Document:

kl09044_ex10-2.htm

    
      

    

    Exhibit
      10.2

     

    EXCHANGE
      AGREEMENT

     

    This
      Exchange Agreement (this “Agreement”) is dated as of September 19, 2007,
      by and among Nephros, Inc., a Delaware corporation (the “Company”), and
      the holders of the Company’s 6% Secured Convertible Notes due 2012 the (“Old
      Notes”) whose signatures appear on the signature page attached hereto (the
“Holders”).

     

    Recitals:

     

    WHEREAS,
      each Holder purchased its Old Note from the Company pursuant to a Subscription
      Agreement between such Holder and the Company in June 2006 (the “2006
      Subscription Agreement”);

     

    WHEREAS,
      in connection with the purchase of the Old Notes, the Holders and the Company
      entered into a Registration Rights Agreement dated as of June 1, 2006 (the
      “2006 Registration Rights Agreement” and together with the 2006
      Subscription Agreement and any other documents or agreements referred to therein
      or made a part thereof, the “2006 Transaction Documents”);

     

    WHEREAS,
      the Holders currently hold the Old Notes in an aggregate principal amount plus
      accrued interest of $5,609,892.85 issued to the Holders on the dates and in
      the
      amounts set forth on Exhibit A attached hereto;

     

    WHEREAS,
      subject to the terms and conditions set forth herein, the Company desires to
      cancel the Old Notes and the Holders are willing to exchange (the
“Exchange”) the Old Notes, and all accrued but unpaid interest and
      obligations thereon, for new Series B 10% Secured Convertible Notes due 2008
      in
      an aggregate principal amount of $5,300,000 (the “New Notes”), in
      substantially the form attached hereto as Exhibit B, issued to the
      Holders in the amounts set forth on Exhibit C attached
      hereto.  The New Notes are convertible into shares of the Company’s
      common stock, par value $0.001 per share (the “Common Stock”), at a per
      share conversion price of $0.706 per share; and

     

    WHEREAS,
      concurrently with the Exchange, the Company is engaging in an offering (the
      “Offering”) pursuant to those several Subscription Agreements
      (collectively, the “Subscription Agreement”), the form of which is attached
      hereto as Exhibit D, of up to fifteen million dollars ($15,000,000)
      aggregate principal amount (the “Maximum Amount”) of Series A 10% Secured
      Convertible Notes due 2008 (the “Purchased Notes”, a copy of which is
      attached to the Subscription Agreement as Exhibit A, and together with the
      New
      Notes, the “2007 Notes”) convertible into shares of the Company’s Common
      Stock, at a per share conversion price of $0.706, and Class D warrants for
      the
      purchase of shares of Common Stock (the “Warrants”, a copy of which is
      attached to the Subscription Agreement as Exhibit B) with certain other
      investors.  The Company is offering the Purchased Notes until
      September 28, 2007, although the Company reserves the right, in its sole
      discretion, to extend the Offering period until some later date (such date,
      as
      the same may be extended, the “Expiration Date”).  Pursuant to
      the Subscription Agreement, each person purchasing Purchased Notes in the
      Offering (collectively, the “Purchasers”, and together with the Holders,
      the “2007 Holders”) shall enter into a

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    registration
      rights agreement among the Company and the Holders, in substantially the form
      attached hereto as Exhibit E (the “2007 Registration Rights
      Agreement”).

     

    NOW,
      THEREFORE, for good and valuable consideration, the receipt and sufficiency
      of
      which are hereby agreed and acknowledged, the parties hereby agree as
      follows:

     

    AGREEMENT:

     

    1.  Securities
      Exchange.

     

    (a)  Subject
      to the satisfaction of the conditions and upon the terms set forth in this
      Agreement and in consideration of and in express reliance upon the
      representations, warranties, covenants, terms and conditions of this Agreement,
      each Holder agrees to deliver to the Company the Old Notes in exchange for
      the
      New Notes and the Company agrees to issue and deliver the New Notes to the
      Holders in exchange for the Old Notes.

     

    (b)  The
      closing under this Agreement (the “Closing”) shall take place at the
      offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas,
      New York, NY 10036 upon the satisfaction of each of the conditions set forth
      herein (the “Closing Date”).

     

    (c)  At
      the
      Closing, the Company shall issue the New Notes in an aggregate principal amount
      of $5,300,000 to the Holders in the amounts set forth on Exhibit C
      attached hereto and the Holders shall deliver to the Company for cancellation
      the Old Notes.

     

    (d)  Each
      Holder shall enter into the 2007 Registration Rights Agreement.

     

    (e)  Each
      Holder shall enter into an investor rights agreement among the Company, the
      Purchasers and the other parties thereto, in substantially the form attached
      hereto as Exhibit F (the “Investor Rights
      Agreement”).

     

    (f)  It
      is
      understood and agreed that this Agreement is made subject to the execution
      and
      delivery of the 2007 Registration Rights Agreement by all parties thereto and
      the Company’s acceptance of the Holders as “Holders” thereunder, the execution
      and delivery of the Subscription Agreement by all parties thereto resulting
      in a
      minimum investment made by the holders of the Purchased Notes of $10,000,000,
      the satisfaction of all conditions thereunder and the funding of the Purchased
      Notes, and the execution and delivery of the Investor Rights Agreement by all
      parties thereto.

     

    (g)  Upon
      the
      satisfaction of all conditions to the Exchange, any and all contracts,
      agreements, arrangements, and understandings arising under the 2006 Transaction
      Documents are hereby terminated and of no further force or effect, and no
      rights, duties, obligations, or liabilities arising thereunder or relating
      thereto shall survive this termination.

     

    2.  Closing
      Conditions.

     

    (a)  The
      obligations of the Company hereunder in connection with the Closing are subject
      to the following conditions being satisfied:

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (i)  each
      of
      the representations and warranties of each Holder shall be true and correct
      in
      all material respects as of the date when made and as of the Closing as though
      made at that time, except for representations and warranties that speak as
      of a
      particular date, which shall be true and correct in all material respects as
      of
      such date;

     

    (ii)  each
      Holder shall have performed, satisfied and complied in all material respects
      with all covenants, agreements and conditions required by this Agreement to
      be
      performed, satisfied or complied with by each Holder at or prior to the
      Closing;

     

    (iii)  at
      the
      Closing, the Company will have received, in the aggregate, not less than ten
      million dollars ($10,000,000) pursuant to executed acceptances of subscriptions
      from Purchasers in the Offering;

     

    (iv)  to
      the
      extent not already delivered, the tender of delivery at the Closing by each
      Holder  of the items set forth in Section 2(d) of this
      Agreement;

     

    (v)  each
      Holder shall have executed and delivered this Agreement;

     

    (vi)  each
      Holder shall have delivered the Old Notes to the Company; and

     

    (vii)  no
      statute, rule, regulation, executive order, decree, ruling or injunction shall
      have been enacted, entered, promulgated, endorsed or threatened or is pending
      by
      or before any governmental authority of competent jurisdiction which prohibits
      or threatens to prohibit the consummation of any of the transactions
      contemplated by the Subscription Agreement or the 2007 Transaction Documents
      (as
      defined below).

     

    (b)  The
      obligations of each Holder hereunder in connection with the Closing are subject
      to the following conditions being satisfied:

     

    (i)  each
      of
      the representations and warranties of the Company shall be true and correct
      in
      all material respects as of the date when made and as of the Closing as though
      made at that time, except for representations and warranties that speak as
      of a
      particular date, which shall be true and correct in all material respects as
      of
      such date;

     

    (ii)  the
      Company shall have performed, satisfied and complied in all material respects
      with all covenants, agreements and conditions required by this Agreement to
      be
      performed, satisfied or complied with by the Company at or prior to the
      Closing;

     

    (iii)  to
      the
      extent not already delivered, the tender of delivery at the Closing by the
      Company of the items set forth in Section 2(c) of this
      Agreement;

     

    (iv)  the
      Company and all parties to the Subscription Agreement shall have duly executed
      and delivered the Subscription Agreement, the Investor Rights Agreement, and
      the
      2007 Registration Rights Agreement, all in the forms attached hereto, and the
      transactions contemplated by the Subscription Agreement shall be consummated
      simultaneous

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    with
      the
      Closing hereof, resulting in a minimum investment made by the holders of the
      Purchased Notes of $10,000,000;

     

    (v)  the
      holders of a majority of the outstanding Common Stock as of the Closing shall
      have executed and delivered to the Company written consents, in a form
      reasonably acceptable to each Holder  (the “Stockholder
      Consents”), consenting to (x) the issuance of the 2007 Notes, the Common
      Stock and Warrants issuable upon the conversion of the 2007 Notes and the Common
      Stock issuable upon the exercise of the Warrants, and (y) approving an amendment
      to the Company’s Certificate of Incorporation to increase the number of shares
      of Common Stock that it is authorized to issue to 60,000,000 shares (the
“Certificate of Amendment”);

     

    (vi)  (x)
      two
      individuals designated by Lambda Investors LLC (“Lambda”) (such
      individuals hereafter known as the “New Directors”) shall be duly elected
      to the board of directors of the Company (the “Board of Directors”)
      effective at the Closing; (y) Lambda shall have consented to the election of
      any
      new members of the Board of Directors of the Company or the Subsidiary elected
      in connection with the Closing; and (z) no more than four members of the Board
      of Directors of the Company that Lambda has requested to resign shall have
      submitted resignations to the Company (which resignations shall include releases
      in a form reasonably satisfactory to Lambda) with such resignations to become
      effective at the Closing;

     

    (vii)  at
      the
      Closing, the Company shall have received an extension, until October 4, 2007,
      to
      serve its opposition to the motion of the Receiver for Lancer Offshore, Inc.
      to
      enforce the Company’s settlement agreement with the Receiver and for entry of
      final default judgment; and

     

    (viii)  no
      statute, rule, regulation, executive order, decree, ruling or injunction shall
      have been enacted, entered, promulgated, endorsed or threatened or is pending
      by
      or before any governmental authority of competent jurisdiction which prohibits
      or threatens to prohibit the consummation of any of the transactions
      contemplated by the 2007 Transaction Documents or the Subscription
      Agreement.

     

    (c)   At
      the
      Closing, the Company shall deliver or cause to be delivered to each Holder
      the
      following (to the extent not previously delivered):

     

    (i)  an
      executed signature page to this Agreement;

     

    (ii)  New
      Notes
      in the aggregate principal amount of $5,300,000, registered in the name of
      each
      Holder;

     

    (iii)  the
      2007
      Registration Rights Agreement duly executed by the Company and all other parties
      thereto other than the Holders, and the Investor Rights Agreement duly executed
      by the Company and all other parties thereto other than the
      Holders;

     

    (iv)  a
      certificate, duly executed by the Chief Executive Officer of the Company, to
      the
      effect that the conditions set forth in clauses (i), (ii), (iv), (v), (vi),
      (vii) and (viii) of Section 2(b) have been satisfied;

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (v)  copies
      of
      the duly executed Subscription Agreement, Stockholder Consents and resignations
      of directors; and

     

    (vi)  waivers
      from Eric A. Rose, M.D., Norman J. Barta, William J. Fox and Lawrence Centella
      waiving any right held by such persons pursuant to agreements entered into
      prior
      to the date hereof to have securities of the Company registered under the 2007
      Registration Rights Agreement.

     

    (d)   At
      the
      Closing, each Holder  shall deliver or cause to be delivered to the
      Company the following (to the extent not previously delivered):

     

    (i)  an
      executed copy of the signature page of and Exhibit G to this Agreement,
      the Investor Rights Agreement and the 2007 Registration Rights
      Agreement;

     

    (ii)  the
      original of the Old Note held by such Holder; and

     

    (iii)  a
      certificate, duly executed by a duly authorized officer, manager or member
      of
      each Holder , to the effect that the conditions set forth in clauses (i) and
      (ii) of Section 2(b) have been satisfied.

