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, 2003
                                       -----------------------------------------

                                       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.


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<PAGE>


Indicate  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

                               Yes           No  X
                                               -----

The  aggregate  market  value of the  4,897,156  shares of voting  stock held by
non-affiliates of the registrant on June 30, 2003, based on the closing price of
such stock on June 30, 2003, was $9,794,312.

The number of shares  outstanding of the Registrant's  Common Stock at March 16,
2004 was 18,009,526.

                       DOCUMENTS INCORPORATED BY REFERENCE

Sections  of Nestor,  Inc.'s  definitive  Proxy  Statement  for the 2004  Annual
Meeting of Stockholders  are  incorporated by reference into Parts II and III of
this report.






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<PAGE>



                                                                       PART I

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

GENERAL

Nestor,  Inc.,  and its wholly owned  subsidiary  Nestor Traffic  Systems,  Inc.
(together the  "Company"),  provides  traffic  safety  solutions and services to
states and municipalities.  The Company's products combine sophisticated digital
and analog  video  technologies  with  advanced  image-processing  to detect and
interpret a wide range of  traffic-related  elements and  conditions.  Using the
captured video images,  Nestor  applies  proprietary  neural network  predictive
models  and  other   algorithms  to  convert   existing  data  into   meaningful
recommendations and actions.  This advanced  technology,  which effectively sees
and interprets  objects captured in video images, is at the core of each product
solution.  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.  The Company's systems offer an array of features
and unique  functionality  that address critical  transportation  management and
traffic safety needs.  The Company formerly  developed and marketed  products in
the fields of risk management,  customer  relationship  management and character
recognition.

The  Company  is  currently   devoting  its   resources  to  its  core  product,
CrossingGuard(R),   and  expects  that  all  material  revenue  will  come  from
CrossingGuard or associated products and services.  Offered as part of a turnkey
system for automated red light enforcement, CrossingGuard(R) is tailored to meet
clients specific needs, including  intersection analysis,  hardware and software
installation,   user  training  and  support,  and  backroom   processing.   The
CrossingGuard  system  provides  a unique  combination  of  aboveground  vehicle
detection,  multiple  time-synchronized videos, and a collision avoidance safety
feature.

Exclusive  rights  in the field of  traffic-management  solutions  were  granted
Nestor Traffic Systems,  Inc. (NTS) on January 1, 1997;  co-exclusive  rights in
the field of Risk Management and  non-exclusive  rights in the field of Customer
Relationship Management Systems (CRM) are held by Applied  Communications,  Inc.
(ACI) and Retail Decisions, Inc. (ReD); and non-exclusive rights in the field of
Intelligent  Character  Recognition  Systems (ICR) are held by National Computer
Systems,  Inc.  (NCS).  IBM has  non-exclusive  rights to  incorporate  Nestor's
technology into hardware products known as the ZISC family of computer chips.

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.

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.

Information  about  the  industry  segments  and  geographic  areas in which the
Company operates can be found in Note 11 to the financial statements included in
this report.

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  red  light  violators  at  signalized
intersections.

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<PAGE>

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.

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
traffic  signal pole or a roadside  pole  installed by the Company used to track
approaching vehicles and record the actions of an approaching violator.  Another
camera is  positioned so as to see the signal heads as they change from green to
yellow to red and record the vehicles actions as the lights change and it enters
the  intersection.  The views from these two cameras can also be  presented in a
side-by-side   synchronized  mode  to  demonstrate  the  complete  view  of  the
violation,  including extenuating  circumstances,  aggressive behavior, or other
factors. Finally, an enforcement camera is positioned to obtain a close-up image
of the vehicle  license  plate,  and where needed the driver  image,  based upon
vehicle  location  instructions  provided  by the  tracking  camera.  A personal
computer is installed  in an  enclosure  by the wayside,  or remotely if a fiber
connection  to the  roadside is used,  that runs the  intelligent  software  and
controls camera activity. 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  improving  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,  fine
collection 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. Most
contracts compensate NTS on a per ticket paid or issued basis in return for both
equipment lease, maintenance and back office services. 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.  During 2003, there has been a
trend by states  towards fixed monthly fee as opposed to variable per ticket fee
pricing structures.

As of  December  31,  2003,  NTS  had 90  approaches  installed  and  generating
citations,  including  two  pilot  program  approaches,  and  an  additional  47
approaches under contract and in various stages of delivery.  In March 2004, NTS
executed  a  new  contract  for  up  to  an   additional   40   approaches   (20
intersections).  No assurances can be given that all  approaches  under contract
will ultimately be installed.  The Company realizes from $25 to $97 per citation


                                       4
<PAGE>

issued or paid or fixed monthly fees ranging from $4,000 to $12,000 per approach
for system delivery and lease,  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 or monthly 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 capture and
issuance rates.

During 2003, NTS realized $2,677,000 in CrossingGuard  related revenues,  a 217%
increase  over the  $844,000  earned in 2002 due to the  increase  in  installed
approaches during the respective periods.

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  218,000 collisions and as many
as 181,000 injuries and 880 deaths occurred as a result of red-light  running as
per Federal Highway Administration 2001 statistics.  First-generation  Red-Light
Camera  Systems  gained  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,  and (iii)
general lack of functionality.

The use of cameras to enforce red light  running  violations  requires  specific
authority at the state or local  government  level (state  statutes or home rule
statutes). To date, approximately 15 states, including the District of Columbia,
have authorized on a full or limited basis the use of red light cameras.  Recent
studies have shown these  systems to be effective in reducing red light  running
at enforced intersections,  and a positive halo effect at surrounding unenforced
intersections.  The Federal Highway  Administration and other organizations have
recently  acknowledged  these systems as positive  tools in the reduction of red
light  running  and  correspondingly  the number of  accidents.  However,  there
remains  opposition to these  systems,  largely  based upon  concerns  regarding
individual  privacy rights and due process rights.  Many  additional  states and
communities have or are considering authorization of cameras but need to address
these minority  concerns first.  The Company  believes that the overall trend is
towards  expanded  state  authorization  of camera  based red light  enforcement
systems,  and  eventually  speed  enforcement  systems,  but it is  difficult to
estimate when these  changes may occur.  The Company also believes that business
opportunities  from the  currently  authorized  communities  will be  enough  to
support near term growth objectives.

Rail  CrossingGuard.  NTS  developed  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  enhance   rail-crossing   safety  by  improving  signal  and  crossing  gate
monitoring,  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 had 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  2003,  NTS  realized  $10,000  in  Rail
CrossingGuard related revenues as compared to $426,000 in 2002. 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 Company
does not expect to receive material revenue related to Rail CrossingGuard in the
future.

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


                                       5
<PAGE>

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 and no such revenues in 2003.  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 Company does not expect to
receive material revenue related to TrafficVision in the future.

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
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
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. The Company does
not expect to receive  material  revenue related to fraud  detection,  financial
risk management,  or CRM in the future.  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 13) 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 2003 and 2002 revenues.

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<PAGE>

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 2003 and
2002 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.

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 four program managers
and  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.

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  Decisions,  Inc.,  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 2002, Other
Income of  $2,812,000  was  recorded  as a result of the sale of the ACI royalty
rights to CLA. No such revenues were recorded in 2003

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.


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<PAGE>


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, 2003,  primarily in the area of traffic  management,
enforcement and safety.

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  $121,000,  $1,604,000  and  $1,641,000 in the years ended
December 31, 2003, 2002 and 2001 respectively, in support of the various aspects
of Company-sponsored research and development.

PATENTS

The  Company has  continually  sought and  obtained  patent  protection  for its
proprietary neural networks and other 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 it's  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.

During  2003,  the  Company  received  two  additional  patents  relative to the
CrossingGuard  product  line.  The  first  issued in June  2003  recognizes  the
Company's  method of  predicting  and  recording  a red light  violation  with a
video-based system including the use of violation probability scores. The second
patent  issued in November  2003  defines a system and method of  detecting  and
filtering non-violations in a traffic light enforcement system employing a video
camera to improve the effectiveness of the system.

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.

The Company owns 10 United States  patents and 5 foreign  patents issued in four
countries,  Australia and Europe.  The foreign patents correspond to one or more
of the United States patents.  The United States patents expire at various times
from 2006 to 2021.

COMPETITION

The Company believes that  CrossingGuard is more  technologically  advanced than
most competing systems for traffic safety enforcement. Its competition generally
consists of "wet film" or digital  still image red light camera  systems.  These
systems  generally  rely on in-ground  sensor loops and wet film,  or on digital


                                       8
<PAGE>

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. By the end of 2003,  most  competitors  have
developed  digital still systems and do not promote wet film  applications.  The
Company is aware of two  competitors  that have included  video cameras in their
systems.  The Company has initiated patent  infringement  lawsuits against these
competitors  on the basis of its February 13, 2001 patent  entitled  "Integrated
Traffic light Violation Citation  Generation and Court Date Scheduling  System".
See "Item 3 -- Legal  Proceedings."  There can be no assurance  that the Company
will be  successful  in  defending  this patent and limiting the use of video by
competitors in the U.S. red light enforcement market.

CrossingGuard  vehicle detection cameras, on the other hand, are installed above
the ground, on roadside poles or if needed, 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 non-video  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). This perception of fairness makes the
Company's video evidence attractive to city councils, law enforcement officials,
courts, and the general public.

NTS's largest  competitors in the  intersection  market are Affiliated  Computer
Services,  Inc. (ACS), which has the greatest number of red-light camera systems
installed,  and Redflex Traffic Systems, Inc. (Redflex).  Among others are Laser
Craft, Mulvihill ICS, Peek Traffic, Poltech, Traffipax,  Transol, 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, enhanced driver image, additional products
offered, and/or citation-processing experience.

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 development,  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  were  generally  fixed-fee  deliverable  contracts and
termination  rights were 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, 2003, the Company had 49 full-time employees, including 11 in
software  engineering  and  product  development,  11 in  processing  and system
support,  17 in program management and field services,  3 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.

                                       9
<PAGE>

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
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.  (ReD) On May 18, 2001,  Nestor  entered into a license
agreement  with Retail  Decisions,  Inc. 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.
Nestor receives  approximately  $25,000 in minimum royalties per year under this
license.

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

In 2000, 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  month-to-month  lease dated August 2002,
and pays approximately $1,500 per month. NTS also maintains a local field office
at 330 East  Orangethorpe  Ave. in Placentia,  CA on a  twenty-four  month lease
dated March 2004, and pays approximately  $1,400 per month. The Company believes


                                       10
<PAGE>

these  facilities  are  adequate  to meet its  current  needs  and will  require
additional  space as new  installations  increase  processing and support hiring
needs.

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, and reached a settlement with the landlord under
terms within the reserve established.

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

On November 6, 2003, the Company filed a complaint in the United States District
Court for Rhode Island against  Redflex  Traffic  Systems,  Inc.,  alleging that
Redflex's automated red light enforcement systems infringe the Company's patent.
Redflex  denies this  allegation.  On November  25,  2003,  the Company  filed a
complaint  in the  United  States  District  Court for the  District  of Central
California  against  Transol USA, Inc.,  alleging that  Transol's  automated red
light   enforcement   systems  infringe  the  Company's   patent.   Transol  has
counterclaimed  that  Nestor's  patent  is  invalid  and that  Transol  does not
infringe  on it.  Nestor  was denied a  preliminary  injunction  in the  Transol
litigation.  The Company  cannot give  assurance  that we will be  successful in
either action.

During April 2003, the former president of NTS resigned as a member of the board
of directors of the Company. The president's employment with the Company and NTS
terminated.  The president filed a complaint  against the Company and NTS in the
Providence  Superior Court seeking severance  benefits,  including twelve months
salary of  $180,000,  upon  termination.  See Form 8-K  dated  April 9, 2003 for
further  information.  The parties  reached a mutually  agreeable  settlement on
December 31,  2003,  the terms of which are  confidential.  All claims have been
dismissed.


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, 2003.









                                       11
<PAGE>



                                                                         PART II


ITEM 5. Market for Registrant's Common Stock and Related Stockholder 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  "NESO." The prices
below have been  adjusted to reflect the 1 for 10 reverse stock split during the
second  quarter of 2003.  Before the stock  split,  the  Company's  common stock
traded under the symbol "NEST."

