Document:

EXHIBIT 10.1
                                                                    ------------

                              EMPLOYMENT AGREEMENT
                              --------------------

     THIS  AGREEMENT  ("Agreement")  is made and  entered  into  this 3rd day of
October  2008 by and  between  PETROL OIL and GAS,  INC.,  a Nevada  corporation
("Company") and Loren Moll, an individual ("Executive").

     RECITALS:

          A. Company is engaged in the business of oil and gas  exploration  and
          production  and desires to employ  Executive  as  President  and Chief
          Executive  Officer on a full time and  exclusive  basis subject to the
          further terms and conditions of this Agreement.

          B. Since May 4, 2007,  Executive  has acted as interim  President  and
          Chief Executive Officer of the Company without a written  compensation
          agreement.

          C. Executive  desires to accept employment with Company and to perform
          the  functions  and  duties of  President  of  Company  subject to the
          further terms and conditions of this Agreement.

          D. The parties  mutually  desire to enter into this Agreement  whereby
          the terms and conditions of such employment are reduced to writing and
          memorialized.

     AGREEMENT:

          1. Term of Employment:  Company hereby employs Executive and Executive
     hereby accepts  employment  with Company for a period of one year beginning
     on October 3, 2008 and ending on October 2, 2009,  subject to the rights of
     early termination as provided herein.

          2. Duties and Powers of  Executive:  Executive  is hereby  employed as
     President to perform and undertake the duties and responsibilities normally
     and ordinarily  attendant to such position.  Without  limiting or excluding
     other duties and  responsibilities,  Executive  shall direct the day to day
     functioning  and  conduct of the  business  of the  Company and in so doing
     shall:  (i) possess and exercise the  exclusive  power to hire and fire all
     employees of the Company  (unless  specifically  otherwise  directed by the
     Board of  Directors);  (ii)  possess and exercise  the  exclusive  power to
     engage and disengage all consultants and outside  professionals used by the
     Company (unless specifically otherwise directed by the Board of Directors);
     (iii) direct the use and control of finances;  (iv) borrow or obtain credit
     in any  amount or  execute  any  guaranty  agreement;  and,  (v) create and
     implement  policies  and  procedures  of the  Company.  In  recognition  of

<PAGE>

     Executive's status as an owner or controller of a substantial percentage of
     the  outstanding  common  shares of the  Company,  any effort by Company to
     diminish  Executive's  duties and powers  absent the agreement of Executive
     evidenced  by the  express  written  consent of  Executive  may be deemed a
     termination  without  cause,  thereby  entitling  Executive to the remedies
     provided  herein for Company's  termination  without cause.  See Section 6,
     below.

          3.  Devotion of Time and Covenant Not To Compete:  Except as otherwise
     agreed, Executive shall devote substantially all of his working time to the
     performance  of  his  duties  as  President  of  Company.  Notwithstanding,
     Executive may serve and hold any other offices or positions in companies in
     which he  currently  holds a position.  During the term of this  agreement,
     Executive shall not, directly or indirectly,  whether as a partner, member,
     joint venture,  owner,  or employee or otherwise,  promote or engage in any
     business that directly  competes with Company's present business of oil and
     gas exploration and production.

          4.  Compensation:  Company  shall  compensate  Executive  for services
     provided  to  Company a salary in the amount of  $135,000  per year paid in
     equal  payments  not less than twice  monthly  during the term  hereof.  In
     addition to salary, the Company shall provide or pay for the following:

               4.1. Retroactive compensation in the amount of $100,000,  payable
               upon full  execution  this  Agreement,  in  consideration  of the
               services  previously  provided  as  interim  President  and Chief
               Executive Officer.

               4.2.  During the term hereof,  Executive  shall be permitted  the
               exclusive use of the  Company's  2007 Dodge Ram 1500 Sport 4X4 or
               substantial  monetary  equivalent at Company's sole expense.  Any
               miles driven for  non-business  purposes  shall not be subject to
               direct  reimbursement  but  rather  shall  be  deemed  additional
               compensation to Executive.

               4.3.  Executive  shall be allowed three (3) weeks of  compensated
               vacation  per  calendar  year  during  employment  subject to the
               Company's  vacation  policies set forth in  Company's  employment
               manual.  In  addition,  Executive  shall be allowed five (5) days
               personal  leave and ten (10) days of sick leave per calendar year
               during  employment.  Any  unused  leave  may be  carried  forward
               without limitation as long as Executive is employed by Company.

               4.4.  Executive shall have the right to all medical and long term
               disability  coverage  on the same  terms  and  conditions  as are
               provided  to other  management  employees  of  Company  as of the
               effective date of this Agreement.

                                       2

<PAGE>

               4.5. Unless specifically addressed in and altered by the terms of
               this  Agreement,  Executive  shall be  entitled  to  receive  all
               benefits of employment  available to Company's  other  managerial
               employees when as he becomes  eligible for the same;  Executive's
               employment  shall be subject to the further terms and  conditions
               of Company's then-current employment manual.

            5. Expenses and  Relocation:  Company shall pay either in advance or
by  reimbursement  all  reasonable  business  expenses of Executive  incurred in
connection  with Company's  business and  Executive's  performance of his duties
hereunder.  Such  expenses  include,  but are not limited to,  travel and travel
related  expenses,  business  entertainment and promotional  expenses,  and cell
phone.  Company shall further pay for reasonable expenses related to maintaining
any of Executive's  professional  licenses.  In  consideration  for  Executive's
ongoing  use of his home  office for  Company's  business,  reimbursement  shall
include  expenses  related to the home office  including but not limited to home
Internet  access and home phone lines,  including a fax line.  Payment  shall be
made in accordance with the general policies of Company as established from time
to time.  The day to day duties of  Executive  generally  are to be performed at
Company's  executive office in Overland Park, Kansas and at the current areas of
exploration and production.  If Company  relocates its executive offices outside
of the Kansas City metropolitan  area Company shall reimburse  Executive for all
reasonable  expenses  attendant to his relocation,  including but not limited to
relocation  of  household  goods and  storage,  mileage,  real estate  sales and
purchase and management  expenses,  fees and commissions,  temporary lodging and
meal expenses for Executive and  dependents,  and incidental  expenses  incurred
such as connect fees, license and title transfers.

            6.  Termination:  Executive may terminate this Agreement at any time
with or without cause and without payment or penalty. Company may terminate this
Agreement at any time without cause. Company may terminate this Agreement at any
time "for cause" if  Executive  willfully  breaches or  habitually  neglects the
duties  Executive is required to perform under the terms of this Agreement.  Any
termination shall be by notice in writing and delivered as provided herein.  For
termination  by the Company to be  effective,  the notice must  specify  whether
Executive's  termination  is for  cause  or  without  cause,  however,  any such
specification is not  dispositive.  In the event that termination by the Company
is  stated  to  be or  finally  determined  to be  without  cause,  there  shall
immediately  be due and payable from  Company to Executive  the amount of annual
salary  due for the  balance  of the term of the  contract  together  with  such
further amounts that may be due under applicable state law,  including  interest
and  vacation  pay with such sum being deemed due and payable at the time of the
service  of the  notice of  termination.  Such sums  shall be deemed  liquidated
damages  and shall be due and  payable  without  consideration  for  Executive's
ability to obtain replacement employment.

                                       3

<PAGE>

            7.  Disability  or Death:  In the event of  Executive's  disability,
Company  shall  have no  further  obligations  to  Executive.  In the  event  of
Executive's  death,  this agreement  shall  automatically  terminate and Company
shall pay to Executive's  heirs,  without setoff or defense,  the greater of six
(6) month's salary or the amount of salary and other benefits  remaining due and
owing under this Agreement. Any other payments upon the death of Executive shall
be subject to the terms and conditions of such other benefit plans and programs.

            8.  Arbitration:  In the  event  that a dispute  arises  out of this
Agreement,  either  party may demand  that the dispute be  submitted  to binding
arbitration of a single  arbitrator  selected under the Federal  Arbitration Act
and the  then-existing  rules of the American  Arbitration  Association  or such
similar  national  arbitration  organization  that may  exist at the time of the
dispute.  Failure  of the  Company  to  submit  voluntarily  to any  demand  for
arbitration hereunder shall be considered a breach of this Agreement.  Any award
entered in the arbitration shall include a reasoned determination of which party
prevailed  and shall  include the  reasonable  attorney  fees of the  prevailing
party; however, the arbitrator shall have no authority to award punitive damages
or exemplary damages of any kind whatsoever.

            9.  Miscellaneous:   Company  shall  indemnify  and  hold  Executive
harmless  from any and all claims and legal actions  arising out of  Executive's
employment,   regardless  of  whether  such  claims  and  actions  allege  gross
negligence  or  intentional   acts.   This  Agreement  shall  be  construed  and
interpreted under the laws of the state of residence of Executive at the time of
the legal action or arbitration  requiring such construction or  interpretation.
Executive's  rights  and  duties  under  this  Agreement  are  personal  and not
assignable

            IN WITNESS:

            "COMPANY"                            "EXECUTIVE"

            PETROL OIL AND GAS, INC.             LOREN MOLL

            /s/  Robert H. Kite                  /s/  Loren Moll
            ---------------------------          ------------------------------
            By:  Robert H. Kite                       Loren Moll

            Its: Chairman of the Board

                                       4ex10_1.htm

    
      

    

    SECURITIES
PURCHASE AGREEMENT

    

    This
SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of
October 7, 2008, is made by and among Nestor, Inc., a corporation organized
under the laws of the State of Delaware (the “Company”), each of the
purchasers (individually, a “Purchaser” and collectively
the “Purchasers”) set
forth on the execution pages hereof (each, an “Execution Page” and
collectively the “Execution
Pages”), and U.S. Bank National Association, as collateral agent pursuant
to Section 9 (the “Collateral
Agent”).

    

    BACKGROUND

    

    A.            The
Company and each Purchaser are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by the
provisions of Regulation D (“Regulation D”), as promulgated
by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act
of 1933, as amended (the “Securities Act”).

    

    B.           
 Upon the terms and conditions stated in this Agreement, the Company
desires to issue and sell to the Purchasers, and each Purchaser desires to
purchase, a senior secured promissory note, in the form attached hereto as Exhibit A
(collectively, the “Notes”), in the principal face
amount of $1,000 (which aggregate amount for all Purchasers shall be
$500,000).

    

    C.           
 In connection with the Closing pursuant to this Agreement, the
Company will execute and deliver, and shall cause each of its Subsidiaries (as
defined in Section 3(a)) to execute and deliver, as applicable, an Amended and
Restated Security Agreement (the “Security Agreement”), an
Amended and Restated Guaranty and Suretyship Agreement (the “Guaranty”), an Amended and
Restated Borrower/Subsidiary Pledge Agreement (the “Pledge Agreement”) and an
Amended and Restated Security Agreement - Trademarks, Patents and Copyrights
(the “IP Security
Agreement”) in the forms attached hereto as Exhibit B, Exhibit C, Exhibit D and Exhibit E
respectively, in favor of the Collateral Agent (as defined herein) for the
benefit of all of the Purchasers, pursuant to which the Company and its
Subsidiaries have agreed to grant a security interest in all of their respective
properties and assets in order to secure the Company’s obligations under the
Notes and the Subsidiaries’ obligations under the Guarantees.

    

    D.            
In connection with the Closing pursuant to this Agreement, the Company,
each of its Subsidiaries, each holder of the outstanding Senior Secured
Convertible Notes of the Company, the Purchasers and the Collateral Agent shall
execute and deliver a Payment Priority and Voting Agreement (the “Payment Priority Agreement”)
in the form of Exhibit
F (the Security Agreements, the Guaranty, the Pledge Agreement, the IP
Security Agreement, the Payment Priority Agreement and any other document
securing the Notes, are hereinafter collectively referred to as the “Security
Documents”).

    

    E.             This
Agreement, the Notes, the Security Agreements, the Guarantees, the Pledge
Agreements, any other Security Documents and all other agreements executed and
delivered in connection herewith and therewith are collectively referred to
herein as the “Transaction
Documents.”

    

    NOW,
THEREFORE, in consideration of the premises and mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and the Purchasers, intending to be
legally bound, hereby agree as follows:

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    1.         
    PURCHASE AND SALE OF
NOTES.

    

    (a)         
  Purchase and Sale of
Notes.  Subject to the terms and conditions hereof, at the
Closing (as defined in Section 1(b) below), the Company shall issue and sell to
each Purchaser, and each Purchaser, severally and not jointly, shall purchase
from the Company, such principal amount of Notes as is set forth on such
Purchaser’s Execution Page, for a purchase price (as to each Purchaser, the
“Purchase Price”) of
$1,000 per $1,000 in principal amount of Notes.

    

    (b)         
  The
Closing.  Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the closing of the transactions
contemplated hereby (the “Closing”) shall take place at
the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New
York 10022 at 10:00 a.m., New York City time, on the date hereof, or such other
time or place as the Company and the Purchasers may mutually agree (the “Closing Date”).

    

    2.     
        PURCHASER’S REPRESENTATIONS
AND WARRANTIES.

    

     Each
Purchaser severally, but not jointly, represents and warrants to the Company as
follows:

    

    (a)       
    Purchase for Own Account,
Etc.  Such Purchaser is purchasing the Notes for such
Purchaser’s own account and not with a present view towards the public sale or
distribution thereof, except pursuant to sales that are exempt from the
registration requirements of the Securities Act and/or sales registered under
the Securities Act.  Such Purchaser understands that such Purchaser
must bear the economic risk of this investment indefinitely, unless the Notes
are registered pursuant to the Securities Act and any applicable state
securities or blue sky laws or an exemption from such registration is available,
and that the Company has no present intention of registering the resale of any
of the Notes.  Notwithstanding anything in this Section 2(a) to the
contrary, by making the representations herein, such Purchaser does not agree to
hold the Notes for any minimum or other specific term and reserves the right to
dispose of the Notes at any time in accordance with or pursuant to a
registration statement or an exemption from the registration requirements under
the Securities Act.

    

    (b)        
   Accredited Investor
Status.  Such Purchaser is an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D.

    

    (c)       
    Reliance on
Exemptions.  Such Purchaser understands that the Notes are
being offered and sold to such Purchaser in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and such
Purchaser’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the availability of such exemptions and the eligibility of such
Purchaser to acquire the Notes.

    

    (d)       
    Information.  Such
Purchaser and its counsel, if any, have been furnished all materials relating to
the business, finances and operations of the Company and materials relating to
the offer and sale of the Notes which have been specifically requested by such
Purchaser or its counsel.  Neither such inquiries nor any other
investigation conducted by such Purchaser or its counsel or any of its
representatives shall modify, amend or affect such Purchaser’s right to rely on
the Company’s representations and warranties contained in Section 3
below.  Such Purchaser understands that such Purchaser’s investment in
the Notes involves a high degree of risk.

    
      
         

      

      
        - 2
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    (e)       
    Governmental
Review.  Such Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Notes.

    

    (f)       
    Authorization;
Enforcement.  This Agreement has been duly and validly
authorized, executed and delivered on behalf of such Purchaser and is a valid
and binding agreement of such Purchaser enforceable against such Purchaser in
accordance with its terms.

    

    (g)      
     Residency.  Such
Purchaser is a resident of the jurisdiction set forth under such Purchaser’s
name on the Execution Page hereto executed by such Purchaser.

    

    (h)      
     Short Sales and
Confidentiality Prior To The Date Hereof.  Other than the
transactions contemplated hereunder, such Purchaser has not directly or
indirectly, nor has any person acting on behalf of or pursuant to any
understanding with such Purchaser, executed any transaction, including short
sales, in the securities of the Company during the period commencing from the
time that such Purchaser was first contacted by the Company or any other person
disclosing the material terms of the transactions contemplated hereunder until
the date hereof.  Notwithstanding the foregoing, (i) in the case of LB
I Group Inc., the representation set forth above shall only apply with respect
to the Global Trading Strategies group of Lehman Brothers Holdings Inc. and (ii)
in the case of a Purchaser that is a multi-managed investment vehicle whereby
separate portfolio managers manage separate portions of such Purchaser’s assets
and the portfolio managers have no direct knowledge of the investment decisions
made by the portfolio managers managing other portions of such Purchaser’s
assets, the representation set forth above shall only apply with respect to the
portion of assets managed by the portfolio manager that had or has knowledge of
the transactions contemplated herein.  Each Purchaser understands and
acknowledges, severally and not jointly with any other Purchaser, that the SEC
currently takes the position that entering into a short sale of the Company’s
common stock, par value $0.01 per share (the “Common Stock”) “against the
box” while holding unregistered shares of the Common Stock, followed by coverage
of the short sale with such shares after the Registration Statement has been
declared effective by the SEC, is a violation of Section 5 of the Securities
Act, as set forth in Item 65, Section 5 under Section A, of the Manual of Publicly Available
Telephone Interpretations, dated July 1997, compiled by the Office of
Chief Counsel, Division of Corporation Finance.  Notwithstanding the
foregoing, for avoidance of doubt, nothing contained herein shall constitute a
representation or warranty, or preclude any actions, with respect to the
identification of the availability of, or securing of, available shares to
borrow in order to effect short sales or similar transactions in the
future.

    

     Each
Purchaser’s representations and warranties made in this Article 2 are made
solely for the purpose of permitting the Company to make a determination that
the offer and sale of the Notes pursuant to this Agreement comply with
applicable U.S. federal and state securities laws and not for any other
purpose.  Accordingly, the Company may not rely on such
representations and warranties for any other purpose.  No Purchaser
has made or hereby makes any other representations or warranties, express or
implied, to the Company in connection with the transactions contemplated
hereby.

    

    3.         
    REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.

    

     Except
as set forth on a Disclosure Schedule executed and delivered by the Company to
each Purchaser (the “Disclosure
Schedule”) or as set forth in the Select SEC Documents (as defined in
Section 3(g) below), other than what is set forth in the Risk Factors of any
such Select SEC Documents or any other disclosure that is forward looking or
prospective in nature in any such Select SEC Documents, the Company represents
and warrants to each Purchaser as follows:

    
      
         

      

      
        - 3
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    (a)        
   Organization and
Qualification.  The Company and each of its “Subsidiaries” (which for
purposes of this Agreement means any entity in which the Company, directly or
indirectly, owns capital stock or holds an equity or similar interest) is a
corporation duly organized and existing in good standing under the laws of the
jurisdiction in which it is incorporated or organized, and has the requisite
corporate power to own its properties and to carry on its business as now being
conducted.  The Company and each of its Subsidiaries is duly qualified
as a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary and where the failure so to qualify or be in good
standing would have a Material Adverse Effect.  For purposes of this
Agreement, “Material Adverse
Effect” means any effect which, individually or in the aggregate with all
other effects, reasonably would be expected to be materially adverse to (i) the
Notes, (ii) the ability of the Company to perform its obligations under this
Agreement or the other Transaction Documents or (iii) the business, operations,
properties, prospects, financial condition or results of operations of the
Company and its Subsidiaries, taken as a whole.  The Company has no
Subsidiaries except as set forth in Section 3(a) of the
Disclosure Schedule, each of which is, except as set forth on such schedule, a
direct or indirect wholly-owned subsidiary of the Company.

    

    (b)      
     Authorization;
Enforcement.  (i) The Company and, with respect to each of the
other Transaction Documents to which any such Subsidiary is a party, each of its
Subsidiaries, as applicable, has the requisite corporate power and authority to
enter into and perform their obligations under this Agreement and the other
Transaction Documents, to issue and sell the Notes in accordance with the terms
hereof; (ii) the execution, delivery and performance of this Agreement and the
other Transaction Documents by the Company and each of its Subsidiaries, as
applicable, and the consummation by them of the transactions contemplated hereby
and thereby (including, without limitation, the issuance of the Notes by the
Company) have been duly authorized by the Company’s and each of its
Subsidiaries’ Board of Directors, as applicable, and no further consent or
authorization of the Company or any of its Subsidiaries, their Boards of
Directors, or any committee of their Boards of Directors is required, and (iii)
this Agreement constitutes, and, upon execution and delivery by the Company and
each of its Subsidiaries, as applicable, of the other Transaction Documents,
such Transaction Documents will constitute, valid and binding obligations of the
Company and each of its Subsidiaries, as applicable, enforceable against the
Company and its Subsidiaries in accordance with their terms.  Neither
the execution, delivery or performance by the Company or any of its Subsidiaries
of their obligations under this Agreement or the other Transaction Documents,
nor the consummation by them of the transactions contemplated hereby or thereby
(including, without limitation, the issuance of the Notes by the Company)
requires any consent or authorization of the Company’s stockholders, or the
stockholders of any of the Company’s Subsidiaries.

    

    (c)      
     Capitalization.  The
capitalization of the Company as of the date hereof, including the authorized
capital stock, the number of shares issued and outstanding, the number of shares
issuable and reserved for issuance pursuant to the Company’s stock option plans,
the number of shares issuable and reserved for issuance pursuant to securities
(other than the Notes) exercisable or exchangeable for, or convertible into, any
shares of capital stock is set forth in Section 3(c) of the
Disclosure Schedule.  All of such outstanding shares of capital stock
have been, or upon issuance in accordance with the terms of any such
exercisable, exchangeable or convertible securities will be, validly issued,
fully paid and non-assessable.  No shares of capital stock of the
Company are subject to preemptive rights or any other similar rights of the
stockholders of the Company or any liens or encumbrances.  Except as
set forth in Section
3(c) of the Disclosure Schedule, (i) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exercisable
or exchangeable for, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries,
nor are any such issuances, contracts, commitments, understandings or
arrangements contemplated, (ii) there are no contracts, commitments,
understandings or arrangements under which the Company or any of its
Subsidiaries is obligated to register the sale of any of its or their securities
under the Securities Act; (iii) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem or otherwise acquire any security of the
Company or any of its Subsidiaries; and (iv) the Company does not have any
shareholder rights plan, “poison pill” or other anti-takeover plans or similar
arrangements.  Section 3(c) of the
Disclosure Schedule sets forth all of the securities or instruments issued by
the Company or any of its Subsidiaries that contain anti-dilution or similar
provisions, and, except as and to the extent set forth thereon, the sale and
issuance of the Notes will not trigger any anti-dilution adjustments to any such
securities or instruments.  The Company has furnished to each
Purchaser true and correct copies of the Company’s Certificate of Incorporation
as in effect on the date hereof (“Certificate of
Incorporation”), the Company’s Bylaws as in effect on the date hereof
(the “Bylaws”), and all
other instruments and agreements governing securities convertible into or
exercisable or exchangeable for capital stock of the Company, all of which
instruments and agreements are set forth in Section 3(c) of the
Disclosure Schedule.  The Company’s Certificate of Incorporation may
be amended by the vote of the holders of the majority of the outstanding equity
securities of the Company entitled to vote thereon.  The Company or
one of its Subsidiaries has the unrestricted right to vote, and (subject to
limitations imposed by applicable law) to receive dividends and distributions
on, all capital securities of its Subsidiaries as owned by the Company or any
such Subsidiary.

    
      
         

      

      
        - 4
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    (d)        
   Issuance of
Notes.  The Notes are duly authorized and, upon issuance in
accordance with the terms of this Agreement, (i) will be validly issued, fully
paid and non-assessable and free from all taxes, liens, claims and encumbrances,
(ii) will not be subject to preemptive rights, rights of first refusal or other
similar rights of stockholders of the Company or any other person and (iii) will
not impose personal liability on the holder thereof.  The issuance by
the Company of the Notes is exempt from registration under the Securities
Act.

    

    (e)       
    No Conflicts;
Consents.  The execution, delivery and performance of this
Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
will not (i) result in a violation of the Certificate of Incorporation or
Bylaws, (ii) conflict with, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment (including, without limitation, the
triggering of any anti-dilution provisions), acceleration or cancellation of,
any agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including United States federal and state
securities laws, rules and regulations and rules and regulations of any
self-regulatory organizations to which either the Company or its securities are
subject) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or affected
(except, with respect to clauses (ii) and (iii), for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations that would
not, individually or in the aggregate, have a Material Adverse
Effect).  Except (x) for the filing of a Form D with the SEC, (y) as
may be required for compliance with applicable state securities or “blue sky”
laws, or (z) as otherwise set forth in Section 3(e) of the
Disclosure Schedule, the Company is not required to obtain any consent,
approval, authorization or order of, or make any filing or registration with,
any court or governmental agency or any regulatory or self-regulatory agency or
other third party (including, without limitation, pursuant to any Material
Contract (as defined in Section 3(g) below)) in order for it to execute, deliver
or perform any of its obligations under this Agreement or any of the other
Transaction Documents.

    
      
         

      

      
        - 5
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    (f)        
    Compliance.  Neither
the Company nor any of its Subsidiaries is in violation of its Certificate of
Incorporation, Bylaws or other organizational documents and no Subsidiary is in
violation of any of its organizational documents.  Except as set forth
in Section 3(f)
of the Disclosure Schedule, neither the Company nor any of its Subsidiaries is
in default (and no event has occurred that with notice or lapse of time or both
would put the Company or any of its Subsidiaries in default) under, nor has
there occurred any event giving others (with notice or lapse of time or both)
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party (including, without limitation, the Material Contracts),
except for actual or possible violations, defaults or rights that would not,
individually or in the aggregate, have a Material Adverse Effect.  The
businesses of the Company and its Subsidiaries are not being conducted, and
shall not be conducted so long as any Purchaser owns any of the Notes, in
violation of any law, ordinance or regulation of any governmental entity, except
for possible violations the sanctions for which either individually or in the
aggregate have not had and would not have a Material Adverse
Effect.  Neither the Company, nor any of its Subsidiaries, nor any
director, officer, agent, employee or other person acting on behalf of the
Company or any Subsidiary has, in the course of his actions for, or on behalf
of, the Company or any Subsidiary, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity, made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds, violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977,
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or
employee.  The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, provincial
or foreign regulatory authorities that are material to the conduct of its
business, and neither the Company nor any of its Subsidiaries has received any
notice of proceeding relating to the revocation or modification of any such
certificate, authorization or permit.

    

    (g)    
       SEC Documents, Financial
Statements.  Since December 31, 2007, the Company has timely
filed (within applicable extension periods) all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents
incorporated by reference therein, the “SEC
Documents”).  The Company has delivered or otherwise made
available to each Purchaser true and complete copies of the SEC
Documents.  As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act or the
Securities Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.  None of
the statements made in any such SEC Documents is, or has been, required to be
amended or updated under applicable law (except for such statements as have been
amended or updated in subsequent filings made prior to the date
hereof).  As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC applicable with respect thereto.  Such
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”), consistently applied,
during the periods involved (except as may be otherwise indicated in such
financial statements or the notes thereto or, in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the consolidated
financial position of the Company and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal, immaterial year-end audit adjustments).  Except as set forth
in the financial statements of the Company included in the Select SEC Documents
(as defined below), the Company has no liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
subsequent to the date of such financial statements and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under GAAP to be reflected in such financial statements, which
liabilities and obligations referred to in clauses (i) and (ii), individually or
in the aggregate, are not material to the financial condition or operating
results of the Company.  To the extent required by the rules and
regulations of the SEC applicable thereto, the Select SEC Documents contain a
complete and accurate list of all undischarged Material Contracts to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary
is bound or to which any of the properties or assets of the Company or any
Subsidiary is subject.  Except as set forth in the Select SEC
Documents, none of the Company, its Subsidiaries or, to the best knowledge of
the Company, any of the other parties thereto is in breach or violation of any
Material Contract, which breach or violation would have a Material Adverse
Effect.  For purposes of this Agreement, “Material Contracts” means the
contracts, agreements, leases and other instruments required to be filed
pursuant to Item 601 of Regulation S-K promulgated under the Exchange Act
and  “Select SEC
Documents” means the Company’s (A) Proxy Statement for its 2007 Annual
Meeting, (B) Annual Report on Form 10-K for the fiscal year ended December 31,
2007, as amended (the “Annual
Report”), and (C) all Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K filed since December 31, 2007.  No other information
provided by or on behalf of the Company to the Purchasers that is not included
in the Select SEC Documents contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstance under which they are or were made, not
misleading.

    
      
         

      

      
        - 6
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    (h)       
    Internal Accounting
Controls.  The Company and each of its Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.  The Company has established disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) for the Company
and designed such disclosures controls and procedures to ensure that material
information relating to the Company, including its Subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which the Company’s Annual Report on Form 10-K or Quarterly Report
on Form 10-Q, as the case may be, is being prepared.  The Company’s
certifying officers have evaluated the effectiveness of the Company’s controls
and procedures as of a date within 90 days prior to the filing date of the
Annual Report and the Company’s most recently filed Quarterly Report on Form
10-Q (each such date, an “Evaluation
Date”).  The Company presented in the Annual Report and its
most recently filed Quarterly Report on Form 10-Q the conclusions of the
certifying officers about the effectiveness of the disclosure controls and
procedures based on their evaluations as of the respective Evaluation
Date.  Since the Evaluation Date for the Annual Report, there have
been no significant changes in the Company’s internal controls (as such term is
defined in Item 307(b) of Regulation S-K under the Exchange Act) or, to the
Company’s knowledge, in other factors that could significantly affect the
Company’s internal controls, except as expressly disclosed in the Select SEC
Documents as to changes that occurred after the Evaluation
Date.

    
      
         

      

      
        - 7
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    (i)          
  Absence of Certain
Changes.  Except as set forth in the Select SEC Documents,
since December 31, 2007, there has been no material adverse change and no
material adverse development in the business, properties, operations, prospects,
financial condition or results of operations of the Company and its
Subsidiaries, taken as a whole. Except as disclosed in Section 3(i) of the
Disclosure Schedule, since December 31, 2007, the Company has not (i) declared
or paid any dividends, (ii) sold any assets, individually or in the aggregate,
in excess of $100,000 outside of the ordinary course of business or (iii) had
any capital expenditures in excess of $100,000 outside the ordinary course of
business. The Company has not taken any steps, and does not currently expect to
take any steps, to seek protection pursuant to any bankruptcy or receivership
law, nor does the Company or any of its Subsidiaries have any knowledge or
reason to believe that its creditors intend to initiate involuntary bankruptcy
proceedings with respect to the Company or any of its Subsidiaries.

    

    (j)      
      Transactions With
Affiliates.  Except as set forth in the Select SEC Documents,
none of the officers, directors, or employees of the Company or any of its
Subsidiaries is presently a party to any transaction with the Company or any of
its Subsidiaries (other than for ordinary course services solely in their
capacity as officers, directors or employees), including any contract, agreement
or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any such officer, director or employee or any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has an ownership interest of five percent or more or is an
officer, director, trustee or partner.

    

    (k)     
      Absence of
Litigation.  Except as disclosed in the Select SEC Documents or
in Section 3(k)
of the Disclosure Schedule, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body (including, without limitation, the SEC)
pending or, to the knowledge of the Company or any of its Subsidiaries,
threatened against or affecting the Company, any of its Subsidiaries, or any of
their respective directors or officers in their capacities as such. There are no
facts which, if known by a potential claimant or governmental authority, could
give rise to a claim or proceeding which, if asserted or conducted with results
unfavorable to the Company or any of its Subsidiaries, could reasonably be
expected to have a Material Adverse Effect.  The matters set forth in
the Select SEC Documents or Section 3(k) of the
Disclosure Schedule would not have a Material Adverse Effect.

    

    (l)    
        Intellectual
Property.  Each of the Company and its Subsidiaries owns or is
duly licensed (and, in such event, has sufficient rights to grant sublicenses)
to use all patents, patent applications, trademarks, trademark applications,
trade names, service marks, copyrights, copyright applications, licenses,
permits, inventions, discoveries, processes, scientific, technical, engineering
and marketing data, object and source codes, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, “Intangibles”) necessary for
the conduct of its business as now being conducted and as presently contemplated
to be conducted in the future.  Section 3(l) of the
Disclosure Schedule sets forth a list of all patents, patent applications,
trademarks, service marks, trademark and service mark applications, trade names,
registered copyrights, copyright applications, licenses and permits material to
the Company and owned and/or used by the Company in its business.  To
the knowledge of the Company and its Subsidiaries, neither the Company nor any
Subsidiary of the Company infringes or is in conflict with any right of any
other person with respect to any third party Intangibles.  Neither the
Company nor any of its Subsidiaries has received written notice of any pending
conflict with or infringement upon such third party
Intangibles.  Neither the Company nor any of its Subsidiaries has
entered into any consent agreement, indemnification agreement, forbearance to
sue or settlement agreement with respect to the validity of the Company’s or its
Subsidiaries’ ownership of or right to use its Intangibles and there is no
reasonable basis for any such claim to be successful.  The Intangibles
are valid and enforceable and no registration relating thereto has lapsed,
expired or been abandoned or canceled or is the subject of cancellation or other
adversarial proceedings, and all applications therefor are pending and in good
standing.  The Company and its Subsidiaries have complied, in all
material respects, with their respective contractual obligations relating to the
protection of the Intangibles used pursuant to licenses.  To the
knowledge of the Company, no person is infringing on or violating the
Intangibles owned or used by the Company or its Subsidiaries.

    
      
         

      

      
        - 8
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    (m)           Title.  The
Company and its Subsidiaries have good and marketable title in fee simple to all
real property and good and merchantable title to all personal property owned by
them that is material to the business of the Company and its Subsidiaries, in
each case free and clear of all liens, encumbrances and defects except such as
do not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and its Subsidiaries.  Any real property and facilities held
under lease by the Company and its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not materially interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.

    

    (n)      
     Tax Status. Except as
set forth in the Select SEC Documents, the Company and each of its Subsidiaries
has made or filed all foreign, U.S. federal, state, provincial and local income
and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject (unless and only to the extent that the Company and each
of its Subsidiaries has set aside on its books provisions reasonably adequate
for the payment of all unpaid and unreported taxes) and has paid all taxes and
other governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.  The Company has not executed a waiver with respect to any
statute of limitations relating to the assessment or collection of any foreign,
federal, state, provincial or local tax. None of the Company’s tax returns is
presently being audited by any taxing authority.

    

    (o)      
     Key
Employees.  Each of the Company’s directors and officers and
any Key Employee (as defined below) is currently serving the Company in the
capacity disclosed in the Select SEC Documents.  To the knowledge of
the Company, no Key Employee is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each Key Employee does not subject the Company or any of its Subsidiaries to
any material liability with respect to any of the foregoing
matters.  No Key Employee has, to the knowledge of the Company and its
Subsidiaries, any intention to terminate or limit his employment with, or
services to, the Company or any of its Subsidiaries, nor is any such Key
Employee subject to any constraints which would cause such employee to be unable
to devote his full time and attention to such employment or
services.  For purposes of this Agreement, “Key Employee” means the
persons listed in Section 3(o) of the
Disclosure Schedule and any individual who assumes or performs any of the duties
of a Key Employee.

    

    (p)       
    Employee
Relations.  Neither the Company nor any of its Subsidiaries is
involved in any material union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute
threatened.  The Company and its Subsidiaries believe that their
relations with their employees are good.  No executive officer (as
defined in Rule 501(f) of the Securities Act) has notified the Company that such
officer intends to leave the Company or otherwise terminate such officer’s
employment with the Company.  The Company and its Subsidiaries are in
compliance with all federal, state, local and foreign laws and regulations
respecting employment and employment practices, benefits, terms and conditions
of employment and wages and hours, except where failure to be in compliance
would not, either individually or in the aggregate, result in a Material Adverse
Effect.

    
      
         

      

      
        - 9
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    (q)        
   Insurance.  The
Company and each of its Subsidiaries has in force fire, casualty, product
liability and other insurance policies, with extended coverage, sufficient in
amount to allow it to replace any of its material properties or assets which
might be damaged or destroyed or sufficient to cover liabilities to which the
Company may reasonably become subject, and such types and amounts of other
insurance with respect to its business and properties, on both a per occurrence
and an aggregate basis, as are customarily carried by persons engaged in the
same or similar business as the Company.  No default or event has
occurred that could give rise to a default under any such
policy.  Neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.

    

    (r)        
    Environmental
Matters.  There is no environmental litigation or other
environmental proceeding pending or, to the knowledge of the Company or any of
its Subsidiaries, threatened by any governmental regulatory authority or others
with respect to the current or any former business of the Company or any of its
Subsidiaries or any partnership or joint venture currently or at any time
affiliated with the Company or any of its Subsidiaries.  No state of
facts exists as to environmental matters or Hazardous Substances (as defined
below) that involves the reasonable likelihood of a material capital expenditure
by the Company or any of its Subsidiaries that may otherwise have a Material
Adverse Effect.  No Hazardous Substances have been treated, stored or
disposed of, or otherwise deposited, in or on the properties owned or leased by
the Company or any of its Subsidiaries or by any partnership or joint venture
currently or at any time affiliated with the Company or any of its Subsidiaries
in violation of any applicable environmental laws.  The environmental
compliance programs of the Company and each of its Subsidiaries comply in all
respects with all environmental laws, whether foreign, federal, state,
provincial or local, currently in effect.  For purposes of this
Agreement, “Hazardous
Substances” means any substance, waste, contaminant, pollutant or
material that has been determined by any governmental authority to be capable of
posing a risk of injury to health, safety, property or the
environment.

    

    (s)      
     [Intentionally
Omitted]

    

    (t)      
      Listing.  Since
December 31, 2007, the Common Stock has been and currently is listed for trading
on the Nasdaq Over-the-Counter Bulletin Board (the “Principal
Market”).  The Company is not in violation of the listing
requirements of the Principal Market, does not reasonably anticipate that the
Common Stock will be delisted by the Principal Market for the foreseeable
future, and has not received any notice regarding the possible delisting of the
Common Stock from the Principal Market.

    

    (u)       
    [Intentionally Omitted]

    

    (v)       
    Anti-Takeover
Provisions.  The Company and its board of directors have taken
all necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution under
a rights agreement) or other similar anti-takeover provision under its
Certificate of Incorporation or the laws of the state of its incorporation
(including, without limitation, Section 203 of the Delaware General Corporation
Law, as amended) which is or could become applicable to any Purchaser as a
result of the transactions contemplated by this Agreement, including, without
limitation, the Company’s issuance of the Notes and any and all Purchaser’s
ownership of the Notes.

    
      
         

      

      
        - 10
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    (w)           Acknowledgment Regarding
Each Purchaser’s Purchase of the Notes.  The Company
acknowledges and agrees that each Purchaser is acting solely in the capacity of
arm’s length purchaser with respect to this Agreement and the other Transaction
Documents and the transactions contemplated hereby and thereby, and that no
Purchaser is (i) an officer or director of the Company, (ii) an “affiliate” of
the Company (as defined in Rule 144 under the Securities Act (including any
successor rule, “Rule
144”)) or (iii) a “beneficial owner” of more than 5% of the Common Stock
(as defined for purposes of Rule 13d-3 of the Exchange Act).  The
Company further acknowledges that no Purchaser is acting as a financial advisor
or fiduciary of the Company (or in any similar capacity) with respect to this
Agreement or the other Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by a Purchaser or any of its
representatives or agents in connection with this Agreement or the other
Transaction Documents and the transactions contemplated hereby and thereby is
merely incidental to such Purchaser’s purchase of the Notes.  The
Company further represents to each Purchaser that the Company’s decision to
enter into this Agreement and the other Transaction Documents has been based
solely on the independent evaluation by the Company and its
representatives.

    

    (x)            No General Solicitation or
Integrated Offering.  Neither the Company nor any distributor,
agent or affiliate participating on the Company’s behalf in the transactions
contemplated hereby (if any) nor any person acting for the Company, or any such
distributor, agent or affiliate has conducted any “general solicitation” (as
such term is defined in Regulation D) with respect to the Notes being offered
hereby.  Neither the Company nor any of its affiliates, nor any person
acting on its or their behalf, has directly or indirectly made any offers or
sales of any security or solicited any offers to buy any security under
circumstances that would require registration of the Notes being offered hereby
under the Securities Act or cause this offering of Notes to be integrated with
any prior offering of securities of the Company for purposes of the Securities
Act, which result of such integration would require registration under the
Securities Act, or any applicable stockholder approval provisions.

    

    (y)     
      No
Brokers.  The Company has taken no action that would give rise
to any claim by any person for brokerage commissions, finder’s fees or similar
payments by any Purchaser relating to this Agreement or the transactions
contemplated hereby.

    

    (z)      
      [Intentionally
Omitted]

    

    (aa)          Indebtedness and Other
Contracts.  Except as disclosed in Section 3(aa) of the
Disclosure Schedule, neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument would result in a
Material Adverse Effect, (iii) is in violation of any term of or in default
under any contract, agreement or instrument relating to any Indebtedness, except
where such violations and defaults would not result, individually or in the
aggregate, in a Material Adverse Effect, or (iv) is a party to any contract,
agreement or instrument relating to any Indebtedness, the performance of which,
in the judgment of the Company’s officers, has or is expected to have a Material
Adverse Effect.  For purposes of this Agreement: (x) “Indebtedness” of any Person
means, without duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations (as defined below) in respect of indebtedness or obligations of
others of the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) “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.

    
      
         

      

      
        - 11
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    (bb)         Off Balance Sheet
Arrangements.  There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance
sheet entity that is required to be disclosed by the Company in its Exchange Act
filings and is not so disclosed or that otherwise would be reasonably likely to
have a Material Adverse Effect.

    

    (cc)         
Manipulation of
Price.  The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the Notes,
(ii) sold, bid for, purchased, or paid any compensation for soliciting purchases
of, any of the Notes, or (iii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.

    

    (dd)         Transfer
Taxes.  On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Notes to be sold to each Purchaser hereunder
will be, or will have been, fully paid or provided for by the Company, and all
laws imposing such taxes will be or will have been complied with.

    

    (ee)          Sarbanes-Oxley
Act.  The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date
hereof, and any and all applicable rules and regulations promulgated by the SEC
thereunder that are effective as of the date hereof, except where such
noncompliance would not have, individually or in the aggregate, a Material
Adverse Effect.

    

    (ff)           Disclosure.  All
information relating to or concerning the Company and/or any of its Subsidiaries
set forth in this Agreement or provided to the Purchasers pursuant to Section
2(d) hereof or otherwise in connection with the transactions contemplated hereby
is true and correct in all material respects and the Company has not omitted to
state any material fact necessary in order to make the statements made herein or
therein, in light of the circumstances under which they were made, not
misleading.  Except for the transactions contemplated by the
Transaction Documents, no event or circumstance has occurred or exists with
respect to the Company or its Subsidiaries or their respective businesses,
properties, prospects, operations or financial conditions, which has not been
publicly disclosed but, under applicable law, rule or regulation, would be
required to be disclosed by the Company in a registration statement filed or to
be declared effective on the date hereof by the Company under the Securities Act
with respect to a primary issuance of the Company’s securities.  Each
press release issued by the Company during the 12 months preceding the date of
this Agreement did not at the time of release contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.

    
      
         

      

      
        - 12
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    4.        
     COVENANTS.

    

    (a)         
  Best
Efforts.  The Company and the Purchasers shall use their
respective best efforts timely to satisfy each of the conditions described in
Sections 5, 6 and 7 of this Agreement.

