Exhibit 10.11


    EXHIBIT
      10.11

      


       

      REGISTRATION
        RIGHTS AGREEMENT

       

      REGISTRATION
        RIGHTS AGREEMENT
        (this
“Agreement”),
        dated
        as of May 25, 2006, by and among Nestor, Inc., a Delaware corporation (the
        “Company”),
        and
        the undersigned buyers (each, a “Buyer”,
        and
        collectively, the “Buyers”).

       

      


      WHEREAS:

       

      A. In
        connection with the Securities Purchase Agreement, dated as of May 24, 2006,
        by
        and among the Company and the Buyers (the “Securities
        Purchase Agreement”),
        the
        Company has agreed, upon the terms and subject to the conditions set forth
        in
        the Securities Purchase Agreement, to issue and sell to each Buyer (i) the
        Company’s 7.0% Senior Secured Convertible Notes (the “Notes”),
        which
        will be convertible into shares (“Conversion Shares”)
        of the
        Company’s common stock, par value $.01 per share (“Common
        Stock”),
        in
        accordance with the terms of the Notes and (ii) warrants (the “Warrants”)
        which
        will be exercisable to purchase shares of Common Stock (as exercised
        collectively, the “Warrant
        Shares”).

       

      B. In
        accordance with the terms of the Securities Purchase Agreement, the Company
        has
        agreed to provide certain registration rights under the Securities Act of
        1933,
        as amended, and the rules and regulations thereunder, or any similar successor
        statute (collectively, the “1933
        Act”),
        and
        applicable state securities laws.

       

      NOW,
        THEREFORE,
        in
        consideration of the premises and the mutual covenants contained herein and
        other good and valuable consideration, the receipt and sufficiency of which
        are
        hereby acknowledged, the Company and each of the Buyers hereby agree as
        follows:

       

      1. Definitions.
        

       

      Capitalized
        terms used herein and not otherwise defined herein shall have the respective
        meanings set forth in the Securities Purchase Agreement. As used in this
        Agreement, the following terms shall have the following meanings:

       

      a. “Business
        Day”
means
        any day other than Saturday, Sunday or any other day on which commercial
        banks
        in The City of New York are authorized or required by law to remain
        closed.

       

      b. “Closing
        Date”
shall
        have the meaning set forth in the Securities Purchase Agreement.

       

      c. “Effective
        Date”
means
        the date the Registration Statement has first been declared effective by
        the
        SEC.

       

      d. “Effectiveness
        Deadline”
means
        the date which is (i) in the event that the Registration Statement is not
        subject to full review by the SEC, 60 calendar days after the Filing Deadline
        or
        (ii) in the event that the Registration Statement is subject to full review
        by
        the SEC, 90 calendar days after the Filing Deadline.

       

      e. “Filing
        Deadline”
means
        the earlier of (i) 10 calendar days after the Company’s receipt of Stockholder
        Approval and (ii) July 17, 2006.

       

      f. “Investor”
means
        a
        Buyer or any transferee or assignee thereof to whom a Buyer or another Investor
        assigns its rights under this Agreement and who agrees to become bound by
        the
        provisions of this Agreement in accordance with Section 9.

       


      
        
          
          

        

        
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      g. “Person”
means
        an individual, a limited liability company, a partnership, a joint venture,
        a
        corporation, a trust, an unincorporated organization and a government or
        any
        department or agency thereof.

       

      h. “register,”
        “registered,”
and
        “registration”
refer
        to a registration effected by preparing and filing one or more Registration
        Statements (as defined below) in compliance with the 1933 Act and pursuant
        to
        Rule 415 and the declaration or ordering of effectiveness of such Registration
        Statement(s) by the SEC.

       

      i. “Registrable
        Securities”
means
        (i) the Conversion Shares issued or issuable upon conversion of the Notes,
        (ii)
        the Warrant Shares issued or issuable upon exercise of the Warrants, (iii)
        any
        share capital of the Company issued or issuable with respect to the Notes,
        the
        Conversion Shares, the Warrant Shares or the Warrants as a result of any
        split,
        dividend, recapitalization, exchange or similar event or otherwise, without
        regard to any limitations on conversion of the Notes or exercise of the Warrants
        and (iv) any share capital of the Company issued or issuable upon a repurchase,
        redemption or similar transaction with respect to the Notes.

       

      j. “Registration
        Statement”
means
        a
        registration statement or registration statements of the Company filed under
        the
        1933 Act covering the Registrable Securities.

       

      k. “Required
        Holders”
means
        the holders of at least 75% of the Registrable Securities.

       

      l. “Required
        Registration Amount”
means
        120% of the number of Registrable Securities issued and issuable pursuant
        to the
        Notes and Warrants as of the trading day immediately preceding the applicable
        date of determination, subject to adjustment as provided in Section 2(e)
        (without regard to any limitations on conversion of the Notes or exercise
        of the
        Warrants).

       

      m. “Rule
        415”
means
        Rule 415 under the 1933 Act or any successor rule providing for offering
        securities on a continuous or delayed basis.

       

      n. “SEC”
means
        the United States Securities and Exchange Commission.

       

      2. Registration.

       

      a. Mandatory
        Registration.
        The
        Company shall prepare, and, as soon as practicable but in no event later
        than
        the Filing Deadline, file with the SEC the Registration Statement on Form
        S-3
        covering the resale of all of the Registrable Securities. In the event that
        Form
        S-3 is unavailable for such a registration, the Company shall use such other
        form as is available for such a registration, subject to the provisions of
        Section 2(d). The Registration Statement prepared pursuant hereto shall register
        for resale at least the number of shares of Common Stock equal to the Required
        Registration Amount as of the date the Registration Statement is initially
        filed
        with the SEC. The Registration Statement shall contain (except if otherwise
        directed by the Required Holders) the “Selling
        Stockholders”
and
        “Plan
        of Distribution”
        sections in substantially the form attached hereto as Exhibit
        A.
        The
        Company shall use its best efforts to have the Registration Statement declared
        effective by the SEC as soon as practicable, but in no event later than the
        Effectiveness Deadline. By 9:30am on the Business Day immediately following
        the
        Effective Date, the Company shall file with the SEC in accordance with Rule
        424
        under the 1933 Act the final prospectus to be used in connection with sales
        pursuant to such Registration Statement.

       


      
        
          
          

        

        
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      b. Allocation
        of Registrable Securities.
        The
        initial number of Registrable Securities included in any Registration Statement
        and any increase in the number of Registrable Securities included therein
        shall
        be allocated pro rata among the Investors based on the number of Registrable
        Securities held by each Investor at the time the Registration Statement covering
        such initial number of Registrable Securities or increase thereof is declared
        effective by the SEC. In the event that an Investor sells or otherwise transfers
        any of such Investor’s Registrable Securities to one or more Investors, each
        transferee Investor shall be allocated a pro rata portion of the number of
        Registrable Securities included in such Registration Statement for such
        transferor Investor at the time of transfer. Any shares of Common Stock included
        in a Registration Statement that remain allocated to any Person which ceases
        to
        hold any Registrable Securities covered by such Registration Statement shall
        be
        allocated to the remaining Investors, pro rata based on the number of
        Registrable Securities then held by such Investors which are covered by such
        Registration Statement. In no event shall the Company include any securities
        other than Registrable Securities on any Registration Statement without the
        prior written consent of the Required Holders.

       

      c. Legal
        Counsel.
        Subject
        to Section 5 hereof, the Required Holders shall have the right to select
        two
        legal counsel to review and oversee any registration pursuant to this Section
        2
        (collectively, the “Legal
        Counsel”),
        which
        shall be Schulte Roth & Zabel LLP and Drinker Biddle & Reath LLP or such
        other counsel as thereafter designated by the Required Holders. The Company
        and
        Legal Counsel shall reasonably cooperate with each other in performing the
        Company’s obligations under this Agreement.

       

      d. Ineligibility
        for Form S-3.
        In the
        event that Form S-3 is not available for the registration of the resale of
        Registrable Securities hereunder, the Company shall (i) register the resale
        of
        the Registrable Securities on another appropriate form reasonably acceptable
        to
        the Required Holders and (ii) undertake to register the Registrable Securities
        on Form S-3 as soon as such form is available, provided that the Company
        shall
        maintain the effectiveness of the Registration Statement then in effect until
        such time as a Registration Statement on Form S-3 covering the Registrable
        Securities has been declared effective by the SEC.

