.

          Lease and Service Fees - The Company  recognizes lease and service fee
          revenue from  operating  lease  arrangements  with  customers over the
          terms of the lease  agreements.  The  majority of NTS's  CrossingGuard
          revenues  are  expected  to  be  generated  from  fees  received  from
          red-light  violation  citations  issued by the system  and  associated
          services.  Revenues  are  recognized  upon the issuance of the related
          tickets.

          Both companies:
          Postcontract  Customer Support - PCS includes maintenance  agreements.
          Revenue  allocable to PCS is recognized on a straight-line  basis over
          the period the PCS is provided or upon issuance of related  tickets if
          a component of ticket fees.

          Engineering  Services - Engineering  services range from installation,
          training, and basic consulting to modeling,  software modification and
          customization to meet specific  customer needs. For arrangements  that
          include  customization  or  modification  of the  software,  or  where
          software  services  are  otherwise  considered  essential,  revenue is
          recognized  using  contract  accounting.  Revenue from these  software
          arrangements is recognized on a  percentage-of-completion  method with
          progress-to-completion  measured  based upon  estimated  total  costs.
          Contracts   may  include   penalty   provisions   relating  to  timely
          performance  and  delivery.  Penalties  are charged to  operations  as
          incurred.

                                       38
<PAGE>


     G.   Inventory
          Inventory  is  valued  at the  lower  of cost  or  market,  with  cost
          determined by the  first-in,  first-out  basis and consists  mostly of
          equipment to be installed as capitalized system costs.

     H.   Goodwill
          Goodwill  represents  the  excess of cost  over the fair  value of net
          assets acquired.  Statement of Financial  Accounting  Standards (SFAS)
          No.  142,  "Goodwill  and  Other  Intangible  Assets,"  requires  that
          goodwill  be tested for  impairment  at least  annually  and  whenever
          events or changes in  circumstances  indicate that the carrying amount
          of the  asset  may  not  be  recoverable.  Goodwill  is  reviewed  for
          impairment  using the Company's quoted stock price as a measurement of
          the  Company's  fair  value  of  assets,   including   goodwill,   and
          liabilities.  Any  resulting  goodwill  impairment  will be charged to
          operations.

     I.   Concentrations of credit risk
          The Company's financial instruments that are exposed to concentrations
          of credit risk  consist  primarily  of cash and cash  equivalents  and
          trade accounts  receivable.  The Company places its cash and temporary
          cash investments with high credit quality institutions.  At times such
          investments  may be in excess of the FDIC  insurance  limit.  However,
          senior management continually reviews the financial stability of these
          financial  institutions.  The Company routinely assesses the financial
          strength of its customers, most of which are municipalities, and, as a
          result,  believes  that its  trade  accounts  receivable  credit  risk
          exposure is limited.  The Company does not require collateral from its
          customers.

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

     K.   Earnings (loss) per share
          The  Company   reports  its  earnings  (loss)  per  share  ("EPS")  in
          accordance with the provisions of the Financial  Accounting  Standards
          Board Statement No. 128, Earnings Per Share ("FAS 128").  Basic EPS is
          calculated by dividing the net income  (loss) by the weighted  average
          number  of  common  shares   outstanding   for  the  period,   without
          consideration  for common stock  equivalents.  Diluted EPS is computed
          giving  effect  to  common  stock   equivalents   and  other  dilutive
          securities,  unless the computation results in anti-dilution.  Diluted
          per share  computations  are not  presented  since the effect would be
          anti-dilutive.

     L.   Shipping and handling costs
          Shipping and handling costs are capitalized if part of a leased system
          or included in engineering services expense.

     M.   Reclassification
          Certain  assets and operating  expenses  reported at December 31, 2001
          have  been   reclassified   to  conform  to  the   December  31,  2002
          presentation.  These  reclassifications  have no  effect  on 2001  net
          income as previously reported.

     N.   Accounts receivable
          Accounts receivable represent balances due from customers. The Company
          considers   accounts   receivable   to  be  fully   collectible,   and
          accordingly,  no allowance  for  doubtful  accounts is  necessary.  In
          determining  the  need for an  allowance,  objective  evidence  that a
          single receivable is uncollectible as well as an historical pattern of
          collections of accounts  receivable that indicate that the entire face
          amount of a portfolio of accounts  receivable  may not be collected is
          considered at each balance sheet date.

                                       39
<PAGE>


     O.   Stock option plans
          The Company  accounts  for stock  option  awards  granted to officers,
          directors  and   employees   (collectively   "employees")   under  the
          recognition and measurement  principles of Accounting Principles Board
          Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
          Under APB 25, no stock-based  employee  compensation cost is reflected
          in net income,  as all options  granted to employees under these plans
          have been  granted  at no less than fair  market  value on the date of
          grant.  The Company applies the disclosure only provision of Statement
          of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
          Stock-based  Compensation"  ("SFAS 123") and SFAS No. 148, "Accounting
          for Stock-based  Compensation-Transition  and Disclosure  ("SFAS 148")
          for such employee stock option awards.  The Company accounts for stock
          option awards granted to consultants  under the fair value recognition
          provisions  of SFAS 123.  Under this method,  options are valued using
          the  Black-Scholes  option  pricing model,  and the calculated  option
          value is recorded as an expense in the financial statements.

          For purposes of providing pro forma  disclosures for employee  grants,
          the fair value for  options was  estimated  at the date of grant using
          the  Black-Scholes  pricing mode with the following  weighted  average
          assumptions:

                                                   2002                2001
                                                   ----                ----
          Expected life (years)                        8                   8
          Average risk-free interest rate      2.6 to 6.8%         4.2 to 6.8%
          Volatility                                109.8%              105.9%
          Dividend yield                                0%                  0%

          The  weighted-average  fair value of options granted during 2002, 2001
          and 2000 was $.18, $.51 and $.75, respectively. The Company recognizes
          forfeitures as they occur.

          Had the  Company  determined  compensation  expense  for  the  Plan in
          accordance with the fair value methodology prescribed by SFAS 123, the
          Company's pro forma net loss and loss per share would have been:
<TABLE>
<CAPTION>

                                                        Years Ended December 31,
                                            ------------------------------------------------
                                                 2002              2001             2000
                                                 ----              ----             ----

          <S>                                <C>               <C>              <C>
          Net loss - reported                $(12,634,263)     $(1,565,054)     $(2,994,574)
          Deduct:  total stock-based
            compensation expense
            determined under fair-value
            based method for all awards,
            net of related tax effects       $    (22,464)     $   (23,679)     $   421,087
          Pro Forma - net loss               $(12,656,727)     $(1,588,733)     $(2,573,487)
          Pro forma net loss per share -
            basic and diluted                $      (0.25)     $     (0.06)     $     (0.14)
</TABLE>


          For the purposes of this  disclosure,  the estimated fair value of the
          options is amortized to expense over the options' vesting periods. The
          effects on pro forma  disclosures  of applying SFAS 123 are not likely
          to be representative of the effects on pro forma disclosures of future
          years  since the pro forma  expense  includes  only one year of option
          grants.