                                          Low                High
                                          ---                ----
Year Ended December 31, 2003
----------------------------
         1st Quarter                    $  .30              $ 1.90

         2nd Quarter                    $  .80              $ 2.60

         3rd Quarter                    $ 1.30              $ 2.05

         4th Quarter                    $ 1.60              $ 4.90


Year Ended December 31, 2002
----------------------------
         1st Quarter                    $ 4.50              $10.30

         2nd Quarter                    $ 1.80              $ 5.80

         3rd Quarter                    $  .80              $ 2.80

         4th Quarter                    $  .20              $ 1.00


Holders of Common Stock

At March 18, 2004, the number of holders of record of the issued and outstanding
common stock of the Company was 483, which includes  brokers who hold shares for
approximately 1,555 beneficial holders.

Dividend Policy

The Company has not paid any cash  dividends  with  respect to its common  stock
since  formation  and does not expect to pay cash  dividends in the  foreseeable
future.

Securities Authorized for Issuance Under Equity Compensation Plans

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

Recent Sales of Unregistered Securities

On  December  31,  2003,  the  Company  exercised  its  option  to  satisfy  its
obligations to Silver Star Partners I, LLC under a $2,000,000  principal  amount
convertible  note by issuing  676,384 shares of the Company's  common stock at a
conversion price of $3.00 per share.

The Company  issued  2,843,000  shares of its common  stock in January 2004 in a
series of private placements made to accredited investors, at an aggregate price
of $8,529,000. In connection with those private placements,  the Company paid an
aggregate sales  commission of $682,320.  The shares of common stock were issued
without  registration  under the  Securities  Act in reliance  on the  exemption
provided by Section 4(2) of the Securities Act.

On January 14, 2004, the Company issued to Laurus Master Fund Ltd.  ("Laurus") a
Convertible  Note (the "Note") in the principal  amount of $1,500,000 that bears
interest at the prime rate plus 1.25% (subject to a floor of 5.25% per year) and


                                       12
<PAGE>

matures on January 14, 2006. The Note may be repaid at the Company's  option, in
cash or,  subject to certain  limitations,  through  the  issuance  of shares of
common  stock.  The  Company  will have an option to pay the  monthly  amortized
amount in shares at the fixed  conversion price of $3.50 per share if the shares
are registered  with the Securities and Exchange  Commission  ("SEC") for public
resale and the then  current  market  price is 120%  above the fixed  conversion
price.  The Note includes a right of  conversion  in favor of Laurus.  If Laurus
exercises its  conversion  right at any time or from time to time at or prior to
maturity, the Note will be convertible into shares of the Company's common stock
at  a  fixed  conversion  price,   subject  to  adjustments  for  stock  splits,
combinations  and  dividends and for shares of common stock issued for less than
the fixed conversion price (unless exempted pursuant to the Company's  agreement
with Laurus). In conjunction with this transaction,  Sage Investments, Inc. will
be  paid a fee of  $60,000.  The  Company  has  agreed  to  file a  registration
statement  with the SEC to  register  the public  resale by Laurus of the common
stock to be issued  upon  conversion  of the Note.  The Note was issued  without
registration  under the Securities Act in reliance on the exemption  provided by
Section 4(2) of the Securities Act.


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 2003 and 2002.  (From January 1, 1999 through  September 12, 2001,
the Company's investment in NTS was recorded on the equity method.)

<TABLE>

<CAPTION>
                                                                 Years Ended December 31,
                                    ----------------------------------------------------------------------------------
                                          2003              2002           2001                2000             1999
                                          ----              ----           ----                ----             ----

<S>                                 <C>              <C>               <C>              <C>               <C>
Revenue                             $   2,705,534    $   2,121,574     $   3,520,924    $   3,652,422     $  5,114,779
Operating income (loss)             $  (4,261,045)   $ (15,127,235)    $  (1,297,145)   $  (1,548,777)    $    742,451
Contract termination reserve        $    (125,000)   $         ---     $         ---    $         ---     $        ---
Gain on royalty assignment          $         ---    $   2,811,590     $         ---    $         ---     $        ---
Other expense                       $    (504,413)   $    (318,618)    $    (186,809)   $    (106,675)    $    (97,386)
Net loss                            $  (4,890,458)   $ (12,634,263)    $  (1,565,054)   $  (2,994,574)    $   (836,824)
Earnings per share
   Weighted number of
   outstanding shares -
   basic and diluted                   12,964,498        5,047,611         2,881,877        1,790,160        1,784,433

   Loss per share                   $       (0.38)   $       (2.50)    $       (0.54)   $       (1.67)    $      (0.49)
SELECTED BALANCE SHEET DATA:
Total assets                        $  16,299,434    $   9,200,964     $  22,035,420    $   4,922,703     $  6,773,905
Working capital (deficit)           $   3,294,231    $  (1,572,209)    $   1,775,401    $    (199,775)    $  1,211,257
Long-term
   Note and lease obligations       $   3,322,384    $   2,849,126     $   2,409,202    $         ---     $        ---
   Deferred income                  $         ---    $         ---     $     421,399    $   2,036,896     $  1,965,532

(Note:  Earnings per share information as previously reported at December 31, 2002 has been adjusted to a post-reverse split basis.)
</TABLE>




                                       13
<PAGE>



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

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The  following  discussion  includes  "forward-looking  statements"  within  the
meaning  of Section  21E of the  Securities  and  Exchange  Act of 1934,  and is
subject to the safe harbor created by that section.  Forward-looking  statements
give our current  expectations  or forecasts of future events.  All  statements,
other than  statements of historical  facts,  included or  incorporated  in this
report regarding our strategy,  future operations,  financial  position,  future
revenues,  projected  costs,  prospects,  plans and objectives of management are
forward-looking  statements.  The words "anticipates,"  "believes," "estimates,"
"expects,"  "intends," "may," "plans,"  "projects,"  "will," "would" and similar
expressions are intended to identify  forward-looking  statements,  although not
all  forward-looking  statements contain these identifying  words.  Factors that
could  cause  results  to  differ   materially   from  those  projected  in  the
forward-looking  statements  are set forth in this section and in Exhibit  99.1.
The  following   discussion   should  also  be  read  in  conjunction  with  the
Consolidated Financial Statements and accompanying Notes thereto.

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  other reports  filed with the  Securities  and
Exchange Commission.

EXECUTIVE SUMMARY

The Company  considers  following areas to be of highest  importance in 2003 and
2004:
     o    During 2003 through  January 2004, the Company raised $15.7 million in
          financing. This was critical to the continuance of operations in early
          2003 and the  Company's  ability to support  construction  on its 2003
          customer contract backlog.  Expensive debt obligations were eliminated
          in January 2004 and the Company has both cash and available  financing
          to support anticipated 2004 business expansion.
     o    The  Company  has  completed  the  transition  from  several  lines of
          business including  financial  services/PRISM,  Rail and TrafficVision
          which  generated  the  majority  of  revenue  in  2001  and  2002,  to
          intelligent  traffic  management  products  and  services,   primarily
          red-light enforcement services and products, as the on-going operating
          focus  of  the  Company.   The  Company's   leading   product  is  its
          CrossingGuard video-based red light enforcement system.
     o    Revenues are not yet  sufficient to support  operating  expenses.  The
          Company needs to install  additional  CrossingGuard  approaches and is
          currently   retrofitting   some   operating   approaches   to  improve
          performance.  Over the past year,  the Company  more than  doubled the
          number of operating red-light enforcement approaches to 88 at December
          31, 2003.  Additional  approaches  to  contribute  to 2004 revenue are
          expected to come from existing customer  contracts which have not been
          fully  built  out,  the  recently  announced  Delaware  Department  of
          Transportation statewide contract and new customers to be signed.
     o    Over the past years, the Company has devoted substantial  resources to
          the  development  of its patented  technology  and it will  vigorously
          contest  infringement  thereon.  In November  2003,  the Company filed
          complaints  in  United  States  District  Courts  against  two  of its
          competitors,  alleging  that  their  automated  red light  enforcement
          systems  infringe  upon the  Company's  patent.  Further  details  are
          discussed  in the  Liquidity  and  Capital  Resources  and  Results of
          Operations sections below.

LIQUIDITY AND CAPITAL RESOURCES

Cash Position and Working Capital

The Company had cash and short-term  investments of approximately  $5,410,000 at
December 31, 2003 as compared with approximately  $309,000 at December 31, 2002.
At December 31, 2003, the Company had working capital of $3,294,000, as compared
with a working  capital deficit of $1,572,000 at December 31, 2002. The increase
in cash and working capital in 2003  substantially  relates to private placement
common stock sold at year-end.

                                       14
<PAGE>

In January 2004, the Company received $3.4 million in additional proceeds on the
remaining private placement  offering,  $2.2 million of which was used to settle
the remaining lease obligation to Electronic Data Systems Corporation (EDS). The
EDS settlement  resulted in a gain on early  extinguishment  of debt of $681,000
and eliminated the 12% interest obligation.

Also in January 2004,  the Company  satisfied its  obligations on a July 2003 $2
million Laurus Master Fund, Ltd.  (Laurus)  convertible  note by issuing 492,904
shares of Nestor  common stock and repaying the note balance,  accrued  interest
and prepayment penalty. On the same date, Laurus entered into a new $1.5 million
note ("second Laurus note").  While Nestor  received  $98,000 as a net result of
these  transactions,  the  more  beneficial  change  was  increasing  the  fixed
conversion  price,  as defined  in the notes,  from $1.55 per share in the first
note to $3.50 in the new note.

The Company had a net worth of $9,662,000 at December 31, 2003, as compared with
a net worth of  $3,865,000  at  December  31,  2002.  The  increase in net worth
resulted  primarily  from the equity  financing  activities  vigorously  pursued
during the year,  resulting  in over $10  million  being  raised,  offset by the
consolidated  net loss.  Silver Star Partners I, LLC (SSP) invested $4.2 million
through April 2003 and, on December 31, 2003,  the Company  converted an October
2003 $2 million note payable to SSP into common  stock.  Also in December  2003,
the Company raised $4.4 million from a private  placement  offering.  See Note 9
for additional information.

Future Commitments

During 2003,  the Company  acquired  additional  property  and leased  equipment
(primarily  computers and related equipment) at a cost of $86,000,  and invested
$2,341,000 in capitalized  systems.  At December 31, 2003,  Nestor  recorded its
investments  in  computers  and  related  equipment  (net  of  depreciation)  at
$385,000,  and in  capitalized  systems  (net of  depreciation)  at  $3,515,000.
Management  expects  that NTS will make future  commitments  for the purchase of
additional  computers  and  related  computing  equipment,   for  furniture  and
fixtures,   for  delivery  of  capitalized   systems,  for  consulting  and  for
promotional and marketing expenses.

As discussed above, the Laurus note payable and the EDS lease payable  presented
on the December  31, 2003 balance  sheet were  satisfied  in January  2004.  The
second  Laurus note calls for  principal  repayments  to commence  May 2004 with
$375,000  due in 2004,  $1,012,500  due in 2005 and $112,500 due in January 2006
before maturity.

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

After  satisfying  the initial  Laurus note payable and the EDS lease payable in
January 2004, the Company's future contractual obligations (assuming Laurus does
not exercise its conversion rights) and other commitments are as follows:

Contractual Obligations and Commercial Commitments:



                                              Payment Due Date
                            ----------------------------------------------------
                         Total    < 1 Year   1-3 Years   3-5 Years   Thereafter
                         -----    --------   ---------   ---------   ----------


Second Laurus note    $1,500,000  $375,000  $1,125,000    $ ---       $  ---
   payable

Operating leases      $  221,000  $137,000  $   84,000    $ ---       $  ---

Inflation


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

                                       15
<PAGE>



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  lease and service fee revenue
generally tied to the number of citations issued to red-light  violators.  Under
the terms of several current contracts, the Company cannot bill the municipality
until the court has collected the citation fine. On these contracts,  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.
This will have less impact on the Company  going forward as new contracts do not
have this provision and are trending towards fixed fee terms.

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
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
pursuant to Statement of Financial  Accounting  Standards No. 142, "Goodwill and
Other  Intangible  Assets" and SFAS No. 144,  "Accounting  for the Impairment or
Disposal of Long-Lived Assets".

RESULTS OF OPERATIONS

During 2003, the Company completed the transition from several lines of business
including financial  services/PRISM,  Rail and TrafficVision which generated the
majority of revenue in 2001 and 2002,  to  red-light  enforcement  services  and
products as the on-going  operating focus of the Company.  The Company's leading
product  is its  CrossingGuard  video-based  red light  enforcement  system  and
services,  and  future  growth  will be tied to the  increase  in the  number of
CrossingGuard  approaches  installed  and  operational.  In 2002 and  2001,  the
Company  reorganized  by (i)  eliminating  direct  investment  in its  financial
services/Risk  Management  products,  transferring all contracts through license
and/or  assignment  to other  parties  and (ii)  through  a  further  operations
reduction,  restructured  the Company to focus  primarily  on its  CrossingGuard
product.

