EXHIBIT 10.8

 
Execution Copy

GUARANTY AND SURETYSHIP AGREEMENT

THIS GUARANTY AND SURETYSHIP AGREEMENT (this “Agreement”) made as of the 25th
day of May, 2006, by and among Nestor, Inc., a Delaware corporation (together
with its successors and permitted assigns, the “Borrower”) and the subsidiaries
of the Borrower designated as “Guarantors” on the signature lines hereto
(together with their successors and permitted assigns and any other person or
entity that becomes a Guarantor hereunder pursuant to Section 5 below, jointly
and severally, the “Guarantors” or, individually, a “Guarantor”), in favor of
U.S. Bank National Association, as collateral agent for the Purchasers (as that
term is defined in the Securities Purchase Agreement referred to below)
(together with its successors and assigns in such capacity, the “Agent”).

Background

The Agent, the Borrower and the Purchasers entered into a certain Securities
Purchase Agreement, dated as of May 24, 2006 (as the same may be amended,
restated, modified and/or supplemented from time to time, the “Securities
Purchase Agreement”; terms used herein and not otherwise defined herein are used
as defined in the Securities Purchase Agreement). Nestor Traffic Systems, Inc.
is a Subsidiary of the Borrower; CrossingGuard, Inc. is a Subsidiary of Nestor
Traffic Systems, Inc. Pursuant to the Securities Purchase Agreement, the
Purchasers agreed to purchase the Notes from the Borrower on the terms and
conditions described therein. The Borrower may, among other things, use the
proceeds of the issuance of the Notes to extend credit to, and make capital
contributions in, the Guarantors. Therefore, as a result of the Securities
Purchase Agreement, the Guarantors can obtain capital on terms more favorable to
them as part of this borrowing group than they could acting alone. One of the
conditions to the extension of credit under the Securities Purchase Agreement is
that the Guarantors guaranty payment of and act as surety for the obligations of
the Borrower arising out of the Securities Purchase Agreement and related
agreements and instruments.

Accordingly, each Guarantor and the Borrower, intending to be legally bound,
hereby agrees with the Agent as follows.

NOW THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:

1. Guaranty and Suretyship.

1.1 Guaranty of Payment. The Guarantors hereby jointly and severally agree to
act as surety for the Guaranteed Obligations (as defined in Section 1.2 below),
and irrevocably and unconditionally guaranty to the Agent and the Purchasers
that the Guaranteed Obligations shall be paid in full when due and payable,
whether at the stated or accelerated maturity thereof or upon any mandatory or
voluntary prepayment or otherwise.

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1.2 Definition of “Guaranteed Obligations”. For purposes of this Agreement, the
term “Guaranteed Obligations” shall mean (a) any obligations of the Borrower
pursuant to the Securities Purchase Agreement and the Transaction Documents
including, without limitation, any amounts due from time to time in respect of
(i) principal and interest thereon under the Notes, (ii) conversion, exercise or
redemption of the Notes and the Warrants, as applicable, (iii) fees payable
under the Securities Purchase Agreement and (iv) indemnifications provided for,
and other amounts payable, under the Securities Purchase Agreement or other
Transaction Documents. Notwithstanding the definition of “Guaranteed
Obligations” herein, the liability of each Guarantor hereunder is limited to an
amount equal to (x) the amount that would render this guaranty void, voidable or
unenforceable against such Guarantor’s creditors or creditors’ representatives
under any applicable fraudulent conveyance, fraudulent transfer or similar act
or under Section 544 or 548 of the Bankruptcy Code of 1978, as amended, minus
(y) $1.00 (one U.S. Dollar).

