Exhibit
10.56

    


    THIS NOTE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT

    OF 1933
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE

    DISPOSED
OF UNLESS REGISTERED UNDER THAT ACT

    OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.


     

    NEPHROS,
INC.

     

    Senior
Secured Note

    Due April 1, 2011

     

    
      
        	
                $500,000

              	
                No.
      R-2010-A-1

              	
                October
      1, 2010

              


      

    

     

    Nephros,
Inc., a Delaware corporation (the “Company”),
for value received, hereby promises to pay to the order of Lambda Investors LLC
(the “Lender”)
or its registered assigns, the principal sum of FIVE HUNDRED THOUSAND DOLLARS
And No Cents ($500,000) on or before April 1, 2011, and to pay interest
(computed on the basis of a 360-day year consisting of twelve 30-day months)
from the date hereof on the unpaid principal amount hereof at the rate of 12%
per annum (but in no event in excess of the maximum non-usurious rate of
interest permitted under applicable law), payable at the time the principal
amount hereof shall have become due and payable, whether at maturity or by
acceleration or otherwise, and thereafter at the rate of 16% per annum on any
overdue principal amount and (to the extent permitted by applicable law) on any
overdue interest until paid (but in no event in excess of the maximum
non-usurious rate of interest permitted under applicable law).

     

    All
payments of principal and interest on this Note shall be in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for payment of public and private debts.

     

    If any
payment on this Note is due on a day which is not a Business Day, it shall be
due on the next succeeding Business Day.  For purposes of this Note,
“Business
Day” shall mean any day other than a Saturday, Sunday or a legal holiday
or day on which banks are authorized or required to be closed in New
York.

     

    1.     
       Definitions.  As
used herein, the term “Note”
shall mean this Senior Secured Note Due April 1, 2011 and any Senior Secured
Note or Notes subsequently issued upon exchange or transfer hereof, and shall
include all amendments, supplements and other modifications
thereto.  The term “Security
Documents” shall mean (a) the Security Agreement by and between the
Company and the Lender that was executed and delivered on the date of the
original issuance of this Note, including all amendments, supplements and other
modifications thereto, (b) the Intellectual Property Security Agreement by and
between the Company and the Lender that was executed and delivered on the date
of the original issuance of this Note, including all amendments, supplements and
other modifications thereto, and (c) all other documents, agreements and
instruments now or hereafter executed and delivered by the Company or any other
person or entity (each, a “Person”)
as security for the payment or performance of the Note, including all
amendments, supplements and other modifications thereto.


    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    2.             Transfer, Etc. of
Note.  The holder of this Note may transfer this Note or sell
participations herein without the consent of the Company.  The holder
shall provide the Company with written notice of any transfer of this Note,
which notice shall include the name and address of the transferee, and such
other identification and other verification as the Company may reasonably
request, whereupon the Company shall register the transferee as the owner and
holder of this Note for all purposes.

     

    3.             Loss, Theft, Destruction or
Mutilation of Note.  In the case of any loss, theft or
destruction of this Note, upon receipt of an affidavit of loss from the holder
thereof, or, in the case of mutilation of this Note, upon surrender and
cancellation of this Note, the Company will make and deliver, in lieu of this
Note, a substitute Note of like tenor and unpaid principal amount and dated as
of the date hereof.

     

    4.             Persons Deemed Owners;
Holders.  The Company may deem and treat the person in whose
name this Note is registered as the owner and holder of this Note for the
purpose of receiving payment of principal of and interest on this Note and for
all other purposes whatsoever, whether or not this Note shall be
overdue.  The terms “Noteholder”
or “holder,”
as used herein, shall be deemed to mean the person in whose name the Note is
registered as aforesaid at such time.

     

    5.             Prepayments.

     

    (a)         
 Optional
Prepayment.  Upon notice given as provided in Section 5(c), the
Company may, at its option, prepay this Note, without premium or penalty, as a
whole at any time or in part from time to time in principal amounts which shall
be integral multiples of $1,000, together with any accrued and unpaid interest
thereon through the date of such prepayment.

     

    (b)        
 Mandatory
Prepayments.

     

    (i)           
If on any date the Company or any subsidiary shall receive any Cash Proceeds (X)
from the Rights Offering (as defined in Section 7(n), below), (Y) from any other
issuance of debt or equity securities of the Company or any subsidiary, or (Z)
from any issuance or incurrence of any other Indebtedness (excluding any
Indebtedness incurred in accordance with Section 7(j)), an amount equal to 100%
of the Cash Proceeds therefrom shall be applied on the date of such receipt,
issuance or incurrence toward the prepayment of this Note and any other amounts
payable under the Loan Documents (as defined below) until all such amounts have
been paid in full.  The provisions of this paragraph do not constitute
a consent to the incurrence of any Indebtedness not permitted by Section
7(j).

