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, 2001
                                       -------------------------

                                       OR

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

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

                         Commission file Number 0-12965

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

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

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

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

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

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

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

                               Yes   X      No
                                    ---

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

                                               Exhibit Index is on Page:   _____


The  aggregate  market  value of the  15,790,430  shares of voting stock held by
non-affiliates  of the registrant,  based on the average bid and asked prices of
such  stock  on  February  28,  2002  was  $11,053,301.  The  number  of  shares
outstanding  of  the  Registrant's   Common  Stock  at  February  28,  2002  was
50,241,112.

<PAGE>


                                                                         PART I

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

General

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

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

Nestor  Traffic  Systems,  Inc.,  or NTS,  which is 100 percent  owned by Nestor
effective  September  12, 2001, is an emerging  leader in providing  innovative,
video-based  monitoring  systems and services for traffic management and safety.
NTS incorporates its patented pattern-recognition technologies into intelligent,
real-time  solutions that promote traffic efficiency,  intersection  safety, and
railway grade  crossing  monitoring  and safety.  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.

CrossingGuard.   NTS's  main  product  line  is   CrossingGuard,   an  automated
traffic-intersection  red-light  enforcement and safety system.  CrossingGuard's
video  technology  senses vehicles as they approach the  intersection,  predicts
when a vehicle  will run a red light,  records a digital  video  sequence of the
incident  (including a close up of the vehicle and license  plate),  and sends a
signal to the  traffic  controller  to extend the  all-red  phase of the traffic
signal to help  decrease  the  likelihood  of broadside  collisions  between the
red-light violator and cross traffic.  The video record of the violation is used
as evidence to issue a citation for the infraction.  NTS generally  delivers the
CrossingGuard solution through a citation-processing  service agreement with the
municipality whereby: (i) NTS installs under lease, configures and maintains the
system at the intersection;  (ii) NTS assembles all of the information necessary
to issue a  citation,  prints and mails it when  verified  and  approved  by the
municipality  (mostly through  automated  procedures);  and (iii) NTS receives a
portion of the  municipality's  citation  revenue in the form of  licensing  and
processing fees.

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

As of September  30, 2001,  NTS had nine  approaches  installed  and  generating
citations,  and an additional fifty-two approaches under contract and in various
stages of  delivery.  As of  December  31,  2001,  NTS had  fourteen  approaches
installed and generating  citations,  and an additional  sixty-eight  approaches
contracted  for and in various  stages of delivery.  Experience at these initial
approaches  was varying  from less than one citation per day to over fifteen per
day. The Company  realizes  from $25 to $97 per  citation  for system  delivery,
maintenance,  software licensing,  and processing services.  Actual results from
deployment  of  CrossingGuard  systems are expected to  fluctuate  substantially
depending  upon  intersection  configurations,   driver  response  to  installed
systems, and many other factors.

As of December 31, 2001,  NTS has 82  approaches  under  contract and in various
stages of installation. Beyond the company's original three approaches installed
in Vienna,  VA in 1999,  installation work is completed or in process for: eight
approaches  in Falls  Church,  VA,  twelve  approaches  in Fresno,  CA,  sixteen
approaches in Long Beach,  CA, three net  additional  approaches in Vienna,  VA,
four approaches in Germantown, TN, eight approaches in Rancho Cucamonga, CA, six
approaches  in  Montclair,  CA, and up to twenty  approaches  in Irvine,  CA. In
addition,  NTS is installing two  demonstration  approaches in Dubuque,  IA, and
Overland Park, KS, to assist in local  red-light  program  development.  NTS has
also been informed that it has been  selected to provide  CrossingGuard  systems
for other red-light  enforcement  projects in more than ten  municipalities  for
over 100 additional  approaches,  and contract  negotiations are proceeding with
these  customers.  No  assurances  can be given  that  final  contracts  will be
realized  from  these  negotiations.  During  2001,  NTS  realized  $226,000  in
CrossingGuard  related  revenues,  of which $80,000 is included in the Company's
consolidated financial results in 2001.

Status of the CrossingGuard market.  Ineffective red-light safety enforcement is
a costly and growing problem that until recently has been largely unaddressed by
technology solutions. There are approximately 300,000 intersections with traffic
signals in the United States where  approximately  106,000  collisions  and over
1,000 deaths occurred last year as a result of red-light  running as per Federal
Highway  Administration  2000  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 continue to rely
on in-ground  vehicle  sensors  ("loops") and still  photography and have become
inferior solutions because of their (i) significant roadbed installation issues,
(ii) high maintenance  requirements,  (iii) inherently low level of performance,
and (iv) general lack of functionality.

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

On April 1, 2001,  NTS completed its first Rail  CrossingGuard  installation  in
DuPage  County,  Illinois and had  completed  design work  necessary to commence
construction  on the delivery of five Rail  CrossingGuard  units in Florida.  In
addition,  NTS has received a contract from the Federal Railroad  Administration
("FRA") to develop a portable Rail  CrossingGuard  unit for  non-permanent  data
gathering  capabilities.  Also,  NTS,  working  with  GeoFocus,  Inc., a Florida
company, won a contract to expand two of the Rail CrossingGuard units in Florida
to incorporate  remote  communication  capabilities  between Rail  CrossingGuard
units  and  train  operators.   During  2001,  NTS  realized  $828,000  in  Rail
CrossingGuard  related revenues,  of which $322,000 is included in the Company's
consolidated  financial  results  in 2001.  As of  December  31,  2001,  NTS had
approximately $456,000 in unearned Rail CrossingGuard contract backlog.

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

TrafficVision.  TrafficVision  is a product  that uses video  cameras to monitor
traffic flow and to send traffic data to a central  Traffic  Operations  Center.
Replacing short-life,  high-maintenance,  road-embedded copper-loop technologies
from the 1950's,  TrafficVision  is a  non-intrusive  sensor  system for traffic
management.  TrafficVision uses Nestor's proprietary high-speed image-processing
technology to analyze  video  content to sense and monitor  traffic on highways,
roadways and intersections in real-time. TrafficVision recognizes and classifies
multiple vehicles  continuously so that surveillance and traffic  management are
based upon detailed,  real-time  information.  TrafficVision  is installed at 26
locations  in Rhode  Island and in the state's  centralized  Traffic  Operations
Center in Providence.  Although TrafficVision was its first traffic product, NTS
has de-emphasized  TrafficVision  marketing,  in favor of CrossingGuard and Rail
CrossingGuard,  which in the opinion of management  are serving more  attractive
markets.  During 2001, NTS realized $183,000 in TrafficVision  related revenues,
of which $46,000 is included in the Company's  consolidated financial results in
2001.  As of  December  31,  2001,  NTS had  approximately  $595,000 in unearned
TrafficVision contract backlog.

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
accurately predict vehicle positions. In the CrossingGuard  application,  when a
vehicle  is about to run a red light,  a signal can then be sent to the  traffic
controller  to extend  the  all-red  phase of the  traffic  signal so that cross
traffic   vehicles  can  be  briefly   delayed  before  they  proceed  into  the
intersection. Thus, intersections equipped with CrossingGuard have the potential
to become smarter and safer.

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

Nestor has granted an exclusive license to NTS for application of its technology
in the field of traffic  management  applications.  Under the license,  NTS owes
Nestor a royalty equal to 10% of gross profit (gross  revenues less  third-party
costs of sales)  realized  from  products  using the  technology  covered by the
license.  The license  requires  minimum  annual  royalties to retain  exclusive
rights of $125,000 in 2001,  increasing  to $1.0  million per year  beginning in
2005. These fees are eliminated during consolidation.

Description of other products and services:

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

Nestor's PRISM(R) fraud detection  solutions help financial  institutions detect
and prevent  fraudulent  payments,  manage  merchant risks and identify  illicit
account usage (money laundering).  The fraud detection products are used by many
of the world's largest financial institutions and represented  approximately 87%
of Nestor's 2001 revenues.

Nestor's eCLIPSE(R) CRM application is a comprehensive  enterprise-wide customer
marketing  solution.  The product allows businesses to use customer  information
from all  channels  (web,  call  center,  direct  mail) to develop  personalized
marketing  campaigns.  Products  in the CRM  group  represented  less than 5% of
Nestor's 2001 revenues.

Nestor's ICR  applications  increase  productivity in document  image-processing
applications.  Royalties  from  the ICR  business  represented  less  than 5% of
Nestor's 2001 revenues.

Nestor's   technology  is  licensed  to  IBM  on  a   non-exclusive   basis  for
incorporation into hardware products known as the ZISC family of computer chips.
Royalties  from the IBM  business  represented  less  than 5% of  Nestor's  2001
revenues.

SALES, MARKETING AND METHODS OF DISTRIBUTION

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

The  Company's  product  lines  are  targeted  toward  federal,  state and local
government agencies (e.g.,  Municipalities and Departments of Transportation for
the CrossingGuard and TrafficVision  products), or large commercial users (e.g.,
banks and card  processors  for the PRISM and eCLIPSE  products).  The  products
require  technical  assistance  through  the sales and  installation  processes.
Accordingly, the Company (for traffic products) and its third-party distributors
(for risk assessment and CRM products)  maintain  in-house staff of engineers to
support the sales, installation, and customer- service functions.

The Traffic Management  products are being marketed directly by NTS to municipal
governments,   governmental  traffic  management  departments  or  their  chosen
integrators.  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. and Retail Decision, primarily to
financial  institutions.  The Company  obtains  product  inquiries  from product
mailings, attendance at trade shows, trade press coverage and its Internet site.

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

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,  world-wide  license to exploit the current versions and
any improvements and modifications  (existing on May 18, 2001) of those products
marketed by Nestor known as eCLIPSE CRM, PRISM, PRISM Credit, PRISM Debit, PRISM
Merchant, PRISM Money Laundering,  PRISM Analysis Review Systems, PRISM Modelers
Workbench, and PRISM Private Label solely for use in the exclusive field of use,
as defined herein; and (ii) a non-exclusive,  perpetual, fully-paid,  world-wide
license to exploit  the Nestor  Technology  solely for use in the  non-exclusive
field of use,  as  defined  herein.  The  exclusive  field of use means a use in
connection  with fraud  detection or risk  management,  but in each case only in
connection  with  electronic  payments,   financial  transaction  systems,  card
systems,  retail,  banking,  financial  services,  telecommunications,  wireless
communications,  insurance, e-commerce, mobile commerce, television commerce and
the card-not-present applications or businesses, and any successor to any of the
foregoing.  The  non-exclusive  field  of use  means  a use in  connection  with
customer  relationship  management,  but  only  in  connection  with  electronic
payments,   financial  transaction  systems,  card  systems,   retail,  banking,
financial  services,  telecommunications,  wireless  communications,  insurance,
e-commerce,  mobile  commerce,  television  commerce  and  the  card-not-present
applications or businesses, and any successor to any of the foregoing.

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 and trademark rights, including "PRISM." To support its newly
acquired license,  ReD has hired 13 of Nestor's  employees,  including  Sushmito
Ghosh, formerly the President of the Nestor Commerce Division.

ReD has paid  $1,800,000 to Nestor under the License  Agreement,  and Nestor has
agreed, for certain services,  to pay ReD $968,000, of which $500,000 was due on
June 30, 2001,  $250,000 was due on or before  September 30, 2001,  and $218,000
was due on or before  December 31,  2001.  All amounts have been paid to ReD. No
ongoing revenues are expected to be realized from ReD.

During 2001,  ACI and ReD accounted for 52%, and 24% of the Company's  revenues,
respectively.  During 2000,  ACI accounted  for 65% of the  Company's  revenues.
During 1999,  ACI and CSK accounted for 61%, and 14% of the Company's  revenues,
respectively.  The loss of ACI as a  distributor  for any  reason  could  have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.