1.3 Obligations of Guarantors Absolute, Etc. The obligations of the Guarantors
hereunder shall be absolute and unconditional. Each Guarantor, jointly and
severally, guarantees that the Guaranteed Obligations will be paid strictly in
accordance with the terms of the agreement, instrument or document giving rise
to such Guaranteed Obligations, regardless of any law, regulation or order now
or hereafter in effect in any jurisdiction affecting any such terms or the
rights of the Agent and the Purchasers with respect thereto. The liability of
the Guarantors hereunder shall be absolute and unconditional irrespective of:

(a) any lack of validity or enforceability of any Transaction Document;

(b) any change in the time, manner or place of payment of the Guaranteed
Obligations;

(c) any amendment or modification of or supplement to the Transaction Documents
(including, without limitation, any amendment which would increase the amount of
the Guaranteed Obligations), or any furnishing or acceptance of any security, or
any release of any security or the release of any Person’s obligations
(including without limitation, any Guarantor, the Borrower or any pledgor), with
respect to the Guaranteed Obligations;

(d) any waiver, consent, extension, indulgence or other action or inaction under
or in respect of any such instrument, document or agreement or any exercise or
nonexercise of any right, remedy, power or privilege under or in respect of any
such instrument;

(e) any counterclaim, setoff, recoupment or defense based upon any claim any
Guarantor, the Borrower or any pledgor may have against the Agent or any
Purchaser;

(f) any bankruptcy, insolvency, reorganization, arrangement, readjustment,
composition, liquidation or similar proceeding with respect to the Borrower, any
Affiliate of the Borrower or any Guarantor or their respective properties or
creditors;

(g) any invalidity or unenforceability, in whole or in part, of any term hereof
or of the Transaction Documents;

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(h) any failure on the part of the Borrower or any Affiliate or any Person that
may have been an Affiliate for any reason to perform or comply with any term of
the Transaction Documents; or

(i) any other occurrence whatsoever, whether similar or dissimilar to the
foregoing.

1.4 Continuing Guaranty. This guaranty and suretyship is an absolute,
unconditional, present and continuing guaranty and suretyship of payment and is
in no way conditional or contingent; it shall remain in full force and effect
until terminated pursuant to Section 7 below.

1.5 Joint and Several Liability. Each and every representation, warranty,
covenant and agreement made by the Guarantors, or any of them, under this
Agreement shall be and constitute joint and several obligations of all of the
Guarantors, whether or not so expressly stated herein.

1.6 Waivers. Each Guarantor hereby waives, to the fullest extent permitted by
applicable law, (a) all presentments, demands for performance, notice of
non-performance, protests, notices of protests and notices of dishonor in
connection with the Guaranteed Obligations or any agreement relating thereto;
(b) notice of acceptance of this Agreement; (c) any requirement of diligence or
promptness on the part of the Agent or any Purchaser in the enforcement of its
rights hereunder or under the Transaction Documents; (d) any enforcement of any
present or future agreement or instrument relating directly or indirectly to the
Guaranteed Obligations; (e) notice of any of the matters referred to in
subsection 1.3 hereof; (f) notices of every kind and description which may be
required to be given by any statute or rule of law; and (g) any defense of any
kind which it may now or hereafter have with respect to its liability under this
Agreement to the fullest extent permitted by law. Without limiting the
foregoing, the Agent and the Purchasers shall not be required to make any demand
upon, or to pursue or exhaust any rights or remedies against the Borrower, any
other Guarantor or any other Person, or against the collateral security, for the
Guaranteed Obligations. No failure on the part of the Agent or the Purchasers to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law. Each Guarantor hereby agrees that it will not enforce
or otherwise exercise or claim or assert any rights of subrogation or
contribution against any Person with respect to the Guaranteed Obligations or
any security therefor unless and until all the Guaranteed Obligations are paid
in full. EACH GUARANTOR’S WAIVERS UNDER THIS SECTION 1.6 HAVE BEEN MADE
VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY AND AFTER SUCH GUARANTOR HAS BEEN
APPRISED AND COUNSELED BY ITS ATTORNEY AS TO THE NATURE THEREOF AND ITS POSSIBLE
ALTERNATIVE RIGHTS.