ANALYSIS OF THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2003 AND 2002

In the quarter ended December 31, 2003, the Company  realized a 236%  ($788,000)
increase in  revenues  and 142%  ($1,379,000)  increase  in  operating  expenses
compared to the prior year,  same quarter.  After  consideration  of $340,000 of
increased other expenses in 2003, the Company  reported a net loss of $1,592,000
compared to $662,000 in the prior year fourth  quarter.  The revenue and expense
increases  relate  primarily  to having more than double the number of installed
operational  approaches in the current year fourth quarter compared to the prior
year fourth quarter. Additionally,  operating expenses include $225,000 relating
to financing  activities and $130,000 of patent lawsuit  expenses in the current
year quarter. Other expense in the fourth quarter of 2003 included the write off
of the unamortized  discount on the first Laurus note and EDS interest  expense,
both of which did not occur in the prior year fourth quarter.

                                       16
<PAGE>


Revenues
--------

The Company's revenues arose from  CrossingGuard  lease and service fees. During
the quarter ended December 31, 2003,  revenues  increased $788,000 to $1,122,000
from  $334,000 in the prior year fourth  quarter.  The Company had 48 additional
installed  approaches in the current year fourth  quarter  compared to the prior
year  fourth  quarter.  At December  31,  2003,  the  Company  had 88  installed
operational approaches.

Operating Expenses
------------------

Total  operating  expenses  amounted to $2,353,000 in the quarter ended December
31, 2003,  an increase of  $1,379,000  as compared to total  operating  costs of
$974,000 in the prior year same quarter.

Cost of Goods Sold

Cost of goods  sold (CGS)  totaled  $940,000  in the  fourth  quarter of 2003 as
compared to $97,000 in 2002. The 2003 CGS relates to  amortization,  maintenance
and processing costs to support 88 approaches  compared to only 40 in the fourth
quarter of 2002. The 2003 quarter also includes a $417,000 net  reclassification
of all 2003  citation  processing  costs  from  engineering  and  operations  as
previously  presented to CGS. Citation processing costs were not material in the
2002  quarter  and were not  reclassified  to conform to the 2003  presentation.
Additionally,  the fourth  quarter of 2002  included a $102,000  reversal of EDS
processing costs which was not repeated in 2003.

Engineering and Operations

Costs  related to  engineering  and  operations  totaled  $419,000 in the fourth
quarter of 2003,  as compared  with  $596,000 in 2002.  These costs  include the
salaries of field and office personnel as well as operating  expenses related to
product design, delivery,  configuration,  maintenance and service. Increases in
headcount,  travel and supplies  generated  $206,000 of additional  costs in the
2003  quarter but were  offset by a $417,000  net  reclassification  of all 2003
citation  processing  costs to CGS in fourth quarter 2003.  Citation  processing
costs  were  not  material  to 2002  engineering  and  operations  and  were not
reclassified to conform to the 2003 presentation.

Research and Development

Research and development  expenses totaled $29,000 in the quarter ended December
31, 2003 as compared with $31,000 in the previous  year's  quarter.  The Company
continues its R&D activities, as deemed necessary.

Selling and Marketing

Selling and marketing costs were $87,000 in the quarter ended December 31, 2003,
and $89,000 in the previous year's quarter. Sales and marketing efforts had been
limited recently due to cash constraints but are expected to increase in 2004.

General and Administrative

General and  administrative  expenses  totaled $876,000 in the fourth quarter of
2003, as compared with $160,000 in the previous year's quarter. These costs were
unusually  high in the current  year  quarter due to (i)  $225,000 of Laurus and
Silver Star  deferred  financing  fees being  expensed in  connection  with note
redemptions/conversions,  (ii) $130,000 of patent lawsuit  defense  expenses and
(iii)  $84,000 of bad debt  expense.  Additionally,  the fourth  quarter of 2002
included a reversal of $113,000 of Wand Partners, Inc. fees in connection with a
Termination and Release Agreement.

Other Expense

For the fourth quarter 2003, net other expense was $362,000 as compared with net
other expense of $22,000 in the  quarter-earlier  period. In 2003, other expense
was  primarily  interest  of  (i)  $169,000  relative  to the  write  off of the


                                       17
<PAGE>

unamortized  discount  on the first  Laurus  note and  $59,000  of other  Laurus
interest,  (ii)  $89,000 to EDS.  Both  periods  included  warrant  amortization
expense of $26,000.

Net Loss
--------

During the fourth quarter 2003, the Company experienced a loss of $1,592,000, as
compared with a loss of $662,000 in the previous year's quarter. For the quarter
ended December 31, 2003, loss per share available for common stock was $0.11 per
share, as compared with a loss per share of $0.13 in the corresponding period of
the prior year. The weighted average shares  outstanding were 13,987,905 for the
quarter ended December 31, 2003 and 5,047,611 for the quarter ended December 31,
2002.


ANALYSIS OF THE YEARS ENDED DECEMBER 31, 2003 AND 2002

For the year ended December 31, 2003,  the Company  experienced a 28% ($584,000)
increase in revenues  compared to the prior  calendar year.  Operating  expenses
decreased 60% ($10,282,000) in 2003. After  consideration of the $2,812,000 gain
on royalty  assignment in 2002 and $311,000 of increased other expenses in 2003,
the  Company  reported a net loss of  $4,890,000  in 2003  compared to a loss of
$12,634,000 in the prior year. Many  significant  changes  occurred during these
two years as more fully described below.

Revenues
--------

The Company's revenues arose from royalties and product sales, lease and service
fees as discussed  separately  below.  During the year ended  December 31, 2003,
revenues  increased $584,000 to $2,706,000 from $2,122,000 in the prior calendar
year.  CrossingGuard  accounted for 40% of 2002 revenues and  substantially  all
2003 revenues.

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  $29,000 in 2003, as compared with $664,000 in 2002.
The  Company  continued  to receive  royalties  from ACI until July 1, 2002 when
these royalty rights were assigned to Churchill Lane Associates,  LLC.  Residual
royalty streams from two customers account for 2003 royalty revenues.

Product Sales, Lease and Service Fees

Product sales,  lease and service fee revenues from the traffic business totaled
$2,677,000 in 2003, as compared  with  $1,457,000 in 2002,  due primarily to the
installed  base of  approaches  more than  doubling  from  December  31, 2002 to
December 31, 2003.  Revenue in 2002 was  comprised of $844,000 in  CrossingGuard
video-based  traffic  enforcement,  $387,000 in Rail  business  and  $187,000 in
TrafficVision   business,   whereas   2003   revenue   was   substantially   all
CrossingGuard.

CrossingGuard  construction started slowly in Q1 '03 but by the end of Q2, there
were 20 additional  approaches  installed,  followed by 12 and 16 more in Q3 and
Q4, respectively,  to total 88 live approaches by the end of 2003.  Construction
is not  expected  to  continue  at this pace in 2004  unless new  contracts  are
signed.  During March 2004, the Company installed three new approaches under its
contract  with  the  Delaware  Department  of  Transportation.  The  Company  is
currently  retrofitting some operating  approaches to improve performance and is
working  with its  customers  to  complete  build outs of  remaining  approaches
committed under existing contracts.

Operating Expenses
------------------

Total operating  expenses  amounted to $6,967,000 in the year ended December 31,
2003, a decrease of $10,282,000 over total operating costs of $17,249,000 in the
prior  year.  The 2002  expenses  include  $743,000 in  restructuring  costs and
$9,294,000  of  impairment  charges.   Excluding  restructuring  and  impairment


                                       18
<PAGE>

charges,  operating  expenses  in 2002  were  $7,212,000.  The most  significant
changes in 2003 were  $414,000 of  increased  amortization  on live  approaches,
$240,000 of  increased  financing  fees and $130,000 of patent  lawsuit  defense
expenses;  offset by $538,000 of CGS expense pertaining to discontinued  product
lines (Rail, TrafficVision) and pilot programs.

Costs of Goods Sold

Cost of goods sold totaled  $1,791,000  in 2003 as compared to $1,476,000 in the
prior year. CGS includes amortization,  maintenance and processing costs related
to  revenues  recorded in the  respective  periods.  Fiscal  year 2002  includes
$289,000 (Rail), $138,000 (TrafficVision) and $111,000 (pilot program) CGS which
did not recur in 2003 but were  offset by a $414,000  current  year  increase in
system  amortization due to the increased  number of installed  approaches and a
$417,000 net reclassification of 2003 citation processing costs from engineering
and  operations as previously  presented to CGS.  Additionally,  2002 included a
$102,000 reversal of EDS processing costs which was not repeated in 2003.

Engineering and Operations

Costs  related to  engineering  and  operations  totaled  $2,578,000 in 2003, as
compared with $2,070,000 in 2002.  These costs include the salaries of field and
office  personnel  as well as  operating  expenses  related to  product  design,
delivery,  configuration,  maintenance and service.  The increase in these costs
reflects  the addition of NTS  expenses  both  internally  and  field-based,  to
support the growing installed  customer base. Staff realignments from R & D were
necessary  to assist in  engineering  efforts.  Also,  $417,000 of net  citation
processing  costs were  reclassified  to CGS in fourth  quarter  2003.  Citation
processing  costs were not material to 2002  engineering and operations and were
not reclassified to conform to the 2003 presentation.

Research and Development

Research and development  expenses  totaled  $121,000 in the year ended December
31, 2003 as compared  with  $1,604,000 in the prior year. R & D efforts had been
significant to roll out the Rail and CrossingGuard  products,  which occurred in
2002.  In March  2002,  management  took  steps to reduce the heavy use of third
party contractors to support development projects (consulting costs decreased by
$183,000 in 2003) and also made staff  realignments to assist  engineering  with
the  increased  customer  base.  Although  the June 2002  restructuring  further
contributed to a $361,000 reduction in salaries,  talent and capacity remain for
research and development, as management deems appropriate.

Selling and Marketing

Selling and  marketing  costs  decreased  $253,000 to $355,000 in the year ended
December  31,  2003,  from  $608,000 in the prior year.  The decrease in selling
costs in the year reflects,  primarily,  the re-focus of strategy to one product
line, which lowered salaries and collateral  costs.  Sales and marketing efforts
had been limited  recently due to cash  constraints but are expected to increase
in 2004.

General and Administrative

General and administrative expenses totaled $2,121,000 in 2003, as compared with
$1,453,000 in the previous  year. The increase is the net result of (i) $240,000
of financing fees in conjunction  with the July 2003 Laurus and the October 2003
Silver Star notes,  (ii) $130,000 of legal expenses on patent  lawsuit  defense,
(iii) $102,000 in general legal  expenses,  (iv) $84,000 of bad debt expense and
(v) the 2002 reversal of $113,000 of Wand  Partners,  Inc.  fees in  conjunction
with a Termination and Release Agreement.

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


                                       19
<PAGE>

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 and in 2003 in connection with the
San Diego office 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 costs 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

On January 1, 2002,  the  Company  adopted  SFAS No.  142,  "Goodwill  and Other
Intangible  Assets."  Under SFAS No. 142,  the Company  will test  goodwill  for
impairment  on an  annual  basis,  or  whenever  indicators  of  impairment  are
identified.  The Company completed the transitional  impairment test of goodwill
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  of 2002,  however,  the fair  value was  recomputed  using the  quoted
quarter-end  stock prices.  Such  computations  resulted in goodwill  impairment
charges of $3,000,000 and $5,500,000  recorded as operating  expenses during the
respective  2002  quarters.  The  Company  continues  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, former 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.

Contract Termination Reserve

A significant  customer  contract in the Rail line of business may be terminated
by  mutual  agreement  prior  to its  completion  as a result  of the  Company's
decision to focus its  resources  on  CrossingGuard  systems and  services.  The
Company accrued $125,000 of estimated contract termination fees in June 2003.



                                       20
<PAGE>


Other Expense
-------------

For 2003, net other expense was $504,000;  as compared with net other expense of
$319,000 in the year-earlier  period.  In 2003, other expense included  interest
expense of  $470,000 as  compared  to  $217,000  in 2002,  2003 also  included a
$64,000  favorable  settlement with a vendor 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 high in 2003 due
to the $169,000 write off of the  unamortized  discount on the first Laurus note
and $59,000 of other Laurus interest.