     

    3.  Representations
      and Warranties of the Company.The Company
      represents and warrants to each Holder as follows, in each case as of the date
      hereof and in all material respects as of the date of the Closing, except for
      any changes resulting from the Exchange or the Offering:

     

    (a)  The
      Company is duly organized, validly existing and in good standing under the
      laws
      of the jurisdiction of its organization with full power and authority to own,
      lease, license and use its properties and assets and to carry out the business
      in which it proposes to engage. Nephros International
      Limited (the “Subsidiary”) is duly organized, validly existing and in
      good standing under the laws of the jurisdiction of its organization with full
      power and authority to own, lease, license and use its properties and assets
      and
      to carry out the business in which it proposes to engage.  Each of the
      Company and the Subsidiary is duly qualified to conduct business and is in
      good
      standing as a foreign corporation or other entity in each jurisdiction in which
      the nature of the business conducted or property owned by it makes such
      qualification necessary, except where the failure to be so qualified or in
      good
      standing, as the case may be, could not have or reasonably be expected to result
      in a (x) material adverse effect on the legality, validity or
      enforceability of any 2007 Transaction Document (as defined below),
      (y) material adverse effect on the results of operations, assets, business,
      prospects or condition (financial or otherwise) of the Company and the
      Subsidiary, taken as a whole, or (z) material adverse effect on the
      Company’s ability to perform in any material respect on a timely basis its
      obligations under any 2007 Transaction Document (as defined below) (any of
      (x),
      (y) or (z), a “Material Adverse Effect”).  The Company
      owns all of the capital stock or other equity interests of the Subsidiary free
      and clear of any liens or encumbrances, other than Permitted Liens, and all
      of
      the issued and outstanding shares of capital stock of the Subsidiary are validly
      issued and are fully paid, non-assessable and free of preemptive and similar
      rights to subscribe for or purchase securities.  The Company does not
      own, and never has owned, any capital stock of or equity interest in any entity
      other than the Subsidiary.  Neither the Company nor the Subsidiary is
      in

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    violation
      or default of any of the provisions of its respective certificate or articles
      of
      incorporation, bylaws or other organizational or charter documents.

     

    (b)  The
      Company has all requisite corporate power and authority to execute, deliver
      and
      perform its obligations under this Agreement and to issue the New Notes to
      be exchanged hereunder and the shares of Common Stock issuable upon conversion
      thereof (collectively, the “Subject Securities”).  Subject to
      written consents of the stockholders of the Company that the Company has
      obtained (the “Stockholder Consents”) becoming effective, all necessary
      proceedings of the Company have been duly taken to authorize the execution,
      delivery, and performance of this Agreement, the New Notes, the 2007
      Registration Rights Agreement and the Investor Rights Agreement (collectively,
      the “2007 Transaction Documents”).  The 2007 Transaction
      Documents have been duly authorized by the Company and, when executed and
      delivered by the Company will constitute the legal, valid and binding obligation
      of the Company enforceable against the Company in accordance with their terms
      except as limited by general equitable principles and applicable bankruptcy,
      insolvency, reorganization, moratorium and other laws of general application
      affecting enforcement of creditors’ rights generally.  The Common
      Stock issuable upon conversion of the New Notes, when issued in compliance
      with
      the provisions of the 2007 Transaction Documents, will be validly issued, fully
      paid and nonassessable and free of any liens or encumbrances other than any
      liens or encumbrances created by the respective Holder thereof.  The
      New Notes are duly authorized, and when issued pursuant to the 2007 Transaction
      Documents, will be validly issued.

     

    (c)  No
      consent of any party to any contract, agreement, instrument, lease or license
      to
      which the Company or the Subsidiary is a party or to which any of the Company’s
      or the Subsidiary’s properties or assets are subject is required for the
      execution, delivery or performance by the Company of its obligations under
      any
      of the 2007 Transaction Documents or the issuance and sale of the Subject
      Securities.  The Company is not required to obtain any consent,
      waiver, authorization or order of, give any notice to, or make any filing or
      registration with, any court or other federal, state, local or other
      governmental authority or other person or entity in connection with the
      execution, delivery and performance by the Company of the 2007 Transaction
      Documents, other than (i) the filing with the Securities and Exchange
      Commission (the “Commission”) of the registration statement or
      registration statements pursuant to the 2007 Registration Rights Agreement,
      a
      Schedule 14C information statement and a Form 8-K and related press release
      announcing the Offering and changes in directors and officers of the Company,
      (ii) the notice and/or application(s) to the American Stock Exchange for
      the issuance and sale of the Subject Securities and the listing for trading
      thereon in the time and manner required thereby, (iii) the filing of Form D
      with the Commission and such filings as are required to be made under applicable
      state securities laws, (iv) the Stockholder Consents, and (v) the filing
      with the Delaware Secretary of State of a Certificate of Amendment to increase
      the capitalization of the Company.

     

    (d)  Except
      as
      set forth on Schedule 3(d), the execution, delivery and performance of 2007
      Transaction Documents and the issuance of the Subject Securities will not (i)
      violate or result in a breach of, or entitle any party (with or without the
      giving of notice or the passage of time or both) to terminate, amend,
      accelerate, cancel or call a default under any contract or agreement to which
      the Company or the Subsidiary is a party or result in the creation

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    of
      any
      lien, charge or encumbrance upon any of the properties or assets of the Company
      or the Subsidiary, other than the liens, charges or encumbrances created by
      the
      applicable Holder, (ii) conflict with, violate or result in a breach of any
      term
      of the certificate of incorporation or by-laws of the Company or the Subsidiary,
      or (iii) violate any law, rule, regulation, order, judgment or decree binding
      upon the Company or the Subsidiary or to which any of their respective
      operations, businesses, properties or assets are subject, except, in the case
      of
      a breach, termination, violation or default referenced in clauses (i) or (iii),
      would not reasonably be expected to have a Material Adverse Effect.

     

    (e)  The
      capitalization of the Company is as set forth on Schedule 3(e), which
Schedule 3(e) shall also include the number of shares of Common Stock
      owned beneficially, and of record, by officers or directors of the Company
      or
      holders of 5% or more of the outstanding Common Stock, in each case as of the
      date hereof.  The Company has not issued any capital stock since its
      most recently filed periodic report under the Securities Exchange Act of 1934,
      as amended (the “Exchange Act”), other than shares of Common Stock issued
      pursuant to the exercise of employee stock options under the Company’s stock
      option plans.  No person or entity has any right of first refusal,
      preemptive right, right of participation, or any similar right to participate
      in
      the transactions contemplated by the 2007 Transaction
      Documents.  Except as a result of the purchase and sale of the Subject
      Securities or as set forth on Schedule 3(e), there are no outstanding
      options, warrants, scrip rights to subscribe to, calls or commitments of any
      character whatsoever relating to, or securities, rights or obligations
      convertible into or exercisable or exchangeable for, or giving any Person any
      right to subscribe for or acquire, any shares of Common Stock or other capital
      stock or securities of the Company, or contracts, commitments, understandings
      or
      arrangements by which the Company is or may become bound to issue additional
      shares of Common Stock or other capital stock or securities of the
      Company.  The issuance and sale of the Subject Securities will not
      obligate the Company to issue shares of Common Stock or other capital stock
      or
      securities of the Company to any person or entity (other than the Holders)
      and
      will not result in a right of any holder of Company securities to adjust the
      exercise, conversion, exchange or reset price under any of such
      securities.  All of the outstanding shares of capital stock of the
      Company are validly issued, fully paid and nonassessable, have been issued
      in
      compliance with all federal and state securities laws, and none of such
      outstanding shares was issued in violation of any preemptive rights or similar
      rights to subscribe for or purchase securities.  There are no
      stockholders agreements or voting agreements with respect to the Company’s
      capital stock to which the Company is a party or, to the knowledge of the
      Company, between or among any of the Company’s stockholders.

     

    (f)  Except
      as
      set forth on Schedule 3(f), there are no brokerage commissions, finder’s
      fees or similar fees or commissions payable by the Company in connection with
      the transactions contemplated by the 2007 Transaction Documents or the Offering
      based on any agreement, arrangement or understanding with or known to the
      Company.  The Holders will have no obligation with respect to any
      brokerage commissions, finder’s fees or similar fees or commissions described on
      Schedule 3(f).

     

    (g)  Except
      as
      disclosed on Schedule 3(g), as disclosed in the reports, schedules,
      forms, statements and other documents filed by the Company under the Exchange
      Act on or after April 10, 2007 (the “Current SEC Filings”) or as would
      not reasonably be expected to

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    have
      a
      Material Adverse Effect, neither the Company nor the Subsidiary is in violation
      or default of any provisions of any instrument, judgment, order, writ or decree,
      or any provision of any contract or agreement, to which it is a party or by
      which it is bound or of any provision of statute, rule or regulation of any
      country, state, province or other local governmental unit applicable to the
      Company, the Subsidiary or their respective businesses.

     

    (h)  Except
      as
      disclosed on Schedule 3(h), neither the Company nor the Subsidiary is a
      party to any litigation, action, suit, proceeding or investigation, and, to
      the
      knowledge of the Company, no litigation, action, suit, proceeding or
      investigation has been threatened against the Company or the
      Subsidiary.  There has not been, and to the knowledge of the Company,
      there is not pending or contemplated, any investigation by the Commission
      involving the Company or any current or former director or officer of the
      Company.  The Commission has not issued any stop order or other order
      suspending the effectiveness of any registration statement filed by the Company
      under the Exchange Act or the Securities Act of 1933, as amended (the
“Securities Act”).  Except as disclosed on Schedule 3(g)
      or in the Current SEC Filings, since January 1, 2007 there has been no material
      adverse effect on the products of the Company, the prospects of the products
      of
      the Company or the status of the regulatory approval of the products of the
      Company.

     

    (i)  Each
      of
      the Company and the Subsidiary has good and marketable title to its properties
      and assets (including without limitation those assets
      pledged as collateral pursuant to this Agreement) held in each case free and
      clear of all liens, pledges, security interests, encumbrances, attachments
      or
      charges of any kind (each a “Lien”), except for (i) Liens for taxes that
      are not yet due and payable, (ii) Liens that do not or are not reasonably likely
      to result in a Material Adverse Effect, or (iii) Liens disclosed in the Current
      SEC Filings or arising under the Offering (Liens described in clauses (i),
      (ii)
      and (iii) are referred to as “Permitted Liens”).  Neither the
      Company nor the Subsidiary owns, or has ever owned, any real
      property.  With respect to the property and assets it leases, except
      as would not reasonably be expected to have a Material Adverse Effect or as
      disclosed on Schedule 3(i), the Company is in compliance with such leases
      and, to the best of the Company’s knowledge, the Company holds valid leasehold
      interests in such property and assets free and clear of any Liens of any other
      party other than the lessors of such property and assets, except for Permitted
      Liens.  The properties and assets owned and leased by the Company and
      the Subsidiary are sufficient to enable the Company and the Subsidiary to
      conduct their respective business as presently conducted.

     

    (j)  Neither
      the Company nor the Subsidiary has any liability or obligation of any nature
      whatsoever (whether absolute, accrued, contingent, or otherwise and whether
      due
      or to become due) which would be required to be reflected on a balance sheet
      or
      in the notes thereto prepared in accordance with GAAP, except for (i) those
      liabilities that are fully reflected or reserved against on the financial
      statements included in the Current SEC Filings, described in the notes to such
      financial statements, or expressly described elsewhere in the Current SEC
      Filings, including without limitation, under the headings “Management’s
      Discussion and Analysis or Plan of Operation” and “Controls and Procedures” in
      the applicable Current SEC Filings, (ii) liabilities and obligations which
      have
      been incurred since June 30, 2007 in the ordinary course of business which
      are not material in nature or amount, or (iii) liabilities and obligations
      described on Schedule 3(j).