     

    (ii)           If
on any date the Company or any of its subsidiaries shall receive Cash Proceeds
from any Disposition of assets outside of the ordinary course of business, then
on the date of receipt by the Company or such subsidiary of such Cash Proceeds,
an amount equal to the amount of such Cash Proceeds shall be applied on the date
of such receipt towards the prepayment of this Note and any other amounts
payable under the Loan Documents until all such amounts have been paid in
full.  The provisions of this paragraph do not constitute a consent to
the consummation of any Disposition not permitted by Section
7(i).


    
      
         


      

      
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    (iii)           In
connection with any mandatory prepayment pursuant to this Section 5(b), the
Company shall give notice as provided in Section 5(c).

     

    For
purposes of this Note:

     

    “Cash
Proceeds” means, with respect to the Rights Offering, any other issuance
of debt or equity securities of the Company or any subsidiary, any other
issuance or incurrence of any Indebtedness by the Company or any subsidiary, or
any Disposition, the cash proceeds received by the Company and its subsidiaries
in connection with such transaction (including any cash received in respect of
non-cash proceeds, but only as and when received).

     

     “Disposition”
means the sale, assignment, transfer, license, lease or other disposition
(including any sale and leaseback transaction) of any property by the Company or
any of its subsidiaries, including any sale, assignment, transfer or other
disposal, with or without recourse, of any intellectual property or any rights
and claims associated therewith.  “Dispose
of” has a corresponding meaning.

     

     (c)          Notice of
Prepayment.  The Company shall give written notice of any
prepayment of this Note or any portion hereof pursuant to Section 5(a) or
Section 5(b) not less than five (5) nor more than sixty (60) days prior to the
date fixed for such prepayment.  Such notice of prepayment and all
other notices to be given to the holder of this Note shall be given by
registered or certified mail to the Person in whose name this Note is registered
at its address designated on the register maintained by the Company on the date
of mailing such notice of prepayment or other notice.  Upon notice of
prepayment being given as aforesaid, the Company covenants and agrees that it
will prepay, on the date therein fixed for prepayment, this Note or the portion
hereof, as the case may be, so called for prepayment.

     

    (d)           Allocation of All
Payments.  Payments hereunder shall be applied first to unpaid
fees and expenses, next to accrued and unpaid interest, and thereafter to the
unpaid principal of this Note.

     

    (e)           Interest After Date Fixed
for Prepayment.  If this Note or a portion hereof is called for
prepayment as herein provided, whether optional or mandatory, this Note or such
portion shall cease to bear interest on and after the date fixed for such
prepayment unless, upon presentation for such purpose, the Company shall fail to
pay this Note or such portion, as the case may be, in which event this Note or
such portion, as the case may be, and, so far as may be lawful, any overdue
installment of interest, shall bear interest on and after the date fixed for
such prepayment and until paid at the rate per annum provided herein for overdue
amounts.

     

    (f)    
       Surrender of Note; Notation
Thereon.  Upon any prepayment of a portion of the principal
amount of this Note, the holder hereof, at its option, may require the Company
to execute and deliver at the expense of the Company (other than for transfer
taxes, if any), upon surrender of this Note, a substitute Note registered in the
name of such Person as may be designated by such holder for the principal amount
of this Note then remaining unpaid, dated as of the date hereof, or may present
this Note to the Company for notation hereon of the payment of the portion of
the principal amount of this Note so prepaid.

     


    
      
         


      

      
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    6.  
          Representations and
Warranties.  The Company hereby represents and warrants
that:

     

    (a)           Organization, Qualifications
and Corporate Power.  The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is duly licensed or qualified to do business as a foreign
corporation and in good standing in each jurisdiction in which it is required to
be so licensed or qualified with respect to the operations of its business,
except where the failure to be so licensed or qualified would not have a
material adverse effect on the business, assets, results of operations or
condition (financial or other) of the Company and its business.  The
Company has all requisite power and authority to own, operate and lease its
assets and to carry on its business as it is now being conducted and to execute
and deliver this Note and the Security Documents, and to perform its obligations
hereunder and thereunder.

     

    (b)           Authorization of Agreements,
Etc.  The execution and delivery by the Company of this Note
and Security Documents, and the performance by the Company of its respective
obligations hereunder and thereunder have been duly authorized by all requisite
corporate action.