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.

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, 2001,  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  $1,641,000,  $1,247,000,  and $921,000 in the years ended
December  31,  2001,  2000,  and 1999,  respectively,  in support of the various
aspects of  Company-sponsored  research and development.  Prior to September 12,
2001, NTS expended  $2,062,000,  $715,000,  and $906,000 during 2001,  2000, and
1999, respectively,  in support of the various aspects of NTS-sponsored research
and development,  which were not included in the December 31, 2001, consolidated
financial statements of the Company.

PATENTS

The  Company has  continually  sought and  obtained  patent  protection  for its
proprietary neural networks and systems, which have as a principal feature rapid
learning  from a relatively  small number of examples.  The Company's RCE neural
network  exhibits rapid learning and minimizes the internal  connections  needed
for its  functioning.  The Company  believes  that these  capabilities  make the
Company's   technology  uniquely  suited  to  applications  that  require  field
trainability or  self-modification  to adapt to new or changing  patterns in the
data. The Company's patents also cover  multiple-neural-network  systems,  which
enable the company to develop  products  that  combine high  accuracy  with high
processing speeds.

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

In  October  2000,  NTS  received  a letter  from the  attorneys  for Mark White
asserting  that NTS may be infringing on his U.S.  patent No.  6,100,819 for the
"Vehicular  Traffic   Signalization   Method  and  Apparatus  for  Automatically
Documenting  Traffic Light  Violations  and Protecting  Non-Violating  Drivers,"
which was issued to Mark White on August 8, 2000 (the "White  Patent").  NTS has
received an opinion from its patent  counsel that the NTS  CrossingGuard  system
does not violate any valid claims of the White Patent.  Since 2000,  the Company
has received no further communication from Mr. White or his attorneys.

COMPETITION

NTS  experiences  intense  competition  in the  traffic  industry.  Some  of its
competitors  have  better  funding and more  resources.  NTS's  competitors  use
red-light  camera systems that depend on inefficient  technology  such as buried
loops, still cameras, 35mm wet film, and/or digital still cameras.  Installation
of these  systems  requires  cutting  pavement at the  intersection  to bury the
loops,  which is both costly and time consuming.  The use of wet film requires a
burdensome level of human  intervention in that: (i) someone must perform onsite
retrieval and  replacement  of the film,  usually  daily;  (ii) the film must be
developed  and the negative  must be scanned into a computer;  and (iii) someone
must  attempt  to  confirm  from  just two  photos  that a  violation  occurred.
Management  believes  that  NTS  products  are  superior  to  these  competitive
offerings in technology,  features and  price-performance.  NTS's  CrossingGuard
system is the first and only intersection safety and enforcement system that can
issue  traffic   violation   citations  based  upon  digital  video  information
transmitted  directly from the  intersection to the police station using a video
sensor without loops.

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

NTS's    TrafficVision     product    faces    competition     primarily    from
traffic-management-systems  companies such as ISS, Econolite,  Traficon, Iteris,
Peek  Traffic,  Odetics,  Computer  Recognition  Systems,  Siemens and  Rockwell
International.  Management  believes that the platforms on which these  products
operate  do  not  provide  the  image  processing   capabilities   possessed  by
TrafficVision, CrossingGuard and Rail CrossingGuard.

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.

In the field of  fraud-detection  and  risk-assessment  systems,  the  Company's
distributors encounter competition from a number of sources, including (a) other
software  companies,  (b) companies'  internal MIS departments,  (c) network and
service providers, and (d) neural-network tool suppliers. In the fraud-detection
market,  the Company has  experienced  competition  from Fair,  Isaac & Co., HNC
Software, Inc., IBM, MasterCard Corporation,  NeuralTech Inc., Neuralware, Inc.,
Visa  International  and others.  The  Company's  fraud  detection  product also
competes  against  other  methods  of  preventing  credit-card  fraud,  such  as
card-activation programs, credit cards that contain the cardholder's photograph,
smart cards and other card authorization  techniques.  The introduction of these
and other new technologies will result in increased  competition for the Company
and its products.

CONTRACTS WITH GOVERNMENTAL ENTITIES

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


EMPLOYEES

As of  December  31,  2001,  the  Company had  sixty-four  full-time  employees,
including forty in software  engineering and product  development,  ten in sales
and  marketing  and  fourteen in  management,  finance and  support.  One of the
Company's  current  directors (and a founder of the Company)  received the Nobel
Prize in  Physics  in 1972.  All of these  employees  are  located in the United
States.  None of the Company's  employees are represented by a labor union.  The
Company  has   experienced   no  work   stoppages   and  believes  its  employee
relationships are generally good. The Company's success depends to a significant
degree  upon  the  continued   employment   of  the  Company's  key   personnel.
Accordingly,  the loss of any key  personnel  could  have a  materially  adverse
effect on the Company's business, financial condition and results of operations.
No employee currently has an employment contract in place with the Company.  The
Company  believes its future success will depend upon its ability to attract and
retain industry-skilled managerial,  engineering, software development and sales
personnel,  for whom the  competition  is intense.  In the past, the Company has
experienced   difficulty  in   recruiting  a  sufficient   number  of  qualified
engineering  and sales people.  In addition,  competitors may attempt to recruit
the Company's key employees.  There can be no assurance that the Company will be
successful in attracting,  assimilating and retaining such qualified  personnel,
and the failure to attract,  assimilate  and retain key  personnel  could have a
materially  adverse effect on the Company's  business,  financial  condition and
results of operations.

LICENSING, JOINT VENTURE AND DEVELOPMENT AGREEMENTS

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

Applied Communications, Inc. (ACI) On February 1, 2001, the Company entered into
a new  non-exclusive  license  agreement  with Applied  Communications,  Inc., a
subsidiary  of  Transaction  Systems  Architects,  Inc.  Pursuant to the license
agreement, ACI has been granted the right to integrate and distribute all of the
Company's PRISM and fraud detection  products  throughout  ACI's worldwide sales
and  support  network.  ACI 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.

In April 1998, ACI's parent company, Transaction Systems Architects, Inc. (TSAI)
entered into a Stock  Purchase  Agreement  with the Company.  TSAI purchased 2.5
million shares of common stock for $5,000,000 and obtained a warrant to purchase
an additional  2,500,000  common shares for  $7,500,000.  The warrant expired on
March 1, 2002.  Additionally,  TSAI provided a $1,000,000  Line of Credit at the
prime  interest  rate plus 1%, which matured and was repaid on March 1, 2001. As
of  December  31,  2000,  the  Company had  advances  against the line  totaling
$425,000. This line of credit was repaid and closed in May 2001.

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

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

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

The Company leases offices and research and development  facilities,  consisting
of approximately 13,000 square feet, located at One Richmond Square, Providence,
Rhode Island 02906,  for which the annual base rental is $200,000.  In 2001, NTS
entered into a five-year  lease for new offices  providing 9,600 square feet for
approximately   $10,800  per  month  located  at  400  Massasoit  Avenue,   East
Providence,  Rhode  Island  02914.  In April 2001,  NTS entered into a forty-six
month sublease for its California operations at 10145 Pacific Heights Boulevard,
Suite 510, San Diego, CA 92121 providing for approximately 5,700 square feet for
$12,050  per month.  NTS also  maintains a local  field  office  6528  Greenleaf
Avenue,  Suite  104,  Whittier,  CA 90601 on a  month-to-month  basis,  and pays
approximately  $450 per month. The Company believes these facilities will exceed
its needs in the  foreseeable  future,  and is  looking at options to reduce its
current lease requirements.

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

On October 6, 1998, HNC Software Corp. ("HNC"), a significant  competitor of the
Company's in the field of financial services,  obtained a patent entitled "Fraud
Detection Using Predictive Modeling" and began advising prospective customers of
the Company of the patent.  Upon review of the patent and consideration of prior
actions taken by HNC, the Company  initiated a lawsuit against HNC in the United
States District Court in Providence,  RI on November 25, 1998 alleging violation
of  Sections 1 and 2 of the  Sherman  Act  (antitrust),  violation  of the Rhode
Island  Antitrust Act,  patent  invalidity,  and  infringement  of the Company's
patents  (infringement  claims  withdrawn  January  10,  2000).  The suit sought
various  damages,  including lost profits and treble damages.  On June 15, 1999,
HNC  answered  the lawsuit  denying  the  allegations,  bringing a  counterclaim
alleging  infringement of the above described patent by the Company, and seeking
a  declaration  of  invalidity  and  unenforceability  of one  of the  Company's
patents.  On the same day,  HNC brought  suit in San Diego,  CA against  Applied
Communications, Inc. (ACI) and its parent TSAI alleging various causes of action
including  patent  infringement of the above  described  patent by the Company's
PRISM product which ACI markets.  In April 2000,  HNC, ACI and its parent agreed
to dismiss the California  lawsuit.  During 2000, ACI requested that the Company
provide  indemnification  for approximately  $870,000 of its legal counsel costs
pursuant  to the PRISM  License  Agreement  then in effect  between  ACI and the
Company. The Company is disputing the indemnification claim and does not believe
it is obligated to reimburse these costs.

On January 16, 2001,  HNC and the Company agreed to settle the case. The Company
agreed to drop  their  claims in return  for HNC  agreeing  not to  enforce,  or
threaten to enforce, its patent against the Company or its customers.

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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the year ended December 31, 2001.

An annual meeting of securityholders was held on September 12, 2001 at which the
merger of the Company  and NTS was  approved  whereby NTS became a  wholly-owned
subsidiary  of  the  Company,   directors  were  elected,   the  certificate  of
incorporation of the Company was amended and incentive stock option plans of the
Company were amended and  restated,  all of which is described  and set forth in
the Registration Statement on Form S-4 #333-63560 of the Company which is hereby
incorporated by reference.


<PAGE>


                                                                        PART II

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

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

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

Year Ended December 31, 2001
----------------------------
         1st  Quarter                 $ .44          $ .97
         2nd  Quarter                 $ .75          $1.80
         3rd  Quarter                 $1.00          $1.59
         4th  Quarter                 $ .77          $1.20

Year Ended December 31, 2000
----------------------------
         1st  Quarter                 $ .69          $5.75
         2nd  Quarter                 $1.50          $4.25
         3rd  Quarter                 $1.88          $2.31
         4th  Quarter                 $ .27          $2.00


As at  February  28,  2002,  the  number of  holders of record of the issued and
outstanding common stock of the Company was 412, which includes brokers who hold
shares for approximately 1,782 beneficial holders.

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

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

The  following  data  includes  the  accounts  of Nestor,  Inc.  for all periods
presented and NTS for the period  September  13, 2001 through  December 31, 2001
and the years 1998 and 1997.  (From January 1, 1999 through  September 12, 2001,
the  Company's  investment  in NTS was recorded on the equity  method.) The data
reflects the activity of Interactive in 1998 and 1997.