       

      e. Sufficient
        Number of Shares Registered.
        In the
        event the number of shares available under a Registration Statement filed
        pursuant to Section 2(a) is insufficient to cover all of the Registrable
        Securities required to be covered by such Registration Statement or an
        Investor’s allocated portion of the Registrable Securities pursuant to Section
        2(b), the Company shall amend the applicable Registration Statement, or file
        a
        new Registration Statement (on the short form available therefor, if
        applicable), or both, so as to cover at least the Required Registration Amount
        as of the trading day immediately preceding the date of the filing of such
        amendment or new Registration Statement, in each case, as soon as practicable,
        but in any event not later than 30 days after the necessity therefor arises.
        The
        Company shall use its best efforts to cause such amendment and/or new
        Registration Statement to become effective as soon as practicable following
        the
        filing thereof. For purposes of the foregoing provision, the number of shares
        available under a Registration Statement shall be deemed “insufficient to cover
        all of the Registrable Securities or an Investor’s allocated portion of the
        Registrable Securities” if at any time the number of shares of Common Stock
        available for resale under the Registration Statement is less than the Required
        Registration Amount as of such time. The calculation set forth in the foregoing
        sentence shall be made without regard to any limitations on the conversion
        of
        the Notes or the exercise of the Warrants and such calculation shall assume
        that
        the Notes are then convertible for shares of Common Stock at the then prevailing
        Conversion Price (as defined in the Notes) and the Warrants are then exercisable
        for shares of Common Stock at the then prevailing Exercise Price (as defined
        in
        the Warrants).

       


      
        
          
          

        

        
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      f. Effect
        of Failure to File and Obtain and Maintain Effectiveness of Registration
        Statement.
        If (i)
        a Registration Statement covering all of the Registrable Securities required
        to
        be covered thereby and required to be filed by the Company pursuant to this
        Agreement is (A) not filed with the SEC on or before the applicable Filing
        Deadline (a “Filing
        Failure”)
        or (B)
        not declared effective by the SEC on or before the applicable Effectiveness
        Deadline (an “Effectiveness
        Failure”)
        or
        (ii) on any day after the Effective Date sales of all of the Registrable
        Securities required to be included on such Registration Statement cannot
        be made
        (other than during an Allowable Grace Period (as defined in Section 3(r))
        pursuant to such Registration Statement or otherwise (including, without
        limitation, because of a failure to keep such Registration Statement effective,
        to disclose such information as is necessary for sales to be made pursuant
        to
        such Registration Statement, to register a sufficient number of shares of
        Common
        Stock or to maintain the listing of the Common Stock) (a “Maintenance
        Failure”)
        then,
        as partial relief for the damages to any holder by reason of any such delay
        in
        or reduction of its ability to sell the underlying shares of Common Stock
        (which
        remedy shall not be exclusive of any other remedies available at law or in
        equity), the Company shall pay to each holder of Registrable Securities relating
        to such Registration Statement an amount in cash equal to 1.5% of the aggregate
        Purchase Price (as defined in the Securities Purchase Agreement) of such
        Investor’s Notes relating to the Registrable Securities required to be included
        in such Registration Statement on each of the following dates: (i) on every
        30th
        day after the day of a Filing Failure and thereafter (pro rated for periods
        totaling less than 30 days) until such Filing Failure is cured; (ii) on every
        30th day after the day of an Effectiveness Failure and thereafter (pro rated
        for
        periods totaling less than 30 days) until such Effectiveness Failure is cured;
        (iii) on every 30th day after the initial day of a Maintenance Failure and
        thereafter (pro rated for periods totaling less than 30 days) until such
        Maintenance Failure is cured. The payments to which a holder shall be entitled
        pursuant to this Section 2(f) are referred to herein as “Registration
        Delay Payments.”
        Registration Delay Payments shall be paid on the earlier of (I) the 30th
        day
        after the event or failure giving rise to the Registration Delay Payments
        has
        occurred and (II) the third Business Day after the event or failure giving
        rise
        to the Registration Delay Payments is cured. In the event the Company fails
        to
        make Registration Delay Payments in a timely manner, such Registration Delay
        Payments shall bear interest at the rate of two percent per month (prorated
        for
        partial months) until paid in full. Notwithstanding anything herein or in
        the
        Securities Purchase Agreement to the contrary, in no event shall the aggregate
        amount of Registration Delay Payments payable to any Investor exceed, in
        the
        aggregate, 10% of the aggregate Purchase Price of such Investor’s
        Notes.

       

      3. Related
        Obligations.

       

      At
        such
        time as the Company is obligated to file a Registration Statement with the
        SEC
        pursuant to Section 2(a), 2(d) or 2(e), the Company will use its best efforts
        to
        effect the registration of the Registrable Securities in accordance with
        the
        intended method of disposition thereof and, pursuant thereto, the Company
        shall
        have the following obligations:

       

      a. The
        Company shall submit to the SEC, within two Business Days after the Company
        learns that no review of a particular Registration Statement will be made
        by the
        staff of the SEC or that the staff has no further comments on a particular
        Registration Statement, as the case may be, a request for acceleration of
        effectiveness of such Registration Statement to a time and date not later
        than
        48 hours after the submission of such request. The Company shall keep each
        Registration Statement effective pursuant to Rule 415 at all times until
        the
        earlier of (i) the date as of which the Investors may sell all of the
        Registrable Securities covered by such Registration Statement without
        restriction pursuant to Rule 144(k) (or any successor thereto) promulgated
        under
        the 1933 Act or (ii) the date on which the Investors shall have sold all
        of the
        Registrable Securities covered by such Registration Statement (the “Registration
        Period”).
        The
        Company shall ensure that each Registration Statement (including any amendments
        or supplements thereto and prospectuses contained therein) does not contain
        any
        untrue statement of a material fact or omit to state a material fact required
        to
        be stated therein, or necessary to make the statements therein (in the case
        of
        prospectuses, in the light of the circumstances in which they were made)
        not
        misleading.

       


      
        
          
          

        

        
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      b. The
        Company shall prepare and file with the SEC such amendments (including
        post-effective amendments) and supplements to a Registration Statement and
        the
        prospectus used in connection with such Registration Statement, which prospectus
        is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may
        be
        necessary to keep such Registration Statement effective at all times during
        the
        Registration Period, and, during such period, comply with the provisions
        of the
        1933 Act with respect to the disposition of all Registrable Securities of
        the
        Company covered by such Registration Statement until such time as all of
        such
        Registrable Securities shall have been disposed of in accordance with the
        intended methods of disposition by the seller or sellers thereof as set forth
        in
        such Registration Statement. In the case of amendments and supplements to
        a
        Registration Statement which are required to be filed pursuant to this Agreement
        (including pursuant to this Section 3(b)) by reason of the Company filing
        a
        report on Form 10-Q, Form 10-K or any analogous report under the Securities
        Exchange Act of 1934, as amended (the “1934
        Act”),
        the
        Company shall have incorporated such report by reference into such Registration
        Statement, if applicable, or shall file such amendments or supplements with
        the
        SEC on the same day on which the 1934 Act report is filed which created the
        requirement for the Company to amend or supplement such Registration
        Statement.

       

      c. The
        Company shall (A) permit Legal Counsel and each Investor to review and comment
        upon (i) a Registration Statement at least three Business Days prior to its
        filing with the SEC and (ii) all amendments and supplements to all Registration
        Statements (except for Annual Reports on Form 10-K, and Reports on Form 10-Q,
        Reports on Form 8-K and any similar or successor reports) within a reasonable
        number of days prior to their filing with the SEC, and (B) not file any
        Registration Statement or amendment or supplement thereto in a form to which
        Legal Counsel or any Investor reasonably objects. The Company shall not submit
        a
        request for acceleration of the effectiveness of a Registration Statement
        or any
        amendment or supplement thereto without the prior approval of Legal Counsel,
        which consent shall not be unreasonably withheld, conditioned or delayed.
        The
        Company shall furnish to Legal Counsel, without charge, (i) copies of any
        correspondence from the SEC or the staff of the SEC to the Company or its
        representatives relating to any Registration Statement, (ii) promptly after
        the
        same is prepared and filed with the SEC, one copy of any Registration Statement
        and any amendment(s) thereto, including financial statements and schedules,
        all
        documents incorporated therein by reference, if requested by an Investor,
        and
        all exhibits and (iii) upon the effectiveness of any Registration Statement,
        one
        copy of the prospectus included in such Registration Statement and all
        amendments and supplements thereto. The Company shall cooperate with Legal
        Counsel in performing the Company’s obligations pursuant to this Section
        3.

       

      d. The
        Company shall furnish to each Investor whose Registrable Securities are included
        in any Registration Statement, without charge, (i) promptly after the same
        is
        prepared and filed with the SEC, at least one copy of such Registration
        Statement and any amendment(s) thereto, including financial statements and
        schedules, all documents incorporated therein by reference, if requested
        by an
        Investor, all exhibits and each preliminary prospectus, (ii) upon the
        effectiveness of any Registration Statement, ten (10) copies of the prospectus
        included in such Registration Statement and all amendments and supplements
        thereto (or such other number of copies as such Investor may reasonably request)
        and (iii) such other documents, including copies of any preliminary or final
        prospectus, as such Investor may reasonably request from time to time in
        order
        to facilitate the disposition of the Registrable Securities owned by such
        Investor.