     

    (c)           Validity.  This
Note and the Security Documents have been duly executed and delivered by the
Company and constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
subject, as to enforcement of remedies, to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws from time to time in effect
affecting the enforcement of creditors’ rights generally and to general equity
principles.

     

    (d)           Non-Contravention.  The
execution, delivery and performance by the Company of this Note and the Security
Documents will not:  (i) violate any provision of any law, any order
of any court or other agency of government or permits currently in effect to
which the Company is subject; (ii) result in a breach of, or constitute a
default under, the provisions of any indenture, loan or credit agreement or any
other agreement, lease or instrument to which the Company is subject or by which
it or any of its assets is bound; or (iii) result in, or require, the creation
or imposition of any lien, security interest, mortgage, pledge, charge or
encumbrance of any nature whatsoever (each, a “Lien”)
with respect to any of the assets of the Company or any of its subsidiaries,
except as created pursuant to the Security Documents.

     

    (e)           Governmental
Approvals.  No registration or filing with, or consent or
approval of, or other action by, any Federal, state or other governmental agency
or instrumentality is or will be necessary for the valid execution, delivery and
performance of the Security Documents or the issuance, sale and delivery of this
Note, except as contemplated by the Security Documents.

     

    7.       
     Covenants Relating to the
Note.  The Company covenants and agrees that so long as the
Note shall be outstanding:


    
      
         


      

      
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    (a)           Maintenance of
Office.  The Company will maintain an office or agency in such
place in the United States of America as the Company may designate in writing to
the registered holder of this Note, where this Note may be presented for
registration of transfer and for exchange as herein provided, where notices and
demands to or upon the Company in respect of this Note may be served and where
this Note may be presented for payment.  Until the Company otherwise
notifies the holder hereof, said office shall be the principal office of the
Company located at 41 Grand Avenue, River Edge, New Jersey 07661.

     

    (b)           Payment of
Taxes.  The Company will promptly pay and discharge or cause to
be paid and discharged, before the same shall become in default, all material
taxes and assessments imposed upon the Company or any of its subsidiaries or
upon the income and profits of the Company or any of its subsidiaries, or upon
any property, real, personal or mixed, belonging to the Company or any of its
subsidiaries, or upon any part thereof by the United States or any State
thereof, as well as all material claims for labor, materials and supplies which,
if unpaid, would become a Lien upon such property or any part thereof; provided, however, that neither
the Company nor any of its subsidiaries shall be required to pay and discharge
or to cause to be paid and discharged any such tax, assessment, charge, levy or
claim so long as both (i) the Company has established adequate reserves for such
tax, assessment, charge, levy or claim and (ii) the Company or a subsidiary
shall be contesting the validity thereof in good faith by appropriate
proceedings.

     

    (c)           Corporate
Existence.  The Company will do or cause to be done all things
necessary and lawful to preserve and keep in full force and effect (i) its
corporate existence and the existence of each of its subsidiaries and (ii) the
material rights and franchises of the Company and each of its subsidiaries under
the laws of the United States or any state thereof, or, in the case of
subsidiaries organized and existing outside the United States, under the laws of
the applicable jurisdiction; provided, however, that,
subject to Section 7(i) below, nothing in this paragraph (c) shall prevent the
abandonment or termination of any rights or franchises of the Company, or the
liquidation or dissolution of, or a Disposition (whether through merger,
consolidation, sale or otherwise) of all or any substantial part of the property
and assets of, any subsidiary or the abandonment or termination of the
existence, rights and franchises of any subsidiary if such abandonment,
termination, liquidation, dissolution or Disposition is, in the good faith
business judgment of the Company, in the best interests of the Company and not
materially disadvantageous to the holder of this Note.

     

    (d)           Maintenance of
Property.  The Company will at all times maintain and keep, or
cause to be maintained and kept, in good repair, working order and condition
(reasonable wear and tear excepted) all significant properties of the Company
and its subsidiaries used in the conduct of the business of the Company and its
subsidiaries, and will from time to time make or cause to be made all needful
and proper repairs, renewals, replacements, betterments and improvements thereto
necessary so that the business of the Company and its subsidiaries may be
conducted at all times in the ordinary course consistent with past
practice.

     

    (e)           Insurance.  The
Company will, and will cause each of its subsidiaries to, (i) keep
adequately insured, by financially sound and reputable insurers, all property of
a character usually insured by corporations engaged in the same or a similar
business similarly situated against loss or damage of the kinds customarily
insured against by such corporations and (ii) carry, with financially sound
and reputable insurers, such other insurance (including without limitation
liability insurance) in such amounts as are available at reasonable expense and
to the extent believed advisable in good faith business judgment of the
Company.


