NESTOR INC, DEF 14A, 1997-04-07

NESTOR INC
DEF 14A, 1997-04-07
PREPACKAGED SOFTWARE

Previous: SUNRISE MEDICAL INC, SC 13G, 1997-04-07

Next: INVESTORS TITLE CO, DEF 14A, 1997-04-07

NESTOR, INC.
One Richmond Square
Providence, Rhode Island 02906
(401) 331-9640

April 8, 1997

To Our Stockholders:

You are cordially invited to attend the annual meeting
of stockholders of Nestor, Inc. (the "Company") to be held at the
DAYS HOTEL, located at 220 INDIA STREET, PROVIDENCE, RI, on
Tuesday, May 6, 1997, at 1:00 p.m., local time. The accompanying
Notice of Annual Meeting of Stockholders and proxy statement
describe the matters to be acted upon at the annual meeting.

A proxy card is also enclosed. Whether or not you plan
to attend the annual meeting, it is important that your shares be
represented and voted at the annual meeting. Accordingly, after
reading the enclosed proxy statement, you are urged to complete,
date, sign and return the enclosed proxy in the envelope
provided, which requires no postage if mailed in the United
States. If you attend the annual meeting, you may then revoke
your proxy by voting in person.

We look forward to greeting personally as many of our
stockholders as possible at the annual meeting.

Sincerely yours,

/s/ David Fox
President and Chief Executive
Officer

Directions to Days Hotel:
Function Room: Bayview

South (from New North (from Boston) East (from Cape Cod)
York) 95 South 195 West
95 North 195 East (Cape Cod) Exit 2 (South Main
195 East (Cape Cod) Exit 3 (Gano Street) Street Exit)
Exit 3 (Gano Street) Left off exit ramp You will see a large
Left off exit ramp Second right into orange sign for
Second right into hotel parking lot Wickenden Street
hotel parking lot Take left on to
Wickenden and
follow to Gano
Street
Take right on to
Gano Street
Go under overpass
and take second
right into parking
lot.

NESTOR, INC.
One Richmond Square
Providence, Rhode Island 02906
(401) 331-9640

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on May 6, 1997

To the Stockholders of Nestor, Inc.:

NOTICE IS HEREBY GIVEN that the annual meeting of the
stockholders of Nestor, Inc., a Delaware corporation (the
"Company"), will be held at the DAYS HOTEL located at 220 India
Street, Providence, Rhode Island, on May 6, 1997, at 1:00 p.m.
local time, to act upon the following:

1. To consider and vote upon the election of eight
directors, each to hold office until the next annual meeting and
until their successors are elected and qualified;

2. To approve the 1997 Incentive Stock Option Plan

3. To approve the selection of independent auditors
for the Company for the period ending December 31, 1997; and

4. To transact such other business as may properly
come before the meeting or any adjournments or postponements
thereof.

Only stockholders of record as of the close of business
on March 21, 1997, will be entitled to vote at the meeting.

By Order of the Board of Directors,

/s/ Herbert S. Meeker, Secretary

Providence, Rhode Island
April 8, 1997

IMPORTANT: THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES
OF COMMON STOCK AND SERIES B, D, F, G and H CONVERTIBLE PREFERRED
STOCK, VOTING AS A GROUP, MUST BE REPRESENTED AT THE ANNUAL
MEETING IN PERSON OR BY PROXY IN ORDER TO HAVE A QUORUM.
THEREFORE, WE URGE YOU TO COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING IN PERSON. IF YOU ATTEND THE MEETING,
YOU MAY THEN REVOKE YOUR PROXY BY VOTING IN PERSON.

PROXY STATEMENT

NESTOR, INC.
One Richmond Square
Providence, Rhode Island 02906
(401) 331-9640

ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 6, 1997

This proxy statement is being furnished to holders of
shares of (i) common stock, par value $.01 per share (the "Common
Stock") and (ii) the Series B, D, F, G and H Convertible
Preferred Stock, par value $1.00 per share (the "Preferred
Stock"), of Nestor, Inc., a Delaware corporation (the "Company"),
in connection with the solicitation of proxies by the Company's
Board of Directors for use at the annual meeting of stockholders
to be held May 6, 1997, at 1:00 p.m. local time at the DAYS HOTEL
located at 220 India Street, Providence, Rhode Island. This
proxy statement and the enclosed form of proxy are first being
mailed on or about April 8, 1997 to stockholders of the Company
entitled to vote.

PROXIES

The shares represented by each properly executed and
dated proxy which is not revoked as set forth below will be voted
at the annual meeting in accordance with the instructions given.
If no instructions are given on the proxy, the proxy will be
voted FOR each of the nominees for director listed herein, FOR
the approval of the 1997 Incentive Stock Option Plan, and FOR the
approval of the selection of independent auditors and, in the
discretion of the proxy holders, on such other business as may
properly come before the annual meeting or any adjournments or
postponements thereof, as further described herein.

REVOCABILITY OF PROXIES

A proxy executed in the form enclosed may be revoked at
any time prior to its exercise by notifying in writing the
Secretary of the Company of such revocation at the Company's
principal executive offices, by delivering a duly executed proxy
bearing a later date or by attending the annual meeting and
voting in person.

PERSONS MAKING THE SOLICITATION

The accompanying proxy is being solicited on behalf of
the Company's Board of Directors. In addition to mailing the
proxy materials, solicitation may be made in person or by
telephone or telegraph by directors, officers or regular
employees of the Company, none of whom will receive additional
compensation in connection with such solicitation. The expense
of the solicitation of proxies for the annual meeting will be
borne by the Company. The Company will request banks, brokers
and other nominees to forward proxy materials to beneficial
owners of the Common Stock and Preferred Stock held by them and
will reimburse such banks, brokers and other nominees for their
reasonable out-of-pocket expenses in doing so.

VOTING SECURITIES

The Common Stock and the Preferred Stock are the only
outstanding classes of securities of the Company entitled to vote
at the meeting. Holders of record of the Common Stock and the
Preferred Stock at the close of business on March 21, 1997, (the
"Record Date") will be entitled to vote on the matters to be
voted upon at the annual meeting. At the close of business on
the Record Date, 8,915,741 shares of the Common Stock, 1,595,000
shares of Series B Preferred Stock, 3,402 shares of Series F, G
and H Preferred Stock and 175,071 shares of Series D Preferred
Stock were outstanding and entitled to vote as a group at the
meeting.

The 3,402 shares of Series F, G and H Preferred Stock
are convertible subject to adjustment into an aggregate of
2,707,288 shares of Common Stock and each holder thereof is
entitled to vote a number of shares equal to the greatest number
of whole shares of Common Stock into which the holders thereof
could be converted at the Record Date. The holders of shares of
Common Stock and Series B and Series D Convertible Preferred
Stock, which are convertible on a share for share basis, are
entitled to one vote per share of Common Stock held or into which
the Series B and Series D Preferred Stock could be converted.

The presence, in person or by proxy, of the holders of
a majority of the outstanding shares of the Common Stock and
Preferred Stock voting as a group will constitute a quorum for
the transaction of business at the annual meeting.

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 21, 1997,
the beneficial ownership of shares of the Common Stock and
Preferred Stock of (i) any person who is known by the Company to
own more than 5% of the voting securities of the Company, (ii)
the Chief Executive Officer and each of the Company's other four
most highly compensated executive officers whose salary and bonus
exceed $100,000 for the calendar year ended December 31, 1996
(collectively, the "Names of Executive Officers"), (iii) each
director, and (iv) all directors and Executive Officers of the
Company as a group. Except as otherwise herein indicated, the
Company believes, based on information furnished by such owners,
that the beneficial owners of shares of the Company's Common and
Preferred Stock described below have sole investment voting power
with respect to such shares, subject to any applicable community
property laws:
Name and address Amount and nature of
of beneficial owner beneficial ownershipPercent of class

Leon Cooper 932,320 (1) 5.6
49 Intervale Road
Providence, RI

Charles Elbaum 1,060,819 (1) 6.3
85 Lorraine Ave.
Providence, RI

David Fox 713,074 (2) 4.3
265 West Trail
Stamford, CT

Herbert S. Meeker 263,113 (3) 1.6
115 East 35th St.
New York, NY

Reliance Group 872,078 5.2
Holdings, Inc.
Park Avenue Plaza
New York, NY

Jeffrey B. Harvey 109,592 (4) .7
114 Woodbury Drive
Amherst, New York 14226

Bruce W. Schnitzer 5,222,609 (5) 31.2
471 Broadway
New York, New York 10013

Thomas F. Hill 130,000 (6) .8
320 East 57th Street
New York, New York 10022

Douglas L. Reilly 191,261 (7) 1.1
9 Island View Road
Narragansett, RI 02882

Christopher L. Scofield 124,763 (7) .8
38 Meadow Lane
Barrington, RI 02806

Michael T. Glier 87,500 (7) .5
74 Southwest Avenue
Jamestown, RI 02835

Sushmito Ghosh 62,908 (7) .4
25 Brookway Road
Providence, RI 02906

Sam Albert 17,500 (8) .1
27 Kingwood Road
Scarsdale, NY 10583

All executive officers 9,925,719 (9) 59.4
and directors as a group
(16 persons)

____________________________________

(1)Includes 60,000 shares of Series B Convertible Preferred
Stock.