     P.   Income taxes
          The Company  accounts for income  taxes using the  deferred  liability
          method.  Under this method,  deferred tax assets and  liabilities  are
          determined  based on differences  between the financial  reporting and
          the tax basis of assets and  liabilities,  and are measured  using the


                                       40
<PAGE>

          enacted  tax  rates  and tax  laws  that  will be in  effect  when the
          differences  are  expected to reverse.  The primary  component  of the
          deferred tax asset as of December 31, 2002,  which is fully  reserved,
          is net operating loss carry forwards.

          Although  the Company  reports  consolidated  results and balances for
          financial reporting purposes,  the individual  companies file separate
          tax returns. Due to operating losses throughout the reporting periods,
          no provision for income tax was made in 2002, 2001 or 2000.


     Q.   Research and development
          Research  and  development  in  the  current  year  represents   costs
          associated  with  the  NTS  product  line  and  include  approximately
          $227,000 of third-party billings.

NOTE 3 -  CAPITALIZED SYSTEM COSTS:
          Equipment,  installation  and in some cases  interest costs related to
          operating lease contracts are capitalized and, after acceptance by the
          municipality  (customer),  are depreciated  generally over a five year
          estimated  useful  life.  The  associated  operating  lease  terms are
          predominantly  three to five years from the last installation date. As
          larger contracts entail phased in installations  over a period of time
          and the Company  expects  some  contracts  to be  renewed,  management
          estimates that a five-year  average useful life is reasonable.  In the
          event that a lease is not  renewed,  the Company will  depreciate  the
          remaining book value of the equipment,  which could  approximate up to
          25% of the original  cost,  over the  remaining  lease term.  Revenues
          realized from these agreements,  generally in the form of per-citation
          fees, are expected to be adequate to cover the  capitalized and future
          costs related to these agreements. Most leases contain minimum payment
          requirements,  which currently aggregate to $652,000 in 2003, $652,000
          in 2004 and $315,000 in 2005 but management  expects that these annual
          amounts  could  increase  and  extend  to future  years as  additional
          intersections are installed.  A substantial  portion of this equipment
          is collateral for the Company's leases payable.

                                                             December 31,
                                                      2002              2001
                                                      ----              ----
          Equipment under operating leases:
                Work-in-process                   $   381,030      $ 1,289,478
                Installed and accepted              1,884,611          892,337
                                                  -----------      -----------
                                                    2,265,641        2,181,815

          Less: Accumulated depreciation             (328,858)        (101,877)
                                                  -----------      -----------

          Net investment in leased equipment      $ 1,936,783      $ 2,079,938
                                                  ===========      ===========


NOTE 4 -  PROPERTY AND EQUIPMENT - NET:
                                                             December 31,
                                                       2002             2001
                                                       ----             ----

          Office furniture and equipment          $   140,475      $   194,763
          Computer equipment                        1,607,256        1,524,181
          Demonstration equipment                     125,562          123,518
          Leasehold improvements                      227,872          230,314
                                                  -----------      -----------
                                                    2,101,165        2,072,776
          Less:  Accumulated depreciation          (1,614,425)      (1,420,132)
                                                  -----------      -----------
                                                  $   486,740      $   652,644
                                                  ===========      ===========

          In 2002,  the Company sold or disposed of $56,877 in office  furniture
          and equipment,  $13,194 of computer  equipment and $2,442 of leasehold
          improvements.  The loss on  disposal  of fixed  assets is  included in
          Other expense - net.

                                       41
<PAGE>

          Depreciation and amortization expense on the above assets of $235,361,
          $175,573  and $92,540 was  recorded  for the years ended  December 31,
          2002, 2001 and 2000, respectively.


NOTE 5 -  GOODWILL AND OTHER TANGIBLE ASSETS:
          As of January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
          Other  Intangible  Assets."  SFAS No.  142 sets  forth  new  financial
          accounting  and  reporting  standards  that  require  goodwill  to  be
          separately  disclosed from other intangible assets in the statement of
          financial position, and no longer amortized, but tested for impairment
          on  an  annual  basis,  or  whenever   indicators  of  impairment  are
          identified.  The provisions of this  accounting  standard also require
          the completion of a transitional  impairment test within six months of
          adoption, with any impairment identified accounted for as a cumulative
          effect of a change in accounting principle.  The Company completed the
          transitional  impairment  test during the quarter  ended June 30, 2002
          and concluded that no impairment  existed on January 1, 2002, when the
          standard was adopted.  Management considers the Company's quoted stock
          price  to be  the  best  indicator  of  fair  value  for  purposes  of
          performing these analyses.

          Based on the decline of the  Company's  stock price  during the second
          and third quarters  however,  the fair value was recomputed  using the
          quoted June 30, 2002 stock price of $.25 and  September 30, 2002 stock
          price of $.09.  Such  computations  resulted  in  goodwill  impairment
          charges of $3,000,000  and $5,500,000  recorded as operating  expenses
          during the  respective  quarters.  Although the Company's  stock price
          declined to $.04 at  December  31,  2002,  management  considered  the
          decline to be  temporary  in nature as the stock  price  rebounded  in
          2003. If the  Company's  fair value  declines  below the September 30,
          2002 measurement at a future quarterly  measurement date and is deemed
          to be  other  than  temporary,  further  impairment  changes  will  be
          required in the respective future period. The Company will continue to
          monitor goodwill for potential impairment.

          As all of the  goodwill  recorded on the  Company's  books was created
          subsequent  to June 30, 2001,  no goodwill  amortization  was recorded
          during 2001, in accordance with SFAS No. 142. Since no amortization of
          goodwill had been  recorded in 2001,  adoption of SFAS No. 142 has had
          no pro forma effect on the net loss or earnings per share calculations
          for fiscal year 2001.

          Amortization  of  other  intangible  assets  has  been  immaterial  to
          operating results to date.

NOTE 6 -  LEASES PAYABLE:
          On June 28, 2001, NTS executed a Master Lease Purchase  Agreement with
          Electronic Data Systems Corporation ("EDS"), whereby EDS would provide
          lease  financing  to  support  installation  of the NTS  CrossingGuard
          product to municipalities under leasing terms. NTS received $3,183,180
          in advances,  drawn at $53,053 per approach  contracted to fund system
          equipment,  design and installation costs. Advances are collateralized
          by equipment  delivered  under leased  CrossingGuard  systems and were
          being repaid  interest (20%) only for the first 6 months and principal
          and interest over the next 60 months from each advance date.