       

      e. The
        Company shall use its best efforts to (i) register and qualify, unless an
        exemption from registration and qualification applies, the resale by Investors
        of the Registrable Securities covered by a Registration Statement under such
        other securities or “blue sky” laws of all applicable jurisdictions in the
        United States, (ii) prepare and file in those jurisdictions, such amendments
        (including post-effective amendments) and supplements to such registrations
        and
        qualifications as may be necessary to maintain the effectiveness thereof
        during
        the Registration Period, (iii) take such other actions as may be necessary
        to
        maintain such registrations and qualifications in effect at all times during
        the
        Registration Period, and (iv) take all other actions reasonably necessary
        or
        advisable to qualify the Registrable Securities for sale in such jurisdictions;
        provided, however, that the Company shall not be required in connection
        therewith or as a condition thereto to (x) qualify to do business in any
        jurisdiction where it would not otherwise be required to qualify but for
        this
        Section 3(e), (y) subject itself to general taxation in any such jurisdiction,
        or (z) file a general consent to service of process in any such jurisdiction.
        The Company shall promptly notify Legal Counsel and each Investor who holds
        Registrable Securities of the receipt by the Company of any notification
        with
        respect to the suspension of the registration or qualification of any of
        the
        Registrable Securities for sale under the securities or “blue sky” laws of any
        jurisdiction in the United States or its receipt of notice of the initiation
        or
        threatening of any proceeding for such purpose.

       


      
        
          
          

        

        
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      f. The
        Company shall notify Legal Counsel and each Investor in writing of the happening
        of any event, as promptly as practicable after becoming aware of such event,
        as
        a result of which the prospectus included in a Registration Statement, as
        then
        in effect, includes an untrue statement of a material fact or an omission
        to
        state a material fact required to be stated therein or necessary to make
        the
        statements therein, in the light of the circumstances under which they were
        made, not misleading (provided that in no event shall such notice contain
        any
        material non-public information), and, subject to Section 3(r), promptly
        prepare
        a supplement or amendment to such Registration Statement to correct such
        untrue
        statement or omission and deliver ten (10) copies of such supplement or
        amendment to Legal Counsel and each Investor (or such other number of copies
        as
        Legal Counsel or such Investor may reasonably request). The Company shall
        also
        promptly notify Legal Counsel and each Investor in writing (i) when a prospectus
        or any prospectus supplement or post-effective amendment has been filed,
        and
        when a Registration Statement or any post-effective amendment has become
        effective (notification of such effectiveness shall be delivered to Legal
        Counsel and each Investor by facsimile on the same day of such effectiveness
        and
        by overnight mail), (ii) of any request by the SEC for amendments or supplements
        to a Registration Statement or related prospectus or related information,
        and
        (iii) of the Company’s reasonable determination that a post-effective amendment
        to a Registration Statement would be appropriate.

       

      g. The
        Company shall use its best efforts to prevent the issuance of any stop order
        or
        other suspension of effectiveness of a Registration Statement, or the suspension
        of the qualification of any of the Registrable Securities for sale in any
        jurisdiction and, if such an order or suspension is issued, to obtain the
        withdrawal of such order or suspension at the earliest possible moment and
        to
        notify Legal Counsel and each Investor who holds Registrable Securities being
        sold of the issuance of such order and the resolution thereof or its receipt
        of
        notice of the initiation or threat of any proceeding for such
        purpose.

       

      h. If,
        after
        the execution of this Agreement, an Investor believes, after consultation
        with
        its legal counsel, that it could reasonably be deemed to be an underwriter
        of
        Registrable Securities, at the request of such Investor, the Company shall
        furnish to such Investor, on the date of the effectiveness of the Registration
        Statement and thereafter from time to time on such dates as such Investor
        may
        reasonably request (i) a letter, dated such date, from the Company’s independent
        certified public accountants in form and substance as is customarily given
        by
        independent certified public accountants to underwriters in an underwritten
        public offering, addressed to such Investor, and (ii) an opinion, dated as
        of
        such date, of counsel representing the Company for purposes of such Registration
        Statement, in form, scope and substance as is customarily given in an
        underwritten public offering, addressed to such Investor.

       

      i. If
        after
        the execution of this Agreement an Investor believes, after consultation
        with
        its legal counsel, that it could reasonably be deemed to be an underwriter
        of
        Registrable Securities, at the request of such Investor, the Company shall
        make
        available for inspection by (i) such Investor, (ii) its legal counsel and
        (iii)
        one firm of accountants or other agents retained by all such Investors
        (collectively, the “Inspectors”)
        during
        regular business hours and upon reasonable notice, all pertinent financial
        and
        other records, and pertinent corporate documents and properties of the Company
        (collectively, the “Records”),
        as
        shall be reasonably deemed necessary by each Inspector, and cause the Company’s
        officers, directors and employees to supply all information which any Inspector
        may reasonably request; provided, however, that each Inspector shall agree
        to
        hold in strict confidence and shall not make any disclosure (except to an
        Investor) or use of any Record or other information which the Company determines
        in good faith to be confidential, and of which determination the Inspectors
        are
        so notified, unless (a) the disclosure of such Records is necessary to avoid
        or
        correct a misstatement or omission in any Registration Statement or is otherwise
        required under the 1933 Act, (b) the release of such Records is ordered pursuant
        to a final, non-appealable subpoena or order from a court or government body
        of
        competent jurisdiction, or (c) the information in such Records has been made
        generally available to the public other than by disclosure in violation of
        this
        Agreement. Each Investor agrees that it shall, upon learning that disclosure
        of
        such Records is sought in or by a court or governmental body of competent
        jurisdiction or through other means, give prompt notice to the Company and
        allow
        the Company, at its expense, to undertake appropriate action to prevent
        disclosure of, or to obtain a protective order for, the Records deemed
        confidential. Nothing herein (or in any other confidentiality agreement between
        the Company and any Investor) shall be deemed to limit the Investors’ ability to
        sell Registrable Securities in a manner which is otherwise consistent with
        applicable laws and regulations.

       


      
        
          
          

        

        
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      j. The
        Company shall hold in confidence and not make any disclosure of information
        concerning an Investor provided to the Company unless (i) disclosure of such
        information is necessary to comply with federal or state securities laws,
        (ii)
        the disclosure of such information is necessary to avoid or correct a
        misstatement or omission in any Registration Statement, (iii) the release
        of
        such information is ordered pursuant to a subpoena or other order from a
        court
        or governmental body of competent jurisdiction, or (iv) such information
        has
        been made generally available to the public. The Company agrees that it shall,
        upon learning that disclosure of such information concerning an Investor
        is
        sought in or by a court or governmental body of competent jurisdiction or
        through other means, give prompt written notice to such Investor and allow
        such
        Investor, at the Investor’s expense, to undertake appropriate action to prevent
        disclosure of, or to obtain a protective order for, such
        information.

       

      k. The
        Company shall cause all of the Registrable Securities covered by a Registration
        Statement to be listed on each securities exchange or automated quotation
        system
        on which securities of the same class or series issued by the Company are
        then
        listed. The Company shall pay all fees and expenses in connection with
        satisfying its obligation under this Section 3(k).

       

      l. The
        Company shall cooperate with the Investors who hold Registrable Securities
        being
        offered and, to the extent applicable, facilitate the timely preparation
        and
        delivery of certificates (not bearing any restrictive legend) representing
        the
        Registrable Securities to be offered pursuant to a Registration Statement
        and
        enable such certificates to be in such amounts as the Investors may reasonably
        request and registered in such names as the Investors may request.

       

      m. If
        requested by an Investor, the Company shall (i) as soon as practicable
        incorporate in a prospectus supplement or post-effective amendment such
        information as an Investor reasonably requests to be included therein relating
        to the sale and distribution of Registrable Securities, including, without
        limitation, information with respect to the number of Registrable Securities
        being offered or sold, the purchase price being paid therefor and any other
        terms of the offering of the Registrable Securities to be sold in such offering
        and (ii) as soon as practicable make all required filings of such prospectus
        supplement or post-effective amendment after being notified of the matters
        to be
        incorporated in such prospectus supplement or post-effective amendment; and
        (iii) as soon as practicable, supplement or make amendments to any Registration
        Statement if reasonably requested by an Investor holding any Registrable
        Securities.

       

      n. The
        Company shall use its best efforts to cause the Registrable Securities covered
        by a Registration Statement to be registered with or approved by such other
        governmental agencies or authorities as may be necessary to consummate the
        disposition of such Registrable Securities.

       

      o. The
        Company shall make generally available to its security holders as soon as
        practical, but not later than 90 days after the close of the period covered
        thereby, an earnings statement (in form complying with, and in the manner
        provided by, the provisions of Rule 158 under the 1933 Act) covering a
        twelve-month period beginning not later than the first day of the Company’s
        fiscal quarter next following the effective date of a Registration
        Statement.