(2)Includes 318,000 shares of Common Stock which he may acquire
on a fully vested basis upon the exercise of options granted
under the Company's incentive stock option plan and 20,000
shares of Series B Convertible Preferred Stock.

(3)Includes 7,500 shares of Common Stock which Mr. Meeker may
acquire on a fully vested basis upon the exercise of options
granted by the Company

(4)Includes 100,000 shares of Series B Convertible Preferred
Stock, and 7,500 shares of common stock which may be acquired
on a fully vested basis.

(5)Bruce W. Schnitzer is the Chairman and owns 66% of the
outstanding common stock of Wand (Nestor) Inc., a Delaware
corporation, which, as a general partner, controls
Wand/Nestor Investments L. P., Wand/Nestor Investments II L.
P. and Wand/Nestor Investments III L.P., Delaware limited
partnerships, which purchased an aggregate of 20,000 shares
of Series D Convertible Preferred Stock (convertible into
shares of Common Stock on a share-for-share basis after
January 1, 1996), an aggregate of 1,444 shares of Series E
Convertible Preferred Stock (convertible, subject to
adjustment into 1,088,817 shares of Common Stock), an
aggregate of 599 shares of Series F Convertible Preferred
Stock (convertible, subject to adjustment into 520,250 shares
of Common Stock), an aggregate of 777 shares of Series G
Convertible Preferred Stock (convertible, subject to
adjustment into 659,100 shares of Common Stock), an aggregate
of 2,026 shares of Series H Convertible Preferred Stock
(convertible, subject to adjustment into 1,527,938 shares of
Common Stock), 178,781 shares of Common Stock, and Common
Stock Purchase Warrants to acquire 2,109,040 shares of
Common Stock of the Company in several private placement
transactions. Bruce W. Schnitzer disclaims beneficial
ownership of these securities except to the extent of his
"pecuniary interest," as such term is defined in Rule 16a-1
of the Securities Exchange Act, therein as owner of a
10.7103% limited partnership interest in Wand/Nestor
Investments L.P. and as the owner of 66% of Wand (Nestor)
Inc.'s 1% general partnership interest in Wand/Nestor
Investments L. P. The Series E Convertible Preferred Stock
is held by holders subject to the Bank Holding Company Act of
1958, as amended, and have no voting rights.

Bruce W. Schnitzer is the Chairman and owns 66% of the
outstanding Common Stock of Wand Partners Inc., a Delaware
corporation, which, as general partner controls Wand Partners
L. P., a Delaware limited partnership, which has been granted
by the Company a Common Stock Fee Purchase Warrant to acquire
207,500 shares of Common Stock of the Company at a price of
$2.00 per share. Bruce W. Schnitzer disclaims beneficial
ownership of this Warrant except to the extent of his
"pecuniary interest," as defined in Rule 16a-1, therein, as
the indirect owner of a 33% partnership interest in Wand
Partners L. P.

(6)Includes a Common Stock Fee Purchase Warrant to acquire
130,000 shares of the Common Stock of the Company exercisable
until August 1, 2004, at a price of $2.00 per share issued to
Hill & Partners of which Mr. Hill is President and sole
owner.

(7)Includes 121,500, 123,750, 87,500 and 62,625 shares of Common
Stock which Messrs. Reilly, Scofield, Glier and Ghosh,
respectively, may acquire on a fully vested basis upon the
exercise of options granted under the Company's Incentive
Stock Option Plan.

(8)Includes 17,500 shares of Common Stock which Mr. Albert may
acquire on a fully vested basis upon exercise of options
granted by the Company.

(9)(i) Includes 883,500 shares of Common Stock of the Company
which may be acquired on a fully vested basis upon the
exercise of the options granted to employees of the Company
under the Company's Incentive Stock Option Plan, (ii) 240,000
shares of Series B Convertible Preferred Stock owned by four
officers and directors of the Company, (iii) 2,727,288 shares
of Common Stock which may be acquired upon the exercise of
Series D, F, G and H Convertible Preferred Stock owned by
various limited partnerships and whose general partners'
chairman serves as a director of the Company, (iv) 2,446,540
shares of Common Stock which may be acquired upon the
exercise of Warrants issued to Wand (Nestor), Inc., Wand
Partners, Inc. and one director.

ELECTION OF DIRECTORS

At the Annual Meeting, eight directors will be elected
to hold office until their successors have been duly elected and
qualified as provided in the Company's Certificate of
Incorporation and By-Laws. The following persons have consented
to be nominated and, if elected, to serve as directors of the
Company: Sam Albert, Leon N Cooper, Charles Elbaum, David Fox,
Jeffrey B. Harvey, Thomas F. Hill, Herbert S. Meeker and Bruce W.
Schnitzer. None of the nominees is related by blood, marriage or
adoption to any other director, executive officer or nominee.

Directors and Executive Officers

The following table sets forth information, regarding
the directors, nominees and executive officers of the Company:

Director/ Capacities
Officer in which
Name Age Since Served

Sam Albert 63 1991 Director

Leon N Cooper 67 1983 Co-Chairman and Director

Charles Elbaum 70 1983 Co-Chairman and Director

David Fox 61 1983 President, Chief
Executive Officer
and Director

Jeffrey B. Harvey 47 1993 Director

Thomas F. Hill 51 1994 Director

Herbert S. Meeker 71 1983 Secretary and Director

Bruce W. Schnitzer 52 1994 Director

Nigel P. Hebborn 38 1996 Chief Financial Officer

Sushmito Ghosh 38 1995 Vice President
Financial Solutions

Michael T. Glier 48 1992 Vice President
Intelligent Sensors

Thomas Halket 48 1993 Assistant Secretary

Kevin C. Hughes 43 1991 Vice President Finance &
Administration

Douglas L. Reilly 44 1983 Senior Vice President
Strategic Analysis &
Technology

Christopher Scofield 40 1989 Vice President
Nestor Interactive

Sam Albert became a Director of the Company as of April
1991. Mr. Albert is currently President of Sam Albert
Associates, an independent management consulting firm
specializing in developing marketing strategies and facilitating
strategic relationships for the information technology industry.
Mr. Albert is a former IBM Corporation executive who retired
after thirty years in 1989, as IBM Director of Business and
Management Services Industries. These segments included the CPA,
legal and consulting professions and the software and services
industries. Mr. Albert also serves on the Boards of the
Outsourcing Institute, Quantum Development Corp., the Information
Technology Services Division of the Information Technology
Association of America (ITAA), the Computer Museum (Boston) as
well as the Advisory Board of Cross Access Corporation. He is
also a member of the Executive Committee of the New York Venture
Group.

Leon N Cooper is the Thomas J. Watson Senior Professor
of Science at Brown University which represents his principal
occupation. He specializes in theoretical physics including low-
temperature physics, and has also done theoretical work in
modeling neural networks, which are networks of nerve cells. Dr.
Cooper is the Director of the Brown University Institute for
Brain and Neural Systems which consists of a group of scientists
applying various disciplines to the study of the brain as well as
Professor in the Departments of Physics and Neuroscience. He was
awarded the Comstock Prize by the National Academy of Science in
1968 and the Nobel Prize in Physics in 1972 for his contributions
to the theory of superconductivity. He is a Fellow of the
American Physical Society and the American Academy of Arts and
Sciences, a member of the American Philosophical Society and the
National Academy of Sciences, and is the author of many
publications. He has recently been appointed chairman of the
Scientific Advisory Board of Spectra Science, a company that
commercializes innovative laser products. Professor Cooper was a
general partner of Nestor Associates ("Nestor"), the predecessor
of the Company, from its inception until May 1983, and is
currently a part-time consultant to the Company.