Net Loss
--------

During 2003, the Company  experienced a loss of  $4,890,000,  as compared with a
loss of  $12,634,000  in the prior year.  For the year ended  December 31, 2003,
loss per share was $0.38 per share,  as compared  with a loss per share of $2.50
in the  corresponding  period  of the  prior  fiscal  year.  For the year  ended
December  31,  2003,  there was  outstanding  a weighted  average of  12,964,498
shares, as compared to 5,047,611 shares in the year-earlier period.


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  resulting in a loss of  $12,634,000 as compared to a loss of $1,565,000
in the prior year.

Revenues
--------

The Company's revenues arose from royalties and product sales, lease and service
fees 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 agreement until July 2002 when
it was assigned to CLA.

Product Royalties

Product royalty  revenues  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,  and  $1,104,000  from the ACI license in the first  quarter of
2001.  The Company  continued to receive  royalties  from ACI until July 1, 2002
when these royalty rights were assigned to CLA

Product Sales, Lease and Service Fees

Product sales,  lease and service fee revenues from the traffic business totaled
$1,457,000  in 2002,  as compared  with  $524,000 in 2001,  which  included only
post-merger revenues.

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.


                                       21
<PAGE>


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.  In July 2002 a letter agreement
was reached and finalized in January 2003 to eliminate 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 performs 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  reflects the addition of NTS  engineering
expenses effective with 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.  The increase in such
costs reflects 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 during
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 and in 2003 in connection with the
San Diego office.

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


                                       22
<PAGE>

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

On January 1, 2002,  the  Company  adopted  SFAS No.  142,  "Goodwill  and Other
Intangible  Assets."  Under SFAS No. 142,  the Company  will test  goodwill  for
impairment  on an  annual  basis,  or  whenever  indicators  of  impairment  are
identified.  The Company completed the transitional  impairment test of goodwill
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  of 2002,  however,  the fair  value was  recomputed  using the  quoted
quarter-end  stock prices.  Such  computations  resulted in goodwill  impairment
charges of $3,000,000 and $5,500,000  recorded as operating  expenses during the
respective  2002  quarters.  The  Company  continues  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, former 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
higher in 2002 in comparison  to 2001 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 $2.50 per share, as compared with a loss per share of $0.54 in the
corresponding  period of the prior fiscal year.  For the year ended December 31,


                                       23
<PAGE>

2002, there was outstanding a weighted average of 5,047,611 shares (post reverse
split), as compared to 2,881,877 shares in the year-earlier period.

ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk.
         ---------------------------------------------------------

The Company has long term  obligations,  however the interest rate is fixed. The
Company  also has a  convertible  note  payable at prime plus 1.25%  through its
January  2006  maturity.  The  Company  does not hedge  against  this  exposure.
Management assesses their exposure to these risks as immaterial.

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

See annexed financial statements.

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.  During the fiscal year ended December 31, 2002 or any
subsequent  interim  period prior to engaging  Carlin,  Charron & Rosen LLP, the
Company did not 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.

ITEM 9A. Controls and Procedures.
         -----------------------

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-15(e) and 15d-15(e) as of December 31, 2003. 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
December 31, 2003. 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.




                                       24
<PAGE>





                                                                         PART II


ITEM 8.





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




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




                                December 31, 2003
                                -----------------



                                       25
<PAGE>






                                  NESTOR, INC.
                                  ------------

                                    CONTENTS
                                    --------







                                                                     Page No.
                                                                     --------

Independent Auditors' Reports                                         27

Consolidated Balance Sheets -
 December 31, 2003 and 2002                                           29

Consolidated Statements of Operations -
 For the Years Ended December 31, 2003, 2002 and 2001                 30

Consolidated Statements of Stockholders' Equity -
 For the Years Ended December 31, 2003, 2002 and 2001                 31

Consolidated Statements of Cash Flows -
 For the Years Ended December 31, 2003, 2002 and 2001                 32

Notes to Consolidated Financial Statements                            33


















                                       26
<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 sheets of Nestor, Inc. as
of  December  31,  2003 and 2002,  and the related  consolidated  statements  of
operations,  stockholders'  equity and cash flows for the years then ended.  Our
audit  also  included  the  financial  statement  schedule  for the years  ended
December 31, 2003 and 2002 listed in the index at Item 15(a)(2). 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 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  audits  provide  a
reasonable basis for our opinion.

In our opinion, the 2003 and 2002 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Nestor,
Inc.  at  December  31,  2003  and  2002  and the  consolidated  results  of its
operations  and its cash  flows  for the years  then  ended 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.



                                                 /s/Carlin, Charron & Rosen, LLP


Providence, Rhode Island
March 16, 2004



                                       27
<PAGE>










                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
   of Nestor, Inc.


We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity and cash flows for the year ended  December 31, 2001.  Our
audit also included the financial  statement  schedule listed for the year ended
December 31, 2001 in the index at Item 15(a)(2).  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. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated results of Nestor, Inc.'s operations and
its  cash  flows  for the  year  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




                                       28
<PAGE>

<TABLE>

<CAPTION>

                                                    NESTOR, INC.
                                            Consolidated Balance Sheets
                                            ---------------------------
                                                                                           DECEMBER 31,
                      ASSETS                                                         2003                2002
                                                                                     ----                ----
<S>                                                                             <C>                <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                   $   5,410,123      $     308,894
    Accounts receivable, net of allowance for doubtful accounts                       521,872            141,263
    Unbilled contract revenue                                                         158,952            122,684
    Inventory                                                                         442,298            281,108
    Other current assets                                                               75,791             60,963
                                                                                -------------      -------------
      Total current assets                                                          6,609,036            914,912

NONCURRENT ASSETS:
    Capitalized system costs, net of accumulated depreciation                       3,514,908          1,936,783
    Property and equipment, net of accumulated depreciation                           385,165            486,740
    Goodwill                                                                        5,580,684          5,580,684
    Patent development costs, net of accumulated amortization                         175,216            153,275
    Other long term assets                                                             34,425            128,570
                                                                                -------------      -------------

TOTAL ASSETS                                                                    $  16,299,434      $   9,200,964
                                                                                =============      =============

       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Note payable                                                                $     884,750      $         ---
    Accounts payable                                                                  468,289            616,878
    Accrued employee compensation                                                     386,652            354,269
    Accrued liabilities                                                               765,676            795,749
    Leases payable                                                                    662,541            354,286
    Restructuring reserve                                                             146,897            365,939
                                                                                -------------      -------------
      Total current liabilities                                                     3,314,805          2,487,121

NONCURRENT LIABILITIES:
    Long term note payable                                                          1,030,000                ---
    Long term leases payable                                                        2,292,384          2,849,126
                                                                                -------------      -------------
      Total liabilities                                                             6,637,189          5,336,247
                                                                                -------------      -------------

    Commitments and contingencies                                                         ---                ---

STOCKHOLDERS' EQUITY:
    Preferred stock, $1.00 par value, authorized 10,000,000 shares;
      issued and outstanding:  Series B - 190,000 shares at
      December 31, 2003 and 235,000 shares at December 31, 2002                       190,000            235,000
    Common stock, $.01 par value, authorized 20,000,000 shares;
      issued and outstanding:   13,997,238 shares at December 31, 2003
      and 5,024,111  shares at December 31, 2002                                      139,972             50,241
    Warrants                                                                        1,377,251          1,072,825
    Additional paid-in capital                                                     49,230,803         45,227,851
    Stock pending issuance                                                          6,335,877                ---
    Accumulated deficit                                                           (47,611,658)       (42,721,200)
                                                                                -------------      -------------
      Total stockholders' equity                                                    9,662,245          3,864,717
                                                                                -------------      -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $  16,299,434      $   9,200,964
                                                                                =============      =============


See Independent Auditors' Reports and Notes to the Financial Statements.

</TABLE>



                                       29
<PAGE>



<TABLE>


                                                               NESTOR, INC.
                                                  Consolidated Statements of Operations
                                                  -------------------------------------
<CAPTION>


                                                                          YEARS ENDED DECEMBER 31,
                                                                 2003                2002               2001
                                                            -------------------------------------------------------
<S>                                                         <C>                 <C>                <C>
Revenue:
     Product royalties                                      $      28,555       $     664,401      $   2,996,550
     Product sales, lease and service fees                      2,676,979           1,457,173            524,374
                                                            -------------       -------------      -------------

         Total revenue                                          2,705,534           2,121,574          3,520,924
                                                            -------------       -------------      -------------

Operating expenses:
     Cost of goods sold                                         1,791,203           1,475,945            692,418
     Engineering and operations                                 2,578,056           2,070,476            508,955
     Research and development                                     121,350           1,604,159          1,623,182
     Selling and marketing                                        354,847             607,901            779,389
     General and administrative                                 2,121,123           1,453,342          1,214,125
     Restructuring costs                                              ---             742,705                ---
     Capitalized system costs impairment                              ---             794,281                ---
     Goodwill impairment loss                                         ---           8,500,000                ---
                                                            -------------       -------------      -------------
         Total operating expenses                               6,966,579          17,248,809          4,818,069
                                                            -------------       -------------      -------------


Loss from operations                                           (4,261,045)        (15,127,235)        (1,297,145)

Contract termination reserve                                     (125,000)                ---                ---
Gain on royalty assignment                                            ---           2,811,590                ---
Other expense - net                                              (504,413)           (318,618)          (186,809)
                                                            -------------       -------------      -------------

Loss before investment loss                                    (4,890,458)        (12,634,263)        (1,483,954)

Loss from investment in affiliate                                     ---                 ---            (81,100)
                                                            -------------       -------------      --------------

Net loss                                                    $  (4,890,458)      $ (12,634,263)     $  (1,565,054)
                                                            =============       =============      =============


Loss Per Share:

Loss per share, basic and diluted                           $       (0.38)      $       (2.50)     $       (0.54)
                                                            =============       =============      =============

Shares used in computing loss per share:
     Basic and diluted                                         12,964,498           5,047,611          2,881,877
                                                            =============       =============      =============


See Independent Auditors' Reports and Notes to the Financial Statements.
</TABLE>









                                       30
<PAGE>



<TABLE>

                                                                  Nestor, Inc.
                                                Consolidated Statements of Stockholders' Equity

                                              For the Years Ended December 31, 2003, 2002 and 2001

<CAPTION>



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




<S>                <C>       <C>         <C>         <C>         <C>         <C>            <C>          <C>            <C>
Balance at
Dec. 31, 2000      235,000   $235,000    1,768,845   $ 17,688    $ 843,434   $27,593,325    $      ---   $(28,521,883)  $   167,564

Issuance of
 Common Stock          ---        ---    3,233,856     32,339          ---    17,490,520           ---            ---    17,522,859
Accretion value
 of warrants           ---        ---          ---        ---      106,484           ---           ---            ---       106,484
Variable
 warrants              ---        ---          ---        ---    1,662,450    (1,662,450)          ---            ---           ---
Options
 exercised             ---        ---       21,410        214          ---       160,430           ---            ---       160,644
Loss for the
 year ended
 Dec. 31, 2001         ---        ---          ---        ---          ---           ---           ---     (1,565,054)   (1,565,054)
                  --------   --------   ----------   ---------  ----------   -----------    ----------   ------------   -----------
Balance at
 Dec. 31, 2001     235,000   $235,000    5,024,111   $ 50,241   $2,612,368   $43,581,825           ---   $(30,086,937)  $16,392,497


Accretion value
 of warrants           ---        ---          ---        ---      106,483           ---           ---            ---       106,483
Variable
 warrants              ---        ---          ---        ---   (1,646,026)    1,646,026           ---            ---           ---
Loss for the
 year ended
 Dec. 31, 2002         ---        ---          ---        ---          ---           ---           ---    (12,634,263)  (12,634,263)
                  --------   --------   ----------   ---------   ----------  -----------    ----------   ------------   -----------
Balance at
 Dec. 31, 2002     235,000   $235,000    5,024,111   $ 50,241   $1,072,825   $45,227,851           ---   $(42,721,200)  $ 3,864,717



Issuance of
 Common Stock          ---        ---    8,968,627     89,686          ---     3,997,561           ---            ---     4,087,247
Conversion
 of Preferred
 Stock to
 Common Stock      (45,000)   (45,000)       4,500         45          ---        44,955           ---            ---           ---
Stock issuance
 outstanding           ---        ---          ---        ---          ---           ---     6,335,877            ---     6,335,877
Issuance of
 warrants              ---        ---          ---        ---          ---       158,378           ---            ---       158,378
Accretion value
 of warrants           ---        ---          ---        ---      106,484           ---           ---            ---       106,484
Variable
 warrants              ---        ---          ---        ---      197,942      (197,942)          ---            ---           ---
Loss for the
 year ended
 Dec. 31, 2003         ---        ---          ---        ---          ---           ---           ---     (4,890,458)   (4,890,458)
                  --------   --------   ----------   ---------   ----------  -----------    ----------   ------------   -----------
Balance at
 Dec. 31, 2003     190,000   $190,000   13,997,238   $139,972   $1,377,251   $49,230,803    $6,335,877   $(47,611,658)  $ 9,662,245
                  ========   ========   ==========   ========   ==========   ===========    ==========   ============   ===========


</TABLE>




      See Independent Auditors' Reports and Notes to the Financial Statements.