<TABLE>

<CAPTION>
                                                 Years Ended December 31,
                      ------------------------------------------------------------------------------------
                                    2001            2000            1999            1998           1997
                                    ----            ----            ----            ----           ----
<S>                            <C>             <C>             <C>             <C>             <C>
Revenue                        $  3,520,925    $  3,652,422    $  5,114,779    $  2,241,376    $ 5,681,076
Operating income (loss)        $ (1,297,145)   $ (1,548,777)   $    742,451    $ (5,236,975)   $  (295,985)
Other income (expense)         $   (186,809)   $   (106,675)   $    (97,386)   $    (26,178)   $    31,321
Net loss                       $ (1,565,054)   $ (2,994,574)   $   (836,824)   $ (5,263,153)   $  (294,664)
Earnings per share
  Weighted number of
  outstanding shares -
  basic and diluted              28,818,768      17,901,602       17,844,327      15,249,932     9,243,508
  Loss per share               $      (0.05)   $      (0.17)   $      (0.05)   $      (0.36)   $     (0.08)
SELECTED BALANCE SHEET DATA:
Total assets                   $ 22,035,420    $  4,922,703    $  6,773,905    $  3,250,089    $ 2,613,031
Working capital                $  1,822,074    $   (199,775)   $  1,211,257    $    535,806    $   146,081
Long-term
  Redeemable Preferred Stock   $        ---    $        ---    $        ---    $        ---    $ 5,792,787
  Capital lease obligations    $  2,409,202    $        ---    $        ---    $        ---        $10,220
  Deferred income              $    421,399    $  2,036,896    $  1,965,532    $    440,400    $       ---

</TABLE>

<PAGE>


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

PROSPECTIVE STATEMENTS

The  Company  experienced   significant   operating  changes  during  the  first
nine-months  ended  September 30, 2001. The Company  changed its operating focus
from  financial  services  products  and  services,  primarily  risk  management
software,  to intelligent  traffic management  products and services,  primarily
red-light  enforcement  services  and  products.  The Company  entered  into two
separate source-code  licensing agreements for its PRISM product line appointing
Applied  Communications,   Inc.  and  Retail  Decisions,  Inc.  as  co-exclusive
resellers in industries of transaction processing. Additionally, essentially all
engineering,  development,  sales and marketing  employees  associated  with the
financial solutions division were hired by these resellers. Future revenues from
our financial  solutions  products will come from a 15% royalty rate realized on
ACI generated PRISM revenues;  and no direct license  revenues,  engineering and
modeling  revenues,  or operating  expenses  will be realized from this business
(see Notes 4 and 5 to the financial statements). Subsequent to the completion of
the merger  with Nestor  Traffic  Systems,  Inc.  on  September  12,  2001,  the
Company's  primary operation is in the field of intelligent  traffic  management
systems.  See Note 2 to the financial  statements.  The financial statements and
management's  discussion and analysis only include NTS results for the three and
one-half month period from September 13, 2001 to December 31, 2001.

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

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

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 1 to the  Consolidated
Financial  Statements).  The Company believes that of its significant accounting
policies (see Note 1 to the Consolidated  Financial  Statements),  the following
may involve a higher degree of judgment and complexity.

Revenue Recognition

Engineering service revenues ranging from installation, training, consulting and
modeling,  software  modification and  customization:  Arrangements that include
customization or modification of 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.

Lease and service fees for the  Company's  CrossingGuard  project:  Revenues are
expected to be generated from fees received from associated services. 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.

Long Term Asset Impairment

In assessing the  recoverability  of the Company's long term assets,  management
must make assumptions regarding estimated future cash flows and other factors to
determine the fair value. If these estimates  change in the future,  the Company
may be required to record impairment charges that were not previously  recorded.
On January 1, 2002,  the  Company  adopted  Statement  of  Financial  Accounting
Standards No. 142,  "Goodwill and Other  Intangible  Assets" and "Accounting for
the  Impairment or Disposal of Long-Lived  Assets." The Company will be required
to analyze its goodwill for  impairment as of 2002, and then on a periodic basis
thereafter.


LIQUIDITY AND CAPITAL RESOURCES

Cash Position and Working Capital

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

The Company had cash and short-term  investments of approximately  $3,239,000 at
December 31, 2001 as compared with approximately  $150,000 at December 31, 2000.
At December 31, 2001, the Company had working capital of $1,822,000, as compared
with working  capital  deficit of $200,000 at December 31, 2000. The increase in
working  capital in 2001 reflects  primarily;  (i) the new  $8,000,000 in equity
raised,  (ii) negative working capital of $4,000,000 assumed upon acquisition of
all unowned  shares of Nestor  Traffic  Systems,  Inc.,  (iii)  working  capital
generated  by Nestor,  Inc.  operations  in the  current  year of  approximately
$1,200,000,  and (iv) offset by the  consolidated  working  capital  used by the
operating loss of NTS reported during the period  September 13, through December
31, 2001 of $2,779,000.

The Company had a net worth of  $16,392,000  at December 31,  2001,  as compared
with a net worth of $168,000 at December  31,  2000.  The  increase in net worth
resulted primarily from; (i) $8,000,000 in new equity raised, (ii) $9,523,000 in
connection  with the issuance of stock and  warrants  related to the NTS merger,
and (iii) offset by the  consolidated net operating loss realized by the Company
of $1,565,000 in 2001.

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

The Company has  retained  investment  advisors  and is  actively  pursuing  the
raising of additional  capital.  The possible success of these efforts,  and the
effect of any new capital on the current  structure  of the  Company,  cannot be
determined as of the date of this filing.

Future Commitments

During  2001,  Nestor  acquired  additional  property and  equipment  (primarily
computers  and  related  equipment)  at a cost of  $43,000,  while NTS  acquired
additional   property  and  equipment   (primarily  East  Providence   leasehold
improvements  and  computers)  at a cost of $548,000 and invested  $2,039,000 in
equipment  leased to  customers.  At December  31,  2001,  Nestor  recorded  its
investments  in  computers  and  related  equipment  (net  of  depreciation)  at
$653,000,   and  in  leased  equipment  (net  of  depreciation)  at  $2,080,000.
Management  expects  that NTS will make future  commitments  for the purchase of
additional  computers  and  related  computing  equipment,   for  furniture  and
fixtures,  for  development of hardware,  for consulting and for promotional and
marketing expenses.

On March 30,  2001,  NTS and EDS entered into a ten-year  agreement  whereby EDS
will provide  back-office  citation processing support services on behalf of NTS
and its customers for CrossingGuard installations. EDS services include citation
printing,  mailing,  telephone inquiry,  reporting,  interface to court, and NTS
systems,  and collection  tracking and reporting.  If requested,  EDS would team
solely  with NTS on  proposal  opportunities  or NTS  would  have the  option of
terminating  the  agreement if EDS declines to team with NTS on two  consecutive
requests. NTS has agreed to pay EDS a monthly minimum fee (subject to credit for
actual ticket fees) starting  August 2001. In certain cases,  termination by NTS
may  require a  termination  fee of  $100,000  in years one and two and such fee
decreases $25,000 per year through year five.

On June 28, 2001, NTS entered into a Master Lease  Purchase  Agreement with EDS.
The agreement  provides up to $6.1 million in system lease  financing to support
current  and  future   installations  of  the  NTS   CrossingGuard   product  to
municipalities under leasing terms. NTS may draw $53,053 per approach contracted
to  fund  system  equipment,   design,  and  installation  costs.  NTS  received
$2,652,650 in advances  during 2001.  Advances are  collateralized  by equipment
delivered under leased CrossingGuard systems and are being repaid over 66 months
from the respective tranche advance date.

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

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

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

<S>                          <C>          <C>        <C>          <C>          <C>
Capital lease obligations    $4,248,053   $766,990   $1,636,800   $1,636,800   $207,463
  including interest

Operating leases             $1,488,000   $561,000   $  717,000   $  170,000   $ 40,000

     Other Commitments
     -----------------

EDS service arrangement      $  420,000   $420,000   $      ---   $      ---   $    ---

</TABLE>


Amounts due on capital  lease  obligations  in the  preceding  table will likely
increase as the number of intersection approaches are contracted and financed.

Amounts due under  operating  leases may also increase  should the Company enter
additional  arrangements  deemed  necessary  to support  development  of the NTS
business plan.

Amounts due under the EDS service  arrangement are required citation  processing
fee minimums.  Should the number of citations processed by EDS increase,  as the
number of intersections approaches increase,  amounts due under this arrangement
will likely increase as well.

Inflation

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

RESULTS OF OPERATIONS

During the year-ended  December 31, 2001, the Company reorganized by eliminating
direct investment in its Risk Management products and transferring all contracts
to a pure royalty basis while  reacquiring  all unowned shares of Nestor Traffic
Systems,  Inc. on September 12, 2001 and reporting the operating results of this
subsidiary  after that date.  Accordingly,  comparisons  of  operating  activity
between  fiscal 2001 and 2000 are of  operations  that have changed  materially.
Looking forward,  the consolidated  operating results reported during the fourth
quarter of 2001 will more clearly  reflect the operating  costs  associated with
the company in early 2002.  Revenues will come  primarily  from ITS products and
services,  and growth  should be tied to growth in the  number of  CrossingGuard
approaches  installed  and  operational.  Nestor,  Inc. is  expecting to realize
royalties from non-ITS  product  licenses  (primarily  from ACI) of $600,000 per
year, subject to ACI's experience with licensing the Risk Management products in
the future.

ANALYSIS OF THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2001 AND 2000

In the quarter ended December 31, 2001,  the Company  realized a 33% decrease in
revenues compared to the prior calendar quarter. Expenses increased 220% in 2001
resulting in an operating loss of $2,250,000  when compared to an operating loss
of $25,000 in the prior year fourth  quarter.  Payroll and  consulting  expenses
associated with the NTS product line  development and deployment  efforts in the
fourth  quarter of 2001 were much greater than payroll costs to support the risk
management  products in the comparable  quarter in 2000. In part, this is due to
traffic  products being delivered and supported on a direct basis,  whereby risk
management  products  included  engineering  support  provided by our resellers.
Additionally, general and administrative costs increased due to the inclusion of
NTS costs  effective  September 12, 2001 upon the completion of the merger.  NTS
expenses were not consolidated prior to that date.

Revenues
--------

The  Company's  revenues  arise from  licensing  of the  Company's  products and
technology and from contract services and are discussed separately below. During
the quarter ended  December 31, 2001,  revenues  decreased  $286,000 to $567,000
from  $853,000 in the prior  calendar  quarter.  Fiscal 2000  revenues  included
direct and royalty  revenues  realized  from the risk  management  product line.
Fiscal  2001  revenues  included  $227,000  in  royalties  from risk  management
products and $340,000 from traffic management products and services.

Software Licensing

Product-licensing  revenues  totaled  $227,000 in the fourth quarter of 2001, as
compared  with  $760,000  in 2000.  The  decrease in these  revenues  reflects a
decrease in initial license fees realized from new PRISM products of $468,000 as
four new PRISM  licenses were realized in the fourth quarter of 2000 as compared
to none in 2001.

Engineering Services

Engineering revenues totaled $340,000 in the fourth quarter of 2001, as compared
with $93,000 in 2000. The 2001 revenues  relate  entirely to the delivery of NTS
product and services,  primarily under Rail CrossingGuard contracts.  Prior year
engineering  revenues related to PRISM  customization  and modeling  services no
longer performed directly by the Company.

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

Total operating expenses - consisting of engineering,  research and development,
selling and  marketing,  and general and  administrative  expenses - amounted to
$2,817,000  in the quarter  ended  December 31, 2001,  an increase of $1,939,000
over total operating costs of $878,000 in the prior quarter.

Engineering Services

Costs related to engineering  services totaled $906,000 in the fourth quarter of
2001, as compared with  $188,000 in 2000.  The increase in these costs  reflects
the payroll and consulting expenses incurred by NTS for product delivery efforts
in  2001  as  compared  to   engineering   payrolls   needed  to  support  PRISM
deliverables,   primarily  delivered  through  third-party  resellers  requiring
limited engineering support from the Company.

Research and Development

Research  and  development  expenses  totaled  $1,047,000  in the quarter  ended
December 31, 2001 as compared with $248,000 in the previous year's quarter.  The
increase in such costs is consistent  with the increase in engineering  services
expenses.