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (k)  Except
      as
      disclosed in the Current SEC Filings, each of the Company and the Subsidiary
      owns, free and clear of all Liens, other than Permitted Liens, or is licensed
      or
      otherwise possesses legally enforceable rights to use, all patents, patent
      applications, trademarks, trademark applications, trade names, service marks,
      copyrights, know-how, trade secrets, inventions and similar rights necessary
      to
      permit the Company and the Subsidiary to conduct its respective business as
      described in the Current SEC Filings (collectively, “Intellectual
      Property”).  To the Company’s knowledge, the Intellectual Property
      does not violate or infringe upon the rights of any other person or entity,
      and
      neither the Company nor the Subsidiary has received a notice (written or
      otherwise) claiming such infringement.  To the knowledge of the
      Company, all Intellectual Property is enforceable and there is no existing
      infringement by another person or entity of any of the Intellectual
      Property.  The Company and the Subsidiary have taken reasonable
      security measures to protect the secrecy, confidentiality and value of all
      of
      their intellectual properties, except where failure to do so would not,
      individually or in the aggregate, reasonably be expected to have a Material
      Adverse Effect.

     

    (l)  The
      Company has filed all reports, schedules, forms, statements and other documents
      required to be filed by the Company under the Securities Act and the Exchange
      Act, including pursuant to Section 13(a) or 15(d) thereof, since September
      20, 2004 (the reports, schedules, forms, statements and other documents filed
      pursuant to the Securities Act and the Exchange Act on or after September 20,
      2004, including the exhibits thereto and documents incorporated by reference
      therein, being collectively referred to herein as the “Nephros SEC
      Filings”).  Except for the Company’s Annual Report on Form 10-KSB
      for the year ended December 31, 2005, each Nephros SEC Filing that is an Annual
      Report on Form 10-KSB, a Quarterly Report on Form 10-QSB or a Current Report
      on
      Form 8-K (other than a Current Report on Form 8-K that is required solely
      pursuant to Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a) or 5.02(e) of
      Form
      8-K) was filed on a timely basis or the Company received a valid extension
      of
      such time of filing and has filed such Nephros SEC Filing prior to the
      expiration of such extension.  Except as disclosed on Schedule
      3(l), as of their respective dates, the Nephros SEC Filings complied in all
      material respects with the requirements of the Securities Act and the Exchange
      Act, as applicable, and none of the Nephros SEC Filings, when filed, 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 the light of the circumstances under which they were made, not
      misleading.  Except as disclosed on Schedule 3(l), the
      financial statements of the Company included in the Nephros SEC Filings complied
      in all material respects with applicable accounting requirements and the rules
      and regulations of the Commission with respect thereto as in effect at the
      time
      of filing.  Such financial statements have been prepared in accordance
      with United States generally accepted accounting principles applied on a
      consistent basis during the periods involved (“GAAP”), except as may be
      otherwise specified in such financial statements or the notes thereto and except
      that unaudited financial statements may not contain all footnotes required
      by
      GAAP, and fairly present in all material respects the financial position of
      the
      Company and the Subsidiary as of and for the dates thereof and the results
      of
      operations and cash flows for the periods then ended, subject, in the case
      of
      unaudited statements, to normal year-end audit adjustments.

     

    (m)  The
      Company is in material compliance with all provisions of the Sarbanes-Oxley
      Act
      of 2002 which are applicable to it as of the Closing.  Except as
      disclosed in

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    the
      Current SEC Filings, the Company and the Subsidiary maintain 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.  Except as disclosed in the Current SEC Filings, the
      Company has established disclosure controls and procedures (as defined in
      Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such
      disclosure controls and procedures to ensure that information required to be
      disclosed by the Company in the reports it files or submits under the Exchange
      Act is recorded, processed, summarized and reported, within the time periods
      specified in the Commission’s rules and forms.  The Company’s
      certifying officers have evaluated the effectiveness of the Company’s disclosure
      controls and procedures as of the end of the period covered by the Company’s
      most recently filed periodic report under the Exchange Act (such date, the
      “Evaluation Date”).  The Company presented in its most recently
      filed periodic report under the Exchange Act the conclusions of the certifying
      officers about the effectiveness of the disclosure controls and procedures
      based
      on their evaluations as of the Evaluation Date.  Since the Evaluation
      Date, there have been no changes in the Company’s internal control over
      financial reporting (as such term is defined in the Exchange Act) that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.

     

    (n)  No
      material labor dispute exists or, to the knowledge of the Company, is imminent
      with respect to any of the employees of the Company which could reasonably
      be
      expected to result in a Material Adverse Effect.  None of the
      Company’s or the Subsidiary’s employees is a member of a union that relates to
      such employee’s relationship with the Company, and neither the Company nor the
      Subsidiary is a party to a collective bargaining agreement, and the Company
      and
      the Subsidiaries believe that their relationships with their employees are
      good.  No executive officer, to the knowledge of the Company, is, or
      is now expected to be, in violation of any material term of any employment
      contract, confidentiality, disclosure or proprietary information agreement
      or
      non-competition agreement, or any other contract or agreement or any restrictive
      covenant, and the continued employment of each such executive officer does
      not
      subject the Company or any of its Subsidiaries to any liability with respect
      to
      any of the foregoing matters. The Company and its Subsidiaries are in compliance
      with all federal, state, local and foreign laws and regulations relating to
      employment and employment practices, terms and conditions of employment and
      wages and hours, except where the failure to be in compliance could not,
      individually or in the aggregate, reasonably be expected to have a Material
      Adverse Effect.

     

    (o)  The
      Company and the Subsidiary possess all certificates, authorizations and permits
      issued by the appropriate federal, state, local or foreign regulatory
      authorities necessary to conduct their respective businesses as described in
      the
      Current SEC Filings, except where the failure to possess such permits could
      not
      have or reasonably be expected to result in a Material Adverse Effect
      (“Material Permits”), and neither the Company nor the Subsidiary has
      received any notice of proceedings relating to the revocation or modification
      of
      any Material Permit.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (p)  The
      Company and the Subsidiary are insured by insurers of recognized financial
      responsibility against such losses and risks and in such amounts as are prudent
      and customary in the businesses in which the Company and the Subsidiary are
      engaged, including, but not limited to, directors and officers insurance
      coverage at least equal to $7,000,000.  Neither the Company nor the
      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 without a significant increase in cost.

     

    (q)  Except
      as
      set forth in the Current SEC Filings, none of the officers or directors of
      the
      Company and, to the knowledge of the Company, none of the employees of the
      Company is presently a party to any transaction with the Company or the
      Subsidiary, 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 officer,
      director or such employee or, to the knowledge of the Company, any entity in
      which any officer, director, or any such employee has a substantial interest
      or
      is an officer, director, trustee or partner, in each case in excess of $120,000
      other than for (i) payment of salary or consulting fees for services
      rendered, (ii) reimbursement for expenses incurred on behalf of the Company
      and (iii) other employee benefits, including stock option agreements under
      any stock option plan of the Company.

     

    (r)  Neither
      the Company nor any person or entity acting on its behalf has offered or sold
      any of the Subject Securities by any form of general solicitation or general
      advertising.  The Company has offered the Subject Securities only to
      the Holders.  Assuming the accuracy of each Holder’s representations
      and warranties set forth in Section 4, no registration under the Securities
      Act is required for the issuance of the Subject Securities by the Company to
      the
      Holders pursuant to this Agreement.  Neither the Company, nor any of
      its affiliates, nor any person or entity 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 cause the
      issuance of the Subject Securities to be integrated with prior offerings by
      the
      Company for purposes of the Securities Act or any applicable shareholder
      approval provision of the American Stock Exchange.  Subject to the
      Stockholder Consents becoming effective and the filing of an additional shares
      listing application with the American Stock Exchange, the issuance of the
      Subject Securities does not contravene the rules and regulations of the American
      Stock Exchange.

     

    (s)  The
      Company is not, and is not an affiliate of, and immediately after receipt of
      payment for the Notes, will not be or be an affiliate of, an “investment
      company” within the meaning of the Investment Company Act of 1940, as amended.
      The Company shall conduct its business in a manner so that it will not become
      subject to the Investment Company Act of 1940, as amended.

     

    (t)  Except
      as
      disclosed on Schedule 3(t), as of the Closing, no Person will have any
      right to cause the Company to effect the registration under the Securities
      Act
      of any securities of the Company except pursuant to the 2007 Registration Rights
      Agreement.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (u)  The
      Company’s Common Stock is registered pursuant to Section 12(b) of the
      Exchange Act, and the Company has taken no action designed to, or which to
      its
      knowledge is likely to have the effect of, terminating the registration of
      the
      Common Stock under the Exchange Act nor has the Company received any
      notification that the Commission is contemplating terminating such
      registration.  The Company’s outstanding Common Stock is listed for
      trading on the American Stock Exchange and, since January 1, 2007, the trading
      of the Company’s Common Stock on the American Stock Exchange has not been
      de-listed or suspended.  The Company has taken no action for the
      purpose of de-listing the Common Stock from the American Stock Exchange or
      suspending the trading of the Common Stock on the American Stock
      Exchange.  Except as described in the Current SEC Filings, the Company
      has not, in the 12 months preceding the date hereof, received written notice
      from the American Stock Exchange to the effect that the Company is not in
      compliance with the listing or maintenance requirements of the American Stock
      Exchange or that the American Stock Exchange is considering suspending the
      trading of or de-listing the Company’s Common Stock from the American Stock
      Exchange.

     

    (v)  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, shareholder rights plan (including any distribution under a rights
      agreement) or other similar anti-takeover provision under the Company’s
      certificate of incorporation (or similar charter documents) or the laws of
      its
      state of incorporation (including without limitation Section 203 of the Delaware
      General Corporation Law) that is or could become applicable to the Holders
      as a
      result of the Holders and the Company fulfilling their obligations or exercising
      their rights under the 2007 Transaction Documents, including without limitation
      as a result of the Company’s issuance of the Subject Securities and the Holders’
ownership of the Subject Securities.

     

    (w)  All
      disclosure furnished by or on behalf of the Company in writing to the Holders
      regarding the Company, its business and the transactions contemplated hereby,
      including the Schedules to this Agreement, with respect to the representations
      and warranties contained herein is true and correct in all material respects
      with respect to such representations and warranties and does not contain any
      untrue statement of a material fact or omit to state any material fact necessary
      in order to make the statements made therein, in light of the circumstances
      under which they were made, not misleading.  The press releases
      disseminated by the Company during the twelve months preceding the date of
      this
      Agreement taken as a whole do not 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 made therein, in light of the circumstances
      under which they were made and when made, not misleading.

     

    (x)  Based
      on
      the financial condition of the Company as of the Closing, after giving effect
      to
      the receipt by the Company of not less than ten million dollars ($10,000,000)
      from the Offering, and assuming (counterfactually) that all of the 2007 Notes
      issued as of the Closing were converted as of such date, (i) the fair
      saleable value of the Company’s assets exceeds the amount that will be required
      to be paid on or in respect of the Company’s existing debts and other
      liabilities (including known contingent liabilities) as they mature;
      (ii) the Company’s assets do not constitute unreasonably small capital to
      carry on its business as now conducted and as proposed to be conducted including
      its capital needs taking into account the

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    particular
      capital requirements of the business conducted by the Company, and projected
      capital requirements and capital availability thereof; and (iii) the
      current cash flow of the Company, together with the proceeds the Company would
      receive, were it to liquidate all of its assets, after taking into account
      all
      anticipated uses of the cash, would be sufficient to pay all amounts on or
      in
      respect of its liabilities when such amounts are required to be
      paid.  The Company has no knowledge of any facts or circumstances
      which lead it to believe that it will file for reorganization or liquidation
      under the bankruptcy or reorganization laws of any jurisdiction within one
      year
      from the Closing.  Schedule 3(x) sets forth as of the date
      hereof all outstanding secured and unsecured Indebtedness of the Company or
      the
      Subsidiary, or for which the Company or the Subsidiary has
      commitments.  For the purposes of this Agreement,
“Indebtedness” means (a) any liabilities for borrowed money (other
      than trade accounts payable incurred in the ordinary course of business), (b)
      every obligation of the Company evidenced by bonds, debentures, notes or other
      similar instruments, (c) all guaranties, endorsements and other contingent
      obligations in respect of Indebtedness of others, whether or not the same are
      or
      should be reflected in the Company’s balance sheet (or the notes thereto),
      except guaranties by endorsement of negotiable instruments for deposit or
      collection or similar transactions in the ordinary course of business; and
      (d) the present value of any lease payments due under leases required to be
      capitalized in accordance with GAAP.  Except as set forth on
Schedule 3(x), neither the Company nor the Subsidiary is in default with
      respect to any Indebtedness.