Charles Elbaum has been a Professor of Physics at Brown
University since 1963, specializing in experimental solid-state
physics, including the design of circuits and information-
processing systems, which represents his principal occupation.
He was also Chairman of the Physics Department at Brown. He is a
Fellow of the American Physical Society, a member of several
scientific and professional societies and is the author of many
publications, and is the Hazard Professor of Physics at Brown
University. Professor Elbaum was a general partner of Nestor
Associates ("Nestor"), the predecessor of the Company from its
inception until May 1983, and is currently a part-time consultant
to the Company.

David Fox was President of Container Transport
International, a container leasing concern, from 1971 to 1982.
Mr. Fox was President of Cognitive Systems, Inc. ("CSI"), a
computer software company, from 1983 until 1986 and a director of
CSI from 1983 until 1987. On July 17, 1989, Mr. Fox was
appointed President and Chief Executive Officer of the Company.

Nigel P. Hebborn, Chief Financial Officer, joined the
Company in October 1996. He is responsible for the Company's
financial and corporate development activities, including working
with the Company's management in the development and roll-out of
commercial applications. He was most recently President of
Wolffish Consulting Services, Inc., a consulting and background
reporting firm. Prior to forming Wolffish Consulting Services,
Inc., Mr. Hebborn served as Vice President Finance of Nova
American Group, Inc., in Buffalo, New York and as President of
various subsidiaries of this insurance and banking holding
company. Earlier in his career, Mr. Hebborn, a CPA, was
associated with Price Waterhouse.

Jeffrey B. Harvey joined the Company's Board of
Directors in September 1993. Mr. Harvey has been in the
brokerage business since 1976 and is currently Division Vice
President of Paine Webber. He is a graduate of the Massachusetts
Institute of Technology where he received his Master of Science
Degree in Nuclear Engineering. Mr. Harvey is also a director of
Nova American Group an insurance underwriter in Buffalo, NY.

Thomas F. Hill joined the Company's Board of Directors
in August 1994. He is President of Hill & Partners, a consulting
firm with broad experience in marketing, sales and business
planning, and a director of the private investment firm, Wand
Partners. Mr. Hill works closely with the management of
companies invested in or acquired by Wand to improve their
business strategies, sales and marketing productivity, and
overall performance. Hill's clients during his twenty-five year
career have included Marsh & McLennan, Bristol Meyers, Royal
Dutch Shell, CBS, Nestle, Proctor & Gamble, Toyota and Unilever.
Mr. Hill serves as a director of Diagraph Corporation, a
manufacturer of automated industrial marking systems; Old
American Insurance Services, a specialty insurance provider;
Information Management Associates, a marketing, sales and
customer service software provider; and Yankelovich Partners, a
marketing research company.

Herbert S. Meeker is an attorney and partner in the law
firm of Baer Marks & Upham, which is general counsel to the
Company. Mr. Meeker was a general partner of Nestor from its
inception until May 1983, and is Secretary of the Company. He is
currently Secretary and a director of Oratronics, Inc., a
manufacturer of titanium dental implants and instruments.

Bruce W. Schnitzer joined the Company's Board of
Directors in August 1994 and has been Chairman of the Executive
Committee of the Board of the Company since December 1996. Mr.
Schnitzer is Chairman of Wand Partners, a private investment
firm, engaged in management buy-outs and growth capital
investments, with a portfolio weighted in favor of information
service and financial service companies. Mr. Schnitzer's
experience prior to establishing Wand in 1987 includes having
served as President and CEO of Marsh & McLennan, Inc. and head of
the Merger and Acquisition Advisory Department of J. P. Morgan.
Mr. Schnitzer presently serves as director of the following U. S.
companies with publicly quoted securities: Chartwell Re
Corporation (a property and casualty insurance holding company)
Penn Corp. Financial Group (a life insurance holding company);
and AMRESCO Inc. (real estate investment manager).

Sushmito Ghosh has been with Nestor since 1986 when he
joined the Company as a software engineer and was named an
officer of the company in 1995. As a principal designer of
Nestor's internal R&D software environment, Mr. Ghosh has an in-
depth knowledge of Nestor's technology and has developed neural-
network models for machine vision, on-line character recognition,
mortgage portfolio analysis and securities trading. He has
served as project manager, overseeing all phases of development,
customization and implementation of Nestor's fraud detection
system solutions. As Vice President of Financial Solutions, Mr.
Ghosh's responsibilities include the development and execution of
the divisional marketing and sales plan, and supervising the
delivery of Nestor's proactive risk management system PRISM.
Mr. Ghosh holds a Masters Degree in Engineering from the
University of Rhode Island and has completed the Neural Networks
and Machine Learning Program offered at the Massachusetts
Institute of Technology. He has co-authored a number of
technical publications.

Michael T. Glier joined the Company in December 1990 to
provide architectural direction and manage the implementation of
a DARPA funded project to develop the Ni1000 Recognition
Accelerator neural network chip with Intel. He was named an
officer of the Company in December 1992, and currently serves as
Vice President of Intelligent Sensors. He is responsible for
managing the development and marketing of products utilizing
commodity hardware to accelerate the Company's proprietary
software products. Mr. Glier was a co-recipient of the 1994
Discover Award for Computer Hardware and Electronics. Mr.
Glier's experience spans 27 years in the electronics industry,
from space-based systems to multiprocessor design. He has
authored two patents, two technical papers and has co-authored
several technical articles.

Thomas D. Halket became Assistant Secretary of the
Company in 1993. Mr. Halket is an outside counsel for the
Company. For the last year, he has been a partner of the firm of
Halket & Pitegoff in Larchmont, New York. Prior to that, he was
in solo practice, affiliated with law firms in New York City and
Boston, Massachusetts and was Assistant General Counsel to
Engelhard Corporation. Mr. Halket holds a law degree from
Columbia University and a Bachelors Degree and a Masters Degree
in Physics from the Massachusetts Institute of Technology.

Kevin C. Hughes became Controller and Assistant
Secretary of the Company during 1991, and was appointed Vice
President, Finance and Administration in February 1995. He
joined the Company in 1987 and was responsible for the
development of all accounting and information systems as the
Company transitioned from the R&D stage to the commercial stage.
Prior to that he was Controller of Comco, Inc., a national
retailer of compact disks, tapes and records, and prior to that
he was Controller of IIRI International, Inc., a designer,
wholesaler, and retailer of women's clothing with locations
throughout the world. He received a Bachelor of Science degree
from Northeastern University and an M.B.A. degree from the
University of Rhode Island.

Douglas L. Reilly is Senior Vice President Strategic
Analysis & Technology. From 1989 to 1994, he served as Vice
President for Product Development and Financial Applications for
the Company and served as its Vice President for Research and
Development from 1983 until 1989. Dr. Reilly received his
Doctoral Degree in Physics from Brown University in 1980, working
with Leon Cooper and Charles Elbaum to design neural network
systems for pattern recognition. Dr. Reilly continued this work
as a Research Associate until 1982 and as Assistant Professor for
Research at Brown from 1982 to 1983, and co-authored a patent
with Dr. Cooper and Dr. Elbaum on the RCE neural network
paradigm. Dr. Reilly became the Company's first full time
employee in 1983, with responsibility for the hiring, development
and day-to-day management of the Company's technical
organization. He developed the first prototype systems of the
Company's technology in character recognition, and led all
research and development of the Company from 1983 until 1989,
producing prototypes and products for character recognition,
machine vision, and applications of the technology to decision
making and risk assessment in financial services. He is a co-
author on four of the Company's patents and has written numerous
articles in the field of neural network design and application.

Christopher Scofield became an officer of the Company
during December 1989, when he was named Vice President of the
Applied Systems Division of the Company. He earned a Doctoral
Degree in Physics at Brown University in 1984 and has served as
Adjunct Associate Professor at the University's Center for Neural
Sciences since 1987. He has been actively employed by the
Company since 1984 when he became Manager of System Design,
working to design/code the Company's proprietary neural network
system. In 1986 he was named Director of Research and managed
all research and development of new applications in the
industrial vision and financial risk assessment fields. He has
co-authored four of the Company's patents and together with David
Morgan has co-authored the text "Neural Networks and Speech
Processing".