                                       31
<PAGE>


<TABLE>


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

                                                                             YEARS ENDED DECEMBER 31,
                                                                    2003               2002                2001
                                                              -----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                         <C>                 <C>                <C>
  Net loss                                                  $  (4,890,458)      $ (12,634,263)     $  (1,565,054)
    Adjustments to reconcile net loss
      to net cash used by operating activities:
      Depreciation and amortization                             1,012,123             601,938            239,178
      Loss on disposal of fixed assets                              5,291              17,402             66,666
      Loss from investment in affiliate                               ---                 ---             81,100
      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                 264,862             106,483            106,484
      Increase (decrease) in cash arising from
       changes in assets and liabilities:
        Restricted cash                                               ---             943,926           (943,926)
        Accounts receivable - net                                (380,609)             16,943            702,114
        Unbilled contract revenue                                 (36,268)             32,841            384,068
        Inventory                                                (178,210)             46,447            126,801
        Other assets                                               83,041             108,740             55,208
        Accounts payable and accrued expenses                    (117,129)           (257,207)          (277,278)
        Deferred income                                               ---            (270,904)          (610,703)
        Restructuring reserve                                    (219,042)            365,939                ---
                                                            -------------       -------------      -------------

        Net cash used by operating activities                  (4,456,399)         (4,439,024)        (1,635,342)
                                                            -------------       -------------      -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Payments from (advances to) affiliate - net                         ---                 ---            322,952
  Cash of acquired affiliate                                          ---                 ---            361,804
  Acquisition costs                                                   ---                 ---           (555,269)
  Proceeds from royalty assignment - net                              ---           3,040,100                ---
  Investment in capitalized systems                            (2,341,114)         (1,016,985)          (454,778)
  Purchase of property and equipment                              (86,145)            (47,849)           (90,052)
  Proceeds from sale of property and equipment                        ---              11,600                ---
  Patent development costs                                        (31,196)            (21,818)           (60,335)
                                                            -------------       -------------      -------------

        Net cash provided (used) by investing activities       (2,458,455)          1,965,048           (475,678)
                                                            -------------       -------------      -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of obligations under capital leases                  (292,641)            (42,647)           (17,124)
  Proceeds from notes payable                                   4,000,000                 ---                ---
  Repayment of line of credit                                         ---                 ---           (419,769)
  Proceeds from leases payable                                        ---             530,530            742,742
  Proceeds from issuance of common stock - net                  4,001,997                 ---          3,950,123
  Proceeds from stock pending issuance                          4,306,727                 ---                ---
                                                            -------------       -------------      -------------

        Net cash provided by financing activities              12,016,083             487,883          4,255,972
                                                            -------------       -------------      -------------

Net change in cash and cash equivalents                         5,101,229          (1,986,093)         2,144,952
Cash and cash equivalents - beginning of year                     308,894           2,294,987            150,035
                                                            -------------       -------------      -------------

Cash and cash equivalents - end of year                     $   5,410,123       $     308,894      $   2,294,987
                                                            =============       =============      =============

SUPPLEMENTAL CASH FLOWS INFORMATION:
  Interest paid                                             $     361,730       $      89,431      $     112,016
                                                            =============       =============      =============

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


Significant non-cash transactions are described in Notes 9, 10, 13, 16 and 21.
See Independent Auditors' Reports and Notes to the Financial Statements.

</TABLE>


                                       32
<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. Two wholly-owned subsidiaries,
               Nestor Traffic Systems, Inc. ("NTS") and Nestor Interactive, Inc.
               ("Interactive"), were formed effective January 1, 1997. Effective
               November 7, 1998, the Company  ceased  further  investment in the
               Interactive  subsidiary.  CrossingGuard,  Inc.,  a  wholly  owned
               subsidiary  of NTS, was formed July 18, 2003 in  connection  with
               the financing discussed in Note 6. All intercompany  transactions
               and balances have been eliminated. The Company's principal office
               is located in East Providence, RI.

               The Company's  current focus is to offer  customers  products and
               services  to  be  utilized  in  intelligent   traffic  management
               applications.   Its   leading   product   is  its   CrossingGuard
               video-based red light enforcement  system and services,  sold and
               distributed  exclusively  by NTS.  Effective  July 1,  2002,  the
               Company  assigned  its royalty  rights in the field of  financial
               services,   substantially  eliminating  ongoing  product  royalty
               revenue from prior non-traffic related lines of business.

          B.   Liquidity and management's plans
               The  Company  has  incurred  significant  losses  to date  and at
               December  31,  2003  has  an   accumulated   deficit.   The  2003
               consolidated  financial statements do not include any adjustments
               that might result should the Company not be able to continue as a
               going  concern.  In previous  years  similar  conditions  led the
               Company's  auditors to modify  their  opinions  to address  going
               concern   uncertainties.   Management   believes  that  with  the
               significant  financing  obtained in 2003,  the  Company's  strong
               liquidity  at December  31, 2003 and its current  contracts  with
               municipalities,   the  Company  will  be  able  to  continue  the
               development and upgrading of its products and sustain  operations
               through the end of 2004. There can be no assurance, however, that
               the  Company's  operations  will be sustained or be profitable in
               the  future,  or  that  the  Company's  product  development  and
               marketing efforts will be successful.


NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
          A.   Cash equivalents
               The  Company   considers  all  highly  liquid  debt   instruments
               purchased with an original maturity of 90 days or less to be cash
               equivalents.

          B.   Accounts receivable
               Accounts receivable represent balances due from customers, net of
               an $84,213  reserve for  doubtful  accounts at December 31, 2003.
               The Company considered  accounts  receivable at December 31, 2002
               to be  fully  collectible,  and  accordingly,  no  allowance  for
               doubtful  accounts was 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.

          C.   Unbilled contract revenue
               Unbilled  contract  revenue  represents  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.


                                       33
<PAGE>


          D.   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.

          E.   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.

          F.   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.

          G.   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.

          H.   Revenue recognition 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),  postcontract  customer  support
               (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.



                                       34
<PAGE>




               Nestor, Inc.:
               During 2001,  revenue was derived from software licenses (Initial
               License  Fees),   user  fees  (Monthly  License  Fees),  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.

               Both companies above:
               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.

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

          J.   Research and development
               Research  and  development  in 2002  and  2003  represents  costs
               associated with the NTS product line and consists  principally of
               payroll  and  related  costs,  facilities  costs  and the cost of
               prototype components.

          K.   Income taxes
               The Company accounts for income taxes using the liability method.
               Under  this  method,  deferred  tax assets  and  liabilities  are
               determined based on differences  between the financial  reporting
               and the tax bases of assets  and  liabilities,  and are  measured
               using  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, 2003 and 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 2003,
               2002 or 2001.


                                       35
<PAGE>


          L.   Earnings (loss) per share and common stock
               The Company  reports  its  earnings  (loss) per share  ("EPS") in
               accordance   with  the   provisions  of  Statement  of  Financial
               Accounting  Standards  No. 128,  Earnings Per Share ("SFAS 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.

               Common stock and loss per share as previously  reported have been
               adjusted to a post-reverse split basis.

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

          N.   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.

          O.   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 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.

          P.   Accounts payable
               Included  in  accounts  payable is a $221,000  note  payable to a
               vendor with a balance of $75,604 at December 31,  2003.  The note
               bears interest at 8% and monthly  principal and interest payments
               of $19,218 are due through April 2004.

          Q.   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.


                                       36
<PAGE>


               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  model with the following
               weighted average assumptions:


                                         2003             2002           2001
                                         ----             ----           ----

Expected life (years)                        8                8               8
Average risk-free interest rate        1.6-6.8%      2.6 to 6.8%     4.2 to 6.8%
Volatility                               117.4%           109.8%          105.9%
Dividend yield                               0%               0%              0%



               The  weighted-average  fair value of options granted during 2003,
               2002 and 2001 was  $2.55,  $1.80  and  $5.10,  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:


                                                 Years Ended December 31,
                                   ---------------------------------------------
                                         2003             2002           2001
                                         ----             ----           ----

Net loss - reported                $(4,890,458)    $(12,634,263)    $(1,565,054)
Add (Deduct):  total stock-based
  compensation expense
  determined under fair-value
  based method for all awards,
  net of related tax effects       $   149,965     $    (22,464)    $   (23,679)
Pro Forma - net loss               $(4,740,493)    $(12,656,727)    $(1,588,733)
Pro forma net loss per share -
  basic and diluted                $     (0.37)    $      (2.51)    $     (0.55)



               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  may  not be  representative  of  the  effects  on pro  forma
               disclosures of future years.



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 three to
          five  year  estimated  useful  life.   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 $2,746,512 in 2004,  $2,528,824 in 2005,
          $1,918,527  in 2006,  $1,235,568  in 2007 and  $902,917  in 2008,  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 (see Note 7).

                                                              December 31,
                                                              ------------
                                                         2003            2002
                                                         ----            ----
            Equipment under operating leases:
                  Work-in-process                   $  248,693      $   381,030
                  Installed and accepted             4,358,062        1,884,611
                                                   -----------      -----------
                                                     4,606,755        2,265,641

            Less: Accumulated depreciation          (1,091,847)        (328,858)
                                                   -----------      -----------

            Net investment in leased equipment      $3,514,908      $ 1,936,783
                                                   ===========      ===========

                                       37
<PAGE>


NOTE 4 -  PROPERTY AND EQUIPMENT - NET:

                                                              December 31,
                                                              ------------
                                                         2003            2002
                                                         ----            ----
            Office furniture and equipment          $   140,475     $   140,475
            Computer equipment                        1,747,454       1,607,256
            Demonstration equipment                       7,726         125,562
            Leasehold improvements                      231,915         227,872
                                                    -----------     -----------
                                                      2,127,570       2,101,165
            Less:  Accumulated depreciation          (1,742,405)     (1,614,425)
                                                    -----------     -----------
                                                    $   385,165     $   486,740
                                                    ===========     ===========

          Depreciation and amortization  expense of $239,878 and $235,361 on the
          above assets was  recorded  for the years ended  December 31, 2003 and
          2002, respectively.

          In 2003, the Company disposed of $117,189 of demonstration  equipment.
          Additionally, in 2003 equipment with a cost of $17,020 was transferred
          to inventory at net book value.  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
          is included in Other expense - net.


NOTE 5 -  GOODWILL AND OTHER TANGIBLE ASSETS:
          On January 1, 2002,  the Company  adopted SFAS No. 142,  "Goodwill and
          Other  Intangible  Assets."  Under  SFAS 142,  the  Company  will test
          goodwill for impairment on an annual basis, or whenever  indicators of
          impairment  are  identified.  The Company  completed the  transitional
          impairment test of goodwill 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 of 2002,  however,  the fair value was  recomputed
          using the quoted quarter-end stock prices. Such computations  resulted
          in goodwill  impairment charges of $3,000,000 and $5,500,000  recorded
          as operating expenses during the respective 2002 quarters. The Company
          continues 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 -  NOTES PAYABLE:
          First Laurus Convertible Note:
          On July 31,  2003,  the Company  entered  into a  Securities  Purchase
          Agreement ("the Agreement") with Laurus Master Fund, Ltd.  ("Laurus").
          Pursuant to the Agreement,  the Company issued to Laurus a Convertible
          Note ("Note") in the principal amount of $2,000,000 that bore interest
          at the prime rate plus 1.25% (subject to a floor of 5.25%) and matured
          on July 31, 2005. The initial  principal payment of $20,000 was due in
          December  2003 and  increased  over the  term of the  loan  such  that
          aggregate  principal  payments totaled $950,000 in 2004 and $1,030,000
          in 2005. The Note allowed repayment,  at the Company's option, in cash
          or, subject to certain limitations,  through the issuance of shares of
          the Company's  common stock at the fixed conversion price of $1.55 per


                                       38
<PAGE>

          share if the then  current  market  price was above  120% of the fixed
          conversion  price.  Laurus also had a conversion  right at any time or
          from time to time at or prior to  maturity,  to convert  the Note into
          shares of the Company's  common stock at the fixed  conversion  price,
          subject to adjustments for shares of common stock issued for less than
          the  fixed  conversion   price  (unless   exempted   pursuant  to  the
          Agreement).  The  Company  had the  option of  redeeming  for cash any
          outstanding  principal  by paying 115% of such amount plus accrued but
          unpaid interest.