Selling and Marketing

Selling and marketing costs increased  $109,000 to $334,000 in the quarter ended
December 31, 2001, from $225,000 in the previous year's quarter. The increase in
selling costs in the quarter  reflects,  primarily,  an increase in staffing for
the  deployment of NTS products,  including a west coast and east coast presence
over  sale and  marketing  efforts  required  for the  PRISM  product  which was
primarily marketed through a distributor.

General and Administrative

General and  administrative  expenses  totaled $529,000 in the fourth quarter of
2001,  as compared  with $217,000 in the previous  year's  quarter.  General and
administrative costs for the quarter ended December 2001 reflect the combination
of Nestor and NTS administrative expenses into a combined organization.

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

For 2001, net other expense was $115,000,  as compared with net other expense of
$31,000 in the  quarter-earlier  period.  In 2001,  other  expense was comprised
primarily of loss on asset disposals of $62,000 and warrant amortization expense
of  $26,000.  In 2000,  other  expense  was  comprised  primarily  of $26,000 of
amortization  expense related to the assigned value of warrants  outstanding and
being amortized over their remaining life.

Investment in Product Development and Marketing
-----------------------------------------------

The Company has not  capitalized  any expenses  relating to the  development  or
marketing of its products during the current quarter.

Net Income
----------

During the fourth quarter in 2001, the Company experienced a loss of $2,365,000,
as compared  with a loss of $379,000 in the  previous  year's  quarter.  For the
quarter ended December 31, 2001,  loss per share  available for common stock was
$0.05 per share, as compared with a loss per share of $0.02 in the corresponding
period of the prior fiscal  quarter.  For the quarter  ended  December 31, 2001,
there was outstanding a weighted  average of 50,476,112  shares,  as compared to
17,920,116 shares in the fourth quarter of 2000.

ANALYSIS OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000

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

Revenues
--------

The  Company's  revenues  arise from  licensing  of the  Company's  products and
technology and from contract services and are discussed separately below. During
the year ended December 31, 2001, revenues decreased $131,000 to $3,521,000 from
$3,652,000  in  the  prior  calendar  year.  The  company  granted   source-code
distribution  rights to two companies in 2001 for up-front  source-code  license
fees  and,  from  ACI,  ongoing  royalties  of equal to 15% of  future  revenues
realized from the licensed  software.  Beginning in the fourth  quarter of 2001,
the Company's  revenues will be generated  primarily  from sales,  support,  and
services provided  regarding its intelligent  traffic  management  product line.
Ongoing  revenues from the risk  management  product line will come from the ACI
distributor agreement and are currently averaging around $50,000 per month.

Software Licensing

Product-licensing   revenues  totaled  $2,997,000  in  2001,  as  compared  with
$2,537,000 in 2000. The Company realized net ReD license revenues of $832,000 in
the  second  quarter  of 2001 (See  Note 17 of the  financial  statements),  and
$1,104,000 from the ACI license in the first quarter of 2001 (See Note 16 of the
financial statements).

Engineering Services

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

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

Total operating expenses - consisting of engineering,  research and development,
selling and  marketing,  and general and  administrative  expenses - amounted to
$4,818,000  in the year ended  December 31,  2001,  a decrease of $383,000  over
total operating costs of $5,201,000 in the prior year.

Engineering Services

Costs related to engineering  services  totaled  $1,146,000 in 2001, as compared
with $967,000 in 2000.  The increase in these costs reflects the addition of NTS
engineering expenses effective on the merger completed September 12, 2001.

Research and Development

Research and development  expenses totaled $1,641,000 in the year ended December
31, 2001 as compared  with  $1,247,000  in the prior year.  The increase in such
costs reflects the net of increased  investment in the NTS products  included in
the consolidated expenses after the merger completed on September 12, 2001.

Selling and Marketing

Selling and  marketing  costs  decreased  $703,000 to $791,000 in the year ended
December 31, 2001,  from  $1,494,000 in the prior year.  The decrease in selling
costs in the year  reflects,  primarily,  the  transfer  of sales and  marketing
activity for the PRISM product to ACI and ReD during early 2001.

General and Administrative

General and administrative expenses totaled $1,240,000 in 2001, as compared with
$1,493,000  in the  previous  year.  The  decrease  reflects a decrease in legal
expenses  related to the Nestor versus HNC Software  lawsuit  settled in January
2001 and the  contribution  to overhead and  facility  cost by ReD and ACI under
sublicense  agreements  during  2001,  offset  in part by the  inclusion  of NTS
expenses after the merger on September 12, 2001.

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

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


Loss from Investment in Affiliate
---------------------------------

During 2000, the Company's  affiliate NTS sold additional common stock interests
reducing the Company's  equity interest in the affiliate to 34.6%. The Company's
interests in NTS are accounted for under the equity method of accounting in 2000
and 1999.  As a result of the  Company's  equity  interest  in NTS,  the Company
reported a loss from investment in affiliate of $1,339,000 in 2000, representing
34.6% of NTS's actual net loss in 2000 of $3,513,000.  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.

Investment in Product Development and Marketing
-----------------------------------------------

The Company has not  capitalized  any expenses  relating to the  development  or
marketing of its products during 2001 or 2000.

Net Income
----------

During 2001, the Company  experienced a loss of  $1,565,000,  as compared with a
loss of $2,995,000 in the prior year. For the year ended December 31, 2001, loss
per share was $0.05 per share, as compared with a loss per share of $0.17 in the
corresponding  period of the prior fiscal year.  For the year ended December 31,
2001, there was outstanding a weighted average of 28,818,768 shares, as compared
to 17,844,327 shares in the year-earlier period.

ANALYSIS OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999

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

Revenues
--------

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

Software Licensing

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

Engineering Services

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

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

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

Engineering Services

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

Research and Development

Research and development  expenses totaled $1,247,000 in the year ended December
31, 2000 as compared with $921,000 in the prior year. The increase in such costs
reflects the net of increased  investment in product  development  in all of the
Company's product lines in the current year, including PRISM V6.0 shipped in the
fourth quarter of 2000,  development of eCLIPSE, and development of PRISM eFraud
during 2000.

Selling and Marketing

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

General and Administrative

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

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

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

Loss from Investment in Affiliate
---------------------------------

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

Investment in Product Development and Marketing
-----------------------------------------------

The Company has not  capitalized  any expenses  relating to the  development  or
marketing of its products.

Net Income
----------

During 2000, the Company  experienced a loss of  $2,995,000,  as compared with a
loss of $837,000 in the prior year. For the year ended  December 31, 2000,  loss
per share  available  for common stock was $0.17 per share,  as compared  with a
loss per share of $0.05 in the  corresponding  period of the prior  fiscal year.
For the year ended December 31, 2000,  there was outstanding a weighted  average
of  17,901,602  shares,  as compared to  17,844,327  shares in the  year-earlier
period.


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

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


ITEM 8.        Financial Statements and Supplementary Data

               See annexed financial statements.


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

               Not Applicable.


<PAGE>


                                    SIGNATURE

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

                                   NESTOR, INC.
                                   (Registrant)

                                   /s/ David Fox
                                   --------------------------------------------
                                   David Fox, President and CEO

Date:  March 29, 2002

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

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

/s/ Alan M. Wiener
---------------------------------
Alan M. Wiener                      Chairman of the Board         March 29, 2002


/s/ Robert M. Carroll
---------------------------------
Robert Carroll                      Director                      March 29, 2002


/s/ Leon N Cooper
---------------------------------   Founding Co-Chairman
Leon N Cooper                        and Director                 March 29, 2002


/s/ Charles Elbaum
---------------------------------   Founding Co-Chairman
Charles Elbaum                       and Director                 March 29, 2002


/s/ J. Steve Emerson
---------------------------------
J. Steve Emerson                    Director                      March 29, 2002


/s/ David Fox                       President
---------------------------------    Chief Executive Officer
David Fox                            and Director                 March 29, 2002


/s/ David A. Polak
---------------------------------
David A. Polak                      Director                      March 29, 2002


/s/ Bruce W. Schnitzer
---------------------------------
Bruce W. Schnitzer                  Director                      March 29, 2002


/s/ Alvin J. Siteman
---------------------------------
Alvin J. Siteman                    Director                      March 29, 2002


<PAGE>




ITEM 8.








                        CONSOLIDATED FINANCIAL STATEMENTS




                                    FORM 10-K




                                December 31, 2001


<PAGE>





                                  NESTOR, INC.

                                    CONTENTS






                                                                  PAGE NO.
                                                                  --------



  Independent Auditor's Report                                      26

  Consolidated Balance Sheets -                                     27
   December 31, 2001 and 2000

  Consolidated Statements of Operations -                           28
    For the Years Ended December 31, 2001, 2000 and 1999

  Consolidated Statements of Stockholders' Equity -                 29
    For the Years Ended December 31, 2001, 2000 and 1999

  Consolidated Statements of Cash Flows -                           30
    For the Years Ended December 31, 2001, 2000 and 1999

  Notes to Consolidated Financial Statements                        31


<PAGE>









                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
   of Nestor, Inc.

We have audited the accompanying  consolidated balance sheets of Nestor, Inc. as
of  December  31,  2001 and 2000,  and the related  consolidated  statements  of
operations,  stockholders'  equity and cash flows for each of the three years in
the period  ended  December  31, 2001.  Our audits also  included the  financial
statement schedule listed in the index at Item 14(a). These financial statements
and  schedule  are  the   responsibility  of  the  Company's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

In our opinion, the 2001 and 2000 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Nestor,
Inc.  at  December  31,  2001 and  2000,  and the  consolidated  results  of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United  States.  Also,  in our  opinion,  the  related  financial  statement
schedule when considered in relation to the basic financial  statements taken as
a whole,  presents  fairly in all material  respects the  information  set forth
therein.

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


                                                           /s/ ERNST & YOUNG LLP



Providence, Rhode Island
February 26, 2002




<PAGE>

<TABLE>

<CAPTION>
                                                            NESTOR, INC.
                                                     Consolidated Balance Sheets
                                                     ---------------------------
                                                                                        DECEMBER 31,
                      ASSETS                                                      2001                2000
                                                                                  ----                ----
<S>                                                                          <C>                <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                $   2,294,987      $     150,035
    Restricted cash                                                                943,926                ---
    Accounts receivable, net of allowance for doubtful accounts                    158,206            693,555
    Unbilled contract revenue                                                      595,023          1,260,884
    Due from affiliate                                                                 ---            322,952
    Inventory                                                                      375,098                ---
    Other current assets                                                           298,273             91,042
                                                                             -------------      -------------
      Total current assets                                                       4,665,513          2,518,468

NONCURRENT ASSETS:
    Long term unbilled contract revenue                                            421,399          2,036,896
    Investment in affiliate                                                            ---             81,100
    Capitalized system costs, net of accumulated depreciation                    2,079,938                ---
    Property and equipment at cost, net of accumulated depreciation                652,644            177,377
    Deferred development costs                                                         ---             32,000
    Goodwill                                                                    14,080,684                ---
    Patent development costs, net of accumulated amortization                      135,242             76,862
                                                                             -------------      -------------

TOTAL ASSETS                                                                 $  22,035,420      $   4,922,703
                                                                             =============      =============

       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Line of credit                                                           $         ---      $     419,769
    Accounts payable                                                               601,361            253,696
    Accrued employee compensation                                                  478,444            265,779
    Accrued liabilities                                                            944,298            472,983
    Deferred income                                                                481,892          1,306,016
    Leases payable                                                                 306,327                ---
                                                                             -------------      -------------
      Total current liabilities                                                  2,812,322          2,718,243

NONCURRENT LIABILITIES:
    Long term deferred income                                                      421,399          2,036,896
    Long term leases payable                                                     2,409,202                ---
                                                                             -------------      -------------
      Total liabilities                                                          5,642,923          4,755,139
                                                                             -------------      -------------

