Exhibit 21.2







                              FINANCIAL STATEMENTS




                          NESTOR TRAFFIC SYSTEMS, INC.

                          (A Development Stage Company)




                                December 31, 2000


<PAGE>





                          NESTOR TRAFFIC SYSTEMS, INC.

                          (A Development Stage Company)


                                    CONTENTS







                                                                Page No.
                                                                --------

Independent Auditor's Report                                       3

Balance Sheets -
 December 31, 2000 and 1999                                        4

Statements of Operations -
 For the Years Ended December 31, 2000 and 1999                    5

Statements of Stockholders' Equity -
 For the Years Ended December 31, 2000 and 1999                    6

Statements of Cash Flows -
 For the Years Ended December 31, 2000 and 1999                    7

Notes to Financial Statements                                      8


<PAGE>









                         Report of Independent Auditors


The Board of Directors and Stockholders
   of Nestor Traffic Systems, Inc.

We have audited the accompanying balance sheets of Nestor Traffic Systems,  Inc.
(a development  stage company) as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

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

In our opinion, the 2000 and 1999 financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of Nestor  Traffic
Systems,  Inc. at December 31, 2000 and 1999,  and the results of its operations
and its cash flows for the years  then  ended,  in  conformity  with  accounting
principles generally accepted in the United States.

The accompanying  financial  statements have been prepared  assuming that Nestor
Traffic Systems,  Inc. will continue as a going concern. As discussed in Note 1,
the Company is a  development  stage  company that since  inception has expended
cash in excess of cash generated from operations.  Additionally, the Company has
a working  capital deficit and has not achieved  sufficient  revenues to support
future  operations   without  additional   financing.   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 11. 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.


                                                               ERNST & YOUNG LLP



Providence, Rhode Island
February 26, 2001




<PAGE>





                          NESTOR TRAFFIC SYSTEMS, INC.
                          (A Development Stage Company)

                                 Balance Sheets


                                     ASSETS
                                                           December 31,
                                                   ----------------------------
                                                       2000            1999
                                                       ----            ----
CURRENT ASSETS:
    Cash and cash equivalents                     $    54,690    $ 1,599,112
    Accounts receivable                                57,592         30,756
    Unbilled contract revenue                         109,673         20,000
    Inventory                                         158,691        442,493
    Other current assets                               85,273         31,561
                                                  -----------    -----------
      Total current assets                            465,919      2,123,922

Investment in leased equipment -
  net of accumulated depreciation                     487,031        138,961
Property and equipment at cost -
  net of accumulated depreciation                     161,321        156,997
Other assets                                           45,320          1,680
                                                  -----------    -----------

TOTAL ASSETS                                      $ 1,159,591    $ 2,421,560
                                                  ===========    ===========


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable and accrued expenses         $   593,383    $   394,324
    Due to affiliate                                  322,952        320,459
    Deferred income                                     8,998          8,998
                                                  -----------    -----------
      Total current liabilities                       925,333        723,781

Commitments and contingencies                            --             --

STOCKHOLDERS' EQUITY:
    Common stock, $.01 par value, authorized
      4,000,000 shares; issued and outstanding
      2,600,000 shares at December 31, 2000
      and 2,150,000 shares at December 31, 1999        26,000         21,500
    Additional paid-in capital                      9,599,371      7,554,446
    Deficit accumulated during
      the development stage                        (9,391,113)    (5,878,167)
                                                  -----------    -----------
      Total stockholders' equity                      234,258      1,697,779
                                                  -----------    -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $ 1,159,591    $ 2,421,560
                                                  ===========    ===========


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



<PAGE>



<TABLE>


                                 NESTOR TRAFFIC SYSTEMS, INC.
                                 (A Development Stage Company)

                                   Statements of Operations


<CAPTION>
                                                                              (Unaudited)
                                                                               Cumulative
                                                                           January 1, 1997 to
                                        Years Ended December 31,           December 31, 2000
                                   ---------------------------------       ------------------
                                        2000                1999
                                       -----                ----
<S>                                <C>                  <C>                 <C>
Revenue:
  Lease and service fees          $     79,295          $     18,474        $      107,030
  Product sales and
   engineering services                793,856               148,959             1,496,576
                                  ------------          ------------          ------------

    Total revenue                      873,151               167,433             1,603,606
                                  ------------          ------------          ------------