          During  November and December 2003,  Laurus  converted  $85,250 of the
          Note into 55,000 shares of Nestor common stock at $1.55 per share.  On
          January  14,  2004,  the  Company   satisfied  its  remaining  payment
          obligations on the Note by issuing  492,904 shares of its common stock
          to  Laurus  at the  fixed  conversion  price of $1.55  per  share  and
          redeeming  the  remaining  $1,150,750  note  balance by a "payment" of
          $1,340,972,  which included accrued interest and a $172,613 prepayment
          penalty.  This  "payment"  was netted  against the  proceeds  from the
          Second Laurus  Convertible Note (see below),  resulting in $98,028 net
          cash proceeds to the Company.

          The Company filed a Registration Statement on Form S-2 on September 2,
          2003  (SEC  File No.  333-108432),  registering  the  resale of shares
          issued to Laurus under that note,  pursuant to a  registration  rights
          agreement.  That  registration  became effective on November 26, 2003.
          The Company  filed a  post-effective  amendment  to that  registration
          statement on January 30, 2004,  which became effective on February 13,
          2004.  Laurus  has  agreed  to limit  the  volume  of its sales of the
          Company's  common stock to a  percentage  of the total daily volume of
          open  market  sales of the  Company's  common  stock on its  principal
          trading  market  whenever the previous  trading day's volume  weighted
          average  price for  shares of the  Company's  common  stock is between
          $2.00 and $5.00 per share  (inclusive)  until  January 14,  2008.  The
          percentage  to which  Laurus  will  limit  its sales  varies  with the
          previous day's volume weighted average price. If the relevant price is
          $2.00 or more and  less  than  $3.00,  the  limit is 15% of the  daily
          volume on the day of the sale; if the relevant  price is $3.00 or more
          and less than $4.00,  22% of the daily  volume on the day of the sale;
          and if the relevant price is $4.00 or more and not greater than $5.00,
          30% of the daily volume on the day of the sale.  Laurus may seek,  and
          the Company may give, its approval to exceed those volume  limitations
          in negotiated transactions.

          The  note  was  collateralized  by  a  first  lien  on  all  available
          CrossingGuard,  Inc. assets. Laurus has a general security interest in
          four customer contracts assigned by NTS to CrossingGuard, Inc. and NTS
          has pledged the common stock of CrossingGuard, Inc. In connection with
          financing,  Laurus  was  paid a fee of  $80,000,  had  certain  of its
          expenses  reimbursed and received a warrant to purchase 140,000 shares
          of the  Company's  common  stock.  The  warrant  exercise  price is as
          follows:  $1.78  per share for the  purchase  of up to 83,000  shares;
          $1.94 per share for the purchase of an additional  33,000 shares;  and
          $2.25 per share for the purchase of an additional  24,000 shares.  The
          warrant exercise price may be paid in cash, in shares of the Company's
          common  stock (if the fair  market  value of a single  share of common
          stock exceeds the value of the per share warrant exercise  price),  or
          by a  combination  of both.  The warrant  expiration  date is July 31,
          2008.

          Also in connection  with  financing,  Management  Services  Group/Sage
          Investments,  Inc. ("Sage") was paid a fee of $80,000 and will receive
          $4,444 per month for nine  months for  continuing  consultation.  Sage
          received  warrants  to  purchase  14,000  shares of  Company  stock as
          follows: $1.78 per share for the purchase of up to 8,300 shares; $1.94
          per share for the purchase of an additional  3,300  shares;  and $2.25
          per share for the purchase of an additional 2,400 shares.  The warrant
          expiration date is July 31, 2008.

          The  Black-Scholes  values of the warrants  issued in connection  with
          this financing  totaled $143,980  (Laurus) and $14,398 (Sage) and were
          recorded as additional  paid-in capital.  The Laurus warrant value was
          recorded as a discount on the note  payable.  During the quarter ended
          September 30, 2003, the Company  amortized  $11,998 of the discount as
          interest  expense.  As the Note was satisfied on January 14, 2004, the
          remaining  unamortized  discount  of  $113,984,  deferred  interest of
          $55,148  and  deferred  financing  fees  of  $131,228  had  negligible
          continuing value and were consequently written off to interest expense


                                       39
<PAGE>

          (discount and deferred interest) and financing fees, respectively,  at
          December 31, 2003. The warrants have not been exercised as of December
          31, 2003.

          Second Laurus Convertible Note:
          On January  14,  2004,  the Company  also  entered  into a  securities
          purchase  agreement  with  Laurus.  Pursuant  to that  agreement,  the
          Company  issued  to  Laurus a new  convertible  note in the  principal
          amount of $1,500,000  that bears interest at the prime rate plus 1.25%
          (subject  to a floor of 5.25% per year) and  matures  on  January  14,
          2006.  Principal  repayments  commence  May 2004 with  $375,000 due in
          2004,  $1,012,500  due in  2005  and  $112,500  due in  2006.  The net
          proceeds  from  the  new  note  will be  used  for  the  construction,
          installation,  and maintenance of traffic surveillance systems and for
          other general  corporate  purposes.  The new note may be repaid at the
          Company's  option,  in cash or,  subject to  limitations,  through the
          issuance of shares of its common  stock.  The Company has an option to
          pay the monthly  amortized amount in shares of its common stock at the
          fixed conversion price of $3.50 per share if the shares are registered
          with the Securities and Exchange  Commission for public resale and the
          then current  market price is 120% above the fixed  conversion  price.
          The  Company  agreed  to  file  a  registration   statement  with  the
          Commission to register the public resale by Laurus of the common stock
          to be issued upon  conversion of the note and to pay Laurus damages if
          that  registration   statement  is  not  declared   effective  by  the
          Commission  by July 30, 2004.  The note includes a right of conversion
          in favor of Laurus.  If Laurus  exercises its conversion  right at any
          time or from time to time at or prior to  maturity,  the new note will
          be convertible  into shares of the Company's common stock at the fixed
          conversion   price,   subject  to   adjustments   for  stock   splits,
          combinations,  and dividends.  In conjunction  with this  transaction,
          Sage is  entitled  to a fee of  $60,000  and an  affiliate  of  Laurus
          received a  management  fee of $45,000  and  reimbursement  of certain
          expenses.   The  first   lien,   security   interest   and  pledge  of
          CrossingGuard, Inc. stock from the first Laurus Note continued to this
          second note.

          Silver Star Convertible Note:
          On October 15, 2003,  the Company sold a $2,000,000  convertible  note
          ("Silver Star Note") to Silver Star  Partners I, LLC ("Silver  Star").
          The Silver Star Note was due on January 15, 2004 and bore  interest at
          the rate of 7% per  year.  The  Company's  obligations  under the note
          could,  at the Company's  option,  be satisfied,  in whole or part, by
          issuing  shares of the  Company's  common  stock to  Silver  Star at a
          conversion price equal to the gross price from the first offering of a
          similar number of such shares made after October 15, 2003.

          On December 31, 2003, the Company  exercised its option to satisfy the
          Silver Star note and accrued  interest  by issuing  676,384  shares of
          Nestor common stock at $3.00 per share. See Common and Preferred Stock
          footnote also.

          Silver Star has the right to require the Company to register  with the
          SEC Silver Star's resale of all shares of common stock that it owns as
          soon as practicable after Silver Star requests that registration.  The
          Company  is  obligated  to  pay  all  expenses  associated  with  that
          registration.  The Company has other  obligations  in connection  with
          that registration,  including causing the registration statement filed
          to remain  continuously  effective  until the  distribution  of shares
          covered by the  registration  statement is complete  and  indemnifying
          Silver Star from  liabilities  it may incur  resulting from any untrue
          statement or omission of a material fact in the registration statement
          and  related  documents  and from  other  liabilities  related  to the
          registration.  Danzell  Investment  Management,  Ltd.  received  a  3%
          finders fee from the Company in connection with the Silver Star Note.

          William B. Danzell is the Chief Executive Officer of Nestor, Inc., the
          President  of Danzell  Investment  Management,  Ltd.  and the Managing
          Director of Silver Star  Partners I, LLC.  Robert M. Krasne,  David N.
          Jordan and George L. Ball,  each a director  of Nestor,  are each also
          affiliates of Silver Star Partners I, LLC. Stephen H. Marbut, a former
          director of Nestor,  is also an affiliate  of Silver Star  Partners I,
          LLC. The sale of the note by Nestor to Silver Star Partners I, LLC and
          the  satisfaction of our obligations  under it by issuing common stock
          were  approved by the directors of Nestor not  affiliated  with Silver
          Star Partners I, LLC.

                                       40
<PAGE>


NOTE 7 -  LEASES PAYABLE:
          On June 28, 2001, NTS executed a Master Lease Purchase  Agreement with
          Electronic  Data  Systems  Corporation  ("EDS"),  whereby EDS provided
          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 were 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.

          During 2003, the Company recorded $163,961 of EDS interest expense. 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
          directly,  respectively.  In addition, $19,237 of EDS interest in 2001
          was expensed by NTS pre-merger.

          On January 26, 2004, the Company  satisfied its remaining  obligations
          to EDS by making a payment of $2,178,764. This transaction resulted in
          the  Company  recording  a gain  on  early  extinguishment  of debt of
          $680,737 in January 2004.


NOTE 8 -  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 and in
          2003 in connection with the San Diego lease. After offsetting security
          and inventory deposits against restructuring costs and paying $142,000
          and  $119,000  in  severance  benefits,  $15,000  and $89,000 in lease
          settlement  costs and $62,000 and zero  purchase  commitment  costs in
          2003 and  2002,  respectively,  $147,000  remains  outstanding  on the
          balance sheet as a restructuring reserve at December 31, 2003.

NOTE 9 -  COMMON AND PREFERRED STOCK:

          Private  Placement and Silver Star Note  Conversion:  The Company sold
          2,843,000  shares  of its  common  stock to  accredited  investors  in
          private placements  conducted during December 2003 (1,596,560 shares),
          and January  2004.  The shares were sold at $3.00 per share,  with net
          proceeds to Nestor,  excluding expenses of the offering,  of $2.76 per
          share totaling $7,846,680.  The Company has continuing  obligations in
          connection with the  registration of the resale of the shares offered,
          including   causing  the   registration   statement  filed  to  remain
          continuously effective for two years or, if earlier, until the sale of
          shares  covered  by  the   registration   statement  is  complete  and


                                       41
<PAGE>

          indemnifying  the holders from liabilities it may incur resulting from
          any  untrue   statement  or  omission  of  a  material   fact  in  the
          registration   statement   and  related   documents   and  from  other
          liabilities related to the registration.

          On  December  31,  2003,  after the  initial  closing  of the  private
          placement above, the Company exercised its right to convert the Silver
          Star Note and accrued  interest  (see Note 6 also) by issuing  676,384
          shares of Nestor common stock at $3.00 per share.

          Although the proceeds from the initial  closing above were received in
          December  2003 and the  Silver  Star  note  conversion  was  effective
          December 31, 2003, the associated stock  certificates  were not issued
          until January 2004. As such,  these 2,272,944 shares are classified as
          "Stock Pending Issuance" on the balance sheet at December 31, 2003.

          Laurus Note Conversion:
          As more fully  described in Note 6, Laurus elected to convert  $85,250
          of their first note into 55,000 shares of Nestor common stock in 2003.
          In January 2004,  Laurus further  converted  $764,000 of the note into
          492,904 shares of Nestor common stock. Both conversions were priced at
          $1.55 per share.

          Silver Star Equity Financing:
          In a first  closing on January  15,  2003,  Silver Star  purchased  49
          million  shares of Nestor common stock  (pre-reverse  stock split) for
          $2,376,500  and  on  April  16,  2003,  completed  a  second  closing,
          purchasing an additional  4,013,557 shares  (post-reverse stock split)
          for $1,946,575.  Danzell Investment Management, Ltd., in which William
          B. Danzell, the Managing Director of Silver Star, serves as president,
          has  provided   investment-related   services  (including   consulting
          services) to the Company and has received a fee for services  rendered
          in an amount equal to 3% of the cash proceeds generated by the Company
          in connection with the financing  transactions  with Silver Star. Upon
          completion of the second closing,  Silver Star owned 64% of the issued
          and outstanding  shares of Company common stock (63.7% at December 31,
          2003). See Form 8-K dated April 9, 2003 for further information.