Committees and Meetings of the Board of Directors

The Company's Board of Directors held four meetings
during the six month period ended December 31, 1996. The
incumbent directors attended all of these meetings. Directors
did not, during the last fiscal year, receive fees for attending
meetings of the Board. The Company does not have a Nominating
Committee.

The Company has an Audit and Finance Committee. This
committee generally selects and reviews recommendations made by
the Company's independent public accountants. The Audit and
Finance Committee met once during the six month period ended
December 31, 1996. The Company also has a Management
Compensation Committee consisting of Jeffrey B. Harvey, Sam
Albert and Herbert S. Meeker. The Committee meets periodically
to review and consider compensation matters relating to employees
of the Company.

Compensation of Executive Officers

The following table sets forth information for the year
ended December 31, 1996, and for the fiscal years ended June 30,
1996, 1995 and 1994 compensation paid by the Company to the chief
executive officer and to each of the four most highly compensated
officers of the Company whose total annual salary and bonus
exceed $100,000.

Long-Term Compensation Awards
Other Restricted All
Name and Salary Bonus Annual Stock Options/ Pay- Other
Principal Position Period ($) ($) Comp. Awards SARs outs Comp ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Fox Calendar Yr.
President and CEO 12/96 127,084 64,316 1,193 (1) 0 250,000 0 0
Fiscal Yr.
6/96 99,325 30,316 675 (1) 0 318,000 0 0
Fiscal Yr.
6/95 100,000 0 30,675 (1) (2) 0 0 0 0
Fiscal Yr.
6/94 90,000 0 675 (1) 0 50,000 0 148,000 (3)

Christopher Scofield Calendar Yr.
Vice President 12/96 120,144 17,000 73 (1) 0 100,000 0 0
Fiscal Yr.
6/96 106,956 0 54 (1) 0 140,000 0 0

Sushmito Ghosh Calendar Yr.
Vice President 12/96 97,217 20,870 73 (1) 0 60,000 0 0
Fiscal Yr.
6/96 98,629 4,227 33 (1) 0 64,500 0 0

Douglas Reilly Calendar Yr.
Vice President 12/96 96,789 7,500 88 (1) 0 20,000 0 0

Michael Glier Calendar Yr.
Vice President 12/96 96,305 7,500 139 (1) 0 20,000 0 0

(1) Payment of group term life insurance premiums.
(2) Payment of salary deferred in prior period.
(3) Release from escrow of restricted shares issued upon joining the Company.
</TABLE>

Options and Warrants

The Board of Directors of the Company approved and
adopted on April 1, 1984, and the stockholders approved on November
16, 1984, the Nestor, Inc. Incentive Stock Option Plan (the "Plan")
within the meaning of Section 422A of the Internal Revenue Code.
Giving effect to the adoption of amendments to the Plan in 1985,
1987, 1989, 1993 and 1994 the Plan provides for the granting of
options to key executive and supervisory employees for the purchase
of up to an aggregate of 2,450,000 shares at fair market value at
the time of grant for a term of up to five years from the date of
grant. The shares issued under the Plan are registered on Form S-8
under the Securities Act of 1933 as amended, Registration No. 01-
12965. Subject to approval by the stockholders of the 1997
Incentive Stock Option Plan, the Plan will be terminated. As of
December 31, 1996, options to purchase 1,781,500 shares under the
Plan were outstanding.

The Company grants warrants and options outside of the
Plan at the discretion of the Board of Directors, to directors and
employees at a price equal to the market price of the Common Stock
on the date of grant. No warrants or options were granted to
executive officers, other than options under the Plan, during the
six months ended December 31, 1996. At December 31, 1996, warrants
entitling Sam Albert, a director, to purchase an aggregate of
10,000 shares were outstanding.

APPROVAL OF THE ADOPTION OF
THE 1997 STOCK OPTION PLAN

General

Subject to the approval of the Company's stockholders,
the Board of Directors of the Company adopted on February 4, 1997
the 1997 Stock Option Plan (the "1997 Option Plan"). The 1997
Option Plan is intended to help the Company to attract, retain
and motivate key employees (including officers) of the Company.

The 1997 Option Plan provides for the grant of options
("Options") to purchase Common Stock that are intended to qualify
as incentive stock options ("Incentive Options") under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code")
as well as options that do not so qualify ("Non-Qualified
Options").

Background of Shareholder Approval Requirement

Shareholder approval of the 1997 Option Plan is
required in order for options granted to qualify as Incentive
Options under Section 422 of the Code. For this purpose,
shareholders must approve a plan that designates the aggregate
number of shares which may be issued under the plan and the class
of employees eligible to receive options under the plan.
Shareholder approval must be obtained within twelve months after
adoption of the plan by the Board of Directors.

Section 162(m) of the Code disallows a tax deduction
for compensation in excess of $1 million that is paid to certain
employees of a corporation whose common stock is subject to the
registration requirements of Section 12 of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act"). However,
this limitation does not apply to "qualified performance-based
compensation." Pursuant to Treasury Regulation Section 1.162-27
promulgated under Section 162(m) of the Code, in order for grants
under the 1997 Option Plan to satisfy the requirements to be
"qualified performance-based compensation," it is necessary to
obtain shareholder approval of the class of employees eligible to
receive grants under the 1997 Option Plan, the business criteria
to be used in making such grants, the maximum number of shares
with respect to which grants can be made to any one employee
under the 1997 Option Plan and the exercise price of any Options.
Another requirement for "qualified performance-based
compensation" is that grants under the plan be made by a
compensation or option committee consisting solely of two or more
"outside directors," within the meaning of Treasury Regulation
Section 1.162-27(e)(3).

The following description of the 1997 Option Plan
summarizes the principal features of the 1997 Option Plan and
sets forth those matters as to which shareholder approval is
required as described above. A vote in favor of the 1997 Option
Plan shall be treated as the shareholder's approval of the 1997
Option Plan and, specifically, the description below of the class
of employees eligible to receive grants, the maximum number of
shares as to which grants can be made to any one employee and the
aggregate number of shares that can be issued in each case under
the 1997 Option Plan.

Any such options that are granted will not satisfy the
"qualified performance-based compensation" exception to Section
162(m) absent shareholder approval of the business criteria to be
used in making such grants.

Description of the 1997 Option Plan

The following is a summary of the principal features of
the 1997 Option Plan. This summary is qualified in its entirety
by reference to the specific provisions of the plan which is
annexed hereto.

Administration of the 1997 Option Plan

The 1997 Option Plan will be administered by the Board
of Directors or by a committee (the "Committee") which is
appointed by the Board of Directors. The Committee will consist
of not less than two non-employee members of the Company's Board
of Directors, neither of whom is eligible at any time for the
grant of Incentive Options under the 1997 Option Plan and each of
whom is a "non-employee director" within the meaning of Rule 16b-
3 promulgated under the Exchange Act and an "outside director"
within the meaning of Treasury Regulation Section 1.162-27(e)(3).
The Company's Board of Directors or the Committee is authorized
to interpret the 1997 Option Plan, adopt and amend rules and
regulations relating to the 1997 Option Plan, and determine the
recipients, form, and terms of Options granted under the 1997
Option Plan. All Options must be evidenced by a written
agreement.

Shares Available

Under the 1997 Option Plan, the maximum number of
shares of Common Stock that may be subject to Options may not
exceed an aggregate of 1,000,000 shares. The maximum number of
shares will be adjusted in certain events, such as a stock split,
reorganization or recapitalization. The shares issued under the
1997 Option Plan will be registered on Form S-8 under the
Securities Act of 1933 as amended.

Eligibility

Employees (including officers and directors who are
employees) of the Company or its subsidiaries are eligible for
the grant of Incentive Options under the 1997 Option Plan.
Directors who are not employees or officers are not eligible to
participate. In the event of Incentive Options, the aggregate
fair market value (determined at the time the Option is granted)
of the Common Stock with respect to which Incentive Options
become exercisable for the first time by the Option holder (i.e.,
vest) during any calendar year cannot exceed $100,000. This
limit does not apply to Non-Qualified Options. To the extent an
Option that otherwise would be an Incentive Option exceeds this
$100,000 threshold, it will be treated as a Non-Qualified Option.

Exercise Price of Options

The Company will receive no monetary consideration for
the grant of Options under the 1997 Option Plan. In case of an
Incentive Option, the exercise price cannot be less than the fair
market value (as defined in the 1997 Option Plan) of the shares
on the date the Option is granted, and if an optionee is a
shareholder who beneficially owns 10% or more of the outstanding
Common Stock, the exercise price of Incentive Options cannot be
less than 110% of such fair market value. The exercise price of
Non-Qualified Options shall be determined by the Company's Board
of Directors or the Committee. The exercise price of Options
will be adjusted in certain events, such as a stock split,
reorganization or recapitalization.