    

    (b)       
    Form D;  Blue Sky
Laws.  The Company shall file with the SEC a Form D with
respect to the Notes as required under Regulation D and provide a copy thereof
to each Purchaser promptly after such filing.  The Company shall, on
or before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Notes for sale to each Purchaser pursuant
to this Agreement under applicable securities or “blue sky” laws of the states
of the United States or obtain exemption therefrom.  On or before 8:30
a.m., New York Time, on the first Business Day (as defined in the Notes)
following the Closing Date, the Company shall file a Form 8-K with the SEC
concerning this Agreement and the transactions contemplated hereby, which Form
8-K shall attach this Agreement and its Exhibits as exhibits to such Form 8-K
(the “8-K
Filing”).  From and after the 8-K Filing, the Company hereby
acknowledges that no Purchaser shall be in possession of any material non-public
information received from the Company, any of its Subsidiaries or any of its
respective officers, directors, employees or agents, which is not disclosed in
the 8-K Filing. The Company shall not, and shall cause each of its Subsidiaries
and its and each of their respective officers, directors, employees and agents
not to, provide any Purchaser with any material non-public information regarding
the Company or any of its Subsidiaries from and after the 8-K Filing without the
express written consent of such Purchaser.  In the event of a breach
of the foregoing covenant by the Company, any of its Subsidiaries or any of its
or their respective officers, directors, employees and agents, if the Company
does not make a public disclosure of such information within one Trading Day (as
defined in the Note) of a Purchaser’s delivery of a written notice of such
breach to the Company, which notice shall include in reasonable detail the
information that such Purchaser believes constitutes material non-public
information, then in addition to any other remedy provided herein or in the
other Transaction Documents, such Purchaser shall have the right to make a
public disclosure, in the form of a press release, public advertisement or
otherwise, of such material non-public information without the prior approval by
the Company, its Subsidiaries or any of its or their respective officers,
directors, employees or agents.  No Purchaser shall have any liability
to the Company, its Subsidiaries or any of its or their respective officers,
directors, employees, shareholders or agents for any such
disclosure.  Subject to the foregoing, neither the Company nor any
Purchaser shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the Company
shall be entitled, without the prior approval of any Purchaser, to make any
press release or other public disclosure with respect to such transactions (i)
in substantial conformity with the 8-K Filing and contemporaneously therewith
and (ii) as is required by applicable law and regulations (provided that in the
case of clause (i) each Purchaser shall be consulted by the Company in
connection with any such press release or other public disclosure prior to its
release).  Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the SEC or any regulatory agency or Principal
Market, or the stock exchange or automated quotation system upon which the
Company’s shares of Common Stock are traded, including, without limitation, any
and all discounted issuance rules, if applicable, without the prior written
consent of such Purchaser, except (i) for disclosure thereof in the exhibits to
the 8-K Filing or the “Selling Stockholders” section of the Registration
Statement or (ii) as required by law or Principal Market regulations, the
regulations of the stock exchange or automatic quotation system upon which the
Company’s shares of Common Stock are then traded or any order of any court or
other governmental agency, in which case the Company shall provide such
Purchaser with prior notice of such disclosure and the opportunity to review and
comment on such disclosure.

    
      
         

      

      
        - 13
-

        
          

        

      

      
         

      

    

    (c)     
      [Intentionally
Omitted]

    

    (d)       
    Reporting
Status.  So long as any Purchasers (or any of their respective
affiliates) beneficially own any of the Notes, the Company shall timely file all
reports required to be filed with the SEC pursuant to the Exchange Act, and the
Company shall not terminate its status as an issuer required to file reports
under the Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination.  In addition, the Company
shall take all actions necessary to meet the “registrant eligibility”
requirements set forth in the general instructions to Form S-3 or any successor
form thereto, to continue to be eligible to register the resale of its Common
Stock on a registration statement on Form S-3 under the Securities
Act.

    

    (e)     
      Use of Proceeds. The
Company shall use the proceeds from the sale and issuance of the Notes (the
“Proceeds”) solely for
the payment of legal fees and expenses of Schulte Roth & Zabel LLP in
accordance with Section 4(r) and the fees and expenses of the Collateral Agent
(including the legal fees and expenses of counsel to the Collateral Agent) and
capital expenditures set forth on Section 4(e) of the
Disclosure Schedules attached hereto (the “Approved Capital
Expenditures”); provided, that, the Company
shall not spend more than $100,000 of the Proceeds on or prior to the date ten
(10) Business Days after the Closing Date (the “Consent Deadline”) unless the
Company has obtained the written consent (the “Consent”) of the holders of
the Variable Rate Senior Notes (as defined in the Notes) to the restructuring of
the Company in accordance with the terms of the term sheet attached hereto as
Exhibit H (the
“Restructuring”).  In
the event that the Company has not obtained the Consent on or prior to the
Consent Deadline, the Company shall use the balance of the Proceeds only to
effect the Restructuring or as otherwise approved by the Required
Holders.  If the Company obtains the Consent on or prior to the
Consent Deadline, then the Company shall use (i) up to an additional $325,000 of
the Proceeds for the Approved Capital Expenditures and (ii) the balance of the
Proceeds for the payment of legal fees and expenses of Schulte Roth & Zabel
LLP in accordance with Section 4(r), the fees and expenses of the Collateral
Agent (including the legal fees and expenses of counsel to the Collateral Agent)
and to reimburse Radcliffe SPC, Ltd. for and on behalf of the Class A Segregated
Portfolio (“Radcliffe”),
or its designee(s), for reasonable costs and expenses, incurred in connection
with the transactions contemplated by the Restructuring.

    

    (f)     
      Financial
Information.  So long as any Purchasers (or any of their
respective affiliates) beneficially own any of the Notes, the Company shall send
(via electronic transmission or otherwise) the following reports to each such
Purchaser:  (i) within ten days after the filing with the SEC, a copy
of its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its proxy
statements and any Current Reports on Form 8-K; and (ii) within one day after
release, copies of all press releases issued by the Company or any of its
Subsidiaries.

    

    (g)      
     [Intentionally
Omitted]

    

    (h)       
    [Intentionally
Omitted]

    

    (i)        
    Corporate
Existence.  So long as any Purchasers (or any of their
respective affiliates) beneficially own any of the Notes, the Company shall
maintain its corporate existence, and in the event of a merger, consolidation or
sale of all or substantially all of the Company’s assets, the Company shall
ensure that the surviving or successor entity in such transaction assumes the
Company’s obligations under this Agreement and the other Transaction Documents
and the agreements and instruments entered into in connection herewith and
therewith.

    
      
         

      

      
        - 14
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    (j)       
     No Integrated
Offerings.  The Company shall not make any offers or sales of
any security under circumstances that would require registration of the Notes
being offered or sold hereunder under the Securities Act or cause this offering
of the Notes to be integrated with any other offering of securities by the
Company for purposes of any stockholder approval provision applicable to the
Company or its securities.

    

    (k)      
     Legal
Compliance.  The Company shall conduct its business and the
business of its Subsidiaries in compliance with all laws, ordinances or
regulations of governmental entities applicable to such businesses, except where
the failure to do so would not have a Material Adverse Effect.

    

    (l)      
      Redemptions, Dividends and
Repayments of Indebtedness.  So long as any Purchasers (or any
of their respective affiliates) beneficially own any of the Notes, the Company
shall not, without first obtaining the written approval of the holders of at
least a majority of the aggregate principal amount of the Notes then outstanding
(which approval may be given or withheld by such holders in their sole and
absolute discretion), repurchase, redeem or declare or pay any cash dividend or
distribution on any shares of capital stock of the Company or repay or prepay
any Indebtedness (except for any capital leases) other than trade payables in
the ordinary course of business of the Company.

    

    (m)           Information.  So
long as any Purchasers (or any of their respective affiliates) beneficially own
any of the Notes the Company shall furnish to each such Purchaser:

    

    (i)           
 concurrently with the filing with the SEC of its annual reports on
Form 10-K, a certificate of the President, a Vice President or a senior
financial officer of the Company stating that, based upon such examination or
investigation and review of this Agreement as in the opinion of the signer is
necessary to enable the signer to express an informed opinion with respect
thereto, neither the Company nor any of its Subsidiaries is or has during such
period been in default in the performance or observance of any of the terms,
covenants or conditions hereof, or, if the Company or any of its Subsidiaries
shall be or shall have been in default, specifying all such defaults, and the
nature and period of existence thereof, and what action the Company or such
Subsidiary has taken, is taking or proposes to take with respect thereto;
and

    

    (ii)      
     the information the Company must deliver to
any holder or to any prospective transferee of Notes in order to permit the sale
or other transfer of such Notes pursuant to Rule 144A of the SEC or any similar
rule then in effect.

    

    The
Company shall keep at its principal executive office a true copy of this
Agreement (as at the time in effect), and cause the same to be available for
inspection at such office during normal business hours by any holder of Notes or
any prospective transferee of Notes designated by a holder thereof.

    

    (n)      
     Inspection of Properties and
Books.  So long as any Purchasers (or any of their respective
affiliates) beneficially own any of the Notes, each such Purchaser and its
representatives and agents (collectively, the “Inspectors”) shall have the
right, at such Purchaser’s expense, to visit and inspect any of the properties
of the Company and of its Subsidiaries, to examine the books of account and
records of the Company and of its Subsidiaries, to make or be provided with
copies and extracts therefrom, to discuss the affairs, finances and accounts of
the Company and of its Subsidiaries with, and to be advised as to the same by,
its and their officers, employees and independent public accountants (and by
this provision the Company authorizes such accountants to discuss such affairs,
finances and accounts, whether or not a representative of the Company is
present) all at such reasonable times and intervals and to such reasonable
extent as the Purchasers may desire; provided, however, that each Inspector
shall hold in confidence and shall not make any disclosure (except to such
Purchaser) of any such information which the Company determines in good faith to
be confidential, and of which determination the Inspectors are so notified,
unless (i) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement filed, (ii) the release
of such information is ordered pursuant to a subpoena or other order from a
court or government body of competent jurisdiction, or (iii) such information
has been made generally available to the public other than by disclosure in
violation of this or any other agreement.  Each Purchaser agrees that
it shall, upon learning that disclosure of such information 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 information deemed confidential.

    
      
         

      

      
        - 15
-

        
          

        

      

      
         

      

    

    (o)       
    Shareholders Rights
Plan.  No claim shall be made or enforced by the Company or any
other person that any Purchaser is an “Acquiring Person” under any shareholders
rights plan or similar plan or arrangement in effect or hereafter adopted by the
Company, or that any Purchaser could be deemed to trigger the provisions of any
such plan or arrangement, by virtue of receiving Notes under this Agreement or
any other Transaction Documents or under any other agreement between the Company
and the Purchasers.

    

    (p)      
     Pledge of Notes. The
Company acknowledges and agrees that the Notes may be pledged by any Purchaser
in connection with a bona fide margin agreement or other loan or financing
arrangement that is secured by the Notes.  The pledge of Notes shall
not be deemed to be a transfer, sale or assignment of the Notes hereunder, and
no Purchaser effecting a pledge of Notes shall be required to provide the
Company with any notice thereof or otherwise make any delivery to the Company
pursuant to this Agreement or any other Transaction Document.  The
Company shall execute and deliver such documentation as a pledgee of the Notes
may reasonably request in connection with a pledge of the Notes to such pledgee
by a Purchaser.

    

    (q)     
      Variable
Securities.  So long as any Purchasers (or any of their
respective affiliates) beneficially own any of the Notes, the Company shall not,
without first obtaining the written approval of the holders of at least a
majority of the aggregate principal face amount of the Notes then outstanding
(which approval may be given or withheld by such holders in their sole and
absolute discretion), issue or sell any rights, warrants or options to subscribe
for or purchase Common Stock, or any other securities directly or indirectly
convertible into or exchangeable or exercisable for Common Stock, at an
effective conversion, exchange or exercise price that varies or may vary with
the market price of the Common Stock, including by way of one or more reset(s)
to any fixed price (which shall not include any anti-dilution provisions in any
securities).

    

    (r)     
      Expenses.  The
Company shall pay Schulte Roth & Zabel LLP, counsel to Radcliffe, for
its reasonable fees and expenses, not to exceed $78,000 in the aggregate
(the “Expense Cap”),
incurred in connection with documentation and implementation of the transactions
contemplated by the Transaction Documents (the “Expenses”), which fees and
expenses shall be disbursed to Schulte Roth & Zabel LLP from the proceeds
from the sale of the Notes concurrent with the Closing upon submission of an
invoice to the Company.  In addition, from time to time thereafter,
upon any written request of Schulte Roth & Zabel LLP, the Company shall pay
to Schulte Roth & Zabel LLP such additional Expenses (subject to the Expense
Cap), if any, not covered by such payment, in each case to the extent reasonably
incurred by Schulte Roth & Zabel LLP in connection with the negotiation,
preparation, execution and delivery of this Agreement and the other Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby.

    

    (s)   
        [Intentionally
Omitted]

    
      
         

      

      
        - 16
-

        
          

        

      

      
         

      

    

    (t)      
     Noteholder
Consents.  The Company shall use its best efforts to cause (i)
each holder of the outstanding 5% Senior Convertible Notes of the Company to
execute and deliver a Consent, Waiver and Forbearance Agreement (a “5% Noteholder Agreement”),
substantially in the form attached hereto as Exhibit G-1 and (ii)
each holder of the outstanding Senior Secured Convertible Notes of the Company
to execute and deliver a Consent, Waiver and Forbearance Agreement (a “Secured Noteholder
Agreement”), substantially in the form attached hereto as Exhibit
G-2.

    

    (u)     
      Material Information;
Notices.  In the event the Company has made a good faith
determination that the matters relating to any notice required to be provided to
any Purchaser pursuant to any Transaction Document (each a “Required Notice”), constitute
material non-public information, the Company shall give written notice (the
“Material Event Notice”)
to the person designated on the signature page of each Purchaser for the receipt
of any Material Event Notice, or such other person as such Purchaser shall
designate in writing to the Company (the “Material Notice
Recipient”).  Until the earlier to occur of (x) the date on
which the Material Notice Recipient gives written notice to the Company
authorizing the delivery of such Required Notice to the Purchaser (the “Material Event Notice
Acceptance”) or (y) the date on which the material non-public information
which is the subject of the Required Notice is publicly disclosed in a filing
with the SEC, the Company shall be relieved of any obligation imposed by this
Agreement or any other Transaction Document to deliver the Required Notice to
the Purchaser and such Purchaser shall be deemed to have waived the Purchaser’s
rights hereunder to receive such Required Notice until such time as the Material
Notice Recipient delivers such Material Event Notice Acceptance to the
Company.  Notwithstanding anything in any Transaction Document to the
contrary, the Company covenants and agrees that it shall not provide the
Required Notice to any Purchaser until the earlier to occur of (x) such time as
the Material Event Notice Acceptance is received by the Company or (y) the
material non-public information which is the subject of the Required Notice has
been disclosed in a filing with the SEC.  Any Purchaser may, as set
forth on its signature page hereto or otherwise by written notice to the
Company, elect to waive its right to appoint a Material Notice Recipient under
this Section 4(u) for such Purchaser; provided, that in such event
the Company shall not be relieved from the performance of any of its obligations
with respect to such Purchaser under this Agreement.

    

    5.        
     NOTES TRANSFER
MATTERS.

    

    (a)        
   Transfer or
Resale.  Each Purchaser understands that (i) the sale or resale
of the Notes have not been and are not being registered under the Securities Act
or any state securities laws, and the Notes may not be transferred unless (A)
the transfer is made pursuant to and as set forth in an effective registration
statement under the Securities Act covering the Notes (including in conformity
with applicable prospectus delivery requirements, if any); or (B) such Purchaser
shall have delivered to the Company an opinion of counsel (which opinion shall
be in form, substance and scope customary for opinions of counsel in comparable
transactions) to the effect that the Notes to be sold or transferred may be sold
or transferred pursuant to an exemption from such registration; or (C) sold
under and in compliance with Rule 144; or (D) sold or transferred to an
affiliate of such Purchaser that agrees to sell or otherwise transfer the Notes
only in accordance with the provisions of this Section 5(b); and (ii) neither
the Company nor any other person is under any obligation to register such Notes
under the Securities Act or any state securities
laws.  Notwithstanding the foregoing or anything else contained herein
to the contrary, the Notes may be pledged as collateral in connection with a
bona fide margin account or other lending arrangement, provided such pledge is
consistent with applicable laws, rules and regulations.

    

    (b)     
      Legends.  Each
Purchaser understands that the Notes may bear a restrictive legend in
substantially the following form:

    
      
         

      

      
        - 17
-

        
          

        

      

      
         

      

    

    [THE
ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL SELECTED BY THE HOLDER AND REASONABLY ACCEPTABLE TO THE ISSUER, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.  NOTWITHSTANDING
THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.

    

    (c)         
  Transferees Bound by
Transaction Documents.  Notwithstanding the provisions of this
Section 5, no Purchaser may transfer the Notes unless the transferee agrees in
writing to be bound by all of the provisions of the Transaction Documents
(including, but not limited to, Section 9 of this Agreement), and it shall be a
condition to any such transfer that any such transferee execute and deliver
appropriate documentation, in form and substance reasonably satisfactory to the
Company and the Collateral Agent, to such effect.

    

    6.         
    CONDITIONS TO THE COMPANY’S OBLIGATION TO
SELL.

    

     The
obligation of the Company hereunder to issue and sell the Notes to each
Purchaser hereunder is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions as to such Purchaser, provided that
such conditions are for the Company’s sole benefit and may be waived by the
Company at any time in its sole discretion:

    

    (a)       
    Execution of Transaction
Documents.  Each Purchaser shall have executed such Purchaser’s
Execution Page to this Agreement and each other Transaction Document to which
such Purchaser is a party and delivered the same to the Company.

    

    (b)      
     Payment of Purchase
Price.  Each Purchaser shall have delivered the full amount of
such Purchaser’s Purchase Price to the Company by wire transfer in accordance
with the Company’s written wiring instructions.

    

    (c)      
     Representations and
Warranties True; Covenants Performed.  The representations and
warranties of each Purchaser shall be true and correct as of the date when made
and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date, which
representations and warranties shall be true and correct as of such date), and
such Purchaser shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by such Purchaser at or
prior to the Closing Date.

    

    (d)           No Legal
Prohibition.  No statute, rule, regulation, executive order,
decree, ruling, injunction, action or proceeding shall have been enacted,
entered, promulgated or endorsed by any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which restricts or prohibits the consummation of
any of the transactions contemplated by this Agreement.

    
      
         

      

      
        - 18
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    7.          
   CONDITIONS TO EACH
PURCHASER’S OBLIGATION TO PURCHASE.

    

    The
obligation of each Purchaser hereunder to purchase the Notes for which it is
subscribing from the Company hereunder is subject to the satisfaction, at or
before the Closing Date, of each of the following conditions, provided that such
conditions are for each Purchaser’s individual and sole benefit and may be
waived by any Purchaser as to such Purchaser at any time in such Purchaser’s
sole discretion:

    

    (a)      
     Execution of Transaction
Documents.  The Company shall have executed such Purchaser’s
Execution Page to this Agreement and each other Transaction Document to which
the Company is a party (including, without limitation, the Security Agreement,
the Guaranty, the Pledge Agreement and any other Security Document) and
delivered executed originals of the same to such Purchaser.

    

    (b)     
      Execution of Security
Documents.  Each of the Subsidiaries shall have executed the
Security Agreement, the Guaranty, the Pledge Agreement and any other Security
Document to which such Subsidiary is a party and delivered executed originals of
the same to such Purchaser.  Each holder of the outstanding Senior
Secured Convertible Notes of the Company and the Collateral Agent shall have
executed and delivered the Payment Priority Agreement.

    

    (c)      
     Delivery of
Notes.  The Company shall have delivered to such Purchaser duly
executed Notes for the principal amount of Notes being purchased by such
Purchaser (each in such denominations as such Purchaser shall request),
registered in such Purchaser’s name.

    

    (d)     
      Listing.  The
Common Stock shall be authorized for quotation and listed on the Principal
Market and trading in the Common Stock (or on the Principal Market generally)
shall not have been suspended by the SEC or the Principal Market.

    

    (e)     
      Representations and
Warranties True; Covenants Performed.  The representations and
warranties of the Company shall be true and correct as of the date when made and
as of the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date, which representations and
warranties shall be true and correct as of such date) and the Company shall have
performed, satisfied and complied with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date.  Such Purchaser shall have
received a certificate, executed by the Chief Executive Officer of the Company
after reasonable investigation, dated as of the Closing Date to the foregoing
effect and as to such other matters as may reasonably be requested by such
Purchaser.

    

    (f)   
        No Legal Prohibition;
Government Approval.  No statute, rule, regulation, executive
order, decree, ruling, injunction, action or proceeding shall have been enacted,
entered, promulgated or endorsed by any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which restricts or prohibits the consummation
of, any of the transactions contemplated by this Agreement.  The
Company shall have obtained all governmental, regulatory or third party consents
and approvals, if any, necessary for the sale of the Notes.

    

    (g)           No Material Adverse
Change.  There shall have been no material adverse changes and
no material adverse developments in the business, properties, operations,
prospects, financial condition or results of operations of the Company and its
Subsidiaries, taken as a whole, since the date hereof, and no information that
is materially adverse to the Company and of which such Purchaser is not
currently aware shall come to the attention of such Purchaser.

    
      
         

      

      
        - 19
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    (h)      
     Corporate
Approvals.  Such Purchaser shall have received a copy of
resolutions, duly adopted by the Board of Directors of the Company, which shall
be in full force and effect at the time of the Closing, authorizing the
execution, delivery and performance by the Company of this Agreement and the
other Transaction Documents and the consummation by the Company of the
transactions contemplated hereby and thereby, certified as such by the Secretary
or Assistant Secretary of the Company, and such other documents they reasonably
request in connection with the Closing.

    

    (i)        
    Noteholder
Agreements.  Holders of at least 66-2/3% of the aggregate face
amount of the outstanding 5% Senior Convertible Notes of the Company shall have
executed and delivered a 5% Noteholder Agreement substantially in the form
attached hereto as Exhibit
G-1.  Each holder of the outstanding Senior Secured Convertible
Notes of the Company shall have executed and delivered a Secured Noteholder
Agreement substantially in the form attached hereto as Exhibit
G-2.

    

    (j)      
      Good Standing
Certificates.  The Company shall have delivered to such
Purchaser a true copy of a certificate evidencing the formation and good
standing of the Company and each of its Subsidiaries (other than Nestor
Interactive, Inc.) in such entity’s jurisdiction of formation issued by the
Secretary of State (or comparable office) of such jurisdiction, as of a date
within 10 days of the Closing Date.

    

    (k)     
      Transfer Agent
Certification.  The Company shall have delivered to such
Purchaser a letter from the Company’s transfer agent certifying the number of
shares of Common Stock outstanding as of a date within five days of the Closing
Date.

    

    (m)           UCC Search
Results.  Within six (6) Business Days prior to the Closing,
the Company shall have delivered or caused to be delivered to each Purchaser (A)
certified copies of UCC search results, listing all effective financing
statements which name as debtor the Company or any of its Subsidiaries filed in
the prior five years to perfect an interest in any assets thereof, together with
copies of such financing statements, none of which, except for the Liens granted
under the Security Documents or as otherwise agreed in writing by the
Purchasers, shall cover any of the Collateral (as defined in the Notes) and the
results of searches for any tax lien and judgment lien filed against such Person
or its property, which results, except as otherwise agreed to in writing by the
Purchasers shall not show any such Liens (as defined in the Security Agreement);
and (B) a perfection certificate, duly completed and executed by the Company and
each of its Subsidiaries, in form and substance satisfactory to the
Purchasers.

    

    8.         
    [Intentionally Omitted]

     

     

     

    9.        
     COLLATERAL AGENCY
PROVISIONS.

    

    (a)        
   Appointment of Collateral
Agent.  The Purchasers hereby appoint the Collateral Agent to
act as collateral agent and the Collateral Agent agrees to act as collateral
agent for the Purchasers, as contemplated herein and in the Security
Documents.

    

    (b)       
    Collateral Agent Authorized
to Enter into Security Documents.  Each of the Purchasers
authorizes and directs the Collateral Agent to enter into the Security Documents
on its behalf.

    
      
         

      

      
        - 20
-

        
          

        

      

      
         

      

    

    (c)      
     Amendment to Security
Documents.  The Purchasers holding at least a majority of the
total outstanding principal balance of the Notes (the “Required Holders”) shall have
the right to direct the Collateral Agent in writing, from time to time, to
consent to any amendment, modification or supplement to or waiver of any
provision of any Security Document and to release any Collateral (as defined in
the Security Documents) from any lien or security interest held by the
Collateral Agent; provided, however, that (i) no such
direction shall require the Collateral Agent to consent to the modification of
any provision or portion thereof which (in the sole judgment of the Collateral
Agent) is intended to benefit the Collateral Agent, (ii) the Collateral Agent
shall have the right to decline to follow any such direction if the Collateral
Agent shall determine in good faith that the directed action is not permitted by
the terms of any Security Document or may not lawfully be taken and (iii) no
such direction shall waive or modify any provision of any Security Document the
waiver or modification of which requires the consent of all Purchasers unless
all Purchasers consent thereto.  The Collateral Agent may rely on any
such written direction given to it by the Required Holders and shall be fully
protected in relying thereon, and shall under no circumstances be liable, except
in circumstances involving the Collateral Agent’s gross negligence or willful
misconduct as shall have been determined in a final nonappealable judgment of a
court of competent jurisdiction, to any holder of the Notes or any other person
or entity for taking or refraining from taking action in accordance with any
direction or otherwise in accordance with any of the Security
Documents.

    

    (d)      
     Duties of Collateral
Agent.  

    

    (i)         
   Powers.  The
Collateral Agent shall have and may exercise such powers under the Security
Documents as are specifically delegated to the Collateral Agent by the terms
hereof and thereof.  The Collateral Agent shall not have any implied
duties or any obligations to take any action under this Agreement or the
Security Documents.

    

    (ii)       
    No Obligation to
Act.  The Collateral Agent shall be entitled to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the written instructions of the Required Holders and such
instructions shall be binding upon all the Purchasers, including, without
limitation, the instructions set forth in Section 4(c) hereof; provided, however, that the
Collateral Agent shall not be under any obligation to exercise any of the rights
or powers vested in it by this Agreement or any Security Document in the manner
so requested unless, if so requested by the Collateral Agent, it shall have been
provided indemnity from the Company satisfactory to it against the costs,
expenses and liabilities which may be incurred by it in compliance with or in
performing such request or direction.  No provisions of this Agreement
or any Security Document shall otherwise be construed to require the Collateral
Agent to expend or risk its own funds or take any action that could in its
judgment cause it to incur any cost, expenses or liability for which it is not
specifically indemnified hereunder.  No provision of this Agreement or
of any Security Document shall be deemed to impose any duty or obligation on the
Collateral Agent to perform any act or acts or exercise any right, power, duty
or obligation conferred or imposed on it, in any jurisdiction in which it shall
be illegal, or in which the Collateral Agent shall be unqualified or
incompetent, to perform any such act or acts or to exercise any such right,
power, duty or obligation or if such performance or exercise would constitute
doing business by the Collateral Agent in such jurisdiction or impose a tax on
the Collateral Agent by reason thereof.

    

    (iii)           Action by Collateral
Agent.  Absent written instructions from the Required Holders
at a time when an Event of Default shall have occurred and be continuing, the
Collateral Agent shall have no obligation to take any actions under the Security
Documents.

    
      
         

      

      
        - 21
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    (iv)           Independent Right of Each
Purchaser to Instruct Collateral Agent.  The right of each
Purchaser to instruct the Collateral Agent is the separate and individual
property of such Purchaser and may be exercised as such Purchaser sees fit in
its sole discretion and with no liability to any other such Purchaser for the
exercise or non-exercise thereof.  Without limiting the foregoing, the
Required Holders shall not be liable under any circumstances to any other
Purchaser for any action taken or omitted to be taken hereunder by the
Collateral Agent upon written instructions from the Required
Holders.

    

    (v)      
     Relationship Between
Collateral Agent and Purchasers.  The relationship between the
Collateral Agent and the Purchasers is and shall be only to the extent
explicitly provided for herein that of agent and principal and nothing herein
contained shall be construed to constitute the Collateral Agent a trustee for
any Purchaser or to impose on the Collateral Agent duties and obligations other
than those expressly provided for herein.  Without limiting the
generality of the foregoing, neither the Collateral Agent nor any of its
directors, officers, employees, partners or agents shall:

    

    (A)           be
responsible to the Purchasers for any recitals, representations or warranties
contained in, or for the execution, validity, genuineness, perfection,
effectiveness or enforceability of, the Security Documents (it being expressly
understood that any determination of the foregoing is the responsibility of each
Purchaser),

    

    (B)           be
responsible to the Purchasers for the validity, genuineness, perfection,
effectiveness, enforceability, existence, value or enforcement of any security
interest in the Collateral (it being expressly understood that any determination
of the foregoing is the responsibility of each Purchaser),

    

    (C)           be
under any duty to inquire into or pass upon any of the foregoing matters, or to
make any inquiry concerning the performance by any person or entity of its or
their obligations under any Security Document (it being expressly understood
that any determination of the foregoing is the responsibility of each
Purchaser),

    

    (D)           be
deemed to have knowledge of the occurrence of an Event of Default (as defined in
the Notes), or any event, condition or circumstance the occurrence of which
would, with the giving of notice or the passage of time or both, constitute an
Event of Default,

    

    (E)           be
responsible or liable to the Purchasers for any shortage, discrepancy, damage,
loss or destruction of any part of the Collateral wherever the same may be
located regardless of the cause thereof unless the same shall happen solely
through the gross negligence or willful misconduct of the Collateral Agent as
shall have been determined in a final nonappealable judgment of a court of
competent jurisdiction,

    

    (F)           have
any liability to the Purchasers for any error or omission or action or failure
to act of any kind made in the settlement, collection or payment in connection
with any of the Security Documents or any of the Collateral or any instrument
received in payment therefor or for any damage resulting therefrom other than as
a sole result of its own gross negligence or willful misconduct as shall have
been determined in a final nonappealable judgment of a court of competent
jurisdiction, 

    

    (G)           in
any event, be liable to the Purchasers as such for any action taken or omitted
by it, absent, in each case described in this subsection, its gross negligence
or willful misconduct as shall have been determined in a final nonappealable
judgment of a court of competent jurisdiction, or

    
      
         

      

      
        - 22
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    (H)           be
responsible or liable for any failure or delay in the performance of its
obligations hereunder arising out of or caused by, directly or indirectly,
forces beyond its control, including without limitation strikes, work stoppages,
accidents, acts of war or terrorism, civil or military disturbances, nuclear or
natural catastrophes or acts of god, and interruptions, loss or malfunctions of
utilities, communications or computer (software or hardware) services; it being
understood that the Collateral Agent shall use reasonable efforts which are
consistent with accepted practices in the banking industry to resume performance
as soon as practicable under the circumstances.

    

    (e)     
      Standard of
Care.  Each Purchaser agrees with all other Purchasers and the
Collateral Agent that nothing contained in this Agreement shall be construed to
give rise to, nor shall such Purchaser have, any claims whatsoever against the
Collateral Agent on account of any act or omission to act in connection with the
exercise of any right or remedy of the Collateral Agent with respect to the
Security Documents or the Collateral in the absence of gross negligence or
willful misconduct of the Collateral Agent as shall have been determined in a
final nonappealable judgment of a court of competent jurisdiction.  In
no event shall the Collateral Agent be liable under or in connection with this
Agreement or any Security Documents for indirect, special, incidental, punitive
or consequential losses or damages of any kind whatsoever, including but not
limited to lost profits, whether or not foreseeable, even if the Collateral
Agent has been advised of the possibility thereof and regardless of the form of
action in which such damages are sought.

    

    (f)        
    Collateral In Possession of
Collateral Agent.  The Collateral Agent shall be at liberty to
place any of the Collateral, this Agreement, the Security Documents and any
other instruments, documents or deeds delivered to it pursuant to or in
connection with any of such documents in any safe deposit box, safe or
receptacle selected by it or with any bank, any company whose business includes
undertaking the safe custody of documents or any firm of lawyers of good repute
and the Collateral Agent shall not be responsible for any loss thereby incurred
unless such loss is solely the result of the Collateral Agent’s gross negligence
or willful misconduct as shall have been determined in a final nonappealable
judgment of a court of competent jurisdiction.  The Collateral Agent’s
books and records shall at all times show that the Collateral is held by the
Collateral Agent subject to the pledge and lien of the Security
Documents.

    

    (g)       
    Agents, Officers and
Employees of Collateral Agent.  The Collateral Agent may
execute any of its duties under the Security Documents by or through its agents,
officers or employees.  Neither the Collateral Agent nor any of its
agents, officers or employees shall be liable for any action taken or omitted to
be taken by it or them in good faith, be responsible for the consequence of any
oversight or error of judgment or answerable for any loss unless any of the
foregoing shall happen through its or their gross negligence or willful
misconduct as shall have been determined in a final nonappealable judgment of a
court of competent jurisdiction.

    

    (h)       
    Appointment of
Co-Agent.  Whenever the Collateral Agent shall deem it
necessary or prudent in order either to conform to any law of any jurisdiction
in which all or any part of the Collateral shall be situated or to make any
claim or bring any suit with respect to the Collateral or the Security
Documents, or in the event that the Collateral Agent shall have been requested
to do so by or on behalf of the Required Holders, the Collateral Agent shall
execute and deliver a supplemental agreement and all other instruments and
agreements necessary or proper to constitute a bank or trust company, or one or
more other persons or entities approved by the Collateral Agent, either to act
as co-agent or co-agents with respect to all or any part of the Collateral or
with respect to the Security Documents, jointly with the Collateral Agent or any
successor or successors, or to act as separate agent or agents of any such
property, in any such case with such powers as may be provided in such
supplemental agreement, and to vest in such bank, trust company or other persons
or entities as such co-agent or separate agent, as the case may be, any
property, title, right or power of the Collateral Agent deemed necessary or
advisable by the Required Holders or the Collateral Agent.

    
      
         

      

      
        - 23
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    (i)         
   Reliance on Certain
Documents.  The Collateral Agent shall be entitled to rely on
any communication, instrument or document believed by it to be genuine and
correct and to have been signed or sent by the proper person or entity, and with
respect to all legal matters shall be entitled to rely on the advice of legal
advisors selected by it concerning all matters relating to the Security
Documents and its duties hereunder and thereunder and otherwise shall rely on
such experts as it deems necessary or desirable, and shall not be liable to any
Purchaser or any other person or entity for the consequences of such reliance in
the absence of gross negligence or willful misconduct as shall have been
determined in a final nonappealable judgment of a court of competent
jurisdiction.

    

    (j)      
      Collateral Agent May Have
Separate Relationship with Parties.  The Collateral Agent (or
any affiliate of the Collateral Agent) may, notwithstanding the fact that it is
the Collateral Agent, act as a lender to the Company and lend money to, and
generally engage in any kind of business with such party in the same manner and
to the same effect as though it were not the Collateral Agent; and such business
shall not constitute a breach of any obligation of the Collateral Agent to the
other Purchasers.

    

    (k)     
      Indemnification of
Collateral Agent.  The Company hereby agrees to indemnify and
hold harmless the Collateral Agent (and its directors, officers and employees)
for any and all liabilities, losses, damages, penalties, actions, judgments,
suits, costs, expenses (including the fees and other charges of counsel) or
disbursements of any kind and nature whatsoever that may be imposed on, incurred
by or asserted against the Collateral Agent in its capacity as the Collateral
Agent, in any way relating to or arising out of the Security Documents or the
transactions contemplated hereby or thereby or the enforcement of any of the
terms hereof or thereof, provided that the Company shall not be liable for any
of the foregoing to the extent they arise from gross negligence or willful
misconduct on the part of the Collateral Agent as shall have been determined in
a final nonappealable judgment of a court of competent
jurisdiction.  This Section 9(k) shall survive the termination of this
Agreement.  Prior to taking any action hereunder as Collateral Agent,
the Collateral Agent may require the Company to deposit, and the Company shall
deposit, with the Collateral Agent sufficient sums as it determines in good
faith is necessary to protect the Collateral Agent for costs and expenses
associated with taking such action, and the Collateral Agent shall have no
liability hereunder for failure to take such action unless the Company promptly
deposits such sums; provided, however, that if the Company fails to deposit such
amounts within 3 business days of the Collateral Agent’s request therefore, the
Collateral Agent shall notify the Purchasers of such failure.

    

    (l)   
         Resignation and
Removal.  The Collateral Agent at any time may resign, upon 30
days’ prior written notice, by an instrument addressed and delivered to the
Purchasers and the Company and may be removed at any time with or without cause
upon 30 days’ prior written notice, by an instrument in writing duly executed by
duly authorized signatories of the Required Holders.  The Required
Holders shall have the right to appoint a successor to the Collateral Agent upon
any such resignation or removal, by instrument of substitution complying with
the requirements of applicable law, or, in the absence of any such requirement,
without any formality other than appointment and designation in writing, a copy
of which instrument or writing shall be sent to each Purchaser.  Upon
the making of such appointment and delivery to such successor Collateral Agent
of the Collateral then held by the retiring Collateral Agent, such successor
Collateral Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties conferred hereby and by the Security
Documents upon the Collateral Agent named herein, and one or more such
appointments and designations shall not exhaust the right to appoint and
designate further successor Collateral Agents hereunder.  The retiring
Collateral Agent shall not be discharged from its duties and obligations
hereunder until, and the retiring Collateral Agent shall be so discharged when,
all the Collateral held by the retiring Collateral Agent has been delivered to
the successor Collateral Agent and such successor Collateral Agent shall
execute, acknowledge and deliver to each holder of the Notes and to the Company
an instrument accepting such appointment.  If no successor shall be
appointed and approved on or prior to the date of any such resignation, the
resigning Collateral Agent may apply to any court of competent jurisdiction to
appoint a successor to act until a successor shall have been appointed by the
Required Holders as above provided.

    
      
         

      

      
        - 24
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    (m)           Rights with Respect to
Collateral.

    

    (i)       
     Each Purchaser agrees with all other
Purchasers (A) that it shall not, and shall not attempt to, exercise any rights
with respect to its security interest in the Collateral, whether pursuant to any
other agreement or otherwise (other than pursuant to this Agreement), or take or
institute any action against the Collateral Agent or any of the other Purchasers
in respect of the Collateral or its rights hereunder (other than any such action
arising from the breach of this Agreement) and (B) that such Purchaser has no
other rights with respect to the Collateral other than as set forth in this
Agreement and the Security Documents.

    

    (ii)      
     Each Purchaser agrees with all other
Purchasers and the Collateral Agent that nothing contained in this Section 9
shall be construed to give rise to, nor shall such Purchaser have, any claims
whatsoever against the Collateral Agent on account of any act or omission to act
in connection with the exercise of any right or remedy of the Collateral Agent
with respect to the Collateral in the absence of gross negligence or willful
misconduct of the Collateral Agent, as shall have been determined in a final
nonappealable judgment of a court of competent jurisdiction.

    

    (n)        
   Fees, Costs and Expenses of
Collateral Agent.  Without limiting any other cost
reimbursement provisions in this Agreement or the Security Documents, upon
demand, the Company shall pay to the Collateral Agent the amount of any and all
fees and reasonable expenses incurred by the Collateral Agent under this
Agreement or the Security Documents or in connection herewith or therewith,
including, without limitation, reasonable fees of counsel to the Collateral
Agent and those other expenses that may be incurred in connection with (i) the
execution and delivery of this Agreement and the Security Documents and any
amendments, waivers and supplements hereto or thereto, (ii) the administration
of this Agreement and the Security Documents, (iii) the custody or preservation
of, or the sale of, collection from, or other realization upon, any of the
Collateral (as defined in the Security Agreement), (iv) the exercise or
enforcement of any of the rights of the Collateral Agent under this Agreement or
the Security Documents, and (v) the failure of any the Company to perform or
observe any of the provisions of this Agreement or the Security
Documents.

    
      
         

      

      
        - 25
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    10.        
   GOVERNING LAW;
MISCELLANEOUS.

    

    (a)     
      Governing Law; Jurisdiction;
Jury Trial.  This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be performed in the State of New York.  The Company, each
Purchaser and the Collateral Agent irrevocably consent to the jurisdiction of
the United States federal courts and the state courts located in the City of New
York, Borough of Manhattan, in any suit or proceeding based on or arising under
this Agreement and irrevocably agree that all claims in respect of such suit or
proceeding may be determined in such courts. The Company, each Purchaser and the
Collateral Agent each irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding in such forum.  The
Company, each Purchaser and the Collateral Agent each further agrees that
service of process upon such party mailed by first class mail shall be deemed in
every respect effective service of process upon such party in any such suit or
proceeding.  Nothing herein shall affect the right of any party hereto
to serve process in any other manner permitted by law.  The Company,
each Purchaser and the Collateral Agent each agrees that a final non-appealable
judgment in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful
manner.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE
TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF ANY TRANSACTION DOCUMENT OR
ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY.

    

    (b)     
      Counterparts.  This
Agreement may be executed in two or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other
party.  This Agreement, once executed by a party, may be delivered to
the other parties hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.  In
the event any signature is delivered by facsimile transmission, the party using
such means of delivery shall cause the manually executed execution page(s)
hereof to be physically delivered to the other party within five days of the
execution hereof, provided that the failure to so deliver any manually executed
execution page shall not affect the validity or enforceability of this
Agreement.

    

    (c)     
      Construction.  Whenever
the context requires, the gender of any word used in this Agreement includes the
masculine, feminine or neuter, and the number of any word includes the singular
or plural.  Unless the context otherwise requires, all references to
articles and sections refer to articles and sections of this Agreement, and all
references to schedules are to schedules attached hereto, each of which is made
a part hereof for all purposes.  The descriptive head­ings of the
several articles and sections of this Agreement are inserted for purposes of
reference only, and shall not affect the meaning or construction of any of the
provisions hereof.

    

    (d)      
     Severability.  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 or the validity or
enforceability of this Agreement in any other jurisdiction.

    

    (e)       
    Entire Agreement;
Amendments.  This Agreement and the other Transaction Documents
(including any schedules and exhibits hereto and thereto) contain the entire
understanding of the Purchasers, the Company, the Collateral Agent, their
affiliates and persons acting on their behalf with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company, the Purchasers nor the Collateral Agent make any
representation, warranty, covenant or undertaking with respect to such
matters.  No provision of this Agreement may be waived other than by
an instrument in writing signed by the party to be charged with enforcement,
and, except as otherwise provided herein, no provision of this Agreement may be
amended other than by an instrument in writing signed by the Company and each
Purchaser; provided,
that no amendment or waiver of any provision of Section 9 hereof shall be
effective unless it is set forth in a written instrument signed by the Company,
each Purchaser and the Collateral Agent.  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 the Transaction Documents unless the same consideration
also is offered to all of the parties to the Transaction Documents or holders of
Notes, as the case may be.  The Company has not, directly or
indirectly, made any agreements with any Purchasers relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except
as set forth in the Transaction Documents.

    
      
         

      

      
        - 26
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    (f)           
 Notices.  Any
notices required or permitted to be given under the terms of this Agreement
shall be in writing and sent by certified or registered mail (return receipt
requested) or delivered personally, by nationally recognized overnight carrier
or by confirmed facsimile transmission, and shall be effective five days after
being placed in the mail, if mailed, or upon receipt or refusal of receipt, if
delivered personally or by nationally recognized overnight carrier or confirmed
facsimile transmission, in each case addressed to a party as provided
herein.  The initial addresses for such communications shall be as
follows, and each party shall provide notice to the other parties of any change
in such party’s address:

    

    
      	
               
      

            	
              (i)

            	
              If
      to the Company:

            

    

    

    Nestor,
Inc.

    42
Oriental Street

    Providence,
Rhode Island 02908

    Telephone:
(401) 274-5658

    Facsimile:  (401)
274-5707

    Attention:  Brian
R. Haskell, Esq.

    

    
      	
               
      

            	
              with
      a copy simultaneously transmitted by like means (which transmittal shall
      not constitute notice hereunder)
to:

            

    

    

    
      Hinckley,
Allen & Snyder LLP

    

    50
Kennedy Plaza, Suite 1500

    Providence,
Rhode Island 02903

    Telephone:
(401) 274-2000

    Facsimile:
(401) 277-9600

    Attention:  Margaret
D. Farrell, Esq.

    

    with a
copy (for informational purposes only) to:

    

    Schulte
Roth & Zabel LLP

    919 Third
Avenue

    New York,
New York  10022

    Telephone:
(212) 756-2000

    Facsimile:
(212) 593-5955

    Attention:
Eleazer N. Klein, Esq.

    
      
         

      

      
        - 27
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    (ii)           If
to any Purchaser, to the address set forth under such Purchaser’s name on the
Execution Page hereto executed by such Purchaser.

    

    
      	
               
      

            	
              (iii)

            	
              If
      to the Collateral Agent:

            

    

    

    U.S. Bank
National Association

    Corporate
Trust Services

    225
Asylum Street, 23rd
Floor

    Hartford,
CT 06103

    Telephone:
(860) 241-6859

    Facsimile:
(860) 241-6881

    Attention:
Arthur Blakeslee

    

    (g)        
   Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and assigns.  Except as
provided herein, the Company shall not assign this Agreement or any rights or
obligations hereunder.  Any Purchaser may assign or transfer the Notes
pursuant to the terms of this Agreement and of such Notes, or assign such
Purchaser’s rights hereunder to any other person or entity, which assignee shall
be considered a Purchaser for purposes of this Agreement.