2. Expenses.

Whether or not the transactions contemplated by this Agreement are fully
consummated, each Guarantor and the Borrower shall promptly pay (or reimburse,
as the Agent may elect) all costs and expenses which the Agent has incurred or
may incur in connection with the negotiation, preparation, reproduction,
interpretation, administration and enforcement of this Agreement and all
amendments, waivers, modifications and supplements hereto and the collection of
all amounts due hereunder, including, without limitation, reasonable fees of
counsel to the Agent.

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3. Representations and Warranties.

The Guarantors hereby jointly and severally represent and warrant that each of
the representations and warranties relating to them set forth in any Transaction
Document is incorporated herein by reference and is true and correct on and as
of the date hereof.

4. Covenants.

Each of the covenants and agreements of the Borrower which are set forth or
incorporated in any of the Transaction Documents and which are expressly
applicable or refer to the “Subsidiaries” of Borrower or otherwise refer to any
Guarantors are hereby incorporated by reference as though set forth herein in
their entirety, and each Guarantor hereby agrees to perform and abide by each
such covenant and agreement which purports to be applicable to it.

5. Additional Parties.

Except as otherwise provided in the Transaction Documents, the Guarantors shall
at all times constitute all of the direct and indirect Subsidiaries of Borrower
(other than Nestor Interactive, Inc. (“NII”), but only so long as NII is
inactive and has no significant assets other than net operating losses). If any
Person becomes such a Subsidiary after the date hereof or, in the case of NII,
if it ceases to be inactive or has significant assets other than net operating
losses, such Person shall become a Guarantor hereunder, and the Borrower shall
cause such Person to signify its acceptance of the terms hereof by execution and
delivery to the Agent of one or more counterparts of the Joinder hereto,
appropriately dated.

6. Right of Set-off.

Each Guarantor hereby pledges and gives to each Purchaser a lien and security
interest for the amount of the Guaranteed Obligations upon and in the balance of
any account maintained by such Guarantor with such Purchaser or any other
liability of such Purchaser to such Guarantor. Upon the occurrence of and
throughout the period in which the Purchasers reasonably believe there is
continuing an Event of Default under the Notes, each Guarantor hereby authorizes
each Purchaser to apply any such deposit balances now or hereafter in the
possession of such Purchaser to the payment of the Guaranteed Obligations. The
provisions hereof shall not be deemed or construed to limit rights of set-off or
liens or similar rights which any Purchaser may otherwise have by reason of
applicable Law or other agreement.

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7. Termination of Guaranty.

7.1 Termination of Guaranty Obligations of All Guarantors. At such time as (a)
no Purchaser has any Commitment to make further fundings to the Borrower under
the terms of the Securities Purchase Agreement and (b) all the Guaranteed
Obligations in respect of the Notes have been indefeasibly paid and/or performed
in full (including the conversion in full of the Notes), then the guaranty
provided for herein and this Agreement shall terminate, provided, however, that
(i) all indemnities of the Guarantors or the Borrower contained in this
Agreement or any Transaction Document shall survive and remain operative and in
full force and effect regardless of the termination of this Agreement, and (ii)
the guaranty provided for herein shall be reinstated if at any time any payment
of any of the Guaranteed Obligations is rescinded or must otherwise be returned
by the Agent or any Purchaser upon the insolvency, bankruptcy or reorganization
of the Borrower or any Guarantor or otherwise, all as though such payment had
not been made.

7.2 Termination of Guaranty Obligations of Sold Guarantors. Effective upon the
closing of a sale or other disposition by the Borrower or any Subsidiary of the
Borrower of all the outstanding capital stock of, or all partnership interests
or all other equity interests in, any of the Guarantors hereunder (any Guarantor
being so sold is hereinafter the “Sold Guarantor”) in conformity with the
provisions of the Securities Purchase Agreement and the Notes, and receipt by
the Agent of a certification to such effect from the chief financial officer of
the Borrower, the obligations of that Sold Guarantor hereunder (including,
without limitation, obligations under Section 9 below) shall terminate. However,
all the obligations of the other Guarantors hereunder shall remain in full force
and effect.