Operating Expenses:
  Engineering services               1,691,489               675,315             2,899,341
  Product costs                        681,742                36,644               862,589
  Research and development             714,812               905,880             3,066,922
  Selling and marketing                695,943               717,004             2,463,036
  General and administrative           640,926               321,456             1,777,949
                                  ------------          ------------          ------------

    Total operating expenses         4,424,912             2,656,299            11,069,837
                                  ------------          ------------          ------------


Loss from operations                (3,551,761)           (2,488,866)           (9,466,231)

Other income - net                      38,815                36,333                75,118
                                  ------------          ------------          ------------

Loss before income taxes            (3,512,946)           (2,452,533)           (9,391,113)

Income taxes                              --                    --                    --
                                  ------------          ------------          ------------

Net Loss                          $ (3,512,946)         $ (2,452,533)         $ (9,391,113)
                                  ============          ============          ============



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

</TABLE>



<PAGE>



<TABLE>


                                                    Nestor Traffic Systems, Inc.
                                                    (A Development Stage Company)


                                                 Statements of Stockholders' Equity

<CAPTION>

                                                                                               Deficit
                                                                                             Accumulated
                                                  Common Stock                               During (the)
                                              ----------------------         Additional      Development
                                                Shares       Amount        Paid-in Capital      Stage           Total
                                                ------       ------        ---------------      -----           -----

<S>                                           <C>             <C>           <C>             <C>             <C>
Issuance of Common Stock                          1,000       $     1       $    1,009      $      --       $     1,010
Capital contributed by Nestor, Inc.                --            --          1,565,780             --         1,565,780
Loss for the year ended December 31, 1997          --            --               --         (1,491,701)     (1,491,701)
                                             ----------       -------       ----------      -----------     -----------
Balance at December 31, 1997 (unaudited)          1,000       $     1       $1,566,789      $(1,491,701)    $    75,089

Capital contributed by Nestor, Inc.                --            --          1,904,156             --         1,904,156
Loss for the year ended December 31, 1998          --            --               --         (1,933,933)     (1,933,933)
                                             ----------       -------       ----------      -----------     -----------
Balance at December 31, 1998 (unaudited)          1,000       $     1       $3,470,945      $(3,425,634)    $    45,312

Issuance of Common Stock                      2,149,000        21,499        4,083,501             --         4,105,000
Loss for the year ended December 31, 1999          --            --               --         (2,452,533)     (2,452,533)
                                             ----------       -------        ----------      -----------     -----------
Balance at December 31, 1999                  2,150,000       $21,500       $7,554,446      $(5,878,167)    $ 1,697,779

Issuance of Common Stock                        450,000         4,500        2,020,325             --         2,024,825
Issuance of Warrants                               --            --             24,600             --            24,600
Loss for the year ended December 31, 2000          --            --               --         (3,512,946)     (3,512,946)
                                             ----------       -------       ----------      -----------     -----------
Balance at December 31, 2000                  2,600,000       $26,000       $9,599,371      $(9,391,113)    $   234,258
                                             ==========       =======       ==========      ===========     ===========


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

</TABLE>



<PAGE>



<TABLE>


                                              NESTOR TRAFFIC SYSTEMS, INC.
                                              (A Development Stage Company)

                                                Statements of Cash Flows

<CAPTION>
                                                                                                        (Unaudited)
                                                                                                         Cumulative
                                                                                                     January 1, 1997 to
                                                                Years Ended December 31,             December 31, 2000
                                                          ---------------------------------          ------------------
                                                               2000                1999
                                                               ----                ----
<S>                                                       <C>                   <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                $(3,512,946)          $(2,452,533)            $(9,391,113)
    Adjustments to reconcile net loss
      to net cash used by operating activities:
      Depreciation                                            102,509                51,033                 197,372
      Changes in assets and liabilities:
        Accounts receivable                                   (26,836)              (30,756)                (57,592)
        Unbilled contract revenue                             (89,673)              (11,659)               (107,722)
        Inventory                                             283,803              (210,880)                (39,232)
        Other assets                                          (72,752)              (19,186)               (101,868)
        Accounts payable and accrued expenses                 199,059               121,939                 469,614
        Deferred income                                          --                   8,998                   8,998
                                                          -----------           -----------             -----------

        Net cash used by operating activities              (3,116,836)           (2,543,044)             (9,021,543)
                                                          -----------           -----------             -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                          (66,333)             (140,967)               (257,944)
  Investment in leased equipment                             (388,571)             (142,336)               (530,907)
                                                          -----------           -----------             -----------