     

    (y)  Except
      for matters that would not, individually or in the aggregate, have or reasonably
      be expected to result in a Material Adverse Effect, the Company and the
      Subsidiary have filed all necessary federal, state, local and foreign income,
      franchise, employment and other tax returns and have paid or accrued all taxes
      shown as due thereon, and the Company has no knowledge of a tax deficiency
      which
      has been asserted or threatened against the Company or the
      Subsidiary.

     

    (z)  Neither
      the Company nor the Subsidiary, nor to the knowledge of the Company, any agent
      or other person or entity acting on behalf of the Company or the Subsidiary,
      has
      (i) directly or indirectly, used any funds for unlawful contributions,
      gifts, entertainment or other unlawful expenses related to foreign or domestic
      political activity, (ii) made any unlawful payment to foreign or domestic
      government officials or employees or to any foreign or domestic political
      parties or campaigns from corporate funds, (iii) failed to disclose fully
      any contribution made by the Company or the Subsidiary (or made by any person
      or
      entity acting on behalf of the Company or the Subsidiary) which is in violation
      of law, or (iv) violated in any material respect any provision of the
      Foreign Corrupt Practices Act of 1977, as amended.

     

    (aa)  The
      Company’s accounting firm is Rothstein Kass & Company, P.C.  To
      the knowledge of the Company, (i) such accounting firm is a registered public
      accounting firm as required by the Exchange Act, and (ii) has been engaged
      by the Company’s Audit Committee to conduct procedures to provide its opinion
      with respect to the financial statements to be included in the Company’s Annual
      Report on Form 10-KSB for the year ending December 31, 2007.

     

    (bb)  Immediately
      following the Closing, no Indebtedness or other claim against the Company is
      senior to the New Notes in right of payment, whether with respect to interest
      or
      upon liquidation or dissolution, or otherwise, other than indebtedness secured
      by purchase

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    money
      security interests (which is senior only as to underlying assets covered
      thereby) and capital lease obligations (which is senior only as to the property
      covered thereby).

     

    (cc)  There
      are
      no disagreements of any kind presently existing, or reasonably anticipated
      by
      the Company to arise, between the Company and the accountants and lawyers
      formerly or presently employed by the Company, and except as set forth on
Schedule 3(cc) the Company is current with respect to any fees owed to
      its accountants and lawyers.

     

    (dd)  The
      Company acknowledges and agrees that each of the Holders is acting solely in
      the
      capacity of an arm’s length counterparty with respect to the 2007 Transaction
      Documents and the transactions contemplated thereby.  The Company
      further acknowledges that no Holder is acting as a financial advisor or
      fiduciary of the Company (or in any similar capacity) with respect to the 2007
      Transaction Documents and the transactions contemplated thereby and any advice
      given by any Holder or any of their respective representatives or agents in
      connection with the 2007 Transaction Documents and the transactions contemplated
      thereby is merely incidental to the Holders’ acquisition of the Subject
      Securities.  The Company further represents to each Holder that the
      Company’s decision to enter into this Agreement and the other 2007 Transaction
      Documents has been based solely on the independent evaluation of the
      transactions contemplated hereby by the Company and its
      representatives.

     

    (ee)  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 Subject Securities,
      (ii) sold, bid for, purchased, or paid any compensation for soliciting
      purchases of, any of the securities of the Company, or (iii) paid or agreed
      to pay to any person or entity any compensation for soliciting another to
      purchase any other securities of the Company, other than, in the case of clauses
      (ii) and (iii), compensation paid to the Company’s placement agent in
      connection with the Offering.

     

    (ff)  The
      Company (i) is in compliance with any and all Environmental Laws (as
      hereinafter defined), (ii) has received all permits, licenses or other
      approvals required of it under applicable Environmental Laws to conduct its
      business and (iii) is in compliance with all terms and conditions of any
      such permit, license or approval where, in each of the foregoing clauses (i),
      (ii) and (iii), the failure to so comply would be reasonably expected to
      have, individually or in the aggregate, a Material Adverse Effect. The term
      “Environmental Laws” means all federal, state, local or foreign laws
      relating to pollution or protection of human health or the environment
      (including, without limitation, ambient air, surface water, groundwater, land
      surface or subsurface strata), including, without limitation, laws relating
      to
      emissions, discharges, releases or threatened releases of chemicals, pollutants,
      contaminants, or toxic or hazardous substances or wastes (collectively,
“Hazardous Materials”) into the environment, or otherwise relating to the
      manufacture, processing, distribution, use, treatment, storage, disposal,
      transport or handling of Hazardous Materials, as well as all authorizations,
      codes, decrees, demands or demand letters, injunctions, judgments, licenses,
      notices or notice letters, orders, permits, plans or regulations issued,
      entered, promulgated or approved thereunder.

     

    (gg)  In
      entering into this Agreement, the Company is not relying on any representations
      and warranties of the Holders other than those in this Agreement.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (hh)  The
      Company acknowledges that the representations, warranties and agreements made
      by
      the Company herein shall survive the execution and delivery of this Agreement,
      the Closing and the issuance and conversion of the New Notes.

     

    (ii)  The
      Company has received the written consent from at least 50.1% of the outstanding
      Common Stock as of the date hereof approving the Offering in accordance with
      Rule 713 of the American Stock Exchange Company Guide.

     

    4.  Representations,
      Warranties and Covenants of the
      Holders.  Each of the Holders hereby
      makes the following representations and warranties to the Company, and covenants
      for the benefit of the Company, with respect solely to itself and not with
      respect to any other Holder:

     

    (a)  Each
      Holder is an Accredited Investor, as specifically indicated in Exhibit F
      to this Agreement, which is being delivered to the Company
      herewith.

     

    (b)  If
      a
      natural person, such Holder is: a bona fide resident of the state or non-United
      States jurisdiction contained in the address set forth on the signature page
      of
      this Agreement as such Holder’s home address; at least twenty-one (21) years of
      age; and legally competent to execute the 2007 Transaction
      Documents.  If an entity, such Holder has its principal offices or
      principal place of business in the state or non-United States jurisdiction
      contained in the address set forth on the signature page of this Agreement,
      the
      individual signing on behalf of such Holder is duly authorized to execute the
      2007 Transaction Documents.

     

    (c)  When
      executed and delivered by each Holder, each of the 2007 Transaction Documents
      to
      which the Holders are parties will constitute the legal, valid and binding
      obligation of the Holders, enforceable against the Holders in accordance with
      its terms except as limited by general equitable principles and applicable
      bankruptcy, insolvency, reorganization, moratorium and other laws of general
      application affecting enforcement of creditors’ rights generally.

     

    (d)  Neither
      the execution, delivery nor performance of the 2007 Transaction Documents by
      each Holder violates or conflicts with, creates (with or without the giving
      of
      notice or the lapse of time, or both) a default under or a lien or encumbrance
      upon any of such Holder’s assets or properties pursuant to, or requires the
      consent, approval or order of any government or governmental agency or other
      person or entity under (i) any note, indenture, lease, license or other
      agreement to which such Holder is a party or by which it or any of its assets
      or
      properties is bound or (ii) any statute, law, rule, regulation or court decree
      binding upon or applicable to such Holder or its assets or
      properties.  If such Holder is not a natural person, the execution,
      delivery and performance by such Holder of the 2007 Transaction Documents,
      have
      been duly authorized by all necessary corporate or other action on behalf of
      such Holder and such execution, delivery and performance does not and will
      not
      constitute a breach or violation of, or default under, the charter or by-laws
      or
      equivalent governing documents of such Holder.

     

    (e)  Each
      Holder has received from the Company, or has been directed to, all materials
      which have been requested by such Holder and the Nephros SEC
      Filings.  Each Holder has had a reasonable opportunity to ask
      questions of the Company and its representatives, and

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    the
      Company has answered to the satisfaction of such Holder all inquiries that
      such
      Holder or such Holder’s representatives have put to it.

     

    (f)  Each
      Holder or such Holder’s purchaser representative has such knowledge and
      experience in finance, securities, taxation, investments and other business
      matters so as to be capable of evaluating the merits and risks of an investment
      in the Subject Securities.  Each Holder can afford to bear such risks,
      including, without limitation, the risk of losing its entire
      investment.

     

    (g)  Each
      Holder acknowledges that no liquid market for the New Notes presently exists
      and
      none may develop in the future and that such Holder may find it impossible
      to
      liquidate the investment at a time when it may be desirable to do so, or at
      any
      other time.

     

    (h)  Each
      Holder has been advised by the Company and understands that none of the Subject
      Securities have been registered under the Securities Act, that the Subject
      Securities are being offered and issued on the basis of the statutory exemption
      provided by Section 4(2) of the Securities Act, Regulation D promulgated
      thereunder or both, relating to transactions by an issuer not involving any
      public offering and under similar exemptions under certain state securities
      laws; that this transaction has not been reviewed by, passed on or submitted
      to
      any United States Federal or state agency or self-regulatory organization where
      an exemption is being relied upon; and that the Company’s reliance thereon is
      based in part upon the representations made by such Holder in this
      Agreement.

     

    (i)  Each
      Holder will acquire the Subject Securities for such Holder’s own account (or, if
      such individual is married, for the joint account of such Holder and such
      Holder’s spouse either in joint tenancy, tenancy by the entirety or tenancy in
      common) for investment and not with a view to the sale or distribution thereof
      or the granting of any participation therein, in each case in violation of
      applicable securities laws, and has no present intention of distributing or
      selling to others any of such Subject Securities or granting any participation
      therein, in each case in violation of applicable securities laws.

     

    (j)  In
      entering into this Agreement and acquiring the New Notes, such Holder is not
      relying on any representations and warranties of the Company other than those
      in
      this Agreement.

     

    (k)  Each
      Holder acknowledges that the representations, warranties and agreements made
      by
      such Holder herein shall survive the execution and delivery of this Agreement,
      the Closing and the purchase and conversion of the New Notes.

     

    (l)  Except
      as
      set forth on the signature page hereto, such Holder has not engaged any broker
      or other person or entity that is entitled to a commission, fee or other
      remuneration as a result of the execution, delivery or performance of this
      Agreement.

     

    (m)  Such
      Holder is not entering into this Agreement or acquiring New Notes as a result
      of
      any advertisement, article, notice or other communication published in any
      newspaper, magazine or similar media or broadcast over television or radio,
      or
      presented at any

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    seminar
      or meeting, or any solicitation by a person other than a representative of
      the
      Company with whom such Holder had a pre-existing relationship.