       

      p. The
        Company shall otherwise use its best efforts to comply with all applicable
        rules
        and regulations of the SEC in connection with any registration
        hereunder.

       

      q. Within
        two Business Days after a Registration Statement that covers Registrable
        Securities is ordered effective by the SEC, the Company shall deliver, and
        shall
        cause legal counsel for the Company to deliver, to the transfer agent for
        such
        Registrable Securities (with copies to the Investors whose Registrable
        Securities are included in such Registration Statement) confirmation that
        such
        Registration Statement has been declared effective by the SEC in the form
        attached hereto as Exhibit
        B.

       


      
        
          
          

        

        
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      r. Notwithstanding
        anything to the contrary herein, at any time after the Effective Date, the
        Company may delay the disclosure of material non-public information concerning
        the Company the disclosure of which at the time is not, in the good faith
        opinion of the Board of Directors of the Company, in the best interest of
        the
        Company and, in the opinion of counsel to the Company, otherwise required
        (a
“Grace
        Period”);
        provided, that the Company shall promptly (i) notify the Investors in writing
        of
        the existence of material non-public information giving rise to a Grace Period
        (provided that in each notice the Company will not disclose the content of
        such
        material non-public information to the Investors) and the date on which the
        Grace Period will begin, and (ii) notify the Investors in writing of the
        date on
        which the Grace Period ends; and, provided further, that no Grace Period
        shall
        exceed 20 consecutive days and no more than two Grace Periods shall occur
        during
        any 365 day period and the first day of any Grace Period must be at least
        two
        trading days after the last day of any prior Grace Period (each, an
“Allowable
        Grace Period”).
        For
        purposes of determining the length of a Grace Period above, the Grace Period
        shall begin on and include the date the Investors receive the notice referred
        to
        in clause (i) and shall end on and include the later of the date the Investors
        receive the notice referred to in clause (ii) and the date referred to in
        such
        notice. The provisions of Section 2(f) hereof shall not be applicable during
        the
        period of any Allowable Grace Period. Upon expiration of the Grace Period,
        the
        Company shall again be bound by the first sentence of Section 3(f) with respect
        to the information giving rise thereto unless such material non-public
        information is no longer applicable. Notwithstanding anything to the contrary,
        the Company shall cause its transfer agent to deliver unlegended shares of
        Common Stock to a transferee of an Investor in accordance with the terms
        of the
        Securities Purchase Agreement in connection with any sale of Registrable
        Securities with respect to which an Investor has entered into a contract
        for
        sale prior to the Investor’s receipt of the notice of a Grace Period and for
        which the Investor has not yet settled. 

       

      s. The
        Company shall use its best efforts to maintain the eligibility of its
        registration statement on Form S-3 so that it is available for the registration
        of the resale of Registrable Securities.

       

      4. Obligations
        of the Investors.

       

      a. At
        least
        five Business Days prior to the first anticipated filing date of a Registration
        Statement other than the initial Registration Statement, the Company shall
        notify each Investor in writing of the information the Company requires from
        each such Investor if such Investor elects to have any of such Investor’s
        Registrable Securities included in such Registration Statement. It shall
        be a
        condition precedent to the obligations of the Company to complete the
        registration pursuant to this Agreement with respect to the Registrable
        Securities of a particular Investor that such Investor furnish to the Company
        such information regarding itself, the Registrable Securities held by it
        and the
        intended method of disposition of the Registrable Securities held by it as
        shall
        be reasonably required to effect the effectiveness of the registration of
        such
        Registrable Securities and shall execute such documents in connection with
        such
        registration as the Company may reasonably request. 

       

      b. Each
        Investor, by such Investor’s acceptance of the Registrable Securities, agrees to
        cooperate with the Company as reasonably requested by the Company in connection
        with the preparation and filing of any Registration Statement hereunder,
        unless
        such Investor has notified the Company in writing of such Investor’s election to
        exclude all of such Investor’s Registrable Securities from such Registration
        Statement.

       

      c. Each
        Investor agrees that, upon receipt of any notice from the Company of the
        happening of any event of the kind described in Section 3(f), such Investor
        will
        immediately discontinue disposition of Registrable Securities pursuant to
        any
        Registration Statement(s) covering such Registrable Securities until such
        Investor’s receipt of notice that the supplemented or amended prospectus
        contemplated by Section 3(f) has been filed with the SEC or receipt of notice
        that no supplement or amendment is required. Notwithstanding anything to
        the
        contrary, the Company shall cause its transfer agent to deliver unlegended
        shares of Common Stock to a transferee of an Investor in accordance with
        the
        terms of the Securities Purchase Agreement in connection with any sale of
        Registrable Securities with respect to which an Investor has entered into
        a
        contract for sale prior to the Investor’s receipt of a notice from the Company
        of the happening of any event of the kind described in Section 3(f) and for
        which the Investor has not yet settled.

       


      
        
          
          

        

        
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      d. Each
        Investor covenants and agrees that it will comply with the prospectus delivery
        requirements of the 1933 Act as applicable to it or an exemption therefrom
        in
        connection with sales of Registrable Securities pursuant to the Registration
        Statement.

       

      5. Expenses
        of Registration.

       

      All
        reasonable expenses, other than underwriting discounts and commissions, incurred
        in connection with registrations, filings or qualifications pursuant to Sections
        2 and 3, including, without limitation, all registration, listing and
        qualifications fees, printers and accounting fees, and fees and disbursements
        of
        counsel for the Company and Legal Counsel, up to a maximum of $5,000 each
        per
        Legal Counsel, shall be paid by the Company.

       

      6. Indemnification.

       

      In
        the
        event any Registrable Securities are included in a Registration Statement
        under
        this Agreement:

       

      a. To
        the
        fullest extent permitted by law, the Company will, and hereby does, indemnify,
        hold harmless and defend each Investor, the directors, officers, members,
        partners, employees, agents, representatives of, and each Person, if any,
        who
        controls any Investor within the meaning of the 1933 Act or the 1934 Act
        (each,
        an “Indemnified
        Person”),
        against any losses, claims, damages, liabilities, judgments, fines, penalties,
        charges, costs, reasonable attorneys’ fees, amounts paid in settlement or
        expenses, joint or several, (collectively, “Claims”)
        incurred in investigating, preparing or defending any action, claim, suit,
        inquiry, proceeding, investigation or appeal taken from the foregoing by
        or
        before any court or governmental, administrative or other regulatory agency,
        body or the SEC, whether pending or threatened, whether or not an indemnified
        party is or may be a party thereto (“Indemnified
        Damages”),
        to
        which any of them may become subject insofar as such Claims (or actions or
        proceedings, whether commenced or threatened, in respect thereof) arise out
        of
        or are based upon: (i) any untrue statement or alleged untrue statement of
        a
        material fact in a Registration Statement or any post-effective amendment
        thereto or in any filing made in connection with the qualification of the
        offering under the securities or other “blue sky” laws of any jurisdiction in
        which Registrable Securities are offered (“Blue
        Sky Filing”),
        or
        the omission or alleged omission to state a material fact required to be
        stated
        therein or necessary to make the statements therein not misleading, (ii)
        any
        untrue statement or alleged untrue statement of a material fact contained
        in any
        preliminary prospectus if used prior to the effective date of such Registration
        Statement, or contained in the final prospectus (as amended or supplemented,
        if
        the Company files any amendment thereof or supplement thereto with the SEC)
        or
        the omission or alleged omission to state therein any material fact necessary
        to
        make the statements made therein, in the light of the circumstances under
        which
        the statements therein were made, not misleading, (iii) any violation or
        alleged
        violation by the Company of the 1933 Act, the 1934 Act, any other law,
        including, without limitation, any state securities law, or any rule or
        regulation thereunder relating to the offer or sale of the Registrable
        Securities pursuant to a Registration Statement or (iv) any violation of
        this
        Agreement (the matters in the foregoing clauses (i) through (iv) being,
        collectively, “Violations”).
        Subject to Section 6(c), the Company shall reimburse the Indemnified Persons,
        promptly as such Indemnified Damages are incurred and are due and payable,
        for
        any legal fees or other reasonable expenses incurred by them in connection
        with
        investigating or defending any such Claim. Notwithstanding anything to the
        contrary contained herein, the indemnification agreement contained in this
        Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising
        out of or based upon a Violation which occurs in reliance upon and in strict
        conformity with information furnished in writing to the Company by such
        Indemnified Person expressly for use in the Registration Statement or any
        such
        amendment thereof or supplement thereto, if such prospectus was timely made
        available by the Company to such Indemnified Person pursuant to Section 3(c);
        and (ii) shall not apply to amounts paid in settlement of any Claim if such
        settlement is effected without the prior written consent of the Company,
        which
        consent shall not be unreasonably withheld or delayed. Such indemnity shall
        remain in full force and effect regardless of any investigation made by or
        on
        behalf of the Indemnified Person and shall survive the transfer of the
        Registrable Securities by the Investors pursuant to Section 9.