        Net cash used by investing activities                (454,904)             (283,303)               (788,851)
                                                          -----------           -----------             -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Due to affiliate                                              2,493               320,459                 322,952
  Capital investsments by affiliate - net                        --                    --                 3,412,307
  Proceeds from issuance of common stock - net              2,024,825             4,105,000               6,129,825
                                                          -----------           -----------             -----------

        Net cash provided by financing activities           2,027,318             4,425,459               9,865,084
                                                          -----------           -----------             -----------

Net change in cash and cash equivalents                    (1,544,422)            1,599,112                  54,690
Cash and cash equivalents - beginning of period             1,599,112                 --                      --
                                                          -----------          -----------             -----------

Cash and cash equivalents - end of period                 $    54,690           $ 1,599,112             $    54,690
                                                          ===========           ===========             ===========

SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid                                             $        51           $      --               $        51
                                                          ===========           ===========             ===========

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

Non-cash transaction:
Net assets transferred from affiliate                     $      --             $      --               $    58,639
                                                          ===========           ===========             ===========


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. ORGANIZATION

          Nestor Traffic Systems,  Inc. (the "Company") was organized on January
          1, 1997 in Delaware as a  wholly-owned  subsidiary of Nestor,  Inc. to
          exploit and develop  certain  patent  rights and  know-how,  which the
          Company  licenses from Nestor,  Inc.  During 1999,  the Company issued
          common  stock  to  a  group  of  private  investors  in  two  separate
          transactions  aggregating  $4,105,000,  representing  a  58.1%  equity
          ownership in the Company.  In June 2000,  the Company sold  additional
          shares  of its  common  stock to  private  investors  for  $2,025,000,
          bringing  their equity  ownership  to 65.38%.  Nestor,  Inc.  owns the
          remaining 34.62% equity of the Company and accounts for the investment
          using equity accounting.  As discussed in Note 11, in January 2001, an
          agreement  in  principle  was reached to combine  the  Company  into a
          Nestor, Inc. subsidiary,  with Nestor, Inc. owning 100% of the Company
          post-merger.  The Company's principal office is located in Providence,
          RI, and it maintains a branch office in Irvine, CA.

          The  Company  is a  development  stage  company  and has  had  limited
          revenues.  Activities  through December 31, 2000 consist  primarily of
          raising capital,  research and development,  establishing supplies and
          production processes, and sales and marketing.

          The financial  statements have been prepared on a going-concern basis.
          From its inception through December 31, 2000, the Company has expended
          cash in excess of cash generated from  operations.  Additionally,  the
          Company has a working capital deficit and has not achieved  sufficient
          revenues to support future operations  without  additional  financing.
          Management is in the process of identifying  new customers and raising
          additional  capital to support its operations  and provide  sufficient
          liquidity to enable it to continue as a going concern (Note 11). These
          conditions  raise  substantial  doubt about the  Company's  ability to
          continue as a going concern.  The financial  statements do not include
          any   adjustments   that  might   result  from  the  outcome  of  this
          uncertainty.

          B. CASH EQUIVALENTS

          The Company  considers  all highly liquid debt  instruments  purchased
          with an original maturity of 90 days or less to be cash equivalents.

          C. DEPRECIATION

          Depreciable  assets are recorded at cost.  Depreciation is provided on
          the straight-line method over the estimated useful lives or lease term
          of the respective assets.

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

          D. REVENUE RECOGNITION

          Revenue is derived  mainly  from the sale or lease of  products  which
          incorporate the Company's  software and the delivery of services based
          upon such products.  Lease and service fees include  software  license
          and  processing  service  fees tied to  citations  issued to red-light
          violators.  The Company  provides  equipment,  in some instances under
          operating  lease  agreements,  and engineering  services  ranging from
          installation,  training, and basic consulting to software modification
          and  customization  to  meet  specific  customer  needs.  Postcontract
          customer  support  includes   maintenance   agreements.   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.

          Revenue has been recognized as follows:

          Product  Sales - The  Company  recognizes  the  revenue  allocable  to
          product sales upon delivery of the 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.  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. Product returns or exchanges are
          charged to operations as incurred.

<PAGE>

          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  the  Company'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  related
          tickets.

          Contract  Accounting - For arrangemetns 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.  Certain  contracts  include penalty
          provisions relating to timely performance and delivery.  Penalties are
          charged to operations as incurred.