    

    (h)      
     Third Party
Beneficiaries.  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; provided, however, that Section 4(r)
may be enforced by any Purchaser’s affiliates and its or their advisors to the
extent the same is entitled to reimbursement of Expenses pursuant
thereto.

    

    (i)       
     Survival.  The
representations and warranties of the Company and the agreements and covenants
set forth in Sections 3, 4, 5 and 10 hereof shall survive the Closing
notwithstanding any due diligence investigation conducted by or on behalf of any
Purchaser.  Moreover, none of the representations and warranties made
by the Company herein shall act as a waiver of any rights or remedies any
Purchaser may have under applicable U.S. federal or state securities
laws.

    

    (j)      
      Further
Assurances.  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
the 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.

    

    (k)     
      Indemnification.

    

    (i)          
  In consideration of each Purchaser’s execution and delivery
of this Agreement and the other Transaction Documents and purchase of the Notes
hereunder, and in addition to all of the Company’s other obligations under this
Agreement and the other Transaction Documents, from and after the Closing, the
Company shall defend, protect, indemnify and hold harmless each Purchaser and
each other holder of the Notes and all of their stockholders, partners, members,
officers, directors, employees and direct or indirect investors and any of the
foregoing persons’ agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement, collectively, the “Indemnitees”) from and against
any and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”),
incurred by any Indemnitee as a result of, or arising out of, or relating to (i)
any misrepresentation or breach of any representation or warranty made by the
Company in this Agreement, any other Transaction Document or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement, any other Transaction Document or any other certificate, instrument
or document contemplated hereby or thereby or (iii) any cause of action, suit,
claim, order, proceeding or process brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) and arising out of or resulting from (A) the execution,
delivery, performance or enforcement of this Agreement, any other Transaction
Document or any other certificate, instrument or document contemplated hereby or
thereby (B) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance and sale of the Notes,
(C) any disclosure made by such Purchaser pursuant to and in full compliance
with Section 4(b) or 4(n) hereof or (D) the status of such Purchaser or holder
of the Notes as an investor in the Company. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable
law.

    
      
         

      

      
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    (ii)        
   Promptly after receipt by an Indemnitee under this
Section 10(k) of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving an Indemnified
Liability, such Indemnitee shall, if a claim for indemnification in respect
thereof is to be made against any indemnifying party under this Section 10(k),
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 Indemnitee; provided,
however, that an Indemnitee shall have the right to retain its own counsel with
the fees and expenses of not more than one counsel for such Indemnitee to be
paid by the indemnifying party, if, in the reasonable opinion of the Indemnitee,
the representation by such counsel of the Indemnitee and the indemnifying party
would be inappropriate due to actual or potential differing interests between
such Indemnitee and any other party represented by such counsel in such
proceeding.  Legal counsel referred to in the immediately preceding
sentence shall be selected by the holders of at least a majority of the
Notes.  The Indemnitee shall cooperate fully with the indemnifying
party in connection with any negotiation or defense of any such action or
Indemnified Liabilities by the indemnifying party and shall furnish to the
indemnifying party all information reasonably available to the Indemnitee that
relates to such action or Indemnified Liabilities.  The indemnifying
party shall keep the Indemnitee fully 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 Indemnitee, consent to entry of any judgment or enter into any
settlement or other compromise which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnitee of a release
from all liability in respect to such Indemnified Liabilities or
litigation.  Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnitee 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 Indemnitee under this Section 10(k), except to the extent that the
indemnifying party is prejudiced in its ability to defend such
action.

    
      
         

      

      
        - 29
-

        
          

        

      

      
         

      

    

    (iii)           The
indemnification required by this Section 10(k) 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 Liabilities are
incurred.

    

    (iv)           The
indemnity agreements contained herein shall be in addition to  (x) any
cause of action or similar right of the Indemnitee against the indemnifying
party or others, and (y) any liabilities the indemnifying party may be subject
to pursuant to the law.

    

    (l)       
     Payment Set Aside. To
the extent that the Company makes a payment or payments to any Purchaser
hereunder or pursuant to any of the other Transaction Documents or any Purchaser
enforces or exercises its rights hereunder or thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

    

    (m)           No Strict
Construction.  The language used herein and therein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any party to
this Agreement.

    

    (n)       
    Remedies.  No
provision of this Agreement or any other Transaction Document providing for any
remedy to a Purchaser shall limit any other remedy which would otherwise be
available to such Purchaser at law, in equity or otherwise.  Nothing
in this Agreement or any other Transaction Document shall limit any rights any
Purchaser may have under any applicable federal or state securities laws with
respect to the investment contemplated hereby.  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Purchasers by vitiating the intent and purpose of the
transactions contemplated hereby.  Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations hereunder
(including, but not limited to, its obligations pursuant to Section 5 hereof)
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Agreement (including, but not limited to,
its obligations pursuant to Section 5 hereof), that each Purchaser shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer of the
Notes, without the necessity of showing economic loss and without any bond or
other security being required.

    

    (o)         
  Knowledge.  As
used in this Agreement, the term “knowledge” of any person or entity shall mean
and include (i) actual knowledge and (ii) that knowledge which a reasonably
prudent business person could have obtained in the management of his or her
business affairs after making due inquiry and exercising due diligence which a
prudent business person should have made or exercised, as applicable, with
respect thereto and with respect to the Company, shall mean the knowledge (as so
defined) of the directors, officers and Key Employees of the
Company.

    
      
         

      

      
        - 30
-

        
          

        

      

      
         

      

    

    (p)         
  Exculpation Among
Purchasers; No “Group”. The obligations of each Purchaser under any
Transaction Document are several and not joint with the obligations of any other
Purchaser, and no Purchaser shall be responsible in any way for the performance
or non-performance of the obligations of any other Purchaser under any
Transaction Document.  Nothing contained herein or in any other
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction
Documents.  Each party to this Agreement confirms that it has
independently participated in the negotiation and drafting of this Agreement and
the other Transaction Documents with the advice of its own counsel and advisors,
that it has independently determined to enter into the transactions contemplated
hereby and thereby, that it is not relying on any advice from or evaluation by
any other Purchaser, and that it is not acting in concert with any other
Purchaser in making its purchase of Notes hereunder or in monitoring its
investment in the Company.  The Purchasers and, to its knowledge, the
Company agree that no action taken by any Purchaser pursuant hereto or to the
other Transaction Documents, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity or
group, or create a presumption that the Purchasers are in any way acting in
concert or would deem such Purchasers to be members of a “group” for purposes of
Section 13(d) of the Exchange Act.  The Purchasers have not agreed to
act together for the purpose of acquiring, holding, voting or disposing of
equity securities of the Company. Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose.  Each Purchaser
acknowledges that LB I Group Inc. has retained Schulte Roth & Zabel LLP
(“SRZ”) to act as its
counsel in connection with the transactions contemplated by this Agreement and
the other Transaction Documents and that SRZ has not acted as counsel for any of
the other Purchasers in connection therewith and none of the other Purchasers
have the status of a client of SRZ for conflict of interest or other purposes as
a result thereof. The Company has elected to provide all Purchasers with the
same terms and Transaction Documents for the convenience of the Company and not
because it was required or requested to do so by the Purchasers. The Company
acknowledges that such procedure with respect to the Transaction Documents in no
way creates a presumption that the Purchasers are in any way acting in concert
or as a “group” for purposes of Section 13(d) of the Exchange Act with respect
to the Transaction Documents or the transactions contemplated hereby or
thereby.

    

    [REMAINDER
OF PAGE LEFT BLANK INTENTIONALLY]

    
      
         

      

      
        - 31
-

        
          

        

      

      
         

      

    

     

    
      IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

      

      NESTOR,
INC.

      

      
        	
                By:

              	
                /s/ Clarence A. Davis

              	 
      
	
                Name:

              	
                Clarence
      A. Davis

              	 
      
	
                Title:

              	
                Chief
      Executive Officer

              	 
      

      

      

      COLLATERAL
AGENT:

      

      U.S. BANK
NATIONAL ASSOCIATION

      

      
        	
                By:

              	
                /s/ Arthur L. Blakeslee

              	 
      
	
                Name:

              	
                Arthur
      L. Blakeslee

              	 
      
	
                Title:

              	
                Vice
      President

              	 
      

      

      

      PURCHASER:

      

      
        	
                Theodore Petroulas

              	 
      
	
                (Print
      or Type Name of Purchaser)

              	 
      

      

      

      

      
        	
                By:

              	
                /s/ Theodore Petroulas

              	 
      
	
                Name:

              	
                Theodore
      Petroulas

              	 
      
	
                Title:

              	 
      	 
      

      

      

      
        	
                RESIDENCE:

              	
                New
      York

              

      

      

      
        	
                ADDRESS:

              	
                722
      Broadway #9

              

      

      New York,
NY 10003

      Telephone:     646-991-6646

      Facsimile:        646-602-2765

      Attention:

      

      Purchaser
elects to waive its right to designate a Material Notice Recipient pursuant to
Section 4(v): Yes £  No
£

      

      Material
Notice Recipient (if different from above):

      

      ADDRESS:

      

      

      

      AGGREGATE
SUBSCRIPTION AMOUNT:

      

      Purchase
Price and

      Principal
Amount of Notes:  $40,000.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    
      	
              NESTOR,
      INC.

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	
              By:

            	 
      	/s/ Clarence A. Davis	 
      
	 
      	 
      	 
      	 
      
	
              Name:

            	 
      	Clarence
      A. Davis	 
      
	 
      	 
      	 
      	 
      
	
              Title:

            	 
      	Chief
      Executive Officer	 
      

    

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION, as Collateral Agent

    

    
      	
              By:

            	 
      	/s/
      Arthur L. Blakeslee	 
      
	 
      	 
      	 
      	 
      
	
              Name:

            	 
      	Arthur
      L. Blakeslee	 
      
	 
      	 
      	 
      	 
      
	
              Title:

            	 
      	Vice
      President	 
      

    

    

    PURCHASER:

    

    PURCHASER:

    

    
      	
              Dolphin
      Offshore Partners, L.P.

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	 
      	
              /s/
      Peter E. Salas

            	 
      
	 
      	 
      	 
      	 
      
	
              Name:

            	 
      	
              Peter
      E. Salas

            	 
      
	 
      	 
      	 
      	 
      
	
              Title:

            	 
      	
              General
      Partner

            	 
      
	 
      	 
      	 
      	 
      
	
              Residence:

            	 
      	
              Delaware
      L.P.

            	 
      
	 
      	 
      	 
      	 
      
	
              Address:

            	 
      	
              c/o
      Dolphin Asset Management Corp.

            	 
      
	 
      	 
      	
              129
      East 17th
      Street

            	 
      
	 
      	 
      	
              New
      York, NY 10003

            	 
      
	
              Telephone:

            	 
      	
              1-212-982-5071

            	 
      
	
              Facsimile

            	 
      	
              1-212-202-3817

            	 
      
	
              Attention:

            	 
      	
              Peter
      E. Salas

            	 
      

    

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
£  No T

    

    Material
Notice Recipient (if different from above):

    

    
      	
              Address:

            	 
      	
              Dolphin
      Advisors, LLC

            	 
      
	 
      	 
      	
              940
      High Road

            	 
      
	 
      	 
      	
              Kensington,
      CT 06037

            	 
      
	
              Telephone:

            	 
      	
              1-212-537-6766

            	 
      
	
              Facsimile

            	 
      	
              1-212-656-1212

            	 
      
	
              Attention:

            	 
      	
              Carlos
      P. Salas

            	 
      

    

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    

    
      	
              Purchase
      Price and

            	 
      	 
      
	
              Principal
      Amount of Notes:

            	
              $4,671

            	 
      

    

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              Dolphin Offshore Partners,
    L.P.

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ Peter E. Salas

            	 
      
	
              Name:

            	
              Peter
      E. Salas

            	 
      
	
              Title:

            	
              General
      Partner

            	 
      

    

    

    
      	
              RESIDENCE:

            	
              Delaware
      L.P.

            

    

    

    
      	
              ADDRESS:

            	
              c/o
      Dolphin Asset Management Corp.

            

    

    129 East
17th
Street

    New York,
NY 10003

    
      	
               
      

            	
              Telephone:   
      1-212-982-5071

            

    

    
      	
               
      

            	
              Facsimile:      
      1-212-202-3817

            

    

    
      	
               
      

            	
              Attention:      Peter
      E. Salas

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
£  No T

    

    Material
Notice Recipient (if different from above):

    

    
      	
              ADDRESS:

            	
              Dolphin
      Advisors, LLC

            

    

    940 High
Road

    Kensington,
CT 06037

    
      	
               
      

            	
              Telephone:    1-212-537-6766

            

    

    
      	
               
      

            	
              Facsimile:       1-212-656-1212

            

    

    
      	
               
      

            	
              Attention:      Carlos
      P. Salas

            

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $2,919

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              Kamunting Street Master Fund
      Ltd

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ Gregor T. Dannacher

            	 
      
	
              Name:

            	
              Gregor
      T. Dannacher

            	 
      
	
              Title:

            	
              Director

            	 
      

    

    

    
      	
              RESIDENCE:

            	
              NY

            

    

    

    
      	
              ADDRESS:

            	
              140
      East 45th
      Street

            

    

    15th
Floor

    NY, NY
10017

    
      	
               
      

            	
              Telephone:     212-490-4343

            

    

    
      	
               
      

            	
              Facsimile:        212-490-4360

            

    

    
      	
               
      

            	
              Attention:       Gregor
      Dannacher

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
£  No T

    

    Material
Notice Recipient (if different from above):

    

    
      	
              ADDRESS:

            	
              140
      East 45th
      Street

            

    

    15th
Floor

    NY, NY
10017

    
      	
               
      

            	
              Telephone:     212-490-4355

            

    

    
      	
               
      

            	
              Facsimile:        212-490-4360

            

    

    
      	
               
      

            	
              Attention:       Jason
      Abrams

            

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $54,496

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              Kuekenhof Equity Fund, L.P.

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ Michael C. James

            	 
      
	
              Name:

            	
              Michael
      C. James

            	 
      
	
              Title:

            	
              General
      Partner

            	 
      

    

    

    
      	
              RESIDENCE:

            	
              51
      Gloria Drive, Allendale, N.J. 07401

            

    

    

    
      	
              ADDRESS:

            	
              22
      Church Street, Suite 5

            

    

    Ramsey,
N.J. 07446

    
      	
               
      

            	
              Telephone:     201-995-1950

            

    

    
      	
               
      

            	
              Facsimile:        201-995-1954

            

    

    
      	
               
      

            	
              Attention:       Michael
      C. James

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
T  No £

    

    Material
Notice Recipient (if different from above):

    

    ADDRESS:

    

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $50,000.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    Connecticut Capital
Associates LP

    

    
      	
              By:

            	
              /s/ J. Howard Coale

            	 
      
	
              Name:

            	
              J.
      Howard Coale

            	 
      
	
              Title:

            	
              General
      Partner

            	 
      

    

    

    
      
        	
                RESIDENCE:

              	 
      	 
      

      

    

    

    
      	
              ADDRESS:

            	
              389
      Farms Road

            

    

    Greenwich,
CT 06831

    
      	
               
      

            	
              Telephone:     203-542-1060

            

    

    
      	
               
      

            	
              Facsimile:       203-322-8732

            

    

    
      	
               
      

            	
              Attention:       H.
      Coale

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
T  No £

    

    Material
Notice Recipient (if different from above):

    

    
      	
              ADDRESS:

            	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      

    

    
      	 
      	
              Telephone:

            	 
      	 
      
	 
      	
              Facsimile:

            	 
      	 
      
	 
      	
              Attention:

            	 
      	 
      

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $4,866.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    as
Collateral Agent

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              Manu P. Daftray

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ Manu P. Daftray

            	 
      
	
              Name:

            	
              Manu
      P. Daftray

            	 
      
	
              Title:

            	 
      	 
      

    

    

    RESIDENCE:

    

    
      	
              ADDRESS:

            	
              8
      Waybridge Lane

            

    

    Wayland,
MA 01778

    
      	
               
      

            	
              Telephone:    
      617-896-1500

            

    

    
      	
               
      

            	
              Facsimile:       
      617-896-1501

            

    

    
      	
               
      

            	
              Attention:      
      Manu Daftray

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
£  No T

    

    Material
Notice Recipient (if different from above):

    

    
      	
              ADDRESS:

            	
              1132
      Bishop Street, Suite 1880

            

    

    Honolulu,
HI 96813

    
      	
               
      

            	
              Telephone:     808-441-4949

            

    

    
      	
               
      

            	
              Facsimile:       
      808-441-4946

            

    

    
      	
               
      

            	
              Attention:       Richard
      Chisholm

            

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $9,731.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              HIGHBRIGE INTERNATIONAL LLC

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    By:
Highbridge Capital Management, LLC, its Managing Member

    

    
      	
              By:

            	
              /s/ Adam J. Chill

            	 
      
	
              Name:

            	
              Adam
      J. Chill

            	 
      
	
              Title:

            	
              Managing
      Director

            	 
      

    

    

    
      	
              RESIDENCE:

            	
              Cayman
      Islands

            

    

    

    
      	
              ADDRESS:

            	
              c/o
      Highbridge Capital Management, LLC

            

    

    9 West
57th
Street, 27th
Floor

    New York,
New York 10019

    
      	
               
      

            	
              Telephone:     (212)
      287-4720

            

    

    
      	
               
      

            	
              Facsimile:       
      (212) 751-0755

            

    

    
      	
               
      

            	
              Attention:       Ari
      J. Storch/Adam J. Chill

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
£  No T

    

    Material
Notice Recipient (if different from above):

    

    
      	
              ADDRESS:

            	
              Schulte
      Roth & Zabel LLP

            

    

    919 Third
Avenue

    New York,
New York 10022

    
      	
               
      

            	
              Telephone:     (212)
      756-2000

            

    

    
      	
               
      

            	
              Facsimile:        (212)
      593-5955

            

    

    
      	
               
      

            	
              Attention:       Eleazer
      N. Klein, Esq.

            

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $58,388.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

         as
Collateral Agent

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

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

    Convertible Crossover
Segregated Portfolio

    By:  RG
Capital Management, L.P.

    By:  RFC
Management Company, LLC

    

    
      	
              By:

            	
              /s/ Gerald F. Stahlecker

            	 
      
	
              Name:

            	
              Gerald
      F. Stahlecker

            	 
      
	
              Title:

            	
              Managing
      Director

            	 
      

    

    

    
      	
              RESIDENCE:

            	
              Cayman
      Islands

            

    

    

    
      	
              ADDRESS:

            	
              c/o
      RG Capital Management, L.P.

            

    

    3 Bala
Plaza – East, Suite 501

    Bala
Cynwyd, PA 19004

    
      	
               
      

            	
              Telephone:     (610)
      617-5900

            

    

    
      	
               
      

            	
              Facsimile:        (610)
      617-0580

            

    

    
      	
               
      

            	
              Attention:       Gerald
      F. Stahlecker

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
£  No T

    

    Material
Notice Recipient (if different from above):

    

    ADDRESS:

    

    Telephone:

    Facsimile:

    Attention:

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $108,993

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              Tom & Nancy Juda Living
      Trust

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ Tom Juda

            	 
      
	
              Name:

            	
              Tom
      Juda

            	 
      
	
              Title:

            	
              Trustee

            	 
      

    

    

    RESIDENCE:

    

    
      	
              ADDRESS:

            	
              410
      S. Lucerne

            

    

    Los
Angeles, CA 90020

    
      	
               
      

            	
              Telephone:     213-253-2207

            

    

    
      	
               
      

            	
              Facsimile:       
      213-253-2249

            

    

    Attention:

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
*  No ý

    

    Material
Notice Recipient (if different from above):

    

    ADDRESS:

    

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $9,731.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              Woodrow Partners, Ltd

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ Manu P. Daftray

            	 
      
	
              Name:

            	
              Manu
      P. Daftray

            	 
      
	
              Title:

            	
              Trustee

            	 
      

    

    

    RESIDENCE:

    

    
      	
              ADDRESS:

            	
              c/o
      DG Capital

            

    

    260
Franklin Street, Suite 1600

    Boston,
MA 02110

    
      	
               
      

            	
              Telephone:     617-896-1500

            

    

    
      	
               
      

            	
              Facsimile:       
      617-896-1501

            

    

    
      	
               
      

            	
              Attention:       Manu
      Daftray

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
£  No T

    

    Material
Notice Recipient (if different from above):

    

    ADDRESS:

    

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $14,597.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              George L. Ball

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ George L. Ball

            	 
      
	
              Name:

            	
              George
      L. Ball

            	 
      
	
              Title:

            	 
      	 
      

    

    

    
      	
              RESIDENCE:

            	
              5573
      Bordley, Houston Texas 77056

            

    

    

    
      	
              ADDRESS:

            	
              600
      Travis, Suite 5800

            

    

    Houston,
Texas 77002

    
      	
               
      

            	
              Telephone:     713-250-4280

            

    

    
      	
               
      

            	
              Facsimile:        713-250-4297

            

    

    
      	
               
      

            	
              Attention:       George
      Ball

            

    

    

    Purchaser elects to waive its right
to designate a Material Notice Recipient pursuant to Section 4(v): Yes
T  No £

    

    Material
Notice Recipient (if different from above):

    

    ADDRESS:

    

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $50,000.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/ Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              HEIGHTS CAPITAL MANAGEMENT,
      INC.

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ Martin Kobinger

            	 
      
	
              Name:

            	
              Martin
      Kobinger

            	 
      
	
              Title:

            	
              Investment
      Manager

            	 
      

    

    

    RESIDENCE:

    

    ADDRESS:

    

    

    

    Purchaser
elects to waive its right to designate a Material Notice Recipient pursuant to
Section 4(v): Yes £  No
£

    

    Material
Notice Recipient (if different from above):

    

    ADDRESS:

    

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $46,711.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.

    

    NESTOR,
INC.

    

    
      	
              By:

            	/s/
      Clarence A. Davis	 
      
	
              Name:

            	Clarence
      A. Davis	 
      
	
              Title:

            	Chief
      Executive Officer	 
      

    

    

    COLLATERAL
AGENT:

    

    U.S. BANK
NATIONAL ASSOCIATION

    

    
      	
              By:

            	/s/
      Arthur L. Blakeslee	 
      
	
              Name:

            	Arthur
      L. Blakeslee	 
      
	
              Title:

            	Vice
      President	 
      

    

    

    PURCHASER:

    

    
      	
              L-J Holding, Inc.

            	 
      
	
              (Print
      or Type Name of Purchaser)

            	 
      

    

    

    
      	
              By:

            	
              /s/ David N. Jordan

            	 
      
	
              Name:

            	
              David
      N. Jordan

            	 
      
	
              Title:

            	
              President

            	 
      

    

    

    RESIDENCE:

    

    ADDRESS:

    

    

    

    Purchaser
elects to waive its right to designate a Material Notice Recipient pursuant to
Section 4(v): Yes £  No
£

    

    Material
Notice Recipient (if different from above):

    

    
      	
              ADDRESS:

            	
              220
      Stonebridge Drive, Ste 405

            

    

    Columbia,
SC 29210

    
      	
               
      

            	
              Telephone:     803-929-1181

            

    

    
      	
               
      

            	
              Facsimile:       
      803-929-7625

            

    

    Attention:

    

    

    AGGREGATE
SUBSCRIPTION AMOUNT:

    

    Purchase
Price and

    Principal
Amount of Notes:  $45,000.00

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    EXHIBIT
A

    

    [FORM
OF SENIOR SECURED CONVERTIBLE NOTE]

    

    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXCHANGEABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
IN A GENERALLY ACCEPTABLE FORM OF COUNSEL, WHICH COUNSEL SHALL BE SELECTED BY
THE HOLDER AND BE REASONABLY ACCEPTABLE TO THE ISSUER, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.  ANY TRANSFEREE OF THIS NOTE
SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 14 AND 15(a)
HEREOF.  THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET
FORTH IN SECTION 5 OF THE SECURITIES PURCHASE AGREEMENT DATED OCTOBER ___,
2008.

    

    NESTOR,
INC.

    

    

    Senior
Secured Bridge Note

    

    

    
      	
              Issuance
      Date:  October 8, 2008

            	
              Principal:  U.S.
      $[          ]

            

    

    

     FOR VALUE RECEIVED,
Nestor, Inc., a Delaware corporation (the "Company"), hereby promises to
pay to [          ] or
registered assigns ("Holder") the amount set out
above as the Principal (as increased pursuant to the addition of any Capitalized
Interest and as reduced pursuant to the terms hereof pursuant to redemption or
otherwise, the "Principal") when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise
(in each case in accordance with the terms hereof) and to pay interest ("Interest") on any outstanding
Principal at the rate equal to the then applicable Interest Rate (as defined
below), from the date set out above as the Issuance Date (the "Issuance Date") until the same becomes
due and payable, whether upon an Interest Date (as defined below), the Maturity
Date, acceleration, redemption or otherwise (in each case, in accordance with
the terms hereof).  This Senior Secured Bridge Note (including all
Senior Secured Bridge Notes issued in exchange, transfer or replacement hereof,
this "Note") is one of
an issue of Senior Secured Bridge Notes issued pursuant to the Securities
Purchase Agreement (as defined below) on the Closing Date (as defined in the
Securities Purchase Agreement) (collectively, the "Notes" and such other Senior
Secured Bridge Notes, the "Other Notes").  Certain
capitalized terms used herein are defined in Section 26.  Capitalized
terms not otherwise defined herein have the meanings set forth in the Securities
Purchase Agreement.

    

    (1)        
   MATURITY.  On
the Maturity Date, the Holder shall surrender this Note to the Company and the
Company shall pay to the Holder an amount in cash representing the sum of (i)
all outstanding Principal, accrued and unpaid Interest and accrued and unpaid
Late Charges, if any (the "Outstanding Amount") and (ii)
the Additional Maturity Date Payment (as defined in Section 3(b)(ii) below), if
any.  The "Maturity Date" shall be the earlier of
(x) January 8, 2009 and (y) consummation of an Equity Financing, but may be
extended at the option of the Holder (i) in the event that, and for so long as,
an Extension Event shall have occurred and be continuing and (ii) through the
date that is 10 days after the consummation of a Change of Control in the event
that a Change of Control is publicly announced or a Change of Control Notice (as
defined in Section 5(b)) is delivered prior to the Maturity
Date.  Except as specifically set forth herein, this Note is not
prepayable.

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    (2)           INTEREST; INTEREST
RATE.

    

    (a)         
  Interest.  Interest
on the outstanding Principal (including Capitalized Interest (as defined below))
amount of this Note shall commence accruing on the Issuance Date and shall be
computed on the basis of a 360-day year comprised of twelve 30-day months and
shall be payable monthly in arrears on the first day of each calendar month
during the period beginning on the Issuance Date and ending on, and including,
the Maturity Date (each such date and the Maturity Date, an "Interest Date") with the first Interest
Date being November 1, 2008.  Interest shall be payable on each
Interest Date to the record holder of this Note on the applicable Interest Date,
(i) in cash if the Company has received any Cash Settlement Proceeds (as defined
in Section 6(a)) but only to the extent of any Net Settlement Proceeds (as
defined in Section 6(a)), or (ii) by adding the remaining amount of Interest due
on such Interest Date to the outstanding Principal amount of this Note ("Capitalized
Interest").  Prior to becoming Capitalized Interest on an
Interest Date, Interest on this Note shall accrue at 10% per annum (the "Interest Rate") subject to
adjustment as set forth herein.

    

    (b)       
    Default
Rate.  From and after the occurrence of an Event of Default and
notwithstanding the provisions of Section 2(a) hereof, the Interest Rate shall
be increased to 13.5% (the "Default Rate").  In
the event that such Event of Default is subsequently cured, the adjustment
referred to in the preceding sentence shall cease to be effective as of the date
of such cure; provided that the Interest calculated at the Default Rate during
the continuance of such Event of Default shall continue to apply to the extent
it relates to the days after the occurrence of such Event of Default through and
including the date of cure of such Event of Default.

    

    (3)        
   HOLDER’S RIGHT OF
EXCHANGE.

    

    (a)          
 Exchange
Right.  If at any time or times on or after the Issuance Date
the Company enters into any Equity Financing, the Holder shall be entitled to
exchange any portion of the Outstanding Amount into fully paid and nonassessable
shares of New Securities (as defined below) pursuant to the terms of this
Section 3.   The Company shall not issue any fraction of a share
of New Securities upon any exchange.  If the issuance would result in
the issuance of a fraction of a share of New Securities, the Company shall round
such fraction of a share of New Securities up to the nearest whole
share.  The Company shall pay any and all taxes that may be payable
with respect to the issuance and delivery of New Securities upon exchange of any
Outstanding Amount.

    

    (b)        
   Mechanics of
Exchange.

    

    (i)          
  So long as this Note is outstanding, if the Company enters
into any Equity Financing following the Subscription Date, the Company shall
deliver a written notice (the "Company Exchange Notice") to
the Holder no later than five (5) Business Days prior to the consummation of
such Equity Financing setting forth the terms of such Equity Financing and
setting forth the rights of the Holder under this Section 3.

    

    (ii)        
   The Holder shall have the right to exchange any portion
of the Outstanding Amount (such amount, the "Exchange Amount") for the
securities being issued in such Equity Financing (the "New Securities") at any time
following the Company Exchange Notice and no later than ten (10) Business Days
following the consummation of such Equity Financing.  To exchange any
Outstanding Amount into shares of New Securities, the Holder shall transmit by
facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York
City time, on such date (the "Exchange Date"), a copy of an
executed notice of exchange in the form attached hereto as Exhibit I (the "Exchange Notice") to the
Company.  The Company shall deliver the New Securities to the Holder
no later than the later of (i) three (3) Business Days following receipt of the
Exchange Notice indicating the Exchange Amount and (ii) the consummation of such
Equity Financing.  The Holder shall be deemed to have tendered 115% of
the Exchange Amount as payment of the purchase price in such Equity
Financing.  If the Holder does not exchange the entire amount of the
Outstanding Amount under this Note after any Equity Financing, then the Holder
shall receive an additional amount on the Maturity Date equal to 15% of the
Outstanding Amount on the Maturity Date (the "Additional Maturity Date
Payment").

    
      
         

      

      
        -2-

        
          

        

      

      
         

      

    

    (iii)           Delivery
of physical certificates shall be deemed to have been made if delivered
personally or when delivered to a nationally recognized overnight
carrier.  If this Note is physically surrendered for exchange as
required by Section 15 and the outstanding Principal of this Note is greater
than the Exchange Amount, then the Company shall as soon as practicable and in
no event later than three Business Days after receipt of this Note and at its
own expense, issue and deliver to the holder a new Note (in accordance with
Section 15(d)) representing the outstanding Principal not
exchanged.

    

    (4)      
     RIGHTS UPON EVENT OF
DEFAULT.

    

    (a)        
   Event of
Default.  Each of the following events shall constitute an
"Event of
Default":

    

    (i)          
  the Company's (A) failure to deliver a certificate for the
required number of shares of New Securities within five (5) days after the later
of (i) three (3) Business Days following receipt of the Exchange Notice
indicating the Exchange Amount and (ii) the consummation of such Equity
Financing or (B) notice, written or oral, to any holder of the Notes, including
by way of public announcement or through any of its agents, at any time, of its
intention not to comply with a request for exchange of any Notes into New
Securities that is tendered in accordance with the provisions of the
Notes;

    

    (ii)         
  the Company's failure to pay to the Holder any amount of
Principal, Interest, Late Charges or other amounts when and as due under this
Note (including, without limitation, the Company's failure to pay any redemption
or make-whole payments, premiums or other amounts hereunder) or any other
Transaction Document (as defined in the Securities Purchase Agreement) except in
the case of a failure to pay Interest and Late Charges when and as due, in which
case only if such failure continues for a period of at least five Trading
Days;

    

    (iii)           the
Company shall either (i) fail to pay, when due, or within any applicable grace
period, any payment with respect to any Indebtedness in excess of $250,000 due
to any third party, other than, with respect to unsecured Indebtedness only,
payments contested by the Company in good faith by proper proceedings and with
respect to which adequate reserves have been set aside for the payment thereof
in accordance with GAAP, or otherwise be in breach or violation of any agreement
for monies owed or owing in an amount in excess of $250,000, which breach or
violation permits the other party thereto to declare a default or otherwise
accelerate amounts due thereunder, or (ii) suffer to exist any other
circumstance or event that would, with or without the passage of time or the
giving of notice, result in a default or event of default under any agreement
binding the Company, which default or event of default would or is likely to
have a material adverse effect on the business, operations, properties,
prospects or financial condition of the Company or any of its Subsidiaries,
individually or in the aggregate, other than any Waived Defaults (as defined
herein);

    
      
         

      

      
        -3-

        
          

        

      

      
         

      

    

    (iv)           the
Company or any of its Subsidiaries, pursuant to or within the meaning of Title
11, U.S. Code, or any similar Federal, foreign or state law for the relief of
debtors (collectively, "Bankruptcy Law"), (A)
commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a
receiver, trustee, assignee, liquidator or similar official (a "Custodian"), (D) makes a
general assignment for the benefit of its creditors or (E) admits in writing
that it is generally unable to pay its debts as they become due;

    

    (v)        
   a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that (A) is for relief against the Company or
any of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Subsidiaries or (C) orders the liquidation of the Company
or any of its Subsidiaries;

    

    (vi)           bankruptcy,
insolvency, reorganization or liquidation proceedings or other proceedings for
the relief of debtors shall be instituted by or against the Company or any of
its Subsidiaries and, if instituted against the Company or any of its
Subsidiaries by a third party, shall not be dismissed within 60 days of their
initiation;

    

    (vii)          a
final judgment or judgments for the payment of money aggregating in excess of
$500,000 are rendered against the Company or any of its Subsidiaries, which
judgments are not, within 60 days after the entry thereof, bonded, discharged or
stayed pending appeal, or are not discharged within 60 days after the expiration
of such stay; provided, however, that any judgment that is covered by insurance
or an indemnity from a credit worthy party shall not be included in calculating
the $500,000 amount set forth above;

    

    (viii)         the
Company breaches any representation, warranty, covenant (other than the
covenants set forth in Section 11 of this Note) or other term or condition of
any Transaction Document, except, in the case of a breach of a covenant which is
curable, only if such breach continues for a period of at least 10 consecutive
days after written notice thereof to the Company by the Holder;

    

    (ix)           any
breach or failure to comply with Section 11 of this Note;

    

    (x)            if
any of the Transaction Documents shall be cancelled, terminated, revoked or
rescinded, in each case otherwise than in accordance with the terms thereof or
with the express prior written agreement, consent or approval of the Required
Holders, or any action at law, suit or in equity or other legal proceeding to
cancel, revoke or rescind any of the Transaction Documents or contest the
Collateral Agent's security interests and liens in any portion of the Collateral
or the priority of the Collateral Agent's security interests and liens in any
portion of the Collateral contemplated by the Security Documents, shall be
commenced by or on behalf of the Company or any of its Subsidiaries party
thereto, or any court or any other governmental or regulatory authority or
agency of competent jurisdiction shall make a determination that, or issue a
judgment, order, decree or ruling to the effect that, any one or more of the
Transaction Documents is illegal, invalid or unenforceable in accordance with
the terms thereof;

    

    (xi)           any
provision of any Security Document (as determined by the Collateral Agent) shall
at any time for any reason (other than pursuant to the express terms thereof)
cease to be valid and binding on or enforceable against the Company or any
Subsidiary intended to be a party thereto, or the validity or enforceability
thereof shall be contested by any party thereto, or a proceeding shall be
commenced by the Company or any Subsidiary or any governmental authority having
jurisdiction over any of them, seeking to establish the invalidity or
unenforceability thereof, or the Company or any Subsidiary shall deny in writing
that it has any liability or obligation purported to be created under any
Security Document;

    
      
         

      

      
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    (xii)          any
Security Agreement or any other security document, after delivery thereof
pursuant hereto, shall for any reason fail or cease to create a valid and
perfected and, except to the extent permitted by the terms hereof or thereof,
first priority Lien in favor of the Collateral Agent for the benefit of the
Required Holders on any Collateral (as defined in the Security Documents)
purported to be covered thereby;

    

    (xiii)         any
damage to, or loss, theft or destruction of, any Collateral, whether or not
insured, if any such damage, or loss, theft or destruction could reasonably be
expected to have a Material Adverse Effect (as defined in the Securities
Purchase Agreement); or

    

    (xiv)         any
Event of Default (as defined in the Other Notes) occurs with respect to any
Other Notes.

    

    (b)         
  Redemption
Right.  Upon the occurrence of an Event of Default with respect
to this Note or any Other Note, the Company shall within one Business Day
deliver written notice thereof via confirmed facsimile and overnight courier (an
"Event of Default
Notice") to the Holder.  At any time after the earlier of the
Holder's receipt of an Event of Default Notice and the Holder becoming aware of
an Event of Default, the Holder may require the Company to redeem all or any
portion of this Note by delivering written notice thereof (the "Event of Default Redemption
Notice") to the Company, which Event of Default Redemption Notice shall
indicate the amount of Principal of this Note the Holder is electing to
redeem.  Each portion of the Principal amount of this Note subject to
redemption by the Company pursuant to this Section 4(b) shall be redeemed by the
Company at a price (the "Event
of Default Redemption Price") equal to 110% of the Outstanding Amount to
be redeemed.  Redemptions required by this Section 4(b) shall be made
in accordance with the provisions of Section 9, to the extent
applicable.  To the extent redemptions required by this Section 4(b)
are deemed or determined by a court of competent jurisdiction to be prepayments
of this Note by the Company, such redemptions shall be deemed to be voluntary
prepayments.  Notwithstanding anything to the contrary in this Section
4, until the Event of Default Redemption Price (together with any interest
thereon) is paid in full, the Outstanding Amount submitted for redemption under
this Section 4(b) may be exchanged, in whole or in part, by the Holder into
Common Stock pursuant to Section 3 hereof.  The parties hereto agree
that in the event of the Company's redemption of any portion of this Note under
this Section 4(b), the Holder's damages would be uncertain and difficult to
estimate because of the parties' inability to predict future interest rates and
the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder.  Accordingly, any premium due under this
Section 4(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder's actual loss of its investment opportunity and not as a
penalty.

    

    (5)       
    RIGHTS UPON FUNDAMENTAL
TRANSACTION AND CHANGE OF CONTROL.

    

    (a)        
   Assumption.  The
Company shall not enter into or be party to a Fundamental Transaction unless
(i)  the Successor Entity and, if an entity other than the Successor
Entity is the entity whose Capital Stock or assets the holders of the Common
Stock are entitled to receive as a result of such Fundamental Transaction, such
other entity (the "Other
Entity"), assumes in writing all of the obligations of the Company under
this Note and the other Transaction Documents in accordance with the provisions
of this Section 5(a) pursuant to written agreements in form and substance
satisfactory to the Required Holders and approved by the Required Holders prior
to such Fundamental Transaction (which approval shall not be unreasonably
withheld), including agreements to deliver to each holder of Notes in exchange
for such Notes a security of the Successor Entity or Other Entity, as
applicable, evidenced by a written instrument substantially similar in form and
substance to the Notes and with appropriate provisions such that the rights and
interests of the Holder and the economic value of this Note are in no way
diminished by such Fundamental Transaction, including, without limitation,
having a principal amount and interest rate equal to the principal amounts and
the interest rates of the Notes held by such holder and having similar ranking
to the Notes and reasonably satisfactory to the Required Holders, and (ii) the
Successor Entity or the Other Entity, as applicable (including its Parent
Entity), is a publicly traded corporation whose common stock is quoted on or
listed for trading on an Eligible Market.  Upon the occurrence of any
Fundamental Transaction, the Successor Entity or the Other Entity, as
applicable, shall succeed to, and be substituted for (so that from and after the
date of such Fundamental Transaction, the provisions of this Note referring to
the "Company" shall refer instead to the Successor Entity or the Other Entity,
as applicable), and may exercise every right and power of the Company and shall
assume all of the obligations of the Company under this Note with the same
effect as if such Successor Entity or such Other Entity, as applicable, had been
named as the Company herein.  The provisions of this Section 5 shall
apply similarly and equally to successive Fundamental Transactions and shall be
applied without regard to any limitations on the exchange or redemption of this
Note.

    
      
         

      

      
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    (b)         
  Redemption
Right.

    

    (i)       
     At least 45 days before the consummation of
a Change of Control, but in no event later than 15 days prior to the record date
for the determination of stockholders entitled to vote with respect thereto (or,
with respect to a tender offer, or a change in the Board of Directors, if the
Company is unable to comply with this time requirement because of the nature of
the Change of Control, as soon as the Company reasonably believes that the
Change of Control is to be consummated), but not prior to the public
announcement of such Change of Control, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (a "Change of Control Notice").  If the
terms of a Change of Control change materially from those set forth in a Change
of Control Notice, the Company shall deliver a new Change of Control Notice and
the time periods in this clause (b) shall be calculated based upon the Holder's
receipt of the later Change of Control Notice.  At any time during the
period (the "Change of Control
Period") beginning after the Holder's receipt of a Change of Control
Notice and ending on the date that is 15 Trading Days after the later of the
consummation of such Change of Control or delivery of the Change of Control
Notice, the Holder may require the Company to redeem all or any portion of the
outstanding Principal of this Note by delivering written notice thereof ("Change of Control Redemption
Notice") to the Company, which Change of Control Redemption Notice shall
indicate the portion of this Note that the Holder is electing to
redeem.  The portion of this Note subject to redemption pursuant to
this Section 5 (the "Redemption
Portion") shall be redeemed by the Company for the Change of Control
Redemption Price (as defined in Section 5(b)(ii)), which shall be payable in
cash.

    

    (ii)       
    As used in this Section 5, the "Change of Control Redemption
Price" shall mean 125% of the Outstanding Amount.

    

    (iii)           Redemptions
required by this Section 5 shall be made in accordance with the provisions of
Section 9 to the extent applicable and shall have priority over payments to
stockholders in connection with a Change of Control.  To the extent
redemptions required by this Section 5(b) are deemed or determined by a court of
competent jurisdiction to be prepayments of this Note by the Company, such
redemptions shall be deemed to be voluntary
prepayments.  Notwithstanding anything to the contrary in this Section
5, until the Change of Control Redemption Price (together with any interest
thereon) is paid in full, the Outstanding Amount submitted for redemption under
this Section 5(b) (together with any interest thereon) may be exchanged, in
whole or in part by the Holder into New Securities pursuant to Section
3.  The parties hereto agree that in the event of the Company's
redemption of any portion of this Note under this Section 5(b), the Holder's
damages would be uncertain and difficult to estimate because of the parties'
inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the
Holder.  Accordingly, any redemption premium due under this Section
5(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder's actual loss of its investment opportunity and not as a
penalty.

    
      
         

      

      
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    (6)      
     HOLDER'S RIGHTS OF OPTIONAL
REDEMPTION.