       


      
        
          
          

        

        
          -9-

          
            

          

        

        
          
          

        

      


      


      b. In
        connection with any Registration Statement in which an Investor is
        participating, each such Investor agrees to severally and not jointly indemnify,
        hold harmless and defend, to the same extent and in the same manner as is
        set
        forth in Section 6(a), the Company, each of its directors, each of its officers
        who signs the Registration Statement and each Person, if any, who controls
        the
        Company within the meaning of the 1933 Act or the 1934 Act (each, an
“Indemnified
        Party”),
        against any Claim or Indemnified Damages to which any of them may become
        subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim
        or
        Indemnified Damages arise out of or are based upon any Violation, in each
        case
        to the extent, and only to the extent, that such Violation occurs in reliance
        upon and in strict conformity with written information furnished to the Company
        by such Investor expressly for use in the Registration Statement; and, subject
        to Section 6(c), such Investor will reimburse any legal or other expenses
        reasonably incurred by an Indemnified Party in connection with investigating
        or
        defending any such Claim; provided, however, that the indemnity agreement
        contained in this Section 6(b) and the agreement with respect to contribution
        contained in Section 7 shall not apply to amounts paid in settlement of any
        Claim if such settlement is effected without the prior written consent of
        such
        Investor, which consent shall not be unreasonably withheld or delayed; provided,
        further, however, that the Investor shall be liable under this Section 6(b)
        for
        only that amount of a Claim or Indemnified Damages as does not exceed the
        net
        proceeds received by such Investor as a result of the sale of Registrable
        Securities pursuant to such Registration Statement. Such indemnity shall
        remain
        in full force and effect regardless of any investigation made by or on behalf
        of
        such Indemnified Party and shall survive the transfer of the Registrable
        Securities by the Investors pursuant to Section 9. Notwithstanding anything
        to
        the contrary contained herein, the indemnification agreement contained in
        this
        Section 6(b) with respect to any preliminary prospectus shall not inure to
        the
        benefit of any Indemnified Party if the untrue statement or omission of material
        fact contained in the preliminary prospectus was corrected on a timely basis
        in
        the prospectus, as then amended or supplemented.

       

      c. Promptly
        after receipt by an Indemnified Person or Indemnified Party under this Section
        6
        of notice of the commencement of any action or proceeding (including any
        governmental action or proceeding) involving a Claim, such Indemnified Person
        or
        Indemnified Party shall, if a Claim in respect thereof is to be made against
        any
        indemnifying party under this Section 6, deliver to the indemnifying party
        a
        written notice of the commencement thereof, and the indemnifying party shall
        have the right to participate in, and, to the extent the indemnifying party
        so
        desires, jointly with any other indemnifying party similarly noticed, to
        assume
        control of the defense thereof with counsel mutually satisfactory to the
        indemnifying party and the Indemnified Person or the Indemnified Party, as
        the
        case may be; provided, however, that an Indemnified Person or Indemnified
        Party
        shall have the right to retain its own counsel with the fees and expenses
        of not
        more than one counsel for such Indemnified Person or Indemnified Party to
        be
        paid by the indemnifying party, if, in the reasonable opinion of counsel
        retained by the indemnifying party, the representation by such counsel of
        the
        Indemnified Person or Indemnified Party and the indemnifying party would
        be
        inappropriate due to actual or potential differing interests between such
        Indemnified Person or Indemnified Party and any other party represented by
        such
        counsel in such proceeding. In the case of an Indemnified Person, legal counsel
        referred to in the proviso of the immediately preceding sentence shall be
        selected by the Investors holding at least a majority in interest of the
        Registrable Securities included in the Registration Statement to which the
        Claim
        relates. The Indemnified Party or Indemnified Person shall cooperate fully
        with
        the indemnifying party in connection with any negotiation or defense of any
        such
        action or Claim by the indemnifying party and shall furnish to the indemnifying
        party all information reasonably available to the Indemnified Party or
        Indemnified Person that relates to such action or Claim. The indemnifying
        party
        shall keep the Indemnified Party or Indemnified Person reasonably apprised
        at
        all times as to the status of the defense or any settlement negotiations
        with
        respect thereto. No indemnifying party shall be liable for any settlement
        of any
        action, claim or proceeding effected without its prior written consent,
        provided, however, that the indemnifying party shall not unreasonably withhold,
        delay or condition its consent. No indemnifying party shall, without the
        prior
        written consent of the Indemnified Party or Indemnified Person, consent to
        entry
        of any judgment or enter into any settlement or other compromise that does
        not
        include as an unconditional term thereof the giving by the claimant or plaintiff
        to such Indemnified Party or Indemnified Person of a release from all liability
        in respect to such Claim or litigation, and such settlement shall not include
        any admission as to fault on the part of the Indemnified Party. Following
        indemnification as provided for hereunder, the indemnifying party shall be
        subrogated to all rights of the Indemnified Party or Indemnified Person with
        respect to all third parties, firms or corporations relating to the matter
        for
        which indemnification has been made. The failure to deliver written notice
        to
        the indemnifying party within a reasonable time of the commencement of any
        such
        action shall not relieve such indemnifying party of any liability to the
        Indemnified Person or Indemnified Party under this Section 6, except to the
        extent that the indemnifying party is materially prejudiced in its ability
        to
        defend such action.

       


      
        
          
          

        

        
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      d. The
        indemnification required by this Section 6 shall be made by periodic payments
        of
        the amount thereof during the course of the investigation or defense, as
        and
        when bills are received or Indemnified Damages are incurred.

       

      


       

      e. The
        indemnity agreements contained herein shall be in addition to (i) any cause
        of
        action or similar right of the Indemnified Party or Indemnified Person against
        the indemnifying party or others, and (ii) any liabilities the indemnifying
        party may be subject to pursuant to the law.

       

      7. Contribution.

       

      To
        the
        extent any indemnification by an indemnifying party is prohibited or limited
        by
        law, the indemnifying party agrees to make the maximum contribution with
        respect
        to any amounts for which it would otherwise be liable under Section 6 to
        the
        fullest extent permitted by law; provided, however, that: (i) no Person involved
        in the sale of Registrable Securities that is guilty of fraudulent
        misrepresentation (within the meaning of Section 11(f) of the 1933 Act) in
        connection with such sale shall be entitled to contribution from any Person
        involved in such sale of Registrable Securities who was not guilty of fraudulent
        misrepresentation; and (ii) contribution by any seller of Registrable Securities
        shall be limited in amount to the net amount of proceeds received by such
        seller
        from the sale of such Registrable Securities pursuant to such Registration
        Statement.

       

      8. Reports
        Under the 1934 Act.
        

       

      With
        a
        view to making available to the Investors the benefits of Rule 144 promulgated
        under the 1933 Act or any other similar rule or regulation of the SEC that
        may
        at any time permit the Investors to sell securities of the Company to the
        public
        without registration (“Rule
        144”),
        the
        Company agrees to:

       

      a. make
        and
        keep public information available, as those terms are understood and defined
        in
        Rule 144;

       

      b. file
        with
        the SEC in a timely manner all reports and other documents required of the
        Company under the 1933 Act and the 1934 Act so long as the Company remains
        subject to such requirements and the filing of such reports and other documents
        is required for the applicable provisions of Rule 144; and

       

      c. furnish
        to each Investor so long as such Investor owns Registrable Securities, promptly
        upon request, (i) a written statement by the Company, if true, that it has
        complied with the reporting requirements of Rule 144, the 1933 Act and the
        1934
        Act, and (ii) such other information as may be reasonably requested to permit
        the Investors to sell such securities pursuant to Rule 144 without
        registration.

       

      


       

      9. Assignment
        of Registration Rights.
        

       

      The
        rights under this Agreement shall be automatically assignable by the Investors
        to any transferee of all or any portion of such Investor’s Registrable
        Securities if: (i) the Investor agrees in writing with the transferee or
        assignee to assign such rights, and a copy of such agreement is furnished
        to the
        Company within a reasonable time after such assignment; (ii) the Company
        is,
        within a reasonable time after such transfer or assignment, furnished with
        written notice of (a) the name and address of such transferee or assignee,
        and
        (b) the securities with respect to which such registration rights are being
        transferred or assigned; (iii) immediately following such transfer or assignment
        the further disposition of such securities by the transferee or assignee
        is
        restricted under the 1933 Act or applicable state securities laws; (iv) at
        or
        before the time the Company receives the written notice contemplated by clause
        (ii) of this sentence the transferee or assignee agrees in writing with the
        Company to be bound by all of the provisions contained herein; and (v) such
        transfer shall have been made in accordance with the applicable requirements
        of
        the Securities Purchase Agreement.