Payment upon Exercise of Options

Payment for shares purchased by exercising an Option is
to be made by cash or check, or by any other means which the
Board of Directors determines are consistent with the purposes of
the 1997 Option Plan and with applicable laws and regulations.

Term of Options

The term of an Option cannot exceed ten years, and in
the case of an optionee who owns 10% or more of the outstanding
Common Stock, cannot exceed five years.

Termination of Employment

Individual option agreements generally will provide
that the Options will expire upon termination of employment
except that (i) in the case of termination that is not for cause
or otherwise attributable to a breach by the optionee of an
employment or confidentiality or non-disclosure agreement, the
Option will be exercisable for three months after termination to
the same extent that it was exercisable prior to termination,
(ii) in the case of termination due to disability, the Option
will be exercisable for one year after termination (or within
such lesser period as may be specified in the applicable option
agreement) to the same extent that it was exercisable prior to
termination and (iii) in the case of death while in the employ of
the Company or, within the three month period referred to in (i),
the Option will be exercisable for one year after death (or
within such lesser period as may be specified in the applicable
option agreement). After the death of an optionee, the Option is
exercisable by the legal representative of the optionee or by the
person that acquired the Option by reason of the death of the
Optionee.

Non-Transferability of Options

Options are not transferable by the optionee except by
will or by the laws of descent and distribution. The disposition
of shares acquired pursuant to the exercise of an Option will be
subject to any applicable restrictions on transferability imposed
by the Commission's regulations.

Effective Date

The 1997 Option Plan became effective when adopted by
the Board of Directors, but no Incentive Option granted under the
plan shall become exercisable unless and until the plan shall
have been approved by the Company's shareholders. If such
shareholder approval is not obtained within twelve months after
the date of the Board of Director's adoption of the plan, no
options previously granted under the plan shall be deemed to be
Incentive Options and no Incentive Options shall be granted
thereafter.

Duration of the 1997 Option Plan

The 1997 Option Plan will terminate automatically and
no Options may be granted after ten years have elapsed from the
date the 1997 Option Plan was approved by the Company's Board of
Directors. The 1997 Option Plan may be terminated at any prior
time by the Board of Directors. Termination of the 1997 Option
Plan will not affect Options that were granted prior to the
termination date.

Amendments or Modifications

The 1997 Option Plan may be amended or modified from
time to time by the Company's Board of Directors. However, if at
any time the approval of the shareholders of the Company is
required under Section 422 of the Code or Rule 16b-3, the Board
of Directors may not effect such modification or amendment
without such approval.

Certain Federal Income Tax Consequences

The following summary outlines certain federal income
tax consequences of the 1997 Option Plan to the Company and
participants under present law.

Incentive Options

A participant will not recognize income for federal
income tax purposes upon the grant of an Incentive Option. A
participant also will not be taxed on the exercise of an
Incentive Option, provided that the Common Stock acquired upon
exercise of the Incentive Option is not sold by the participant
within two years after the Option was granted and one year after
the Option is exercised (the "required holding period").

However, for alternative minimum tax ("AMT") purposes,
the difference between the exercise price of the Incentive Option
and the fair market value of the Common Stock acquired upon
exercise is an item of tax preference in the year the Incentive
Option is exercised. The participant is required to include such
amount in AMT income in such year and to compute the tax basis of
the shares so acquired in the same manner as if a Non-Qualified
Option had been exercised, including the availability of a
Section 83 election (discussed below). Whether a participant
will be liable for AMT in the year the Incentive Option is
exercised will depend on the participant's particular tax
circumstances. AMT paid in such year will be allowed as a credit
to the extent regular tax exceeds AMT in subsequent years.

On a sale, after the required holding period, of Common
Stock that was acquired by exercising an Incentive Option, the
difference between the participant's tax basis in the Common
Stock and the amount received in the sale is taxed as long-term
capital gain or loss.

If Common Stock acquired upon the exercise of an
Incentive Option is disposed of by the participant during the
required holding period (a "disqualifying disposition"), the
excess, if any, of (i) the amount realized on such disposition
(up to the fair market value of the Common Stock on the exercise
date) over (ii) the exercise price, will be taxed to the
participant as ordinary income. If a participant pays the
exercise price of an Incentive Option by delivering Common Stock
that was previously acquired by exercising an Incentive Option
and such delivery occurs before the end of the required holding
period of such Common Stock, the participant is treated as making
a disqualified disposition of the Common Stock so delivered.

The Code puts a $100,000 limit on the value of stock
subject to Incentive Options that first become exercisable in any
one year, based on the fair market value of the underlying Common
Stock on the date of grant. To the extent Options exceed this
limit, they are taxed as Non-Qualified Options.

Non-Qualified Options

A participant who receives a Non-Qualified Option does
not recognize taxable income on the grant of the Option. Upon
exercise of a Non-Qualified Option, a participant generally has
ordinary income in an amount equal to the excess of the fair
market value of the shares at the time of exercise over the
exercise price paid for the shares.

However, if the participant (i) is an officer or
director of the Company or the beneficial owner of more than 10%
of the Company's equity securities (in each case, within the
meaning of Section 16 of the Exchange Act -- as so defined, an
"Insider"), (ii) does not make a Section 83 election and
(iii) receives shares upon the exercise of a Non-Qualified
Option, the recognition of income (and the determination of the
amount of income) is deferred until the earlier of (a) six months
after the shares are acquired or (b) the earliest date on which
the Insider could sell the shares at a profit without being
subject to liability under Section 16(b) of the Exchange Act (six
months after the Non-Qualified Option is granted, in the case of
an "in-the-money" Option). If the participant makes a Section 83
election, income is not deferred. Rather, income is recognized
on the date of exercise of the Non-Qualified Option in an amount
equal to the excess of the fair market value of the shares
acquired upon exercise over the exercise price. A Section 83
election must be filed with the Internal Revenue Service within
thirty (30) days after an Option is exercised.

A participant's tax basis in shares received upon
exercise of a Non-Qualified Option is equal to the amount of
ordinary income recognized on the receipt of the shares plus the
amount of cash, if any, paid upon exercise. The holding period
for the shares begins on the day after the shares are received
or, in the case of an Insider that has not made a Section 83
election, on the day after the date on which income is recognized
by the Insider on account of the receipt of the shares.

If a participant exercises a Non-Qualified Option by
delivering previously held shares in payment of the exercise
price, the participant does not recognize gain or loss on the
delivered shares, even if their fair market value is different
from the participant's tax basis in the shares. The exercise of
the Non-Qualified Option is taxed however, and the Company
generally is entitled to a deduction, in the same amount and at
the same time as if the participant had paid the exercise price
in cash. Provided the participant receives a separate
identifiable stock certificate therefor, his tax basis in the
number of shares received that is equal to the number of shares
surrendered on exercise will be the same as his tax basis in the
shares surrendered. His holding period for such number of shares
will include his holding period for the shares surrendered. The
participant's tax basis and holding period for the additional
shares received upon exercise will be the same as it would if the
participant had paid the exercise price in cash.

If a participant receives shares upon the exercise of a
Non-Qualified Option and thereafter disposes of the shares in a
taxable transaction, the difference between the amount realized
on the disposition and the participant's tax basis in the shares
is taxed as capital gain or loss (provided the shares are held as
a capital asset on the date of disposition), which is long-term
or short-term depending on the participant's holding period for
the shares.

Deduction by the Company

The Company is not allowed a federal income tax
deduction on the grant or exercise of an Incentive Option or the
disposition, after the required holding period, of shares
acquired by exercising an Incentive Option. On a disqualifying
disposition of such shares, the Company is allowed a federal
income tax deduction in an amount equal to the ordinary income
recognized by the participant as a result of the disqualifying
disposition, provided that such amount constitutes an ordinary
and necessary business expense of the Company, is reasonable in
amount and is not disallowed by Section 162(m) of the Code
(discussed above).

The ordinary income recognized by an employee of the
Company on account of the exercise of a Non-Qualified Option is
subject to both wage withholding and employment taxes. A
deduction for federal income tax purposes is allowed to the
Company in an amount equal to the amount of ordinary income
taxable to the participant, provided that such amount constitutes
an ordinary and necessary business expense of the Company, that
such amount is reasonable, and that the Company satisfies any tax
reporting obligation that it has with respect to such income.