          Postcontract   Customer   Support  -  Revenue  is   recognized   on  a
          straight-line basis over the period provided.

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

          E. 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.  Management  believes  the  allowance  carried for doubtful
          accounts  receivable is adequate to cover potential losses  associated
          with uncollectible accounts receivable.

          F. 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, 2000 and
          1999:

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

          Work-in-progress       $       138,445           $        325,171
          Finished goods                  20,246                    117,322
                                 ---------------           ----------------
          Total inventory        $       158,691           $        442,493
                                 ===============           ================

          G. ESTIMATES

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

          H. CHANGE IN PRESENTATION

          Certain December 31, 1999 amounts have been reclassified to conform to
          the December 31, 2000 presentation.


NOTE 2 - INVESTMENT IN LEASED EQUIPMENT:

          In 1999, the Company  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  $53,988 in 2001 and  $49,489  in 2002,  totaling
          $103,477  over the  remaining  term of the  lease.  In  addition,  the
          agreement  calls for  software  license  and  processing  fees tied to
          citations  issued to red light  violators,  which  totaled  $25,307 in
          2000.
<PAGE>

          At December 31, 2000,  the Company has five  contracts in process with
          anticipated   acceptance  under  operating  lease  agreements   having
          36-month terms.

          Equipment and installation  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.

                                                       December 31,
                                                -------------------------
                                                   2000           1999
                                                   ----           ----
          Equipment under operating leases:
               Work-in process                  $  388,571    $     --
               Installed and accepted              142,336       142,366
                                                ----------    ----------
                                                   530,907       142,336

          Less: Accumulated depreciation           (43,876)       (3,375)
                                                ----------    ----------

          Net investment in leased equipment    $  487,031    $  138,961
                                                ==========    ==========

NOTE 3 - PROPERTY AND EQUIPMENT AT COST-NET:


                                                 December 31,
                                            ---------------------   Useful Life
                                               2000        1999    or Lease Term
                                               ----        ----    -------------

          Computer equipment               $ 231,284    $ 184,449     5 years
          Demonstration equipment            101,315       93,244     3 years
          Leasehold improvements              11,426         --       5 years
                                           ---------    ---------
                                             344,025      277,693
          Less:  Accumulated depreciation   (182,704)    (120,696)
                                           ---------    ---------
                                           $ 161,321    $ 156,997
                                           =========    =========

NOTE 4 - DUE TO AFFILIATE:

          During the period January 1, 1999 through March 31, 1999, Nestor, Inc.
          advanced the Company financing to cover operating  expenses  amounting
          to approximately $550,000. Of this advance, $275,000 was reimbursed to
          Nestor,  Inc. in March 1999, and the balance was paid in January 2001.
          Included  in  due  to   affiliate  at  December  31,  2000  is  $9,548
          representing  royalties  for 2000 and the December  2000  facility and
          administrative fee of $47,267 (Note 9).  Periodically,  other advances
          are made on behalf of the  Company by  Nestor,  Inc.,  primarily  as a
          result of shared accounts.  These amounts are due and paid as invoiced
          and are also included in the due to affiliate balance.


NOTE 5 - COMMON STOCK:

          On March 25, 1999, the Company sold a 37.5% common stock interest 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 and the investor group agreed to accelerate the
          exercise of the option and the investor group  purchased an additional
          20.6% ownership in the Company for  $1,755,000.  On June 23, 2000, the
          Company  sold  additional  shares  of  its  common  stock  to  private
          investors for $2,025,000,  bringing their equity  ownership to 65.38%.
          The  investor  group  includes  three  officers  and a director of the
          Company  who,  in the  aggregate,  have  contributed  $970,085 of cash
          invested on the same basis as third-party investors.

          As  discussed in Note 11, in January  2001,  an agreement in principle
          was  reached to combine the Company  with a Nestor,  Inc.  subsidiary,
          with Nestor,  Inc.  acquiring a 100% equity interest in the Company in
          exchange for Nestor  common stock.  If the merger does not occur,  new
          investors have the option of investing $8,000,000 in the Company for a
          50% common equity position.
<PAGE>


NOTE 6 - OPTIONS:

          On May 5,  1999,  the  Company  adopted  the 1999  Stock  Option  Plan
          providing  for the  granting  of  options  to  purchase  shares of the
          Company's  common  stock at a price equal to the fair market  value of
          the common  stock at the date of grant as  determined  by the Board of
          Directors.  The 1999 Stock  Option  Plan has  authorized  the grant of
          options to employees for up to 400,000 shares of the Company's  common
          stock.  Options are  exercisable  for up to ten years from the date of
          grant.