       


      
        
          
          

        

        
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      10. Amendment
        of Registration Rights.

       

      Provisions
        of this Agreement may be amended and the observance thereof may be waived
        (either generally or in a particular instance and either retroactively or
        prospectively), only with the written consent of the Company and the Required
        Holders. Any amendment or waiver effected in accordance with this Section
        10
        shall be binding upon each Investor and the Company. No such amendment shall
        be
        effective to the extent that it applies to less than all of the holders of
        the
        Registrable Securities. No amendment shall be effective against any holder
        of
        Registrable Securities without the consent of such holder if such amendment
        adversely effects the rights of such holder hereunder. No consideration shall
        be
        offered or paid to any Person to amend or consent to a waiver or modification
        of
        any provision of any of this Agreement unless the same consideration also
        is
        offered to all of the parties to this Agreement.

       

      11. Miscellaneous.

       

      a. A
        Person
        is deemed to be a holder of Registrable Securities whenever such Person owns
        or
        is deemed to own of record such Registrable Securities. If the Company receives
        conflicting instructions, notices or elections from two or more Persons with
        respect to the same Registrable Securities, the Company shall act upon the
        basis
        of instructions, notice or election received from the record owner of such
        Registrable Securities.

       

      b. Any
        notices, consents, waivers or other communications required or permitted
        to be
        given under the terms of this Agreement must be in writing and will be deemed
        to
        have been delivered: (i) upon receipt, when delivered personally; (ii) upon
        receipt, when sent by facsimile (provided confirmation of transmission is
        mechanically or electronically generated and kept on file by the sending
        party);
        or (iii) one Business Day after deposit with a nationally recognized overnight
        delivery service, in each case properly addressed to the party to receive
        the
        same. The addresses and facsimile numbers for such communications shall
        be:

       

      If
        to the
        Company: 

       

      Nestor,
        Inc.

      42
        Oriental Street

      Providence,
        RI 02908

      Telephone: (401)
        274-5658

      Facsimile: (401)
        274-5707

      Attention: Benjamin
        M. Alexander, Esq.

      


      With
        a
        copy to: 

      


      Hinckley,
        Allen & Snyder LLP

      50
        Kennedy Plaza, Suite 1500

      Providence,
        RI 02903

      Telephone: (401)
        274-2000

      Facsimile: (401)
        277-9600

      Attention: Margaret
        D. Farrell, Esq.

      


      If
        to
        Legal Counsel:

      


      Drinker
        Biddle & Reath LLP

      One
        Logan
        Square

      18th
        and
        Cherry Streets

      Philadelphia,
        PA 19103

      Telephone: (215)
        988-2880

      Facsimile: (215)
        988-2757

      Attention: Stephen
        T. Burdumy, Esq. 


      
        
          
          

        

        
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      and

      


      Schulte
        Roth & Zabel LLP 

      919
        Third
        Avenue

      New
        York,
        New York 10022

      Telephone: (212)
        756-2000s

      Facsimile: (212)
        593-5955

      Attention: Eleazer
        N. Klein, Esq.

      


      


      If
        to a
        Buyer, to its address and facsimile number set forth on the Schedule of Buyers
        attached hereto, with copies to such Buyer’s representatives as set forth on the
        Schedule of Buyers, or to such other address and/or facsimile number and/or
        to
        the attention of such other Person as the recipient party has specified by
        written notice given to each other party five days prior to the effectiveness
        of
        such change. Written confirmation of receipt (A) given by the recipient of
        such
        notice, consent, waiver or other communication, (B) mechanically or
        electronically generated by the sender’s facsimile machine containing the time,
        date, recipient facsimile number and an image of the first page of such
        transmission or (C) provided by a courier or overnight courier service shall
        be
        rebuttable evidence of personal service, receipt by facsimile or receipt
        from a
        nationally recognized overnight delivery service in accordance with clause
        (i),
        (ii) or (iii) above, respectively.

       

      c. Failure
        of any party to exercise any right or remedy under this Agreement or otherwise,
        or delay by a party in exercising such right or remedy, shall not operate
        as a
        waiver thereof.

       

      d. All
        questions concerning the construction, validity, enforcement and interpretation
        of this Agreement shall be governed by the internal laws of the State of
        New
        York,
        without
        giving effect to any choice of law or conflict of law provision or rule (whether
        of the State of New York or any other jurisdictions) that would cause the
        application of the laws of any jurisdictions other than the State of New
        York.
        Each party hereby irrevocably submits to the exclusive jurisdiction of the
        state
        and federal courts sitting in the City of New York, Borough of Manhattan
        for the
        adjudication of any dispute hereunder or in connection herewith or with any
        transaction contemplated hereby or discussed herein, and hereby irrevocably
        waives, and agrees not to assert in any suit, action or proceeding, any claim
        that it is not personally subject to the jurisdiction of any such court,
        that
        such suit, action or proceeding is brought in an inconvenient forum or that
        the
        venue of such suit, action or proceeding is improper. Each party hereby
        irrevocably waives personal service of process and consents to process being
        served in any such suit, action or proceeding by mailing a copy thereof to
        such
        party at the address for such notices to it under this Agreement and agrees
        that
        such service shall constitute good and sufficient service of process and
        notice
        thereof. Nothing contained herein shall be deemed to limit in any way any
        right
        to serve process in any manner permitted by law. If any provision of this
        Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
        or unenforceability shall not affect the validity or enforceability of the
        remainder of this Agreement in that jurisdiction or the validity or
        enforceability of any provision of this Agreement in any other jurisdiction.
        EACH
        PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
        REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
        CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
        CONTEMPLATED HEREBY.

       

      e. This
        Agreement, the other Transaction Documents (as defined in the Securities
        Purchase Agreement) and the instruments referenced herein and therein constitute
        the entire agreement among the parties hereto with respect to the subject
        matter
        hereof and thereof. There are no restrictions, promises, warranties or
        undertakings, other than those set forth or referred to herein and therein.
        This
        Agreement, the other Transaction Documents and the instruments referenced
        herein
        and therein supersede all prior agreements and understandings among the parties
        hereto with respect to the subject matter hereof and thereof.

       

      f. Subject
        to the requirements of Section 9, this Agreement shall inure to the benefit
        of
        and be binding upon the permitted successors and assigns of each of the parties
        hereto.

       


      
        
          
          

        

        
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      g. The
        headings in this Agreement are for convenience of reference only and shall
        not
        limit or otherwise affect the meaning hereof.

       

      h. This
        Agreement may be executed in identical counterparts, each of which shall
        be
        deemed an original but all of which shall constitute one and the same agreement.
        This Agreement, once executed by a party, may be delivered to the other party
        hereto by facsimile transmission of a copy of this Agreement bearing the
        signature of the party so delivering this Agreement.

       

      i. Each
        party shall do and perform, or cause to be done and performed, all such further
        acts and things, and shall execute and deliver all such other agreements,
        certificates, instruments and documents, as any other party may reasonably
        request in order to carry out the intent and accomplish the purposes of this
        Agreement and the consummation of the transactions contemplated
        hereby.

       

      j. All
        consents and other determinations required to be made by the Investors pursuant
        to this Agreement shall be made, unless otherwise specified in this Agreement,
        by the Required Holders.

       

      k. The
        language used in this Agreement will be deemed to be the language chosen
        by the
        parties to express their mutual intent and no rules of strict construction
        will
        be applied against any party. 

       

      l. This
        Agreement is intended for the benefit of the parties hereto and their respective
        permitted successors and assigns, and is not for the benefit of, nor may
        any
        provision hereof be enforced by, any other Person, except to the extent set
        forth in Section 6.

       

      m. The
        obligations of each Investor hereunder are several and not joint with the
        obligations of any other Investor, and no provision of this Agreement is
        intended to confer any obligations on any Investor vis-à-vis any other Investor.
        Nothing contained herein, and no action taken by any Investor hereto, shall
        be
        deemed to constitute the Investors as a partnership, an association, a joint
        venture or any other kind of entity or group, or create a presumption that
        the
        Investors are in any way acting in concert or as a group with respect to
        such
        obligations or the transactions contemplated herein.

       

      


      [Signature
        Page Follows]

       

      


       


      
        
          
          

        

        
          -14-

          
            

          

        

        
          
          

          
          

        

      



      IN
        WITNESS WHEREOF,
        each
        Buyer and the Company have caused their respective signature page to this
        Registration Rights Agreement to be duly executed as of the date first written
        above.

       

      


       

      
        	 	
                COMPANY:

              
	 	 
	 	 
	 	
                NESTOR,
                  INC.