    Commitments and contingencies                                                      ---                ---

STOCKHOLDERS' EQUITY:
    Preferred stock, $1.00 par value, authorized 10,000,000 shares;
      issued and outstanding:  Series B - 235,000 shares at
      December 31, 2001 and 2000                                                   235,000            235,000
    Common stock, $.01 par value, authorized 100,000,000 shares;
      issued and outstanding: 50,241,112  shares at December 31, 2001
      and 17,688,449 shares at December 31, 2000                                   502,411            176,884
    Warrants                                                                     2,612,368            843,434
    Additional paid-in capital                                                  43,129,655         27,434,129
    Retained deficit                                                           (30,086,937)       (28,521,883)
                                                                             --------------     -------------
      Total stockholders' equity                                                16,392,497            167,564
                                                                             -------------      -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $  22,035,420      $   4,922,703
                                                                             =============      =============

                                  SIGNIFICANT RELATED PARTY TRANSACTIONS ARE DESCRIBED IN NOTE 13.
                           THE NOTES TO THE FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
</TABLE>

<PAGE>

<TABLE>

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


                                                             YEARS ENDED DECEMBER 31,
                                                    2001                2000               1999
                                               ----------------------------------------------------

<S>                                            <C>                 <C>                <C>
Revenue (Notes 13, 16 and 17):
     Software licensing                        $   2,996,550       $   2,537,511      $   3,872,016
     Engineering services                            524,374           1,114,911          1,242,763
                                               -------------       -------------      -------------

         Total revenue                             3,520,924           3,652,422          5,114,779
                                               -------------       -------------      -------------

Operating expenses:
     Engineering services                          1,145,864             966,681          1,023,046
     Research and development                      1,641,024           1,247,205            920,918
     Selling and marketing                           791,284           1,493,968          1,218,476
     General and administrative                    1,239,897           1,493,345          1,209,888
                                               -------------       -------------      -------------

         Total operating expenses                  4,818,069           5,201,199          4,372,328
                                               -------------       -------------      -------------


Income (loss) from operations                     (1,297,145)         (1,548,777)           742,451

Other expense - net                                 (186,809)           (106,675)           (97,386)
                                               --------------      --------------     --------------

Income (loss) before income taxes
  and investment loss                             (1,483,954)         (1,655,452)           645,065

Income taxes                                             ---                 ---                ---
Loss from investment in affiliate                    (81,100)         (1,339,122)        (1,481,889)
                                               --------------      --------------     --------------

Net loss                                       $  (1,565,054)      $  (2,994,574)     $    (836,824)
                                               ==============      ==============     ==============


Loss Per Share:

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

Shares used in computing loss per share:
     Basic and diluted                            28,818,768          17,901,602         17,844,327
                                               =============       =============      =============


            THE NOTES TO THE FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.

</TABLE>



<PAGE>

<TABLE>

<CAPTION>

                                                            Nestor, Inc.
                                           Consolidated Statement of Stockholders' Equity
                                           ----------------------------------------------


                           Common Stock             Preferred Stock
                      ----------------------     --------------------     Additional      Retained
                        Shares       Amount       Shares       Amount  Paid-in Capital     Deficit        Warrants        Total
                        ------       ------       ------       -----   ---------------  -------------    ----------    -----------
<S>                   <C>           <C>          <C>        <C>          <C>            <C>              <C>           <C>
BALANCE AT
DECEMBER 31, 1998     17,479,327    $174,793     365,000    $ 365,000    $24,504,556    $(24,690,485)    $  630,467    $    984,331


Conversion of
Preferred Stock
to Common Stock           20,000         200     (20,000)     (20,000)        19,800             ---            ---             ---

Issuance of equity
by subsidiary                ---         ---         ---          ---      2,049,767             ---            ---       2,049,767

Accretion value
of warrants
                             ---         ---         ---          ---            ---             ---        106,484         106,484
Loss for the
year ended
December 31, 1999            ---         ---         ---          ---            ---        (836,824)           ---        (836,824)
                     -----------    --------    --------    ---------    -----------    -------------    ----------     ------------
BALANCE AT
DECEMBER 31, 1999     17,499,327    $174,993     345,000    $ 345,000    $26,574,123    $(25,527,309)    $  736,951     $ 2,303,758


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

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

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

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

Loss for the
year ended
December 31, 2000            ---         ---         ---          ---           ----      (2,994,574)           ---      (2,994,574)
                     -----------    --------    --------    ---------    -----------    -------------    ----------     -----------
BALANCE AT
DECEMBER 31, 2000     17,688,449    $176,884     235,000    $ 235,000    $27,434,129    $(28,521,883)    $  843,434     $   167,564


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

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

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

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

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



                           THE NOTES TO THE FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
</TABLE>


<PAGE>


<TABLE>

<CAPTION>

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

                                                                             YEARS ENDED DECEMBER 31,
                                                                    2001               2000                1999
                                                              -----------------------------------------------------
<S>                                                         <C>                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                  $  (1,565,054)      $  (2,994,574)     $    (836,824)
    Adjustments to reconcile net loss
      to net cash provided (used) by operating activities:
      Depreciation and amortization                               239,178             116,540            120,257
      Loss on disposal of fixed assets                             66,666                 ---                ---
      Loss from investment in affiliate                            81,100           1,339,122          1,481,889
      Expenses charged to operations relating to
       options, warrants and capital transactions                 106,484             106,483            106,484
      Increase (decrease) in cash arising from
       changes in assets and liabilities:
        Restricted cash                                          (943,926)                ---                ---
        Accounts receivable                                       702,114             290,763           (471,570)
        Unbilled contract revenue                                 384,068            (131,764)        (2,397,648)
        Inventory                                                 126,801                 ---                ---
        Other assets                                               55,208              70,767           (168,053)
        Accounts payable and accrued expenses                    (277,277)           (124,624)           279,101
        Deferred income                                          (610,703)              6,163          2,244,213
                                                            --------------      -------------      -------------

        Net cash provided (used) by operating activities       (1,635,342)         (1,321,124)           357,849
                                                            --------------      --------------     -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Payments from (advances to) affiliate - net                     322,952             (45,764)          (320,459)
  Cash of acquired affiliate                                      361,804                 ---                ---
  Acquisition costs                                              (555,269)                ---                ---
  Investment in capitalized systems                              (454,778)                ---                ---
  Purchase of property and equipment                              (90,052)                ---            (61,337)
  Patent development costs                                        (60,335)            (20,968)           (55,894)
                                                            --------------      --------------     --------------

      Net cash used by investing activities                      (475,678)            (66,732)          (437,690)
                                                            --------------      --------------     --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of obligations under capital leases                   (17,124)            (16,317)           (46,540)
  Proceeds from (repayment of) line of credit                    (419,769)            419,769                ---
  Proceeds from leases payable                                    742,742                 ---                ---
  Proceeds from issuance of common stock - net                  3,950,123              85,637                ---
                                                            -------------       -------------      -------------

      Net cash provided (used) by financing activities          4,255,972             489,089            (46,540)
                                                            -------------       -------------      --------------

Net change in cash and cash equivalents                         2,144,952            (898,767)          (126,381)
Cash and cash equivalents - beginning of year                     150,035           1,048,802          1,175,183
                                                            -------------       -------------      -------------

Cash and cash equivalents - end of year                     $   2,294,987       $     150,035      $   1,048,802
                                                            =============       =============      =============

SUPPLEMENTAL CASH FLOWS INFORMATION:
  Interest paid                                                    65,355       $      10,603      $      13,054
                                                            =============       =============      =============

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

                  SIGNIFICANT NON-CASH TRANSACTIONS ARE DESCRIBED IN NOTES 8, 12 AND 16. THE NOTES
                        TO THE FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.

</TABLE>

<PAGE>


                        NOTES TO THE FINANCIAL STATEMENTS

NOTE  1 - SUMMARY  OF  SIGNIFICANT   ACCOUNTING  POLICIES:
          A.   Liquidity  and management's plans
               As a result of the ACI and ReD agreements and the NTS merger, the
               Company's  primary  operations  relate to NTS.  In 2000,  NTS was
               considered a  development  stage  company with limited  revenues.
               NTS's primary  activities  through  December 31, 2000,  consisted
               primarily  of  raising   capital,   research   and   development,
               establishing  supplies and  production  processes,  and sales and
               marketing. Although the NTS merger raised working capital through
               the  issuance  of  Nestor,  Inc.  common  stock,  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 without additional financing to carry
               out  product  delivery  efforts  under  current   contracts,   to
               underwrite the delivery costs of future systems  delivered  under
               turnkey agreements with municipalities, for continued development
               and  upgrading of its  products,  for customer  support,  and for
               other operating uses. If the Company does not realize  additional
               equity and/or debt capital or revenues sufficient to maintain its
               operations at the current level,  management of the Company would
               be required to modify certain initiatives including the cessation
               of some or all of its operating activities until additional funds
               become available through investment or revenues.

               The  Company has  retained  investment  advisors  and is actively
               pursuing the raising of additional capital.  The possible success
               of  these  efforts,  and the  effect  of any new  capital  on the
               current structure of the Company,  cannot be determined as of the
               date of this filing.

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

               Nestor,  Inc.  organized two  wholly-owned  subsidiaries,  Nestor
               Traffic  Systems,  Inc.  ("NTS")  and  Nestor  Interactive,  Inc.
               ("Interactive")  effective January 1, 1997. Effective November 7,
               1998, the Company ceased  further  investment in the  Interactive
               subsidiary.   In  1999,   NTS  sold  in  the  aggregate  a  58.1%
               common-stock  interest to a private group of  investors.  In June
               2000, NTS sold  additional  shares of its common stock to private
               investors,  bringing the Company's ownership of NTS to 34.62%. As
               discussed in Note 12, on September 12, 2001,  NTS was merged into
               a  wholly-owned   subsidiary  of  the  Company.  The  merger  was
               accounted  for  as  a  purchase.  Accordingly,  the  consolidated
               financial  statements  include NTS balances at December 31, 2001,
               and operating  results from  September 13, 2001 through  December
               31, 2001. All  intercompany  transactions  and balances have been
               eliminated.

               In 2001, Nestor,  Inc. ceased direct product  development,  sales
               and  support in the  fields of fraud  detection,  financial  risk
               management, and customer relationship management ("CRM"). Through
               license agreements entered into with Applied Communications, Inc.
               ("ACI") on February 1, 2001 (Note 16), and with Retail Decisions,
               Inc. ("ReD") on May 18, 2001 (Note 17), co-exclusive development,
               licensing and support  rights were granted to these  resellers in
               fraud and risk management;  and non-exclusive rights in the field
               of CRM were  granted  to ReD.  Nestor  will  continue  to receive
               royalties  from future ACI licensing  revenues  realized from the
               Company's  products.  In addition,  all expenses  associated with
               development,  support and selling these products were transferred
               to these parties.

           C.  Cash equivalents and restricted cash
               The  Company   considers  all  highly  liquid  debt   instruments
               purchased with an original maturity of 90 days or less to be cash
               equivalents. Restricted cash represents the unexpended balance of
               advances received under a financing  agreement (Note 6). Advances
               are restricted to equipment,  installation  and service costs for
               certain contracted CrossingGuard approaches.

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

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

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

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

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

           G.  Deferred Income
               Corresponding  with unbilled contract  revenues,  deferred income
               represents primarily minimum guaranteed monthly license fees (see
               D above  and H below)  where a  customer  pays a  portion  of the
               license fees over the software  license term (usually five years)
               based  on  a  contractually   predetermined   minimum  volume  of
               transactions.