          Payments  were  made as  scheduled  through  February  2002,  then the
          Company became  delinquent on payments and fell out of compliance with
          the lease  agreement.  On January 10, 2003,  the lease  agreement  was
          amended, pursuant to a letter agreement between NTS and EDS dated July
          18, 2002, to provide:  (i) a moratorium  on NTS' interest  obligations
          under the  lease for the  period  from July 1, 2002  through  June 30,
          2003; (ii) a moratorium on all principal  repayments  through June 30,
          2003, at which time regular  monthly  payments will resume;  (iii) all
          lease  payments  in  arrears as of June 30,  2002 will be accrued  and
          payable as  follows,  $150,000  on  September  30,  2003,  $100,000 on
          December 31, 2003,  and $37,590 on March 30, 2004;  and (iv) effective
          July 1, 2002,  the interest rate factor upon which the lease  payments
          are based was lowered to 12% per annum. EDS will not extend additional
          financing under the Master Lease Purchase Agreement.

          In 2002 and 2001,  the Company  recorded  $303,481 and $174,218 of EDS
          interest  costs;  $100,559 and $105,193 of which were  capitalized  as
          capitalized  systems  costs and  $202,922  and $49,788  were  expensed


                                       42
<PAGE>

          directly,  respectively.  In addition, $19,237 of EDS interest in 2001
          was expensed by NTS pre-merger.

          Based upon the  original  lease terms,  at December  31,  2002,  total
          repayments  would  have  been  approximately  $4.9  million  of  which
          approximately $1.8 million represented  interest at 20%. However,  the
          aggregate  minimum payments based upon the payment terms as revised in
          January 2003,  including  interest due at 12% over the remaining lease
          term are as follows:

                                 2003     $   669,040
                                 2004         875,670
                                 2005         838,080
                                 2006         838,080
                                 2007         838,080
                                 2008         193,224
                                          -----------
                                            4,252,174
                  Less amounts
                  representing interest    (1,088,118)
                                          -----------
                                          $ 3,164,056
                                          ===========


NOTE 7 -  RESTRUCTURING:
          In June  2002,  the  Company  underwent  a  significant  restructuring
          involving  management  changes and cost control to lower personnel and
          facilities expenses as the Company refocused its efforts solely on its
          red-light video enforcement contracts for CrossingGuard installations.
          The  Company   terminated  19  full-time   employees,   affecting  all
          departments,  and offices were consolidated  into smaller  facilities.
          During  the  quarter  ended  June  30,  2002,  the  Company   recorded
          restructuring  costs (which are separately  disclosed in the Statement
          of Operations) of $743,000 primarily comprised of $332,000 in employee
          severance  agreements and estimated lease obligations  associated with
          closing its Providence, RI and San Diego, CA offices. A settlement was
          reached in 2002 in connection with the Providence  office lease but no
          agreement has been finalized regarding the amount due on the San Diego
          lease.  The Company  feels that it has fully  accrued any amounts that
          will  ultimately  be paid on the San  Diego  lease.  After  offsetting
          security and inventory deposits against restructuring costs and paying
          $119,000 in severance  benefits and $89,000 in lease settlement costs,
          at December  31, 2002,  $366,000  remains  outstanding  on the balance
          sheet as a restructuring reserve.

NOTE 8 -  COMMON AND  PREFERRED STOCK:
          In September 2001, the Company  completed a merger with NTS (Note 15),
          which  resulted in the issuance of 32,338,558  shares of Nestor,  Inc.
          common stock.

          Series B Convertible  Preferred Stock is convertible into Common Stock
          of the  Company  at any  time on a  share-for-share  basis.  Series  B
          Convertible Preferred Stock has the same rights with respect to voting
          and dividends as the Common Stock,  except that each share of Series B
          Convertible  Preferred  Stock  has  the  right  to  receive  $1.00  in
          liquidation  before any  distribution is made to holders of the Common
          Stock.  The  liquidation  value of Series B Preferred  was $235,000 at
          December 31, 2002 and 2001.

NOTE 9 -  OPTIONS AND WARRANTS:
          On April 1, 1984, the Company  adopted an Incentive  Stock Option Plan
          under  which  the  Board  of   Directors   may  grant   incentive   or
          non-qualified stock options to employees, directors and consultants to
          purchase shares of the Company's  common stock at a price equal to the
          market price of the stock at the date of grant.  The  Company's  Stock
          Option Plan has authorized the grant of options to employees for up to
          2,450,000 shares of the Company's common stock. Options generally vest
          over three years and are  exercisable  for five years from the date of
          grant.  The  options are not  transferable  except by will or domestic
          relations order.

                                       43
<PAGE>

          On May 6, 1997,  the Company  adopted the 1997 Stock Option Plan under
          which the Board of  Directors  may grant  incentive  or  non-qualified
          stock options to  employees,  directors  and  consultants  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.  In June 2001, the 1997 Stock
          Option Plan was amended to increase  the  aggregate  number of options
          authorized from 1 million to 5 million shares of the Company's  common
          stock.  Options vest over four years and are exercisable for up to ten
          years  from  the  date  of  grant,  although  most  options  currently
          outstanding expire eight years from the date of grant. The options are
          not transferable except by will or domestic relations order.

          The  following  table  presents  the activity of the  Company's  Stock
          Option Plans for the years ended December 31, 2002, 2001 and 2000. The
          number of options granted and  outstanding in 2001 rose  significantly
          due to the  conversion  of 302,800 NTS stock  options  into  2,775,000
          Nestor,  Inc. stock options priced at $.55 pursuant to the merger. The
          number  of  options  canceled  in 2002  included  unexercised  options
          previously  held by employees who were  terminated in connection  with
          the Company's restructuring.  In 2003, the pending one-for-ten reverse
          split  will  impact  both the  number of  options  and  option  prices
          proportionately.

<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                              ----------------------------------------------------------------
                                                       2002                   2001                2000
                                                       ----                   ----                ----

                                                         Weighted               Weighted               Weighted
                                                          Av. Ex.                Av. Ex.                Av. Ex.
                                               Shares      Price     Shares       Price     Shares       Price
                                               ------------------    -------------------    -------------------

          <S>                                  <C>         <C>       <C>         <C>        <C>          <C>
          Outstanding beginning  of year       3,951,212   $ .71     1,104,821   $1.28      1,628,316    $1.20
          Granted                                368,000     .20     3,445,840     .59        270,500      .94
          Exercised                                  ---     ---       174,127     .70         79,122     1.08
          Canceled                             1,077,219     .71       425,322    1.23        714,873      .99
                                               ---------             ---------             ----------
          Outstanding end  of year             3,241,993   $ .65     3,951,212   $ .71      1,104,821    $1.28
                                               =========             =========              =========

          Options exercisable  at year end     2,247,298   $ .73     2,148,630   $ .82        805,928    $1.42
                                               =========             =========              =========
</TABLE>

          The  following  table  presents   weighted   average  price  and  life
          information  about significant  option groups  outstanding at December
          31, 2002.