     

    (n)  Each
      Holder is not with respect to such Holder’s acquisition of New Notes a person or
      entity (a “Person”) with whom a United States citizen, entity organized
      under the laws of the United States or its territories or entity having its
      principal place of business within the United States or any of its territories
      (collectively, a “U.S. Person”), is prohibited from transacting business
      of the type contemplated by this Agreement, whether such prohibition arises
      under United States law, regulation or executive orders and lists published
      by
      the Office of Foreign Assets Control, Department of the Treasury (“OFAC”)
      (including those executive orders and lists published by OFAC with respect
      to
      Persons that have been designated by executive order or by the sanction
      regulations of OFAC as Persons with whom U.S. Persons may not transact business
      or must limit their interactions to types approved by OFAC “Specially
      Designated Nationals and Blocked Persons”).  Neither such Holder
      nor any Person who owns an interest in such Holder (collectively, a “Holder
      Party”) is a Person with whom a U.S. Person, including a United States
      Financial Institution as defined in 31 U.S.C. Section 5312, as amended
      (“Financial Institution”), is prohibited from transacting business of the
      type contemplated by this Agreement, whether such prohibition arises under
      United States law, regulation or executive orders and lists published by the
      OFAC (including those executive orders and lists published by OFAC with respect
      to Specially Designated Nationals and Blocked Persons).

     

    (o)  To
      the
      actual knowledge of each Holder, neither such Holder nor any Holder Party,
      nor
      any Person providing funds to such Holder: (i) is under investigation by any
      governmental authority for, or has been charged with, or convicted of, money
      laundering, drug trafficking, terrorist related activities, any crimes which
      in
      the United States would be predicate crimes to money laundering, or any
      violation of any Anti-Money Laundering Laws (as hereinafter defined in this
      Section 4(p)); (ii) has been assessed civil or criminal penalties under
      any Anti-Money Laundering Laws; or (iii) has had any of its funds seized or
      forfeited in any action under any Anti-Money Laundering Laws.  For
      purposes of this Section 4(p), the term “Anti-Money Laundering
      Laws” shall mean laws, regulations and sanctions, state and federal,
      criminal and civil, that:  (i) limit the use of and/or seek the
      forfeiture of proceeds from illegal transactions; (ii) limit commercial
      transactions with designated countries or individuals believed to be terrorists,
      narcotics dealers or otherwise engaged in activities contrary to the interests
      of the United States; (iii) require identification and documentation of the
      parties with whom a Financial Institution conducts business; or (iv) are
      designed to disrupt the flow of funds to terrorist
      organizations.  Such laws, regulations and sanctions shall be deemed
      to include the USA PATRIOT Act of 2001, Pub. L. No. 107-56 (the “Patriot
      Act”), the Bank Secrecy Act, 31 U.S.C. Section 5311 et. seq. (the “Bank
      Secrecy Act”), the Trading with the Enemy Act, 50 U.S.C. Appendix, the
      International Emergency Economic Powers Act, 50 U.S.C. Section 1701 et. seq.,
      and the sanction regulations promulgated pursuant thereto by the OFAC, as well
      as laws relating to prevention and detection of money laundering in 18 U.S.C.
      Sections 1956 and 1957.

     

    (p)  Each
      Holder is in compliance in all material respects with any and all applicable
      provisions of the Patriot Act, including, without limitation, amendments to
      the
      Bank Secrecy Act.  If a Holder is a Financial Institution, it has
      established and is in compliance in all

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    material
      respects with all procedures, if any, required by the Patriot Act and the Bank
      Secrecy Act.

     

    (q)  Each
      Holder represents and warrants that, since July 15, 2007, such Holder has not
      engaged in any short sale of any equity security of the Company.

     

    5.  Covenants
      of the Company.

     

    (a)  Except
      for the 2007 Notes, without the prior written consent of the Secured Party
      (as
      defined in Section 8 herein), the Company shall not create, issue, incur (by
      conversion, exchange or otherwise), assume, guarantee or otherwise become or
      remain directly or indirectly liable for any Indebtedness while the 2007 Notes
      are outstanding.  In addition, so long as the 2007 Notes are
      outstanding, without the prior written consent of the 2007 Notes Majority
      Holders (as defined in section 7(b) hereof) the Company shall not and shall
      not
      permit the Subsidiary to:

     

    (i)  sell,
      assign (by operation of law or otherwise), lease, license, exchange or otherwise
      transfer or dispose of any Collateral (as defined in the Form of Note) other
      than the sale of inventory in the ordinary course of business and the sale
      or
      other disposition of worn out or obsolete assets not necessary for the conduct
      of its business;

     

    (ii)  grant
      any
      Lien upon or with respect to any Collateral (as defined in the Form of Note)
      or
      create or suffer to exist any Lien upon or with respect to any Collateral (as
      defined in the Form of Note) other than a Permitted Lien;

     

    (iii)  declare,
      set aside, or pay any dividends on, make any other distributions in respect
      of,
      redeem or otherwise repurchase any of its capital stock or other securities,
      other than dividends and distributions by the Subsidiary to the Company, or
      redeem or repurchase any of its capital stock or other securities;

     

    (iv)  split,
      combine or reclassify any of its capital stock;

     

    (v)  adopt
      or
      amend any employee benefit plan;

     

    (vi)  except
      with respect to the compensation of Norman J. Barta, grant, award or enter
      into
      any compensation (including stock options or other awards under existing benefit
      plans) or change of control arrangement with any employee or director of the
      Company or the Subsidiary or amend the terms of employment or compensation
      of
      any employee or director of the Company or the Subsidiary; or

     

    (vii)  increase
      the size of the Board of Directors of the Company or the Subsidiary or, except
      with respect to the New Directors, appoint any new members to the Board of
      Directors of the Company or the Subsidiary.

     

    (b)  No
      later
      than fifteen (15) business days from the Closing date, the Company will file
      a
      preliminary Schedule 14C information statement (the “Preliminary Schedule
      14C”) with the Commission.  The Company agrees to respond to the
      initial and any subsequent

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    Commission
      comments relating to the Preliminary Schedule 14C as soon as practicable after
      receipt of such comments and to use commercially reasonable efforts to address
      all of such Commission comments.  The Company agrees to file a
      definitive Schedule 14C information statement with the Commission no later
      than
      the second business day after receiving confirmation that the Commission has
      no
      further comments on the Preliminary Schedule 14C.

     

    (c)  Upon
      the
      terms and subject to the conditions hereof, the Company shall use its
      commercially reasonable best efforts to take, or cause to be taken, all
      appropriate actions and do, or cause to be done, all things necessary, proper
      or
      advisable to consummate and make effective as promptly as practicable the
      transactions contemplated by this Agreement (including, without limitation,
      to
      cause the conditions in clauses (i), (ii), (iv), (v), (vi), (vii) and (viii)
      of
      Section 2(b) to be satisfied) and to cooperate with each Holder  in
      connection with the foregoing.

     

    (d)  As
      long
      as any Holder owns Subject Securities and the Company is required to file
      reports pursuant to the Exchange Act, the Company covenants to use commercially
      reasonable best efforts to timely file (or obtain extensions in respect thereof
      and file within the applicable grace period) all reports required to be filed
      by
      the Company after the date hereof pursuant to the Exchange Act.  As
      long as any Holder owns Subject Securities, if the Company is not required
      to
      file reports pursuant to the Exchange Act, it will prepare and furnish to the
      Holders and make publicly available in accordance with Rule 144(c) such
      information as is required for the Holders to sell the Subject Securities under
      Rule 144. The Company further covenants that it will take such further action
      as
      any holder of Subject Securities may reasonably request, to the extent required
      from time to time to enable such holder to sell such Subject Securities without
      registration under the Securities Act within the requirements of the exemption
      provided by Rule 144.

     

    (e)  The
      Company shall not sell, offer for sale or solicit offers to buy or otherwise
      negotiate in respect of any security (as defined in Section 2 of the
      Securities Act) that would be integrated with the offer or sale of the Subject
      Securities in a manner that would require the registration under the Securities
      Act of the sale of the Securities to the Purchasers or that would be integrated
      with the offer or sale of the Securities for purposes of the rules and
      regulations of the American Stock Exchange.

     

    (f)  Other
      than in the case of a Form 8-K and any exhibits thereto, including any press
      releases included therein, required to be filed with the Commission by the
      Company, neither the Company nor any Holder shall issue any press release or
      otherwise make any public statement concerning the transactions contemplated
      by
      the 2007 Transaction Documents and Subscription Agreement without the prior
      consent of the Company, with respect to any press release of any Holder, or
      without the prior consent of each Holder, with respect to any press release
      of
      the Company or otherwise authorized by the Company, which consent shall not
      unreasonably be withheld or delayed, except if such disclosure is required
      by
      law, in which case the disclosing party shall promptly provide the other party
      with prior notice of such public statement or communication.

     

    (g)  No
      claim
      will be made or enforced by the Company or, with the consent of the Company,
      any
      other person or entity, that any Holder is an “acquiring person” or “interested
      stockholder” under any control share acquisition, business combination,
      shareholder

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    rights
      plan (including any distribution under a rights agreement) or similar
      anti-takeover plan or arrangement in effect or hereafter adopted by or
      applicable to the Company  (including without limitation Section 203
      of the Delaware General Corporation Law), or that any Holder could be deemed
      to
      trigger the provisions of any such plan or arrangement, by virtue of receiving
      Subject Securities under this Agreement, the 2007 Transaction Documents or
      under
      any other agreement between the Company and the Holders.

     

    (h)  Except
      as
      set forth on Schedule 5(g) to the Subscription Agreement, the Company
      shall use the net proceeds from the sale of the Subject Securities for working
      capital purposes and shall not use such proceeds for the payment of any
      dividends or distributions or the redemption or repurchase of any Common Stock
      or other securities of the Company.

     

    (i)  Promptly
      after the Stockholder Consents become effective, the Company shall file the
      Certificate of Amendment with the Secretary of State of the State of
      Delaware.  Thereafter, the Company shall maintain a reserve from its
      duly authorized shares of Common Stock, free of all preemptive or preferential
      rights, for issuance pursuant to the 2007 Transaction Documents  in
      such amount as may be required to fulfill its obligations in full under the
      2007
      Transaction Documents.  Promptly following the conversion of the
      Notes, the Company shall: (i) in the time and manner required by the
      American Stock Exchange (or any subsequent trading market which is the principal
      trading market on which the Common Stock is listed or quoted, as applicable,
      the
“Trading Market”), prepare and file with the Trading Market an additional
      shares listing application covering a number of shares of Common Stock equal
      to
      the number of shares of Common Stock issued upon the Conversion of the Notes
      and
      issuable upon the exercise of the Warrants, (ii) take all steps necessary
      to cause such shares of Common Stock to be approved for listing on such Trading
      Market as soon as possible thereafter, (iii) provide to the Purchasers
      evidence of such listing, and (iv) maintain the listing of such Common
      Stock on such Trading Market or another Trading Market.

     

    (j)  From
      the
      date hereof until 90 days after the date on which a registration statement
      is
      declared effective pursuant to the 2007 Registration Rights Agreement (the
      “Effective Date”), neither the Company nor the Subsidiary shall issue
      shares of Common Stock, any other capital stock or equity securities of the
      Company or the Subsidiary, or any securities convertible into or exercisable
      for
      Common Stock, capital stock or equity securities of the Company or the
      Subsidiary (collectively, “Equity Securities”); provided,
however, the 90 day period set forth in this Section 5(j) shall be
      extended for the number of days during such period in which (i) trading in
      the Common Stock is suspended by the Trading Market, or (ii) following the
      Effective Date, the Registration Statement is not effective or the prospectus
      included in the Registration Statement may not be used by the Holders for the
      resale of Common Stock.  This Section 5(j) shall not apply to any
“Exempt Issuance” as such term is defined in the Warrant.

     

    (k)  From
      the
      Effective Date until the Cessation Date (as defined below), the Company will
      not, directly or indirectly, effect any sale, issuance or exchange of any Equity
      Securities (a “Subsequent Placement”) unless the Company shall have first
      complied with this Section 5(k).