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

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

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

               Nestor Traffic Systems, Inc.:
               Revenue  is  derived  mainly  from the sale or 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,  in some instances
               under operating lease agreements,  PCS and engineering  services.
               In software  arrangements  that include  multiple  elements,  the
               total  arrangement fee is allocated among each deliverable  based
               on the relative fair value of each of the deliverables determined
               based on vendor-specific objective evidence.

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

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

               Both companies:
               Postcontract   Customer   Support  -  PCS  includes   maintenance
               agreements.   Revenue   allocable  to  PCS  is  recognized  on  a
               straight-line basis over the period the PCS is provided.

               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.

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

           I.  Inventory
               Inventory  is  valued  at the  lower  of  cost or  market  on the
               first-in,  first-out  basis  and  consists  of the  following  at
               December 31, 2001:

                                            December 31, 2001
                                            -----------------

               Work-in-progress               $   364,162
               Finished goods                      10,936
                                              -----------
               Total inventory                $   375,098
                                              ===========

           J.  Goodwill
               Goodwill represents the excess of cost over the fair value of net
               assets  acquired.  The Company  continually  assesses the Company
               value of goodwill to determine  whether  impairment has occurred.
               Statement  of  Financial  Accounting  Standards  (SFAS) No.  121,
               "Accounting  for the  Impairment  of  Long-Lived  Assets  and for
               Long-Lived  Assets to be Disposed of,"  requires that  long-lived
               assets and  certain  intangibles  held and used by the Company be
               reviewed   for   impairment   whenever   events  or   changes  in
               circumstances  indicate that the carrying amount of the asset may
               not be recoverable. If the estimated undiscounted cash flows that
               are  expected  to result  from the use of the asset are less than
               the carrying  amount of the asset, an impairment loss is recorded
               equal to the excess of the carrying amount over the fair value of
               the asset.

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

           L.  Estimates
               The  preparation  of  financial  statements  in  conformity  with
               accounting  principles  generally  accepted in the United  States
               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.

           M.  Earnings (loss) per share
               The Company  reports  its  earnings  (loss) per share  ("EPS") in
               accordance  with  the  provisions  of  the  Financial  Accounting
               Standards  Board  Statement  No.  128,  Earnings  Per Share ("FAS
               128").  Basic EPS is calculated by dividing the net income (loss)
               by the weighted  average number of common shares  outstanding for
               the period,  without  consideration for common stock equivalents.
               Diluted EPS is computed giving effect to common stock equivalents
               and other dilutive securities,  unless the computation results in
               anti-dilution.

           N.  Shipping and handling costs
               Shipping and handling costs are included in engineering  services
               expense.


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

                                                            December 31,
                                                    ---------------------------
                                                        2001            2000
                                                        ----            ----

           Trade accounts receivable                 $ 158,206      $ 697,700
           Allowance for doubtful accounts                 ---         (4,145)
                                                     ---------      ---------
           Accounts receivable, net of allowance
               for doubtful accounts                 $ 158,206      $ 693,555
                                                     =========      =========


NOTE 3 -  CAPITALIZED SYSTEM COSTS:
          In 1999, NTS entered into an operating lease with a customer providing
          for quarterly fixed payments of system lease and software license fees
          of $13,497  over a term of 36  months,  and  providing  for a lump-sum
          buyout  of  $20,834  at the  end of the  term.  Future  minimum  lease
          revenues are $49,489 in 2002.  In addition,  the  agreement  calls for
          software  license and processing fees tied to citations  issued to red
          light violators, which totaled $9,911 in 2001 and $25,307 in 2000.

          At December 31, 2001,  the Company has five  contracts in process with
          anticipated   acceptance  under  operating  lease  agreements   having
          36-month terms.

          Equipment,  installation  and in some  cases  interest  (Note 6) costs
          related to  operating  lease  contracts  are  capitalized  and,  after
          acceptance, are depreciated over the minimum lease term of the related
          lease agreement,  currently three years.  Revenues realized from these
          agreements, generally in the form of per-citation fees, is expected to
          be adequate to cover the capitalized and future costs related to these
          agreements.  A substantial portion of this equipment is collateral for
          the financing agreement described in Note 6.

                                                         December 31, 2001
                                                         -----------------

              Equipment under operating leases:
                    Work-in process                        $   1,289,478
                    Installed and accepted                       892,337
                                                           -------------
                                                               2,181,815

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

              Net investment in leased equipment           $   2,079,938
                                                           =============


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

<CAPTION>
                                                                                              Useful Life
                                                                                              in Years or
                                                                      December 31,            Lease Term
                                                           -------------------------------    -----------
                                                                2001              2000
                                                                ----              ----

              <S>                                          <C>               <C>                  <C>
              Office furniture and equipment               $     194,763     $     234,706        5 - 7
              Leased equipment under capital leases                  ---           113,893          3
              Computer equipment                               1,524,181         1,268,855        3 - 5
              Demonstration equipment                            123,518               ---          3
              Leasehold improvements                             230,314               ---          4
                                                           -------------     -------------
                                                               2,072,776         1,617,454
              Less:  Accumulated depreciation                  1,420,132         1,440,077
                                                           -------------     -------------
                                                           $     652,644     $     177,377
                                                           =============     =============

</TABLE>

          In 2001,  the Company  disposed of  $177,828 in office  furniture  and
          equipment and $160,054 of computer  equipment  which were no longer in
          service. Additionally,  $141,768 of computer equipment was transferred
          to ReD in connection with their license  agreement (Note 17). The loss
          on disposal of fixed  assets is included in Other  expense--net  (Note
          10).

          Depreciation and amortization expense on the above assets of $175,573,
          $92,540 and  $96,257 was  recorded  for the years ended  December  31,
          2001,  2000  and  1999,  respectively.  Accumulated  depreciation  and
          amortization  includes $63,741 and $40,963 of amortization  related to
          leased  equipment  under capital leases at December 31, 2000 and 1999,
          respectively.


NOTE 5 -  LINE OF CREDIT:
          On March 24,  1999,  the Company  entered  into a  $1,000,000  Line of
          Credit agreement with Transaction  Systems  Architect,  Inc. ("TSAI").
          The loan was secured by the royalty  stream and other fees produced by
          the Company's  License  Agreements  with Financial  Services  Division
          customers. As of December 31, 2000, $419,769 had been advanced against
          the  loan.  Principal  payments  were  due  in  twelve  equal  monthly
          installments ($34,981) beginning March 1, 2001. The Company repaid and
          closed the line of credit in May 2001. Interest was based on the prime
          interest  rate plus 1% and was due  quarterly in arrears.  Included in
          accrued  expenses  at December  31, 2000 is $4,296 of interest  due to
          TSAI.

NOTE 6 -  LEASES PAYABLE:
          On June 28, 2001, NTS executed a Master Lease Purchase  Agreement with
          Electronic Data Systems Corporation ("EDS"). The agreement provides up
          to $6.1  million in system  lease  financing  to support  current  and
          future   installations   of  the  NTS   CrossingGuard(R)   product  to
          municipalities  under leasing terms. NTS may draw $53,053 per approach
          contracted to fund system  equipment,  design and installation  costs.
          NTS  received   $2,652,650  in  advances  during  2001.  Advances  are
          collateralized  by  equipment  delivered  under  leased  CrossingGuard
          systems  (Note 3) and are being  repaid  interest  (20%)  only for the
          first 6 months and principal and interest over the next 60 months from
          the respective traunch advance date.

          In 2001, the Company recorded $174,218 of EDS interest costs; $105,193
          of which were  capitalized as  capitalized  systems costs (Note 3) and
          $19,237 and  $49,788  were  expensed  directly,  pre and  post-merger,
          respectively.

          The  aggregate  minimum  payments  including  interest  due  over  the
          remaining lease term is as follows:

                           December 31, 2002       $   766,990
                           December 31, 2003           818,400
                           December 31, 2004           818,400
                           December 31, 2005           818,400
                           December 31, 2006           818,400
                           Thereafter                  207,463
                                                   -----------
                                                     4,248,053
                           Less amounts
                           representing interest    (1,532,524)
                                                   ------------
                                                   $ 2,715,529
                                                   ===========

NOTE 7 -  COMMON AND  PREFERRED STOCK:
          On April 29, 1998, Nestor sold to Transaction Systems Architects, Inc.
          ("TSAI") $5 million of newly issued  common stock at a price of $2 per
          share and a warrant  which  expires  on March 1, 2002 to  purchase  an
          additional 2.5 million shares at $3 per share (Note 8).  Proceeds from
          the sale consisted of $4.5 million in cash and surrender of a $500,000
          note owed to TSAI.  Concurrent  with this  transaction,  Wand Partners
          converted its $5.8 million of redeemable  convertible  preferred stock
          into common stock.

          As more fully  described  in Note 12, in September  2001,  the Company
          completed  a  merger  with  NTS  which  resulted  in the  issuance  of
          33,338,558  shares of Nestor,  Inc.  common  stock,  raising the total
          outstanding shares to approximately 50 million.

          Series B Convertible  Preferred Stock is convertible into Common Stock
          of the  Company  at any  time on a  share-for-share  basis.  Series  B
          Convertible Preferred Stock has the same rights with respect to voting
          and dividends as the Common Stock,  except that each share of Series B
          Convertible  Preferred  Stock  has  the  right  to  receive  $1.00  in
          liquidation  before any  distribution is made to holders of the Common
          Stock.  The  liquidation  value of Series B Preferred  was $235,000 at
          December 31, 2001 and 2000.

NOTE 8 -  OPTIONS AND WARRANTS:
          On April 1, 1984, the Company  adopted an Incentive  Stock Option Plan
          providing  for the  granting  of  options  to  purchase  shares of the
          Company's  common  stock at a price  equal to the market  price of the
          stock  at the date of  grant.  The  Company's  Stock  Option  Plan has
          authorized  the grant of  options  to  employees  for up to  2,450,000
          shares of the Company's  common  stock.  Options  generally  vest over
          three years and are exercisable for five years from the date of grant.

          On May 6,  1997,  the  Company  adopted  the 1997  Stock  Option  Plan
          providing  for the  granting  of  options  to  purchase  shares of the
          Company's  common  stock at a price  equal to the market  price of the
          stock at the date of grant.  In June 2001,  the 1997 Stock Option Plan
          was amended to increase  the  aggregate  number of options  authorized
          from 1 million  to 5 million  shares of the  Company's  common  stock.
          Options vest over three 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 Company has adopted the  disclosure-only  provisions  of Financial
          Accounting   Standards  Board   Statement  No.  123,   Accounting  for
          Stock-Based  Compensation  ("FAS 123").  The Company will  continue to
          account for its stock option plans in accordance  with the  provisions
          of APB 25, Accounting for Stock Issued to Employees.  Accordingly,  no
          compensation cost has been recognized in the financial  statements for
          qualifying grants issued pursuant to the Company's Stock Option Plan.

          The  following  table  presents  the activity of the  Company's  Stock
          Option Plan for the years ended December 31, 2001,  2000 and 1999. The
          number of options granted and  outstanding in 2001 rose  significantly
          due to the  conversion  of 302,800 NTS stock  options  into  2,775,000
          Nestor, Inc. stock options priced at $.55 pursuant to the merger.