<TABLE>
<CAPTION>
                                          Options Outstanding                       Options Exercisable
                               -----------------------------------------        ---------------------------
                                                 Weighted
                                                  Average       Weighted                         Weighted
                                 Number          Remaining       Average          Number         Averaged
             Range of          Outstanding      Contractual     Exercise        Exercisable     Exercisable
          Exercise Prices      at 12/31/02     Life (Years)       Price         at 12/31/02        Price

           <S>                 <C>              <C>               <C>           <C>                <C>
           $ .10 - $ .19           348,000          7.52          $.18             69,600          $ .18
           $ .55                 1,952,269          6.53           .55          1,275,849            .55
           $ .69 - $1.44           784,224          1.51           .74            744,974            .73
           $2.20- $ 2.89           157,500          1.97          2.43            156,875           2.43
                              ------------      --------          ----          ---------          -----
                                 3,241,993          5.20          $.65          2,247,298          $ .73
                              ============      ========          ====          =========          =====
</TABLE>


          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.  During  2001,  the  Company  issued  3,980,712  warrants in
          connection  with the NTS merger and  converted a premerger NTS warrant
          to purchase  91,655 common  shares.  Transaction  Systems  Architects,
          Inc.'s ("TSAI")  warrant to purchase 2.5 million common shares expired
          on March 1, 2002,  triggering the  concurrent  expiration of 1,250,000
          NTS  merger   warrants.   The  following   table   presents   warrants
          outstanding:

                                       44
<PAGE>


                                                Years Ended December 31,
                                       -----------------------------------------
                                           2002           2001           2000
                                           ----           ----           ----

          Eligible, end of year
            for exercise currently      5,321,407      9,071,407      4,999,040
                                        =========      =========      =========

          Warrants issued                     ---      4,072,367            ---
            Low exercise price         $      ---     $     0.01     $      ---
            High exercise price        $      ---     $     1.28     $      ---

          The  warrants  outstanding  as of  December  31,  2002  are  currently
          exercisable  and expire at various dates through  October 5, 2005. The
          outstanding warrants entitle the owner to purchase one share of common
          stock for each  warrant,  at prices  ranging  from  $0.01 to $1.28 per
          share. In 2003, the pending one-for-ten reverse split will impact both
          the  number  of  warrants  and  warrant  prices  proportionately.  The
          exercise  price of existing  warrants  will be adjusted  downward as a
          result of anti-dilution  provisions of the warrants and the completion
          of the Silver Star Partners I, LLC  transaction.  The adjusted warrant
          prices will be  determined  based upon the final  investment  received
          from the pending transaction.

          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 in 2002, 2001 and
          2000.

NOTE 10 - SEGMENT INFORMATION:
     A.   Description of reportable segments
          Effective  with  the  September  2001  merger,  the  Company  has  two
          reportable  segments:  Financial Solutions (Nestor,  Inc.) and Traffic
          Systems (NTS). Segment information for 2000 has been omitted since all
          operations relate to a single segment.

          The Financial  Solutions  division  produced and sold credit and debit
          card fraud  detection  products  and  database  marketing  products to
          financial institutions and processors of financial data. Subsequent to
          the ACI and ReD agreements, Financial Solutions revenues were mainly a
          royalty  stream  from  ACI.  The  Traffic  Systems  segment   provides
          video-based monitoring systems and services for traffic safety, mainly
          to municipalities.  Goodwill has been allocated to the Traffic Systems
          segment.

     B.   Measurement of segment profit or loss and segment assets
          The  Company  evaluates  performance  based  on  profit  or loss  from
          operations. The accounting policies of the reportable segments are the
          same as those described elsewhere in these financial statements.

     C.   Segment profit or loss and segment assets
          All revenues are from external  customers.  There are no  intercompany
          sales.

                                    Financial        Traffic
                                    Solutions        Systems           Totals
                                    ---------        -------           ------
          Year Ended
          December 31, 2002:
          Revenues                 $  665,000     $ 1,457,000      $  2,122,000
          Segment profit (loss)     3,591,000      (16,225,000)     (12,634,000)
          Segment assets            5,099,000        4,102,000        9,201,000

          Year Ended
          December 31, 2001:
          Revenues                 $3,073,000      $   448,000     $  3,521,000
          Segment profit (loss)     1,295,000       (2,779,000)      (1,484,000)
          Segment assets            2,516,000       19,519,000       22,035,000

                                       45
<PAGE>


     D.   Geographic Information
          Revenues  are  attributed  to  countries  based  on  the  location  of
          customers.  All foreign revenues related to Financial  Solutions.  All
          long-lived assets are located in the United States.

                                              Years Ended December 31,
                                   ---------------------------------------------
                                        2002             2001             2000
                                        ----             ----             ----

          United States            $ 2,112,281     $  3,450,613    $  2,841,558
          Belgium                          ---              ---         276,799
          Japan                            ---           46,844         117,532
          Canada                         9,293           23,467         416,533
                                   -----------     ------------    ------------

                                   $ 2,121,574     $  3,520,924    $  3,652,422
                                   ===========     ============    ============

     E.   Revenues from Major Customers
<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                -----------------------------------------------------
                                                         2002             2001           2000
                                                         ----             ----           ----

          <S>                                      <C>             <C>             <C>
          Customer A - Financial Solutions         $    629,569    $  1,841,031    $  2,299,208
          Customer B - Financial Solutions                  ---         832,000             ---
          Customer C - Traffic Systems                  293,911         218,023             ---
          Customer D - Financial Solutions                  ---             ---         285,834
          Customer E - Financial Solutions                  ---         285,536         256,876
          Customer F - Financial Solutions                  ---             ---         276,799
          Customer G - Traffic Systems                  266,751          34,925             ---
</TABLE>

NOTE 11 - IMPAIRMENT CHARGE:
          During the quarter ended June 30, 2002,  the Company  determined  that
          potential citation revenues from certain  CrossingGuard  installations
          in two cities  would not exceed  the cost of the  underlying  carrying
          value of the capitalized  systems.  These contracts were signed in the
          early  stages  of  CrossingGuard  development  and the site  selection
          procedures and contract terms have since been improved.  In accordance
          with SFAS No.  144,  "Accounting  for the  Impairment  or  Disposal of
          Long-Lived Assets",  the Company wrote off capitalized systems cost of
          $794,000 and recorded a corresponding  impairment  charge in operating
          expenses.  Ongoing revenues from these  installations  are expected to
          offset future costs of system operations.