     

    (i)  The
      Company shall deliver to each 2007 Holder a written notice (the “Offer”)
      of any proposed or intended sale, issuance or exchange of the securities
      being

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    offered
      (the “Offered Securities”) in a Subsequent Placement, which Offer shall
      (w) identify and describe the Offered Securities, (x) describe the price and
      other terms upon which they are to be sold, issued or exchanged, and the number
      or amount of the Offered Securities to be sold, issued or exchanged, (y)
      identify the persons or entities to which or with which the Offered Securities
      are to be offered, sold, issued or exchanged, and (z) offer to sell and issue
      to
      or exchange with each 2007 Holder (A) a pro rata portion of the Offered
      Securities based on such 2007 Holder’s pro rata portion of the aggregate
      principal amount of the 2007 Notes purchased or received by such 2007 Holder
      (the “Basic Amount”), and (B) with respect to each 2007 Holder that
      elects to purchase its Basic Amount, any additional portion of the Offered
      Securities attributable to the Basic Amounts of other 2007 Holders as such
      2007
      Holder shall indicate it will purchase or acquire should the other 2007 Holders
      subscribe for less than their Basic Amounts (the “Undersubscription
      Amount”).

     

    (ii)  To
      accept
      an Offer, in whole or in part, a 2007 Holder must deliver a written notice
      to
      the Company prior to the end of the 10 trading day period following receipt
      of
      the Offer, setting forth the portion of the 2007 Holder’s Basic Amount that such
      2007 Holder elects to purchase and, if such 2007 Holder shall elect to purchase
      all of its Basic Amount, the Undersubscription Amount, if any, that such 2007
      Holder elects to purchase (in either case, the “Notice of Acceptance”).
      If the Basic Amounts subscribed for by all 2007 Holders are less than the total
      of all of the Basic Amounts, then each 2007 Holder who has set forth an
      Undersubscription Amount in its Notice of Acceptance shall be entitled to
      purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
      Amount it has subscribed for; provided, however, that if the Undersubscription
      Amounts subscribed for exceed the difference between the total of all the Basic
      Amounts and the Basic Amounts subscribed for (the “Available
      Undersubscription Amount”), each 2007 Holder who has subscribed for any
      Undersubscription Amount shall be entitled to purchase only that portion of
      the
      Available Undersubscription Amount as the Basic Amount of such 2007 Holder
      bears
      to the total Basic Amounts of all 2007 Holders that have subscribed for
      Undersubscription Amounts.

     

    (iii)  The
      Company shall have 10 trading days from the expiration of the period set forth
      in Section 5(k)(ii) above to sell, issue or exchange all or any part of such
      Offered Securities as to which a Notice of Acceptance has not been given by
      the
      2007 Holders (the “Refused Securities”), but only to the offerees
      described in the Offer and only upon terms and conditions (including, without
      limitation, unit prices and interest rates), taken as a whole, that are not
      more
      favorable to the acquiring persons or entities or less favorable to the Company
      than those set forth in the Offer.

     

    (iv)  In
      the
      event the Company shall propose to sell less than all the Refused Securities
      (any such sale to be in the manner and on the terms specified in Section
      5(j)(iii) above), then each 2007 Holder may, at its sole option and in its
      sole
      discretion, reduce the number or amount of the Offered Securities specified
      in
      its Notice of Acceptance to an amount that shall be not less than the number
      or
      amount of the Offered Securities that the 2007 Holder elected to purchase
      pursuant to Section 5(k)(ii) above multiplied by a fraction, (i) the numerator
      of which shall be the number or amount of Offered Securities the Company
      actually proposes to issue, sell or exchange (including Offered Securities
      to be
      issued or sold to 2007 Holders pursuant to Section 5(k)(ii) above prior to
      such
      reduction) and (ii) the denominator of

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    which
      shall be the original amount of the Offered Securities.  In the event
      that any 2007 Holder so elects to reduce the number or amount of Offered
      Securities specified in its Notice of Acceptance, the Company may not issue,
      sell or exchange more than the reduced number or amount of the Offered
      Securities unless and until such securities have again been offered to the
      2007
      Holders in accordance with Section 5(k)(i) above.

     

    (v)  Upon
      the
      closing of the sale, issuance or exchange of all or less than all of the Refused
      Securities, the 2007 Holders shall acquire from the Company, and the Company
      shall issue to the 2007 Holders, the number or amount of Offered Securities
      specified in the Notices of Acceptance, as reduced pursuant to Section 5(k)(iv)
      above if the 2007 Holders have so elected, upon the terms and conditions
      specified in the Offer.  The purchase by the 2007 Holders of any
      Offered Securities is subject in all cases to the preparation, execution and
      delivery by the Company and the 2007 Holders of a purchase agreement relating
      to
      such Offered Securities reasonably satisfactory in form and substance to the
      2007 Holders, the Company and their respective
      counsel.  Notwithstanding anything to the contrary contained in this
      Agreement, if the Company does not consummate the closing of the sale, issuance
      or exchange of all or less than all of the Refused Securities within 7 trading
      days after the expiration of the period set forth in Section 5(k)(ii), the
      Company shall issue to the 2007 Holders the number or amount of Offered
      Securities specified in the Notices of Acceptance, as reduced pursuant to
      Section 5(j)(iv) above if the 2007 Holders have so elected (which, in this
      case
      may be reduced to zero), upon the terms and conditions specified in the
      Offer.

     

    (vi)  The
      Company and the 2007 Holders agree that if any 2007 Holder elects to participate
      in the Offer, any registration rights set forth in the agreement regarding
      the
      Subsequent Placement with respect to such Offer or any other transaction
      documents related thereto (collectively, the “Subsequent Placement
      Documents”) shall not entitle the purchasers of any Offered Securities
      issued in such Subsequent Placement to participate in any registration statement
      filed under the Registration Rights Agreement and shall not obligate the Company
      to file a registration statement with respect to such Offered Securities unless
      one or more registration statements covering all shares of Common Stock issued
      or issuable upon the conversion of the 2007 Notes or the exercise of the
      Warrants are then effective.  The Subsequent Placement Documents shall
      not include any term or provision whereby any 2007 Holder shall be required
      to
      agree to any restrictions in trading as to any securities of the Company owned
      by such 2007 Holder prior to such Subsequent Placement if the 2007 Holders
      purchase all of the Offered Securities, and, in all other cases, such
      restrictions shall apply only to 2007 Holders who participate in the Subsequent
      Placement and the period of such restrictions shall not exceed ninety (90)
      days
      after the closing of the Subsequent Placement.

     

    (vii)  Notwithstanding
      anything to the contrary in this Section 5(k) and unless otherwise agreed to
      by
      the 2007 Notes Majority Holders (as defined in section 7(b) hereof), the Company
      shall either confirm in writing to the 2007 Holders that the transaction with
      respect to the Subsequent Placement has been abandoned or shall publicly
      disclose its intention to issue the Offered Securities, in either case in such
      a
      manner such that the 2007 Holders will not be in possession of material
      non-public information as a result of having information concerning the proposed
      Subsequent Placement, by the seventeenth (17th) trading day following
      delivery

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    of
      the
      Offer. If by the seventeenth (17th) trading day following delivery of the Offer
      no public disclosure regarding a transaction with respect to the Offered
      Securities has been made, and no notice regarding the abandonment of such
      transaction has been received by the 2007 Holders, such transaction shall be
      deemed to have been abandoned and the 2007 Holders shall not be deemed to be
      in
      possession of any material, non-public information with respect to the Company
      as a result of having information concerning the proposed Subsequent Placement.
      Should the Company decide to pursue such transaction with respect to the Offered
      Securities, the Company shall provide each 2007 Holder with another Offer Notice
      and each 2007 Holder will again have the right of participation set forth in
      this Section 5(k). The Company shall not be permitted to deliver more than
      one
      such Offer to the 2007 Holders in any 60 day period.

     

    (viii)  Any
      Offered Securities not acquired by the 2007 Holders or the offerees in
      accordance with Section 5(k)(iii) above may not be issued, sold or exchanged
      until they are again offered to the 2007 Holders under the procedures specified
      in this Agreement.

     

    (ix)  This
      Section 5(k) shall not apply to any “Exempt Issuance” as such term is defined in
      the Form of Warrant.

     

    (x)  For
      purposes of this Agreement, the term “Cessation Date” shall mean the
      first day on which the Purchasers (including transferees treated as Purchasers
      pursuant to Section 11(c) of the Subscription Agreement) no longer hold: (x)
      prior to the conversion of the Purchased Notes, Notes representing at least
      25%
      of the aggregate principal amount of all Purchased Notes issued in the Offering,
      and (y) after the conversion of the Purchased Notes, (A) if the Per Share
      Exercise Price (as such term is defined in the Warrants) is greater than the
      closing price of the Common Stock last reported by the Trading Market prior
      to
      such day, shares of Common Stock representing at least 25% of the aggregate
      shares of Common Stock issued upon the conversion of the Purchased Notes or
      previously issued upon the exercise of any Warrants, or (B) if the Per Share
      Exercise Price is less than the closing price of the Common Stock last reported
      by the Trading Market prior to such day, shares of Common Stock representing
      at
      least 25% of the aggregate shares of Common Stock issued upon the conversion
      of
      the Purchased Notes, previously issued upon the exercise of any Warrants, or
      issuable upon the future exercise of any Warrants (treating the Purchasers
      as
      holding any shares of Common Stock that would be issuable upon the exercise
      of
      any Warrants then held by Purchasers).

     

    (l)  The
      Company acknowledges and agrees that each Holder may from time to time pledge
      pursuant to a bona fide margin agreement with a registered broker-dealer or
      grant a security interest in some or all of the Subject Securities to a
      financial institution that is an “accredited investor” as defined in Rule 501(a)
      under the Securities Act and who agrees to be bound by the provisions of this
      Agreement and the Registration Rights Agreement and, if required under the
      terms
      of such arrangement, each Holder  may transfer pledged or secured
      Subject Securities to the pledgees or secured parties. Such a pledge or transfer
      would not be subject to approval of the Company and no legal opinion of legal
      counsel of the pledgee, secured party or pledgor shall be required in connection
      therewith.  Further, no notice shall be required of such
      pledge.  At each Holder ’s expense, the Company will execute and
      deliver such reasonable documentation as a pledgee or secured party of Subject
      Securities may reasonably request in connection with a pledge or transfer of
      the
      Subject Securities, including, if the Subject Securities are subject to
      registration pursuant to the Registration Rights Agreement, the preparation
      and

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    filing
      of
      any required prospectus supplement under Rule 424(b)(3) under the Securities
      Act
      or other applicable provision of the Securities Act to appropriately amend
      the
      list of selling stockholders thereunder.

     

    (m)  Prior
      to
      the Automatic Conversion Date (as defined in the Form of New Note), the Company
      will not enter into any agreement for additional financing through equity or
      equity-linked securities on terms that are materially different or more
      beneficial to the purchasers of such equity or equity linked securities than
      those contained in the Subscription Agreement and all exhibits thereto without
      the prior consent of the 2007 Notes Majority Holders (as defined in section
      7(b)
      hereof).

     

    (n)  From
      the
      date hereof until such time as no Holder holds any of the Subject Securities,
      the Company will, at its own expense, maintain insurance (including, without
      limitation, commercial general liability and property insurance, and directors
      and officers liability insurance, including such directors and officers
      liability insurance in respect of acts or omissions occurring prior to the
      Closing covering each such person serving as an officer or director of the
      Company immediately prior to the Closing to the extent that such coverage is
      in
      place as of the Closing) in such amounts, against such risks, in such form
      and
      with responsible and reputable insurance companies or associations as is
      required by any governmental authority having jurisdiction with respect thereto
      or as is carried generally in accordance with sound business practice by
      companies in similar businesses similarly situated and in any event, in amount,
      adequacy, scope and with comparable insurance companies as the insurance in
      place as of the date of this Agreement; provided, if the Closing shall not
      have
      occurred prior to September 21, 2007 the directors and officers liability
      coverage may be reduced to $7,000,000.