<TABLE>

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

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

              <S>                                  <C>         <C>        <C>        <C>          <C>        <C>
              Outstanding beginning  of year       1,104,821   $1.28      1,628,316  $1.20        1,579,124  $1.22
              Granted                              3,445,840     .59        270,500    .94           62,500    .72
              Exercised                              174,127     .70         79,122   1.08              ---    ---
              Canceled                               425,322    1.23        714,873    .99           13,308   1.08
                                                  ----------             ----------              ----------
              Outstanding end  of year             3,951,212   $ .71      1,104,821  $1.28        1,628,316
                                                  ==========             ==========              ==========
              $1.20

              Options exercisable  at year end     2,148,630   $ .82        805,928  $1.42        1,322,786  $1.24
                                                  ==========             ==========               =========

              Weighted average fair value of
                options granted during the year   $      .51             $     0.75              $    0.42
                                                  ==========             ==========              =========
</TABLE>


              The following table presents weighted average price and life
              information about significant option groups outstanding at
              December 31, 2001.
<TABLE>

<CAPTION>

                                                 Options Outstanding                      Options Exercisable
                                    ------------------------------------------      ------------------------------
                                                      Weighted
                                                       Average       Weighted                           Weighted
                                      Number          Remaining       Average          Number           Averaged
                  Range of          Outstanding      Contractual     Exercise        Exercisable       Exercisable
               Exercise Prices      at 12/31/01     Life (Years)       Price         at 12/31/01          Price
               ---------------      -----------     ------------       -----         -----------          -----

                <S>                   <C>                <C>         <C>              <C>                <C>
                $ .55                 2,775,340          7.74        $  .55           1,066,508          $  .55
                $ .69 - $ .94           866,372          2.29           .72             790,372             .72
                $1.44- $ 1.50           122,000          2.03          1.49             105,500            1.50
                $2.20- $ 2.50           127,500          1.50          2.26             126,250            2.26
                $2.52- $ 2.89            60,000          2.42          2.76              60,000            2.76
                                     ----------      --------          ----         -----------            ----
                                     $3,951,212          6.09        $  .71          $2,148,630          $  .82
                                     ==========      ========        ======          ==========          ======
</TABLE>



          The  following  are the pro  forma net loss and net loss per share for
          the  years  ended  December  31,  2001,  2000  and  1999,  as  if  the
          compensation cost for the option had been determined based on the fair
          value at the grant date for grants in those  periods and  reflected in
          the financial statements:

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

          Net loss:
            As Reported          $ (1,565,054)    $ (2,994,574)    $  (836,824)
            Pro Forma            $ (1,588,733)    $ (2,573,487)    $(1,022,488)

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


          The effects on the years ended  December 31,  2001,  2000 and 1999 pro
          forma loss per share of expensing  the  estimated  fair value of stock
          options are not necessarily representative of the effects on reporting
          the results of operations for future years because  additional options
          will vest  subsequent to December 31, 2001 and the Company  expects to
          grant additional options in future years.

          The  fair  value  of  each  option  grant  was  estimated   using  the
          Black-Scholes  model  with  risk-free  interest  rates  on the date of
          grant,  which ranged from 4.2% to 6.8%. The Company has never declared
          nor paid  dividends  on its common stock and does not expect to in the
          foreseeable future. The volatility factor of the expected market price
          of the Company's common stock used in estimating the fair value of the
          grants was 1.059 and the expected life of the options was estimated as
          eight years.

          The Company, at the discretion of the Board of Directors,  has granted
          warrants from time to time,  generally in conjunction with the sale of
          equities.  During  2001,  the  Company  issued  3,980,712  warrants in
          connection with the NTS merger (Note 12) and converted a premerger NTS
          warrant. The following table presents warrants outstanding:

                                                      December 31,
                                       -----------------------------------------
                                           2001             2000          1999
                                           ----             ----          ----

          Eligible, end of year for
            exercise currently           9,071,407       4,999,040     5,000,580
                                        ==========       =========     =========

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

          The  warrants  outstanding  as of  December  31,  2001  are  currently
          exercisable  and expire at various dates through  October 5, 2005. The
          outstanding warrants entitle the owner to purchase one share of common
          stock for each  warrant,  at prices  ranging  from  $0.01 to $1.28 per
          share.

          During the year ended June 30, 1996,  the exercise  price of 1,000,000
          warrants  issued in the prior year was reduced from $1.50 to $.65. The
          maximum cumulative expense to be recorded by the Company upon exercise
          of these  warrants will be $850,000.  During the period ended December
          31,  1996,  the Company  began  recording,  on a prorated  basis,  the
          maximum expense over the remaining life of the warrants.  Accordingly,
          the Company  recognized  expenses  totaling $106,000 annually in 2001,
          2000 and 1999.


NOTE 9 -  SEGMENT INFORMATION:

           A.  Description of reportable segments
               Effective  with the  September  2001 merger,  the Company has two
               reportable  segments:  Financial  Solutions and Traffic  Systems.
               Segment  information for 1999 and 2000 has been omitted since all
               operations relate to a single segment.

               The  Financial  Solutions  division  produced and sold credit and
               debit  card  fraud  detection  products  and  database  marketing
               products to financial  institutions  and  processors of financial
               data. Subsequent to the ACI and ReD agreements (Notes 16 and 17),
               Financial Solutions revenues will be mainly a royalty stream from
               ACI. The Traffic Systems segment provides video-based  monitoring
               systems   and   services   for   traffic   safety,    mainly   to
               municipalities.

           B.  Measurement of segment profit or loss and segment assets
               The Company  evaluates  performance  based on profit or loss from
               operations  before income taxes.  The accounting  policies of the
               reportable segments are the same as those described in Note 1.

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

                                          Financial        Traffic
                                          Solutions        Systems       Totals
                                          ---------        -------       ------
               Year Ended
               December 31, 2001:
               Revenues                 $3,073,000   $  448,000     $ 3,521,000
               Segment profit (loss)     1,295,000    (2,779,000)    (1,484,000)
               Segment assets            2,516,000    19,515,000     22,035,000

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

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

               United States           $3,450,613    $ 2,841,558    $  4,196,612
               Belgium                       ---        276,799         151,200
               Japan                      46,844        117,532         685,850
               Canada                     23,467        416,533          81,117
                                    ------------     -----------     -----------
                                    $  3,520,924    $  3,652,422     $ 5,114,779
                                    ============     ===========     ===========

           E.  Revenues from Major Customers

               All revenues  presented are derived from the Company's  Financial
               Solutions segment with the exception of Customer G, which relates
               to the Traffic Systems  segment.  Customer A is ACI, a subsidiary
               of TSAI  (see  Notes 5, 7, 13 and 16).  In 2001,  2000 and  1999,
               revenues from ACI constituted 52%, 63% and 61%, respectively,  of
               total revenues.


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

               Customer A          $ 1,841,031      $ 2,299,208      $ 3,106,631
               Customer B                  ---          285,834              ---
               Customer C                  ---              ---          685,850
               Customer D              832,000              ---              ---
               Customer E                  ---          276,799              ---
               Customer F              285,536          256,876              ---
               Customer G              218,023              ---              ---


NOTE 10 - OTHER EXPENSE - NET:
          Other income (expense) as reflected in the consolidated  statements of
          operations consists of the following:

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

          Interest income           $   51,695      $    10,411      $   22,152

          Interest expense             (65,355)         (10,603)        (13,054)

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

          Loss on disposal of
            fixed assets (Note 4)      (66,666)             ---             ---
                                    -----------      ----------      ----------

          Other expense - net       $ (186,809)     $  (106,675)     $  (97,386)
                                    ===========     ============     ===========


NOTE 11 - INCOME TAXES:
          The Company  accounts for income  taxes using the  deferred  liability
          method as required by Financial  Accounting  Standards Board Statement
          No.  109,  Accounting  for Income  Taxes ("FAS  109").  Under FAS 109,
          deferred  tax  assets  and   liabilities   are  determined   based  on
          differences  between  the  financial  reporting  and the tax  basis of
          assets and  liabilities,  and are measured using the enacted rates and
          laws that will be in  effect  when the  differences  are  expected  to
          reverse.

          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  2001,  2000  or  1999.
          Significant  components of the Company's  deferred tax liabilities and
          assets as of December 31, 2001 and 2000 are as follows:

                                                         December 31,
                                             -----------------------------------
                                                    2001                  2000
                                                    ----                  ----
          Deferred tax liabilities:
            Property and equipment           $        5,000        $       3,000
            Deferred development costs                  ---               13,000
                                             --------------        -------------
          Total deferred tax liabilities              5,000               16,000

          Deferred tax assets:
            Accounts receivable                         ---                2,000
            Accrued expenses                        450,000              347,000
            Deferred income                             ---               35,000
            Tax credits                              18,000               17,000
            Net operating loss                   12,731,000            6,839,000
                                             --------------        -------------
          Total deferred tax assets              13,199,000            7,240,000

          Valuation allowance                   (13,194,000)         (7,224,000)
                                             ---------------       -------------
          Net deferred tax assets                     5,000               16,000
                                             --------------        -------------
          Net deferred tax balance           $          ---        $         ---
                                             ==============        =============


          In accordance with FAS 109, a valuation  allowance must be established
          until it is more likely than not that future benefits arising from net
          deferred  tax assets will be realized.  Realization  is not assured in
          future tax projections.

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

<CAPTION>

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

          <S>                                <C>                <C>               <C>
          Income (loss) before taxes
            and investment loss              $   (1,484,000)    $  (1,655,000)    $     645,000
                                             ===============    ==============    =============

          Tax at statutory rate of 34%       $     (505,000)    $    (563,000)    $     219,000
          State income tax (net of
            federal benefit)                        (49,000)         (110,000)           47,000
          Effect of permanent differences           (26,000)          (54,000)           36,000
          Valuation allowance                       580,000           727,000          (302,000)
                                             --------------     -------------     --------------

          Income tax expense                 $          ---     $         ---     $         ---
                                             ==============     =============     =============
</TABLE>

          The Company  has  available  at December  31,  2001,  $33,296,000  and
          $23,745,000 of net operating loss  carryforwards for federal and state
          purposes,  respectively.  Approximately $13,352,000 and $13,354,000 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 began to expire in 2002.

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


NOTE 12 - NESTOR TRAFFIC SYSTEMS, INC.:
          On March 25, 1999,  Nestor Traffic Systems,  Inc., a subsidiary of the
          Company,  sold a 37.5% common stock interest  (540,000 shares at $4.35
          per share) to a private group of investors for  $2,350,000 in cash and
          issued an option to purchase an  additional  17.5% of its common stock
          for  $1,750,000.  The option was  scheduled  to expire on January  31,
          2000. On November 30, 1999,  the Company,  NTS and the investor  group
          agreed to  accelerate  the  exercise  of the option and an  additional
          20.6%  interest  (710,000  shares  at $2.47  per  share)  was sold for
          $1,755,000. On June 23, 2000, NTS sold additional shares of its common
          stock to private investors for $2,025,000 (450,000 shares at $4.50 per
          share).  The investor  group includes three officers and a director of
          the Company and the subsidiary, who in the aggregate, have contributed
          $970,085 of cash invested on the same basis as third-party investors.

          As a result of the 1999  transactions,  the Company's  interest in NTS
          decreased to 41.9%,  prompting the change from consolidation to equity
          accounting  for the year ended  December 31, 1999.  The Company  owned
          34.62% of NTS at  December  31,  2000.  The  investment  in  affiliate
          balance  of $81,100 at  December  31,  2000,  reflects  the  Company's
          interest in NTS's equity.

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

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

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

          In  addition,  the Group  received  a warrant  right to  acquire up to
          2,980,712  additional  shares of common stock  exercisable at the same
          price at which  currently  outstanding  warrants of Nestor,  Inc.  are
          exercisable,  but only in the event the currently outstanding warrants
          are  exercised,  so as to maintain  their initial  ownership  interest
          percentage.  In  addition,  the Group  received  a warrant  to acquire
          1,000,000  shares of the Company's common stock at $1.28 per share for
          three years as dilution  protection  against  both the  Company's  and
          NTS's converted  employee stock options  outstanding at closing.  Such
          warrants  are  treated as  variable  and,  accordingly,  are  revalued
          quarterly with offsetting adjustments to additional paid-in capital.