Required Affirmative Vote

Approval of the adoption of the 1997 Option Plan
requires the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock and Preferred Stock entitled
to vote. The Board of Directors believes that the proposal is in
the best interests of the Company and its shareholders and
recommends that the shareholders vote FOR the adoption of the
1997 Option Plan as described herein.

PROPOSAL TO APPROVE THE SELECTION
OF INDEPENDENT AUDITORS

The accounting firm of Ernst & Young LLP is recommended
for election to serve as the Company's independent auditors for
the fiscal year ending December 31, 1997. On December 10, 1996
the Directors approved a change in the Company's fiscal year from
June 30 to December 31 and the appointment of Ernst & Young LLP,
as the Company's independent auditors for the fiscal period ended
December 31, 1996. Gassman, Rebhun & Co., P.C. was terminated by
the Directors on December 10, 1996 as the independent auditors of
the Company and it audited the Company's accounting records for
the fiscal year ended June 30, 1996.

Representatives of Ernst & Young LLP are expected to
be present at the annual meeting.

ANNUAL REPORT

THE ANNUAL REPORT TO STOCKHOLDERS ON FORM 10-K CONCERNING THE
OPERATIONS OF THE COMPANY FOR THE FISCAL PERIOD ENDED DECEMBER
31, 1996, INCLUDING FINANCIAL STATEMENTS FOR THE PERIOD,
ACCOMPANIES THIS PROXY STATEMENT.

STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING

Stockholder proposals for consideration at the annual
meeting expected to be held in April 1998 must be received by the
Company no later than December 31, 1997 and must comply with the
Rules and Regulations of the Securities and Exchange Commission
in order to be included in the proxy statement for the 1997
annual meeting.

OTHER MATTERS

The Board of Directors is not aware of any other
matters to be presented at the annual meeting. However, if any
other matter should properly come before the annual meeting, the
persons entitled to vote on that matter will be given the
opportunity to do so.

The above notice and proxy statement are sent by order
of the Board of Directors.

/s/Herbert S. Meeker
Secretary
Providence, Rhode Island
April 8, 1997

NESTOR, INC.

1997 INCENTIVE STOCK OPTION PLAN

1. Purpose

The purpose of this plan (the "Plan") is to secure for
Nestor, Inc. (the "Company") and its stockholders the benefits
arising from capital stock ownership by employees, officers and
directors (who are also either employees or officers) of the
Company and its subsidiary corporations who are expected to
contribute to the Company's future growth and success. Those
provisions of the Plan which make express reference to Section
422 of the Internal Revenue Code of 1986, as amended or replaced
from time to time (the "Code"), shall apply only to Incentive
Stock Options (as that term is defined in the Plan). The Plan is
also designed to attract and retain other persons who will
provide services to the Company.

2. Type of Options and Administration

(a) Types of Options. Options granted pursuant to the
Plan shall be authorized by action of the Board of Directors (the
"Board") of the Company (or a committee designated by the Board)
and may be either incentive stock options ("Incentive Stock
Options") meeting the requirements of Section 422 of the Code or
non-statutory options which are not intended to meet the
requirements of Section 422 of the Code ("Non-Qualified
Options").

(b) Administration. The Plan will be administered by
the Board or by a committee consisting of two or more directors
each of whom shall be a "non-employee director" within the
meaning of Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or any successor
rule ("Rule 16b-3") and an "outside director" within the meaning
of Treasury Regulation Section 1.162-27(e)(3) promulgated under
Section 162(m) of the Code (the "Committee") appointed by the
Board, in each case whose construction and interpretation of the
terms and provisions of the Plan shall be final and conclusive.
If the Board determines to create a Committee to administer the
Plan, the delegation of powers to the Committee shall be
consistent with applicable laws or regulations (including,
without limitation, applicable state law and Rule 16b-3). The
Board or Committee may in its sole discretion grant options to
purchase shares of the Company's Common Stock, $0.01 par value
per share ("Common Stock"), and issue shares upon exercise of
such options as provided in the Plan. The Board or Committee
shall have authority, subject to the express provisions of the
Plan, to construe the respective option agreements and the Plan;
to prescribe, amend and rescind rules and regulations relating to
the Plan; to determine the terms and provisions of the respective
option agreements, which need not be identical; and to make all
other determinations in the judgment of the Board or Committee
necessary or desirable for the administration of the Plan. The
Board or Committee may correct any defect or supply any omission
or reconcile any inconsistency in the Plan or in any option
agreement in the manner and to the extent it shall deem expedient
to carry the Plan into effect and it shall be the sole and final
judge of such expediency. No director or person acting pursuant
to authority delegated by the Board shall be liable for any
action or determination under the Plan made in good faith.

3. Eligibility

Options may be granted to persons who are, at the time
of grant, employees, officers or directors (who are also either
employees or officers) of the Company or any subsidiaries of the
Company as defined in Sections 424(e) and 424(f) of the Code,
provided, that Incentive Stock Options may only be granted to
individuals who are employees of the Company (within the meaning
of Section 3401(c) of the Code). Options may also be granted to
other persons, provided that such options shall be Non-Qualified
Options. A person who has been granted an option may, if he or
she is otherwise eligible, be granted additional options if the
Board or Committee shall so determine.

4. Stock Subject to Plan

The stock subject to options granted under the Plan
shall be shares of authorized but unissued or reacquired Common
Stock. Subject to adjustment as provided in Section 15 below,
the maximum number of shares of Common Stock of the Company which
may be issued and sold under the Plan is 1,000,000. If an option
granted under the Plan shall expire, terminate or is canceled for
any reason without having been exercised in full, the unpurchased
shares subject to such option shall again be available for
subsequent option grants under the Plan.

5. Forms of Option Agreements

As a condition to the grant of an option under the
Plan, each recipient of an option shall execute an option
agreement in such form not inconsistent with the Plan. Such
option agreements may differ among recipients.

6. Purchase Price

(a) General. The purchase price per share of stock
issuable upon the exercise of an option shall be determined by
the Board or the Committee at the time of grant of such option,
provided, however, that in the case of an Incentive Stock Option
or Non-Qualified Option, the exercise price shall not be less
than 100% of the Fair Market Value (as hereinafter defined) of
such stock at the time of grant of such option, or less than 110%
of such Fair Market Value in the case of options described in
Section 11(b). "Fair Market Value" of a share of Common Stock of
the Company as of a specified date for purposes of the Plan shall
mean the closing price of a share of the Common Stock on a
principal securities exchange on which such shares are traded on
the day immediately preceding the date as of which Fair Market
Value is being determined, or on the next preceding date on which
such shares are traded if no shares were traded on such
immediately preceding day, or if the shares are not traded on a
securities exchange, Fair Market Value shall be deemed to be the
average of the high bid and low asked prices of the shares in the
over-the-counter market on the day immediately preceding the date
as of which Fair Market Value is being determined or on the next
preceding date on which such high bid and low asked prices were
recorded. If the shares are not publicly traded, Fair Market
Value of a share of Common Stock (including, in the case of any
repurchase of shares, any distributions with respect thereto
which would be repurchased with the shares) shall be determined
in good faith by the Board. In no case shall Fair Market Value
be determined with regard to restrictions other than restrictions
which, by their terms, will never lapse.

(b) Payment of Purchase Price. Options granted under
the Plan may provide for the payment of the exercise price by
delivery of cash or a check to the order of the Company in an
amount equal to the exercise price of such options, or by any
other means which the Board determines are consistent with the
purpose of the Plan and with applicable laws and regulations
(including, without limitation, the provisions of Rule 16b-3 and
Regulation T promulgated by the Federal Reserve Board).

7. Exercise Option Period

Subject to earlier termination as provided in the Plan,
each option and all rights thereunder shall expire on such date
as determined by the Board or the Committee and set forth in the
applicable option agreement, provided, that such date shall not
be later than ten (10) years after the date on which the option
is granted.

8. Exercise of Options

Each option granted under the Plan shall be exercisable
either in full or in installments at such time or times and
during such period as shall be set forth in the option agreement
evidencing such option, subject to the provisions of the Plan.
Subject to the requirements in the immediately preceding
sentence, if an option is not at the time of grant immediately
exercisable, the Board may (i) in the agreement evidencing such
option, provide for the acceleration of the exercise date or
dates of the subject option upon the occurrence of specified
events, and/or (ii) at any time prior to the complete termination
of an option, accelerate the exercise date or dates of such
option.