     

    (o)  Except
      with respect to the material terms and conditions of the transactions
      contemplated by the 2007 Transaction Documents and the Subscription Agreement,
      the Company covenants and agrees that neither it nor any other person or entity
      acting on its behalf will, following the Closing, provide any Holder or its
      agents or counsel with any information that the Company believes constitutes
      material non-public information, unless prior thereto such Holder shall have
      executed a written agreement (which may be in the form of an e-mail or other
      electronic confirmation) regarding the confidentiality and use of such
      information.  The Company understands and confirms that each Holder
      shall be relying on the foregoing representations in effecting transactions
      in
      securities of the Company.

     

    (p)  From
      the
      date hereof until such time as no Holder holds any of the Subject Securities,
      the Company shall not effect or enter into an agreement to effect any financing
      involving a Variable Rate Transaction.  “Variable Rate
      Transaction” means a transaction in which the Company issues or sells
      (i) any Equity Securities that are convertible into, exchangeable or
      exercisable for, or include the right to receive additional shares of Common
      Stock either (A) at a conversion, exercise or exchange rate or other price
      that is based upon and/or varies with the trading prices of or quotations for
      the shares of Common Stock at any time after the initial issuance of such Equity
      Security, or (B) with a conversion, exercise or exchange price that is
      subject to being reset at some future date after the initial issuance of such
      Equity Security or upon the occurrence of specified or contingent events
      directly or indirectly related to the business of the Company or the market
      for
      the Common Stock or (ii) enters into any

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    agreement,
      including, but not limited to, an equity line of credit, whereby the Company
      may
      sell securities at a future determined price.

     

    (q)  Notwithstanding
      Section 6(b), the Company agrees to issue or reissue certificates of Common
      Stock without a legend if at such time, prior to making any transfer of any
      Common Stock, each Holder shall give written notice to the Company making such
      request and:  (i) a registration statement covering the resale of such
      Common Stock is effective under the Securities Act, or (ii) each Holder
      provides the Company or its counsel with reasonable assurances that such
      security can be sold pursuant to Rule 144 promulgated under the Securities
      Act
      or any successor or replacement rule (as applicable, “Rule 144”) (which
      may include an opinion of counsel provided by the Company), or (iii) each
      Holder  provides the Company or its counsel with reasonable assurances
      that such security can be sold pursuant to section (k) of Rule 144 (or a
      corresponding successor or replacement section, as applicable, “Rule
      144(k)”), or (iv) the Company has received other evidence reasonably
      satisfactory to the Company that such legend is not required under applicable
      requirements of the Securities Act and state securities laws (including judicial
      interpretations and pronouncements issued by the staff of the
      Commission).  The Company shall cause its counsel to issue a legal
      opinion to its transfer agent, after each Holder has provided the Company’s
      counsel with all necessary documentation required by such counsel to issue
      such
      an opinion, if such legal opinion is required by the transfer agent to effect
      the removal of the legend hereunder.  If all or any portion of a 2007
      Note is converted or exercised (as applicable) at a time when there is an
      effective registration statement to cover the resale of the Common Stock issued
      upon such conversion or exercise, or if such shares of Common Stock may be
      sold
      under Rule 144(k) or if such legend is not otherwise required under applicable
      requirements of the Securities Act (including judicial interpretations and
      pronouncements issued by the staff of the Commission) then certificates
      representing such shares of Common Stock shall be issued free of all
      legends.  The Company agrees that at such time as such legend is no
      longer required under this Section 5(q) and each Holder  has
      complied with this Section 5(q), it will, no later than three trading days
      following the delivery by each Holder  to the Company or the transfer
      agent of a certificate representing shares of Common Stock issued with a
      restrictive legend, deliver or cause to be delivered to each Holder  a
      certificate representing such shares that is free from all restrictive and
      other
      legends. The Company may not make any notation on its records or give
      instructions to the transfer agent that enlarge the restrictions on transfer
      set
      forth in this Section 5(q).  Certificates for shares of Common Stock
      subject to legend removal hereunder shall, at the direction of each Holder
      , be
      transmitted by the transfer agent of the Company to each Holder  by
      crediting the account of each Holder ’s prime broker with the Depository Trust
      Company System.

     

    (r)  At
      all
      times until the Investor Rights Agreement has terminated in accordance with
      its
      terms (the “Designation Period”), the Company will cause two individuals
      designated by Lambda (the individuals whom Lambda has so designated from time
      to
      time are referred to herein as the “Lambda Designees”) to be members of
      the Board of Directors of the Company except to the extent that (i) Lambda
      otherwise consents in writing, or (ii) a member of the Board of Directors
      originally designated by Lambda resigns and Lambda has not yet designated a
      successor.  Without limiting the generality of the foregoing, during
      the Designation Period the Company will cause the Lambda Designees to be elected
      or nominated to the Board of Directors, to promptly remove any Lambda Designee
      from the Board of Directors upon the

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    written
      direction of Lambda, and to promptly elect or appoint any successor designated
      by Lambda having reasonably appropriate business experience and background
      to
      fill any vacancy caused by any Lambda Designee ceasing to be a member of the
      Board of Directors for any reason.

     

    6.  Covenants of
      the Holders.

     

    (a)  Each
      Holder agrees that no sale, assignment or transfer of any of the Subject
      Securities acquired by such Holder shall be valid or effective, and the Company
      shall not be required to give any effect to such a sale, assignment or transfer,
      unless (i) the sale, assignment or transfer of such Subject Securities is
      registered under the Securities Act, it being understood that the Subject
      Securities are not currently registered for sale and that the Company has no
      obligation or intention to so register the Subject Securities, except as
      provided by the 2007 Registration Rights Agreement; (ii) the Subject Securities
      are sold, assigned or transferred in accordance with all the requirements and
      limitations of an exemption from registration under the Securities
      Act.  Without limiting the generality of the foregoing, each Holder
      agrees that following the removal of the restrictive legend from certificates
      representing Common Stock, such Holder will sell any such Common Stock pursuant
      to either the registration requirements of the Securities Act, including any
      applicable prospectus delivery requirements, or an exemption therefrom, and
      that
      if shares of Common Stock are sold pursuant to a Registration Statement, they
      will be sold in compliance with the plan of distribution set forth
      therein.

     

    (b)  Each
      Holder agrees to the imprinting, so long as is required by Section 6(b)(i),
      of a legend on any of the Securities in the following or a substantially similar
      form and such other legends as may be required by state blue sky
      laws:

     

    “THE
      SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
      SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
      SECURITIES LAWS.  SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
      PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
      REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE
      SECURITIES ACT OR AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
      OF
      THE SECURITIES ACT.  ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO
      COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.”

     

    (c)  Each
      Holder hereby agrees that from the date hereof and continuing until such Holder
      no longer owns any Subject Securities, such Holder shall not, without the prior
      written consent of the Company, directly or indirectly, through related parties,
      affiliates or otherwise, (i) sell “short” or “short against the box” (as those
      terms are generally understood) any equity security of the Company or (ii)
      otherwise engage in any transaction which involves hedging of such Holder’s
      position in any equity security of the Company, provided, however, that it
      shall
      not be a violation of this Section 6(b)(i), if such Holder places a sell order
      for shares of Common Stock underlying the New Notes at or following the time
      of
      conversion of such New Notes, relies on the Company to deliver such Common
      Stock
      in accordance with the Form of

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    New
      Note,
      and completes the sale of such Common Stock before the Company delivers the
      Common Stock to such Holder.

     

    (d)  Upon
      the
      terms and subject to the conditions hereof, each Holder shall use its reasonable
      best efforts to take, or cause to be taken, all appropriate actions and do,
      or
      cause to be done, all things necessary, proper or advisable to consummate and
      make effective as promptly as practicable the transactions contemplated by
      this
      Agreement (including, without limitation, to cause the conditions in paragraphs
      (a), (b) and (c) of Section 5 to be satisfied) and to cooperate with the Company
      in connection with the foregoing.

     

    (e)  After
      the
      Closing, upon the request of the Company each Holder shall provide to the
      Company such additional information and documentation concerning such Holder’s
      legal or beneficial ownership, policies, procedures and sources of funds as
      is
      reasonably necessary to enable the Company to comply with Anti-Money Laundering
      Laws now in existence or hereafter enacted or amended.

     

    7.  Indemnification.

     

    (a)  General.  The
      Company shall indemnify and hold harmless each Holder  and each
      officer, director, partner, employee, agent and controlling person of each
      Holder (within the meaning of Section 15 of the Securities Act and
      Section 20 of the Exchange Act), past, present or future (each, an
“Indemnified Party”), from and against any and all claims, losses,
      damages, liabilities, judgments, fines, penalties, charges, costs, and expense,
      including reasonable attorneys fees and disbursements including those incurred
      in enforcing this Section 7(a) (collectively, “Losses”), due to or
      arising out of (i) a breach of any representation, warranty, covenant or
      agreement by the Company in this Agreement or any other 2007 Transaction
      Document, or (ii) a claim against any Holder by a third party based on the
      transactions contemplated by the 2007 Transaction Documents (other than a claim
      based on a breach by each Holder of any representation, warranty or covenant
      of
      each Holder in the 2007 Transaction Documents  to which it is a
      party).  No knowledge by any Holder of any breach or inaccuracy of any
      representation, warranty, covenant or agreement by the Company in this Agreement
      shall impair, limit, release or otherwise impair any rights of any
      Holder  pursuant to this Section 7.

     

    (b)  Limitation
      on Indemnification.  The maximum amount payable by the Company to
      all Indemnified Parties in respect of claims made for indemnification under
      Section 7(a) shall not exceed, in the aggregate, the aggregate amount of the
      New
      Note(s) received by such Holder in the Exchange plus the Indemnified Parties’
reasonable out-of-pocket expenses incurred in connection with (i) the 2007
      Transaction Documents  and the transactions contemplated thereby, (ii)
      enforcing its rights under Section 7(a) and (iii) defending itself against
      any
      claim related to the 2007 Transaction Documents or the transactions contemplated
      thereby.  No Indemnified Party shall be entitled to bring a claim with
      respect to Losses due to or arising out of a breach by the Company of any
      representation or warranty contained in Sections 3(e) through (ii) (including
      a
      claim permitted by clause (i) or (ii) of Section 7(c)) unless such claim is
      brought by, or the bringing of such claim is consented to in writing by, the
      2007 Notes Majority Holders.  For purposes of this Section 7(b), the
“2007 Notes Majority Holders” shall be (x) prior to the conversion of the
      2007 Notes, holders of 2007 Notes having a principal amount greater than fifty
      percent (50%) of the principal amount of all 2007 Notes then outstanding, and
      (y) after

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    the
      conversion of the 2007 Notes, the holders of a majority of the shares of Common
      Stock that were issued upon the conversion of the 2007 Notes or were issued
      or
      are issuable upon the exercise of the Warrants (excluding from such analysis
      any
      shares of Common Stock that have been sold pursuant to an effective registration
      statement or Rule 144 and the holders thereof).  Once a claim has been
      brought or approved by the 2007 Notes Majority Holders, each Indemnified Party
      may continue to prosecute such claim even if the persons or entities bringing
      or
      approving such claim subsequently cease to constitute the 2007 Notes Majority
      Holders.

     

    (c)  Sole
      Remedy.  The parties hereto agree and acknowledge that subsequent
      to the Closing, the indemnification rights provided in this Section 7
      shall be the exclusive remedy of the each party hereto against the Company,
      for
      breaches of the representations and warranties contained in this Agreement
      except with respect to (i) claims involving fraud or a knowing breach of the
      representations and warranties or (ii) any equitable relief to which any party
      may be entitled, including without limitation, rescission.