          As discussed  in Note 11, an  agreement  in  principle  was reached to
          combine the Company and Nestor,  Inc.,  with  Nestor,  Inc.  being the
          surviving  entity.  Options  outstanding at the  combination  date are
          expected to be exchanged for comparable  Nestor,  Inc.  options at the
          exchange ratio in effect on the combination date.

          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 plan 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, 2000 and 1999:

<TABLE>

<CAPTION>
                                                         2000                         1999
                                              -------------------------     -----------------------
                                                              Weighted                    Weighted
                                                               Average                     Average
                                                              Exercise                    Exercise
                                                   Shares       Price          Shares       Price
                                                   ------       -----          ------       -----

          <S>                                  <C>              <C>          <C>            <C>
          Outstanding beginning of year          87,000         $5.00            --         $ --
          Granted                               109,000          5.00          90,000        5.00
          Exercised                                --             --             --           --
          Canceled                                1,000          5.00           3,000        5.00
                                               --------                      --------
          Outstanding end of year               195,000         $5.00          87,000       $5.00
                                               ========                      ========

          Options exercisable at year end        56,200         $5.00          17,400       $5.00
                                               ========                      ========

          Weighted average fair value of
           options granted during the year     $   1.87                      $   1.42
                                               ========                      ========
</TABLE>


          All options granted and outstanding  have a ten-year life and vest 20%
          upon issuance and each anniversary thereafter, until fully vested.

          Below is the pro forma net loss for the years ended  December 31, 2000
          and  1999,  as if the  compensation  cost  for  the  option  had  been
          determined based on the fair value at the grant date:


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

          Net Loss:
                 As Reported        $ (3,512,946)          $  (2,452,533)
                 Pro Forma          $ (3,566,961)          $  (2,468,730)



          The fair value of each option  grant was  estimated  using the Minimum
          Value method with risk-free interest rates on the date of grant, which
          ranged  from 5.3% to 6.8%.  The Company  has never  declared  nor paid
          dividends  on  its  common  stock  and  does  not  expect  to  in  the
          foreseeable future.


NOTE 7 - OTHER INCOME - NET:

          Other income as reflected in the  statements  of  operations  consists
          primarily of interest income realized on short-term investments.

<PAGE>

NOTE 8 - INCOME TAXES:

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

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

                                                        December 31
                                             --------------------------------
                                                  2000               1999
                                                  ----               ----
          Deferred tax assets:
          -------------------
            Accrued expenses                 $     48,000       $     25,000
            Net operating loss                  3,694,000          2,317,000
                                             ------------       ------------
          Total deferred tax assets             3,742,000          2,342,000

          Valuation allowance                  (3,742,000)        (2,342,000)
                                             ------------       ------------
          Net deferred tax assets                    --                 --
                                             ------------       ------------
          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:

                                                  2000                 1999
                                                  ----                 ----

          Loss before taxes                  $  (3,513,000)      $  (2,453,000)
                                             =============       =============

          Tax at statutory rate of 34%       $  (1,195,000)      $    (834,000)
          State income tax (net of
            federal benefit)                      (208,000)           (145,000)
          Effect of permanent differences            3,000               3,000
          Valuation allowance                    1,400,000             976,000
                                             -------------       -------------

          Income tax expense                 $        --       $          --
                                             =============       =============


          The Company has  available  at December 31,  2000,  $9,248,000  of net
          operating loss  carryforwards  for federal and state  purposes.  These
          loss  carryforwards  may be applied  against future taxable income and
          begin  to  expire  in 2012 for  federal  purposes  and 2002 for  state
          purposes.  The Company has had numerous equity transactions during its
          history.  These  transactions  may  affect  the  Company's  ability to
          utilize  these  net  operating  loss   carryforwards  due  to  certain
          provisions contained in IRC Section 382.


