A nasty power struggle has erupted at Nestor Inc. between the company’s former chief executive officer and the board of directors that fired him in May.

William B. Danzell, a major shareholder and former head of Nestor, notified the eight-member board last month that he was electing his own slate of directors, including himself.

So far, the board has decided to ignore Danzell’s actions, saying they are not valid, and has announced that the company has hired a permanent CEO to replace Danzell. Clarence A. Davis, a Nestor board member who was tapped as interim CEO in May, will stay on in that role, the company said.

The dispute comes at a difficult time for Nestor, which has been struggling financially and has seen its stock price drop dramatically over the past 18 months. However, the company said Friday that its financial situation has improved after it raised nearly $5 million in a private stock offering.

After the stock market closed yesterday, Nestor reported that its total revenue for the second quarter that ended June 30 was $3.1 million, up 53 percent from $2 million in the second quarter of last year. Revenue rose as a result of an increase in the number of traffic-control cameras installed, the company said in a regulatory filing. At the end of the quarter, the company had 247 installed, compared with 182 in the same period last year.

The company also trimmed its net loss to $2 million, or 10 cents a share, an improvement from its net loss of $4 million, or 20 cents a share, in the second quarter of 2006.

Stock in Nestor (NEST:Nasdaq) jumped yesterday to 89 cents a share, up 17 percent, or 13 cents a share. The 52-week high for the stock was $3.38 on Aug. 29 and the low was 32 cents on June 18.

Nestor is a Providence-based company that makes cameras and technology designed to catch drivers who ignore red traffic signals. Its customers are municipalities and local governments that use the technology to ticket motorists.

The power struggle emerged into public view in May through documents filed by Nestor with the U.S. Securities and Exchange Commission.

According to those documents, Nestor’s board of directors voted 6 to 0 on May 17 to remove Danzell, with one director abstaining. At the time, the company issued a statement saying Danzell was “relieved … of his duties and responsibilities,” but did not offer an explanation.

The firing followed a precipitous drop in Nestor’s stock price over the previous 18 months, as well as a lender’s unexpected decision in December to call in $5.7 million of an outstanding $28.6-million loan, leaving the company in a precarious financial position. In addition, Nestor had been warned that it could be delisted from the Nasdaq Capital Market because its share price has dropped below $1 for more than 30 consecutive trading days.

Danzell, a private investor, joined the company in 2003. He has had previous disagreements with board members, according to regulatory filings. In 2005, four Nestor directors chose not to seek reelection to the board because of “fundamental disagreements with the chief executive officer concerning his management of the company,” according to documents the company filed with the SEC.

The board had decided not to give Danzell a bonus in 2004 and in 2005 because Nestor had not attained certain financial goals, according to company filings.

At the time of his firing, Danzell owned roughly half of the company’s outstanding shares, according to regulatory filings. Since then, he has purchased more shares and has said, in regulatory filings, that the purchases were made to provide his company, Silver Star Partners, “with a view to controlling Nestor.”

Silver Star purchased 160,000 shares of Nestor common shares in the open market on June 4 for about $86,000. That purchase pushed Danzell’s voting power to 50.3 percent, he said in a regulatory filing.

On June 5, Nestor’s board planned to meet to discuss what type of employment agreement the company would offer to Danzell. (Although Danzell had been removed as CEO, he remained a company employee.)

Danzell was initially excluded from the meeting, but his attorney convinced the board to allow Danzell to make a presentation. According to Nestor, Danzell presented the board with an ultimatum — either appoint him chairman, get rid of two other board members and replace them with two people of Danzell’s choosing, or Danzell would use his voting power to effect the changes himself.

(Danzell did not return phone calls requesting comment.)

The board did not agree, and later that day, Danzell faxed a letter to the board, naming new directors. The board decided that the letter was not valid because it did not represent a majority of shares entitled under law to vote.

On June 8, board members voted to fine Danzell $86,000, the amount he paid for the stock purchase a few days earlier, because they said Danzell violated the company’s code of ethics. They said he made the purchase “based on his possession of material non-public information” and failed to get clearance from the company’s ethics compliance officer before making the purchase.

On June 11, Danzell faxed another letter to the board, again asserting his control. This time, the letter was also signed by three other shareholders. Again, the board decided that the letter was not valid.

On Friday, the company announced that Davis, the Nestor board member who was named interim CEO in May after Danzell was fired, would stay on in that role. Davis is one of the board members that Danzell wanted to replace.

Initially, Davis was not interested in the position, and was heading a three-person committee that was to search for a permanent CEO, said Brian Haskell, vice president and general counsel for Nestor.

But since then, “a couple things changed,” Haskell said in an interview on Monday.

Senior lenders and investors said they would be willing to invest more in the company if there was some “continuity of management.” The investors, as well as the company’s largest customers, thought well of Davis, Haskell said.

“I basically browbeat him into agreeing,” Haskell said. “It’s a coup for the company to get him as CEO. He’s out of our league. Every once in a while we get lucky.”

Nestor also announced Friday that it sold 8.5 million shares of its common stock, at 58.02 cents each, to several institutional and accredited investors in a private placement, raising a total of $4.95 million.

The money will be used to provide the capital needed to complete the design and installation of about 100 of its traffic camera approaches that have already been ordered. The company now has orders for up to 207 new approaches, and Haskell said the company predicts it won’t have to seek new capital to complete its existing orders.

As part of the stock sale, investors that previously lent money to the company agreed to waive a provision in their loan agreements that would have allowed them to convert the debt into ownership of company stock at the price the new shares were sold for. That waiver was a key element in getting new financing, Haskell said. Without it, Nestor might have had to issue millions of new shares, greatly diluting the value of each one.

Apparent from the company’s filings yesterday, the offering has diluted Danzell’s ownership stake in Nestor.

Haskell could not be reached yesterday for comment.

tbarmann@projo.com