diff --git a/core/block_processor.go b/core/block_processor.go
index 9fe74ef0a2..f421c35395 100644
--- a/core/block_processor.go
+++ b/core/block_processor.go
@@ -79,12 +79,10 @@ func (self *BlockProcessor) ApplyTransaction(coinbase *state.StateObject, stated
 	statedb.EmptyLogs()
 
 	cb := statedb.GetStateObject(coinbase.Address())
-	/*
-		st := NewStateTransition(NewEnv(statedb, self.bc, tx, block), tx, cb)
-		_, err := st.TransitionState()
-	*/
 	_, gas, err := ApplyMessage(NewEnv(statedb, self.bc, tx, block), tx, cb)
 	if err != nil && (IsNonceErr(err) || state.IsGasLimitErr(err) || IsInvalidTxErr(err)) {
+		// If the account is managed, remove the invalid nonce.
+		self.bc.TxState().RemoveNonce(tx.From(), tx.Nonce())
 		return nil, nil, err
 	}
 
diff --git a/state/managed_state.go b/state/managed_state.go
index b0a129af09..1914e977ae 100644
--- a/state/managed_state.go
+++ b/state/managed_state.go
@@ -2,44 +2,53 @@ package state
 
 import "sync"
 
+type account struct {
+	stateObject *StateObject
+	nstart      uint64
+	nonces      []bool
+}
+
 type ManagedState struct {
 	*StateDB
 
 	mu sync.RWMutex
 
-	accounts map[string]*StateObject
+	accounts map[string]*account
 }
 
 func ManageState(statedb *StateDB) *ManagedState {
 	return &ManagedState{
 		StateDB:  statedb,
-		accounts: make(map[string]*StateObject),
+		accounts: make(map[string]*account),
 	}
 }
 
-func (ms *ManagedState) IncrementNonce(addr []byte) {
-	ms.mu.Lock()
-	defer ms.mu.Unlock()
-
-	ms.getAccount(addr).nonce++
-}
-
-func (ms *ManagedState) DecrementNonce(addr []byte) {
-	// Decrementing a nonce does not mean we are interested in the account
-	// incrementing only happens if you control the account, therefor
-	// incrementing  behaves differently from decrementing
+func (ms *ManagedState) RemoveNonce(addr []byte, n uint64) {
 	if ms.hasAccount(addr) {
 		ms.mu.Lock()
 		defer ms.mu.Unlock()
 
-		ms.getAccount(addr).nonce--
+		account := ms.getAccount(addr)
+		if n-account.nstart < uint64(len(account.nonces)) {
+			reslice := make([]bool, n-account.nstart)
+			copy(reslice, account.nonces[:n-account.nstart])
+			account.nonces = reslice
+		}
 	}
 }
 
-func (ms *ManagedState) GetNonce(addr []byte) uint64 {
+func (ms *ManagedState) NewNonce(addr []byte) uint64 {
 	ms.mu.RLock()
 	defer ms.mu.RUnlock()
-	return ms.getAccount(addr).nonce
+
+	account := ms.getAccount(addr)
+	for i, nonce := range account.nonces {
+		if !nonce {
+			return account.nstart + uint64(i)
+		}
+	}
+	account.nonces = append(account.nonces, false)
+	return uint64(len(account.nonces)) + account.nstart
 }
 
 func (ms *ManagedState) hasAccount(addr []byte) bool {
@@ -47,10 +56,15 @@ func (ms *ManagedState) hasAccount(addr []byte) bool {
 	return ok
 }
 
-func (ms *ManagedState) getAccount(addr []byte) *StateObject {
+func (ms *ManagedState) getAccount(addr []byte) *account {
 	if _, ok := ms.accounts[string(addr)]; !ok {
-		ms.accounts[string(addr)] = ms.GetOrNewStateObject(addr)
+		so := ms.GetOrNewStateObject(addr)
+		ms.accounts[string(addr)] = newAccount(so)
 	}
 
 	return ms.accounts[string(addr)]
 }
+
+func newAccount(so *StateObject) *account {
+	return &account{so, so.nonce - 1, nil}
+}
diff --git a/state/managed_state_test.go b/state/managed_state_test.go
new file mode 100644
index 0000000000..ae374f728a
--- /dev/null
+++ b/state/managed_state_test.go
@@ -0,0 +1,54 @@
+package state
+
+import "testing"
+
+var addr = []byte("test")
+
+func create() (*ManagedState, *account) {
+	ms := ManageState(nil)
+	ms.accounts[string(addr)] = newAccount(&StateObject{nonce: 100})
+
+	return ms, ms.accounts[string(addr)]
+}
+
+func TestNewNonce(t *testing.T) {
+	ms, _ := create()
+
+	nonce := ms.NewNonce(addr)
+	if nonce != 100 {
+		t.Error("expected nonce 101. got", nonce)
+	}
+}
+
+func TestRemove(t *testing.T) {
+	ms, account := create()
+
+	nn := make([]bool, 10)
+	for i, _ := range nn {
+		nn[i] = true
+	}
+	account.nonces = append(account.nonces, nn...)
+
+	i := uint64(5)
+	ms.RemoveNonce(addr, account.nstart+i)
+	if len(account.nonces) != 5 {
+		t.Error("expected", i, "'th index to be false")
+	}
+}
+
+func TestReuse(t *testing.T) {
+	ms, account := create()
+
+	nn := make([]bool, 10)
+	for i, _ := range nn {
+		nn[i] = true
+	}
+	account.nonces = append(account.nonces, nn...)
+
+	i := uint64(5)
+	ms.RemoveNonce(addr, account.nstart+i)
+	nonce := ms.NewNonce(addr)
+	if nonce != 105 {
+		t.Error("expected nonce to be 105. got", nonce)
+	}
+}
diff --git a/xeth/xeth.go b/xeth/xeth.go
index 4ce1ee6a54..3e8c544c6d 100644
--- a/xeth/xeth.go
+++ b/xeth/xeth.go
@@ -353,7 +353,7 @@ func (self *XEth) Transact(fromStr, toStr, valueStr, gasStr, gasPriceStr, codeSt
 	}
 
 	state := self.chainManager.TxState()
-	nonce := state.GetNonce(from)
+	nonce := state.NewNonce(from) //state.GetNonce(from)
 	tx.SetNonce(nonce)
 
 	if err := self.sign(tx, from, false); err != nil {
@@ -362,7 +362,7 @@ func (self *XEth) Transact(fromStr, toStr, valueStr, gasStr, gasPriceStr, codeSt
 	if err := self.eth.TxPool().Add(tx); err != nil {
 		return "", err
 	}
-	state.IncrementNonce(from)
+	//state.IncrementNonce(from)
 
 	if contractCreation {
 		addr := core.AddressFromMessage(tx)