    
      
         


      

      
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    (f)           Keeping of
Books.  The Company will at all times keep, and cause each of
its subsidiaries to keep, proper books of record and account in which proper
entries will be made of its transactions in accordance with generally accepted
accounting principles consistently applied.

     

    (g)           Transactions with
Affiliates.  Except for transactions with Lender and its
affiliates, the Company shall not enter into, and shall not permit any of its
subsidiaries to enter into, any transaction with any of its or any subsidiary’s
officers, directors, employees or any person related by blood or marriage to any
such person or any entity in which any such person owns any beneficial interest,
except for normal employment arrangements, benefit programs and employee
incentive option programs on reasonable and customary terms.

     

    (h)           Notice of Certain
Events.  The Company shall, immediately after it becomes aware
of the occurrence of (i) any Event of Default (as hereinafter defined) or any
event which, upon notice or lapse of time or both, would constitute such an
Event of Default, or (ii) any action, suit or proceeding at law or in
equity or by or before any governmental instrumentality or agency which could
reasonably be expected to materially impair the right of the Company to carry on
its business substantially as then conducted, or could reasonably be expected to
have a material adverse effect on the properties, assets, financial condition,
operating results or business of the Company and its subsidiaries taken as a
whole, give notice to the holder of this Note, specifying the nature of such
event.

     

    (i)          
 Consolidation,
Merger and Sale.  The Company shall not, and shall not permit
any of its subsidiaries to, consolidate or merge with or into, or sell or
otherwise Dispose of all or any material portion of its property or the property
of the Company and its subsidiaries taken as a whole in one or more related
transactions to, any other Person or Persons.

     

    (j)       
    Limitation on Indebtedness
and Disqualified Stock.  The Company shall not, and shall not
permit any of its subsidiaries to, (i) incur or permit to remain outstanding any
indebtedness for money borrowed (“Indebtedness”),
except (A) the Note, (B) Indebtedness existing on the date of original issuance
of this Note (or, if applicable, the earliest predecessor Note) and described in
the Company’s public SEC filings prior to such date, and (C) such Indebtedness
as may be mutually agreed upon by the Company and the holder of the Note, or
(ii) issue any capital stock (“Disqualified
Stock”) of the Company or any of its subsidiaries which by its terms, or
upon the happening of any event, matures, or is mandatorily redeemable, whether
pursuant to a sinking fund obligation or otherwise, or redeemable at the option
of the holder thereof, in whole or in part, on or prior to January
1, 2012.  The term “Indebtedness” shall not include trade or
other payables of or extensions of credit to the Company to or by the Company’s
vendors in the ordinary course of business.


    
      
         


      

      
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    (k)           Restricted
Payments.  The Company shall not, and shall not permit any of
its subsidiaries to: (i) declare or pay any dividends on, or make any other
distribution or payment on account of, or redeem, retire, purchase or otherwise
acquire, directly or indirectly, any shares of any class of stock of the Company
or any option, warrant or other security, whether now or hereafter outstanding,
or make any other distribution in respect thereof, either directly or
indirectly, whether in cash, property or in obligations of the Company or any of
its subsidiaries, except for (Y) distributions of shares of the same class of
stock pro rata to all holders of shares of a class of stock and (Z) dividends,
distributions or payments by any subsidiary to the Company or to any
wholly-owned subsidiary of the Company, or (ii) make any payments of principal
of, or retire, redeem, purchase or otherwise acquire any Indebtedness other than
the Note (such declarations, payments, purchases, redemptions, retirements,
acquisitions or distributions being herein called “Restricted
Payments”).

     

    (l)      
     Limitation on
Liens.  The Company shall not, and shall not permit any of its
subsidiaries to, directly or indirectly, create, incur, assume or otherwise
cause or suffer to exist any Liens on any asset now owned or hereafter acquired,
or on any income or profits therefrom or assign or convey any right to receive
income therefrom, except for (i) liens for current taxes not yet due, (ii)
landlord’s liens, (iii) purchase money liens, (iv) workman’s, materialman’s,
warehouseman’s and similar liens arising by law or statute, and (v) liens in
favor of the Noteholder pursuant to the Security Documents.

     

    (m)           Inspection of
Property.  The Company shall permit the holder hereof to visit
and inspect any of the properties of the Company and any subsidiaries and their
books and records and to discuss the affairs, finances and accounts of any of
such entities with the principal officers of the Company and such subsidiaries
and their independent public accountants, all at such reasonable times and as
often as such holders may reasonably request.