9. Nontransferability of Options

No option granted under this Plan shall be assignable
or otherwise transferable by the optionee, except by will or by
the laws of descent and distribution. An option may be exercised
during the lifetime of the optionee only by the optionee.

10. Effect of Termination of Employment or Other Relationship

Except as provided in Section 11(d) with respect to
Incentive Stock Options and except as otherwise determined by the
Board or Committee at the date of grant of an option, and subject
to the provisions of the Plan, an optionee may exercise an option
at any time within three (3) months following the termination of
the optionee's employment or other relationship with the Company
or within one (1) year if such termination was due to the death
or disability of the optionee (to the extent such option is then
exercisable) but in no event later than the expiration date of
the option. If the termination of the optionee's employment is
for cause or is otherwise attributable to a breach by the
optionee of an employment or confidentiality or non-disclosure
agreement, the option shall expire immediately upon such
termination. The Board shall have the power to determine what
constitutes a termination for cause or a breach of an employment
or confidentiality or non-disclosure agreement, whether an
optionee has been terminated for cause or has breached such an
agreement, and the date upon which such termination for cause or
breach occurs. Any such determinations shall be final and
conclusive and binding upon the optionee.

11. Incentive Stock Options

Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following
additional terms and conditions:

(a) Express Designation. All Incentive Stock Options
granted under the Plan shall, at the time of grant, be
specifically designated as such in the option agreement covering
such Incentive Stock Options.

(b) 10% Shareholder. If any employee to whom an
Incentive Stock Option is to be granted under the Plan is, at the
time of the grant of such option, the owner of stock possessing
more than 10% of the total combined voting power of all classes
of stock of the Company (after taking into account the
attribution of stock ownership rules of Section 424(d) of the
Code), then the following special provisions shall be applicable
to the Incentive Stock Option granted to such individual:

(i) the purchase price per share of the Common
Stock subject to such Incentive Stock Option shall not be
less than 110% of the Fair Market Value of one share of
Common Stock at the time of grant; and

(ii) the option exercise period shall not exceed
five (5) years from the date of grant.

(c) Dollar Limitation. For so long as the Code shall
so provide, options granted to any employee under the Plan (and
any other incentive stock option plans of the Company) which are
intended to constitute Incentive Stock Options shall not
constitute Incentive Stock Options to the extent that such
options, in the aggregate, become exercisable for the first time
in any one calendar year for shares of Common Stock with an
aggregate Fair Market Value, as of the respective date or dates
of grant, of more than $100,000.

(d) Termination of Employment, Death or Disability.
No Incentive Stock Option may be exercised unless, at the time of
such exercise, the optionee is, and has been continuously since
the date of grant of his or her option, employed by the Company,
except that:

(i) an Incentive Stock Option may be exercised
within the period of three (3) months after the date the
optionee ceases to be an employee of the Company (or within
such lesser period as may be specified in the applicable
option agreement), to the extent it is then exercisable,
provided, that the agreement with respect to such option may
designate a longer exercise period and that the exercise
after such three (3) month period shall be treated as the
exercise of a non-statutory option under the Plan,

(ii) if the optionee dies while in the employ of
the Company, or within three (3) months after the optionee
ceases to be such an employee, the Incentive Stock Option
may be exercised by the person to whom it is transferred by
will or the laws of descent and distribution within the
period of one (1) year after the date of death (or within
such lesser period as may be specified in the applicable
option agreement), to the extent it is then exercisable, and

(iii) if the optionee becomes disabled (within the
meaning of Section 22(e)(3) of the Code or any successor
provisions thereto) while in the employ of the Company, the
Incentive Stock Option may be exercised within the period of
one (1) year after the date the optionee ceases to be such
an employee because of such disability (or within such
lesser period as may be specified in the applicable option
agreement), to the extent it is then exercisable.

For all purposes of the Plan and any option granted hereunder,
"employment" shall be defined in accordance with the provisions
of Section 1.421-7(h) of the Income Tax Regulations (or any
successor regulations). Notwithstanding the foregoing
provisions, no Incentive Stock Option may be exercised after its
expiration date.

12. Additional Provisions

(a) Additional Option Provisions. The Board or the
Committee may, in its sole discretion, include additional
provisions in option agreements covering options granted under
the Plan, including without limitation, restrictions on transfer,
vesting of options, repurchase rights, rights of first refusal,
commitments to pay cash bonuses or to make, arrange for or
guaranty loans or to transfer other property to optionees upon
exercise of options, or such other provisions as shall be
determined by the Board or the Committee, provided that such
additional provisions shall not be inconsistent with any other
term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan
to fail to qualify as an Incentive Stock Option within the
meaning of Section 422 of the Code.

(b) Acceleration, Extension, Etc. The Board or the
Committee may, in its sole discretion (i) accelerate the date or
dates on which all or any particular option or options granted
under the Plan may be exercised, or (ii) extend the dates during
which all, or any particular, option or options granted under the
Plan may be exercised, provided, however that no such extension
shall be permitted if it would cause the Plan to fail to comply
with Section 422 of the Code or with Rule 16b-3 (if applicable to
such option).

13. General Restrictions

(a) Investment Representations. The Company may
require any person to whom an option is granted, as a condition
of exercising such option or award, to give written assurances in
substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option
or award for his or her own account for investment and not with
any present intention of selling or otherwise distributing the
same, and to such other effects as the Company deems necessary or
appropriate in order to comply with federal and applicable state
securities laws, or with covenants or representations made by the
Company in connection with any public offering of its Common
Stock, including any "lock-up" or other restriction on
transferability.

(b) Compliance With Securities Law. Each option shall
be subject to the requirement that if, at any time, counsel to
the Company shall determine that the listing, registration or
qualification of the shares subject to such option or award upon
any securities exchange or automated quotation system or under
any state or federal law, or the consent or approval of any
governmental or regulatory body, or that the disclosure of non-
public information or the satisfaction of any other condition, is
necessary as a condition of, or in connection with the issuance
or purchase of shares thereunder, such option or award may not be
exercised, in whole or in part, unless such listing,
registration, qualification, consent or approval or satisfaction
of such condition shall have been effected or obtained on
conditions acceptable to the Board or the Committee. Nothing
herein shall be deemed to require the Company to apply for or to
obtain such listing, registration or qualification, or to satisfy
such condition.

14. Rights as a Stockholder

The holder of an option shall have no rights as a
stockholder with respect to any shares covered by the option
(including, without limitation, any right to vote or to receive
dividends or non-cash distributions with respect to such shares)
until the effective date of exercise of such option and then only
to the extent of the shares of Common Stock so purchased. No
adjustment shall be made for dividends or other rights for which
the record date is prior to the date of exercise.

15. Adjustment Provisions for Recapitalizations,
Reorganizations and Related Transactions

(a) Recapitalizations and Related Transactions. If,
through or as a result of any recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other similar
transaction (i) the outstanding shares of Common Stock are
increased, decreased or exchanged for a different number or kind
of shares or other securities of the Company, or (ii) additional
shares or new or different shares or other non-cash assets are
distributed with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment shall be
made in (x) the maximum number and kind of shares reserved for
issuance under or otherwise referred to in the Plan, (y) the
number and kind of shares or other securities subject to any then-
outstanding options under the Plan, and (z) the price for each
share subject to any then-outstanding options under the Plan,
without changing the aggregate purchase price as to which such
options remain exercisable. Notwithstanding the foregoing, no
adjustment shall be made pursuant to this Section 15 if such
adjustment (A) would cause the Plan to fail to comply with
Section 422 of the Code or with Rule 16b-3 (if applicable to such
option), or (B) would be considered as the adoption of a new plan
requiring stockholder approval.