8. Miscellaneous.

8.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York (without giving effect to the
choice of law provisions thereof).

8.2 Specific Performance. The Borrower and each Guarantor hereby authorizes the
Agent and the Purchasers to demand specific performance of this Agreement at any
time when the Borrower or such Guarantor shall have failed to comply with any
provision hereof, and the Borrower and each Guarantor hereby irrevocably waives
any defense based on the adequacy of a remedy at law which might be asserted as
a bar to the remedy of specific performance hereof in any action brought
therefor.

8.3 Acknowledgement of Terms of Securities Purchase Agreement and the Notes;
Relationship to Securities Purchase Agreement and the Notes. Each Guarantor
hereby acknowledges receipt from the Borrower of a correct and complete copy of
the Securities Purchase Agreement and the Notes and consents to all of the
provisions of the Securities Purchase Agreement and the Notes as in effect on
the date of this Agreement and agrees that its consent is not required for any
amendments, modifications, restatements or waivers of the Securities Purchase
Agreement or the Notes or any of the provisions thereof. If any of the terms
hereof are inconsistent with those of the Securities Purchase Agreement or the
Notes (including, without limitation, any amendments, restatements, supplements
and waivers that the Guarantors have been made aware of), those of the
Securities Purchase Agreement or the Notes, as applicable, shall control.

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8.4 Non-Exclusive Remedies. No remedy or right herein conferred upon, or
reserved to the Agent or the Purchasers is intended to be to the exclusion of
any other remedy or right, but each and every such remedy or right shall be
cumulative and shall be in addition to every other remedy or right given
hereunder or under any other contract or under law.

8.5 Delay and Non-Waiver. No delay or omission by the Agent or any Purchaser to
exercise any remedy or right hereunder shall impair any such remedy or right or
shall be construed to be a waiver of any Event of Default, or an acquiescence
therein, nor shall it affect any subsequent Event of Default of the same or of a
different nature.

8.6 Successors and Assigns. Except as otherwise provided in the Securities
Purchase Agreement, the Agent may assign or transfer this Agreement and any or
all rights or obligations hereunder without the consent of the Borrower or any
Guarantor and without prior notice. Neither the Borrower nor any Guarantor shall
assign or transfer this Agreement or any rights or obligations hereunder without
the prior written consent of the Agent. The rights and privileges of the Agent
and the Purchasers under this Agreement shall inure to the benefit of their
respective successors, assigns and participants. All promises, covenants and
agreements of the Borrower and each Guarantor contained in this Agreement shall
be binding upon personal representatives, heirs, successors and assigns of such
Person. Notwithstanding the foregoing, if there shall become additional
“Guarantors” or if there should be any assignment of any guaranty obligations by
operation of law or in contravention of the terms of this Agreement or
otherwise, then all covenants, agreements, representations and warranties made
herein or pursuant hereto by or on behalf of the Guarantors shall bind the
successors and assigns of the Guarantors and any such additional Guarantors,
jointly and severally, together with the preexisting Guarantors whether or not
such new or additional Guarantors execute the Joinder as set forth in Section 5.