     

    (n)           Rights
Offering.  The Company shall undertake an SEC registered rights
offering to raise $3.5 million from its existing common stock shareholders (the
“Rights
Offering”) on the following terms:

     

    (i)          
 All existing shareholders of the Company shall be eligible to participate
in the Rights Offering pro rata based upon their common stock interest in the
Company.

     

    (ii)           The
Rights Offering shall be for the right to purchase up to an aggregate of 175
million new shares of common stock at a price of $0.02/share plus a pro rata
share of new $0.02 common stock warrants (the “New
Warrants”).  The number of New Warrants available for issuance
in the rights offering will be equal to 50% of the number of $0.90 full ratchet
common stock warrants held by the Noteholders or their affiliates (the “Wexford
Warrants”), after application of the full ratchet adjustment applicable
to the Wexford Warrants as a result of the Rights Offering. The New Warrants
shall have a term of five (5) years.

     

    (iii)           The
Noteholder shall surrender or cause to be surrendered to the Company a number of
Wexford Warrants equal to the total number of New Warrants issued in the Rights
Offering.  The Wexford Warrants surrendered to the Company shall be
cancelled.  The term of the remaining Wexford Warrants will be
increased to equal the term of the New Warrants.


    
      
         


      

      
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    (iv)           The
Noteholder, any other shareholder of the Company or any third party will have
the right to oversubscribe for any unsubscribed shares/warrants in the Rights
Offering.  Any party that seeks to subscribe for such interests shall
provide the Company with a binding commitment not later than the date of the
closing of the Rights Offering.  If there are not enough unsubscribed
shares/warrants to meet the amounts requested by such parties, the unsubscribed
shares/warrants shall be allocated among them pro rata based on the amounts
requested (the “Oversubscription
Process”).  The closing on the Oversubscription Process shall
occur not more than ten (10) business days following the closing of the Rights
Offering.

     

    (v)           The
Company shall have obtained shareholder approval for the authorized shares of
common stock required in connection with the Rights Offering and for the
transactions contemplated thereby.

     

    (vi)           The
Company shall have obtained board and SEC approval of a registration statement
for the issuance of shares of common stock in connection with the Rights
Offering.

     

    (vii)         The
Lender’s exercise of its basic subscription privilege in the Rights Offering
shall be subject to the Company’s satisfaction of its obligations under this
clause (n) (other than under subclause (x) which obligations arise after the
closing of the Rights Offering) as well as the requirement that at least 50% of
the shares available in the Rights Offering shall have been subscribed for by
non-Wexford affiliated shareholders of the Company.

     

    (viii)        The
Company shall have received all other required approvals and
consents.

     

    (ix)           The
definitive agreements relating to the Rights Offering shall include customary
representations and warranties by the Company and customary covenants
satisfactory to the Noteholders.

     

    (x)           The
Company shall file with the SEC a registration statement on Form S-1 (or other
appropriate form if the Company is not then eligible to use Form S-3) covering
the resale by the Noteholders of the common stock and New Warrants issued in
connection with the Rights Offering, and if requested by any Noteholder, the
Wexford Warrants (the “Registration
Statement”) and shall use its commercially reasonable efforts to cause
the Registration Statement to be declared effective within ninety (90) calendar
days after the filing date, or within one-hundred and eighty (180) calendar
days after the filing date in the event the Registration Statement is reviewed
by the SEC.  The Company shall use its commercially reasonable efforts
to keep the Registration Statement continuously effective until such time as all
the securities have been sold thereunder or the securities may be sold without
restriction under applicable securities laws, subject to normal and customary
blackout periods.  The registration rights specified in this clause
(x) shall be embodied in a registration rights agreement in customary form
between the Company and the Noteholders.


    
      
         


      

      
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    (o)           Fees &
Expenses.  Without limitation of the last sentence of Section
10, the Company shall pay the Lender in respect of the legal fees and other
expenses of the  Lender in connection with the issuance of this Note a
payment in the amount of $50,000, and in connection with the Rights
Offering, a payment of an additional $50,000.  Such amounts shall be
due and payable in full, in cash, upon the consummation of the Rights Offering
or, if earlier, upon the maturity of any principal of this Note (whether at
stated maturity, at a date fixed for optional or mandatory prepayment, upon
acceleration pursuant to Section 9 or otherwise), and, if then unpaid, shall
thereafter constitute additional principal amounts under this Note, bearing
interest at the rate provided herein for overdue principal amounts.