          One-for-Ten Reverse Stock Split:
          The Company filed a  certificate  of amendment to its  certificate  of
          incorporation on April 11, 2003,  causing a one-for-ten  reverse stock
          split of the outstanding  shares of the Company common stock effective
          on that date.  The  Company's  common  stock  began  trading on a post
          reverse  split basis on April 21,  2003 under the new  trading  symbol
          "NESO" (previously "NEST").  These financials reflect common stock and
          loss per share on a post-split basis.

          Stock Issued in Connection with NTS Merger:
          In September 2001, the Company  completed a merger with NTS (Note 16),
          which  resulted in the issuance of 32,338,558  shares of Nestor,  Inc.
          common stock.

          Preferred Stock:
          Series B Convertible  Preferred Stock is convertible into Common Stock
          of the  Company  at any  time on a  share-for-share  basis.  Series  B
          Convertible Preferred Stock has the same rights with respect to voting
          and dividends as the Common Stock,  except that each share of Series B
          Convertible  Preferred  Stock  has  the  right  to  receive  $1.00  in
          liquidation  before any  distribution is made to holders of the Common
          Stock.  The  liquidation  value of Series B Preferred  was $190,000 at
          December 31, 2003 and $235,000 at December 31, 2002.

NOTE 10 - 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
          245,000  shares  (post-reverse  split) of the Company's  common stock.
          Options  generally vest over three years and are  exercisable for five


                                       42
<PAGE>

          years from the date of grant. The options are not transferable  except
          by will or domestic relations order.

          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  to 500,000  shares  (post-reverse  split) 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, 2003,  2002 and 2001 on
          post-reverse   split  basis.   The  number  of  options   granted  and
          outstanding  in  2001  rose  significantly  due to the  conversion  of
          302,800 NTS stock  options into 277,500  Nestor,  Inc.  stock  options
          priced at $5.50.  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,  options
          granted were to directors of the Company;  many of which were canceled
          later in 2003 due to changes in the Board.



                                      Years Ended December 31,
                     -----------------------------------------------------------
                            2003                 2002                2001
                            ----                 ----                ----

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


Outstanding
  beginning of
  year               324,199    $6.50     395,121    $7.10     110,482    $12.80
Granted              176,250     3.34      36,800     2.00     344,584      5.90
Exercised                ---      ---         ---      ---      17,413      7.00
Canceled             188,052     4.85     107,722     7.10      42,532     12.30
                     -------              -------              -------
Outstanding-
  end of year        312,397    $5.75     324,199    $6.50     395,121    $ 7.10
                     =======              =======              =======

Options
  exercisable
  at year end        233,970    $6.80     224,730    $7.30     214,863    $ 8.20
                     =======              =======              =======


          The  following  table  presents   weighted   average  price  and  life
          information  about significant  option groups  outstanding at December
          31, 2003.




                            Options Outstanding           Options Exercisable
                     -------------------------------   -------------------------
                                Weighted
                                 Average    Weighted                  Weighted
                   Number       Remaining    Average     Number       Averaged
   Range of      Outstanding   Contractual  Exercise   Exercisable   Exercisable
Exercise Prices  at 12/31/03  Life (Years)    Price    at 12/31/03      Price
---------------  -----------  ------------  --------   -----------   -----------



$ 1.00 - $ 1.90    74,300         3.73      $  1.45       17,321      $ 1.81
$ 5.50            126,485         3.51         5.50      120,802        5.50
$ 6.00 - $14.40    96,612         1.35         7.04       80,847        7.17
$15.00 - $28.90    15,000         1.12        20.97       15,000        2.60
                  -------         ----      -------       ------      ------
                  312,397         2.78      $  5.75      233,970      $ 6.80
                  =======         ====      =======      =======      ======


          The Company, at the discretion of the Board of Directors,  has granted
          warrants from time to time,  generally in conjunction with the sale of


                                       43
<PAGE>

          equities.   During  2001,  the  Company  issued  398,071  warrants  in
          connection  with the NTS merger and  converted a premerger NTS warrant
          to purchase  9,166 common  shares  (post-reverse  split).  Transaction
          Systems Architects, Inc.'s ("TSAI") warrant to purchase 250,000 common
          shares (post-reverse  split) expired on March 1, 2002,  triggering the
          concurrent expiration of 125,000 NTS merger warrants. During 2003, the
          Company issued  154,000  warrants in connection  with the  convertible
          note  financing.  The following  table presents  warrants  outstanding
          after adjusting to a post-reverse split basis:

                                               Years Ended December 31,
                                           --------------------------------
                                              2003        2002        2001
                                              ----        ----        ----
              Eligible, end of year
                for exercise currently      660,936     532,141     907,141
                                           ========    ========    ========

              Warrants issued               154,000         ---     407,237
                Low exercise price         $   1.78    $    ---    $   0.10
                High exercise price        $   2.25    $    ---    $  12.80

          The  warrants  outstanding  as of  December  31,  2003  are  currently
          exercisable  and  expire  at  various  dates  through  July 31,  2008.
          outstanding warrants entitle the owner to purchase one share of common
          stock for each  warrant,  at prices  ranging  from $0.10 to $12.80 per
          share  (post-reverse  split).  In 2003, the one-for-ten  reverse split
          impacted   both  the   number   of   warrants   and   warrant   prices
          proportionately.   The  exercise  price  of  warrants  outstanding  at
          December 31, 2002 was adjusted  downward as a result of  anti-dilution
          provisions  of the  warrants  and the  completion  of the Silver  Star
          Partners I, LLC investment.

          During the year ended June 30,  1996,  the  exercise  price of 100,000
          warrants  issued in the prior year was  reduced  from  $15.00 to $6.50
          (post-reverse split). 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 2003, 2002 and 2001.


NOTE 11 - SEGMENT INFORMATION:
          A.   Description of reportable segments
               Effective  with the  September  2001 merger,  the Company has two
               reportable  segments:  Nestor,  Inc. and Nestor Traffic  Systems,
               Inc.

               Nestor,  Inc.  produced  and sold  credit  and debit  card  fraud
               detection  products and database  marketing products to financial
               institutions  and  processors of financial data until the Company
               entered   into   reseller   license   agreements   with   Applied
               Communications,   Inc.  on  February  1,  2001  and  with  Retail
               Decisions,  Inc.  on May 18,  2001.  In  addition,  all  expenses
               associated with  development,  support and selling these products
               were  transferred  to these  parties.  Subsequent to the reseller
               agreements,  Nestor,  Inc.  revenues were mainly  royalties  from
               these licenses  until the Company  assigned its royalty rights as
               of July 1, 2002. The NTS segment provides video-based  monitoring
               systems   and   services   for   traffic   safety,    mainly   to
               municipalities. Goodwill has been allocated to the NTS segment.

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

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



                                       44
<PAGE>




                                              Nestor Traffic
                             Nestor, Inc.      Systems, Inc.           Totals
                             ------------     --------------           ------
YEAR ENDED
DECEMBER 31, 2003:
Revenues                     $   29,000        $  2,677,000        $  2,706,000
Segment net loss               (528,000)         (4,362,000)         (4,890,000)
Segment assets                5,702,000          10,597,000          16,299,000

YEAR ENDED
DECEMBER 31, 2002:
Revenues                     $  665,000        $  1,457,000        $  2,122,000
Segment net income (loss)     3,591,000         (16,225,000)        (12,634,000)
Segment assets                  598,000           8,603,000           9,201,000

YEAR ENDED
DECEMBER 31, 2001:
Revenues                     $3,073,000        $    448,000        $  3,521,000
Segment income (loss)         1,295,000          (2,779,000)         (1,484,000)
Segment assets                2,516,000          19,519,000          22,035,000


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



                                           Years Ended December 31,
                             ---------------------------------------------------
                                 2003               2002                2001
                                 ----               ----                ----

United States                $2,705,534        $  2,112,281        $  3,450,613
Japan                               ---                 ---              46,844
Canada                              ---               9,293              23,467
                             ----------        ------------        ------------

                             $2,705,534        $  2,121,574        $  3,520,924
                             ==========        ============        ============


          E.   Revenues from Major Customers


                                           Years Ended December 31,
                             ---------------------------------------------------
                                 2003               2002                2001
                                 ----               ----                ----

Customer A - Nestor, Inc.    $      ---        $    629,569        $  1,841,031
Customer B - Nestor, Inc.           ---                 ---             832,000
Customer C - NTS                406,670             266,751              34,925
Customer D - NTS                399,067                 ---                 ---
Customer E - NTS                348,143             150,331                 ---
Customer F - NTS                    ---             293,911             218,023
Customer G - Nestor, Inc.           ---                 ---             285,536

NOTE 12 - 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


                                       45
<PAGE>

          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 13 - 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  Nestor,  Inc. and ACI ("ACI License")
          (Note 21). CLA is owned and  controlled by three former  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.


NOTE 14 - OTHER EXPENSE - NET:

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

                                              Years Ended December 31,
                                    --------------------------------------------
                                      2003             2002             2001
                                      ----             ----             ----

Interest income                     $  13,438       $  11,229        $  51,695
Interest expense                     (470,206)       (217,023)         (65,355)
Expense relating to financing
  operations                         (106,484)       (106,483)        (106,483)
Other income                           64,130             ---              ---
Loss on disposal of fixed assets       (5,291)         (6,341)         (66,666)
                                    ----------       ---------       ---------
Other expense - net                 $(504,413)      $(318,618)       $(186,809)
                                    ==========      ==========       ==========

NOTE 15 - INCOME TAXES:
          During  2003 and  2002,  the  Company  recorded  deferred  tax  assets
          primarily  for the  benefit of net  operating  losses in the amount of
          $1,742,000 and  $1,573,000,  respectively.  The  cumulative  amount of
          these assets,  which is  $16,514,000  and  $14,772,000 at December 31,
          2003 and 2002,  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,  2003,  $41,142,000  and
          $26,700,000 of net operating loss  carryforwards for federal and state
          purposes,  respectively.  Approximately  $13,318,000 and $9,960,000 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 2004.

          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 use of state net
          operating losses may be limited in the future due to the apportionment
          of net  operating  losses  among  different  states  and  varying  net
          operating loss utilization  requirements by state. The Company has not
          determined the effect of these limitations.


                                       46
<PAGE>


NOTE 16 - NESTOR TRAFFIC SYSTEMS, INC.:
          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  pre-reverse
          stock split 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   pre-reverse  stock  split  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
          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. All shares above
          are on a pre-reverse stock split basis.

          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)
                                                                   ===========


                                       47
<PAGE>

          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,
              pre-reverse stock split                              $      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
          annual   minimum   royalties   were   recorded   and   eliminated   in
          consolidation.

          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
          charges were eliminated in consolidation.


NOTE 17 - RELATED PARTY TRANSACTIONS:
          Herbert S. Meeker,  a former director of the Company,  is a partner in
          the law firm of Brown Raysman  Millstein Felder & Steiner,  LLP, which
          the Company uses for legal services.  For the years ended December 31,
          2003,  2002, and 2001, the Company recorded an expense to Mr. Meeker's
          firm of $41,316, $7,254 and $121,065,  respectively.  In addition, for
          the years  ended  December  31, 2003 and 2002,  the  Company  recorded
          $42,657  and $9,919 of fees  relating  to the 2003  Silver  Star stock
          purchase agreement.  Lastly, $369,501 of fees were recorded in 2001 as
          acquisition costs related to the NTS merger.

          Bruce W. Schnitzer,  a former director of the Company,  is Chairman of
          Wand Partners,  Inc., a private  investment firm that the Company used
          for management  consulting.  For the year ended December 31, 2001, the
          Company  recorded an expense for Wand  Partners,  Inc. of $49,636.  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 is $96,250 due to
          Wand Partners, Inc.

          Benjamin Alexander,  secretary of the Company (as of June 2003), is an
          attorney  with the firm of  Partridge,  Snow and Hahn  LLP,  which the
          Company uses for legal services. For the year ended December 31, 2003,
          the Company recorded legal and stockholder expenses to Mr. Alexander's
          firm in the amounts of $63,973 and $24,354, respectively. In addition,
          $11,261 was recorded relating to the July 2003 Laurus financing, which
          was fully expensed as financing fees.

          TSAI,  the parent  company of ACI, is a  stockholder  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 and 2001, the Company recorded  revenues of $629,569
          and  $1,841,031,   respectively   from  ACI.   Further  related  party
          transactions  with  TSAI  and  ACI  are  discussed   throughout  these
          financial statements.


                                       48
<PAGE>


          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 full January 2003.