8.7 Amendments and Waivers. This Agreement represents the entire agreement
between the parties with respect to the transactions contemplated herein and,
except as expressly provided herein, shall not be affected by reference to any
other documents. The Purchasers holding 75% of the total outstanding principal
balance of the Notes (the “Required Holders”) shall have the right to direct the
Agent, from time to time, to consent to any amendment, modification or
supplement to or waiver of any provision of this Agreement and to release any
Collateral from any lien or security interest held by the Agent; provided,
however, that (i) no such direction shall require the Agent to consent to the
modification of any provision or portion thereof which (in the sole judgment of
the Agent) is intended to benefit the Agent, (ii) the Agent shall have the right
to decline to follow any such direction if the Agent shall determine in good
faith that the directed action is not permitted by the terms of this Agreement
or may not lawfully be taken and (iii) no such direction shall waive or modify
any provision of this Agreement the waiver or modification of which requires the
consent of all Purchasers unless all Purchasers consent thereto. The Agent may
rely on any such direction given to it by the Required Holders and shall be
fully protected in relying thereon, and shall under no circumstances be liable,
except in circumstances involving the Agent's gross negligence or willful
misconduct as shall have been determined in a final nonappealable judgment of a
court of competent jurisdiction, to any holder of the Notes or any other person
or entity for taking or refraining from taking action in accordance with any
direction or otherwise in accordance with this Agreement.

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8.8 Notices and Communications. Any notice contemplated herein or required or
permitted to be given hereunder shall be made in the manner set forth in the
Securities Purchase Agreement and delivered at the addresses set forth on the
signature pages to this Agreement, or to such other address as any party hereto
may have last specified by written notice to the other party or parties.

8.9 Headings; Counterparts. Headings to this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, and all of which, taken together, shall constitute one instrument.
Delivery of a photocopy or telecopy of an executed counterpart of a signature
page to this Agreement shall be as effective as delivery of a manually executed
counterpart of such signature page.

8.10 Severability. If any of the provisions or terms of this Agreement shall for
any reason be held to be invalid or unenforceable such invalidity or
unenforceability shall not affect any of the other terms hereof, but this
Agreement shall be construed as if such invalid or unenforceable term had never
been contained herein. Any such invalidity or unenforceability in a particular
jurisdiction shall not be deemed to render a provision invalid or unenforceable
in any other jurisdiction. Without limiting the generality of the foregoing, any
invalidity, illegality or unenforceability of any term or provision of this
Agreement in any jurisdiction or as against any Guarantor shall not affect the
validity, legality or enforceability of any other terms hereof or in any other
jurisdiction or against any other Guarantor.

9. Indemnification.

Each Guarantor, jointly and severally, shall indemnify, reimburse and hold
harmless all Indemnitees from and against any and all losses, claims,
liabilities, damages, penalties, suits, costs and expenses, of any kind or
nature, (including fees relating to the cost of investigating and defending any
of the foregoing) imposed on, incurred by or asserted against such Indemnitee in
any way related to or arising from or alleged to arise from this Agreement or
the guarantees provided herein except any such losses, claims, liabilities,
damages, penalties, suits, costs and expenses which result from the gross
negligence or willful misconduct of the Indemnitee as determined by a final
nonappealable decision of a court of competent jurisdiction. This
indemnification provision is in addition to, and not in limitation of, any other
indemnification provision in any other Transaction Document.

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10. Jurisdiction; Waiver of Jury Trial.

For the purpose of any action that may be brought in connection with this
Agreement, the Borrower and each Guarantor hereby consents to the jurisdiction
and venue of the courts of the State of New York or of any federal court located
in such state and waives personal service of any and all process upon it and
consents that all such service of process be made by certified or registered
mail directed to the Borrower or Guarantor at the address provided for in
Section 8.8. Service so made shall be deemed to be completed upon actual receipt
at the address specified in said section. The Borrower and each Guarantor waives
the right to contest the jurisdiction and venue of the courts located in the
county of New York, State of New York on the ground of inconvenience or
otherwise and, further, waives any right to bring any action or proceeding
against (a) the Agent in any court outside the county of New York, State of New
York, or (b) any other Purchaser other than in a state within the United States
designated by such Purchaser. The provisions of this Section shall not limit or
otherwise affect the right of the Agent or any Purchaser to institute and
conduct an action in any other appropriate manner, jurisdiction or court.