(b) Reorganization, Merger and Related Transactions.
All outstanding options under the Plan shall become fully
exercisable for a period of sixty (60) days following the
occurrence of any Trigger Event (as defined below), whether or
not such options are then exercisable under the provisions of the
applicable agreements relating thereto. For purposes of the
Plan, a "Trigger Event" is any one of the following events:

(i) the date on which shares of Common Stock are
first purchased pursuant to a tender offer or exchange offer
(other than such an offer by the Company, any subsidiary of
the Company, any employee benefit plan of the Company or of
any subsidiary of the Company or any entity holding shares
or other securities of the Company for or pursuant to the
terms of such plan), whether or not such offer is approved
or opposed by the Company and regardless of the number of
shares purchased pursuant to such offer;

(ii) the date the Company acquires knowledge that
any person or group deemed a person under Section 13(d)-3 of
the Exchange Act (other than the Company, any subsidiary of
the Company, any employee benefit plan of the Company or of
any subsidiary of the Company or any entity holding shares
of Common Stock or other securities of the Company for or
pursuant to the terms of any such plan or any individual or
entity or group or affiliate thereof which acquired its
beneficial ownership interest prior to the date the Plan was
adopted by the Board), in a transaction or series of
transactions, has become the beneficial owner, directly or
indirectly (with beneficial ownership determined as provided
in Rule 13d-3, or any successor rule, under the Exchange
Act), of securities of the Company entitling the person or
group to 30% or more of all votes (without consideration of
the rights of any class or stock to elect directors by a
separate class vote) to which all stockholders of the
Company would be entitled in the election of the Board were
an election held on such date;

(iii) the date, during any period of two (2)
consecutive years, when individuals who at the beginning of
such period constitute the Board cease for any reason to
constitute at least a majority thereof, unless the election,
or the nomination for election by the stockholders of the
Company, of each new director was approved by a vote of at
least a majority of the directors then still in office who
were directors at the beginning of such period; and

(iv) the date of approval by the stockholders of
the Company of an agreement (a "reorganization agreement")
providing for:

(A) The merger or consolidation of the
Company with another corporation (x) where the
stockholders of the Company, immediately prior to the
merger or consolidation, do not beneficially own,
immediately after the merger or consolidation, shares
of the corporation issuing cash or securities in the
merger or consolidation entitling such stockholders to
80% or more of all votes (without consideration of the
rights of any class of stock to elect directors by a
separate class vote) to which all stockholders of such
corporation would be entitled in the election of
directors, or (y) where the members of the Board,
immediately prior to the merger or consolidation, do
not, immediately after the merger or consolidation,
constitute a majority of the Board of Directors of the
corporation issuing cash or securities in the merger or
consolidation, or

(B) The sale or other disposition of all or
substantially all the assets of the Company.

(c) Board Authority to Make Adjustments. Any
adjustments under this Section 15 will be made by the Board or
the Committee, whose determination as to what adjustments, if
any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under the
Plan on account of any such adjustments.

16. Merger, Consolidation, Asset Sale, Liquidation, etc.

(a) General. In the event of any sale, merger,
transfer or acquisition of the Company or substantially all of
the assets of the Company in which the Company is not the
surviving corporation, provided that after the merger, transfer
or acquisition the Company shall have requested the acquiring or
succeeding corporation (or an affiliate thereof) that equivalent
options shall be substituted and such successor corporation shall
have refused or failed to assume all options outstanding under
the Plan or issue substantially equivalent options, then any or
all outstanding options under the Plan shall accelerate and
become exercisable in full immediately prior to such event. The
Board or Committee will notify holders of options under the Plan
that any such options shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the options
will terminate upon expiration of such notice.

(b) Substitute Options. The Company may grant options
under the Plan in substitution for options held by employees of
another corporation who become employees of the Company, or a
subsidiary of the Company, as the result of a merger or
consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by
the Company, or one of its subsidiaries, of property or stock of
the employing corporation. The Company may direct that
substitute options be granted on such terms and conditions as the
Board considers appropriate in the circumstances.

17. No Special Employment Rights

Nothing contained in the Plan or in any option shall
confer upon any optionee any right with respect to the
continuation of his or her employment by the Company or interfere
in any way with the right of the Company at any time to terminate
such employment or to increase or decrease the compensation of
the optionee.

18. Other Employee Benefits

Except as to plans which by their terms include such
amounts as compensation, the amount of any compensation deemed to
be received by an employee as a result of the exercise of an
option or the sale of shares received upon such exercise will not
constitute compensation with respect to which any other employee
benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing,
life insurance or salary continuation plan, except as otherwise
specifically determined by the Board.

19. Amendment, Modification or Termination of the Plan

(a) The Board may at any time modify, amend or
terminate the Plan provided, however, that if at any time the
approval of the stockholders of the Company is required under
Section 422 of the Code or any successor provision with
respect to Incentive Stock Options, or under Rule 16b-3, the
Board may not effect such modification or amendment without such
approval.

(b) The modification, amendment or termination of the
Plan shall not, without the consent of an optionee, affect his or
her rights under an option previously granted to him or her.
With the consent of the optionee affected, the Board or the
Committee may amend or modify outstanding option agreements in a
manner not inconsistent with the Plan. The Board shall have the
right to amend or modify (i) the terms and provisions of the Plan
and of any outstanding Incentive Stock Options granted under the
Plan to the extent necessary to qualify any or all such options
for such favorable federal income tax treatment (including
deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code, and (ii) the terms
and provisions of the Plan and of any outstanding option to the
extent necessary to ensure the qualification of the Plan under
Rule 16b-3.

20. Withholding

(a) The Company shall have the right to deduct from
payments of any kind otherwise due to the optionee any federal,
state or local taxes of any kind required by law to be withheld
with respect to any shares issued upon exercise of options under
the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in
part by (i) causing the Company to withhold shares of Common
Stock otherwise issuable pursuant to the exercise of an option,
or (ii) delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall
have a Fair Market Value equal to such withholding obligation as
of the date that the amount of tax to be withheld is to be
determined. An optionee who has made an election pursuant to
this Section 20(a) may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to
any repurchase, forfeiture, unfulfilled vesting or other similar
requirements.
(b) The acceptance of shares of Common Stock upon
exercise of an Incentive Stock Option shall constitute an
agreement by the optionee (i) to notify the Company if any or all
of such shares are disposed of by the optionee within two (2)
years from the date the option was granted or within one (1) year
from the date the shares were issued to the optionee pursuant to
the exercise of the option, and (ii) if required by law, to remit
to the Company, at the time of and in the case of any such
disposition, an amount sufficient to satisfy the Company's
federal, state and local withholding tax obligations with respect
to such disposition, whether or not, as to both (i) and (ii), the
optionee is in the employ of the Company at the time of such
disposition.

21. Cancellation and New Grant of Options, etc.

The Board or the Committee shall have the authority to
effect, at any time and from time to time, with the consent of
the affected optionees the (i) cancellation of any or all
outstanding options under the Plan and the grant in substitution
therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option
exercise price per share which may be lower or higher than the
exercise price per share of the canceled options, or (ii)
amendment of the terms of any and all outstanding options under
the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of
such outstanding options.

22. Effective Date and Duration of the Plan

(a) Effective Date. The Plan shall become effective
when adopted by the Board, but no Incentive Stock Option granted
under the Plan shall become exercisable unless and until the Plan
shall have been approved by the Company's stockholders. If such
stockholder approval is not obtained within twelve (12) months
after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive
Stock Options and no Incentive Stock Options shall be granted
thereafter. Amendments to the Plan not requiring stockholder
approval shall become effective when adopted by the Board and
amendments requiring stockholder approval (as provided in Section
19) shall become effective when adopted by the Board, but no
Incentive Stock Option granted after the date of such amendment
shall become exercisable (to the extent that such amendment to
the Plan was required to enable the Company to grant such
Incentive Stock Option to a particular optionee) unless and until
such amendment shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained
within twelve (12) months of the Board's adoption of such
amendment, any Incentive Stock Options granted on or after the
date of such amendment shall terminate to the extent that such
amendment to the Plan was required to enable the Company to grant
such option to a particular optionee. Subject to this
limitation, options may be granted under the Plan at any time
after the effective date and before the date fixed for
termination of the Plan.

(b) Termination. Unless sooner terminated by the
Board, the Plan shall terminate upon the close of business on the
day next preceding the tenth anniversary of the date of its
adoption by the Board. After termination of the Plan, no further
options may be granted under the Plan; provided however, that
such termination will not affect any options granted prior to
termination of the Plan.

23. Provision for Foreign Participants

The Board may, without amending the Plan, modify awards
or options granted to participants who are foreign nationals or
employed outside the United States to recognize differences in
laws, rules, regulations or customs of such foreign jurisdictions
with respect to tax, securities, currency, employee benefit or
other matters.

24. Governing Law

The provisions of this Plan shall be governed and
construed in accordance with the laws of the State of Delaware
without regard to the principles of conflicts of laws.