              
	 	 
	
                By:

              	 /s/Nigel
                P. Hebborn
	 	Nigel
                P. Hebborn
	 	 CFO


      

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      [Signature
        Page to Registration Rights Agreement]

       


      
        
          
          

        

        
          -15-

          
            

          

        

        
          
          

        

      


      IN
        WITNESS WHEREOF,
        each
        Buyer and the Company have caused their respective signature page to this
        Registration Rights Agreement to be duly executed as of the date first written
        above.

       

      
        	 	
                BUYERS:

              
	 	
                 Radcliffe
                  SPC, Ltd. for and on behalf of the Class A

              
	 	 Convertible
                Crossover Segregated Portfolio
	 	 By: 
                RG Capital Management, L.P.
	 	 By: 
                RGC Management Company, LLC
	 	 
	 	
                 

              
	 	 
	
                By:

              	 /s/
                Gerald F. Stahlecker
	 	
                Name:
                  Gerald F. Stahlecker

              
	 	
                Title:
                  Managing Director

              
	 	 
	 	 


      

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      [Signature
        Page to Registration Rights Agreement]

       


      
        
          
          

        

        
          -16-

          
            

          

        

        
          
          

        

      


      IN
        WITNESS WHEREOF,
        each
        Buyer and the Company have caused their respective signature page to this
        Registration Rights Agreement to be duly executed as of the date first written
        above.

       

      
        	 	
                OTHER
                  BUYERS:

              
	 	 
	 	LBI
                Group, Inc.
	 	 
	
                By:

              	 /s/Eric
                C. Salzman
	 	
                Name:
                  Eric C. Salzman

              
	 	
                Title:
                  SVP

              


      

       

      
        	 	 Kamunting
                Street Master Fund, Ltd.
	 	 
	
                By:

              	 /s/Gregor
                T. Dannagher
	 	
                Name:
                  Gregor T. Dannagher

              
	 	
                Title:
                  Director of Research

              
	
              	 Kamunting
                Street Capital Management, LP
	
              	 as Investment
                Manager for Kamunting Street Master Fund,
                Ltd.



        	
                By:

              	 /s/
Oliver
                C. Dobbs
	 	
                Name:
                  Oliver C. Dobbs

              
	 	
                Title:
                  Authorized Signatory

              


      

       

      
        	 	Capital
                Ventures International
	 	
                By: 
                  Heights Capital Management, the authorized
                  agent

              
	 	 
	
                By:

              	/s/Martin
                Kobinger
	 	
                Name:
                  Martin Kobinger

              
	 	
                Title:
                  Investment Manager

              



        	
              	 Evolution
                Master Fund Ltd. SPC Segregated Portfolio M.
	 	 
	
                By:

              	 /s/
                Adrian Brindle
	 	
                Name: 
                  Adrian Brindle

              
	 	
                Title:
                  Director

              


      

       

      
        	
              	 Highbridge
                International LLC
	 	
                by: 
                  Highbridge Capital Management, LLC

              
	 	 
	
                By:

              	 /s/
                Adam J. Chill
	 	
                Name:
                  Adam J. Chill

              
	 	
                Title:
                  Managing Director

              


      

       

      
        	
              	 Dolphin
                Offshore Partners, L.P.
	 	 
	
                By:

              	 /s/
                Peter E. Salas
	 	
                Name:
                  Peter E. Salas

              
	 	
                Title:
                  General Partner

              


      

       

      [Signature
        Page to Registration Rights Agreement]

       

       

      
        
          
          

        

        
          -17-

          
            

          

        

        
          
          

          
            


          

        

      




      EXHIBIT
        A

       

      SELLING
        STOCKHOLDERS

       

      The
        shares of common stock being offered by the selling stockholders consists
        of the
        shares of common stock issuable upon conversion of the notes and issuable
        upon
        exercise of the warrants. For additional information regarding the issuance
        of
        the notes and warrants, see “Private Placement of Notes and Warrants” above. We
        are registering the shares of common stock in order to permit the selling
        stockholders to offer the shares for resale from time to time. Except for
        the
        ownership of the notes and the warrants issued pursuant to the Securities
        Purchase Agreement, the selling stockholders have not had any material
        relationship with us within the past three years.

       

      The
        table
        below lists the selling stockholders and other information regarding the
        beneficial ownership of the shares of common stock by each of the selling
        stockholders. The second column lists the number of shares of common stock
        beneficially owned by each selling stockholder, based on its ownership of
        the
        notes and warrants issued pursuant to the Securities Purchase Agreement,
        as of
        ________, 200_, assuming conversion of the notes and exercise of the warrants
        held by the selling stockholders on that date, after giving effect to certain
        limitations included in the notes and the warrants, which are discussed below.
        As a result of these limitations, the beneficial ownership information for
        certain of the selling stockholders reflects the maximum number of shares
        that
        are beneficially owned by those selling stockholders after giving effect
        to
        these provisions and such beneficial ownership information does not include
        all
        of the shares that may be sold by such selling stockholders pursuant to this
        prospectus. The third column lists the shares of common stock being offered
        by
        this prospectus by the selling stockholders. 

       

      In
        accordance with the terms of registration rights agreements with the selling
        stockholders, this prospectus generally covers the resale of at least 120%
        of
        the number of shares of common stock issuable upon conversion of the notes
        and
        exercise of the related warrants as of the trading day immediately preceding
        the
        date the registration statement is initially filed with the SEC. Because
        the
        conversion price of the notes and the exercise price of the warrants may
        be
        adjusted in certain circumstances, the number of shares that will actually
        be
        issued may be more or less than the number of shares being offered by this
        prospectus. The fourth column assumes the sale of all of the shares offered
        by
        the selling stockholders pursuant to this prospectus.

       

      Under
        the
        terms of the notes and the warrants, a selling stockholder may not convert
        the
        notes or exercise the warrants to the extent such conversion or exercise
        would
        cause such selling stockholder, together with its affiliates, to beneficially
        own a number of shares of common stock which would exceed 4.99% of our then
        outstanding shares of common stock following such conversion or exercise,
        excluding for purposes of such determination shares of common stock issuable
        upon conversion of the notes or exercise of the warrants that have not been
        exercised. The selling stockholders may sell all, some or none of their shares
        in this offering. See “Plan of Distribution.”

       


      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      


      


       

      
        	
                Name
                  of Selling Stockholder

              	
                Number
                  of Shares Beneficially Owned Prior to
                  Offering

              	
                Maximum
                  Number of Shares

                to
                  be Sold Pursuant to this Prospectus

              	
                Number
                  of Shares Owned After Offering

              
	
                Radcliffe
                  SPC, Ltd. 

                for
                  and on behalf of the Class A Convertible Crossover Segregated
                  Portfolio

              	 	 	
                0

              
	
                LBI
                  Group, Inc.

              	 	 	
                0

              
	
                Kamunting
                  Street Master Fund, Ltd.

              	 	 	
                0

              
	
                Tribeca
                  Global Convertible Investments Limited

              	 	 	
                0

              
	
                Capital
                  Ventures International

              	 	 	
                0

              
	
                Evolution
                  Master Fund Ltd. SPC, Segregated Portfolio M

              	 	 	
                0

              
	
                Smithfield
                  Fiduciary, LLC

              	 	 	
                0

              
	
                Dolphin
                  Offshore Partners, L.P.

              	 	 	
                0

              


      

      


       

      (1) [  ]
        

       

      


       


      
        
          
          

        

        
          -2-

          
            

          

        

        
          
          

          
            


          

        

      



      PLAN
        OF DISTRIBUTION

       

      We
        are
        registering the shares of common stock issuable upon conversion of the notes
        and
        the shares of common stock issuable upon exercise of the warrants to permit
        the
        resale of these shares of common stock by the holders of the notes and warrants
        from time to time after the date of this prospectus. We will not receive
        any of
        the proceeds from the sale by the selling stockholders of the shares of common
        stock.