     

    8.           Modification by Holders;
Waiver.  The Company may, with the written consent of the
holder of this Note, modify the terms and provisions of this Note or the rights
of the holder of this Note or the obligations of the Company hereunder, and the
observance by the Company of any term or provision of this Note may be waived
with the written consent of the holder.  Notwithstanding the
foregoing, no amendment, modification, or waiver of any provision of this Note
will be valid unless the same is in a writing expressly stating that the intent
of such writing is to amend, modify or waive a right under this
Note.

     

    Any such
modification or waiver shall apply and shall be binding upon each future holder
of this Note and upon the Company, whether or not such Note shall have been
marked to indicate such modification or waiver, but any substitute Note issued
thereafter shall bear a notation referring to any such modification or
waiver.

     

    9.           Events of
Default.  If any one or more of the following events, herein
called “Events
of Default,” shall occur (for any reason whatsoever, and whether such
occurrence shall, on the part of the Company or any of its subsidiaries, be
voluntary or involuntary or come about or be effected by operation of law or
pursuant to or in compliance with any judgment, decree or order of a court of
competent jurisdiction or any order, rule or regulation of any administrative or
other governmental authority) and such Event of Default shall be
continuing:

     

    (i)           default
shall be made in the payment of the principal of this Note when and as the same
shall become due and payable, whether at maturity or at a date fixed for
prepayment or repurchase (including default of any optional or mandatory
prepayment in accordance with the requirements of Section 5) or by acceleration
or otherwise; or

     

    (ii)           default
shall be made in the payment of any installment of interest on this Note
according to its terms when and as the same shall become due and payable;
or

     

    (iii)           default
shall be made in the prompt observance or performance of any covenant, condition
or agreement on the part of the Company contained herein in Section 7, and such
default shall continue for ten (10) days after written notice thereof;
or


    
      
         


      

      
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    (iv)           default
shall be made in the prompt observance or performance of any other covenant,
condition or agreement on the part of the Company to be observed or performed
pursuant to the terms hereof, and such default shall continue for ten (10) days
after written notice thereof, specifying such default and requesting that the
same be remedied; or

     

    (v)           any
representation or warranty made by or on behalf of the Company herein or in any
Security Document shall prove to have been false or incorrect in any material
respect on the date on or as of which made; or

     

    (vi)           default
shall be made in the performance of or compliance with any term contained in any
fee letter related to the Note, any Security Document or any other document,
instrument or agreement (collectively, the “Loan
Documents”) delivered by the Company or any subsidiary in order to grant
or perfect Liens on any assets thereof as security for all or any of the
obligations of the Company under the Loan Documents, or to govern or evidence
any such obligations, and such default shall continue for ten (10) days after
written notice thereof; or

     

    (vii)         the
entry of a decree or order for relief by a court having jurisdiction in the
premises in respect of the Company or any of its subsidiaries in any involuntary
case under the federal bankruptcy laws, as now constituted or hereafter amended,
or any other applicable federal or state bankruptcy, insolvency or other similar
laws, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Company or any of its subsidiaries for
any substantial part of any of their property or ordering the winding-up or
liquidation of any of their affairs and the continuance of any such decree or
order unstayed and in effect for a period of ninety (90) consecutive days;
or

     

    (viii)        the
commencement by the Company or any of its subsidiaries of a voluntary case under
the federal bankruptcy laws, as now constituted or hereafter amended, or any
other applicable federal or state bankruptcy, insolvency or other similar laws,
or the consent by any of them to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of the Company or any of its subsidiaries for any substantial
part of any of their property, or the making by any of them of any general
assignment for the benefit of creditors, or the failure of the Company or of any
of its subsidiaries on a regular or continuing basis to pay its debts as such
debts become due, or the taking of corporate action by the Company or any of its
subsidiaries in furtherance of or which might reasonably be expected to result
in any of the foregoing; or

     

    (ix)           a
default or an event of default as defined in any instrument evidencing or under
which the Company or any of its subsidiaries has outstanding at the time any
Indebtedness in excess of $100,000 in aggregate principal amount shall occur,
and as a result thereof the maturity of any such Indebtedness shall have been,
or at the option of the holder thereof could be, accelerated so that the same
shall have become or could be declared to be due and payable prior to the date
on which the same would otherwise have become due and payable;
or


    
      
         


      

      
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    (x)           final
judgment (not reimbursed by insurance policies of the Company or any of its
subsidiaries) for the payment of money in excess of $100,000 shall be rendered
against the Company or any of its subsidiaries and the same shall remain
undischarged for a period of thirty (30) days during which execution shall not
be effectively stayed; or

     