    

    (a)         
  If at any time and from time to time after the Issuance Date
the Company receives any cash proceeds ("Cash Settlement Proceeds")
from any litigation, mediation or settlement proceeding, the holders of Notes
shall have the right to deliver a written notice to the Company (each such
notice, the "Initial Redemption
Notice") stating that, subject to the terms and conditions of this
Section 6, the holders have elected to exercise the right of Holder Optional
Redemption as set forth herein.  The Company shall deliver a notice to
each holder of Notes no later than one (1) Business Day after receipt of any
Cash Settlement Proceeds which notice shall indicate the amount of such Cash
Settlement Proceeds net of all reasonable legal fees and expenses and other
reasonable costs incurred in connection with such litigation, mediation or
settlement proceeding (“Net
Settlement Proceeds”).  Upon receipt of Initial Redemption
Notice(s) from holders of at least a majority of the outstanding principal
amount of all Notes (such notice, the "Initial Redemption Trigger
Notice" and the date that the Company receives such notice, the "Redemption Trigger Date"), the
Company shall deliver a written notice (the "Redemption Trigger Notice" and
the date all holders receive the Redemption Trigger Notice, the "Redemption Trigger Notice
Date") no later than five (5) Business Days following the Initial
Redemption Trigger Notice Date to each of the other holders of the Notes
notifying the holders of the holders' rights under this Section
6.  The Holder shall have the right (a "Holder Optional Redemption"),
in its sole discretion, to require that the Company redeem all or any portion of
the Outstanding Amount of this Note up to an amount (the "Holder Redemption Amount")
equal to such Holder Pro Rata Amount multiplied by the Net Settlement Proceeds
by delivering written notice thereof to the Company within ten (10) Business
Days after the Redemption Trigger Notice Date (such notice, a "Holder Optional Redemption
Notice" and the date the Holder delivers such notice, the "Holder Optional Redemption Notice
Date).  The Company shall redeem any Holder Redemption Amounts
within five (5) Business Days of the Redemption Trigger Notice Date or the
Holder Optional Redemption Notice Date, as applicable (each such date, the
"Holder Optional Redemption Date") in
cash at a price equal to 100% of the applicable Holder Redemption Amount (the
"Holder Optional Redemption
Price").  Redemptions made pursuant to this Section 6 shall be
made in accordance with Section 9.  No later than one (1) Trading Day
following any Holder Optional Redemption Date, the Company shall file a Current
Report on Form 8-K describing the terms of the applicable Holder Optional
Redemption.

    

    (b)          
 Redemptions made pursuant to this Section 6 shall be made in
accordance with Section 9 to the extent applicable.

    

    (7)        
   SECURITY.  This
Note and the Other Notes are secured to the extent and in the manner set forth
in the Security Documents (as defined in the Securities Purchase
Agreement).

    

    (8)       
    NONCIRCUMVENTION.  The
Company hereby covenants and agrees that the Company will not, by amendment of
its Certificate of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, and will at all
times in good faith carry out all of the provisions of this Note and take all
action as may be required to protect the rights of the Holder of this
Note.

    
      
         

      

      
        -7-

        
          

        

      

      
         

      

    

    (9)      
     REDEMPTIONS.

    

    (a)         
  Mechanics.  The
Company shall deliver the applicable Event of Default Redemption Price to the
Holder within five Business Days after the Company's receipt of the Holder's
Event of Default Redemption Notice.  If the Holder has submitted a
Change of Control Redemption Notice in accordance with Section 5(b), the Company
shall deliver the applicable Change of Control Redemption Price to the Holder
concurrently with the consummation of such Change of Control if such notice is
received prior to the consummation of such Change of Control and within five
Business Days after the Company's receipt of such notice
otherwise.  The Company shall deliver the applicable Holder Optional
Redemption Price on the applicable Holder Optional Redemption
Date.  In the event of a redemption of less than all of the Principal
of this Note, the Company shall promptly cause to be issued and delivered to the
Holder a new Note (in accordance with Section 15(d)) representing the
outstanding Principal which has not been redeemed.  If the Company
fails to pay the Holder the applicable Redemption Price to the Holder within the
time period required, at any time thereafter and until the Company pays such
unpaid Redemption Price in full, the Holder shall have the option, by written
notice to the Company, in lieu of redemption, to require the Company to promptly
return to the Holder all or any portion of this Note representing the
Outstanding Amount that was submitted for redemption and for which the
applicable Redemption Price (together with any Late Charges thereon) has not
been paid.  Upon the Company's receipt of such notice, (x) the
Redemption Notice shall be null and void with respect to such Outstanding Amount
and (y) the Company shall immediately return this Note, or issue a new Note (in
accordance with Section 15(d)) to the Holder representing such Outstanding
Amount.  The Holder's delivery of a notice voiding a Redemption Notice
and exercise of its rights following such notice shall not affect the Company's
obligations to make any payments of Late Charges which have accrued prior to the
date of such notice with respect to the Outstanding Amount subject to such
notice.

    

    (b)        
   Redemption by Other
Holders.  Upon the Company's receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event
or occurrence substantially similar to the events or occurrences described in
Section 4(a), Section 5(b) or Section 6 (each, an "Other Redemption Notice"), the
Company shall immediately, but no later than one Business Day of its receipt
thereof, forward to the Holder by facsimile a copy of such notice and make a
prompt public announcement thereof.  If the Company receives a
Redemption Notice and one or more Other Redemption Notices during the seven
Business Day period beginning on and including the date which is three Business
Days prior to the Company's receipt of the Holder's Redemption Notice and ending
on and including the date which is three Business Days after the Company's
receipt of the Holder's Redemption Notice and the Company is unable to redeem
all principal, interest and other amounts designated in such Redemption Notice
and such Other Redemption Notices received during such seven Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven Business Day
period.

    

    (10)          VOTING
RIGHTS.  The Holder shall have no voting rights as the holder
of this Note, except as required by law, including, but not limited to, the
Delaware General Corporation Law, and as expressly provided in this
Note.

    

    (11)          COVENANTS.

    

    (a)      
     Rank.  All
payments due under this Note (a) shall rank pari passu with all Other
Notes and (b) shall be senior to all other Indebtedness of the Company and its
Subsidiaries, other than the obligations of the Company or its Subsidiaries
under any lease of real or personal property by such Person as lessee which is
required under GAAP to be capitalized on such Person's balance sheet and
Indebtedness permitted by clauses (iv), (vi) and (vii) of the definition of
"Permitted Lien."

    
      
         

      

      
        -8-

        
          

        

      

      
         

      

    

    (b)          
 Incurrence of
Indebtedness.  So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than (i) the Indebtedness evidenced by the Notes, (ii) Permitted
Indebtedness and (iii) Indebtedness incurred solely to repay the Notes at
Maturity and which has a maturity later than and is pari passu or junior in right
of payment to the Notes.

    

    (c)        
   Existence of
Liens.  So long as this Note is outstanding, the Company shall
not, and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "Liens") other than Permitted
Liens.

    

    (d)       
    Restricted
Payments.  The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, (i) redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing, (ii) declare or
pay any cash dividend or distribution on the Common Stock or (iii) redeem,
repurchase or otherwise acquire or retire for value any shares of Common
Stock.

    

    (e)        
   Use of Proceeds. The
Company shall use the proceeds from the sale and issuance of the Notes in
accordance with Section 4(e) of the Securities Purchase Agreement.

    

    (f)          
  Par
Value.  So long as any Notes are outstanding, the Company shall
not change the par value of the Common Stock without the written consent of the
Required Holders.

    

    (12)          VOTE TO ISSUE, OR CHANGE THE
TERMS OF, NOTES.  The affirmative vote at a meeting duly called
for such purpose or the written consent without a meeting of the Required
Holders shall be required for any change or amendment to this Note or the Other
Notes provided, that without the consent of each Holder so affected, no
amendment shall (a) reduce the Principal of or Interest Rate on this Note, (b)
postpone the Maturity Date or any date fixed for the payment of any Interest on
this Note, (c) increase the percentage specified in the definition of "Required
Holders," or (d) have the effect of creating different provisions in different
Notes, provided that nothing contained herein shall prohibit the Holder from
waiving any of the Holder's rights hereunder or under any of the other
Transaction Documents.

    

    (13)          TRANSFER.  This
Note is subject to certain restrictions on transfer set forth in Section 5 of
the Securities Purchase Agreement; provided, however, that this Note and any New
Securities issued upon exchange of this Note may be offered for sale, sold,
assigned or transferred by the Holder without the consent of the Company,
subject to applicable securities law restrictions.

    

    (14)          REGISTRATION.  The
Company shall maintain a register (the "Register") for the recordation
of the names and addresses of the holders of each Note and the principal amount
of the Notes held by such holders (the "Registered
Notes").  The entries in the Register shall be conclusive and
binding for all purposes absent manifest error.  The Company and the
holders of the Notes shall treat each Person whose name is recorded in the
Register as the owner of a Note for all purposes, including, without limitation,
the right to receive payments of principal and interest hereunder,
notwithstanding notice to the contrary.  A Registered Note may be
assigned or sold in whole or in part only by registration of such assignment or
sale on the Register.  Upon its receipt of a request to assign or sell
all or part of any Registered Note by a Holder, the Company shall record the
information contained therein in the Register and issue one or more new
Registered Notes in the same aggregate principal amount as the principal amount
of the surrendered Registered Note to the designated assignee or transferee
pursuant to Section 15.  Notwithstanding anything to the contrary set
forth herein, upon exchange or redemption of any portion of this Note in
accordance with the terms hereof, the Holder shall not be required to physically
surrender this Note to the Company unless (A) the full Outstanding Amount
represented by this Note is being exchanged or redeemed or (B) the Holder has
provided the Company with prior written notice (which notice may be included in
an Exchange Notice) requesting reissuance of this Note upon physical surrender
of this Note.  The Holder and the Company shall maintain records
showing the Principal, Interest and Late Charges, if any, exchanged and redeemed
and the dates of such exchanges and redemptions or shall use such other method,
reasonably satisfactory to the Holder and the Company, so as not to require
physical surrender of this Note upon exchange or redemption.

    
      
         

      

      
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    (15)          REISSUANCE OF THIS
NOTE.

    

    (a)          
 Transfer.  If
this Note is to be transferred, the Holder shall surrender this Note to the
Company, whereupon the Company will forthwith issue and deliver upon the order
of the Holder a new Note (in accordance with Section 15(d)), registered as the
Holder may request, representing the outstanding Principal being transferred by
the Holder and, if less then the entire outstanding Principal is being
transferred, a new Note (in accordance with Section 15(d)) to the Holder
representing the outstanding Principal not being transferred.  The
Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
(i) following redemption of any portion of this Note, the outstanding Principal
represented by this Note may be less than the Principal amount stated on the
face of this Note and (ii) it will be bound by the appointment of the Collateral
Agent (as defined in the Securities Purchase Agreement) and collateral agency
provisions regarding such appointment as set forth in Section 9 of the
Securities Purchase Agreement.

    

    (b)        
   Lost, Stolen or Mutilated
Note.  Upon receipt by the Company of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 15(d)) representing the outstanding Principal.

    

    (c)        
   Note Exchangeable for
Different Denominations.  This Note is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Note or Notes (in accordance with Section 15(d) and in principal amounts of at
least $100,000) representing in the aggregate the outstanding Principal of this
Note, and each such new Note will represent such portion of such outstanding
Principal as is designated by the Holder at the time of such
surrender.

    

    (d)        
   Issuance of New
Notes.  Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 15(a) or Section 15(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued Interest and
Late Charges on the Principal and Interest of this Note, from the Issuance
Date.

    
      
         

      

      
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    (16)          REMEDIES, CHARACTERIZATIONS,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The
remedies provided in this Note shall be cumulative and in addition to all other
remedies available under this Note and any of the other Transaction Documents at
law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the Holder's right to pursue
actual and consequential damages for any failure by the Company to comply with
the terms of this Note.  The Company covenants to the Holder that
there shall be no characterization concerning this instrument other than as
expressly provided herein.  Amounts set forth or provided for herein
with respect to payments, exchange and the like (and the computation thereof)
shall be the amounts to be received by the Holder and shall not, except as
expressly provided herein, be subject to any other obligation of the Company (or
the performance thereof).  The Company acknowledges that a breach by
it of its obligations hereunder will cause irreparable harm to the Holder and
that the remedy at law for any such breach may be inadequate.  The
Company therefore agrees that, in the event of any such breach or threatened
breach, the Holder shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being
required.

    

    (17)          PAYMENT OF COLLECTION,
ENFORCEMENT AND OTHER COSTS.  If (a) this Note is placed in the
hands of an attorney for collection or enforcement or is collected or enforced
through any legal proceeding or the Holder otherwise takes action to collect
amounts due under this Note or to enforce the provisions of this Note or (b)
there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors' rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
attorneys' fees and disbursements.

    

    (18)          CONSTRUCTION;
HEADINGS.  This Note shall be deemed to be jointly drafted by
the Company and the Holder and shall not be construed against any person as the
drafter hereof.  The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.

    

    (19)         
FAILURE OR
INDULGENCE NOT WAIVER.  No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.

    

    (20)          DISPUTE
RESOLUTION.  In the case of a dispute as to the arithmetic
calculation of any Redemption Price or the number of New Securities issuable to
the Holder, the Company shall submit the disputed arithmetic calculations via
facsimile within one Business Day of receipt, or deemed receipt, of the Exchange
Notice or Redemption Notice or other event giving rise to such dispute, as the
case may be, to the Holder.  If the Holder and the Company are unable
to agree upon such calculation within one Business Day of such disputed
arithmetic calculation being submitted to the Holder, then the Company shall,
within one Business Day submit via facsimile the disputed arithmetic calculation
of the Redemption Price or the number of New Securities issuable to the Holder
to the Company's independent, outside accountant.  The Company, at the
Company's expense, shall cause the investment bank or the accountant, as the
case may be, to perform the calculations and notify the Company and the Holder
of the results no later than five Business Days from the time it receives the
disputed calculations.  Such investment bank's or accountant's
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.

    
      
         

      

      
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    (21)          NOTICES;
PAYMENTS.

    

    (a)    
       Notices.  Whenever
notice is required to be given under this Note, unless otherwise provided
herein, such notice shall be given in accordance with Section 10(f) of the
Securities Purchase Agreement.  The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Note, including
in reasonable detail a description of such action and the reason
therefor.  Without limiting the generality of the foregoing, the
Company will give written notice to the Holder at least 10 days prior to the
date on which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining rights
to vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the
Holder.  Notwithstanding anything herein to the contrary, the Company
shall not provide the Holder with any material non-public information without
the Holder's prior written consent.

    

    (b)     
      Payments.  Whenever
any payment of cash is to be made by the Company to any Person pursuant to this
Note, such payment shall be made in lawful money of the United States of America
via wire transfer of immediately available funds in accordance with the Holder's
wire transfer instructions provided to the Company by the
Holder.  Whenever any amount expressed to be due by the terms of this
Note is due on any day which is not a Business Day, the same shall instead be
due on the next succeeding day which is a Business Day and, in the case of any
Interest Date which is not the date on which this Note is paid in full, the
extension of the due date thereof shall not be taken into account for purposes
of determining the amount of Interest due on such date.  Any amount of
Principal or other amounts due under the Transaction Documents, other than
Interest, which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such
amount at the rate of 13.5% per annum from the date such amount was due until
the same is paid in full ("Late
Charge").

    

    (22)          CANCELLATION.  After
all Principal, accrued Interest and other amounts at any time owed on this Note
have been paid in full, this Note shall automatically be deemed canceled, shall
be surrendered to the Company for cancellation and shall not be
reissued.

    

    (23)          WAIVER OF
NOTICE.  To the extent permitted by law, the Company hereby
waives demand, notice, protest and all other demands and notices in connection
with the delivery, acceptance, performance, default or enforcement of this Note
and the Securities Purchase Agreement.

    

    (24)          GOVERNING LAW; JURISDICTION; JURY
TRIAL.  This Note shall be construed and enforced in
accor­dance with, and all questions concerning the construction, validity,
interpretation and performance of this Note 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.  The Company and the Holder
irrevocably consent to the exclusive jurisdiction of the United States federal
courts and the state courts located in the City of New York, Borough of
Manhattan, in any suit or proceeding based on or arising under this Note and
irrevocably agree that all claims in respect of such suit or proceeding may be
determined in such courts. The Company irrevocably waives the defense of an
inconvenient forum to the maintenance of such suit or proceeding in such
forum.  The Company hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing by first class mail a copy thereof to such party at the
address it set forth on the signature page hereto and agrees that such service
shall constitute good and sufficient service of process and notice
thereof.  Nothing herein shall affect the right of the Holder to serve
process in any other manner permitted by law.  In the event that any
provision of this Note is invalid or unenforceable under any applicable statute
or rule of law, then such provision shall be deemed inoperative to the extent
that it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law.  Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of this Note.  Nothing contained herein shall be
deemed or operate to preclude the Holder from bringing suit or taking other
legal action against the Company in any other jurisdiction to collect on the
Company's obligations to the Holder, to realize on any collateral or any other
security for such obligations, or to enforce a judgment or other court ruling in
favor of the Holder.  EACH PARTY HEREBY IRREVOCABLY WAIVES
ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

    
      
         

      

      
        -12-

        
          

        

      

      
         

      

    

    (25)          SEVERABILITY. If any
provision of this Note is prohibited by law or otherwise determined to be
invalid or unenforceable by a court of competent jurisdiction, the provision
that would otherwise be prohibited, invalid or unenforceable shall be deemed
amended to apply to the broadest extent that it would be valid and enforceable,
and the invalidity or unenforceability of such provision shall not affect the
validity of the remaining provisions of this Note so long as this Note as so
modified continues to express, without material change, the original intentions
of the parties as to the subject matter hereof and the prohibited nature,
invalidity or unenforceability of the provision(s) in question does not
substantially impair the respective expectations or reciprocal obligations of
the parties or the practical realization of the benefits that would otherwise be
conferred upon the parties.  The parties will endeavor in good faith
negotiations to replace the prohibited, invalid or unenforceable provision(s)
with a valid provision(s), the effect of which comes as close as possible to
that of the prohibited, invalid or unenforceable provision(s).

    

    (26)          CERTAIN
DEFINITIONS.  For purposes of this Note, the following terms
shall have the following meanings:

    

    (a)     
      "5% Senior Convertible Notes"
means the principal of (and premium, if any), interest on, and all fees and
other amounts (including, without limitation, any reasonable out-of-pocket
costs, enforcement expenses (including reasonable out-of-pocket legal fees and
disbursements and other reimbursement or indemnity obligations relating thereto)
payable by Company under or in connection with those certain 5% Senior
Convertible Notes of the Company, due May 25, 2009, outstanding as of the
Subscription Date and upon the terms and conditions of such notes as in effect
as of the Subscription Date (as modified pursuant to the express terms of the
Securities Purchase Agreement).

    

    (b)       
    "Bloomberg" means Bloomberg
Financial Markets.

    

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

    

    (d)          
 "Capital
Stock" of any person means any and all shares, interests, participations
or other equivalents (however designated) of capital stock of, or other equity
interests in, such Person and all warrants or options to acquire such capital
stock or equity interests.

    

    (e)           
"Change of
Control" means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Stock in
which holders of the Company's voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.

    
      
         

      

      
        -13-

        
          

        

      

      
         

      

    

    (f)         
  "Contingent
Obligation" means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent
of the Person incurring such liability, or the primary effect thereof, is to
provide assurance to the obligee of such liability that such liability will be
paid or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such liability will be protected (in whole or in
part) against loss with respect thereto.

    

    (g)        
   "Contract Indebtedness" shall
mean Indebtedness incurred for the sole purpose of financing all or any part of
the purchase price or cost of design, engineering, installation, construction,
configuring, maintenance, or operation or improvement of property or equipment
used in the business of the Company or any Subsidiary at a customer site,
including without limitation, costs of site analysis and preparation, in
connection with customer contracts entered into on or after October 1, 2006;
provided that such Indebtedness shall not be convertible or exercisable for, or
otherwise entitle the holder of such Indebtedness to any rights with respect to,
any equity securities of the Company.

    

    (h)       
    "Convertible Securities" means
any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.

    

    (i)         
   "Eligible Market" means the
Principal Market, The Nasdaq Capital Market, The Nasdaq Global Select Market,
The Nasdaq Global Market, The New York Stock Exchange, Inc. or the American
Stock Exchange.

    

    (j)         
   "Equity Financing" means the
issuance and sale by the Company of its equity securities, or securities
convertible into its equity securities other than any Excluded
Securities.

    

    (k)       
    "Excluded Securities" means any
Common Stock issued or issuable: (i) in connection with mergers, acquisitions,
strategic business partnerships or joint ventures, in each case with
non-affiliated third parties and otherwise on an arm's length basis, the primary
purpose of which, in the reasonable judgment of the Company's Board of
Directors, is not to raise additional capital; (ii) in connection with the grant
of options to purchase Common Stock or other stock-based awards or sales, with
exercise or purchase prices not less than the market price of the Common Stock
on the date of grant or issuance, which are issued or sold to employees,
officers or directors of the Company for the primary purpose of soliciting or
retaining their employment or service pursuant to an equity compensation plan
approved by the Company's Board of Directors, and the Common Stock issued upon
the exercise thereof; and (iii) upon conversion of any Options or Convertible
Securities which are outstanding on the day immediately preceding the
Subscription Date and disclosed in Schedule 3(c) of the Securities Purchase
Agreement, provided that the terms of such Options or Convertible Securities are
not amended, modified or changed on or after the Subscription Date without the
consent of the Required Holders.

    

    (l)        
    "Existing Notes" means the 5%
Senior Convertible Notes, May 2006 Notes and Variable Rate Senior
Notes.

    
      
         

      

      
        -14-

        
          

        

      

      
         

      

    

    (m)           "Extension Event" means an
Event of Default under clauses (i), (iv), (v), (vi), or (viii) (to the extent
such Event of Default relates to the Company's failure to perform any covenant
or obligation set forth in the Securities Purchase Agreement) of Section 4(a)
hereof or any event shall have occurred and be continuing which with the passage
of time and the failure to cure would result in an Event of Default under said
provisions of Section 4(a) hereof.

    

    (n)         
  "Fundamental
Transaction" means: (i) a transaction or series of related transactions
pursuant to which the Company: (A) sells, conveys or disposes of all or
substantially all of its assets (or the stock or assets of one or more of its
Subsidiaries which, on a consolidated basis, constitute all or substantially all
of the Company's assets), determined on either a quantitative or qualitative
basis (the presentation of any such transaction for stockholder approval being
conclusive evidence that such transaction involves the sale of all or
substantially all of the assets of the Company on a consolidated basis); (B)
merges or consolidates with or into, or engages in any other business
combination with, any other person or entity, in any case that results in the
holders of the voting securities of the Company immediately prior to such
transaction holding or having the right to direct the voting of 50% or less of
the total outstanding voting securities of the Company or such other surviving
or acquiring person or entity immediately following such transaction, as the
case may be; or (C) sells or issues, or any of its stockholders sells or
transfers, any securities to any person or entity, or the acquisition or right
to acquire securities by any person or entity, in either case acting
individually or in concert with others, such that, following the consummation of
such transaction(s), such person(s) or entity(ies) (together with their
respective affiliates, as such term is used under Section 13(d) of the Exchange
Act) would own or have the right to acquire greater than 50% of the outstanding
shares of Common Stock; (ii) any reclassification or change of the outstanding
shares of Common Stock (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination); or (iii) any event, transaction or series of related
transactions that results in individuals serving on the Board of Directors on
the date hereof (the "Incumbent
Board") ceasing
for any reason to constitute at least a majority of the Board of Directors;
provided, however, that any individual becoming a director subsequent to the
date hereof whose appointment, election, or nomination for election by the
Company's stockholders was approved by a vote of at least a two-thirds of the
directors then comprising the Incumbent Board, after giving effect to this
proviso (other than an appointment, election, or nomination of an individual
whose initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the Company),
shall be considered as though such person were a member of the Incumbent
Board.

    

    (o)         
  "GAAP" means United States
generally accepted accounting principles, consistently applied.

    

    (p)        
   "Holders Pro Rata Amount" means
a fraction (i) the numerator of which is the Principal amount of this Note on
the Issuance Date and (ii) the denominator of which is the aggregate principal
amount of all Notes issued to the purchasers pursuant to the Securities Purchase
Agreement on the Issuance Date, provided that in the event that the initial
holder of any Notes has sold or otherwise transferred any of such holder's
Notes, the transferee shall be allocated a pro rata portion of such holder's
Holder Pro Rata Amount..

    

    (q)        
   "Indebtedness" of any Person
means, without duplication (i) all indebtedness for borrowed money, (ii) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) "capital leases" in
accordance with generally accepted accounting principles (other than trade
payables entered into in the ordinary course of business), (iii) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses,
(v) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with respect
to any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (vi) all
monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied
for the periods covered thereby, is classified as a capital lease, (vii) all
indebtedness referred to in clauses (i) through (vi) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person that
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (viii) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (i)
through (vii) above.

    
      
         

      

      
        -15-

        
          

        

      

      
         

      

    

    (r)          
  "May 2006
Notes" means the senior secured convertible notes issued by the Company
on May 25, 2006 in the aggregate principal amount of $22,840,000.

    

    (s)        
   "Options" means any rights,
warrants or options to subscribe for or purchase shares of Common Stock or
Convertible Securities.

    

    (t)        
   "Outstanding Amount" means the sum of (A)
the portion of the Principal (including any Capitalized Interest) to be
redeemed, exchanged or otherwise with respect to which this determination is
being made, (B) accrued and unpaid Interest (other than Capitalized Interest
included in Principal) with respect to such Principal, (C) accrued and unpaid
Late Charges with respect to such Principal and Interest.

    

    (u)        
   "Parent Entity" of a Person
means an entity that, directly or indirectly, controls the applicable Person and
whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the
Person or Parent Entity with the largest public market capitalization as of the
date of consummation of the Fundamental Transaction.

    

    (v)        
   "Permitted Indebtedness" means
(A) the Notes, (B) the May 2006 Notes, (C) the 5% Senior Convertible Notes, (D)
the Variable Rate Senior Notes, (E) the obligations of the Company or its
Subsidiaries under any lease of real or personal property by such Person as
lessee which is required under GAAP to be capitalized on such Person's balance
sheet, and (F) Indebtedness permitted by clauses (iv), (v), (vi), and (vii) of
the definition of "Permitted Lien"; provided that, in the case of clause (v) of
the definition of "Permitted Liens," such Indebtedness is junior to the Notes
and the May 2006 Notes.

    

    (w)           "Permitted Liens" means (i) any
Lien for taxes not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or
delinquent, (iii) any Lien created by operation of law, such as materialmen's
liens, mechanics' liens and other similar liens, arising in the ordinary course
of business with respect to a liability that is not yet due or delinquent or
that are being contested in good faith by appropriate proceedings, (iv) Liens
securing the purchase price of assets purchased or leased by the Company or
Subsidiaries in the ordinary course of business; provided that (A) such Liens
shall not extend to or cover any other property of the Company or its
Subsidiaries, (B) the value of any such Lien shall not, individually, exceed
$50,000 and (C) the value of all Liens incurred under this subsection (iv) while
this Note is outstanding shall not exceed, in the aggregate, $500,000, (v) Liens
securing Contract Indebtedness or customer contracts entered into on or after
October 1, 2006, including without limitation accounts thereunder, in the
fulfillment of which such Contract Indebtedness was incurred, in each case,
covering only assets acquired with such Contract Indebtedness, (vi) that certain
Lien covering all of the Company's right, title and interest, now existing or
hereafter arising, to that certain payment intangible arising to the benefit of
the Company under the License Agreement, dated February 1, 2001 by and between
the Company and ACI Worldwide, Inc., (vii) those certain Liens granted to
General Electric Capital Corporation covering the chattel paper consisting of
the Company's right, title and interest in and to Equipment Schedules 001-002
and 004-007 to that certain Master Lease Agreement, dated February 24, 2004, by
and among Nestor Traffic Systems, Inc. ("Nestor Traffic") and the State
of Delaware Department of Transportation, (viii) Liens securing the Company's
obligations under the May 2006 Notes, (ix) Liens securing obligations of Nestor
Traffic under the Variable Rate Senior Notes and (x) Liens securing the
Company's obligations under the Notes.

    
      
         

      

      
        -16-

        
          

        

      

      
         

      

    

    (x)         
  "Person" means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization, any other entity  and a
government or any department or agency thereof.

    

    (y)        
   "Principal Market" means the
OTC Bulletin Board.

    

    (z)        
   "Redemption Notices" means,
collectively, the Event of Default Redemption Notices, Change of Control
Redemption Notices, the Optional Redemption Notices and, each of the foregoing,
individually, a Redemption Notice.

    

    (aa)          "Redemption Prices" means,
collectively, the Event of Default Redemption Price, the Change of Control
Redemption Price, the Holder Optional Redemption Price and, each of the
foregoing, individually, a Redemption Price.

    

    (bb)         "Required Holders" means the
holders of Notes representing at least a majority of the aggregate principal
amount of the Notes then outstanding.

    

    (cc)          "SEC" means the United States
Securities and Exchange Commission.

    

    (dd)         "Securities Purchase
Agreement" means the Securities Purchase Agreement dated as of the
Subscription Date by and among Nestor, Inc. and the initial holders of the Notes
pursuant to which the Company issued the Notes.

    

    (ee)          "Subscription Date" means
October [__], 2008.

    

    (ff)           "Successor Entity" means the
Person, which may be the Company, formed by, resulting from or surviving any
Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded
entity whose common stock or equivalent equity security is quoted or listed for
trading on an Eligible Market, Successor Entity shall mean such Person's Parent
Entity.

    

    (gg)         "Trading Day" means any day on
which trading the Common Stock is reported on the Principal Market, or, if the
Principal Market is not the principal trading market for the Common Stock, then
on the Eligible Market that is the principal securities exchange or securities
market on which the Common Stock is then traded; provided that "Trading Day"
shall not include any day on which the Common Stock is scheduled to trade on
such exchange or market for less than 4.5 hours or any day that the Common Stock
is suspended from trading during the final hour of trading on such exchange or
market (or if such exchange or market does not designate in advance the closing
time of trading on such exchange or market, then during the hour ending at
4:00:00 p.m., New York Time).

    
      
         

      

      
        -17-

        
          

        

      

      
         

      

    

    (hh)         "Variable Rate Senior Notes"
means the principal of (and premium, if any), interest on, and all fees and
other amounts (including, without limitation, any reasonable out-of-pocket
costs, enforcement expenses (including reasonable out-of-pocket legal fees and
disbursements and other reimbursement or indemnity obligations relating thereto)
payable by Nestor Traffic, due May 25, 2011, outstanding as of the Subscription
Date and upon the terms and conditions of such notes as in effect as of the
Subscription Date.

    

    (ii)        
   "Waived Defaults" means any of
the following events which would be a default or Event of Default under the
Existing Notes (absent the waiver thereof): (i) the suspension from trading of
the Common Stock and failure of the Common Stock to be listed on an Eligible
Market (as such term is defined in the May 2006 Notes); (ii) the Company’s
failure to pay interest when and as due under the Existing Notes, provided such
default has been waived by the holders of such Existing Notes in accordance with
their respective terms; and (iii) any cross-default under the Existing Notes due
to the events listed in clauses (i) and (ii) above.

    

    (27)          DISCLOSURE.  Except
as provided otherwise herein, upon receipt or delivery by the Company of any
notice in accordance with the terms of this Note, unless the Company has in good
faith determined that the matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries, the
Company shall within one Business Day after any such receipt or delivery
publicly disclose such material, nonpublic information on a Current Report on
Form 8-K or otherwise. In the event that the Company believes that a notice
contains material, nonpublic information, relating to the Company or its
Subsidiaries, the Company shall indicate to the Holder contemporaneously with
delivery of such notice, and in the absence of any such indication, the Holder
shall be allowed to presume that all matters relating to such notice do not
constitute material, nonpublic information relating to the Company or its
Subsidiaries.

    

    [Signature
Page Follows]

    
      
         

      

      
        -18-

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the
Issuance Date set out above.

    

    

    
      	 
      	
              NESTOR,
      INC.

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      

    

    

    

    

    
      [Signature
Page to Senior Secured Convertible Bridge Note]

    

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    EXHIBIT
I

    

    NESTOR,
INC.

    EXCHANGE
NOTICE

    

    Reference
is made to the Senior Secured Bridge Note (the "Note") issued to the
undersigned by Nestor, Inc. (the "Company").  In
accordance with and pursuant to the Note, the undersigned hereby elects to
exchange the Outstanding Amount (as defined in the Note) of the Note indicated
below into shares of New Securities, as of the date specified
below.

    

    

    

    
      	
              Date
      of Exchange:

            	 
      
	 	 
	
              Aggregate
      Outstanding Amount to be exchanged:

            	 
      
	 	 
	
              Please
      confirm the following information:

            
	 
	
              Exchange
      Price:

            	 
      
	 	 
	
              New
      Securities to be issued:

            	 
      
	 	 
	
              Please
      issue the New Securities into which the Note is being exchanged in the
      following name and to the following address:

            
	 
	
              Issue to:

            	 
      
	 	 
	 
      	 
      
	 	 
	 
      	 
      
	 	 
	
              Facsimile
      Number:

            	 
      
	 	 
	
              Authorization:

            	 
      
	 	 
	
              By:

            	 
      
	 	 
	
              Title:

            	 
      
	 	 
	
              Dated:

            	 
      
	 	 
	
              Account
      Number:

            	 
      
	
                (if
      electronic book entry transfer)

            	 
      
	 	 
	
              Transaction
      Code Number:

            	 
      
	
                (if
      electronic book entry transfer)

            	 
      

    

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    EXHIBIT
B

    

    FORM OF

    AMENDED AND RESTATED
SECURITY AGREEMENT

    

    THIS
AMENDED AND RESTATED SECURITY AGREEMENT (this “Agreement”) is made as of
October __, 2008, by and among U.S. Bank National Association, as
Collateral Agent for the Purchasers (as that term is defined in the Existing
Securities Purchase Agreement defined below) (together with its successors and
assigns in such capacity, the “Agent”); Nestor, Inc., a
Delaware corporation (together with its successors and permitted assigns, the
“Borrower”); and Nestor
Traffic Systems, Inc., a Delaware corporation, CrossingGuard, Inc., a Delaware
corporation, and Nestor Interactive Inc., a Delaware corporation (together with
their successors and permitted assigns, collectively and jointly and severally,
the “Subsidiary
Guarantors”, and together with the Borrower, collectively and jointly and
severally, the “Grantors”).

    

    Background

    

    The
Agent, the Borrower and each party listed as a “Purchaser” on the execution
pages thereto (collectively, the “Existing Purchasers”) entered
into that certain Securities Purchase Agreement, dated as of May 24, 2006 (as
the same may be amended, restated, modified, supplemented and/or replaced from
time to time, the “Existing Securities Purchase
Agreement”), pursuant to which the Purchasers purchased certain “Notes” (as defined therein)
(as such Notes may be amended, restated, modified, supplemented and/or replaced
from time to time in accordance with the terms thereof, collectively, the “Existing Notes”).

    

    Each of
the Grantors (other than the Borrower) (each a “Guarantor” and collectively,
the “Guarantors” has
executed and delivered a Guaranty and Suretyship Agreement, dated as of May 25,
2006 (as amended, restated, supplemented, replaced, modified or otherwise
changed from time to time, the “Guaranty and Suretyship
Agreement” in favor of the Agent to guarantee the Borrower’s obligations
under the Existing Securities Purchase Agreement, the Existing Notes and the
Transaction Documents (as defined below);

    

    The
Agent, the Borrower and each party listed as a “Purchaser” on the execution
pages thereto (collectively, the “Additional Purchasers” and
together with the Existing Purchasers, each a “Purchaser” and collectively, the
“Purchasers”) are entering into an additional Securities Purchase Agreement,
dated as of the date hereof (as the same may be amended, restated, modified,
supplemented and/or replaced from time to time, the “Additional Securities Purchase Agreement”
and together with the Existing Securities Purchase Agreement, the “Securities Purchase
Agreements”) pursuant to which the Borrower shall agree to sell, and the
Additional Purchasers shall agree to purchase certain additional “Notes” (as defined therein)
(as such Notes may be amended, restated, modified, supplemented and/or replaced
from time to time in accordance with the terms thereof, collectively, the “Bridge Notes” and together
with the Existing Notes, each a “Note” and collectively, the
“Notes”).

    

    Each of
the Grantors (other than the Borrower) (each a “Guarantor” and collectively,
the “Guarantors” has
executed and delivered an Amended and Restated Guaranty and Suretyship
Agreement, dated as of October 8, 2008 (as amended, restated, supplemented,
replaced, modified or otherwise changed from time to time, the “Amended and Restated Guaranty and Suretyship
Agreement” in favor of the Agent to guarantee the Borrower’s obligations
under the Additional Securities Purchase Agreement, the Bridge Notes and the
Transaction Documents (as defined below);

    
      
         

      

      
        - 2
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    Contemporaneously
with the consummation of the transactions contemplated by the Existing
Securities Purchase Agreement, the Grantors entered into a Security Agreement,
dated as of May 25, 2006, in favor of the Agent (the “Existing Security
Agreement”).

    

    One of
the conditions to the obligations of the Additional Purchasers under the
Additional Securities Purchase Agreement is that the Grantors shall amend and
restate the Existing Security Agreement to add the Borrower’s obligations under
the Additional Securities Purchase Agreement, the Bridge Notes and all other
“Transaction Documents” (as defined in the Additional Securities Purchase
Agreement) (together with the “Transaction Documents”, as defined in the
Existing Securities Purchase Agreement, the “Transaction Documents”) as
additional "Secured Obligations" hereunder.

    

    Accordingly,
each Grantor, intending to be legally bound, hereby agrees with the Agent as
follows:

    

    1.            
 DEFINITIONS.  Capitalized
terms used but not otherwise defined herein shall have the meanings assigned to
such terms in the Securities Purchase Agreements; provided however, that in the
event of a conflict, the respective definition in the Existing Securities
Purchase Agreement shall apply.  The following terms, as used herein,
shall have the following meanings:

    

    “Account”
shall be used herein as defined in the Uniform Commercial Code, but in any event
shall include, but not be limited to, credit card receivables, lottery winnings,
health-care-insurance receivables, any right to payment arising out of goods or
other property (including, without limitation, intellectual property) sold or
leased, licensed, assigned or disposed of or for services rendered which is not
evidenced by an instrument or chattel paper, whether or not it has been earned
by performance including all rights to payment of rents under a lease or license
and payment under a charter or other contract and all rights incident to such
lease, charter or contract.

    

    “Additional
Grantor” shall have the meaning ascribed to such term in Section
5(p).

    

    “Chattel
Paper” shall be used herein as defined in the Uniform Commercial Code,
but in any event shall include, but not be limited to, a writing or writings
which evidence both a monetary
obligation and a security interest in, or a lease of, specific
goods.

    

    “Collateral”
shall have the meaning ascribed to such term in Section 2.

    

    “Commercial
Tort Claims” shall be used herein as defined in the Uniform Commercial
Code and shall include those claims listed (including plaintiff, defendant and a
description of the claim) on Schedule 10 attached
hereto.

    

    “Controlled
Foreign Corporation” shall mean “controlled foreign corporation” as
defined in the Internal Revenue Code.

    

    “Deposit
Account” shall be used herein as
defined in the Uniform Commercial Code, but in any event shall include, but not
be limited to, any demand, time, savings, passbook or similar
account.

    

    “Document” shall be used herein as
defined in the Uniform Commercial Code, but in any event shall include, but not
be limited to, a bill of lading, dock warrant, dock receipt, warehouse receipt
or order for the delivery of goods, and also any other document which in the
regular course of business or financing is treated as adequately evidencing that
the Person in possession of it is entitled to receive, hold and dispose of the
document and the goods it covers.

    
      
         

      

      
        - 3
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    “Equipment”
shall be used herein as defined in the Uniform Commercial Code, but in any event
shall include, but not be limited to, tangible personal property held by any
Grantor for use primarily in business and shall include equipment, machinery,
furniture, vehicles, fixtures, furnishings, dyes, tools, and all accessories and
parts now or hereafter affixed thereto as well as all attachments, replacements,
substitutes, accessories, additions and improvements to any of the foregoing,
but Equipment shall not include Inventory.

    

    “Event of
Default” shall be used herein as defined in the Notes.

    

    “Excluded
Collateral” shall mean the rights of the Borrower in and to that certain
Vehicle Speed Violation Video-Enforcement System Lease & Services Agreement
dated December 28, 2006 by and between Nestor Traffic Systems, Inc. and the City
of Akron, Ohio (the "Akron Contract") and any New Contracts (as such term is
defined in the Variable Rate Note Security Agreement) and any and all revenues
resulting therefrom, plus, the items of equipment and machinery set forth on
Schedule A attached hereto and the items of equipment and machinery set forth on
Schedule Aattached hereto when and to the extent deployed in connection with the
Akron Contract or any New Contracts and as described in any Excluded Collateral
Supplement provided to the Agent in accordance with Section 5(u)
hereof.

    

    “Fixtures” shall be used herein as
defined in the Uniform Commercial Code.

    

    “General
Intangibles” shall be used herein as defined in the Uniform Commercial
Code but in any event shall include, but not be limited to, all personal
property of every kind and description of any Grantor other than Goods,
Accounts, Fixtures, Documents, Letter-of-Credit Rights, Chattel Paper, Deposit
Accounts, Instruments, Investment Property, Commercial Tort Claims and
Supporting Obligations, and shall include, without limitation, payment
intangibles, contract rights (other than Accounts), franchises, licenses, choses
in action, books, records, customer lists, tax, insurance and other kinds of
refunds, patents, trademarks, trade names, service marks, slogans, trade dress,
copyrights, other intellectual property rights and applications for intellectual
property rights, goodwill, plans, licenses, software (to the extent it does not
constitute Goods) and other rights in personal property.

    

    “Goods”
shall be used herein as defined in the Uniform Commercial Code, but in any event
shall include, but not be limited to, all computer programs imbedded in goods
and any supporting information provided in connection with the transaction
relating to the program and all other things that are movable.

    

    “Instruments”
shall be used herein as defined in the Uniform Commercial Code, but in any event
shall include, but not be limited to, promissory notes, negotiable certificates
of deposit, a negotiable instrument or a security or any other writing which
evidences a right to the payment of money and is not itself a security agreement
or lease and is of a type which is, in the ordinary course of business,
transferred by delivery with any necessary endorsement or
assignment.

    

    “Inventory”
shall be used herein as defined in the Uniform Commercial Code but in any event
shall include, but not be limited to, tangible personal property held by or on
behalf of any Grantor (or in which any Grantor has an interest in mass or a
joint or other interest) for sale or lease or to be furnished under contracts of
service, tangible personal property which any Grantor has so leased or
furnished, and raw materials, work in process and materials used, produced or
consumed in any Grantor’s business, and shall include tangible personal property
returned to such Grantor by the purchaser following a sale thereof by such
Grantor and tangible personal property represented by Documents.  All
equipment, accessories and parts at any time attached or added to items of
Inventory or used in connection therewith shall be deemed to be part of the
Inventory.

    
      
         

      

      
        - 4
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    “Investment
Property” shall be used herein as defined in the Uniform Commercial Code
but in any event shall include, but not be limited to, all securities, whether
certificated or uncertificated, all financial assets, all security entitlements,
all securities accounts, all commodity contracts and all commodity
accounts.

    

    “Letter-of-Credit
Right”  shall be used herein as defined in the Uniform
Commercial Code, but in any event shall include, but not be limited to, any
right to payment or performance under a letter of credit, whether or not the
beneficiary has demanded or is at the time entitled to demand payment or
performance.

    

    “Organizational
Documents” shall mean, with respect to any Person other than a natural
person, the documents by which such Person was organized (such as a certificate
of incorporation, certificate of limited partnership or articles of
organization, and including, without limitation, any certificates of designation
for preferred stock or other forms of preferred equity) and which relate to the
internal governance of such Person (such as bylaws, a partnership agreement or
an operating, limited liability or members agreement).

    

    “Proceeds”
shall be used herein as defined in the Uniform Commercial Code but, in any
event, shall include, but not be limited to, (a) any and all proceeds of any
insurance (whether or not the Agent is named as the loss payee thereof),
indemnity, warranty or guaranty payable to any Grantor or the Agent from time to
time with respect to any of the Collateral, (b) any and all payments (in any
form whatsoever) made or due and payable to any Grantor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Authority
(or any person acting under color of Governmental Authority), (c) any and all
amounts received when Collateral is sold, leased, licensed, exchanged, collected
or disposed of, (d) any rights arising out of Collateral, and (e) any and all
other amounts from time to time paid or payable under or in connection with any
of the Collateral.

    

    “Software” shall be used herein as
defined in the Uniform Commercial Code but in any event, shall include, but not
be limited to, any computer program or supporting information provided in
connection with the transaction relating to the program.

    

    “Supporting
Obligations” shall be used herein as defined in the Uniform Commercial
Code but in any event shall include, but not be limited to, guarantees and
letters of credit that support payment of another obligation.