NOTE 12 - ROYALTY ASSIGNMENT:
          On  July  15,  2002,   the  Company   entered  into  a  Memorandum  of
          Understanding  ("MOU") with  Churchill Lane  Associates,  LLC ("CLA"),
          assigning CLA certain of the Company's  rights to royalty income under
          the license  agreement  between  the  Company and ACI ("ACI  License")
          (Note 19). CLA is owned and  controlled  by Alan M.  Wiener,  Alvin J.
          Siteman  and Robert M.  Carroll,  directors  and  shareholders  of the
          Company.  The MOU also  provided a  schedule  for  advances  by CLA to
          provide  interim  financing to the Company  during the period prior to
          the closing.  Upon closing on September 30, 2002, CLA paid the Company
          $3.1 million in cash (less advances) for the irrevocable assignment of
          its  royalty  rights  under the ACI  License  from July 1, 2002 and in
          perpetuity.  No  obligations  or  other  rights  of the  Company  were
          transferred or assigned to CLA.

          After offsetting  $860,000 of ACI unbilled contract revenue,  $632,000
          of ACI deferred income and $60,000 in related  professional  fees, the
          Company  recorded a  $2,812,000  gain on this  royalty  assignment  on
          September 30, 2002. The elimination of ACI unbilled  contract  revenue
          and deferred income were recorded as non-cash reductions.

                                       46
<PAGE>


NOTE 13 - OTHER EXPENSE - NET:
          Other income (expense) as reflected in the consolidated  statements of
          operations consists of the following:

                                               Years Ended December 31,
                                      ----------------------------------------
                                          2002         2001            2000
                                          ----         ----            ----

          Interest income             $  11,229      $ 51,695      $  10,411
          Interest expense             (217,023)      (65,355)       (10,603)
          Expense relating to
           financing operations        (106,483)     (106,483)      (106,483)
          Loss on disposal of
           fixed assets                  (6,341)      (66,666)           ---
                                      ----------    ----------     ----------
          Other expense - net         $(318,618)    $(186,809)     $(106,675)
                                      ==========    ==========     ==========

NOTE 14 - INCOME TAXES:
          During  2002 and  2001,  the  Company  recorded  deferred  tax  assets
          primarily  for the  benefit of net  operating  losses in the amount of
          $1,573,000 and  $5,959,000,  respectively.  The  cumulative  amount of
          these assets,  which is  $14,772,000  and  $13,199,000 at December 31,
          2002 and 2001,  respectively,  is fully reserved. Due to the Company's
          history of operating losses, management has concluded that realization
          of the benefit is not likely.

          The Company  has  available  at December  31,  2002,  $36,736,000  and
          $25,692,000 of net operating loss  carryforwards for federal and state
          purposes,  respectively.  Approximately $13,354,000 and $11,850,000 of
          these federal and state net operating loss carryforwards were acquired
          as part of the  merger  with  NTS.  These  loss  carryforwards  may be
          applied against future taxable income and begin to expire in 2003.

          Pursuant to Section 382 of the Internal  Revenue  Code,  annual use of
          the tax loss  carryforwards  may be  limited  if there is a change  in
          ownership.  This limitation  applies to the losses incurred by Nestor,
          Inc.,  as well as to the losses  incurred by NTS.  The Company has not
          determined the effect of this limitation.

NOTE 15 - NESTOR TRAFFIC SYSTEMS, INC.:
          The Company recorded a loss from investment in affiliate of $81,100 in
          2001 and $1,339,122 in 2000 under equity accounting for its investment
          in NTS.

          In January  2001, an agreement in principle was reached to combine the
          Company and NTS, by merging NTS into a wholly-owned  subsidiary of the
          Company,  with Nestor, Inc. in effect,  becoming the surviving entity.
          On August 6, 2001,  the Company  filed Form S-4/A with the  Securities
          and  Exchange   Commission.   The  combination  was  approved  by  the
          shareholders of both companies in meetings held on September 12, 2001.

          On January 9, 2001,  the Company and NTS entered  into a secured  note
          agreement with NTS Investors,  LLC (an  independent  investment  group
          ("Group")).  The Group  loaned NTS  $4,000,000  as of February 1, 2001
          with principal and interest at 8% due on December 31, 2001.

          Upon  consummation of the combination  contemplated  above,  the Group
          converted  the note and accrued  interest to equity and  increased its
          total  investment  to  $8,000,000  in exchange for  16,757,368  shares
          (representing approximately 33.34%) of post-merger Nestor, Inc. common
          stock.  Concurrently,  NTS  shareholders  exchanged  their NTS  common
          shares  held for Nestor,  Inc.  common  stock and,  in the  aggregate,
          received   15,581,190   shares   representing   approximately  31%  of
          post-merger Nestor, Inc. common stock.

          In  addition,  the Group  received  a warrant  right to  acquire up to
          2,980,712  additional  shares of common stock  exercisable at the same
          price at which  currently  outstanding  warrants of Nestor,  Inc.  are
          exercisable,  but only in the event the currently outstanding warrants


                                       47
<PAGE>

          are  exercised,  so as to maintain  their initial  ownership  interest
          percentage.  This warrant right decreased by 1,250,000 shares on March
          1, 2002  with the  expiration  of  TSAI's  warrant  on that  date.  In
          addition,  the Group received a warrant to acquire 1,000,000 shares of
          the  Company's  common  stock at $1.28 per  share  for three  years as
          dilution  protection  against both the Company's  and NTS's  converted
          employee  stock  options  outstanding  at closing.  Such  warrants are
          treated as variable  and,  accordingly,  are revalued  quarterly  with
          offsetting adjustments to additional paid-in capital.

          The following is a summary of the purchase price and allocation to the
          fair value of the assets acquired and liabilities assumed.

          Value of common stock issued to consummate the merger    $  7,790,595
          Value of options issued as a result of the merger           1,621,395
          Value of warrants issued as a result of the merger             43,994
          Acquisition costs                                             622,144
                                                                   ------------
          Total purchase price                                       10,078,128
          Plus net NTS liabilities assumed by Nestor, Inc.            4,002,556
                                                                   ------------
          Goodwill                                                 $ 14,080,684
                                                                   ============

          Fair values of assets acquired and liabilities assumed:

          Cash and cash equivalents                                $    361,804
          Accounts receivable                                           166,765
          Inventory                                                     501,899
          Fixed assets - net                                          2,240,614
          Other assets                                                  281,540
          Note payable                                               (4,000,000)
          Accounts payable and accrued expenses                      (1,519,444)
          Other current liabilities                                    (286,710)
          Long term leases payable                                   (1,749,024)
                                                                   ------------
          Net liabilities assumed                                  $ (4,002,556)
                                                                   ============


          The following  table presents the  consolidated  results of operations
          for the year ended  December 31, 2001 on an unaudited  pro forma basis
          as if the merger took place at the beginning of the period presented.