    (xi)           any
Loan Document shall, at any time, cease to be in full force and effect (other
than by reason of a release thereunder in accordance with the terms hereof or
thereof, the satisfaction in full of the obligations thereunder or any other
termination of such Loan Document in accordance with the terms hereof or
thereof) in any material respect, shall be declared null and void, or the
validity or enforceability thereof shall be contested in writing by the Company
or any subsidiary, or the holder of this Note shall not have or shall cease to
have a valid security interest in any collateral purported to be covered
thereby, perfected and with the priority contemplated by the Loan
Documents;

     

    then any
holder may, at its option, by a notice in writing to the Company declare the
Note to be, and the Note shall thereupon be and become, immediately due and
payable together with interest accrued thereon, without diligence, presentment,
demand, protest, notice of acceleration, notice of intent to accelerate or
further notice of any kind, all of which are expressly waived by the Company to
the extent permitted by law; provided, however, that upon
the occurrence of an Event of Default under paragraphs (vii) or (viii) above,
the Note shall automatically become due and payable, together with interest
accrued thereon, without any further action of the holder.

     

    At any
time after any declaration of acceleration has been made as provided in this
Section 9, the holder of the Note may, by notice to the Company, rescind such
declaration and its consequences with respect to the Note, provided, however, that no such
rescission shall extend to or affect any subsequent default or Event of Default
or impair any right consequent thereon.

     

    10.           Suits for
Enforcement.  In case any one or more of the Events of Default
shall happen and be continuing (subject to any applicable cure period expressly
set forth herein), the holder of this Note may proceed to protect and enforce
its rights by suit in equity, action at law and/or by other appropriate
proceeding, whether for the specific performance of any covenant or agreement
contained in this Note or in aid of the exercise of any power granted in this
Note, or may proceed to enforce the payment of this Note or to enforce any other
legal or equitable right of the holder of this Note.

     

    In case
of any default under this Note, the Company will pay to the holder hereof
collection costs and attorneys’ fees, to the extent actually
incurred.

     

    11.           Remedies
Cumulative.  No remedy herein conferred upon the holder of this
Note is intended to be exclusive of any other remedy and each and every such
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.

     


    
      
         


      

      
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    12.           Remedies Not
Waived.  No course of dealing between the Company and the
holder of this Note nor any delay on the part of the holder hereof in exercising
any rights hereunder shall operate as a waiver of any right of the holder of
this Note.

     

    13.           Successors and
Assigns.  All the covenants, stipulations, promises and
agreements in this Note contained by or on behalf of the Company shall bind its
successors and assigns, whether so expressed or not.

     

    14.           Notices.  All
notices, requests, demands and other communications required or permitted under
this Note shall be in writing (which shall include notice by facsimile
transmission) and shall be deemed to have been duly made and received when
personally served, or when delivered by Federal Express or a similar overnight
courier service, expenses prepaid, or by facsimile communications equipment,
addressed as set forth below:

    


    If to the
Lender:

    


    Lambda
Investors LLC

    Attn:
Arthur Amron

    c/o
Wexford Capital LP

    Wexford
Plaza

    411 West
Putnam Avenue

    Greenwich,
CT 06830

    Tel:
(203) 862-7012

    Fax:
(203) 862-7312

    


    Copy to
(which will not constitute notice):

    


    Akin Gump
Strauss Hauer & Feld LLP

    Attn:
Seth R. Molay, P.C.

    1700
Pacific Avenue, Suite 4100

    Dallas,
Texas 75201

    Tel:
(214) 969-4780

    Fax:
(214) 969-4343

    


    If to the
Company:

    


    Nephros,
Inc.

    Attn:
Gerald J. Kochanski, Chief Financial Officer

    41 Grand
Ave.

    River
Edge, NJ 07661

    Tel:
(201) 343-5202

    Fax:
(201) 343-5207


    
      
         


      

      
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    Any party
may alter the address to which communications are to be sent by giving the other
parties written notice of such change of address in conformity with the
provisions providing for the giving of notice.

    


    15.           GOVERNING
LAW.  THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, EXCLUDING THE CONFLICTS OF
LAWS RULES THEREOF.