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

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

          Fair values of assets acquired and liabilities assumed:

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

          The following  table presents the  consolidated  results of operations
          for the years ended  December  31, 2001 and 2000 on an  unaudited  pro
          forma  basis  as if the  merger  took  place at the  beginning  of the
          periods presented:

                                                   Years ended December 31,
                                                -----------------------------
                                                     2001              2000
                                                     ----              ----
                Revenues                        $  4,435,000     $  4,526,000
                Net Loss                        $  5,419,000     $  5,168,000
                Loss per share,
                 basic and diluted              $       0.13     $       0.10

          On June 29, 2001,  the  Financial  Accounting  Standards  Board issued
          Statement No. 142, Goodwill and Other Intangible  Assets,  eliminating
          the   amortization   of  goodwill   acquired   after  June  30,  2001.
          Accordingly,  the net loss and loss  per  share  amounts  above do not
          include  amortization of goodwill.  See Note 18, also. Goodwill is not
          expected to be deductible for income tax purposes.

          The unaudited pro forma results are for comparative  purposes only and
          do not  necessarily  reflect the results that would have been recorded
          had the merger  occurred at the beginning of the periods  presented or
          the results which might occur in the future.

          Presented  below is summarized  NTS financial  information:

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

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

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

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

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

          During 2001 and 2000, 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 and
          $567,000   in   2000.   Post-merger   changes   were   eliminated   in
          consolidation.


NOTE 13 - RELATED PARTY TRANSACTIONS:
          Herbert S. Meeker, a director of the Company,  is a partner in the law
          firm of  Baer,  Marks &  Upham,  which  the  Company  uses  for  legal
          services.  For the years ended  December 31, 2001,  2000 and 1999, the
          Company  recorded  an  expense  for Baer,  Marks & Upham of  $121,065,
          $4,874 and  $15,600,  respectively.  In  addition,  the  Company  also
          recorded  $369,501 of Baer,  Marks & Upham fees as  acquisition  costs
          related to the NTS merger.

          Bruce W.  Schnitzer,  who became a director  of the  Company in August
          1994, is Chairman of Wand Partners,  Inc., a private  investment  firm
          that the Company uses for management  consulting.  For the years ended
          December 31, 2001, 2000 and 1999, the Company  recorded an expense for
          Wand  Partners,  Inc. of $49,636,  $43,048 and $41,497,  respectively.
          Included in accrued  liabilities  at December 31, 2001,  2000 and 1999
          are  $179,167,  $141,243  and  $99,167,   respectively,  due  to  Wand
          Partners, Inc.

          During 1998,  TSAI,  the parent  company of ACI,  became a significant
          shareholder of the Company (Note 7). 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, 2001,  2000 and
          1999,  the Company  recorded  revenues of  $1,841,031,  $2,299,208 and
          $3,106,631,  respectively  from ACI.  At  December  31,  2001 and 2000
          accounts receivable included $0 and $639,013 due from ACI and unbilled
          were  $1,005,196 and  $3,184,924.  Also at December 31, 2001 and 2000,
          deferred  income included  $791,725 and $3,192,849  from ACI.  Further
          related party transactions with TSAI and ACI are discussed in Notes 5,
          7, 8, 9 and 16.

          See Note 12 for transactions with Nestor Traffic Systems, Inc.


NOTE 14 - COMMITMENTS AND CONTINGENCIES:
          The Company  maintains an office in Providence,  Rhode Island under an
          operating  lease dated April 1, 1998, as amended.  This lease provides
          for annual rentals of $195,000  through March 2001,  $201,500  through
          March 2002, and $208,000 through March 2003. Rent expense of $200,000,
          $195,000,  and $195,000 was charged to operations  for the years ended
          December 31, 2001, 2000 and 1999, respectively.

          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.

          NTS also leases office space in San Diego,  California.  The March 14,
          2001  operating  lease  calls  for  monthly  rent of  $12,050  through
          November  2001 then  increases  3.5%  annually  during the lease term,
          which expires January 31, 2005.  Rent expense was $43,800  post-merger
          in 2001.

          NTS entered into a Services  Agreement with EDS,  effective  August 1,
          2001,  under  which  EDS  will  perform  certain  citation  processing
          services  for NTS.  The  minimum  monthly  fee was $21,000 in 2001 and
          increased  to  $35,000  per  month in  2002.  Although  the  Agreement
          continues  through  July 31,  2011,  the parties  reserve the right to
          renegotiate the contract  payment terms based upon stipulated  average
          citation  volumes  commencing  in  2003.  If an  agreement  cannot  be
          reached,  either party may terminate the contract.  In certain  cases,
          termination by NTS may require a termination  fee of $100,000 in years
          one and two and such fee decreases $25,000 per year through year five.

          During 2000,  the Company began leasing  computer  equipment  under an
          operating  lease  agreement.  The  lease  provides  for  monthly  rent
          payments in arrears  over a three-year  term.  At the end of the lease
          term,  the Company may  purchase the  equipment at fair market  value,
          extend  the lease term or return  the  equipment.  The value of leased
          equipment  was $97,035 at December  31, 2001 and 2000 and rent expense
          was $40,134 in 2001 and $33,233 in 2000.

          On August 1, 1994, the Company signed a Financial  Advisory  Agreement
          with Wand Partners,  Inc. The terms of the Agreement specify that Wand
          Partners,  Inc. will provide consulting  services for a fee of $40,000
          per year, plus out-of-pocket  expenses.  The Agreement is in effect so
          long as Wand  Partners,  Inc. owns at least 500,000 shares of Nestor's
          Common Stock, or other equities which are convertible into that number
          of shares of Common Stock (See Note 13 - Related party transactions).

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

                           December 31, 2002         $   980,000
                           December 31, 2003             387,000
                           December 31, 2004             330,000
                           December 31, 2005             130,000
                           December 31, 2006              40,000
                           Thereafter                     40,000
                                                     -----------
                                                     $ 1,908,000


NOTE 15 - LITIGATION:
          On  October  6,  1998,  HNC  Software  Corp.  ("HNC"),  a  significant
          competitor  of the  Company's  in the  field  of  Financial  Services,
          obtained a patent titled "Fraud Detection Using  Predictive  Modeling"
          and began advising prospective customers of the Company of the patent.
          Upon review of the patent and  consideration of prior actions taken by
          HNC, the Company  initiated a lawsuit against HNC in the United States
          District  Court  in  Providence,  RI on  November  25,  1998  alleging
          violation  of  Sections  1  and  2 of  the  Sherman  Act  (antitrust),
          violation of the Rhode Island  Antitrust Act, patent  invalidity,  and
          infringement  of  Nestor's  patents   (infringement  claims  withdrawn
          January 10, 2000).

          On June 15, 1999,  HNC answered the lawsuit  denying the  allegations,
          bringing a counterclaim  alleging  infringement of the above described
          patent by the Company,  and seeking a declaration  of  invalidity  and
          unenforceability of one of the Company's patents. On the same day, HNC
          brought  suit in San  Diego,  CA against  ACI and its parent  alleging
          various causes of action  including  patent  infringement of the above
          described patent by the Company's PRISM product which ACI markets.  In
          April 2000,  HNC,  ACI and its parent  agreed to dismiss the  lawsuit.
          During 2000,  ACI requested that the Company  provide  indemnification
          for  approximately  $870,000 of its legal counsel  costs  pursuant the
          PRISM license  agreement  between ACI and the Company.  The Company is
          disputing the indemnification claim and therefore, no accrual has been
          established.

          The Company and HNC reached a mutually agreeable settlement on January
          16, 2001,  the terms of which are  confidential.  All claims have been
          dismissed. Costs associated with the suit were expensed as incurred.


NOTE 16-  ACI LICENSE AGREEMENT:
          On February 1, 2001, the Company entered into a license agreement with
          ACI  pursuant  to  which  ACI  was  granted  a  worldwide,  perpetual,
          non-revocable, non-transferable and non-exclusive license in the field
          of use of fraud detection  (including money  laundering  detection) in
          electronic payments. ACI may brand, customize, and extend the software
          products covered by the license  agreement as well as use the software
          programs as a development  platform to develop new  functional and new
          end-user products or applications  subject to the terms and conditions
          of the license. In return, ACI is fully responsible and liable for the
          provision of services to its  licensees.  Nestor,  Inc. had previously
          provided  support,  maintenance and  enhancements  for these products.
          This agreement replaces the April 28, 1998 license agreement with ACI.

          Under the new agreement, ACI paid a one-time license fee of $1,104,000
          for  source  code  license  rights to the  software  products,  and in
          addition,  agreed to pay an  ongoing  royalty  fee of 15% with a first
          year minimum of approximately  $475,000. The license granted to ACI is
          for products that  constituted a significant  portion of the Company's
          gross  revenues.  During the quarter ended March 31, 2001, the Company
          recorded the one-time  initial license fee of $1,104,000 in connection
          with this source code license.  Reported ACI revenues  have  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.

NOTE 17-  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 in connection with this agreement.  No ongoing revenues
          are expected to be realized from ReD.

NOTE 18-  RECENT ACCOUNTING PRONOUNCEMENTS:
          During  2001,  the  Financial   Accounting   Standards   Board  issued
          Statements  of  Financial   Accounting  Standards  No.  141,  Business
          Combinations,  No. 142, "Goodwill and Other Intangible Assets" and No.
          144 "Accounting for the Impairment or Disposal of Long-Lived  Assets,"
          effective for fiscal years  beginning  after December 15, 2001.  Under
          the new  rules,  goodwill  and  intangible  assets  deemed  to have an
          indefinite  lives will no longer be amortized,  but will be subject to
          annual  impairment  tests in  accordance  with the  Statements.  Other
          long-lived  assets will  continue to be  depreciated  or amortized and
          will  be  subject  to   impairment   tests   based  upon   events  and
          circumstances.

          The Company  will apply the new rules on  accounting  for goodwill and
          other intangible  assets and other long-lived  assets beginning in the
          first quarter of 2002. In accordance  with the  transitional  guidance
          rendered  in  SFAS  No.  142,  goodwill  arising  from  the  company's
          September  12,  2001  merger  with NTS  (Note  12) is not  subject  to
          amortization.  During 2002,  the Company will perform the first of the
          required impairment tests of goodwill as of January 1, 2002.

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




<PAGE>

<TABLE>

<CAPTION>

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




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

Allowances deducted from accounts receivable:

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

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

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

</TABLE>



<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  Commission not later than
          120 days following the end of the Company's fiscal year.

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

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

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

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

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

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




<PAGE>


                                                                        PART IV

Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K.
         ----------------------------------------------------------------

          (a)  The following documents are filed as part of this report:

               (1)  The  financial  statements  of the Company and  accompanying
                    notes,  as set  forth  in  the  contents  to  the  financial
                    statements annexed hereto, are included in Part II, Item 8.

                    Schedule II: Valuation and Qualifying Accounts and Reserves

                    All other schedules are omitted because such  information is
                    not applicable

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

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

          (b)  Reports on Form 8-K:

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

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

               On June 1, 2001,  the  Corporation  filed with the Securities and
               Exchange  Commission  a current  report on Form 8-K dated May 18,
               2001, which is hereby incorporated by reference.




<PAGE>


INDEX OF EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    10.39      License  Agreement  dated May 18,  2001  between  the Company and
               Retail  Decisions,  Inc.  filed as an  exhibit  to the  Company's
               current  report  on Form 8K dated  May 18,  2001  which is hereby
               incorporated by reference.

    10.40      Registration  Statement on form S-4 #333-63560 of the Company' is
               hereby incorporated by reference.

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

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


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

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

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