    

    “Uniform
Commercial Code” shall mean the Uniform Commercial Code in effect on the
date hereof and as amended from time to time, and as enacted in the State of New
York or in any state or states which, pursuant to the Uniform Commercial Code as
enacted in the State of New York, has jurisdiction with respect to all, or any
portion of, the Collateral or this Agreement, from time to time.  It
is the intent of the parties that the definitions set forth above should be
construed in their broadest sense so that Collateral will be construed in its
broadest sense.  Accordingly if there are, from time to time, changes
to defined terms in the Uniform Commercial Code that broaden the definitions,
they are incorporated herein and if existing definitions in the Uniform
Commercial Code are broader than the amended definitions, the existing ones
shall be controlling.  Similarly, where the phrase “as defined in the
Uniform Commercial Code, but in any event shall include, but not be limited to .
..  .” is used above, it means as defined in the Uniform Commercial
Code except that if any of the enumerated types of items specified thereafter
would not fall within the Uniform Commercial Code definition, they shall
nonetheless be included in the applicable definition for purposes of this
Agreement.

    
      
         

      

      
        - 5
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    "Variable
Rate Note Security Agreement" means that certain Security Agreement dated
as of April 1, 2007 by and between Nestor Traffic Systems, Inc. and the
purchasers of the Company's Variable Rate Senior Notes due May 25, 2011 as
listed on Schedule A thereto.

    

    2.         
    GRANT OF SECURITY
INTEREST.  As security for the payment and performance of the
Secured Obligations, each Grantor hereby ratifies and confirms the security
interest granted to the Existing Purchasers in the “Collateral” as defined in
the Existing Security Agreement and further pledges, hypothecates, delivers and
assigns to the Agent, for the benefit of the Agent and each of the Purchasers,
and creates in favor of the Agent for the benefit of the Agent and the
Purchasers, a security interest in and to, all of such Grantor’s right, title
and interest in and to all the following property, in all its forms, in each
case whether now or hereafter existing, whether now owned or hereafter acquired,
created or arising, and wherever located (collectively, but without duplication,
the “Collateral”):

    

    

    (a)           All
Equipment;

    

    (b)           All
Inventory and other Goods;

    

    (c)           All
Accounts;

    

    (d)           All
General Intangibles, including, without limitation, the patents and patent
applications listed on Schedule 5 attached
hereto, the trademarks and trademark applications listed on Schedule 6 attached
hereto, the registered copyrights listed on Schedule 7 attached
hereto, the domain names listed on Schedule 8 attached
hereto, the licenses for the use of any patents, trademarks, copyrights and
domain names listed on Schedule 9 attached
hereto;

    

    (e)           All
Fixtures;

    

    (f)           All
Documents, Letter-of-Credit Rights, and Chattel Paper;

    

    (g)           All
Deposit Accounts;

    

    (h)           All
Instruments and Investment Property;

    

    (i)           All
Commercial Tort Claims;

    

    (j)           All
Supporting Obligations; and

    

    (k)           All
Proceeds of any and all of the foregoing.

    

    Notwithstanding
the foregoing, any Excluded Collateral shall not be “Collateral” hereunder and
in no event shall the security interest granted under this Section 2 attach to
any of the outstanding capital stock or other securities of a Controlled Foreign
Corporation in excess of 66% of the voting power of all classes of capital stock
or other securities of such Controlled Foreign Corporation entitled to vote;
provided that immediately upon the amendment of the Internal Revenue Code to
allow the pledge of a greater percentage of the voting power of capital stock or
other securities in a Controlled Foreign Corporation without adverse tax
consequences, the Collateral shall include, and the security interest granted by
each Grantor shall attach to, such greater percentage of capital stock or other
securities of each Controlled Foreign Corporation. Notwithstanding the
foregoing, nothing herein shall be deemed to constitute an assignment of any
asset which, in the event of an assignment, becomes void by operation of
applicable Law or the assignment of which (a) is otherwise prohibited by
applicable Law (in each case to the extent that such applicable Law is not
overridden by Sections 9-406, 9-407 and/or 9-408 of the Uniform Commercial Code
or other similar applicable Law) or (b) would result in the abandonment,
invalidation or unenforceability of any right, title or interest of any Grantor
therein; provided, however,
that to the extent permitted by applicable Law, this Agreement shall create a
valid security interest in such asset and, to the extent permitted by applicable
Law, this Agreement shall create a valid security interest in the Proceeds of
such asset.

    
      
         

      

      
        - 6
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    3.           
  SECURITY
FOR OBLIGATIONS.  The security interest created hereby in the
Collateral constitutes continuing collateral security for all of the following
obligations, whether now existing or hereafter incurred (collectively, the
“Secured
Obligations”):

    

    (a)      
     (i) the payment by the Borrower, as and when due
and payable (by scheduled maturity, required prepayment, acceleration, demand or
otherwise), of all amounts from time to time owing by it in respect of the
Securities Purchase Agreements, the Notes, this Agreement, and the other
Transaction Documents, including, without limitation, (A) all principal of and
interest on the Notes (including, without limitation, all interest that accrues
after the commencement of any bankruptcy, reorganization or similar proceeding
(an “Insolvency
Proceeding”) involving any Grantor, whether or not the payment of such
interest is unenforceable or is not allowable due to the existence of such
Insolvency Proceeding), and (B) all fees, commissions, expense reimbursements,
indemnifications and all other amounts due or to become due under the Securities
Purchase Agreements or any of the Transaction Documents; and

    

    (b)      
     the due performance and observance by each Grantor
of all of its other obligations from time to time existing in respect of any of
the Transaction Documents, including without limitation, with respect to any
conversion or redemption rights of the Purchasers under the Notes, for so long
as they are outstanding.

    

    4.          
   REPRESENTATIONS AND
WARRANTIES OF THE GRANTORS.  Each Grantor represents and
warrants as follows.  The following representations and warranties
shall survive execution of this Agreement and shall not be affected or waived by
any examination or inspection made by the Agent:

    

    (a)     
      Status.  Each
Grantor is a duly organized and validly existing Delaware
corporation.  Borrower’s organizational number is 2005153, Nestor
Traffic Systems, Inc.’s organizational number is 2698828, and CrossingGuard,
Inc.’s organizational number is 368331.  Each Grantor has perpetual
existence and the power and authority to own its property and assets and to
transact the business in which it is engaged or presently proposes to
engage.  Each Grantor has qualified to do business in each state or
jurisdiction where its business or operations so require.

    

    (b)       
    Authority to Execute
Agreement; Binding Agreement.  Each Grantor has the corporate
or other power to execute, deliver and perform its obligations under this
Agreement and each Transaction Document to which it is, or is to be, a party
(including, without limitation, the right and power to give the Agent a security
interest in the Collateral) and has taken all necessary corporate and other
action to authorize the execution, delivery and performance of this Agreement
and each Transaction Document to which it is, or is to be, a
party.  This Agreement has been duly executed by each
Grantor.  This Agreement constitutes the valid and binding obligation
of each Grantor, enforceable against each Grantor in accordance with its terms
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization and similar laws of general application relating to
or affecting the rights and remedies of creditors.

    
      
         

      

      
        - 7
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    (c)         
  Grantors’
Title.  Except for the security interests granted hereunder,
each Grantor is, as to all Collateral presently owned, and shall be as to all
Collateral hereafter acquired, the owner or, in the case of leased or licensed
assets, the lessee or licensee, of said Collateral free from any Lien other than
Permitted Liens (as defined in the Notes).

    

    (d)      
     Taxes and
Assessments.  All assessments and taxes, due or payable by, or
imposed, levied or assessed against each Grantor or any of its property, real or
personal, tangible or intangible, have been paid.

    

    (e)       
    Location of
Collateral.  All Equipment, Inventory and other Goods are
located within the states specified on Schedule 1
hereto.

    

    (f)        
    Location of
Grantors.  The location of the chief executive office of each
Grantor as well as its state of formation are specified on Schedule 2 attached
hereto.  Also listed on Schedule 2 is each
other location where each Grantor maintains a place of business.

    

    (g)      
     Instruments and
Certificates.  All Instruments and all certificates
representing securities that are included in the Collateral, together with all
necessary endorsements, have been delivered to the Agent.

    

    (h)     
      Names Used by
Grantors.  (i) The actual corporate name of each Grantor is the
name set forth in the preamble above; (ii) no Grantor has any trade names except
as set forth on Schedule 3 attached hereto;
(iii) no Grantor has used any name other than that stated in the preamble hereto
or as set forth on Schedule 3 for the
preceding five years; and (iv) no entity has merged into any Grantor or been
acquired by any Grantor within the past five years except as set forth on Schedule
3.

    

    (i)       
     Perfected Security
Interest.  This Agreement creates a valid, first priority
security interest in the Collateral, subject only to Permitted Liens (as defined
in the Notes), securing payment of the Secured Obligations.  Upon the
filing of Uniform Commercial Code financing statements in the offices set forth
on Schedule 4
hereto and the recordation of this Agreement (or a short form hereof) at the
United States Copyright Office and the United States Patent and Trademark
Office, all security interests which may be perfected by filing shall have been
duly perfected.  Except for the filing of the Uniform Commercial Code
financing statements referred to in the preceding sentence and the delivery of
the Instruments referred to in paragraph (g) above, no action is necessary to
create, perfect or protect such security interest.  Without limiting
the generality of the foregoing, except for the filing of said financing
statements and such recordation and except for customer contracts which may
contain limitations on assignment, no consent of any third parties and no
authorization, approval or other action by, and no notice to or filing with any
Governmental Authority or regulatory body is required for  (i) the
execution, delivery and performance of this Agreement, (ii) the creation or
perfection of the security interest in the Collateral or (iii) the enforcement
of the Agent’s rights hereunder.

    

    (j)        
    Absence of Conflicts with
Other Agreements, Etc.  Neither the pledge of the Collateral
hereunder nor any of the provisions hereof (including, without limitation, the
remedies provided hereunder) violates any of the provisions of any
Organizational Documents of any Grantor, or any other agreement to which any
Grantor or any of its property is a party or is subject, or any judgment,
decree, order or award of any court, governmental body or arbitrator or any
applicable law, rule or regulation applicable to the same.

    
      
         

      

      
        - 8
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    (k)        
   Account
Debtors.  None of the account debtors or other Persons
obligated on any of the Collateral is a Governmental Authority covered by the
Federal Assignment of Claims Act or any similar federal, state or local statute
or rule in respect of such Collateral.

    

    (l)         
   Intellectual
Property.  Schedules 5, 6, 7 and
8 list all of the patents, patent applications, trademarks, trademark
applications, registered copyrights, and domain names owned by any of the
Grantor as of the date hereof.  Schedule 9 lists all
licenses in favor of any Grantor for the use of any patents, trademarks,
copyrights and domain names as of the date hereof other than commercial
off-the-shelf software.  All material patents and trademarks of the
Grantors have been duly recorded at the United States Patent and Trademark
Office.  The Grantors have no material copyrights, whether or not
recorded at the United States Copyright Office.

    

    5.           
  COVENANTS OF
GRANTORS.  Each Grantor covenants that:

    

    (a)      
     Filing of Financing
Statements and Preservation of Interests.  Immediately upon
execution hereof, each Grantor shall file (i) in each office set forth on Schedule 4 Uniform
Commercial Code financing statements and (ii) all filings with the United States
Copyright Office and the United States Patent and Trademark Office, including an
intellectual property collateral agreement in favor of the Agent, pursuant to
which each Grantor shall grant to the Agent for the benefit of the Purchasers a
security interest in all of its service marks, trademarks and trade names and
the goodwill associated therewith, and in all of its patents, patent
applications and patent license agreements, as therein provided, in each case in
form and substance satisfactory to the Agent.  Without limiting the
obligation of the Grantors set forth in the preceding sentence, each Grantor
hereby authorizes the Agent, and appoints the Agent as its attorney-in-fact, to
file in such office or offices as the Agent deems necessary or desirable such
financing and continuation statements and amendments and supplements thereto
(including, without limitation, an “all assets” filing), and such other
documents as the Agent may require to perfect, preserve and protect the security
interests granted herein and ratifies all such actions taken by the Agent;
provided, however, that such authority and appointment shall not be construed to
impose upon the Agent any responsibility for performance of the obligations of
the Company set forth in the first sentence of this clause (a).  Each
Grantor also ratifies its authorization for the Lender to have filed in any
jurisdiction any like initial financing statements or amendments thereto filed
prior to the date of this Agreement.

    

    (b)     
      Delivery of Instruments,
Etc.  At any time and from time to time that any Collateral
consists of Instruments, certificated securities or other items that require or
permit possession by the secured party to perfect the security interest created
hereby, the applicable Grantor shall deliver such Collateral to the
Agent.

    

    (c)        
   Chattel
Paper.  Each Grantor shall cause all Chattel Paper constituting
Collateral to be delivered to the Agent, or, if such delivery is not possible,
then to cause such Chattel Paper to contain a legend noting that it is subject
to the security interest created by this Agreement.  To the extent
that any Collateral consists of electronic Chattel Paper, the applicable Grantor
shall cause the underlying Chattel Paper to be “marked” within the meaning of
Section 9-105 of the Uniform Commercial Code (or successor section
thereto).

    

    (d)       
    Investment Property and
Deposit Accounts.  If there are any Investment Property or
Deposit Accounts included as Collateral that can be perfected by “control”
through an account control agreement, the applicable Grantor shall cause such an
account control agreement, in form and substance in each case satisfactory to
the Agent, to be entered into and delivered to the Agent.

    
      
         

      

      
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    (e)            Letter-of-Credit
Rights.  To the extent that any Collateral consists of
Letter-of-Credit Rights, the applicable Grantor shall cause the issuer of each
underlying letter of credit to consent to the assignment to the
Agent.

    

    (f)        
    Collateral In Possession of
Third Parties.  To the extent that any Collateral is in the
possession of any third party other than agencies of state and local governments
or except in the ordinary course of business, the applicable Grantor shall join
with the Agent in notifying such third party of the Agent’s security interest
and shall make commercially reasonable efforts to obtain an acknowledgement from
such third party that it is holding the Collateral for the benefit of the
Agent.

    

    (g)     
      Commercial Tort
Claims.  If any Grantor shall at any time hold or acquire a
Commercial Tort Claim, such Grantor shall promptly notify the Agent in a writing
signed by such Grantor of the particulars thereof and grant to the Agent in such
writing a security interest therein and in the proceeds thereof, all upon the
terms of this Agreement, with such writing to be in form and substance
satisfactory to the Agent.

    

    (h)        
   Notice of Changes in
Representations. Each Grantor shall notify the Agent in advance of any
event or condition which could cause any representations set forth in Section 4
above applicable to such Grantor to fail to be true, correct and
complete.  Without limiting the generality of the
foregoing:

    

    i.         
  without providing at least thirty (30) days prior written notice to
the Agent, no Grantor will change its name in any respect, its place of business
or, if more than one, chief executive office, or its mailing address or
organizational identification number (if it has one);

    

    ii.           if
any Grantor does not have an organizational identification number and obtains
one after the date of this Agreement, such Grantor will forthwith notify the
Agent in writing of such organizational identification number; and

    

    iii.          no
Grantor will change its type of organization, jurisdiction of organization or
other legal structure without prior written notice to the Agent.

    

    (i)       
     Use and Condition of
Equipment.  Each item of Equipment will be maintained in good
repair, working order and condition, ordinary wear and tear excepted, and the
applicable Grantor will provide all maintenance service and repairs necessary
for such purpose.  The Agent may examine and inspect the Collateral at
any reasonable time or times wherever located.

    

    (j)         
   Insurance.  Each
Grantor shall maintain with financially sound and reputable insurers, insurance
with respect to the Collateral against loss or damage of the kinds and in the
amounts customarily insured against by entities of established reputation having
similar properties similarly situated and in such amounts as are customarily
carried under similar circumstances by other such Persons and otherwise as is
prudent for Persons engaged in similar businesses.  Each Grantor shall
cause each insurance policy issued in connection herewith to provide, and the
insurer issuing such policy to certify to the Agent that (a) the Agent will be
named as lender loss payee and additional insured under each such insurance
policy; (b) if such insurance be proposed to be cancelled or materially changed
for any reason whatsoever, such insurer will promptly notify the Agent and such
cancellation or change shall not be effective as to the Agent for at least
thirty (30) days after receipt by the Agent of such notice, unless the effect of
such change is to extend or increase coverage under the policy; and (c) the
Agent will have the right (but no obligation) at its election to remedy any
default in the payment of premiums within thirty (30) days of notice from the
insurer of such default.  Unless the Securities Purchase Agreements or
the Notes expressly provides otherwise, the following sentence will control
application of proceeds.  If no Event of Default exists, loss payments
in each instance will be applied by the applicable Grantor to the repair and/or
replacement of property with respect to which the loss was incurred to the
extent reasonably feasible, and any loss payments or the balance thereof
remaining, to the extent not so applied, shall be payable to the applicable
Grantor, provided, however,
that payments received by any Grantor after an Event of Default occurs and is
continuing shall be paid to the Agent and, if received by such Grantor, shall be
held in trust for and immediately paid over to the Agent unless otherwise
directed in writing by the Agent.  Copies of such policies or the
related certificates, in each case, naming the Agent as lender loss payee shall
be delivered to the Agent at least annually and at the time any new policy of
insurance is issued.

    
      
         

      

      
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    (k)        
   Transfer of
Collateral.  Other than the disposition of inventory and
licensing of Intellectual Property in the ordinary course of the applicable
Grantor’s business as presently conducted or as otherwise permitted under the
terms of the Securities Purchase Agreements, no Grantor shall sell, assign,
transfer, encumber or otherwise dispose of any Collateral in excess of $25,000
per year without the prior written consent of the Agent and the Agent does not
authorize any such disposition.  For purposes of this provision,
“dispose of any Collateral” shall include, without limitation, the creation of a
security interest or other encumbrance (whether voluntary or involuntary) on
such Collateral, except for Permitted Liens (as defined in the
Notes).

    

    (l)       
     Taxes and
Assessments.  Each Grantor shall promptly pay when due and
payable, all taxes and assessments imposed upon the Collateral or operations or
business of such Grantor.

    

    (m)           Inventory.  No
Grantor shall return any Inventory to the supplier thereof, except for damaged
or unsalable Inventory or otherwise in the ordinary course of such Grantor’s
business.  Without limiting the generality of the foregoing, in the
event any Grantor becomes a “debtor in possession” as defined in 11 U.S.C. §1101
(or any successor thereto), such Grantor agrees, to the extent permitted by
applicable Law, not to move pursuant to 11 U.S.C. §546 (or any successor
thereto) for permission to return goods to any creditor which shipped such goods
to such Grantor without the Agent’s written consent and each Grantor hereby
waives any rights to return such Inventory arising under 11 U.S.C. §546(h), or
any successor section thereto.

    

    (n)       
    Defense of Agent’s
Rights.  Each Grantor warrants and will defend the Agent’s
right, title and security interest in and to the Collateral against the claims
of any Person.

    

    (o)       
    Cash
Management.  At any time following an Event of Default that the
Agent so requests, the Grantors will work with the Agent to set up such lock
boxes and segregated accounts as the Agent may request in order to better
perfect the security interest created hereunder in Proceeds.

    

    (p)      
     Additional
Grantors.  Each Grantor shall cause each Subsidiary of such
Grantor including any Person that shall at any time become a Subsidiary of such
Grantor (an “Additional
Grantor”) or to a similar security agreement, as appropriate, by
executing and delivering an Additional Grantor Joinder in substantially the form
of Annex A
attached hereto and comply with the provisions hereof applicable to the Grantors
or by signing a similar security agreement.  If the Additional Grantor
becomes a party hereto, concurrent therewith, the Additional Grantor shall
deliver replacement schedules for, or supplements to all other Schedules to (or
referred to in) this Agreement, as applicable, which replacement schedules shall
supersede, or supplements shall modify, the Schedules then in
effect.  The Additional Grantor shall also deliver such opinions of
counsel, authorizing resolutions, good standing certificates, incumbency
certificates, Organizational Documents, financing statements and other
information and documentation as the Agent may reasonably
request.  Upon delivery of the foregoing to the Agent, the Additional
Grantor shall be and become a party to this Agreement with the same rights and
obligations as the Grantors, for all purposes hereof as fully and to the same
extent as if it were an original signatory hereto and shall be deemed to have
made the representations, warranties and covenants set forth herein as of the
date of execution and delivery of such Additional Grantor Joinder and thereafter
at any time that such representations and covenants must be restated pursuant to
the terms of the Transaction Documents, and all references herein to the
“Grantors” shall be deemed to include each Additional Grantor.

    
      
         

      

      
        - 11
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    (q)         
  Inspections.  Upon
reasonable notice to the Grantors (and for this purpose no more than two
business days’ notice shall be required under any circumstances) if no Event of
Default shall exist, and at any time with or without notice after the occurrence
of an Event of Default, each Grantor will permit the Agent, or its designee, to
inspect the Collateral, wherever located, and to discuss the affairs, business,
finances and accounts of the Grantors with their personnel and
accountants.  In the event that no Event of Default exists and is
continuing, such inspections shall not be held more than twice in any six-month
period.  For the sake of clarity, during any time when an Event of
Default shall exist and is continuing, the Agent may conduct an unlimited number
of inspections, subject to the first sentence of this Section
5(q).  The Agent acknowledges that such inspections and discussions
may result in the Agent, or its designee, receiving material nonpublic
information.  The Agent shall, and shall cause its designee, to keep
confidential such information as is specifically marked or otherwise identified
as material nonpublic information by the Grantors.

    

    (r)         
   Intellectual
Property.  Without limiting the generality of the other
obligations of the Grantors hereunder, each Grantor shall promptly (i) cause to
be registered at the United States Copyright Office all of its material
copyrights and shall cause the security interest contemplated hereby with
respect to such copyrights to be duly recorded at such office, (ii) cause the
security interest contemplated hereby with respect to all material Intellectual
Property registered at the United States Copyright Office or United States
Patent and Trademark Office to be duly recorded at the applicable office, and
(iii) give the Agent notice whenever it acquires (whether absolutely or by
license) or creates any additional material Intellectual Property.

    

    (s)      
     Power of
Attorney.  Each Grantor has duly executed and delivered to the
Agent a power of attorney (a “Power of Attorney”) in
substantially the form attached hereto as Annex
B.  The power of attorney granted pursuant to the Power of
Attorney is a power coupled with an interest and shall be irrevocable until full
and indefeasible payment of the Secured Obligations.  The powers
conferred on the Agent (for the benefit of the Agent and the Purchasers) under
the Power of Attorney are solely to protect the Agent’s interests (for the
benefit of the Agent and the Purchasers) in the Collateral and shall not impose
any duty upon the Agent or any Purchaser to exercise any such
powers.  The Agent agrees that (i) except for the powers granted in
clause (i) of the Power of Attorney, it shall not exercise any power or
authority granted under the Power of Attorney unless an Event of Default has
occurred and is continuing, and (ii) the Agent shall account for any moneys
received by the Agent in respect of any foreclosure on or disposition of
Collateral pursuant to the Power of Attorney provided that none of the Agent or
any Purchaser shall have any duty as to any Collateral, and the Agent and the
Purchasers shall be accountable only for amounts that they actually receive as a
result of the exercise of such powers.  NONE OF THE AGENT, THE
PURCHASERS OR THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES,
AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO THE GRANTORS FOR ANY ACT OR
FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF
DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, NOR FOR ANY
PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.

    
      
         

      

      
        - 12
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    (t)      
      Motor
Vehicles.  (i)           Each
Grantor shall deliver to the Agent originals of the certificates of title or
ownership for all motor vehicles owned by it with the Agent listed as
lienholder, for the benefit of the Purchasers.

    

    (ii)         
  Each Grantor hereby appoints the Agent as its attorney-in-fact,
effective the date hereof and terminating upon the termination of this
Agreement, for the purpose of (A) executing on behalf of such Grantor title or
ownership applications for filing with appropriate state agencies to enable
motor vehicles now owned or hereafter acquired by such Grantor to be retitled
and the Agent listed as lienholder thereof, (B) filing such applications with
such state agencies, and (C) executing such other documents and instruments on
behalf of, and taking such other action in the name of, such Grantor as the
Agent may deem necessary or advisable to accomplish the purposes hereof
(including, without limitation, for the purpose of creating in favor of the
Agent a perfected Permitted Lien on the motor vehicles and exercising the rights
and remedies of the Agent hereunder).  This appointment as
attorney-in-fact is coupled with an interest and is irrevocable until all of the
Secured Obligations are indefeasibly paid in full in cash.

    

    (iii)           So
long as no Event of Default shall have occurred and be continuing, upon the
request of any Grantor, the Agent shall execute and deliver to any Grantor such
instruments as any Grantor shall reasonably request to remove the notation of
the Agent as lienholder on any certificate of title for any motor vehicle; provided, however, that any
such instruments shall be delivered, and the release effective, only upon
receipt by the Agent of a certificate from any Grantor stating that such motor
vehicle is to be sold or has suffered a casualty loss (with title thereto in
such case passing to the casualty insurance company therefor in settlement of
the claim for such loss) and the amount that any Grantor will receive as sale
proceeds or insurance proceeds.  Any proceeds of such sale or casualty
loss shall be paid to the Agent hereunder immediately upon receipt, to be
applied to the Secured Obligations then outstanding.

    

    (u)     
      Upon receipt by the Agent of a supplement to
Schedule A (an “Excluded
Collateral Supplement) from the Borrower, all such assets of the Borrower
set forth on such Supplement shall be deemed to be Excluded Collateral
hereunder. Each Grantor represents and warranties to the Agent and each of the
Noteholders that Schedule A hereto and any Excluded Collateral Supplement
provided from time to time in accordance herewith, shall accurately reflect the
assets of the Grantor that are, at the time of delivery, “Collateral” as defined
in Variable Rate Note Security Agreement, in effect on the date
hereof.

    

    (v)     
      Other
Assurances.  Each Grantor agrees that from time to time, at the
joint and several expense of the Grantors and any Additional Grantors, it will
promptly execute and deliver all such further instruments and documents, and
take all such further action as may be necessary or desirable, or as the Agent
may reasonably request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable the Agent to exercise and
enforce its rights and remedies hereunder and with respect to any Collateral or
to otherwise carry out the purposes of this Agreement.

    

    6.           
  REMEDIES UPON EVENT OF
DEFAULT.

    

    b.           Upon
the occurrence and during the continuation of an Event of Default, the Agent may
exercise, in addition to any other rights and remedies provided herein, under
other contracts and under law, all the rights and remedies of a secured party
under the Uniform Commercial Code.  Without limiting the generality of
the foregoing, upon the occurrence and during the continuation of an Event of
Default, (i) at the request of the Agent, each Grantor shall, at its cost and
expense, assemble the Collateral owned or used by it as directed by the Agent;
(ii) the Agent shall have the right (but not the obligation) to notify any
account debtors and any obligors under Instruments or Accounts to make payments
directly to the Agent and to enforce the Grantors’ rights against account
debtors and obligors; (iii) the Agent may (but is not obligated to), without
notice except as provided below, sell the Collateral at public or private sale,
on such terms as the Agent deems to be commercially reasonable; (iv) the Agent
may (but is not obligated to) direct any financial intermediary or any other
Person holding Investment Property to transfer the same to the Agent or its
designee; and (v) the Agent may (but is not obligated to) transfer any or all
Intellectual Property registered in the name of any Grantor at the United States
Patent and Trademark Office and/or Copyright Office into the name of the Agent
or any designee or any purchaser of any Collateral.  Each Grantor
agrees that ten (10) days notice of any sale referred to in clause (iii) above
shall constitute sufficient notice.  The Agent or any Purchaser may
purchase Collateral at any such sale.  The Grantors shall be liable to
the Agent and the Purchasers for any deficiency amount.

    
      
         

      

      
        - 13
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    c.           The
Agent may comply with any applicable Law in connection with a disposition of
Collateral and compliance will not be considered adversely to affect the
commercial reasonableness of any sale of the Collateral.  The Agent
may sell the Collateral without giving any warranties and may specifically
disclaim such warranties.  If the Agent sells any of the Collateral on
credit, the Borrower will only be credited with payments actually made by the
purchaser.  In addition, each Grantor waives any and all rights that
it may have to a judicial hearing in advance of the enforcement of any of the
Agent’s rights and remedies hereunder, including, without limitation, its right
following an Event of Default to take immediate possession of the Collateral and
to exercise its rights and remedies with respect thereto.

    

    d.           For
the purpose of enabling the Agent to further exercise rights and remedies under
this Section 6 or elsewhere provided by agreement or applicable Law, each
Grantor hereby grants to the Agent, for the benefit of the Agent and the
Purchasers, an irrevocable, nonexclusive license (exercisable without payment of
royalty or other compensation to such Grantor) to use, license or sublicense
following an Event of Default, any Intellectual Property now owned or hereafter
acquired by such Grantor, and wherever the same may be located, and including in
such license access to all media in which any of the licensed items may be
recorded or stored and to all computer software and programs used for the
compilation or printout thereof.

    

    
      	
               
      

            	
              (b)

            	
              OBLIGATIONS
      ABSOLUTE.

            

    

    

    a.           Change of
Circumstance.  THE RIGHTS OF THE AGENT HEREUNDER AND THE
OBLIGATIONS OF THE GRANTORS HEREUNDER SHALL BE ABSOLUTE AND UNCONDITIONAL, SHALL
NOT BE SUBJECT TO ANY COUNTERCLAIM, SETOFF, RECOUPMENT OR DEFENSE BASED UPON ANY
CLAIM THAT ANY GRANTOR OR ANY OTHER PERSON MAY HAVE AGAINST ANY PURCHASER AND
SHALL REMAIN IN FULL FORCE AND EFFECT UNTIL FULL AND INDEFEASIBLE SATISFACTION
OF THE SECURED OBLIGATIONS AFTER OR CONCURRENT WITH THE TERMINATION OF ANY
COMMITMENT OF THE PURCHASERS PURSUANT TO THE SECURITIES PURCHASE
AGREEMENTS.  Without limiting the generality of the foregoing, the
obligations of the Grantors shall not be released, discharged or in any way
affected by any circumstance or condition (whether or not the applicable Grantor
shall have any notice or knowledge thereof) including, without limitation, any
amendment or modification of or supplement to the Securities Purchase
Agreements, any Notes or any other Transaction Document (including, without
limitation, increasing the amount or extending the maturity of the Secured
Obligations); any waiver, consent, extension, indulgence or other action or
inaction under or in respect of any such agreements or instruments, or any
exercise or failure to exercise of any right, remedy, power or privilege under
or in respect of any such agreements or instruments, or any exercise or failure
to exercise of any right, remedy, power or privilege under or in respect of any
such agreements or instruments; any invalidity or unenforceability, in whole or
in part, of any term hereof or of the Securities Purchase Agreements, any Notes
or any other Transaction Document; any failure on the part of Borrower or any
other Person for any reason to perform or comply with any term of the Securities
Purchase Agreements, any Note or any other Transaction Document; any furnishing
or acceptance of any additional security or guaranty; any release of any Grantor
or any other Person or any release of any or all security or any or all
guarantees for the Secured Obligations, whether any such release is granted in
connection with a bankruptcy or otherwise; any bankruptcy, insolvency,
reorganization, arrangement, readjustment, composition, liquidation or similar
proceeding with respect to any Grantor or any other Person or their respective
properties or creditors; the application of payments received by the Agent or
any Purchaser from any source that were lawfully used for some other purpose,
which lawfully could have been applied to the payment, in full or in part, of
the Secured Obligations; or any other occurrence whatsoever, whether similar or
dissimilar to the foregoing.  Without limiting the generality of the
foregoing, at any time that the Securities Purchase Agreements or the Notes are
amended to increase the amount of the Obligations thereunder, the amount of the
Secured Obligations shall be accordingly increased.

    

    
      
        
           

        

        
          - 14
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    b.           No Duty To Marshal
Assets.  The Agent shall have no obligation to marshal any
assets in favor of any Grantor or any other Person or against or in payment of
any or all of the Secured Obligations.

    

    c.           Waiver of Right of
Subrogation, Etc.  Each Grantor hereby waives any and all
rights of subrogation, reimbursement, or indemnity whatsoever in respect of such
Grantor arising out of remedies exercised by the Agent hereunder until full and
indefeasible payment of the Secured Obligations.

    

    d.           Other
Waivers.  Each Grantor hereby waives promptness, diligence and
notice of acceptance of this Agreement.  In connection with any sale
or other disposition of Collateral, to the extent permitted by applicable Law,
each Grantor waives any right of redemption or equity of redemption in the
Collateral.  Each Grantor further waives presentment and demand for
payment of any of the Secured Obligations, protest and notice of protest,
dishonor and notice of dishonor or notice of default or any other similar notice
with respect to any of the Secured Obligations, and all other similar notices to
which any Grantor might otherwise be entitled, except as otherwise expressly
provided in the Transaction Documents.  The Agent is under no
obligation to pursue any rights against third parties with respect to the
Secured Obligations and each Grantor hereby waives any right it may have to
require otherwise.  Each Grantor (to the extent that it may lawfully
do so) covenants that it shall not at any time insist upon or plead, or in any
manner claim or take the benefit of, any stay, valuation, appraisal or
redemption now or at any time hereafter in force that, but for this waiver,
might be applicable to any sale made under any judgment, order or decree based
on this Agreement; and each Grantor (to the extent that it may lawfully do so)
hereby expressly waives and relinquishes all benefit of any and all such laws
and hereby covenants that it will not hinder, delay or impede the execution of
any power in this Agreement delegated to the Agent, but that it will suffer and
permit the execution of every such power as though no such law or laws had been
made or enacted.

    

    
      
        
           

        

        
          - 15
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    e.           Each
Grantor further waives to the fullest extent permitted by law any right it may
have under the constitution of the State of New York (or under the constitution
of any other state in which any of the Collateral or any Grantor may be
located), or under the Constitution of the United States of America, to notice
(except for notice specifically required hereby) or to a judicial hearing prior
to the exercise of any right or remedy provided by this Agreement to the Agent,
and waives its rights, if any, to set aside or invalidate any sale duly
consummated in accordance with the foregoing provisions hereof on the grounds
(if such be the case) that the sale was consummated without a prior judicial
hearing.

    

    f.           EACH
GRANTOR’S WAIVERS UNDER THIS SECTION 7 HAVE BEEN MADE VOLUNTARILY, INTELLIGENTLY
AND KNOWINGLY AND AFTER SUCH GRANTOR HAS BEEN APPRISED AND COUNSELED BY ITS
ATTORNEY AS TO THE NATURE THEREOF AND ITS POSSIBLE ALTERNATIVE
RIGHTS.

    

    
      	
               
      

            	
              (c)

            	
              NO IMPLIED
      WAIVERS.  No failure or delay on the part of the Agent in
      exercising any right, power or privilege under this Agreement or the other
      Transaction Documents and no course of dealing between the Grantor, on the
      one hand, and the Agent or the Purchasers, on the other hand, shall
      operate as a waiver of any such right, power or privilege.  No
      single or partial exercise of any right, power or privilege under this
      Agreement or the other Transaction Documents precludes any other or
      further exercise of any such right, power or privilege or the exercise of
      any other right, power or privilege.  The rights and remedies
      expressly provided in this Agreement and the other Transaction Documents
      are cumulative and not exclusive of any rights or remedies which the Agent
      or the Purchasers would otherwise have.  No notice to or demand
      on any Grantor in any case shall entitle the Grantors to any other or
      further notice or demand in similar or other circumstances or shall
      constitute a waiver of the right of the Agent or the Purchasers to take
      any other or further action in any circumstances without notice or
      demand.  Any waiver that is given shall be effective only if in
      writing and only for the limited purposes expressly stated in the
      applicable waiver.

            

    

    

    
      	
               
      

            	
              (d)

            	
              STANDARD OF
      CARE.

            

    

    

    a.           In
General.  No act or omission of the Agent or any Purchaser (or
agent or employee of any of the foregoing) hereunder or related hereto or
related to the transactions contemplated by this Agreement or the other
Transaction Documents shall give rise to any defense, counterclaim or offset in
favor of any Grantor or any claim or action against the Agent or such Purchaser
(or agent or employee thereof), in the absence of gross negligence or willful
misconduct of the Agent or such Purchaser (or agent or employee thereof) as
determined  in a final, nonappealable judgment of a court of competent
jurisdiction.  The Agent shall be deemed to have exercised reasonable
care in the custody and preservation of the Collateral in its possession if the
Collateral is accorded treatment substantially equal to that which the Agent
accords to other Collateral it holds, it being understood that it has no duty to
take any action with respect to calls, conversions, exchanges, maturities,
tenders or other matters relative to any Collateral or to preserve any rights of
any parties and shall only be liable for losses which are a result of it gross
negligence or willful misconduct as determined in a final, nonappealable
judgment of a court of competent jurisdiction.

    

    
      
        
           

        

        
          - 16
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    b.           No Duty to Preserve
Rights.  Without limiting the generality of the foregoing, the
Agent has no duty (either before or after an Event of Default) to collect any
amounts in respect of the Collateral or to preserve any rights relating to the
Collateral.

    

    c.           No Duty to Prepare for
Sale.  Without limiting the generality of the foregoing, the
Agent has no obligation to clean-up or otherwise prepare the Collateral for
sale.

    

    d.           Duties Relative to
Contracts.  Without limiting the generality of the foregoing,
each Grantor shall remain obligated and liable under each contract or agreement
included in the Collateral to be observed or performed by such Grantor
thereunder.  The Agent shall not have any obligation or liability
under any such contract or agreement by reason of or arising out of this
Agreement or the receipt by the Agent of any payment relating to any of the
Collateral, nor shall the Agent be obligated in any manner to perform any of the
obligations of any Grantor under or pursuant to any such contract or agreement,
to make inquiry as to the nature or sufficiency of any payment received by the
Agent in respect of the Collateral or as to the sufficiency of any performance
by any party under any such contract or agreement, to present or file any claim,
to take any action to enforce any performance or to collect the payment of any
amounts which may have been assigned to the Agent or to which the Agent may be
entitled at any time or times.

    

    e.           Reliance on Advice of
Counsel.  In taking any action under this Agreement or any
other Transaction Document, the Agent shall be entitled to rely upon the advice
of counsel of Agent’s choice and shall be fully protected in acting on such
advice whether or not the advice rendered is ultimately determined to have been
accurate.

    

    f.           No Obligation to
Act.  The Agent shall be entitled to act or to refrain from
acting (and shall be fully protected in so acting or refraining from acting)
upon the written instructions of the Required Holders (as defined below) and
such instructions shall be binding upon all the Purchasers; provided, however, that the
Agent shall not be under any obligation to exercise any of the rights or powers
vested in it by this Agreement or any Security Document in the manner so
requested unless, if so requested by the Agent, it shall have been provided
indemnity from the Borrower satisfactory to it against the costs, expenses and
liabilities which may be incurred by it in compliance with or in performing such
request or direction.  No provisions of this Agreement or any Security
Document shall otherwise be construed to require the Agent to expend or risk its
own funds or take any action that could in its judgment cause it to incur any
cost, expenses or liability for which it is not specifically indemnified
hereunder or under the Securities Purchase Agreements.  No provision
of this Agreement or of any Security Document shall be deemed to impose any duty
or obligation on the Agent to perform any act or acts or exercise any right,
power, duty or obligation conferred or imposed on it, in any jurisdiction in
which it shall be illegal, or in which the Agent shall be unqualified or
incompetent, to perform any such act or acts or to exercise any such right,
power, duty or obligation or if such performance or exercise would constitute
doing business by the Agent in such jurisdiction or impose a tax on the Agent by
reason thereof.

    

    
      
        
           

        

        
          - 17
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    g.           Action By
Agent.  Absent written instructions from the Required Holders
at a time when an Event of Default shall have occurred and be continuing, the
Agent shall have no obligation to take any actions under the Security
Documents.

    

    
      	
               
      

            	
              (e)

            	
              MISCELLANEOUS.

            

    

    

    a.           Assignment.  Except
as otherwise provided in the Securities Purchase Agreements, the Agent and each
Purchaser may assign or transfer this Agreement and any or all rights or
obligations hereunder without the consent of any Grantor and without prior
notice.  No Grantor shall assign or transfer this Agreement or any
rights or obligations hereunder without the prior written consent of the Agent
or as expressly provided in the Securities Purchase
Agreements.  Notwithstanding the foregoing, if there should be any
assignment of any rights or obligations by operation of law or in contravention
of the terms of this Agreement or otherwise, then all covenants, agreements,
representations and warranties made herein or pursuant hereto by or on behalf of
any Grantor shall bind the successors and assigns of such Grantor, together with
the preexisting Grantor, whether or not such new or additional Persons execute a
joinder hereto or assumption hereof (without the same being deemed a waiver of
any default caused thereby) which condition shall not be deemed to be a waiver
of any Event of Default arising out of such assignment.  The rights
and privileges of the Agent under this Agreement shall inure to the benefit of
its successors and assigns.

    

    b.           Joint and Several
Liability.  All Grantors shall jointly and severally be liable
for the obligations of each Grantor to the Agent and the Purchasers
hereunder.

    

    c.           Notices.  All
notices, requests, demands, directions and other communications provided for
herein shall be in writing and shall be delivered or mailed in the manner
specified in the Securities Purchase Agreements addressed to a party at its
address set forth in or determined pursuant to the Securities Purchase
Agreements, as the case may be.

    

    d.           Severability.  Every
provision of this Agreement is intended to be severable.  If any term
or provision of this Agreement shall be invalid, illegal or unenforceable for
any reason, the validity, legality and enforceability of the remaining
provisions shall not be affected or impaired thereby. Any invalidity, illegality
or unenforceability in any jurisdiction shall not affect the validity, legality
or enforceability of any such term or provision in any other
jurisdiction.

    

    
      
        
           

        

        
          - 18
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    e.           Costs and
Expenses.  Without limiting any other cost reimbursement
provisions in the Transaction Documents, upon demand, the Grantors shall pay to
the Agent and the Purchasers, as applicable, the amount of any and all
reasonable expenses incurred by the Agent and the Purchasers hereunder or in
connection herewith, including, without limitation, reasonable fees of counsel
to the Agent and the Purchasers and those other expenses that may be incurred in
connection with (i) the execution and delivery of this Agreement and any
amendments, waivers and supplements hereto, (ii) the administration of this
Agreement, (iii) the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral, (iv) the exercise or
enforcement of any of the rights of the Agent or the Purchasers hereunder or (v)
the failure of any Grantor to perform or observe any of the provisions
hereof.

    

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

    

    g.           Counterparts;
Integration.  This Agreement may be executed in counterparts
(and by different parties hereto in different counterparts), each of which shall
constitute an original, but all of which when taken together shall constitute a
single contract.  This Agreement and the other Transaction Documents
constitute the entire contract among the parties relating to the subject matter
hereof and supersede any and all previous agreements and understandings, oral or
written, relating to the subject matter hereof.  Delivery of an
executed counterpart of a signature page of this Agreement by telecopy shall be
effective as delivery of a manually executed counterpart of this
Agreement.

    

    h.           Amendments and
Waivers.  Subject to the terms of the Payment Priority and
Voting Agreement (as defined below), including without limitation Section 3
thereof, the Purchasers holding seventy-five percent (75%) of the total
outstanding principal balance of the Notes (the “Required Holders”) shall have
the right to direct the Agent, from time to time, to consent to any amendment,
modification or supplement to or waiver of any provision of this Agreement and
to release any Collateral from any lien or security interest held by the Agent;
provided, however, that (i) no such
direction shall require the Agent to consent to the modification of any
provision or portion thereof which (in the sole judgment of the Agent) is
intended to benefit the Agent, (ii) the Agent shall have the right to decline to
follow any such direction if the Agent shall determine in good faith that the
directed action is not permitted by the terms of this Agreement or may not
lawfully be taken and (iii) no such direction shall waive or modify any
provision of this Agreement the waiver or modification of which requires the
consent of all Purchasers unless all Purchasers consent thereto.  The
Agent may rely on any such direction given to it by the Required Holders and
shall be fully protected in relying thereon, and shall under no circumstances be
liable, except in circumstances involving the Agent's gross negligence or
willful misconduct as shall have been determined in a final nonappealable
judgment of a court of competent jurisdiction, to any holder of the Notes or any
other person or entity for taking or refraining from taking action in accordance
with any direction or otherwise in accordance with this Agreement.