                  Revenues                                         $  4,435,000
                  Net loss                                         $  5,419,000
                  Loss per share, basic and diluted                $       0.13

          On January 1, 1999, the Company entered into an exclusive license with
          NTS to apply certain  proprietary  technologies in the fields of using
          video and other sensors to analyze, monitor and respond to movement of
          persons  or  objects  in  vehicular,  rail,  air  or  other  modes  of
          transportation  or supporting the foregoing.  The license expires upon
          the expiration of the underlying  patents  protecting the technologies
          used in NTS's  products.  The license  provides  for  royalties to the
          Company starting in 2000 equal to 5% of the gross margin realized from
          sales or licensing of products subject to the license,  and increasing
          to 10% of the gross  margin in  calendar  years 2001 and  beyond.  The
          license  requires  minimum  annual  royalties  of  $125,000  in  2001,
          $250,000 in 2002,  $500,000  in 2003,  $750,000 in 2004 and $1 million
          for each year thereafter,  in order to maintain  exclusive rights. The
          2002 and 2001  minimum  royalties  were  recorded  and  eliminated  in
          consolidation. The Company recorded royalties of $9,548 for 2000.

          During  2001,  NTS used  facility and  administrative  services of the
          Company,  including  office space and executive,  accounting and other
          support  personnel.  Prior to the September 2001 merger,  facility and
          administrative fees charged to NTS were $397,000 in 2001.  Post-merger
          changes were eliminated in consolidation.

                                       48
<PAGE>

NOTE 16 - RELATED PARTY TRANSACTIONS:
          Herbert S. Meeker, a director of the Company,  is a partner in the law
          firm of Brown Raysman Millstein Felder & Steiner,  LLP (formerly Baer,
          Marks & Upham),  which the Company  uses for legal  services.  For the
          years ended December 31, 2002, 2001 and 2000, the Company  recorded an
          expense  to  Mr.  Meeker's  firm  of  $7,254,   $121,065  and  $4,874,
          respectively.  In addition, the Company also recorded $369,501 of fees
          in 2001 as  acquisition  costs related to the NTS merger and $9,919 of
          fees in 2002  relating to the 2003  Silver Star  Partners I, LLP stock
          purchase agreement.

          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 used for management  consulting.  For the years ended
          December 31, 2001 and 2000,  the Company  recorded an expense for Wand
          Partners,  Inc. of $49,636 and  $43,048,  respectively.  In 2002,  the
          Company reversed $71,848 of previously expensed Wand fees (recorded as
          a reduction to general and administrative expenses) in connection with
          a Termination  and Release  Agreement  agreed to in principle prior to
          December  31,  2002 but dated  January 15,  2003.  Included in accrued
          liabilities  at December  31, 2002 and 2001 are $96,250 and  $179,167,
          respectively, due to Wand Partners, Inc.

          TSAI,  the parent  company of ACI, is a  shareholder  of the  Company.
          Thomas H. Boje, Vice President,  Corporate  Development of TSAI, was a
          director of the Company April 2000 through  2001.  For the years ended
          December 31, 2002,  2001 and 2000,  the Company  recorded  revenues of
          $629,569,  $1,841,031  and  $2,299,208,   respectively  from  ACI.  At
          December 31, 2001,  $1,005,196 was unbilled to ACI and deferred income
          included  $791,725 due from ACI.  Further  related party  transactions
          with TSAI and ACI are discussed throughout these financial statements.

          Deferred  compensation  of $79,131  was  recorded  and accrued for the
          period  July 1, 2002 to  December  31,  2002 for two  officers  of the
          Company. The deferral was paid in January 2003.

          See Note 12 for royalty  assignment to Churchill Lane Associates,  LLC
          and Note 15 for transactions with Nestor Traffic Systems, Inc.


NOTE 17 - COMMITMENTS AND CONTINGENCIES:
          NTS entered into an operating lease dated June 21, 2000 for office and
          warehouse  facilities in East  Providence,  Rhode  Island.  This lease
          provides  for monthly  rentals of $10,360  through  July 2003 and then
          increases to $10,800  monthly through July 2005. Rent expense for this
          lease was $37,300 post-merger in 2001 and $124,300 in 2002.

          NTS also leases  office  space in La Jolla,  California.  The July 17,
          2002  operating  lease  calls for monthly  rent of $1,533  through the
          lease term  expiration  of July 31,  2003.  Rent expense was $8,500 in
          2002.

          NTS entered into a Services  Agreement with EDS,  effective  August 1,
          2001, for EDS to perform certain citation  processing services for NTS
          at a minimum  monthly  fee of $21,000 in 2001 and $35,000 per month in
          2002.  On January 10,  2003,  an  agreement  was reached to modify the
          Services  Agreement by; (i)  eliminating the monthly minimum fee, (ii)
          reducing the per ticket  processing  fees charged,  and (iii) applying
          the  amendments  retroactive  to January 1, 2002 and  terminating  the
          Agreement on December 31, 2002. During the period January through June
          2002,  NTS  recorded in cost of goods sold  approximately  $210,000 in
          processing  fees  under  the  original  service  agreement  terms.  In
          December 2002, NTS recorded a $102,000 reduction in cost of goods sold
          in  connection  with the modified  terms.  Also in January  2003,  the
          parties   entered  into  a  Transition   Services   Agreement,   which
          essentially  extended  the  modified  terms to March 31, 2003 at which
          time NTS will perform these services internally.

                                       49
<PAGE>


          During 2000,  the Company began leasing  computer  equipment  under an
          operating  lease  agreement.  The  lease  provides  for  monthly  rent
          payments in arrears  over a three-year  term.  At the end of the lease
          term,  the Company may  purchase the  equipment at fair market  value,
          extend  the lease term or return  the  equipment.  The value of leased
          equipment  was $97,035 at December  31, 2002 and 2001 and rent expense
          was $40,134 in 2002 and 2001.