NO PARTY TO THIS AGREEMENT, NOR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL
REPRESENTATIVE OF THE FOREGOING SHALL SEEK A JURY TRIAL IN ANY PROCEEDING BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT RELATING
TO SUCH INDEBTEDNESS OR THE RELATIONSHIP BETWEEN OR AMONG SUCH PERSONS OR ANY OF
THEM. NO SUCH PERSON WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER
ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.

EXCEPT AS PROHIBITED BY LAW, EACH PARTY HERETO WAIVES ANY RIGHTS IT MAY HAVE TO
CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THIS SECTION, ANY SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. EACH PARTY TO THIS AGREEMENT (i)
CERTIFIES THAT NEITHER THE AGENT NOR ANY REPRESENTATIVE, OR ATTORNEY OF THE
AGENT NOR ANY PURCHASER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT
OR SUCH PURCHASER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVERS AND (ii) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO
THIS AGREEMENT AND EACH OTHER TRANSACTION DOCUMENT BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS HEREIN. THE PROVISIONS OF THIS SECTION HAVE
BEEN FULLY DISCLOSED TO THE PARTIES AND THE PROVISIONS SHALL BE SUBJECT TO NO
EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER
PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL
INSTANCES.

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IN WITNESS WHEREOF, the undersigned have executed this Guaranty and Suretyship
Agreement on the date and year first above written.

 
Borrower:
     
NESTOR, INC.
     
By: /s/Nigel P. Hebborn
 
Name:  Nigel P. Hebborn
 
Title:  CFO
 
Address:  42 Oriental Street
 
Providence, RI 02908
 
Phone No.:  401-274-5658x738 
 
Fax No.:  401-274-5707
 
Attention: Benjamin M. Alexander, Esq.
     
Guarantors:
     
NESTOR TRAFFIC SYSTEMS, INC.
     
By: /s/Nigel P. Hebborn
 
Name: Nigel P. Hebborn
 
Title: CFO
 
Address: 42 Oriental Street
 
Providence, RI 02908
 
Phone No.: 401-274-5658x738 
 
Fax No.:  401-274-5707
 
Attention: Benjamin M. Alexander, Esq.
     
CROSSINGGUARD, INC.
     
By:/s/Nigel P. Hebborn
 
Name: Nigel P. Hebborn
 
Title: CFO
 
Address: 42 Oriental Street
 
Providence, RI 02908
 
Phone No.: 401-274-5658x738 
 
Fax No.:  401-274-5707
 
Attention: Benjamin M. Alexander, Esq.

[Signature Page to Guaranty and Suretyship Agreement]

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Agent:
       
U.S. BANK NATIONAL ASSOCIATION
     
By:/s/Arthur L. Blakeslee
 
Name: Arthur L. Blakeslee
 
Title: Vice President
     
U.S. Bank National Association
 
Corporate Trust Services
 
225 Asylum Street, 23rd Floor 
 
Hartford, CT 06103
 
Telephone: (860) 241-6859
 
Facsimile: (860) 241-6881
 
Attention: Arthur Blakeslee
                           

[Signature Page to Guaranty and Suretyship Agreement]

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JOINDER

The undersigned acknowledges that it is a Guarantor under the Guaranty and
Suretyship Agreement, dated May [___], 2006 made by and among Nestor, Inc. (the
“Borrower”) and the subsidiaries of the Borrower designated as “Guarantors” on
the signature lines thereto in favor of [_____________] as collateral agent for
the Purchasers (as defined in the Securities Purchase Agreement referred to
therein), and hereby agrees to be bound by the foregoing Guaranty and Suretyship
Agreement and to perform the covenants applicable to Guarantors contained or
incorporated therein, and hereby confirms the accuracy of the representations
and warranties made or incorporated therein insofar as such representation and
warranties purportedly relate to the undersigned.

 
[                                                                                                                                                                                                          
]
         
By:
 
Name:
 
Title:
 
Phone No.:
 
Fax No.:
 
Attention:

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