    

    
      
        
           

        

        
          - 19
-

          
            

          

        

        
           

        

      

    

    

    i.           Headings.  Headings
to this Agreement are for purposes of reference only and shall not limit or
otherwise affect the meaning hereof

    

    (j)           The
parties hereto hereby acknowledge and agree that this Agreement shall amend,
restate, modify, extend, renew and continue the terms and provisions contained
in the Existing Security Agreement and shall not extinguish or release any
Grantor from any liability under the Existing Security Agreement or otherwise
constitute a novation of its obligations thereunder.

    

    (l)    The rights
and remedies of the holders of the Existing Notes (the “Existing Note Holders”) under
the Existing Security Agreement and the holders of the Bridge Notes (the “Bridge Note Holders”) under
this Agreement will be subject to the terms, conditions and provisions of the
Payment Priority and Voting Agreement dated the date hereof, entered into by the
Existing Note Holders, the Bridge Note Holders, the Agent and the Grantors (as
the same may be amended, restated, modified, supplemented and/or replaced from
time to time, the “Payment
Priority and Voting Agreement”).  Notwithstanding
anything to the contrary in this Agreement, the security interest granted to the
Agent, pursuant to this Agreement and the exercise of any right or remedy by the
Agent hereunder are subject to the provisions of the Payment Priority and Voting
Agreement.  In the event of any conflict or inconsistency between the
provisions of the Payment Priority and Voting Agreement and this Agreement, the
provisions of the Payment Priority and Voting Agreement shall
control.

    

    
      	
               
      

            	
              (f)

            	
              SPECIFIC
      PERFORMANCE.  Each Grantor hereby authorizes the Agent to
      demand specific performance of this Agreement at any time when any Grantor
      shall have failed to comply with any provision hereof, and each Grantor
      hereby irrevocably waives any defense based on the adequacy of a remedy at
      law which might be asserted as a bar to the remedy of specific performance
      hereof in any action brought therefor.  Each Grantor that is not
      a party to the Securities Purchase Agreements hereby acknowledges receipt
      from the Borrower of a correct and complete copy of the Securities
      Purchase Agreement sand consents to all of the provisions of the
      Securities Purchase Agreements as in effect on the date hereof and agrees
      that its consent is not required for any amendments, modifications,
      restatements or waivers of it or any of the provisions
      thereof.

            

    

    

    
      	
               
      

            	
              (g)

            	
              RELATIONSHIP WITH
      SECURITIES PURCHASE AGREEMENTS.  To the extent that any
      of the terms hereof is inconsistent with any provision of the Securities
      Purchase Agreements, the provisions of the Securities Purchase Agreements
      shall control.

            

    

    

    
      	
               
      

            	
              (h)

            	
              TERMINATION; PARTIAL
      RELEASE.

            

    

    

    a.           At
such time as all the Secured Obligations in respect of the Notes have been
indefeasibly paid and performed in full (including the conversion in full of the
Notes) then the security provided for herein shall terminate, provided, however,
that all indemnities of the Borrower and each other Grantor contained in this
Agreement or any other Transaction Document shall survive and remain operative
and in full force and effect regardless of the termination of this
Agreement.

    

    
      
        
           

        

        
          - 20
-

          
            

          

        

        
           

        

      

    

    

    b.           Effective
upon the closing of a disposition of any Collateral in conformity with the
provisions of the Securities Purchase Agreements and the Notes, and receipt by
the Agent of a certification to such effect from an authorized officer of the
Borrower, the security interest in the Collateral so disposed of shall terminate
and the Agent shall deliver such releases as may be appropriate, provided, however,
the security interest in all remaining Collateral shall remain in full force and
effect.

    

    
      	
               
      

            	
              (i)

            	
              GOVERNING LAW;
      JURISDICTION; WAIVER OF JURY
TRIAL.

            

    

    

    a.           Governing
Law.  This Agreement and the rights and obligations of the
parties hereunder shall be construed and interpreted in accordance with the laws
of the State of New York (excluding the laws applicable to conflicts or choice
of law).

    

    b.           Submission to
Jurisdiction.  Each Grantor irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of the
courts of the State of New York sitting in New York County and of the United
States District Court of the Southern District of New York, and any appellate
court from any thereof, in any action or proceeding arising out of or relating
to this Agreement or any other Transaction Document, or for recognition or
enforcement of any judgment, and each of the parties hereto irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York state court or, to the
fullest extent permitted by applicable law, in such federal
court.  Each of the parties hereto agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law.  Nothing in this Agreement or in any other Transaction Document
shall affect any right that the Agent or any Purchaser may otherwise have to
bring any action or proceeding relating to this Agreement or any other
Transaction Document against any Grantor or its properties in the courts of any
jurisdiction.

    

    c.           Waiver of
Venue.  Each Grantor irrevocably and unconditionally waives, to
the fullest extent permitted by applicable law, any objection that it may now or
hereafter have to the laying of venue of any action or proceeding arising out of
or relating to this Agreement or any other Transaction Document in any court
referred to in paragraph (b) above.  Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.  Each Grantor irrevocably waives, to the fullest
extent permitted by applicable law, any right to bring any action or proceeding
against the Agent in any court outside the county of New York, New
York.

    

    d.           Service of
Process.  Each party hereto irrevocably consents to service of
process in the manner provided for notices in Section 10.  Nothing in
this Agreement will affect the right of any party hereto to serve process in any
other manner permitted by applicable law.

    

    e.           Waiver of Jury
Trial.  EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY).  EACH PARTY HERETO (I) CERTIFIES THAT NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE
THE FOREGOING WAIVER AND (II) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES
HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER TRANSACTION
DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION.

    

    
      
        
           

        

        
          - 21
-

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in
the name and on behalf of the parties hereto as of the date first above
written.

    

    
      	 
      	
              NESTOR,
      INC.

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      
	 
      	
              Title:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              NESTOR
      TRAFFIC SYSTEMS, INC.

            	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      
	 
      	
              Title:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              CROSSINGGUARD,
      INC.

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      
	 
      	
              Title:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              NESTOR
      INTERACTIVE, INC.

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      
	 
      	
              Title:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              U.S.
      BANK NATIONAL ASSOCIATION

            	 
      
	 
      	
               in
      its capacity as Agent

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      
	 
      	
              Title:

            

    

    

    

    

    Signature
Page to Amended and Restated Security Agreement]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Annex A

    

    
      FORM OF ADDITIONAL GRANTOR
JOINDER

    

    

    Amended and Restated
Security Agreement dated as of ______, 2008 made by

    Nestor,
Inc.

    and its subsidiaries party
thereto from time to time, as Grantors

    to and in favor
of

    U.S. Bank National
Association, as Collateral Agent (the “Security Agreement”)

    

    Reference
is made to the Security Agreement as defined above; capitalized terms used
herein and not otherwise defined herein shall have the meanings given to such
terms in, or by reference in, the Security Agreement.

    

    The
undersigned hereby agrees that upon delivery of this Additional Grantor Joinder
to the Agent referred to above or its successor, the undersigned shall (a) be an
Additional Grantor under the Security Agreement, (b) have all the rights and
obligations of the Grantors under the Security Agreement as fully and to the
same extent as if the undersigned was an original signatory thereto and (c) be
deemed to have made the representations and warranties set forth in Section 4
therein as of the date of execution and delivery of this Additional Grantor
Joinder and at any future dates that such representations must be restated
pursuant to the terms of the Transaction Documents.  WITHOUT LIMITING
THE GENERALITY OF THE FOREGOING, THE UNDERSIGNED SPECIFICALLY GRANTS TO THE
AGENT, FOR THE BENEFIT OF THE PURCHASERS, A SECURITY INTEREST IN THE COLLATERAL
AS MORE FULLY SET FORTH IN THE SECURITY AGREEMENT AND ACKNOWLEDGES AND AGREES TO
THE WAIVER OF JURY TRIAL PROVISIONS SET FORTH THEREIN.

    

    Attached
hereto are supplemental and/or replacement Schedules to the Security Agreement,
as applicable.

    

    Each
Additional Grantor that is not a party to the Securities Purchase Agreements
hereby acknowledges receipt from the Grantor of a correct and complete copy of
the Securities Purchase Agreement and consents to all of the provisions of the
Securities Purchase Agreements as in effect on the date hereof and agrees that
its consent is not required for any amendments, modifications, restatements or
waivers of it or any of the provisions thereof.

    

    An
executed copy of this Joinder shall be delivered to the Agent, and the Agent and
the Purchasers may rely on the matters set forth herein on or after the date
hereof.  This Joinder shall not be modified, amended or terminated
without the prior written consent of the Agent.

    

    
      
        
           

        

        
          - 2
-

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, the undersigned has caused this Joinder to be executed in the
name and on behalf of the undersigned.

    

    
      	 
      	 
      	
              [Name
      of Additional Grantor]

            	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      
	 
      	 
      	
              Address:

            	 
      
	 
      	 
      	 
      	 
      	 
      
	
              Dated:

            	 
      	 
      	 
      	 
      

    

    

    
      
        
           

        

        
          - 3
-

          
            

          

        

        
           

        

      

    

    

    
      Annex
B

    

    

    
      FORM OF POWER OF
ATTORNEY

    

    

    This
Power of Attorney is executed and delivered by ___________________, a
______________________ (“Grantor”), to U.S.
Bank National Association as Agent for itself and Purchasers as such term is
defined in the Amended and Restated Security Agreement referred to below (“Attorney”).  This
Power of Attorney is delivered in connection with and pursuant to a certain
Security Agreement dated as of even date herewith (as the same may be amended,
modified, restated and/or supplemented from time to time, the “Security
Agreement”).  Capitalized terms used but not otherwise defined
herein shall have the meanings assigned to such terms in the Security
Agreement.  No person to whom this Power of Attorney is presented, as
authority for Attorney to take any action or actions contemplated hereby, shall
be required to inquire into or seek confirmation from Grantor as to the
authority of Attorney to take any action described below, or as to the existence
of or fulfillment of any condition to this Power of Attorney, which is intended
to grant to Attorney unconditionally the authority to take and perform the
actions contemplated herein, and Grantor irrevocably waives any right to
commence any suit or action, in law or equity, against any person or entity
which acts in reliance upon or acknowledges the authority granted under this
Power of Attorney.  The power of attorney granted hereby is coupled
with an interest, and may not be revoked or canceled by Grantor without
Attorney’s written consent.

    

    Grantor
hereby irrevocably constitutes and appoints Attorney (and all officers,
employees or agents designated by Attorney), with full power of substitution, as
Grantor’s true and lawful attorney-in-fact with full irrevocable power and
authority in the place and stead of Grantor and in the name of Grantor or in its
own name, from time to time in Attorney’s discretion, to take any and all
appropriate action and to execute and deliver any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
the Securities Purchase Agreement (as defined in the Security Agreement), the
Security Agreement and any and all agreements, documents and instruments
executed, delivered or filed in connection therewith from time to time
(collectively, the “Transaction
Documents”) and, without limiting the generality of the foregoing,
Grantor hereby grants to Attorney the power and right, on behalf of Grantor,
without notice to or assent by Grantor, and at any time, to do the
following:

    

    change
the mailing address of Grantor, open a post office box on behalf of Grantor,
open mail for Grantor, and ask, demand, collect, give acquittances and receipts
for, take possession of, endorse any invoices, freight or express bills, bills
of lading, storage or warehouse receipts, drafts against debtors, assignments,
verifications, and notices in connection with any property of
Grantor;

    

    receive,
endorse Grantor’s name on, and collect, any checks, notes, acceptances, money
orders, drafts and any other forms of payment or security payable to Grantor,
and hold all amounts or proceeds so received or collected as cash collateral in
a restricted account for the benefit of the Purchasers, or apply such amounts or
proceeds to the Secured Obligations in accordance with the terms of the
Securities Purchase Agreements;

    

    effect
any repairs to any asset of Grantor, or continue or obtain any insurance and pay
all or any part of the premiums therefor and costs thereof, and make, settle and
adjust all claims under such policies of insurance, and make all determinations
and decisions with respect to such policies;

    

    pay or
discharge any taxes, liens, security interests, or other encumbrances levied or
placed on or threatened against Grantor or its property;

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    defend
any suit, action or proceeding brought against Grantor if Grantor does not
defend such suit, action or proceeding or if Attorney believes that Grantor is
not pursuing such defense in a manner that will maximize the recovery to
Attorney, and settle, compromise or adjust any suit, action, or proceeding
described above and, in connection therewith, give such discharges or releases
as Attorney may deem appropriate;

    

    file or
prosecute any claim, litigation, suit or proceeding in any court of competent
jurisdiction or before any arbitrator, or take any other action otherwise deemed
appropriate by Attorney for the purpose of collecting any and all such moneys
due to Grantor whenever payable and to enforce any other right in respect of
Grantor’s property;

    

    cause the
certified public accountants then engaged by Grantor to prepare and deliver to
Attorney at any time and from time to time, promptly upon Attorney’s request,
the following reports:  (i) a reconciliation of all accounts, (ii) an
aging of all accounts, (iii) trial balances, (iv) test verifications of such
accounts as Attorney may request, and (v) the results of each physical
verification of inventory;

    

    communicate
in its own name with any party to any contract with regard to the assignment of
the right, title and interest of Grantor in and under the contracts and other
matters relating thereto;

    

    to the
extent that Grantor’s authorization given in the Security Agreement is not
sufficient, to file such financing statements with respect to the Security
Agreement as Attorney may deem appropriate and to execute in Grantor’s name such
financing statements and amendments thereto and continuation statements which
may require the Grantor’s signature;

    

    to
transfer any Intellectual Property or provide licenses respecting any
Intellectual Property; and

    

    execute,
deliver and/or record, as applicable, in connection with any sale or other
remedy provided for in any Transaction Document, any endorsements, assignments
or other applications for or instruments of conveyance or transfer with respect
to the Collateral and to otherwise direct such sale or resale, all as though
Attorney were the absolute owner of the property of Grantor for all purposes,
and to do, at Attorney’s option and Grantor’s expense, at any time or from time
to time, all acts and other things that Attorney reasonably deems necessary to
perfect, preserve, or realize upon Grantor’s property or assets and Attorney’s
liens thereon, all as fully and effectively as Grantor might
do.  Grantor hereby ratifies, to the extent permitted by law, all that
Attorney shall lawfully do or cause to be done by virtue
hereof.  Without limiting the generality of the foregoing, Attorney is
specifically authorized to execute and file any applications for or instruments
of transfer and assignment of any patents, trademarks, copyrights or other
Intellectual Property with the United States Patent and Trademark Office and the
United States Copyright Office.

    

    
      
        
           

        

        
          - 2
-

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, this Power of Attorney is duly executed on behalf of Grantor
this ____ day of ____________, 20___.

    

    
      	 
      	
              [_______________________________]

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      

    

    

    

    

    NOTARY PUBLIC
CERTIFICATE

    

    On this
_____ day of ____________, 20___, [officer’s name] who is personally known to me
appeared before me in his/her capacity as the [title] of [name of Grantor]
(“Grantor”) and
executed on behalf of Grantor the Power of Attorney in favor of _______________,
as Agent, to which this Certificate is attached.

    

    
      	 
      	 
      
	 
      	
              Notary
      Public

            

    

    

    
      
        
           

        

        
          - 3
-

          
            

          

        

        
           

        

      

    

    

    Schedule
1

    

    
      LOCATIONS
OF COLLATERAL

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
2

    

    
      LOCATIONS
OF GRANTORS

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
3

    

    
      NAMES
USED BY GRANTORS

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
4

    

    
      FILING
OFFICES

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
5

    

    PATENTS
AND PATENT APPLICATIONS

    

    

    
      	
              Grantor

            	
              Inventor(s)

            	
              Title

            	
              Patent
      or Application Number

            	
              Patent
      Date or Filing Date

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
6

    

    TRADEMARKS
AND TRADEMARK APPLICATIONS

    

    

    
      	
              Grantor

            	
              Mark
      or Application

            	
              Registration
      Number or Serial Number

            	
              Date
      of Registration

              or
      Application

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
7

    

    REGISTERED
COPYRIGHTS

    

    

    
      	
              Grantor

            	
              Copyrighted
      Work

            	
              Author(s)

            	
              Title

            	
              Registration
      Number

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
8

    

    DOMAIN
NAMES

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
9

    

    INTELLECTUAL
PROPERTY LICENSES

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
10

    

    COMMERCIAL
TORT CLAIMS

    

    

    
      	
              Plaintiff

            	
              Defendant

            	
              Description
      of the Claim

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    SCHEDULE
A

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
C

    

    FORM OF

    AMENDED AND RESTATED
GUARANTY AND SURETYSHIP AGREEMENT

    

    THIS
AMENDED AND RESTATED GUARANTY AND SURETYSHIP AGREEMENT (this “Agreement”)
made as of the ___ day of October, 2008, by and among Nestor, Inc., a Delaware
corporation (together with its successors and permitted assigns, the “Borrower”)
and the subsidiaries of the Borrower designated as “Guarantors” on the signature
lines hereto (together with their successors and permitted assigns and any other
person or entity that becomes a Guarantor hereunder pursuant to Section 5 below,
jointly and severally, the “Guarantors”
or, individually, a “Guarantor”),
in favor of U.S. Bank National Association, as collateral agent for the
Purchasers (as that term is defined below) (together with its successors and
assigns in such capacity, the “Agent”).

    

    Background

    

    The
Agent, the Borrower and each party listed as a “Purchaser” on the execution
pages thereto (collectively, the “Existing
Purchasers”) entered into a certain Securities Purchase Agreement, dated
as of May 24, 2006 (as the same may be amended, restated, modified and/or
supplemented from time to time, the “Existing
Securities Purchase Agreement”; terms used but not otherwise defined
herein shall have the meanings assigned to such terms in the Securities Purchase
Agreements (as referred to below); provided however, that in the event of a
conflict, the respective definition in the Existing Securities Purchase
Agreement shall apply.).  Nestor Traffic Systems, Inc. is a Subsidiary
of the Borrower; CrossingGuard, Inc. is a Subsidiary of Nestor Traffic Systems,
Inc; Nestor Interactive Inc. is a Subsidiary of the
Borrower.  Pursuant to the Existing Securities Purchase Agreement, the
Existing Purchasers agreed to purchase from the Borrower the “Notes” (as defined
therein) (as such Notes may be amended, restated, modified, supplemented and/or
replaced from time to time in accordance with the terms thereof, collectively,
the “Existing
Notes”).

    

    The
Agent, the Borrower and each party listed as a “Purchaser” on the execution
pages thereto (collectively, the “Additional
Purchasers” and together with the Existing Purchasers, each a “Purchaser”
and collectively, the “Purchasers”) are entering into an additional Securities
Purchase Agreement, dated as of the date hereof (as the same may be amended,
restated, modified, supplemented and/or replaced from time to time, the “Additional Securities
Purchase Agreement” and together with the Existing Securities Purchase
Agreement, the “Securities
Purchase Agreements”).  Nestor Traffic
Systems, Inc. is a Subsidiary of the Borrower; CrossingGuard, Inc. is a
Subsidiary of Nestor Traffic Systems, Inc.; Nestor Interactive Inc. is a
Subsidiary of the Borrower.  Pursuant to the Additional Securities
Purchase Agreement, the Borrower shall agree to sell, and the Additional
Purchasers shall agree to purchase certain additional “Notes” (as defined
therein) (as such Notes may be amended, restated, modified, supplemented and/or
replaced from time to time in accordance with the terms thereof, collectively,
the “Bridge
Notes” and together with the Existing Notes, each a “Note” and
collectively, the “Notes”).

    

    The
Borrower may, among other things, use the proceeds of the issuance of the Notes
to extend credit to, and make capital contributions in, the
Guarantors.  Therefore, as a result of the Securities Purchase
Agreements, the Guarantors can obtain capital on terms more favorable to them as
part of this borrowing group than they could acting alone.  One of the
conditions to the extension of credit under the Securities Purchase Agreements
is that the Guarantors guaranty payment of and act as surety for the obligations
of the Borrower arising out of the Securities Purchase Agreements and related
agreements and instruments.

    

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

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    1.     
       Guaranty
and Suretyship.

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    
      
        
           

        

        
          - 2
-

          
            

          

        

        
           

        

      

    

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    2.             Expenses.

    

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

    

    
      
        
           

        

        
          - 3
-

          
            

          

        

        
           

        

      

    

    

    3.             Representations
and Warranties.

    

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

    

    4.       
     Covenants.

    

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

    

    5.        
    Additional
Parties.

    

    Except as
otherwise provided in the Transaction Documents, the Guarantors shall at all
times constitute all of the direct and indirect Subsidiaries of Borrower,
provided that for purposes of this Agreement “Subsidiary” shall mean and include
only a Subsidiary organized under the laws of the United States of America, any
State thereof or the District of Columbia.  If any Person becomes such
a Subsidiary after the date hereof, such Person shall become a Guarantor
hereunder, and the Borrower shall cause such Person to signify its acceptance of
the terms hereof by execution and delivery to the Agent of one or more
counterparts of the Joinder hereto, appropriately dated.

    

    6.      
      Right of
Set-off.

    

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

    

    7.       
     Termination
of Guaranty.

    

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

    

    
      
        
           

        

        
          - 4
-

          
            

          

        

        
           

        

      

    

    

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

    

    8.       
     Miscellaneous.

    

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

    

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

    

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

    

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

    

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

    

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

    

    
      
        
           

        

        
          - 5
-

          
            

          

        

        
           

        

      

    

    

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

    

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

    

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

    

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

    

    9.             Indemnification.

    

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

    

    
      
        
           

        

        
          - 6
-

          
            

          

        

        
           

        

      

    

    

    10.           Jurisdiction;
Waiver of Jury Trial.

    

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

    

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

    

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

    

    
      
        
           

        

        
          - 7
-

          
            

          

        

        
           

        

      

    

    

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

    

    Borrower:

    

    
      	 
      	
              NESTOR,
      INC.

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	By:	
               

            	 
      	 
      	 
      
	 
      	 
      	
              Name:

            	 
      	 
      
	 
      	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	
              Address:

            	
              42
      Oriental Street

            	 
      
	 
      	 
      	 
      	
              Providence,
      RI  02908

            	 
      
	 
      	 
      	
              Phone
      No.:

            	
              401-274-5658x738

            	 
      
	 
      	 
      	
              Fax
      No.:

            	
              401-274-5707

            	 
      
	 
      	 
      	
              Attention:

            	
              Brian
      R. Haskell Esq.

            	 
      

    

    

    Guarantors:

    

    
      	 
      	
              NESTOR
      TRAFFIC SYSTEMS, INC.

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	By:	
               

            	 
      	 
      	 
      
	 
      	 
      	
              Name:

            	 
      	 
      
	 
      	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	
              Address:

            	
              42
      Oriental Street

            	 
      
	 
      	 
      	 
      	
              Providence,
      RI  02908

            	 
      
	 
      	 
      	
              Phone
      No.:

            	
              401-274-5658x738

            	 
      
	 
      	 
      	
              Fax
      No.:

            	
              401-274-5707

            	 
      
	 
      	 
      	
              Attention:

            	
              Brian
      R. Haskell, Esq.

            	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              CROSSINGGUARD,
      INC.

            
	 
      	 
      	 
      	 
      	 
      
	 
      	By:	
               

            	 
      	 
      	 
      
	 
      	 
      	
              Name:

            	 
      	 
      
	 
      	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	
              Address:

            	
              42
      Oriental Street

            	 
      
	 
      	 
      	 
      	
              Providence,
      RI  02908

            	 
      
	 
      	 
      	
              Phone
      No.:

            	
              401-274-5658x738

            	 
      
	 
      	 
      	
              Fax
      No.:

            	
              401-274-5707

            	 
      
	 
      	 
      	
              Attention:

            	
              Brian
      R. Haskell, Esq.

            	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              NESTOR
      INTERACTIVE INC.

            
	 
      	 
      	 
      	 
      	 
      
	 
      	By:	
               

            	 
      	 
      	 
      
	 
      	 
      	
              Name:

            	 
      	 
      
	 
      	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	
              Address:

            	
              42
      Oriental Street

            	 
      
	 
      	 
      	 
      	
              Providence,
      RI  02908

            	 
      
	 
      	 
      	
              Phone
      No.:

            	
              401-274-5658x738

            	 
      
	 
      	 
      	
              Fax
      No.:

            	
              401-274-5707

            	 
      
	 
      	
               

            	
              
                Attention:

              

            	Brian
      R. Haskell, Esq.	 
      

    

    

    [Signature
Page to Amended and Restated Guaranty and Suretyship Agreement]

    

    
      
        
           

        

        
          - 9
-

          
            

          

        

        
           

        

      

    

    

    Agent:

    

    
      	 
      	
              U.S.
      BANK NATIONAL ASSOCIATION

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	By:	
               

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	
              U.S.
      Bank National Association

            	 
      
	 
      	 
      	
              Corporate
      Trust Services

            	 
      
	 
      	 
      	
              225
      Asylum Street, 23rd
      Floor

            	 
      
	 
      	 
      	
              Hartford,
      CT 06103

            	 
      
	 
      	 
      	
              Telephone:
      (860) 241-6859

            	 
      
	 
      	 
      	
              Facsimile:
      (860) 241-6881

            	 
      
	 
      	 
      	
              Attention:
      Arthur Blakeslee

            	 
      

    

    

    

    

    [Signature
Page to Amended and Restated Guaranty and Suretyship Agreement]

    

    
      
        
           

        

        
          - 10
-

          
            

          

        

        
           

        

      

    

    

    JOINDER

    

    

    The
undersigned acknowledges that it is a Guarantor under the Amended and Restated
Guaranty and Suretyship Agreement, dated [______], 2008 made by and among
Nestor, Inc. (the “Borrower”) and the subsidiaries of the Borrower designated as
“Guarantors” on the signature lines thereto in favor of [_____________] as
collateral agent for the Purchasers (as defined in the Securities Purchase
Agreements referred to therein), and hereby agrees to be bound by the foregoing
Amended and Restated Guaranty and Suretyship Agreement and to perform the
covenants applicable to Guarantors contained or incorporated therein, and hereby
confirms the accuracy of the representations and warranties made or incorporated
therein insofar as such representation and warranties purportedly relate to the
undersigned.

    

    

    
      	 
      	
              [_________________________________]

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	By:	
               

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      
	 
      	 
      	
              Address:

            	 
      
	 
      	 
      	
              Phone
      No.:

            	 
      
	 
      	 
      	
              Fax
      No.:

            	 
      
	 
      	 
      	
              Attention:

            	 
      

    

    

    
      
        
           

        

        
          - 11
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    EXHIBIT
D

    

    
      FORM
OF

    

    
      AMENDED AND RESTATED
BORROWER/SUBSIDIARY PLEDGE AGREEMENT

    

    

    THIS
AMENDED AND RESTATED BORROWER/SUBSIDIARY PLEDGE AGREEMENT (this “Agreement”) is made
as of the ____ day of October, 2008, by and between Nestor, Inc., a Delaware
corporation (the “Borrower”), Nestor
Traffic Systems, Inc., a Delaware corporation (“NTS”), CrossingGuard,
Inc., a Delaware corporation (“CGI”), and Nestor
Interactive Inc., a Delaware corporation (“NII”) and U.S. Bank
National Association, as collateral agent for the Purchasers (as that term is
defined below) (together with its successors and assigns in such capacity, the
“Agent”).  NTS,
CGI, NII and the Borrower are each referred to herein individually as a
“Pledgor” and collectively as the “Pledgors.”

    

    Background

    

    On May
24, 2006, each party listed as a “Purchaser” on the execution pages thereto
(collectively, the “Existing Purchasers”)
and the Agent entered into a Securities Purchase Agreement (as amended,
extended, supplemented, restated, or otherwise modified from time to time, the
“Existing Securities
Purchase Agreement”) with the Borrower, pursuant to which the Existing
Purchasers agreed to purchase certain Notes (as defined therein) (the “Existing Notes”) from
the Borrower on the terms and conditions described therein.

    

    On
October ___ 2008, each party listed as a “Purchaser” on the execution pages
thereto (collectively, the “Additional
Purchasers” and together with the Existing Purchasers, each a “Purchaser”
and collectively, the “Purchasers”) and the Agent entered into a Securities
Purchase Agreement (as amended, extended, supplemented, restated, or otherwise
modified from time to time, the “Additional Securities
Purchase Agreement” and together with the Existing Securities Purchase
Agreement, the “Securities Purchase
Agreements”) with the Borrower, pursuant to which the Additional
Purchasers agreed to certain additional Notes (as defined therein) (the “Bridge Notes”) from
the Borrower on the terms and conditions described therein.

    

    Contemporaneously
with the consummation of the transactions contemplated by the Existing
Securities Purchase Agreement, the Existing Purchasers entered into a
Borrower/Subsidiary Pledge Agreement, dated as of May 24, 2006 (the “Existing Borrower/Subsidiary
Pledge Agreement”) by and between the Borrower, NTS, CGI, NII and the
Agent.

    

    One of
the prerequisites to the Additional Purchasers entering into the Additional
Securities Purchase Agreement is that the Pledgors shall amend and restate the
Existing Borrower/Subsidiary Pledge Agreement and shall have granted to the
Agent for the benefit of the Purchasers a security interest in the Collateral
(as defined below) to secure its obligations under the Additional Securities
Purchase Agreement, the Bridge Notes and certain related documents and
agreements as more fully set forth below.

    

    NOW,
THEREFORE, the parties hereto, intending to be legally bound hereby, and in
consideration of the mutual covenants herein contained and other good and
valuable consideration receipt of which is hereby acknowledged, agree as
follows:

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    1.           
  DEFINITIONS.

    

    Capitalized
terms used but not otherwise defined herein shall have the meanings assigned to
such terms in, or by reference in, the Securities Purchase Agreements (provided
however, that in the event of a conflict, the respective definition in the
Existing Securities Purchase Agreement shall apply) or the Uniform Commercial
Code, as applicable.  The following terms shall have the following
meanings:

    

    “Collateral” shall
mean:

    

    (a)         
  all Investment Property, Securities Entitlements and General
Intangibles respecting ownership and/or other equity interests in each
Subsidiary of a Pledgor, but in any event shall include, include, without
limitation, the shares of capital stock and other securities of, or issued by,
any of the entities listed on Schedule I hereto (as
the same may be modified from time to time pursuant to the terms hereof), and
any other shares of capital stock of and/or other equity interests of any
Subsidiary of a Pledgor obtained in the future by a Pledgor or in which a
Pledgor shall have any rights, and, in each case, all certificates representing
such shares and/or equity interests and, in each case, all rights, options,
warrants, stock, other securities and/or equity interests that may hereafter be
received, receivable or distributed in respect of, or exchanged for, any of the
foregoing (all of the foregoing being referred to herein as the “Pledged Securities”)
and all rights of a Pledgor to receive monies due and to become due pursuant
thereto and all other rights related to the Pledged Securities (all the
foregoing being referred to herein as “Pledged
Interests”);

    

    (b)     
      all rights under the Organizational
Documents of any Subsidiary of a Pledgor and all other agreements related to the
Pledged Securities, as such documents and agreements may be amended, modified,
supplemented and/or restated from time to time, and all rights of the Pledgors
to receive monies due and to become due pursuant thereto;

    

    (c)      
     all other property which may be delivered to and
held by the Agent pursuant to the terms hereof of any character whatsoever into
which any of the foregoing may be converted or which may be substituted for any
of the foregoing; and

    

    (d)        
   all Proceeds of the Pledged Securities and Pledged Interests
and of such other property, including, without limitation, all dividends,
interest, cash, notes, securities, equity interests or other property at any
time and from time to time acquired, receivable or otherwise distributed in
respect of, or in exchange for, any of or all such Pledged Securities, Pledged
Interests or other property.

    

    “Controlled Foreign
Corporation” shall mean “controlled foreign corporation” as defined in
the Internal Revenue Code.

    

    “Event of Default” has
the meaning given to such term in the Notes.

    

    “Law” shall mean all
common law and all applicable provisions of constitutions, laws, statutes,
ordinances, rules, treaties, regulations, permits, licenses, approvals,
interpretations and order of courts or governmental authorities and all orders
and decrees of all courts and arbitrators.

    

    “Necessary
Endorsement” shall mean undated stock powers endorsed in blank or other
proper instruments of assignment duly executed and such other instruments or
documents as the Agent may reasonably request.

    

    
      
        
           

        

        
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    “Organizational
Documents” shall mean, with respect to any Person other than a natural
person, the documents by which such Person was organized (such as a certificate
of incorporation, certificate of limited partnership or articles of
organization, and including, without limitation, any certificates of designation
for preferred stock or other forms of preferred equity) and which relate to the
internal governance of such Person (such as bylaws, a partnership agreement or
an operating, limited liability or members agreement).

    

    “Proceeds” shall be
used herein as defined in the Uniform Commercial Code but, in any event, shall
include, but not be limited to, (a) any and all proceeds of any insurance
(whether or not the Agent is named as the loss payee thereof), indemnity,
warranty or guaranty payable to a Pledgor or the Agent from time to time with
respect to any of the Collateral, (b) any and all payments (in any form
whatsoever, cash and non-cash) made or due and payable to a Pledgor from time to
time in connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any governmental authority
(or any person acting under color of governmental authority), (c) any and all
amounts received when Collateral is sold, leased, licensed, exchanged, collected
or disposed of, (d) any rights arising out of Collateral, (e) any dividends or
other distributions associated with the Collateral, and (f) any and all other
amounts from time to time paid or payable under or in connection with any of the
Collateral.

    

    “Secured Obligations”
shall mean, collectively, the following obligations of the Grantors, whether now
existing or hereafter incurred:

    

    f.         
  (i) the payment by the Borrower, as and when due and payable (by
scheduled maturity, required prepayment, acceleration, demand or otherwise), of
all amounts from time to time owing by it in respect of the Securities Purchase
Agreements, the Notes, and the other Transaction Documents, including, without
limitation, (A) all principal of and interest on the Notes (including, without
limitation, all interest that accrues after the commencement of any bankruptcy,
reorganization or similar proceeding (an “Insolvency
Proceeding”) involving any Grantor, whether or not the payment of such
interest is unenforceable or is not allowable due to the existence of such
Insolvency Proceeding), and (B) all fees, commissions, expense reimbursements,
indemnifications and all other amounts due or to become due under the Securities
Purchase Agreements or any of the Transaction Documents; and

    

    g.           the
due performance and observance by each Grantor of all of its other obligations
from time to time existing in respect of any of the Transaction Documents,
including without limitation, with respect to any conversion or redemption
rights of the Purchasers under the Notes, for so long as they are
outstanding.

    

    “Uniform Commercial
Code” shall mean the Uniform Commercial Code in effect on the date hereof
and as amended from time to time, and as enacted in the State of New York or in
any state or states which, pursuant to the Uniform Commercial Code as enacted in
the State of New York, has jurisdiction with respect to all, or any portion of,
the Collateral or this Agreement, from time to time.  It is the intent
of the parties that the definitions set forth above should be construed in their
broadest sense so that Collateral will be construed in its broadest
sense.  Accordingly if there are, from time to time, proposed changes
to defined terms in the Uniform Commercial Code that broaden the definitions,
they are incorporated herein and if existing definitions in the Uniform
Commercial Code are broader than the amended definitions, the existing ones
shall be controlling.  Similarly, the term “but in any event shall
include” shall be construed to mean that each specifically enumerated item is
included in the defined category whether or not it would otherwise be so
included.  For example, where the phrase “as defined in the Uniform
Commercial Code, but in any event shall include, but not be limited to . . .” is
used above, it means as defined in the Uniform Commercial Code except that if
any of the enumerated types of items specified thereafter would not fall within
the Uniform Commercial Code definition, they shall nonetheless be included in
the applicable definition for purposes of this Agreement.

    

    
      
        
           

        

        
          - 3
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    2.          
   CREATION
OF SECURITY INTEREST.

    

    2.1           Grant of Security
Interest.  As security for the payment and performance in full
of the Secured Obligations, each Pledgor hereby hypothecates, pledges, assigns,
sets over and delivers unto the Agent, and grants to the Agent, for the benefit
of the Agent and the Purchasers, a continuing first priority security interest
in all its right, title and interest in, to and under the Collateral, to have
and to hold the Collateral, together with all right, title, interest, powers,
privileges and preferences pertaining or incidental thereto; subject, however,
to the terms, covenants and conditions hereinafter set forth.

    

    2.2.           Certain Limited
Exclusions.  Notwithstanding anything herein to the contrary,
in no event shall the security interest granted under Section 2.1 hereof attach
to any of the outstanding capital stock or other securities of, or issued by, a
Controlled Foreign Corporation in excess of 66% of the voting power of all
classes of capital stock or other securities of such Controlled Foreign
Corporation entitled to vote; provided that immediately upon the amendment of
the Internal Revenue Code to allow the pledge of a greater percentage of the
voting power of capital stock or other securities in a Controlled Foreign
Corporation without adverse tax consequences, the Collateral shall include, and
the security interest granted by each Pledgor shall attach to, such greater
percentage of capital stock or other securities of each Controlled Foreign
Corporation.

    

    3.         
    DELIVERY
OF COLLATERAL.

    

    3.1           At Time of Execution of
Agreement.  Contemporaneously with the execution of this
Agreement or, in any event, prior to the Closing Date, the Pledgors shall
deliver or cause to be delivered to the Agent (a) any and all certificates and
other instruments representing or evidencing the Pledged Securities, (b) any and
all certificates and other instruments or documents representing any of the
other Collateral and (c) all other property comprising part of the Collateral,
in each case along with the Necessary Endorsements.  The Pledgors are,
contemporaneously with the execution hereof, delivering to the Agent, or have
previously delivered to the Agent, a true and correct copy of each
Organizational Document governing any of the Pledged Securities.

    

    3.2           Subsequent Delivery of
Collateral.  If any Pledgor shall become entitled to receive or
shall receive any securities or other property in respect of the Pledged
Securities (whether as an addition to, in substitution of, or in exchange for,
such Pledged Securities or otherwise), such Pledgor agrees to deliver to the
Agent such securities or other property, including, without limitation, shares
of Pledged Securities or instruments representing Pledged Interests acquired
after the Closing Date, or any options, warrants, rights or other similar
property or certificates representing a stock dividend, or any distribution in
connection with any recapitalization, reclassification or increase or reduction
of capital, or issued in connection with any reorganization of the Pledgor or
any Subsidiary of the Pledgor but excluding dividends and interest permitted to
be retained by the Pledgor under Section 5 hereof:

    

    (a)        
   to accept the same as the agent of the
Purchasers;

    

    (b)         
  to hold the same in trust on behalf of and for the benefit of the
Purchasers; and

    

    
      
        
           

        

        
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    (c)          
 to deliver any and all certificates or instruments evidencing the same to
the Agent on or before the close of business on the fifth (5th)
Business Day following the receipt thereof by such Pledgor, in the exact form
received together with the Necessary Endorsements, to be held by the Agent
subject to the terms of this Agreement, as additional Collateral.

    

    4.       
      REPRESENTATIONS
AND WARRANTIES OF PLEDGOR.

    

    4.1       
    Representations and
Warranties.  Each Pledgor represents and warrants that each
representation and warranty set forth in the Transaction Documents that relates
to or refers to the Pledgor or the Collateral (or, in either case, any other
term that is used with the same or similar meaning) is incorporated herein by
reference and is true and correct on and as of the date
hereof.  Without limiting the generality of the foregoing, each
Pledgor further represents and warrants that:

    

    (a)          
 The Pledged Securities are not subject to any Organizational Document,
statutory, contractual or other restriction governing their issuance, transfer,
ownership or control which restriction would limit the effectiveness or
enforceability of the pledge and security interest created under this
Agreement.

    

    (b)        
   The capital stock and other equity interests listed on Schedule I hereto
represent all of the capital stock and other equity interests of the
Subsidiaries of the Pledgors held by the Pledgors in any Subsidiary of the
Pledgors.

    

    (c)        
   The jurisdiction of formation and the chief executive office
of the Pledgors and the other offices or places of business of the Pledgors or
any offices where records concerning the Collateral are kept are set forth on
Schedule II
hereto.  No Pledgor is known by any other name except the name
appearing on the signature page hereof.

    

    (d)        
   Each Pledgor has the corporate power to execute, deliver and
carry out the terms and provisions of this Agreement and has taken all necessary
corporate action (including, without limitation, any consent of stockholders
required by Law or by its Organizational Documents) to authorize the execution,
delivery and performance of this Agreement. This Agreement constitutes the
authorized, valid and legally binding obligations of each Pledgor enforceable in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium or other similar laws affecting
the enforcement of creditors’ rights generally and by general principles of
equity.

    

    (e)          
 All of the Pledged Securities are validly issued, fully paid and
nonassessable, and the Pledgors are the legal and beneficial owners of the
Pledged Securities as reflected on Schedule I, free and
clear of any Lien except for the security interests created by this
Agreement.

    

    (f)          
  The pledge of the Pledged Securities pursuant to this Agreement and
the filing of the necessary financing statements (which filings have been duly
made or will be made substantially simultaneously with the execution of this
Agreement) create a valid and perfected first priority security interest in the
Collateral securing payment of the Secured Obligations.

    

    (g)        
   The ownership and other equity interests in partnerships and
limited liability companies (if any) included in the Collateral by their express
terms do not provide that they are securities governed by Article 8 of the
Uniform Commercial Code and are not held in a securities account or by any
financial intermediary.

    

    4.2      
     Survival of Representations and
Warranties.  All the foregoing representations and warranties
(including, without limitation, those incorporated by reference) shall survive
the execution and delivery of this Agreement and shall continue until this
Agreement is terminated as provided herein and shall not be affected or waived
by any inspection or examination made by or on behalf of the Agent or any
Purchaser.

    

    
      
        
           

        

        
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    5.           
  VOTING;
DIVIDENDS.

    

    5.1           Rights Prior To
Default.  Other than during the existence of an Event of
Default:

    

    (a)         
  each Pledgor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Collateral or any part thereof for any
purpose not inconsistent with the terms of the Transaction
Documents.

    

    (b)         
  Subject to and limited by the provisions set forth in the Securities
Purchase Agreements and the other Transaction Documents, each Pledgor shall be
entitled to receive and retain any and all dividends, interest and other
payments paid in respect of the Collateral, provided, however, that any and
all:

    

    (i)       
     dividends or other payments paid or payable other
than in cash in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for, any
Collateral;

    

    (ii)       
    dividends and other distributions paid or payable in
cash in respect of any Collateral in connection with a partial or total
liquidation or dissolution or in connection with a reduction of capital, capital
surplus or paid-in-surplus; and

    

    (iii)           cash
paid, payable or otherwise distributed in respect of principal of, or in
redemption of, or exchange for, any Collateral, except as specifically permitted
by the Securities Purchase Agreements, shall forthwith be delivered to the Agent
to hold as Collateral and shall, if received by a Pledgor, be received in trust
for the benefit of the Agent on behalf of the Purchasers, be segregated from the
other property or funds of such Pledgor, and be forthwith delivered to the Agent
as Collateral in the same form as so received (with any Necessary
Endorsement).

    

    The Agent
shall execute and deliver to the Pledgors all such proxies and other instruments
as the Pledgors may reasonably request for the purpose of enabling the Pledgors
to exercise the voting and other rights which they are entitled to exercise
pursuant to paragraph (i) above and to receive the dividends or interest
payments which they are authorized to receive and retain pursuant to paragraph
(ii) above.

    

    5.2        
   Rights Upon
Redemption Event.  Upon the occurrence of any event pursuant to
which the Pledgor may be entitled to receive payment in exchange for the Pledged
Securities pursuant to redemption rights, a put option or
otherwise,

    

    (a)          
 Any funds payable to holders of the applicable Pledged Securities
(a “Redemption
Payment”) shall be paid over to the Agent to be held as additional
Collateral or, at the option of the Agent, applied against the Secured
Obligations; and

    

    (b)       
    If a Pledgor for any reason receives all or any
portion of a Redemption Payment, such Pledgor shall receive it in trust for the
benefit of the Purchasers, shall segregate it from other funds of the holder,
and shall pay it over to the Agent to be held as additional Collateral or, at
the option of the Agent, applied against the Secured Obligations.