NOTE 18-  LITIGATION:
          On July 12, 2002, Baldwin Line Construction of Maryland,  Inc. filed a
          lawsuit  against  Nestor  Traffic  Systems,  Inc.  in Fairfax  County,
          Virginia,  seeking  $117,105  plus  interest  related to invoices they
          claim are owed for construction  work in Falls Church,  Virginia.  The
          suit has been transferred to Arlington County,  Virginia.  On November
          15, 2002, NTS answered by filing its Grounds of Defense.  Additionally
          on November  15, 2002,  NTS filed a  counterclaim  alleging  breach of
          contract and breach of warranty,  seeking a $400,000 judgment to cover
          NTS's losses in remedying the installation and lost revenues  suffered
          from  late  delivery  of  the  system.   The  parties  are  conducting
          depositions and the case is scheduled for trial in June 2003.

          Management  believes that all  bona-fide  invoices for services due to
          Baldwin  have been paid and  intends to defend  itself  against  these
          additional  claims,  but has  accrued  approximately  $100,000  in the
          financial  statements  for  costs  related  to  this  lawsuit.   Costs
          associated with the suit are being expensed as incurred.  Although NTS
          believes  that it will  prevail,  there can be no  assurance as to the
          outcome of Baldwin's suit and NTS's counterclaim.

          In the  ordinary  course of  business,  the Company is a defendant  in
          certain  claims and legal  proceedings.  In the opinion of management,
          the outcome of these  matters  will not have a material  effect on the
          financial position of the Company.


NOTE 19-  ACI LICENSE AGREEMENT:
          On February 1, 2001, the Company entered into a license agreement with
          ACI  pursuant  to  which  ACI  was  granted  a  worldwide,  perpetual,
          non-revocable, non-transferable and non-exclusive license in the field
          of use of fraud detection  (including money  laundering  detection) in
          electronic payments. ACI may brand, customize, and extend the software
          products covered by the license  agreement as well as use the software
          programs as a development  platform to develop new  functional and new
          end-user products or applications  subject to the terms and conditions
          of the license. In return, ACI is fully responsible and liable for the
          provision of services to its  licensees.  Nestor,  Inc. had previously
          provided  support,  maintenance and  enhancements  for these products.
          This agreement replaces the April 28, 1998 license agreement with ACI.

          Under the new agreement, ACI paid a one-time license fee of $1,104,000
          for  source  code  license  rights to the  software  products,  and in
          addition,  agreed to pay an  ongoing  royalty  fee of 15% with a first
          year minimum of approximately  $475,000. The license granted to ACI is
          for products that  constituted a significant  portion of the Company's
          gross  revenues.  During the quarter ended March 31, 2001, the Company
          recorded the one-time  initial license fee of $1,104,000 in connection
          with this  source  code  license.  Reported  ACI  revenues  thereafter
          decreased  significantly  due to the  termination  of the previous ACI
          contract that provided a 40% monthly license fee as well as additional
          engineering  revenues.  Expenses  relating to these revenues have also
          decreased  significantly  because ACI hired  thirteen  employees  from
          Nestor,  Inc.,  effective February 1, 2001, and reimbursed the Company
          $13,000 per month for the continued use of Nestor, Inc. facilities and
          equipment  prior to their  office  relocation  in May  2001.  Unbilled
          contract  revenue and deferred  income under the prior  agreement were
          replaced by the new royalty  amounts during the quarter to reflect the
          15% royalty  rate under the new  agreement.  During the quarter  ended
          March  31,  2001,  the  Company  recorded  a  non-cash   reduction  of
          $3,037,000 and a non-cash  increase of $1,111,000 in unbilled contract
          revenue and deferred income related to these agreements.

          Nestor  continued to receive  royalties  under this agreement  through
          June 30, 2002.  Effective July 1, 2002,  the Company  assigned its ACI
          royalty rights to Churchill Lane Associates.

                                       50
<PAGE>

NOTE 20-  RETAIL DECISIONS, INC. LICENSE AGREEMENT:
          On May 18, 2001,  Nestor entered into a license  agreement with Retail
          Decisions,  Inc.  ("ReD")  in  which  Nestor  granted  to ReD:  (i) an
          exclusive (other than ACI), perpetual,  fully-paid,  worldwide license
          in the field of use of fraud and money  laundering  detection and risk
          management in certain defined  industries;  and (ii) a  non-exclusive,
          perpetual,  fully-paid,  worldwide license solely for use in the field
          of  use  of  customer  relationship   management  in  certain  defined
          industries.

          Additionally,  Nestor  transferred  to ReD  certain  assets  that were
          supportive  of  the  technology   licensed   thereunder.   The  assets
          transferred  to ReD by  Nestor  include  all of the  right,  title and
          interest of Nestor in certain equipment, license agreements (excluding
          ACI) and trademark rights. To support its newly acquired license,  ReD
          hired 13 of Nestor's employees.

          ReD paid $1,800,000 to Nestor under the license agreement,  and Nestor
          agreed, for certain marketing and transition services,  to pay to ReD:
          (i) $500,000  which was paid on July 2, 2001;  (ii) $250,000 which was
          paid on October 1, 2001;  and (iii) $218,000 which was paid January 2,
          2002.  The Company  recorded  $832,000  as net license  revenue in the
          second quarter of 2001 in connection with this  agreement.  No ongoing
          revenues have been realized from ReD.

NOTE 21-  RECENT ACCOUNTING PRONOUNCEMENTS:
          During 2001, the Financial  Accounting Standards Board ("FASB") issued
          Statement  of Financial  Accounting  Standards  No. 143,  ("SFAS 143")
          "Accounting for Asset  Retirement  Obligations,"  effective for fiscal
          years  beginning  after June 15,  2002.  This  statement  requires the
          Company to  estimate  the fair value of  liabilities  associated  with
          asset  retirement  obligations.  The associated asset retirement costs
          are to be  capitalized as part of the carrying value of the long-lived
          asset and  allocated  to expense  over the asset's  useful  life.  The
          Company is currently evaluating the effects of this pronouncement.

          In June  2002,  the  FASB  issued  SFAS  146,  "Accounting  for  Costs
          Associated  with  Exit  or  Disposal   Activities,"   which  addresses
          financial  accounting and reporting for costs  associated with exit or
          disposal  activities,  and nullifies Emerging Issues Task Force (EITF)
          Issue  No.  94-3,   "Liability   Recognition   for  Certain   Employee
          Termination  Benefits  and Other Costs to Exit an  Activity  including
          Certain Costs Incurred in a Restructuring"  which previously  governed
          the  accounting  treatment  for  restructuring  activities.  SFAS  146
          applies  to  costs  associated  with an exit  activity  that  does not
          involve an entity newly  acquired in a business  combination or with a
          disposal activity covered by SFAS 144,  "Accounting for the Impairment
          or Disposal of Long-Lived  Assets." These costs  include,  but are not
          limited  to, the  following:  (1)  termination  benefits  provided  to
          current employees that are involuntarily terminated under the terms of
          a benefit  arrangement that, in substance,  is not an on-going benefit
          arrangement or an individual deferred-compensation contract, (2) costs
          to terminate a contract that is not a capital lease,  and (3) costs to
          consolidate facilities or relocate employees.  SFAS 146 does not apply
          to costs  associated with the retirement of long-lived  assets covered
          by SFAS 143,  "Accounting for Asset Retirement  Obligations." SFAS 146
          will be applied  prospectively  and is effective  for exit or disposal
          activities initiated after December 31, 2002.