NOTE 9 - RELATED PARTY TRANSACTIONS:

          On January 1, 1999, the Company entered into an exclusive license with
          Nestor, Inc. 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 the Company's products.  The license provides for
          royalties  to Nestor,  Inc.  starting in 2000 equal to 5% of the gross
          margin (revenues less third-party  direct cost of sales) 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 Company recorded  royalties of $9,548
          for 2000 and such amount is included in due to  affiliate  at December
          31, 2000. No royalties were due or payable in 1999.
<PAGE>

          The Company uses facility and administrative services of Nestor, Inc.,
          including  use of office  space and  executive,  accounting  and other
          support personnel.  The Company  reimburses  Nestor,  Inc. monthly for
          these  services at a rate of $39,913  for up to 15 Company  employees,
          and $47,267 for above 15  employees.  These fees will be replaced with
          direct  expenses as the Company  moves into its own office space (Note
          10) and develops an independent  executive and support staff. Facility
          and  administrative  fees charged to the Company were $567,000 in 2000
          and  $479,000 in 1999.  Included in due to  affiliate  at December 31,
          2000 is $47,267 for December 2000 fees.


NOTE 10 - COMMITMENTS AND CONTINGENCIES:

          The Company  maintains a sales and support office in California  under
          an operating lease dated July 1, 1999. This lease provides for monthly
          rentals of $650,  and can be terminated  upon 60 days advance  notice.
          Total expense under the lease was $7,800 in 2000 and $3,900 in 1999.

          The Company  entered into an  operating  lease dated June 21, 2000 for
          office and warehouse  facilities in Rhode Island.  This lease provides
          for monthly  rentals of $10,360 for August 2000  through July 2003 and
          then increases to $10,800  monthly through July 2005. Rent expense for
          this lease was $51,800 in 2000.

          On October 14, 1999,  the Company  entered into an  engagement  letter
          with FAC Equities, a division of First Albany Corporation,  to provide
          financial  advisory  and  investment  banking  services to the Company
          relating to the potential sale of additional  equity securities by the
          Company.  The Company issued a warrant to FAC to purchase up to 10,000
          shares  of the  company's  common  stock  at $.01 per  share  (expires
          October 14, 2004) and  recorded  deferred  financing  costs of $24,600
          associated with these warrants in 2000.  While this agreement  expired
          in July  2000  without  closing  an equity  transaction,  FAC is still
          entitled  to a fee  equal to 5% of the gross  proceeds  in cash plus a
          warrant equal to 3% of the common shares, or equivalents,  sold in any
          transaction  consumated  prior  to July  13,  2002  with  an  investor
          identified by FAC.

NOTE 11 - SUBSEQUENT EVENTS:

          In January  2001, an agreement in principle was reached to combine the
          Company and Nestor,  Inc., by merging the Company into a  wholly-owned
          subsidiary of Nestor,  Inc., with Nestor,  Inc., in effect,  being the
          surviving  entity.  The  combination is subject to certain  conditions
          including  a  fairness  opinion  of  the  transaction  by a  qualified
          investment company and approval by the shareholders of both companies.

          On January 9, 2001,  the  Company  and  Nestor,  Inc.  entered  into a
          secured  note  agreement  with  NTS  Investors,  LLC  (an  independent
          investment group ("Group")).  The Group loaned the Company  $4,000,000
          as of  February  1,  2001 with  principal  and  interest  at 8% due on
          December 31,  2001.  The note  contains  various  covenants  including
          restrictions on the use of proceeds and payments to Nestor, Inc. It is
          secured by the Company's assets.

          Upon  consummation of the combination  contemplated  above,  the Group
          will convert the note to equity and increase its total  investment  to
          $8,000,000 in exchange for approximately 16,756,000 shares (33.34%) of
          Nestor,  Inc. common stock, the Company's  current  shareholders  will
          receive  approximately  15,580,000 shares (31%) of Nestor, Inc. common
          stock  and  current   Nestor,   Inc.   shareholders   would  then  own
          approximately 17,922,000 shares (35.66%).

          If the  combination is not consummated on or before December 31, 2001,
          the Group may elect on or before  January 31, 2002 to convert the note
          into the Company's  common stock for up to a 25% fully diluted  equity
          interest and reacquire of up to an additional 25% fully diluted equity
          interest for an additional $4,000,000.

          In the event that the combination is completed, the Group will receive
          the right to acquire  additional  common stock of Nestor,  Inc. at the
          same price at which  warrants of Nestor,  Inc. are  exercised so as to
          maintain their ownership interest percentage.  In addition,  the Group
          will  receive the option to acquire up to  1,000,000  shares of Nestor
          common stock at $.75 per share for three years as dilution  protection
          against both Nestor Inc.'s and the Company's  converted employee stock
          options outstanding.