    

    
      
        
           

        

        
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    5.3           Rights After a
Default.  Upon the occurrence and during the continuation of an
Event of Default and as more fully set forth in Section 10 below:

    

    (a)         
  Subject to Section 11 below, (i) upon notice to a Pledgor by the
Agent, all rights of such Pledgor to exercise the voting and other consensual
rights which it would otherwise be entitled to exercise pursuant to subsection
5.1 above and (ii) all rights of such Pledgor to receive the dividends, interest
and other payments which it would otherwise be authorized to receive and retain
pursuant to subsection 5.1 above shall cease, and all such rights shall
thereupon become vested in the Agent who shall have the sole right to exercise
such voting and other consensual rights and to receive and hold as Collateral
such dividends, interest and other payments.

    

    (b)        
   All dividends, interest and other payments which are received
by a Pledgor contrary to the provisions of paragraph (a) of this subsection 5.3
shall be received in trust for the benefit of the Agent, shall be segregated
from other funds of such Pledgor and shall forthwith be paid over to the Agent
as Collateral in the same form as so received (with any Necessary
Endorsement).

    

    5.4       
    Liability of Agent and of the
Purchasers.  Nothing in this Agreement shall be construed to
subject the Agent or any Purchaser to liability as a partner in any Subsidiary
of the Pledgor that is a partnership or as a member in any Subsidiary of the
Pledgor that is a limited liability company, nor shall the Agent or any
Purchaser be deemed to have assumed any obligations under any partnership
agreement or limited liability company agreement, as applicable, of such a
Subsidiary or otherwise, unless and until the Agent exercises its right to be
substituted for the Pledgor as a partner or member, as applicable, pursuant
hereto.

    

    6.          
   COVENANTS
OF PLEDGOR.

    

    6.1           Transaction Documents; Voting;
Sales.  Each of the covenants and agreements which is set forth
or incorporated in the Transaction Documents and which is applicable to a
Pledgor or the Collateral subject hereto (or, in either case, any other term
that is used with the same or similar meaning) is incorporated herein by
reference and each Pledgor agrees to perform and abide by each such covenant and
agreement.  Without limiting the generality of the foregoing and in
furtherance thereof, each Pledgor shall vote the Pledged Securities to comply
with the covenants and agreements set forth in the Transaction
Documents.  Without limiting the generality of the foregoing, no
Pledgor shall sell or otherwise dispose of, or grant any option with respect to,
any of the Collateral, except in connection with a sale or other disposition
permitted under the provisions of the Securities Purchase Agreements or the
other Transaction Documents.

    

    6.2           Proceeds of Collateral
Disposition.  During the continuance of an Event of Default, at
the Agent’s request, each Pledgor having Pledged Securities shall establish and
maintain at all times a trust account with the Agent, and all Proceeds not
required to pay down the Secured Obligations in accordance with the Transaction
Documents, before or after an Event of Default, shall be deposited directly and
immediately into such account.  The Pledgors shall be responsible for
all costs and fees arising with respect to such account at the standard
rates.  The Pledgors expressly and irrevocably authorizes and consents
to the ability of the Agent to charge such trust account, in its sole
discretion, and recover from the funds on deposit therein, from time to time and
at any time, and apply those funds against any and all Secured
Obligations.

    

    6.3           Notice of Changes in
Representations.  A Pledgor shall notify the Agent in advance
of any event or condition which would cause any representation and warranty set
forth in Section 4.1 above to fail to be true, correct and
complete.

    

    
      
        
           

        

        
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    6.4           Defense of
Title.  Each Pledgor shall defend its and the Agent’s
respective title and interest in and to the Collateral against all Liens except
Permitted Liens.

    

    7.         
    FURTHER
ASSURANCES.

    

    Each
Pledgor agrees that at any time and from time to time, at the expense of the
Pledgors and their Subsidiaries, the Pledgors will, and will cause their
Subsidiaries to, promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or desirable, or
that the Agent may request, in order to perfect and protect any security
interest granted or purported to be granted hereby or to enable the Agent to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral or to otherwise carry out the purposes of this
Agreement.

    

    8.          
   AGENT
APPOINTED ATTORNEY-IN-FACT; MAY PERFORM CERTAIN DUTIES.

    

    8.1           Appointment as
Attorney-in-fact.  Effective upon the occurrence of an Event of
Default, and so long as such Event of Default is continuing, each Pledgor hereby
appoints the Agent as its true and lawful agent, proxy and attorney-in-fact for
the purpose of carrying out this Agreement and taking any action and executing
any instrument which the Agent may deem necessary or advisable  to
accomplish the purposes hereof including, without limitation, the execution on
behalf of such Pledgor of any financing or continuation statement with respect
to the security interest created hereby and the endorsement of any drafts or
orders which may be payable to such Pledgor in respect of, arising out of, or
relating to any or all of the Collateral. This power shall be valid until the
termination of the security interests created hereunder, any limitation under
law as to the length or validity of a proxy to the contrary
notwithstanding.  This appointment is irrevocable and coupled with an
interest and any proxies heretofore given by a Pledgor to any other Person are
revoked.  The designation set forth herein shall be deemed to amend
and supersede any inconsistent provision in the Organizational Documents to
which each Pledgor or any Subsidiary of a Pledgor is subject or to which any is
a party.

    

    8.2           Filing of Financing Statements and
Preservation of Interests.  Each Pledgor hereby authorizes the
Agent, and appoints the Agent as its attorney-in-fact, to file in such office or
offices as the Agent deems necessary or desirable such financing and
continuation statements and amendments and supplements thereto (or similar
documents required by any laws of any applicable jurisdiction), and such other
documents as the Agent may require to perfect, preserve and protect the security
interests granted herein all without signature (except to the extent such
signature is required under the laws of any applicable jurisdiction) and
ratifies all such actions taken by the Agent.

    

    8.3           Registration of
Securities.  Each Pledgor and each Subsidiary of a Pledgor
shall register the pledge of the shares included in the Collateral in the name
of the Agent on the books of such Pledgor or such Subsidiary.  Upon
the occurrence of an Event of Default, each Pledgor and each Subsidiary of a
Pledgor shall at the direction of the Agent register the shares included in the
Collateral in the name of the Agent on the books of such Pledgor and such
Pledgor’s Subsidiaries. 

    

    8.4           Performance of Pledgor’s
Duties.  In furtherance, and not by way of limitation, of the
foregoing subsections 8.1 and 8.2, if (at any time either before or after the
occurrence of an Event of Default) a Pledgor fails to perform any agreement
contained herein, the Agent may (but under no circumstance is obligated to)
perform such agreement and any expenses incurred shall be payable by such
Pledgor and its Subsidiaries; provided, however, that nothing herein shall be
deemed to relieve a Pledgor from fulfilling any of its obligations
hereunder.

    

    
      
        
           

        

        
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    8.5           Acts May Be Performed By Agents and
Employees.  Any act of the Agent to be performed pursuant to
this Section 8 or elsewhere in this Agreement may be performed by agents or
employees of the Agent.

    

    9.        
     STANDARD
OF CARE.

    

    9.1           In General.  No act
or omission of any Purchaser (or agent or employee of any of the foregoing)
shall give rise to any defense, counterclaim or offset in favor of the Pledgors
or any claim or action against any such Purchaser (or agent or employee
thereof), in the absence of gross negligence or willful misconduct of such
Purchaser (or agent or employee thereof) as determined in a final, nonappealable
judgment of a court of competent jurisdiction.  The Agent shall be
deemed to have exercised reasonable care in the custody and preservation of the
Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which the Agent accords to other collateral it
holds, it being understood that it has no duty to take any action with respect
to calls, conversions, exchanges, maturities, tenders or other matters relative
to any Collateral or to preserve any rights of any parties and shall only be
liable for losses which are a result of its gross negligence or willful
misconduct as determined in a final, nonappealable judgment of a court of
competent jurisdiction.

    

    9.2           Reliance on Advice of
Counsel.  In taking any action under this Agreement, the Agent
shall be entitled to rely upon the advice of counsel of the Agent’s choice and
shall be fully protected in acting on such advice whether or not the advice
rendered is ultimately determined to have been
accurate.  

    

    9.3           No Obligation To
Act.  The Agent shall be entitled to act or to refrain from
acting (and shall be fully protected in so acting or refraining from acting)
upon the written instructions of the Required Holders and such instructions
shall be binding upon all the Purchasers; provided, however, that the
Agent shall not be under any obligation to exercise any of the rights or powers
vested in it by this Agreement or any Security Document in the manner so
requested unless, if so requested by the Agent, it shall have been provided
indemnity from the Borrower satisfactory to it against the costs, expenses and
liabilities which may be incurred by it in compliance with or in performing such
request or direction.  No provisions of this Agreement or any Security
Document shall otherwise be construed to require the Agent to expend or risk its
own funds or take any action that could in its judgment cause it to incur any
cost, expenses or liability for which it is not specifically indemnified
hereunder or under the Securities Purchase Agreements.  No provision
of this Agreement or of any Security Document shall be deemed to impose any duty
or obligation on the Agent to perform any act or acts or exercise any right,
power, duty or obligation conferred or imposed on it, in any jurisdiction in
which it shall be illegal, or in which the Agent shall be unqualified or
incompetent, to perform any such act or acts or to exercise any such right,
power, duty or obligation or if such performance or exercise would constitute
doing business by the Agent in such jurisdiction or impose a tax on the Agent by
reason thereof.

    

    9.4           Action by
Agent.  Absent written instructions from the Required Holders
at a time when an Event of Default shall have occurred and be continuing, the
Agent shall have no obligation to take any actions under the Security
Documents.

    

    10.           DEFAULT.

    

    10.1          Certain Rights Upon
Default.  In addition to any other rights accorded to the Agent
and the Purchasers hereunder, upon the occurrence and during the continuation of
an Event of Default: 

    

    (a)        
   The Agent shall be entitled to receive any interest, cash
dividends or other payments on the Collateral and, at the Agent’s option, to
exercise in the Agent’s discretion all voting rights pertaining thereto as more
fully set forth in Section 5 above.  Without limiting the generality
of the foregoing, the Agent shall have the right (but not the obligation) to
exercise all rights with respect to the Collateral as if it were the sole and
absolute owner thereof, including, without limitation, to vote and/or to
exchange, at its sole discretion, any or all of the Collateral in connection
with a merger, reorganization, consolidation, recapitalization or other
readjustment concerning or involving the Collateral or the Pledgors or any
Subsidiary of a Pledgor.

    

    
      
        
           

        

        
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    (b)        
   Each Pledgor and each Subsidiary of a Pledgor shall take any
action necessary or required or requested by the Agent in order to allow it
fully to enforce the security interest in the Collateral hereunder and to
realize thereon to the fullest extent possible, including, but not limited to,
the filing of any claims with any court, liquidator, trustee, guardian, receiver
or other like person or party.

    

    (c)       
    The Agent shall have all of the rights of a Purchaser
under the Uniform Commercial Code and any other applicable law including the
right to sell on such terms as it may deem appropriate any or all of the
Collateral at one or more public or private sales upon at least five (5)
Business Days written notice to the Pledgors of the time and place of any public
sale and of the date on which the Collateral will first be offered for sale in
the case of any private sale.  The Agent shall have the right to bid
thereat or purchase any part or all the Collateral in its own or a nominee’s
name.  The Agent shall have the right to apply the proceeds of the
sale, after deduction for any costs and expenses of sale (including any
liabilities incurred in connection therewith including reasonable attorneys’
fees and allocated costs of attorneys who are employees of the Agent), to the
payment of the Secured Obligations, and to pay any remaining proceeds to the
applicable Pledgor or its successors or assigns or to whomsoever may lawfully be
entitled to receive the same or as a court of competent jurisdiction may direct,
without further notice to or consent of such Pledgor and without regard to any
equitable principles of marshalling or other like equitable
doctrines.  Each Pledgor hereby acknowledges and agrees that the
notice provided for above is reasonable and expressly waives any rights it may
have of equity of redemption, stay or appraisal with respect to the
Collateral.

    

    (d)        
   For purposes hereof, a written agreement to purchase the
Collateral or any portion thereof shall be treated as a sale thereof; the Agent
shall be free to carry out such sale pursuant to such agreement, and the
applicable Pledgor shall not be entitled to the return of the Collateral or any
portion thereof, notwithstanding the fact that after the Agent shall have
entered into such an agreement, any and all Events of Default shall have been
remedied and the Obligations paid in full.

    

    (e)          
 The Agent shall have the right, with full power of substitution either in
the Agent’s name or the name of any Pledgor, to ask for, demand, sue, collect
and receive any and all moneys due or to become due under and by virtue of the
Collateral and to settle, compromise, prosecute or defend any action, claim or
proceeding with respect thereto, provided, however, that nothing herein shall be
construed as requiring the Agent to take any action, including, without
limitation, requiring or obligating the Agent to make any inquiry as to the
nature or sufficiency of any payment received, or to present or file any claim
or notice, or to take any action with respect to the Collateral or any part
thereof or the moneys due or to become due in respect thereof or any property
covered thereby.

    

    (f)          
  The Agent shall be entitled to the appointment of a receiver or
trustee for all or any part of the businesses of a Pledgor or a Subsidiary of a
Pledgor, which receiver shall have such powers as may be conferred by law or the
appointing authority.

    

    10.2          Agent May Exercise Less Than All
Rights.  Each Pledgor hereby acknowledges and agrees that the
Agent is not required to exercise all remedies and rights available to it
equally with respect to all of the Collateral, and the Agent may select less
than all of the Collateral with respect to which the remedies as determined by
the Agent may be exercised.  

    

    
      
        
           

        

        
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    10.3          Duties of Pledgors and Subsidiaries
of the Pledgors With Respect to Transferee.  In the event that,
upon an occurrence of an Event of Default, the Agent shall sell all or any of
the Collateral to another party or parties (herein called “Transferee”) or shall
purchase or retain all or any of the Collateral, each Pledgor and each
Subsidiary of such Pledgor shall:

    

    (a)        
   Deliver to the Agent or Transferee, as the case may be, the
articles of incorporation, bylaws, minute books, stock certificate books,
corporate seals, deeds, leases, indentures, agreements, evidences of
indebtedness, books of account, financial records and all other Organizational
Documents and records of such Pledgor and each Subsidiary of such
Pledgor;

    

    (b)         
  Use its best efforts to obtain resignations of the persons then
serving as officers and directors of such Pledgor and each Subsidiary of such
Pledgor, if so requested; and

    

    (c)          
 Use its best efforts to obtain any approvals that are required by any
governmental or regulatory body in order to permit the sale of the Collateral to
the Transferee or the purchase or retention of the Collateral by the Agent and
allow the Transferee or the Agent to continue the business of the
issuer.

    

    11.        
   SECURITIES
LAW PROVISION.

    

    Each
Pledgor recognizes that the Agent may be limited in its ability to effect a sale
to the public of all or part of the Collateral by reason of certain prohibitions
in the Securities Act of 1933, as amended, or other federal or state securities
laws (collectively, the “Securities Laws”),
and may be compelled to resort to one or more sales to a restricted group of
purchasers who may be required to agree to acquire the Collateral for their own
account, for investment and not with a view to the distribution or resale
thereof.  Each Pledgor agrees that sales so made may be at prices and
on terms less favorable than if the Collateral were sold to the public, and that
the Agent has no obligation to delay the sale of any Collateral for the period
of time necessary to register the Collateral for sale to the public under the
Securities Laws.  Each Pledgor and each Subsidiary thereof shall
cooperate with the Agent in its attempts to satisfy any requirements under the
Securities Laws (including without limitation registration thereunder if
requested by the Agent) applicable to the sale of the Collateral by the
Agent.

    

    12.        
   SECURITY
INTEREST ABSOLUTE; WAIVERS BY PLEDGORS.

    

    12.1    
     Absolute Nature of Security
Interest.  All rights of the Agent hereunder, the grant of the
security interest in the Collateral and all obligations of each Pledgor
hereunder, shall be absolute and unconditional irrespective of (a) any lack of
validity or enforceability of any of the terms of the Transaction Documents or
any other instrument or document relating hereto or thereto, (b) any change in
the amount, time, manner or place of payment of, or in any other term of, all or
any of the Secured Obligations, or any other amendment or waiver of any terms
related thereto, (c) any exchange, release or nonperfection of any other
collateral, or any release or amendment or waiver of any guaranty, or (d) any
other circumstance which might otherwise constitute a defense available to, or a
discharge of, a Pledgor or any other Person in respect of the Secured
Obligations or in respect of this Agreement or any other Transaction Document or
any obligations hereunder or thereunder.

    

    12.2   
      No Duty To Marshal
Assets.  The Agent shall have no obligation to marshal any
assets in favor of the Pledgors or any other Person or against or in payment of
any or all of the Obligations.

    

    12.3         Waiver with Right of Subrogation,
Etc.  The Pledgors acknowledge that until all the Obligations
shall have been indefeasibly paid in full, the Pledgors shall have no right (and
hereby waive any such right) of subrogation, reimbursement, or indemnity
whatsoever, in respect of any Pledgor and any Subsidiary of a Pledgor, arising
out of remedies exercised by the Agent hereunder.

    

    
      
        
           

        

        
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    12.4         Compliance with Organizational
Documents.  To the extent that the grant of the security
interest in the Collateral and the enforcement of the terms hereof require the
consent, approval or action of any partner, member, shareholder or other equity
owner, as applicable, of any Subsidiary of a Pledgor or compliance with any
provisions of the Organizational Documents of any Subsidiary of such Pledgor,
such Pledgor hereby grants such consent and approval and waive any such
noncompliance with the terms of said documents.

    

    12.5         Waivers.  Each
Pledgor hereby waives notice of acceptance of this Agreement.  Each
Pledgor further waives presentment and demand for payment of any of the Secured
Obligations, protest and notice of dishonor or default with respect to any of
the Secured Obligations, and all other notices to which such Pledgor might
otherwise be entitled, except as otherwise expressly provided in this Agreement
or any of the other Transaction Documents.  Each Pledgor (to the
extent that it may lawfully do so) covenants that it shall not at any time
insist upon or plead, or in any manner claim or take the benefit of, any stay,
valuation, appraisal or redemption now or at any time hereafter in force that,
but for this waiver, might be applicable to any sale made under any judgment,
order or decree based on this Agreement or any other Transaction Document; and
each Pledgor (to the extent that it may lawfully do so) hereby expressly waives
and relinquishes all benefit of any and all such laws and hereby covenants that
it will not hinder, delay or impede the execution of any power in this Agreement
or in any other Transaction Document delegated to the Agent, but that it will
suffer and permit the execution of every such power as though no such law or
laws had been made or enacted.

    

    12.6         Acknowledgment Regarding
Waivers.   EACH PLEDGOR’S WAIVERS UNDER THIS SECTION 12 HAVE
BEEN MADE VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY AND AFTER SUCH PLEDGOR HAS
BEEN APPRISED AND COUNSELED BY ITS ATTORNEY AS TO THE NATURE THEREOF AND ITS
POSSIBLE ALTERNATIVE RIGHTS.

    

    13.          
 NON-WAIVER
AND NON-EXCLUSIVE REMEDIES.

    

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

    

    13.2     
    Delay
and Non-Waiver.  No delay or omission by the Agent to exercise
any remedy or right hereunder shall impair any such remedy or right or shall be
construed to be a waiver of any Event of Default, or an acquiescence therein,
nor shall it affect any subsequent Event of Default of the same or of a
different nature.

    

    14.          
 NO
IMPLIED WAIVERS.  No failure or delay on the part of the Agent
in exercising any right, power or privilege under this Agreement or the other
Transaction Documents and no course of dealing between a Pledgor, on the one
hand, and the Agent or the Purchasers, on the other hand, shall operate as a
waiver of any such right, power or privilege.  No single or partial
exercise of any right, power or privilege under this Agreement or the other
Transaction Documents precludes any other or further exercise of any such right,
power or privilege or the exercise of any other right, power or
privilege.  The rights and remedies expressly provided in this
Agreement and the other Transaction Documents are cumulative and not exclusive
of any rights or remedies which the Agent or the Purchasers would otherwise
have.  No notice to or demand on the Pledgors in any case shall
entitle the Pledgors to any other or further notice or demand in similar or
other circumstances or shall constitute a waiver of the right of the Agent or
the Purchasers to take any other or further action in any circumstances without
notice or demand.  Any waiver that is given shall be effective only if
in writing and only for the limited purposes expressly stated in the applicable
waiver.

    

    
      
        
           

        

        
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    15.       
    EFFECT OF
PLEDGE ON CERTAIN SHAREHOLDER RIGHTS.

    

    If any of
the Collateral subject to this Agreement consists of nonvoting equity or
ownership interests (regardless of their class, designation, preference or
rights) or other instruments that may be converted into voting equity ownership
interests upon the occurrence of certain events (including, without limitation,
upon the transfer of all or any of the other stock or assets of the issuer), it
is agreed that the pledge of such equity or ownership interests pursuant to this
Agreement or the enforcement of any of the Agent’s rights hereunder shall not be
deemed to be the type of event which would trigger such conversion rights
notwithstanding any provisions in the Organizational Documents or agreements of
the issuer or any Pledgor to the contrary.

    

    16.     
      CONTINUING
SECURITY INTEREST; HEIRS AND ASSIGNS.

    

    This
Agreement shall create a continuing security interest in the Collateral and
shall (a) remain in full force and effect until terminated pursuant to Section
16 below, (b) be binding upon each Pledgor, its successors and assigns and (c)
inure to the benefit of the Agent, the Purchasers and their respective
successors, transferees and assigns provided, however, that no Pledgor shall be
permitted to transfer any of its obligations hereunder except as otherwise
permitted by the Securities Purchase Agreements.

    

    17.      
     TERMINATION
OF AGREEMENT; RELEASE OF COLLATERAL.

    

    17.1         Termination of
Agreement.  At such time as all the Secured Obligations in
respect of the Notes have been indefeasibly paid in full (including the
conversion in full of the Notes), then this Agreement shall terminate and the
Collateral shall be released pursuant to subsection 17.2.

    

    17.2         Duties of Agent With Respect To
Release of Collateral.  When this Agreement terminates pursuant
to subsection 17.1 above, the Agent shall reassign and deliver to the Pledgors,
or to such Person or Persons as the Pledgors shall designate, against receipt,
such of the Collateral (if any) as shall not have been sold or otherwise applied
by the Agent pursuant to the terms hereof and shall still be held by it
hereunder, together with appropriate instruments of reassignment and release,
all without any recourse to, or warranty whatsoever by, the Agent, at the sole
cost and expense of the Pledgors.

    

    17.3         Release of Certain
Collateral.  Effective upon the closing of a sale or other
disposition of any Collateral and the application of proceeds in conformity with
the provisions of the Securities Purchase Agreements, and receipt by the Agent
of a certification to such effect from an authorized officer of the Borrower,
the security interest in the assets which are the subject of the sale or other
disposition (the “Sold
Collateral”) shall terminate.  The Agent shall thereupon
reassign and deliver to the applicable Pledgors, or to such Person as such
Pledgors shall designate, against receipt, the Sold Collateral, together with
appropriate instruments or reassignment and release, all without any recourse
to, or warranty whatsoever by, the Agent, at the sole cost and expense of such
Pledgors.

    

    
      
        
           

        

        
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    18.     
      PAYMENT
OF COSTS AND EXPENSES; INDEMNITIES.  Without limiting any other
cost reimbursement or expense reimbursement provisions in the Transaction
Documents,

    

    18.1          Payment of Costs and
Expenses.  Upon demand, the Pledgors shall pay to the Agent the
amount of any and all reasonable expenses incurred by the Agent and the
Purchasers hereunder or in connection herewith, including, without limitation,
reasonable fees of counsel to the Agent and the Purchasers and those other
expenses that may be incurred in connection with (a) the administration of this
Agreement (b) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Collateral, (c) the exercise or
enforcement of any of the rights of the Agent or the Purchasers hereunder or (d)
the failure of the Pledgors to perform or observe any of the provisions
hereof.

    

    18.2    
     Fees.  Each Pledgor
shall, upon demand, pay to the Agent such reasonable fees (in addition to its
expenses) for its services as the Agent as may be agreed upon from time to time
between the Agent and the Pledgors.

    

    18.3          Indemnification.  Each
Pledgor shall indemnify, reimburse and hold harmless all Indemnitees from and
against any and all losses, claims, liabilities, damages, penalties, suits,
costs and expenses, of any kind or nature, (including fees relating to the cost
of investigating and defending any of the foregoing) imposed on, incurred by or
asserted against such Indemnitee in any way related to or arising from or
alleged to arise from this Agreement or the Collateral except any such losses,
claims, liabilities, damages, penalties, suits, costs and expenses which result
from the gross negligence or willful misconduct of the Indemnitee as determined
by a final nonappealable decision of a court of competent
jurisdiction.

    

    18.4          Taxes.  Each
Pledgor shall pay to the Agent, upon demand, the amount of any taxes which the
Agent may have been required to pay by reason of the security interests
established pursuant to this Agreement (including any applicable transfer
taxes).

    

    18.5          Additional
Obligations.  Any amounts payable pursuant to this Section 18
shall be additional Secured Obligations secured hereby.

    

    19.        
   MISCELLANEOUS
PROVISIONS.

    

    19.1          Governing
Law.  This Agreement shall be governed by and construed in
accordance with the laws of the State of New York (excluding the laws applicable
to conflicts or choice of law).

    

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

    

    19.3          Successors and
Assigns.  Except as otherwise provided in the Securities
Purchase Agreements, the Agent may assign or transfer this Agreement and any or
all rights or obligations hereunder without the consent of the Pledgors and
without prior notice.  No Pledgor shall assign or transfer this
Agreement or any rights or obligations hereunder without the prior written
consent of the Agent or as expressly provided in the Securities Purchase
Agreements.  The rights and privileges of the Agent and the Purchasers
under this Agreement shall inure to the benefit of their respective successors,
assigns and participants.  All promises, covenants and agreements of
each Pledgor contained in this Agreement shall be binding upon personal
representatives, heirs, successors and assigns of such
Person.  Notwithstanding the foregoing, if there is any assignment of
any obligations by operation of law or in contravention of the terms of this
Agreement or otherwise, then all covenants, agreements, representations and
warranties made herein or pursuant hereto by or on behalf of a Pledgor shall
bind the successors and assigns of such Pledgor, jointly and severally (if
applicable), together with the pre-existing Pledgor whether or not such new
Pledgor shall execute a joinder to this Agreement.

    

    
      
        
           

        

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

    

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

    

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

     

    19.7          Severability.  Every
provision of this Agreement is intended to be severable.  If any of
the provisions or terms of this Agreement shall for any reason be held to be
invalid or unenforceable such invalidity or unenforceability shall not affect
any of the other terms hereof, but this Agreement shall be construed as if such
invalid or unenforceable term had never been contained herein.  Any
such invalidity or unenforceability of any term or provision in this Agreement
in a particular jurisdiction shall not be deemed to render a provision invalid
or unenforceable in any other jurisdiction.

    

    19.8          Relationship with Securities
Purchase Agreements.  To the extent that any provision of this
Agreement is inconsistent with any provision of the Securities Purchase
Agreements, the terms of the Securities Purchase Agreements shall
control.

    

    19.9     
    Consent to Jurisdiction, Service and
Venue; Waiver of Jury Trial.  For the purpose of any action
that may be brought in connection with this Agreement, each Pledgor hereby
consents to the jurisdiction and venue of the courts of the State of New York or
of any federal court located in such state and waives personal service of any
and all process upon it and consents that all such service of process be made by
certified or registered mail directed to such Pledgor at the address provided
for in Section 19.5 (Notices and Communications).  Service so made
shall be deemed to be completed upon actual receipt at the address specified in
said section.  Each Pledgor waives the right to contest the
jurisdiction and venue of the courts located in the county of New York, State of
New York on the ground of inconvenience or otherwise and, further, waives any
right to bring any action or proceeding against (a) the Agent in any court
outside the county of New York, State of New York, or (b) any Purchaser other
than in a state within the United States designated by such
Purchaser.  The provisions of this Section shall not limit or
otherwise affect the right of the Agent or any Purchaser to institute and
conduct an action in any other appropriate manner, jurisdiction or
court.

    

    
      
        
           

        

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

    

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

    

    
      
        
           

        

        
          - 16
-

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and
delivered by their respective authorized officers on the date first above
written.

    

    PLEDGOR:

    

    
      	 
      	
              NESTOR,
      INC.

            
	 
      	 
      	 
      	 
      	 
      
	 
      	By:	
               

            	 
      	 
      	 
      
	 
      	
              Name:

            	 
      	 
      	 
      
	 
      	
              Title:

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              Notice
      Information

            	 
      
	 
      	 
      	
              42
      Oriental Street

            	 
      
	 
      	 
      	
              Providence,
      RI  02908

            	 
      
	 
      	 
      	
              Phone
      No.:

            	
              401-274-5658x738

            	 
      
	 
      	 
      	
              Fax
      No. 401-274-5707

            	 
      
	 
      	 
      	
              Attention:

            	
              Brian
      R. Haskell, Esq.

            	 
      
	 
      	 
      	 
      	 
      	 
      
	
              PLEDGOR:

            	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              NESTOR
      TRAFFIC SYSTEMS, INC.

            
	 
      	By:	
               

            	 
      	 
      	 
      
	 
      	
              Name:

            	 
      	 
      	 
      
	 
      	
              Title:

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              Notice
      Information

            	 
      
	 
      	 
      	
              42
      Oriental Street

            	 
      
	 
      	 
      	
              Providence,
      RI  02908

            	 
      
	 
      	 
      	
              Phone
      No.:

            	
              401-274-5658x738

            	 
      
	 
      	 
      	
              Fax
      No. 401-274-5707

            	 
      
	 
      	 
      	
              Attention:

            	
              Brian
      R. Haskell, Esq.

            	 
      
	 
      	 
      	 
      	 
      	 
      
	
              PLEDGOR:

            	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	
              CROSSINGGUARD,
      INC.

            
	 
      	By:	
               

            	 
      	 
      	 
      
	 
      	
              Name:

            	 
      	 
      	 
      
	 
      	
              Title:

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              Notice
      Information

            	 
      
	 
      	 
      	
              42
      Oriental Street

            	 
      
	 
      	 
      	
              Providence,
      RI  02908

            	 
      
	 
      	 
      	
              Phone
      No.:

            	
              401-274-5658x738

            	 
      
	 
      	 
      	
              Fax
      No. 401-274-5707

            	 
      
	 
      	 
      	
              Attention:

            	
              Brian
      R. Haskell, Esq.

            	 
      

    

    

    [Signature
Page to Amended and Restated Borrower/Subsidiary Pledge Agreement]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    PLEDGOR:

    

    
      	 
      	
              NESTOR
      INTERACTIVE, INC.

            
	 
      	 
      	 
      	 
      	 
      
	 
      	By:	
               

            	 
      	 
      	 
      
	 
      	
              Name:

            	 
      	 
      	 
      
	 
      	
              Title:

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              Notice
      Information

            	 
      
	 
      	 
      	
              42
      Oriental Street

            	 
      
	 
      	 
      	
              Providence,
      RI  02908

            	 
      
	 
      	 
      	
              Phone
      No.:

            	
              401-274-5658x738

            	 
      
	 
      	 
      	
              Fax
      No. 401-274-5707

            	 
      
	 
      	 
      	
              Attention:

            	
              Brian
      R. Haskell, Esq.

            	 
      

    

    

    

    

    [Signature
Page to Amended and Restated Borrower/Subsidiary Pledge Agreement]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    AGENT:

    

    
      	 
      	
              U.S. BANK NATIONAL
      ASSOCIATION in its capacity as Agent

            
	 
      	 
      	 
      	 
      
	 
      	
              By:

            
	 
      	 
      	
              Name:

            
	 
      	 
      	
              Title:

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
              Notice
      Information

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
              U.S.
      Bank National Association

            
	 
      	 
      	 
      	
              Corporate
      Trust Services

            
	 
      	 
      	 
      	
              225
      Asylum Street, 23rd
      Floor

            
	 
      	 
      	 
      	
              Hartford,
      CT 06103

            
	 
      	 
      	 
      	
              Telephone:
      (860) 241-6859

            
	 
      	 
      	 
      	
              Facsimile:
      (860) 241-6881

            
	 
      	 
      	 
      	
              Attention:
      Arthur Blakeslee

            

    

    

    

    

    [Signature
Page to Amended and Restated Borrower/Subsidiary Pledge Agreement]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
I

    

    Pledged
Securities

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
II

    

    Locations
of Pledgors

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
E

    

    FORM
OF

    AMENDED
AND RESTATED SECURITY AGREEMENT -- TRADEMARKS,

    PATENTS
AND COPYRIGHTS

    

    THIS
AMENDED AND RESTATED SECURITY AGREEMENT -- TRADEMARKS, PATENTS AND COPYRIGHTS
(this "Amended and
Restated IP Security Agreement") is made as of October ___, 2008, between
Nestor, Inc., a Delaware corporation (the “Company”), and the
Secured Party (as defined below).  As used herein, "Secured Party" means
U.S. Bank National Association, in its capacity as Collateral Agent for the
benefit of the Purchasers (as defined below), together with its successors and
assigns in such capacity.

    

    WHEREAS,
the Company has adopted and is using the trademarks, trade names and designs
listed in Schedule
A annexed to this Amended and Restated IP Security Agreement and made a
part hereof; and

    

    WHEREAS,
the Company has informed the Secured Party that it owns the patents, patent
applications and copyrights listed in Schedule A hereto;
and

    

    WHEREAS,
pursuant to a Securities Purchase Agreement dated as of May 24, 2006 (as the
same may be amended, restated, modified, supplemented and/or replaced from time
to time, the "Existing
Securities Purchase Agreement") by and among the Company, the Secured
Party and the purchasers identified therein (collectively, the “Existing
Purchasers”), the Existing Purchasers have agreed to purchase from the
Company certain of its senior secured convertible notes (individually, an “Existing Note” and
collectively, the “Existing Notes”) in
the aggregate amount and on the terms and conditions set forth in the Existing
Securities Purchase Agreement substantially in the form attached hereto as Exhibit 1 and dated
as of the date hereof; and

    

    WHEREAS,
pursuant to a Securities Purchase Agreement dated as of October ___, 2008 (as
the same may be amended, restated, modified, supplemented and/or replaced from
time to time, the "Additional Securities
Purchase Agreement") by and among the Company, the Secured Party and the
purchasers identified therein (collectively, the “Additional
Purchasers” and together with the Existing Purchasers, collectively, the
“Purchasers”), the Additional Purchasers have agreed to purchase from the
Company a senior secured promissory note (a “Bridge Note” and
together with the Existing Notes, the “Notes”) in the
aggregate amount and on the terms and conditions set forth in the Additional
Securities Purchase Agreement substantially in the form attached hereto as Exhibit 2 and dated
as of the date hereof; and

    

    WHEREAS,
as a condition to the Purchasers' purchase from the Company of any of the
aforementioned Notes, the Purchasers require the execution and delivery of this
Amended and Restated IP Security Agreement by the Company.

     

    Accordingly,
the Company and the Secured Party, intending to be legally bound hereby, agree
that, as security for the full and timely payment of the obligations under the
Notes and the performance of the obligations of the Company under the Notes and
this Amended and Restated IP Security Agreement (collectively, the “Obligations”), the
Company hereby mortgages and pledges to the Secured Party and assigns and grants
to the Secured Party a lien and security interest in, all its right, title and
interest in and to all of the following:

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (A)           (i)
each of the trademarks, trade names and designs described in Schedule A to this
Amended and Restated IP Security Agreement, and any other trademarks, trade
names and designs that the Company may adopt and use, in the United States or
foreign countries, in connection with its business after the date of this
Amended and Restated IP Security Agreement (collectively, the “Trademarks”),
together with the good will of the business symbolized thereby; (ii) all
registrations and pending trademark applications owned presently or obtained or
filed hereafter, both in the United States and in foreign countries; (iii) all
records of the Company relating to the distribution of products bearing the
Trademarks; and (iv) any and all proceeds of the foregoing, including, without
limitation, any royalties, claims for infringement and proceeds of sale or other
disposition (collectively, the “Trademarks
Collateral”); and

    

    (B)           (i)
each of the patents and patent applications, including the inventions disclosed
or claimed therein, described in Schedule A to this
Amended and Restated IP Security Agreement, and any other patents and patent
applications and similar legal protection, both domestic and foreign, including
all continuations, extensions, renewals, substitutes, divisions or reissues
thereof, that the Company may acquire after the date of this Amended and
Restated IP Security Agreement (collectively, the “Patents”); and (ii)
any and all proceeds of the Patents, including, without limitation, any
royalties, fees, claims for past, present and future infringement and proceeds
of sale or other disposition (the “Proceeds” and,
together with the Patents, the “Patents Collateral”);
and

    

    (C)           (i)
all United States original works or authorship fixed in any tangible medium of
expression, all right, title and interest therein and thereto, and all United
States registrations and recordings thereof, including without limitation,
applications, registrations, and recordings in the United States Copyright
Office or in any similar office or agency in the United States, or any State
thereof, all whether now owned or hereafter acquired by the Company, including,
but not limited to, those described on Schedule A annexed
hereto and made a part hereof; and (ii) all extensions and renewals thereof
(collectively, the “Copyrights
Collateral”); and

    

    (D)           certain
other intellectual property, which shall include, without limitation, all
designs, concepts, discoveries, ideas, improvements, inventions, formulae,
processes, techniques, works of authorship, mask works, data (whether or not
patentable or registrable under copyright or similar statutes), object code,
algorithms, blueprints, layouts, integrated circuit die or wafers, marks,
microcode, programs, procedures, schematics, sketches, source code,
specifications, strategies, subroutines, research, test results, hardware,
software (as such term is defined in the Uniform Commercial Code as enacted in
the State of Delaware (the “UCC”)), license
rights, trade secrets and any material constituting a trade secret, methods,
know-how, specifications, and customer lists, proprietary technology and any
information relating thereto, regardless of any contrary interpretation of such
term as now or hereafter used in the UCC; or which relates to or arises out of
the use, function, development, improvement or any additions or modifications to
the Patents Collateral, the Trademarks Collateral or the Copyrights Collateral
(collectively, the “General Intangibles
Collateral”) and pertains to the Company’s business
enterprise.

    

    

    NOW,
THEREFORE, the parties hereto, intending to be legally bound hereby, agree as
follows:

    

    1.          
  As security for the full and prompt payment and performance of all
Obligations, the Company does hereby pledge to the Secured Party and assign and
grant to the Secured Party a security interest in, all of the right, title and
interest of the Company in and to all of the following, now owned or hereafter
arising or acquired: (i) the Trademarks Collateral; (ii) the Patents Collateral;
(iii) the Copyrights Collateral; (iv) any claims by the Company against third
parties for infringement of the Trademarks, Patents or Copyrights; (v) the
General Intangibles Collateral; and (vi) any and all products and proceeds of
the foregoing (collectively, the “Intellectual Property
Collateral”).

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    2.         
    The Company represents and warrants that it is the owner
of its Intellectual Property Collateral and has the right and power to make the
pledge and grant the security interest granted in this Amended and Restated IP
Security Agreement; and that the Intellectual Property Collateral is free of all
liens and encumbrances.  Further, the Company represents and warrants
that the Intellectual Property Collateral constitutes all of the intellectual
property owned by the Company.  The Company shall retain the full
legal and equitable title to the Intellectual Property Collateral and, provided
there exists no Event of Default (as defined in the Notes) under the Notes (or
any of them) or hereunder, the Company shall have the right to use and register
the Intellectual Property Collateral in the ordinary course of its
business.  The Company agrees that it will not sell, transfer, assign
or grant a lien or security interest in any of the Intellectual Property
Collateral except as permitted hereunder.  At such time as all
Obligations in respect of the Notes have been indefeasibly paid and performed in
full (including the conversion in full of the Notes), this Amended and Restated
IP Security Agreement shall terminate and be of no further force and effect and
the Secured Party shall thereupon terminate its security interest in the
Intellectual Property Collateral.  Until such time, however, this
Amended and Restated IP Security Agreement shall be binding upon and inure to
the benefit of the parties, their successors and assigns.

    

    

    3.        
     (a)       
   The Company will take all reasonable steps required to
maintain and defend full effect, title and right in and to keep in force (i) the
Trademarks and registrations of the Trademarks in the United States Patent and
Trademark Office, or any similar office, including, without limitation, filing
of affidavits of use and incontestability and renewal applications, prosecution
of trademark applications, and taking part in opposition, interference and
cancellation proceedings; (ii) the Patents in the United States Patent and
Trademark Office and foreign patent offices, or any similar office, including
without limitation, prosecution of patent applications, payment of maintenance
fees and annuities; and (iii) the Copyrights in the United States Copyright
Office or any similar office.

    

    

    (b)          
 The Company will perform all acts and execute any documents, including
without limitation, assignments suitable for filing with the United States
Patent and Trademark Office or the United States Copyright Office, and Uniform
Commercial Code financing statements, reasonably requested of it by the Secured
Party at any time to evidence, perfect and maintain the rights in the
Intellectual Property Collateral granted to the Secured Party under this Amended
and Restated IP Security Agreement.  The Company will promptly notify
the Secured Party at the time the Company adopts for use in its business any
trademarks, patents or registered copyrights not described on Schedule A to this
Amended and Restated IP Security Agreement and files any applications to
register a trademark or copyright, or files any patent
applications.  To the extent permitted by law, the Company hereby
authorizes the Secured Party to execute and file such assignments and financing
statements (and/or similar documents) with respect to the Intellectual Property
Collateral, or copies thereof or of this Amended and Restated IP Security
Agreement, signed only by the Secured Party.

    

    

    4.           
 Concurrently with the execution and delivery of this Amended and Restated
IP Security Agreement, the Company is executing and delivering to the Secured
Party two originals of a Special Power of Attorney, each in the form of Exhibit 3 to this
Amended and Restated IP Security Agreement, for the Secured Party’s use in
executing on behalf of the Company an Assignment for Security in the form of
Exhibit 4 to
this Amended and Restated IP Security Agreement, which Assignment for Security
shall be suitable for recording in the United States Patent and Trademark Office
and in the United States Copyright Office,  to provide Secured Party
with access to the Patents or Trademarks (or any applications or registrations
thereof), all in accordance with paragraph 3(b) of this Amended and Restated IP
Security Agreement.  The Company hereby releases the Secured Party
from any claims, causes of action and demands at any time arising out of or with
respect to any actions taken or omitted to be taken by the Secured Party under
the powers of attorney granted therein other than gross negligence or willful
misconduct of the Secured Party.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    5.        
     If an Event of Default (as defined in the Notes)
has occurred, then, in addition to all other rights and remedies of the Secured
Party, whether under law, the Notes or otherwise, the Secured Party may, without
notice to, or consent by, the Company, (a) grant itself a license to use the
Patents, Trademarks and Copyrights, or any of them, without payment of any kind,
until all inventories of finished goods produced for the Company are sold or
consumed; (b) assign, sell or otherwise dispose of or use the Intellectual
Property Collateral, or any of it, either with or without special or other
conditions or stipulations, with power to buy the Intellectual Property
Collateral or any part of it, and with power also to execute assurances, and to
do all other acts and things for completing the assignment, sale or disposition
which the Secured Party shall, in its sole discretion, deem appropriate or
proper; and (c) in order to implement any such assignment, sale or other
disposal of any of the Intellectual Property Collateral, pursuant to the
authority granted in the Power of Attorney described in paragraph 4 of this
Amended and Restated IP Security Agreement (such authority becoming effective on
the occurrence of an Event of Default), execute and deliver on behalf of the
Company, one or more instruments of assignment of the Patents, Trademarks or
Copyrights (or any application or registration thereof), in a form suitable for
filing, recording or registration in the United States Patent and Trademark
Office or the United States Copyright Office.

    

    

    6.         
    No failure or delay on the part of Secured Party in
exercising any right, remedy, power or privilege under this Amended and Restated
IP Security Agreement shall operate as a waiver thereof or of any other right,
remedy, power or privilege of Secured Party under this Amended and Restated IP
Security Agreement or the Notes, nor shall any single or partial exercise of any
such right, remedy, power or privilege preclude any other or further exercise
thereof or the exercise of any other right, remedy, power or
privilege.  The rights, remedies, powers and privileges of the Secured
Party under this Amended and Restated IP Security Agreement are cumulative and
not exclusive of any rights or remedies which it may otherwise
have.