          In  December  2002,  the  FASB  issued  SFAS  148,   "Accounting   for
          Stock-based  Compensation  and  Disclosure  -  an  amendment  of  FASB
          Statement No. 123." This statement  amends SFAS 123,  "Accounting  for
          Stock-Based  Compensation," to provide alternative  transition methods
          for a  voluntary  change  to fair  value  accounting  for  stock-based
          employee  compensation.   In  addition,   this  Statement  amends  the
          disclosure   requirements  of  SFAS  123  to  require  more  prominent
          disclosures in both annual and interim financial  statements about the
          method of accounting for  stock-based  employee  compensation  and the
          effect of the method used on reported results. Management is currently
          evaluating the effects of this pronouncement.

SEE INDEPENDENT AUDITORS' REPORTS.

                                       51
<PAGE>




                                                                       PART III

ITEM 10.  Directors and Executive Officers of the Registrant.
          --------------------------------------------------

          Incorporated  by reference from the Company's  Definitive  Information
          Statement  filed with the Securities and Exchange  Commission on March
          14, 2003.


ITEM 11.  Executive Compensation.
          ----------------------

          Incorporated  by reference from the Company's  Definitive  Information
          Statement  filed with the Securities and Exchange  Commission on March
          14, 2003.


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

          Incorporated  by reference from the Company's  Definitive  Information
          Statement  filed with the Securities and Exchange  Commission on March
          14, 2003.


ITEM 13.  Certain Relationships and Related Transactions.
          ----------------------------------------------

          Incorporated  by reference from the Company's  Definitive  Information
          Statement  filed with the Securities and Exchange  Commission on March
          14, 2003.


ITEM 14.  Controls and Procedures.
          -----------------------

          Within the 90-day  period prior to the filing of this report,  Nestor,
          Inc.  management,  including  the Chief  Executive  Officer  and Chief
          Financial Officer, conducted an evaluation of the effectiveness of the
          design  and  operation  of  the  Company's   disclosure  controls  and
          procedures  as defined in Exchange Act Rule  13a-14(c).  Based on that
          evaluation,  the Chief Executive  Officer and Chief Financial  Officer
          concluded that the Company's  disclosure  controls and procedures were
          effective  as of the  date  of that  evaluation.  There  have  been no
          significant  changes in internal  controls,  or in factors  that could
          significantly  affect  internal  controls,  subsequent to the date the
          Chief Executive  Officer and Chief Financial  Officer  completed their
          evaluation.


                                       52
<PAGE>




                                                                        PART IV

Item 15. 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.

               (2)  Consolidated  Financial  Statement  Schedule:  Valuation and
                    Qualifying Accounts and Reserves

                    All other schedules are omitted because such  information is
                    not applicable (3) Exhibits numbered in accordance with Item
                    601 of Regulation S-K and filed herewith.

                    99.1 Safe Harbor for  Forward-Looking  Statements  Under the
                         Private Securities Litigation Reform Act of 1995.
                    99.2 Certification  Pursuant to 18 U.S.C.  Section  1350, as
                         adopted  pursuant to Section 906 of the  Sarbanes-Oxley
                         Act of 2002 - Chief Executive Officer.
                    99.3 Certification  Pursuant to 18 U.S.C.  Section  1350, as
                         adopted  pursuant to Section 906 of the  Sarbanes-Oxley
                         Act of 2002 - President and Chief Financial Officer.

          (b)  Reports on Form 8-K:

               On October 10, 2002,  the  Corporation  filed with the Securities
               and  Exchange  Commission  a  current  report  on Form 8-K  dated
               September 30, 2002, which is hereby incorporated by reference.

               On January 6, 2003, the Corporation filed with the Securities and
               Exchange Commission a current report on Form 8-K dated January 2,
               2003, which is hereby incorporated by reference.

               On January 17, 2003,  the  Corporation  filed with the Securities
               and  Exchange  Commission  a  current  report  on Form 8-K  dated
               January 15, 2003, which is hereby incorporated by reference.





                                       53
<PAGE>




<TABLE>
<CAPTION>

                                                    NESTOR, INC.                                           PART IV
                                                    ------------
                                                                                                    ITEM 15 (a)(2)
                                      CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
                                   VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                   ----------------------------------------------



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


<S>                                    <C>              <C>             <C>           <C>              <C>
Year Ended December 31, 2000           $     4,145      $   62,850      $     ---     $   (62,850)     $   4,145

Year Ended December 31, 2001           $     4,145      $   (4,145)     $     ---     $       ---      $     ---

Year Ended December 31, 2002           $       ---      $      ---      $     ---     $       ---      $     ---

</TABLE>



                                       54
<PAGE>




                                INDEX OF EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       55
<PAGE>




   EXHIBIT
     NO.                          DESCRIPTION OF EXHIBIT
   -------                        ----------------------

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

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

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

     10.12     NestorWriter(TM)License and Development Agreement dated September
               11, 1991 between the Company and Poqet Computer Corporation.

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

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

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

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

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

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

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

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

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

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

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

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


                                       56
<PAGE>

   EXHIBIT
     NO.                          DESCRIPTION OF EXHIBIT
   -------                        ----------------------

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

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

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

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

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

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

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

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

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

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

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

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

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



                                       57
<PAGE>

    EXHIBIT
      NO.                          DESCRIPTION OF EXHIBIT
    -------                        ----------------------

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

     10.39     License  Agreement  dated May 18,  2001  between  the Company and
               Retail  Decisions,  Inc.  filed as an  exhibit  to the  Company's
               current  report  on Form 8K dated  May 18,  2001  which is hereby
               incorporated by reference.  10.40 Registration  Statement on form
               S-4  #333-63560  of  the  Company'  is  hereby   incorporated  by
               reference.

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

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

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

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


     99.2      Certification  Pursuant  to 18 U.S.C.  Section  1350,  as adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief
               Executive Officer.

     99.3      Certification  Pursuant  to 18 U.S.C.  Section  1350,  as adopted
               pursuant  to  Section  906 of the  Sarbanes-Oxley  Act of  2002 -
               President and Chief Financial Officer

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


                                       58
<PAGE>