       

      The
        selling stockholders may sell all or a portion of the shares of common stock
        beneficially owned by them and offered hereby from time to time directly
        or
        through one or more underwriters, broker-dealers or agents. If the shares
        of
        common stock are sold through underwriters or broker-dealers, the selling
        stockholders will be responsible for underwriting discounts or commissions
        or
        agent’s commissions. The shares of common stock may be sold in one or more
        transactions at fixed prices, at prevailing market prices at the time of
        the
        sale, at varying prices determined at the time of sale, or at negotiated
        prices.
        These sales may be effected in transactions, which may involve crosses or
        block
        transactions, 

       

      
        	 	
                •

              	
                on
                  any national securities exchange or quotation service on which
                  the
                  securities may be listed or quoted at the time of
                  sale;

              


      

       

      
        	 	
                •

              	
                in
                  the over-the-counter market;

              


      

       

      
        	 	
                •

              	
                in
                  transactions otherwise than on these exchanges or systems or in
                  the
                  over-the-counter market;

              


      

       

      
        	 	
                •

              	
                through
                  the writing of options, whether such options are listed on an options
                  exchange or otherwise;

              


      

       

      
        	 	
                •

              	
                ordinary
                  brokerage transactions and transactions in which the broker-dealer
                  solicits purchasers;

              


      

       

      
        	 	
                •

              	
                block
                  trades in which the broker-dealer will attempt to sell the shares
                  as agent
                  but may position and resell a portion of the block as principal
                  to
                  facilitate the transaction;

              


      

       

      
        	 	
                •

              	
                purchases
                  by a broker-dealer as principal and resale by the broker-dealer
                  for its
                  account;

              


      

       

      
        	 	
                •

              	
                an
                  exchange distribution in accordance with the rules of the applicable
                  exchange;

              


      

       

      
        	 	
                •

              	
                privately
                  negotiated transactions;

              


      

       

      
        	 	
                •

              	
                short
                  sales;

              


      

       

      
        	 	
                •

              	
                sales
                  pursuant to Rule 144;

              


      

       

      
        	 	
                •

              	
                broker-dealers
                  may agree with the selling securityholders to sell a specified
                  number of
                  such shares at a stipulated price per
                  share;

              


      

       

      
        	 	
                •

              	
                a
                  combination of any such methods of sale;
                  and

              


      

       

      
        	 	
                •

              	
                any
                  other method permitted pursuant to applicable
                  law.

              


      

       

      If
        the
        selling stockholders effect such transactions by selling shares of common
        stock
        to or through underwriters, broker-dealers or agents, such underwriters,
        broker-dealers or agents may receive commissions in the form of discounts,
        concessions or commissions from the selling stockholders or commissions from
        purchasers of the shares of common stock for whom they may act as agent or
        to
        whom they may sell as principal (which discounts, concessions or commissions
        as
        to particular underwriters, broker-dealers or agents may be in excess of
        those
        customary in the types of transactions involved). In connection with sales
        of
        the shares of common stock or otherwise, the selling stockholders may enter
        into
        hedging transactions with broker-dealers, which may in turn engage in short
        sales of the shares of common stock in the course of hedging in positions
        they
        assume. The selling stockholders may also sell shares of common stock short
        and
        deliver shares of common stock covered by this prospectus to close out short
        positions and to return borrowed shares in connection with such short sales.
        The
        selling stockholders may also loan or pledge shares of common stock to
        broker-dealers that in turn may sell such shares.

       


      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      


      


       

      The
        selling stockholders may pledge or grant a security interest in some or all
        of
        the warrants or notes owned by them and, if they default in the performance
        of
        their secured obligations, the pledgees or secured parties may offer and
        sell
        the shares of common stock from time to time pursuant to this prospectus
        or any
        amendment to this prospectus under Rule 424(b)(3) or other applicable provision
        of the Securities Act of 1933, as amended, amending, if necessary, the list
        of
        selling stockholders to include the pledgee, transferee or other successors
        in
        interest as selling stockholders under this prospectus. The selling stockholders
        also may transfer and donate the shares of common stock in other circumstances
        in which case the transferees, donees, pledgees or other successors in interest
        will be the selling beneficial owners for purposes of this
        prospectus.

       

      The
        selling stockholders and any broker-dealer participating in the distribution
        of
        the shares of common stock may be deemed to be “underwriters” within the meaning
        of the Securities Act, and any commission paid, or any discounts or concessions
        allowed to, any such broker-dealer may be deemed to be underwriting commissions
        or discounts under the Securities Act. At the time a particular offering
        of the
        shares of common stock is made, a prospectus supplement, if required, will
        be
        distributed which will set forth the aggregate amount of shares of common
        stock
        being offered and the terms of the offering, including the name or names
        of any
        broker-dealers or agents, any discounts, commissions and other terms
        constituting compensation from the selling stockholders and any discounts,
        commissions or concessions allowed or reallowed or paid to
        broker-dealers.

       

      Under
        the
        securities laws of some states, the shares of common stock may be sold in
        such
        states only through registered or licensed brokers or dealers. In addition,
        in
        some states the shares of common stock may not be sold unless such shares
        have
        been registered or qualified for sale in such state or an exemption from
        registration or qualification is available and is complied with.

       

      There
        can
        be no assurance that any selling stockholder will sell any or all of the
        shares
        of common stock registered pursuant to the shelf registration statement,
        of
        which this prospectus forms a part.

       

      The
        selling stockholders and any other person participating in such distribution
        will be subject to applicable provisions of the Securities Exchange Act of
        1934,
        as amended, and the rules and regulations thereunder, including, without
        limitation, to the extent applicable Regulation M of the Exchange Act, which
        may
        limit the timing of purchases and sales of any of the shares of common stock
        by
        the selling stockholders and any other participating person. To the extent
        applicable Regulation M may also restrict the ability of any person engaged
        in
        the distribution of the shares of common stock to engage in market-making
        activities with respect to the shares of common stock. All of the foregoing
        may
        affect the marketability of the shares of common stock and the ability of
        any
        person or entity to engage in market-making activities with respect to the
        shares of common stock.

       

      We
        will
        pay all expenses of the registration of the shares of common stock pursuant
        to
        the registration rights agreements, estimated to be $[ ] in total, including,
        without limitation, Securities and Exchange Commission filing fees and expenses
        of compliance with state securities or “blue sky” laws; provided, however, that
        a selling stockholder will pay all underwriting discounts and selling
        commissions, if any. We will indemnify the selling stockholders against
        liabilities, including some liabilities under the Securities Act, in accordance
        with the registration rights agreements, or the selling stockholders will
        be
        entitled to contribution. We may be indemnified by the selling stockholders
        against civil liabilities, including liabilities under the Securities Act,
        that
        may arise from any written information furnished to us by the selling
        stockholder specifically for use in this prospectus, in accordance with the
        related registration rights agreements, or we may be entitled to
        contribution.

       

      Once
        sold
        under the shelf registration statement, of which this prospectus forms a
        part,
        the shares of common stock will be freely tradable in the hands of persons
        other
        than our affiliates.

       

      


       


      
        
          
          

        

        
          -2-

          
            

          

        

        
          
          

          
            


          

        

      



      EXHIBIT
        B

      


      FORM
        OF NOTICE OF EFFECTIVENESS

      OF
        REGISTRATION STATEMENT

      


      


      [Transfer
        Agent]

      [Address]

      Attention:
        

      


      Re: Nestor,
        Inc.

      


      Ladies
        and Gentlemen:

      


      [We
        are][I am] counsel to Nestor, Inc., a Delaware corporation (the “Company”),
        and
        have represented the Company in connection with that certain Securities Purchase
        Agreement (the “Securities
        Purchase Agreement”)
        entered into by and among the Company and the buyers named therein
        (collectively, the “Holders”)
        pursuant to which the Company issued to the Holders shares of its common
        stock,
        par value $.01 per share (the “Shares”).
        Pursuant to the Securities Purchase Agreement, the Company also has entered
        into
        a Registration Rights Agreement with the Holders (the “Registration
        Rights Agreement”)
        pursuant to which the Company agreed, among other things, to register the
        Registrable Securities (as defined in the Registration Rights Agreement)
        under
        the Securities Act of 1933, as amended (the “1933
        Act”).
        In
        connection with the Company’s obligations under the Registration Rights
        Agreement, on ____________ ___, 200_, the Company filed a Registration Statement
        on Form S-3 (File No. 333-_____________) (the “Registration
        Statement”)
        with
        the Securities and Exchange Commission (the “SEC”)
        relating to the Registrable Securities which names each of the Holders as
        a
        selling stockholder thereunder.

       

      In
        connection with the foregoing, [we][I] advise you that a member of the SEC’s
        staff has advised [us][me] by telephone that the SEC has entered an order
        declaring the Registration Statement effective under the 1933 Act at [ENTER
        TIME
        OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no
        knowledge, after telephonic inquiry of a member of the SEC’s staff, that any
        stop order suspending its effectiveness has been issued or that any proceedings
        for that purpose are pending before, or threatened by, the SEC and the
        Registrable Securities are available for resale under the 1933 Act pursuant
        to
        the Registration Statement.

       

      This
        letter shall serve as our standing opinion to you that the shares of Common
        Stock are freely transferable by the Holders pursuant to the Registration
        Statement. You need not require further letters from us to effect any future
        legend-free issuance or reissuance of shares of Common Stock to the Holders
        as
        contemplated by the Company’s Irrevocable Transfer Agent Instructions dated
        ________ __, 2006. 

       

      


       

      
        	 	
                Very
                  truly yours,

              
	 	 
	 	 
	 	 
	 	 
	
                By:

              	 
	 	
                Name:

              
	 	
                Title:

              
	 	 
	 	 


      

      


       

      


       

      CC: [LIST
        NAMES OF HOLDERS]