          See Note 6 for transactions  with Silver Star and Laurus,  Note 13 for
          royalty  assignment to Churchill Lane Associates,  LLC and Note 16 for
          transactions with Nestor Traffic Systems, Inc.


NOTE 18 - 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,  $124,300 in 2002 and $126,500
          in 2003.

          NTS also leases  office  space in La Jolla,  California.  The July 17,
          2002  operating  lease called for monthly  rent of $1,533  through the
          lease term  expiration of July 31, 2003. NTS remains in the space on a
          month-to-month  status at $1,691 per month. Rent expense was $8,500 in
          2002 and $20,672 in 2003.

          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.  Rent  expense  was
          $20,504 in 2003 and $40,134 in 2002 and 2001.


NOTE 19 - LITIGATION:
          On November  6, 2003,  the  Company  filed a  complaint  in the United
          States  District  Court  for  Rhode  Island  against  Redflex  Traffic
          Systems, Inc., alleging that Redflex's automated red light enforcement
          systems  infringe  on  the  Company's  patent.   Redflex  denies  this
          allegation. On November 25, 2003, the Company filed a complaint in the
          United States  District  Court for the District of Central  California
          against Transol USA, Inc., alleging that Transol's automated red light
          enforcement  systems  infringe on the  Company's  patent.  Transol has
          counterclaimed  that Nestor's  patent is invalid and that Transol does
          not infringe on it. Nestor was denied a preliminary  injunction in the
          Transol litigation.  The Company cannot give assurance that it will be
          successful in either action.

          During April 2003, the former president of NTS resigned as a member of
          the board of directors of the Company. The president's employment with
          the  Company  and NTS  terminated.  The  president  filed a  complaint
          against the Company and NTS in the  Providence  Superior Court seeking
          severance benefits,  including twelve months salary of $180,000,  upon
          termination. See Form 8-K dated April 9, 2003 for further information.
          The parties  reached a mutually  agreeable  settlement on December 31,
          2003,  the  terms of which  are  confidential.  All  claims  have been
          dismissed.

          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
          claimed were owed for construction work in Falls Church, Virginia. NTS
          and Baldwin  reached a settlement  agreement on April 22, 2003 whereby
          NTS paid $7,500 and all claims of each party were dismissed.

          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 20 - CONTRACT TERMINATION RESERVE:
          A  significant  customer  contract in the Rail line of business may be
          terminated by mutual  agreement prior to its completion as a result of
          the Company's decision to focus its resources on CrossingGuard systems


                                       49
<PAGE>

          and  services.  The Company  accrued  $125,000 of  estimated  contract
          termination fees in June 2003.

NOTE 21 - 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.

          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.

NOTE 22 - 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 23 - RECENT ACCOUNTING PRONOUNCEMENTS:
          In  December  2002,  the FASB issued  SFAS No.  148,  "Accounting  for
          Stock-Based  Compensation--Transition  and Disclosure and Amendment to
          FASB No. 123",  which provides three optional  transition  methods for
          entities that decide to voluntarily  adopt the fair value  recognition
          principles  of  SFAS  No.  123,   "Accounting   for  Stock  Issued  to


                                       50
<PAGE>

          Employees",   and  modifies  the  disclosure   requirements   of  that
          Statement.  The Company  has not  adopted  the fair value  recognition
          principles of SFAS No. 123; therefore this Statement has had no effect
          upon the  Company's  consolidated  financial  condition  or results of
          operations.   The  Company  has  provided  the  additional   quarterly
          disclosures required by SFAS No. 148.


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  proxy or
          information  statement  to be filed with the  Securities  and Exchange
          Commission  not later than 120 days following the end of the Company's
          fiscal year.

          The Company has adopted a written  code of ethics that  applies to all
          employees,  including  but not  limited  to, its  principal  executive
          officer,  principal financial officer, principal accounting officer or
          controller,  or  persons  performing  similar  functions.  A  copy  of
          Nestor's  code of ethics is  available  without  charge by writing to:
          Nestor, Inc., 400 Massasoit Avenue, Suite 200, East Providence,  Rhode
          Island 02914-2020, Attention: Nigel P. Hebborn.

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

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

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

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

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

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

ITEM 14.  Principal Accounting Fees and Services.
          --------------------------------------

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






                                       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.

                         See Exhibit Index.

               (b)  Reports on Form 8-K:

                    On  October  17,  2003,  the  Corporation   filed  with  the
                    Securities and Exchange  Commission a current report on Form
                    8-K dated  September 23, 2003 under Items 5 and 7, reporting
                    the increase in the number of  directors of the  Corporation
                    to seven,  the election to the Board of Albert H. Cox, Terry
                    Fields and Susan A.  Keller and the  purchsae by Silver Star
                    Partners  I,  LLC of a  convertible  note  in the  principal
                    amount of $2,000,000 from the Corporation.

                    On  October  28,  2003,  the  Corporation   filed  with  the
                    Securities and Exchange  Commission a current report on Form
                    8-K dated  October 22,  2003 under Items 5 and 7,  reporting
                    the resignation of Stephen H. Marbut from the  Corporation's
                    Board of  Directors  and the  election  of  George  L.  Ball
                    thereto.



                                       53
<PAGE>


                                                                        PART IV
                                                                  ITEM 15 (a)(2)


                                  NESTOR, INC.
                                  ------------

                    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
                    -----------------------------------------
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                 ----------------------------------------------




                        Balance at   Charged   Charged    Deductions   Balance
                        Beginning    to        to Other   from         at End of
                        of Period    Expense   Accounts   Reserve      Period
                        ---------    -------   --------   -------      ------

Allowances deducted
from accounts
receivable:

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

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

December 31, 2003        $  ---      $84,213    $ ---      $ ---        $84,213















                                       54
<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 29, 2004

         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/ Robert M. Krasne
--------------------
Robert M. Krasne                 Chairman of the Board           March 29, 2004


/s/ George L. Ball
------------------
George L. Ball                   Director                        March 29, 2004


/s/ Albert H. Cox, Jr.
----------------------
Albert H. Cox, Jr.               Director                        March 29, 2004


/s/ William B. Danzell           President
----------------------           Chief Executive Officer
William B. Danzell               and Director                    March 29, 2004



/s/ Terry E. Fields
-------------------
Terry E. Fields                  Director                        March 29, 2004


/s/ David N. Jordan
-------------------
David N. Jordan                  Director                        March 29, 2004


/s/ Susan A. Keller
-------------------
Susan A. Keller                  Director                        March 29, 2004









                                       55
<PAGE>



                                INDEX OF EXHIBITS


       Exhibit
         No.                      Description of Exhibit
       -------                    ----------------------

         3.1    Restated Certificate of Incorporation.

         4.1    Specimen Certificate for shares of Common Stock, $.01 par value,
                of  the  Registrant   filed  as  an  Exhibit  to  the  Company's
                Registration  Statement  on  Form  S-2,  as  amended  (File  No.
                333-108432), is hereby incorporated by reference.

         10.1   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.

         10.2   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.

         10.3   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.

         10.4   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.

         10.5   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.

         10.6   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.

         10.7   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.

         10.8   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.

         10.9   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.

        10.10   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.

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

        10.12   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.


                                       56
<PAGE>


       Exhibit
         No.                      Description of Exhibit
       -------                    ----------------------


        10.13   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.

        10.14   Security Purchase  Agreement dated July 31, 2003 between Nestor,
                Inc.  and Laurus  Master Fund,  Ltd.  filed as an exhibit to the
                Company's  current report on Form 8-K dated July 31, 2003, which
                is hereby incorporated by reference.

        10.15   Convertible  Note dated July 31,  2003 made by Nestor,  Inc.  to
                Laurus  Master Fund,  Ltd.  filed as an exhibit to the Company's
                current  report on Form 8-K dated July 31,  2003 which is hereby
                incorporated by reference.

        10.16   Registration  Rights  Agreement  dated  July  31,  2003  between
                Nestor, Inc. and Laurus Master Fund, Ltd. filed as an exhibit to
                the  Company's  current  report on Form 8-K dated July 31, 2003,
                which is hereby incorporated by reference.

        10.17   Common  Stock  Purchase  Warrant  dated July 31,  2003 issued by
                Nestor,  Inc. to Laurus Master Fund, Ltd. filed as an exhibit to
                the  Company's  current  report on Form 8-K dated July 31,  2003
                which is hereby incorporated by reference.

        10.18   Stock  Pledge  Agreement  dated  July 31,  2003  between  Nestor
                Traffic  Systems,  Inc. and Laurus Master Fund, Ltd. filed as an
                exhibit to the Company's  current  report on Form 8-K dated July
                31, 2003, which is hereby incorporated by reference.

        10.19   Pledge  and  Security  Agreement  dated  July 31,  2003  between
                CrossingGuard,  Inc. and Laurus  Master Fund,  Ltd.  filed as an
                exhibit to the Company's  current  report on Form 8-K dated July
                31, 2003 which is hereby incorporated by reference.

        10.20   Guaranty  dated July 31, 2003 by  CrossingGuard,  Inc. to Laurus
                Master Fund,  Ltd. filed as an exhibit to the Company's  current
                report  on  Form  8-K  dated  July  31,  2003  which  is  hereby
                incorporated by reference.

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

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

        10.23   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 filed as an Exhibit to Nestor's Current
                Report on Form 8-K dated May 7, 1998 is hereby  incorporated  by
                reference.

        10.24   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 filed as an Exhibit to Nestor's Current Report on
                Form  8-K  dated  April  23,  1999  is  hereby  incorporated  by
                reference.

        10.25   Security  Purchase  Agreement  dated  January 14,  2004  between
                Nestor, Inc. and Laurus Master Fund, Ltd. filed as an Exhibit to
                Nestor's  Current  Report on Form 8-K dated December 31, 2003 is
                hereby incorporated by reference.

        10.26   Convertible Note dated January 14, 2004 made by Nestor,  Inc. to
                Laurus Master Fund, Ltd. filed as an Exhibit to Nestor's Current
                Report  on  Form  8-K  dated   December   31,   2003  is  hereby
                incorporated by reference.


                                       57
<PAGE>


       Exhibit
         No.                      Description of Exhibit
       -------                    ----------------------


        10.27   Registration  Rights  Agreement  dated  January 14, 2004 between
                Nestor, Inc. and Laurus Master Fund, Ltd. filed as an Exhibit to
                Nestor's  Current  Report on Form 8-K dated December 31, 2003 is
                hereby incorporated by reference.

        10.28   Redemption  and  Conversion  Agreement  dated  January  14, 2004
                between  Nestor,  Inc. and Laurus Master Fund,  Ltd. filed as an
                Exhibit to the Company's  Registration Statement on Form S-2, as
                amended  (File  No.  333-108432),   is  hereby  incorporated  by
                reference.

        10.29   Placement  Agent Agreement dated December 24, 2003 among Nestor,
                Inc., Sanders Morris Harris,  Inc., and Barrett & Company,  Inc.
                filed as an Exhibit to the Company's  Registration  Statement on
                Form  S-2,  as  amended   (File  No.   333-108432),   is  hereby
                incorporated by reference.


        10.30   Registration  Rights  Agreement  dated  December  31, 2003 among
                Nestor,  Inc.,  Sanders  Morris  Harris,  Inc.,  and  Barrett  &
                Company, Inc. filed as an Exhibit to the Company's  Registration
                Statement  on Form S-2,  as amended  (File No.  333-108432),  is
                hereby incorporated by reference.

         31.1   Certification  of Chief Executive  Officer  required by Exchange
                Act Rules  13a-14(a)  and  15d-14(a),  as  adopted  pursuant  to
                Section 302 of the Sarbanes-Oxley Act of 2002.

         31.2   Certification  of Chief Financial  Officer  required by Exchange
                Act Rules  13a-14(a)  and  15d-14(a),  as  adopted  pursuant  to
                Section 302 of the Sarbanes-Oxley Act of 2002.

         32.1   Certification  of Chief Executive  Officer  required by Exchange
                Act Rules  13a-14(b)  and  15d-14(b),  as  adopted  pursuant  to
                Section 906 of the Sarbanes-Oxley Act of 2002.*

         32.2   Certification  of Chief Financial  Officer required by ExchangeA
                ct Rules 13a-14(b) and 15d-14(b), as adopted pursuant to Section
                906 of the Sarbanes-Oxley Act of 2002.*

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



*Certification  is not deemed "filed" for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section.  Such  certification
is not  deemed  to be  incorporated  by  reference  into any  filing  under  the
Securities  Act or the Exchange  Act,  except to the extent that the  registrant
specifically incorporates it by reference.


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