     

    16.           Submission To Jurisdiction;
Waivers; WAIVER OF JURY TRIAL.  THE COMPANY HEREBY
IRREVOCABLY, UNCONDITIONALLY AND WITH ADVICE OF COUNSEL:

     

    (a)           submits
for itself and its property in any legal action or proceeding relating to this
Note and the other Loan Documents to which it is a party, or for recognition and
enforcement of any judgment in respect thereof, to the exclusive general
jurisdiction of the courts of the State of Delaware, the courts of the United
States of America for the District of Delaware, and appellate courts from any
thereof;

     

    (b)           consents
that any such action or proceeding may be brought in such courts and waives any
objection that it may now or hereafter have to the venue of any such action or
proceeding in any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same;

     

    (c)           agrees
that service of process in any such action or proceeding may be effected by
mailing a copy thereof by registered or certified mail (or any substantially
similar form of mail), postage prepaid, to the Company at its address set forth
in Section 7(a) or at such other address of which the holder shall have been
notified pursuant thereto;

     

    (d)           agrees
that nothing herein shall affect the right to effect service of process in any
other manner permitted by law; and

     

    (e)           WAIVES TRIAL BY JURY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS NOTE OR ANY OTHER LOAN DOCUMENT AND FOR
ANY COUNTERCLAIM RELATED TO ANY OF THE FOREGOING.


    
      
         


      

      
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    17.           Limitation on
Interest.  It is the intention of the parties hereto that the
Company, the Lender and each other holder shall conform strictly to usury laws
applicable to it.  Accordingly, if the transactions contemplated
hereby or by any other Loan Document would be usurious as to any holder under
laws applicable to it, then, in that event, notwithstanding anything to the
contrary in this Note or any other Loan Document or any agreement entered into
in connection with or as security for this Note, it is agreed as follows: (i)
the aggregate of all consideration that constitutes interest under law
applicable to any holder that is contracted for, taken, reserved, charged or
received by the holder under this Note or any other Loan Document or agreements
or otherwise in connection with this Note shall under no circumstances exceed
the maximum amount allowed by such applicable law, any excess shall be canceled
automatically and if theretofore paid shall be credited by the holder on the
principal amount of the Note (or, to the extent that the principal amount of the
Note shall have been or would thereby be paid in full, refunded by the holder to
the Company); and (ii) in the event that the maturity of this Note is
accelerated by reason of any Event of Default under this Note or otherwise, or
in the event of any required or permitted prepayment, then such consideration
that constitutes interest under law applicable to the holder may never include
more than the maximum amount allowed by such applicable law, and excess
interest, if any, provided for in this Note or otherwise shall be canceled
automatically by the holder as of the date of such acceleration or prepayment
and, if theretofore paid, shall be credited by the holder on the principal
amount of the Note (or, to the extent that the principal amount of the Note
shall have been or would thereby be paid in full, refunded by the holder to the
Company).  All sums paid or agreed to be paid to the holder for the
use, forbearance or detention of sums due hereunder shall, to the extent
permitted by law applicable to the holder, be amortized, prorated, allocated and
spread throughout the full term of the Note until payment in full so that the
rate or amount of interest on account of the Note does not exceed the maximum
amount allowed by such applicable law.

     

    18.           Entire
Agreement.  This Note, together with the Security Agreement and
the Intellectual Property Security Agreement referred to in Section 1 hereof
(collectively, the “Closing
Date Documents”), constitute the final agreement between the Company and
the Lender.  The Closing Date Documents are the complete and exclusive
expression of the parties’ agreement on the matters contained in the Closing
Date Documents.  All prior and contemporaneous negotiations, writings
and agreements between the parties and their counsel on the matters contained in
the Closing Date Documents are expressly merged into and superseded by the
Closing Date Documents.  The provisions of the Closing Date Documents
may not be explained, supplemented, interpreted or qualified through evidence of
trade usage, a prior course of dealings or correspondence between the parties or
their counsel, and no such trade usage, prior course of dealings or
correspondence shall give rise to any implied covenants or other implied
terms.  In entering into the Closing Date Documents, neither party has
relied upon any statement, representation, warranty, or agreement of the other
party or any of its agents or attorneys except for those expressly contained in
the Closing Date Documents.

     

    19.           Headings.  The
headings of the sections and paragraphs of this Note are inserted for
convenience only and do not constitute a part of this Note.

     

    [Remainder
of Page Intentionally Left Blank]


    
      
         


      

      
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    IN
WITNESS WHEREOF, Nephros, Inc. has caused this Note to be signed in its
corporate name by one of its officers thereunto duly authorized and to be dated
as of the day and year first above written.

     

    
      
        
          
            	
                    NEPHROS,
      INC.

                  
	 
      	 
      
	
                    By:

                  	
                     /s/ Gerald J.
    Kochanski

                  
	 
      	
                    Name:

                  	
                    Gerald
      J. Kochanski

                  
	 
      	
                    Title:

                  	
                    CFO
      and Treasurer

                  


          

        

      

    

     

    
      Signature
Page

      Nephros,
Inc. - Promissory Note