    

     7.       
     The provisions of this Amended and Restated IP
Security Agreement are intended to be severable.  If any provision of
this Amended and Restated IP Security Agreement shall for any reason be held
invalid or unenforceable in whole or in part in any jurisdiction, such provision
shall, as to such jurisdiction, be ineffective to the extent of such invalidity
or unenforceability without in any manner affecting the validity or
enforceability of such provision in any other jurisdiction or any other
provision of this Amended and Restated IP Security Agreement in any
jurisdiction.

    

    8.          
   All notices, statements, requests and demands given to or made
upon either party in accordance with the provisions of this Amended and Restated
IP Security Agreement shall be deemed to have been given or made when given or
made in accordance with any of the Notes.

    

    9.         
    All rights of the Secured Party hereunder shall inure to
the benefit of its successors and assigns.  This Amended and Restated
IP Security Agreement shall bind all persons who become bound as a debtor to
this Amended and Restated IP Security Agreement.  The Company shall
not assign any of its interest under this Amended and Restated IP Security
Agreement without the prior written consent of the Secured Party.  Any
purported assignment inconsistent with this provision shall, at the option of
the Secured Party, be null and void.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    10.     
      The parties hereto consent to the exclusive
jurisdiction and venue of the federal and state courts located in the Borough of
Manhattan, State of New York in any action on, relating to or mentioning this
Amended and Restated IP Security Agreement.

    

    11.     
      This Amended and Restated IP Security
Agreement shall be deemed to be a contract under the laws of the State of New
York and the execution and delivery of this Amended and Restated IP Security
Agreement and the terms and provisions of this Amended and Restated IP Security
Agreement shall be governed by and construed in accordance with the laws of that
State (without regard to its conflict of laws rules) and, to the extent
applicable or governing, the laws of the United States of America; provided,
however, that to the extent the UCC provides for the application of the law of
another State for purposes of perfection and the effect of perfection of the
security interest granted to the Secured Party hereunder, then the IP Agreement
shall be governed by that State's law.

    

    12.     
      This Amended and Restated IP Security
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which shall together constitute one
agreement.

    

    13.       
    This Amended and Restated IP Security Agreement or any
provision hereof may be changed, waived or terminated only by a statement in
writing signed by the party against which such change, waiver or termination is
sought to be enforced.

    

    14.      
     The Company and the Secured Party request that the
Commissioner of Patents and Trademarks, and the Register of Copyrights record
this Amended and Restated IP Security Agreement with respect to the applicable
Intellectual Property Collateral.

    IN
WITNESS WHEREOF, the parties have executed and delivered this Amended and
Restated IP Security Agreement as of the day and year first above
written.

    

    

    

    
      	 
      	
              The
      Company:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              NESTOR,
      INC.

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      

    

    

    

    

    Secured
Party:

    

    U.S. Bank
National Association, in its capacity as Collateral Agent

    

    
      	
              By:

            	 
      	 
      
	
              Name:

            	 
      	 
      
	
              Title:

            	 
      	 
      

    

    

    

    

    [Signature
Page to Amended and Restated Security Agreement – Trademarks, Patents and
Copyrights]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
A

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
1

    

    Form of Note Purchase
Agreement

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
2

    

    Form of Additional Note
Purchase Agreement

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
3

    

    Form of Special Power of
Attorney

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
4

    

    Form of Assignment for
Security

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
F

    

    FORM OF

    PAYMENT PRIORITY AND VOTING
AGREEMENT

    

    PAYMENT PRIORITY AND VOTING
AGREEMENT, dated as of October __, 2008, (this ”Agreement”), by and
between the holders of the Existing Notes (as defined below) (the “Existing Note
Holders”) and the holders of the Bridge Notes (as defined below) (the
“Bridge Note
Holders” and together with the Existing Note Holders, the “Noteholders”), U.S.
Bank National Association, as Collateral Agent for the Noteholders (in such
capacity, the “Agent”), Nestor,
Inc., a Delaware corporation (the “Company”), and each
of its undersigned Subsidiaries (each, a “Guarantor” and
collectively, the “Guarantors”).

    

    W I T N E S S E T
H:

    

    WHEREAS,
the Company is a party to a Securities Purchase Agreement, dated as of May 24,
2006 (as the same may be amended, restated, modified, supplemented and/or
replaced from time to time, the “Existing Purchase
Agreement”), together with each party listed as a “Purchaser” on the
execution pages thereto, pursuant to which the Company sold, and such Purchasers
purchased, the “Notes” (as defined in the Existing Purchase Agreement) to be
issued pursuant thereto (as such Notes may be amended, restated, replaced or
otherwise modified from time to time in accordance with the terms thereof,
collectively, the “Existing
Notes”);

    

    WHEREAS,
the Company is a party to a Securities Purchase Agreement, dated as of the date
hereof (as the same may be amended, restated, modified, supplemented and/or
replaced from time to time, the “Bridge Purchase
Agreement” and together with the Existing Purchase Agreement, the “Purchase
Agreements”), together with each party listed as a “Purchaser” on the
execution pages thereto, pursuant to which the Company shall sell, and such
Purchasers shall purchase, subject to the conditions thereof, the “Notes” (as
defined in the Bridge Purchase Agreement) to be issued pursuant thereto (as such
Notes may be amended, restated, replaced or otherwise modified from time to time
in accordance with the terms thereof, collectively, the “Bridge Notes” and
together with the Existing Notes, the “Notes”);

    

    WHEREAS,
each of the Guarantors have executed and delivered a Guaranty and Suretyship
Agreement, dated as of the date hereof (as amended, restated, supplemented,
replaced, modified or otherwise changed from time to time, the “Guaranty”) in favor
of the Agent to guarantee the Company’s obligations under the Purchase
Agreements, the Notes and the Transaction Documents (as defined
below);

    

    WHEREAS,
the Company is party to an Amended and Restated Security Agreement dated as of
the date hereof (as amended, restated or otherwise modified from time to time,
the “Security
Agreement” and together with any ancillary documents related thereto,
collectively the “Security Documents”), granting the Agent on behalf of the
Noteholders a first priority security interest in substantially all of its
assets and properties securing the obligations under the Notes and other
“Transaction Documents” (as defined in each of the Purchase Agreements)
(collectively, the “Transaction
Documents”);

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    NOW THEREFORE, in
consideration of the foregoing and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, each of the
parties hereto hereby agrees, notwithstanding anything to the contrary contained
in any of the Transaction Documents, as follows:

    

    (28)          Certain Definitions.
As used in this Agreement, the following terms shall have the meanings ascribed
to them below:

    

    (a)   
        “Bridge Note
Obligations” shall mean any and all obligations, liabilities and
indebtedness of every kind, nature and description owing to the Agent or the
Bridge Note Holders by (i) the Company evidenced by or arising under the Bridge
Notes or (ii) any Guarantor under the Guaranty, in either case, whether direct
or indirect, absolute or contingent, joint or several, due or not due, primary
or secondary, liquidated or unliquidated, including principal, interest,
charges, fees, costs, indemnities and expenses, however evidenced (but excluding
indemnity obligations under the Bridge Notes that are contingent and for which
no claim has been asserted), whether as principal, surety, endorser, guarantor
or otherwise, whether now existing or hereafter arising, or whether arising
after the commencement of any Insolvency Proceeding with respect to any Obligor
(and including, without limitation, the payment of interest which would accrue
and become due but for the commencement of such Insolvency Proceeding whether or
not such interest is allowed or allowable in whole or in part in any such
Insolvency Proceeding).

    

    (b)    
       "Existing Note
Obligations” shall mean all obligations, liabilities and indebtedness of
every kind, nature and description owing by owing to the Agent or the Existing
Note Holders by (i) the Company evidenced by or arising under the Existing Notes
or (ii) any Guarantor under the Guaranty, in either case, whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, including principal, interest, charges,
fees, costs, indemnities and expenses, however evidenced, whether as principal,
surety, endorser, guarantor or otherwise, whether now existing or hereafter
arising, whether arising before, during or after the commencement of any
Insolvency Proceeding with respect to any Obligor (and including, without
limitation, the payment of interest which would accrue and become due but for
the commencement of such Insolvency Proceeding, whether or not such interest is
allowed or allowable in whole or in part in any such Insolvency
Proceeding).

    

    (c)      
     “Insolvency
Proceeding” shall mean, as to any Person, any of the
following:  (i) any case or proceeding with respect to such Person
under the U.S. Bankruptcy Code or any other Federal or State bankruptcy,
insolvency, reorganization or other law affecting creditors’ rights or any other
or similar proceedings seeking any stay, reorganization, arrangement,
composition or readjustment of the obligations and indebtedness of such Person
or (ii) any proceeding seeking the appointment of any trustee, receiver,
liquidator, custodian or other insolvency official with similar powers with
respect to such Person or any of its assets or (iii) any proceeding for
liquidation, dissolution or other winding up of the business of such Person or
(iv) any assignment for the benefit of creditors or any marshalling of assets of
such Person.

    

    (d)   
        “Note Obligations”
shall mean collectively, the Bridge Note Obligations and the Existing Note
Obligations.

    

    (29)          Allocation of
Payments. The parties hereto hereby agree that until the Bridge Note
Obligations have been paid in full:

    

    (a)    
       All payments (including any
prepayments) by any Obligor of any Note Obligations shall be applied to pay
Bridge Note Obligations until all Bridge Note Obligations are paid in full
before any payments are applied to pay any Existing Note
Obligations;

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (b)   
        In the event of any
dissolution, winding up, liquidation, arrangement or reorganization relating to
any Obligor, whether in any bankruptcy, insolvency, arrangement, reorganization
or receivership proceedings or upon an assignment for the benefit of creditors
or any other marshalling of the assets and liabilities of any Obligor or
otherwise, any payment or distribution of any kind (whether in cash, securities
(other than Conversion Shares (as defined in the Existing Notes)) or other
property) which otherwise would be payable or deliverable upon or with respect
to the Existing Note Obligations shall be paid or delivered directly to the
Bridge Note Holders for application (in the case of cash) to, or as collateral
(in the case of securities or other non-cash property) for, the payment or
prepayment of the Bridge Note Obligations until the Bridge Note Obligations
shall have been paid in full;

    

    (c)      
     No Existing Note Holder will ask, demand,
sue for, take or receive, directly or indirectly, from any Obligor, in cash or
other property (excluding capitalized interest or paid-in-kind interest), by
set-off, by realizing upon collateral or in any other manner, payment of, or
security for, any or all of the Existing Note Obligations unless and until the
Bridge Note Obligations shall have been paid in full;

    

    (d)            No
Obligor will make any payment in respect of any of the Existing Note
Obligations, or take any other action, in contravention of the provisions of
this Agreement; and

    

    (e)       
    All payments or distributions upon or with
respect to the Existing Note Obligations which are received by the Existing Note
Holders (other than Conversion Shares) contrary to the provisions of this
Agreement shall be received in trust for the benefit of the Bridge Note Holders,
shall be segregated from other funds and property held by the Existing Note
Holders and shall be forthwith paid over to the Bridge Note Holders in the same
form as so received (with any necessary endorsement) to be applied (in the case
of cash) to or held as collateral (in the case of securities or other non-cash
property) for the payment or prepayment of the Bridge Note Obligations until
paid in full. If any amount received by the Bridge Note Holders is rescinded or
returned for any reason, the payment priorities set forth in this Agreement
shall be reinstated with respect thereto.

    

    (30)          Voting.  The
parties hereto hereby agree that prior to the payment in full of all Bridge Note
Obligations:

    

    (a)       
    For clarification purposes, “Required Holders” as
such term is used in Article 9 of the Purchase Agreements shall mean Noteholders
which hold in the aggregate, at least (i) 75% of the total outstanding principal
balance of the Existing Notes and (ii) a majority of the total outstanding
principal balance of the Bridge Notes; and

    

    (b)        
   Notwithstanding anything to the contrary in Section
3(a) hereof or Article 9 of the Purchase Agreements, if Noteholders holding 51%
or more of the total outstanding principal balance of the Bridge Notes direct
the Collateral Agent to take any remedies following an Event of Default under
the Bridge Notes (the “Enforcement
Directions”), including without limitation any action (i) to foreclose on
the security interest of the Agent in any of the Collateral, (ii)  to
take possession of, sell or otherwise realize (judicially or non-judicially)
upon any of the Collateral (including, without limitation, by setoff or
notification of account debtors), and/or (iii) the commencement of any legal
proceedings against or with respect to all or any of the Collateral to
facilitate the actions described in (i) and (ii) above, the Existing Noteholders
shall agree to vote in a consistent manner with the Enforcement Directions;
provided that such Enforcement Directions are otherwise in accordance with the
Security Documents and the other Transaction Documents.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (31)          Miscellaneous

    

    (a)     
      This Agreement shall (i) be binding
on the Existing Note Holders and the Obligors and their respective successors
and assigns and (ii) inure, together with all rights and remedies of the Bridge
Note Holders hereunder, to the benefit of the Bridge Note Holders and their
respective successors, transferees and assigns.

    

    (b)      
     So long as any of the Bridge Note
Obligations shall remain outstanding, no Existing Note Holder will sell, assign,
pledge, encumber or otherwise dispose of its Existing Notes unless such sale,
assignment, pledge, encumbrance or disposition is made expressly subject to this
Agreement and such assignee, pledgee or grantee expressly acknowledges and
accepts the terms of this Agreement.

    

    (c)        
   Nothing in this Agreement shall in any way restrict any
Existing Note Holder’s right to convert any Existing Note Obligations into
Conversion Shares in accordance with the provisions of its Existing
Notes.

    

    (d)         
  The Bridge Note Holders are hereby authorized to demand
specific performance of this Agreement at any time when any Existing Note Holder
shall have failed to comply with any of the provisions of this Agreement
applicable to the Existing Note Holders whether or not any Obligor shall have
complied with any of the provisions hereof applicable to such Obligor, and any
Existing Note Holders hereby irrevocably waives any defense based on the
adequacy of a remedy at law which might be asserted as a bar to such remedy of
specific performance. No failure on the part of the holders of the Bridge Note
Holders to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right preclude any other or further exercise thereof or the exercise of any
other right.

    

    (e)           
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining portions
hereof or thereof or affecting the validity or enforceability of such provision
in any other jurisdiction.

    

    (f)       
     This Agreement reflects the entire
understanding of the parties with respect to the subject matter hereof and shall
not be contradicted or qualified by any other agreement, oral or written, before
the date hereof.

    

    (g)       
    No amendment or waiver of any provision of this
Agreement shall in any event be effective unless the same shall be in writing
and signed by each party hereto, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.

    

    (h)        
   Nothing contained in this Agreement shall amend, as
between the Obligors, on the one hand and the Existing Note Holders, on the
other hand, the obligations of any Obligor to pay to Existing Note Holders the
principal thereof and prepayment premium, if any, and interest thereon as and
when the same shall become due and payable in accordance with the terms of the
Existing Note or the Guaranty or prevent any Existing Note Holder from
exercising all rights, powers and remedies otherwise permitted by applicable law
or under any Existing Note, subject to the rights of the Bridge Note Holders
hereunder.

    

    (i)          
  The Agent is made a party hereto solely for the purpose of
acknowledging and giving effect to the agreements of the Noteholders contained
herein.

    

    [REMAINDER
OF PAGE LEFT INTENTIONALLY BLANK]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (j)           This
Agreement shall be construed under and governed by the laws of the State of New
York and may be executed in any number of counterparts and by different parties
on separate counterparts.  Each of such counterparts shall be deemed
to be an original, and all of such counterparts, taken together, shall
constitute but one and the same agreement.  Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally effective as
delivery of a manually executed counterpart.

    

    

    
      	 
      	
              [EXISTING
      NOTE HOLDERS]

            
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              [BRIDGE
      NOTE HOLDERS]

            
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              NESTOR,
      INC.

            
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              NESTOR
      TRAFFIC SYSTEMS, INC.

            
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              CROSSINGGUARD,
      INC.

            
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              NESTOR
      INTERACTIVE, INC.

            
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              U.S.
      BANK NATIONAL ASSOCIATION

            
	 
      	
              in
      its capacity as Agent

            
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
G-1

    

    FORM OF

    WRITTEN CONSENT, WAIVER
SUBORDINATION AND FORBEARANCE

    AGREEMENT

    

    This
Written Consent, Waiver, Subordination and Forbearance Agreement (this “Agreement”), dated as
of October ____, 2008, is entered into between Nestor, Inc., a Delaware
corporation (the “Company”) and the
undersigned holder (“Holder”) of the
Company’s Amended and Restated 5% Senior Convertible Notes due May 25, 2009, as
amended (each, a “Note” and
collectively, the “Notes”) and shall be
effective as of the Effective Date (as defined in section 7
below).  Capitalized terms not otherwise defined herein shall have the
meanings as ascribed in the Note Agreement (as defined below).

    

    Background

    

    WHEREAS, Holder and other
investors (collectively, the “Holders”) are parties
to the Note Agreement dated November 5, 2004 by and among the Company and the
Holders (the “Note
Agreement”), pursuant to which the Company issued the Notes;

    

    WHEREAS, on May 12, 2006,
Holder and the other investors entered into that certain Consent and Waiver and
Amendment to Note Agreement pursuant to which the Company and the Holders agreed
to amend the Note Agreement and the Notes to, among other things, extend the
maturity of the Notes until May 25, 2009 and redeem up to 50% of the outstanding
principal balance of the Notes;

    

    WHEREAS, there are currently
outstanding Notes in the aggregate principal amount of $2.58
million;

    

    WHEREAS, the Company is
currently in default of certain covenants and provisions of the Notes and the
Company’s 7% Senior Secured Convertible Notes, including without limitation the
obligation to pay interest on the aforementioned notes;

    

    WHEREAS, the Company now seeks
to privately place (the “2008 Private
Placement”) senior secured bridge notes in the principal face amount of
$1,000 (which aggregate amount for all purchasers shall be $500,000) (the “Secured Bridge
Notes”) as part of a larger restructuring of the Company in accordance
with the terms of the term sheet attached hereto as Exhibit A (the “Term
Sheet”);

    

    WHEREAS, the Secured Bridge
Notes will be senior obligations of the Company, secured by a first priority
interest (the “Security Interest”)
in substantially all assets of the Company and its subsidiaries;

    

    WHEREAS, all payments of
principal and interest on the Notes will be subordinate to payments of principal
and interest on the Secured Bridge Notes and payments of principal and interest
on the Notes will be tolled from the Effective Date until the earlier to occur
of (i) the Exchange (as such term is defined in Term Sheet) or (ii) the six
month anniversary of the Effective Date.

    

    WHEREAS, under Sections 11(c),
8.4 and 8.5 of the Note Agreement, the 2008 Private Placement and the granting
of the Security Interest would constitute an Event of Default under the Note
Agreement absent the consent of Holders of 66-2/3% of the aggregate principal
amount of the Notes currently outstanding (the “Requisite
Holders”);

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    WHEREAS, under Section 15 of
the Note Agreement, the Requisite Holders may consent to any change in or
additions to the Note Agreement or any failure to comply with any covenant or
condition set forth in the Note Agreement (subject to certain
exceptions);

    

    WHEREAS, in addition to the
consent of the Requisite Holders to allow for the 2008 Private Placement and the
grant of the Security Interest, the consummation of the 2008 Private Placement
is conditioned upon the Company receiving an agreement from the Holders to waive
any Event of Default by the Company under the Note Agreement that has occurred
prior to the date of this Agreement, an agreement of the Holders not to declare
an Event of Default during the Forbearance Period (as defined below) and an
agreement of the Holders to forgo their rights to convert the Notes to Common
Stock pursuant to Section 13 of the Note Agreement (the “Conversion Rights”)
during the Forbearance Period.

    

    NOW THEREFORE, the parties
hereby agree as follows:

    

    ARTICLE
I

    CONSENT

    

    1.1          
Consent to 2008 Private
Placement. The Holders hereby consent to and approve the 2008 Private
Placement, the issuance of the Secured Bridge Notes and the granting of the
Security Interest.

    

    1.2          
Consent to Postponement
of Interest Payment.  The Holders hereby consent to the
postponement of the date fixed for any interest payments due during the
Forbearance Period (as defined below) until the expiration of the Forbearance
Period, provided that the amount of any interest which is so postponed shall be
added to the principal of the Notes and accrue interest at the Interest Rate set
forth in the Notes.

    

    1.3         
Consent to
Exchange.  The Holders hereby consent to the Exchange (as such
term is defined in the Term Sheet) upon the terms and conditions as set forth in
the Term Sheet and agree to exchange their Notes for shares of Series C
convertible preferred stock of the Company as contemplated by the Term Sheet and
in connection therewith, to execute, acknowledge and deliver any and all
documents, agreements, certificates and instruments necessary to effect the
Exchange, and to take all such other actions as may be reasonably requested by
the Company in connection with the Exchange.

    

    ARTICLE
II

    SUBORDINATION

    

    2.1           Subordination
of Interest and Principal on Notes.  The Holders acknowledge
and agree that all interest due and payable on the Notes shall be subordinate
and subject in right of payment to the prior payment of interest when and as due
under the Senior Bridge Notes.  The Holders further acknowledge and
agree that all principal due and payable on the Notes shall be subordinate and
subject in right of payment to the prior payment in full of all principal due
under the Secured Bridge Notes.  Notwithstanding the foregoing, no
payments of principal or interest on the Notes shall be made until the earlier
to occur of (i) the Exchange Date or (ii) the later of (a) the Maturity Date of
the Secured Bridge Notes or (b) the six month anniversary of the Effective Date
(the “Forbearance
Period”).

    

    2.2           Payment
Over of Proceeds Upon Dissolution, Etc.  Upon any distribution
of assets of the Company or any of its subsidiaries in the event of (a) any
insolvency or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding in connection therewith, or
(b) any liquidation, dissolution or other winding up of the Company or any of
its subsidiaries, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or
any marshalling of assets and liabilities of the Company or any of its
subsidiaries, then and in any such event, the holders of the Senior Bridge Notes
shall be entitled to receive payment in full of all amounts on or in respect of
the Senior Bridge Notes before the Holders are entitled to receive any payment
on account of the principal of or interest on the Notes, and to that end, the
holders of the Senior Bridge Notes shall be entitled to receive, as their
interests may appear, for application to the payment of the Senior Bridge Notes,
any payment or distribution of any kind or character, whether in cash, property
or securities, which may be payable or deliverable in respect of the Notes owed
by the Company or any of its subsidiaries in any such case, proceeding,
dissolution, liquidation or other winding up event.

    

    
      
        
           

        

        
          39

          
            

          

        

        
           

        

      

    

    

    ARTICLE
III

    WAIVER
AND FORBEARANCE

    

    3.1           Waiver
of Prohibitions on Additional Indebtedness and Granting of Security
Interests.  In connection with the 2008 Private Placement, the
undersigned hereby irrevocably waives (i) the Company’s obligations under
Sections 8.4 and 8.5 of the Note Agreement and any breach thereof arising from
the 2008 Private Placement and the Company’s granting of the Security Interest;
and (ii) the Company’s failure to comply with its obligation under Section
13.4(c) of the Note Agreement to notify the Holders of the 2008 Private
Placement at least five days prior to the closing thereof, in the manner
described in said Section 13.4(c).

    

    3.2           Waiver
of Certain Events of Default.  The Holders hereby irrevocably
waive any defaults arising as a result of the following events occurring prior
to the Effective Date or continuing during the Forbearance Period, which, but
for the waiver set forth in this Section 3.2 would constitute Events of Default
by the Company under the Note Agreement: (i) the Company’s failure to pay
interest when due up to the date hereof, (ii) any defaults by the Company under
the Notes arising from any defaults or events of default under the Company’s 7%
Senior Secured Convertible Notes which have been waived by the holders of such
notes.  In addition, the Holders irrevocably waive any Event of
Default by the Company under the Notes occurring due to the Company’s failure to
pay interest on any interest payment date occurring during the Forbearance
Period (as hereinafter defined).  The waivers effected pursuant to
this Section 3.2 shall be effective as of the date of the occurrence of each
such event specified in this Section 3.2.  Notwithstanding the
foregoing, interest on the principal amount of the Notes shall continue to
accrue at the interest rate provided under the Notes on any amounts not timely
paid under the Notes at all times as though this Agreement were not in
effect.

    

    3.3           Forbearance
on Exercise of Conversion Rights.  The Holders agree not to
exercise the Conversion Rights at any time during the Forbearance
Period.

    

    3.4           Forbearance
on Declaration of Event of Default.  If an Event of Default
occurs under the Note Agreement on or following the Effective Date, then the
Holders agree that during the Forbearance Period, the Holders will forbear the
exercise of the Holders’ rights to declare the Notes immediately due and payable
pursuant to Section 11 of the Note Agreement.  This is a forbearance
and not a waiver.  The Holders hereby reserve the exercise of all of
their rights and remedies with respect to any Event of Default described above
after the expiration of the Forbearance Period.  Notwithstanding the
foregoing, upon the occurrence of an Event of Default as specified in Section
11(d) of the Note Agreement regarding the filing of a petition in bankruptcy
with respect to the Company, the forbearance granted by the Holders in this
Section 3.4 shall terminate.  For purposes of clarification, interest
on the principal amount of the Notes shall continue to accrue at the interest
rate provided under the Notes on any amounts not timely paid under the Notes at
all times as though this Agreement were not in effect.

    

    
      
        
           

        

        
          40

          
            

          

        

        
           

        

      

    

    

    ARTICLE
IV

    REPRESENTATIONS
AND WARRANTIES

    

    In
connection with the agreements herein, the Holder hereby represents and warrants
to the Company as follows:

    

    (a)        
   the Holder is the lawful holder of the Note designated on the
signature page hereto free and clear of all security interests, claims, liens,
pledges, conditional sales contracts, attachments, judgments and encumbrances of
every kind and nature, including restrictions, or rights of any third
parties;

    

    (b)        
   the Holder has the requisite power and authority to execute
and deliver this Agreement, to perform the Holder’s obligations hereunder and to
engage in the transactions contemplated hereby;

    

    (c)       
    the Holder has taken all requisite action to make all
the provisions of this Agreement the valid and enforceable obligations they
purport to be; and

    

    (d)       
    this Agreement constitutes the valid and binding
obligation of the Holder, enforceable in accordance with its terms, subject to
laws of general application from time to time in effect affecting creditors'
rights and the exercise of judicial discretion in accordance with general
equitable principles.

    

    ARTICLE
V

    MISCELLANEOUS

    

    5.1           Notes
Otherwise Unaffected; Transaction Documents Unaffected. Except as
provided in this Agreement, the execution and delivery of this Agreement does
not and will not amend, modify or supplement any provision of, or constitute a
consent to or waiver of any non-compliance with the provisions of the Note
Agreement, and the Note Agreement shall remain in full force and
effect.

    

    5.2           Further
Assurances.  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
the 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.

    

    5.3           Successors
and Assigns.  All of the terms and provisions of this Agreement
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns.

    

    5.4           Effectiveness.  This
Agreement shall be effective as of the date of issuance of the Secured Bridge
Notes in connection with the 2008 Private Placement (the “Effective
Date”).

    

    5.5           Counterparts.  This
Agreement may be may be executed in one or more counterparts, all of which shall
be considered one and the same agreement.

    

    5.6           No
Third Party Beneficiaries.  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.

    

    
      
        
           

        

        
          41

          
            

          

        

        
           

        

      

    

    

    5.7           Independent
Nature of Holder’s Obligations and Rights.  The obligations of
the undersigned Holder under this Agreement are several and not joint with the
obligations of any other Holder, and Investor shall not be responsible in any
way for the performance of the obligations of any other Holder under this
Agreement.  Nothing contained herein or in this Agreement, and no
action taken by the undersigned Holder pursuant hereto, shall be deemed to
constitute the undersigned Holder and other Holders as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the undersigned Holder and other Holders are in any way acting
in concert or as a group with respect to such obligations or the transactions
contemplated by this Agreement and Company acknowledges that the Holders are not
acting in concert or as a group with respect to such obligations or the
transactions contemplated by this Agreement.  Company and the
undersigned Holder confirm that the undersigned Holder has independently
participated in the negotiation of the transactions contemplated hereby with the
advice of its own counsel and advisors.  The undersigned Holder shall
be entitled to independently protect and enforce its rights, including, without
limitation, the rights arising out of this Agreement, and it shall not be
necessary for any other Holder to be joined as an additional party in any
proceeding for such purpose.

    

    

    [Signatures appear on following
page.]

    

    
      
        
           

        

        
          42

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, the parties have executed this Agreement as of the date first
provided above.

    

    

    

    
      	
              Principal
      Amount of Note:

            	 
      	 
      	 
      
	
              U.S.
      $______________

            	
              (Signature
      of Holder)

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              (Print
      Name)

            
	 
      	 
      	 
      	 
      
	
              Denomination
      of Note

            	 
      	 
      	 
      
	
              (Note
      Number indicated on face

            	
              (Address)

            
	
              page
      of Note)

            	 
      	 
      	 
      
	
              No._______

            	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              Social
      Security or other

            
	 
      	
              Taxpayer
      Identification

            
	 
      	
              Number,
      if any

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              NESTOR,
      INC.

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
A

    

    Term
Sheet

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
G-2

    

    FORM OF

    WRITTEN CONSENT, WAIVER AND
FORBEARANCE

    AGREEMENT

    

    This
Written Consent, Waiver and Forbearance Agreement (this “Agreement”), dated as
of September ____, 2008, by and among Nestor, Inc., a Delaware corporation with
a headquarters address at 42 Oriental Street, Providence, Rhode Island 02908
(“Company”) and
Investor that is a signatory to this Agreement (“Investor”).

    

    Background

    

    WHEREAS, on May 25, 2006,
Investor and certain other investors (collectively, the “Holders”) purchased
those certain Senior Secured Convertible Notes bearing interest at the initial
rate of 7.0% per annum (subject to adjustment) (the “Notes”) in the
original aggregate Principal amount of $28,550,000.00.

    

    WHEREAS, on or about December
29, 2006, Company made payment to Holders of the aggregate amount of
$5,710,000.00 in accordance with Holders' exercise of their right under Section
8(a) of the Notes to redeem up to 20.0% of the outstanding principal amount of
the Notes (the “Redemption”).

    

    WHEREAS, the aggregate
principal amount currently outstanding under the Notes is
$22,840,000.

    

    WHEREAS, the Company is
currently in default of certain covenants and provisions of the Notes and the
Company’s 5% Senior Convertible Notes, including without limitation the
obligation to pay interest on the aforementioned notes.

    

    WHEREAS, the Company now seeks
to privately place (the “2008 Private
Placement”) senior secured bridge notes in the principal face amount of
$1,000 (which aggregate amount for all purchasers shall be $500,000) (the “Secured Bridge
Notes”) as part of a larger restructuring of the Company in accordance
with the terms of the term sheet attached hereto as Exhibit A (the “Term
Sheet”).

    

    WHEREAS, the Secured Bridge
Notes will be senior obligations of the Company, secured by a first priority
interest (the “Security Interest”)
in substantially all assets of the Company and its subsidiaries.

    

    WHEREAS, the holders of the
Notes and the Secured Bridge Notes shall enter into a Payment Priority and
Voting Agreement (the “Priority Payment
Agreement”), pursuant to which all payment obligations with respect to
the Notes will be subordinate to all payment obligations due under the Secured
Bridge Notes.

    

    WHEREAS, under Sections 14(a),
(b) and (c) of the Notes, the 2008 Private Placement and the granting of the
Security Interest would constitute an Event of Default under the Notes absent
the consent of Holders of 75% of the aggregate principal amount of the Notes
currently outstanding (the “Required
Holders”).

    

    WHEREAS, under Section 16 of
the Notes, the Required Holders may consent to any change in or additions to the
Notes or any failure to comply with any covenant or condition set forth in the
Notes (subject to certain exceptions).

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    WHEREAS, in addition to the
consent of the Required Holders to allow for the 2008 Private Placement and the
grant of the Security Interest, the consummation of the 2008 Private Placement
is conditioned upon the Company receiving an agreement from the Holders to waive
any Event of Default by the Company under the Notes that has occurred prior to
the date of this Agreement, an agreement of the Holders not to declare an Event
of Default during the Forbearance Period (as defined below) and an agreement of
the Holders to forgo their rights to convert the Notes to Common Stock pursuant
to Section 3 of the Notes (the “Conversion Rights”)
during the Forbearance Period.

    

    WHEREAS, capitalized terms
used herein and not otherwise defined have the meaning ascribed to them in the
Notes unless the context clearly requires otherwise.

    

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

    

    ARTICLE
I

    CONSENT
AND DIRECTION

    

    1.1           Consent to 2008 Private
Placement. The Investor hereby consents to and approves the 2008 Private
Placement, the issuance of the Secured Bridge Notes and the granting of the
Security Interest.

    

    1.2           Consent to Postponement of Interest
Payment.  The Investor hereby consents to the postponement of
the date fixed for any interest payments due during the Forbearance Period (as
defined below) until the expiration of the Forbearance Period, provided that the
amount of any interest which is so postponed shall be added to the principal of
the Notes and accrue interest at the Default Rate set forth in the
Notes.

    

    1.3           Direction
to Collateral
Agent.           In
connection with the transactions contemplated by the 2008 Private Placement,
U.S. Bank National Association, as Collateral Agent (in such capacity, the
“Collateral Agent”), is hereby authorized and directed by the Investor to
execute and deliver each of the following proposed documents: Payment Priority
and Voting Agreement, Bridge Notes Securities Purchase Agreement, Amended and
Restated Security Agreement, Amended and Restated Security Agreement –
Trademarks, Patents and Copyrights, Amended and Restated Guaranty and Suretyship
Agreement, Amended and Restated Borrower/Subsidiary Pledge Agreement, and such
other related documents as may be contemplated thereby.

    

    ARTICLE
II

    WAIVER
AND FORBEARANCE

    

    2.1           Waiver
of Prohibitions on Additional Indebtedness and Granting of Security
Interests.  In connection with the 2008 Private Placement, the
Investor hereby irrevocably waives the Company’s obligations under Sections
14(a), (b) and (c) of the Notes and any breach thereof arising from the 2008
Private Placement and the Company’s granting of the Security
Interest.

    

    2.2           Waiver
of Certain Events of Default.  The Investor hereby irrevocably
waives any defaults arising as a result of the following events occurring prior
to the Effective Date or continuing during the Forbearance Period, which, but
for the waiver set forth in this Section 2.2 would constitute Events of Default
by the Company under the Notes: (i) the suspension from trading and failure of
the Company’s common stock to be listed on an Eligible Market; (iii) the
Company’s failure to pay interest when and as due under the Notes; (iv) the
Company’s failure to list the Registrable Securities on the Principal Market or
on another Eligible Market; (v) any defaults by the Company under the Notes
arising from any events of default under the Company’s 5% Senior Convertible
Notes which have been waived by the holders of such notes.  In
addition, the Investor irrevocably waives any Event of Default by the Company
under the Notes occurring due to the Company’s failure to pay interest on any
interest payment date occurring during the Forbearance Period (as hereinafter
defined).  The waivers effected pursuant to this Section 2.2 shall be
effective as of the date of the occurrence of each such event specified in this
Section 2.2.  Notwithstanding the foregoing, Interest on the principal
amount of the Notes shall continue to accrue at the Default Rate under the Notes
and Late Charges shall continue to accrue on any amounts not timely paid under
the Notes at all times as though this Agreement were not in effect.

    

    
      
        
           

        

        
          4

          
            

          

        

        
           

        

      

    

    

    2.3           Forbearance
on Exercise of Conversion Rights.  The Investor agrees not to
exercise the Conversion Rights at any time after the Effective Date until the
earlier to occur of (i) the earlier to occur of (a) the Second Closing or (b)
the Proxy Deadline (as such terms are defined in the Term Sheet) or (ii) the
Maturity Date (as defined in the Secured Bridge Notes) of the Secured Bridge
Notes or (iii) the date the Company receives any Event of Default Redemption
Notice (as defined in the Secured Bridge Notes) from any holder of Secured
Bridge Notes pursuant to the terms of the Secured Bridge Notes (the “Forbearance
Period”).

    

    2.4           Forbearance
on Declaration of Event of Default.  If an Event of Default
occurs under the Notes on or following the Effective Date, then the Investor
agrees that during the Forbearance Period, the Investor will forbear the
exercise of the Investor’s right to force the Company to redeem the Notes
pursuant to Section 4(b) of the Notes.  This is a forbearance and not
a waiver.  The Investor hereby reserves the exercise of all of the
Investor’s rights and remedies with respect to any Event of Default described
above after the expiration of the Forbearance Period.  Notwithstanding
the foregoing, upon the occurrence of an Event of Default as specified in
Sections 4(a)(vii) through (x) of the Notes regarding the filing of a petition
in bankruptcy or judgment against the Company, the forbearance granted by the
Holders in this Section 2.4 shall terminate.  For purposes of
clarification, Interest on the principal amount of the Notes shall continue to
accrue at the Default Rate under the Notes and Late Charges shall continue to
accrue on any amounts not timely paid under the Notes at all times as though
this Agreement were not in effect.

    

    ARTICLE
III

    CONDITIONS
TO AGREEMENT

    

    The
consents, waivers and forbearance set forth in Sections 1 and 2 above are
subject to satisfaction or waiver by the Investor (in its sole and absolute
discretion) of each of the following:

    

    3.1           Consent of the other
Holders.  Company having received a consent and waiver
substantially identical to this instrument from each of the other
Holders.

    

    3.2           Simultaneous Consent of 5% Senior
Convertible Notes.  Company having obtained the consent and
waiver of the Requisite Holders (as defined in the 5% Convertible Notes) of the
Company's 5% Senior Convertible Notes in the form attached as Exhibit B
hereto.

    

    3.3           Notice of Satisfaction of
Conditions.  Upon satisfaction of the conditions set forth in
Sections 3.1 through 3.2 above, Company will certify to Investor that all such
conditions have been met and shall notify Investor of the Effective
Date.

    

    3.4           Most Favored Nation. Company hereby
represents and warrants as of the date hereof and covenants and agrees from and
after the date hereof that none of the terms offered to any Person with respect
to any amendment, settlement or waiver (each a “Settlement Document”)
relating to the terms, conditions and transactions contemplated hereby, is or
will be more favorable to such Person than those of Investor and this Agreement
shall be, without any further action by Investor or Company, deemed amended and
modified in an economically and legally equivalent manner such that Investor
shall receive the benefit of the more favorable terms contained in such
Settlement Document.  Notwithstanding the foregoing, Company agrees,
at its expense, to take such other actions (such as entering into amendments to
the Transaction Documents (as such term is defined in the Securities Purchase
Agreement for the 2008 Private Placement)) as Investor may reasonably request to
further effectuate the foregoing.

    

    
      
        
           

        

        
          5

          
            

          

        

        
           

        

      

    

    

    ARTICLE
IV

    MISCELLANEOUS

    

    4.1           Notes
Otherwise Unaffected; Transaction Documents Unaffected. Except as
provided in this Agreement, the execution and delivery of this Agreement does
not and will not amend, modify or supplement any provision of, or constitute a
consent to or waiver of any non-compliance with the provisions of the Notes, and
the Notes shall remain in full force and effect.  The execution and
delivery of this Agreement does not and will not amend, modify or supplement any
provision of, or constitute a consent to or waiver of any non-compliance with
the provisions of the Warrants or any other Transaction Document (other than the
Notes).  The parties acknowledge and agree that the Priority Payment
Agreement shall not impair or otherwise limit the effectiveness of any consent,
waiver or forbearance granted by this Agreement.

    

    4.2           Further
Assurances.  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
the 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.

    

    4.3           Successors
and Assigns.  All of the terms and provisions of this Agreement
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns.

    

    4.4           Effectiveness.  This
Agreement shall be effective as of the date of issuance of the Secured Bridge
Notes in connection with the 2008 Private Placement (the “Effective
Date”).

    

    4.5           Counterparts.  This
Agreement may be may be executed in one or more counterparts, all of which shall
be considered one and the same agreement.

    

    4.6           Waiver
Satisfies Section 16 of Notes. Upon satisfaction or waiver of the
conditions set forth in Sections 3.1 through 3.3 hereof, this Agreement will
constitute a written consent without a meeting of the Required Holders pursuant
to Section 16 of the Notes.

    

    4.7           No
Third Party Beneficiaries except Collateral Agent.  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 for the Collateral
Agent.

    

    
      
        
           

        

        
          6

          
            

          

        

        
           

        

      

    

    

    4.8           Independent
Nature of Investor's Obligations and Rights.  The obligations
of Investor under this Agreement or any other Transaction Document are several
and not joint with the obligations of any other Holder, and Investor shall not
be responsible in any way for the performance of the obligations of any other
Holder under any Transaction Document.  Nothing contained herein or in
this Agreement or any other Transaction Document, and no action taken by
Investor pursuant hereto, shall be deemed to constitute Investor and other
Holders as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that Investor and other Holders are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated by this Agreement or any other Transaction Document
and Company acknowledges that Holders are not acting in concert or as a group
with respect to such obligations or the transactions contemplated by this
Agreement and any other Transaction Document.  Company and Investor
confirm that Investor has independently participated in the negotiation of the
transactions contemplated hereby with the advice of its own counsel and
advisors.  Investor shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Holder to be joined as an additional party in any
proceeding for such purpose.

    

    [The
Remainder of this Page Is Intentionally Left Blank]

    

    
      
        
           

        

        
          7

          
            

          

        

        
           

        

      

    

    

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

    

    
      	 
      	
              NESTOR,
      INC.

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
               

            	Name:	 
      
	 
      	
               

            	Title:	 
      

    

     

     

     

    Signature Pages to Waiver
Agreement

     

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    Dolphin
Offshore Partners, L.P.

    

    
      	
              By:

            	 
      	 
      
	
              Name:

            	 
      	 
      
	
              Title:

            	
              General
      Partner

            	 
      

    

    

    Principal
Amount:  $

    Percentage
Interest:

     

     

     

    Signature Pages to Waiver
Agreement

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    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:

            	 
      	 
      	 	 
	 
      	 
      	 
      	
              Name:

            	 
      	 
      	 	 
	 
      	 
      	 
      	
              Title:

            	
              Managing
      Director

            	 
      	 	 

    

    

    Principal
Amount:  $

    Percentage
Interest:

     

     

     

    Signature Pages to Waiver
Agreement

     

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    LBI
Group, Inc.

    

    
      	
              By:

            	 
      	 
      
	
              Name:

            	
              Eric
      C. Salzman

            	 
      
	
              Title:

            	
              Senior
      Vice President

            	 
      

    

    

    Principal
Amount:  $

    Percentage
Interest:

     

     

     

    Signature Pages to Waiver
Agreement

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    Kamunting
Street Master Fund, Ltd.

    

    
      	
              By:

            	 
      	 
      
	
              Name:

            	 
      	 
      
	
              Title:

            	 
      	 
      

    

    

    Principal
Amount:  $

    Percentage
Interest:

     

     

     

    Signature Pages to Waiver
Agreement

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    Tribeca
Global Convertible Investments, Ltd.

     

     

    
      	
              By:

            	 
      	 
      
	
              Name:

            	 
      	 
      
	
              Title:

            	 
      	 
      

    

    

    Principal
Amount:  $

    Percentage
Interest:

     

     

     

    Signature Pages to Waiver
Agreement

     

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    Capital
Ventures International

    

    
      	 
      	
              By:

            	
              Heights
      Capital Management, Inc.

            
	 
      	
              Its:

            	
              Authorized
      Agent

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      	 
      
	 
      	 
      	
              Title:

            	
              Investment
      Manager

            	 
      

    

    

    Principal
Amount:  $

    Percentage
Interest:

     

     

     

    Signature Pages to Waiver
Agreement

     

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    Evolution
Master Fund Ltd. SPC, Segregated Portfolio

    

    
      	
              By:

            	 
      	 
      
	
              Name:

            	 
      	 
      
	
              Title:

            	
              Director

            	 
      

    

    

    Principal
Amount:  $

    Percentage
Interest:

     

     

     

    Signature Pages to Waiver
Agreement

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    Highbridge
International, LLC

    

    
      	 
      	
              By:

            	
              Highbridge
      Capital Management, LLC

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      	 
      
	 
      	 
      	
              Title:

            	
              Managing
      Director

            	 
      

    

    

    Principal
Amount:  $

    Percentage
Interest:

     

     

     

    Signature Pages to Waiver
Agreement

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