     

    (d)  Notice.  With
      respect to any Loss related to a claim by a third party, an Indemnified Party
      shall give written notice thereof to the Company (in such capacity, the
“Indemnifying Party”) promptly after receipt of any written claim by such
      third party and in any event not later than twenty (20) business days after
      receipt of any such written claim (or not later than ten (10) business days
      after the receipt of any such written claim in the event such written claim
      is
      in the form of a formal complaint filed with a court of competent jurisdiction
      and served on the Indemnified Party), specifying in reasonable detail the
      amount, nature and source of the claim, and including therewith copies of any
      notices or other documents received from third parties with respect to such
      claim; provided, however, that failure to give such notice
      shall not limit the right of an Indemnified Party to recover indemnity or
      reimbursement except to the extent that the Indemnifying Party suffers any
      prejudice or harm with respect to such claim as a result of such
      failure.  The Indemnified Party shall also provide the Indemnifying
      Party with such further information concerning any such claims as the
      Indemnifying Party may reasonably request by written notice.

     

    (e)  Payment
      of Losses.  Within thirty (30) calendar days after receiving
      notice of a claim for indemnification or reimbursement, the Indemnifying Party
      shall, by written notice to the Indemnified Party, either (i) concede or deny
      liability for the claim in whole or in part, or (ii) in the case of a claim
      asserted by a third party, advise that the matters set forth in the notice
      are,
      or will be, subject to contest or legal proceedings not yet finally
      resolved.  If the Indemnifying Party concedes liability in whole or in
      part, it shall, within twenty (20) business days of such concession, pay the
      amount of the claim to the Indemnified Party to the extent of the liability
      conceded.  Any such payment shall be made in immediately available
      funds equal to the amount of such claim so payable.  If the
      Indemnifying Party denies liability in whole or in part or advises that the
      matters set forth in the notice are, or will be, subject to contest or legal
      proceedings not yet finally resolved, then the Indemnifying Party shall make
      no
      payment (except for the amount of any conceded liability payable as set forth
      above) until the matter is resolved in accordance with this
      Agreement.

     

    (f)  Defense
      of Claims.  In the case of any third party claim, if within 20
      days after receiving the notice described in the preceding Section 7(d), the
      Indemnifying Party (i) gives written notice to the Indemnified Party stating
      that the Indemnifying Party would be liable

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    under
      the
      provisions hereof for indemnity in the amount of such claim if such claim were
      valid and that the Indemnifying Party disputes and intends to defend against
      such claim, liability or expense at the Indemnifying Party’s own cost and
      expense, and (ii) provides assurance reasonably acceptable to such Indemnified
      Party that such indemnification will be paid fully and promptly if required
      and
      such Indemnified Party will not incur cost or expense during the proceeding,
      then the Indemnifying Party shall be entitled to assume the defense of such
      claim and to choose counsel for the defense (subject to the consent of such
      Indemnified Party which consent shall not be unreasonably withheld) and such
      Indemnified Party shall not be required to make any payment with respect to
      such
      claim, liability or expense as long as the Indemnifying Party is conducting
      a
      good faith and diligent defense at its own expense; provided, however, that
      the
      assumption of the defense of any such matters by the Indemnifying Party shall
      relate solely to the claim, liability or expense that is subject or potentially
      subject to indemnification.  If the Indemnifying Party assumes such
      defense in accordance with the preceding sentence, it shall have the right
      to
      settle indemnifiable matters related to claims by third parties where (x) the
      only obligation of the Indemnified Party and Indemnifying Party in connection
      with such settlement is the payment of money damages and such money damages
      are
      satisfied in full by the Indemnifying Party, and (ii) the settlement includes
      a
      complete release of the relevant Indemnified Party or Parties.  Any
      other settlement of a claim for which the Indemnifying Party has assumed the
      defense shall require the prior written consent of the relevant Indemnified
      Party or Parties, which consent shall not be unreasonably
      withheld.  No Indemnified Party shall settle any claim with respect to
      which the Indemnifying Party has assumed the defense, without the prior written
      consent of the Indemnifying Party.  The Indemnifying Party shall keep
      such Indemnified Party apprised of the status of the claim, liability or expense
      and any resulting suit, proceeding or enforcement action, shall furnish such
      Indemnified Party with all documents and information that such Indemnified
      Party
      shall reasonably request and shall consult with such Indemnified Party prior
      to
      acting on major matters, including settlement
      discussions.  Notwithstanding anything herein stated, such Indemnified
      Party shall at all times have the right to participate in, but not control,
      such
      defense at its own expense directly or through counsel; provided,
however, if the named parties to the action or proceeding include
      both
      the Indemnifying Party and the Indemnified Party and representation of both
      parties by the same counsel would be inappropriate under applicable standards
      of
      professional conduct, the reasonable expense of separate counsel for such
      Indemnified Party shall be paid by the Indemnifying Party provided that such
      Indemnifying Party shall be obligated to pay for only one such
      counsel.  If no such notice of intent to dispute and defend is given
      by the Indemnifying Party, or if such diligent good faith defense is not being
      or ceases to be conducted, such Indemnified Party may undertake the defense
      of
      (with counsel selected by such Indemnified Party, which selection shall require
      the consent of the Indemnifying Party, which consent shall not be unreasonably
      withheld, and paid by the Indemnifying Party), and shall have the right to
      compromise or settle, such claim, liability or expense (exercising reasonable
      business judgment) with the consent of the Indemnifying Party, which consent
      shall not be unreasonably withheld.  Such Indemnified Party shall make
      available all information and assistance that the Indemnifying Party may
      reasonably request and shall cooperate with the Indemnifying Party in such
      defense.

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    8.  Creation
      of Security Interest.

     

    (a)  Grant
      of Security Interest.  The Company hereby confirms that it has
      granted and pledged to Lambda (the “Secured Party”) a continuing security
      interest in the Collateral (as defined in the Form of New Note) in order to
      secure prompt payment of the principal of, interest on and all other amounts
      due
      and payable under the 2007 Notes (collectively, the
“Obligations”).  Such security interest will automatically
      terminate upon the (i) earlier of the payment of principal and interest on
      the
      2007 Notes; (ii) such time as the Company designates sufficient funds (which
      may
      be proceeds from the sale of Collateral) for the payment of the 2007 Notes
      and
      (iii) the Automatic Conversion Date (as defined in the Form of New Note) (the
      “Security Interest Termination Date”).

     

    (b)  Designation
      of Secured Party as Agent.  Each Holder hereby irrevocably
      designates the Secured Party to act as Secured Party on such Holder’s
      behalf.  Each Holder hereby irrevocably authorizes, and each holder of
      any Subject Securities, by such holder’s acceptance of such Subject Securities,
      shall be deemed irrevocably to authorize, the Secured Party to take such action
      on its behalf under the provisions of this Agreement and any other instruments
      and agreements referred to herein or therein and to exercise such powers and
      to
      perform such duties hereunder and thereunder as are specifically delegated
      to,
      or required of, the Secured Party by the terms hereof or thereof and such other
      powers as are reasonably incidental thereto.  Each Holder, on behalf
      of itself and future holders of the Subject Securities issued to such Holder,
      hereby authorizes and directs the Secured Party, from time to time in the
      Secured Party’s discretion, to take any action and promptly to execute and
      deliver on such Holder’s behalf any document or instrument that the Company may
      reasonably request to effect, confirm or evidence the provisions of this Section
      8, the occurrence of the Security Interest Termination Date, any subordination
      agreement, or otherwise.  Pursuant to Section 9-509(d) of the Uniform
      Commercial Code as in effect on the date hereof in the State of New York, the
      Secured Party hereby authorizes the Company to file a termination statement
      upon
      the occurrence of the Security Interest Termination Date; the Secured Party
      agrees to provide any further authorizations of such filing if requested by
      the
      Company.  In no event shall the Secured Party have any liability or
      other obligation to the Company or any Holder whatsoever as a result of any
      act
      or omission taken or failed to be taken in its capacity as the Secured Party,
      and the Company and each Holder hereby irrevocably release the Secured Party
      from any and all such liabilities or other obligations.

     

    (c)  Delivery
      of Additional Documentation Required.  The Company shall from time
      to time execute and deliver to Secured Party, at the request of Secured Party,
      all financing statements and other documents that Secured Party may reasonably
      request and take any action that Secured Party may reasonably request to perfect
      and continue perfected Secured Party’s security interests in the
      Collateral.  Without limiting the generality of the foregoing, the
      Company shall, upon the Secured Party’s written request, duly execute and
      deliver any (i) assignment for security with respect to Intellectual
      Property in a form reasonably requested by the Secured Party, and (ii) any
      account control agreement with respect to any account holding Collateral in
      a
      form reasonably requested by the Secured Party.  Notwithstanding the
      foregoing, the Company need not deliver possession or control of any Collateral
      to the Secured Party or take any action to perfect the security interest granted
      hereby other than the filing of financing

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    statements
      under the Uniform Commercial Code, the delivery and filing of any assignments
      for security with respect to Intellectual Property and the entry into account
      control agreements with respect to accounts holding Collateral.  The
      Secured Party may, at any time and from time to time, file financing statements,
      continuation statements and amendments thereto that describe the Collateral
      as
      all assets of the Company or words of similar effect.

     

    (d)  Remedies
      of Secured Party.  If any Event of Default as defined in the New
      Notes shall have occurred and be continuing, the Secured Party may exercise
      in
      respect of the Collateral, in addition to any other rights and remedies provided
      for herein or otherwise available to it, all of the rights and remedies of
      a
      secured party upon default under the Uniform Commercial Code (whether or not
      the
      Uniform Commercial Code applies to the affected Collateral), and also may
      (i) take absolute control of the Collateral, including, without limitation,
      transfer into the Secured Party’s name or into the name of its nominee or
      nominees (to the extent the Secured Party has not theretofore done so) and
      thereafter receive, for the benefit of the holders of the 2007 Notes, all
      payments made thereon, give all consents, waivers and ratifications in respect
      thereof and otherwise act with respect thereto as though it were the outright
      owner thereof, (ii) require the Company to, and the Company hereby agrees
      that it will at its expense and upon request of the Secured Party forthwith,
      assemble all or part of its respective Collateral as directed by the Secured
      Party and make it available to the Secured Party at a place or places to be
      designated by the Secured Party that is reasonably convenient to both parties,
      and the Secured Party may enter into and occupy any premises owned or leased
      by
      the Company where the Collateral or any part thereof is located or assembled
      for
      a reasonable period in order to effectuate the Secured Party’s rights and
      remedies hereunder or under law, without obligation to the Company in respect
      of
      such occupation, and (iii) without notice except as specified below and
      without any obligation to prepare or process the Collateral for sale,
      (A) sell the Collateral or any part thereof in one or more parcels at
      public or private sale, at any of the Secured Party’s offices or elsewhere, for
      cash, on credit or for future delivery, and at such price or prices and upon
      such other terms as the Secured Party may deem commercially reasonable and/or
      (B) lease, license or dispose of the Collateral or any part thereof upon
      such terms as the Secured Party may deem commercially reasonable.  The
      Company agrees that, to the extent notice of sale or any other disposition
      of
      its respective Collateral shall be required by law, at least 10 days’
notice to the Company of the time and place of any public sale or the time
      after
      which any private sale or other disposition of its Collateral is to be made
      shall constitute reasonable notification.  The Secured Party shall not
      be obligated to make any sale or other disposition of any Collateral regardless
      of notice of sale having been given.  The Secured Party may adjourn
      any public or private sale from time to time by announcement at the time and
      place fixed therefor, and such sale may, without further notice, be made at
      the
      time and place to which it was so adjourned.  The Company hereby
      waives any claims against the Secured Party and the holders of the 2007 Notes
      arising by reason of the fact that the price at which the Collateral may have
      been sold at a private sale was less than the price which might have been
      obtained at a public sale or was less than the aggregate amount of the
      Obligations, even if the Secured Party accepts the first offer received and
      does
      not offer such Collateral to more than one offeree, and waives all rights that
      the Company may have to require that all or any part of such Collateral be
      marshaled upon any sale (public or private) thereof. The Company hereby
      acknowledges that (x) any such sale of the Collateral by the Secured Party
      shall be made without warranty, (y) the Secured Party may specifically
      disclaim any warranties of title, possession, quiet enjoyment or the like,
      and

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (z) such
      actions set forth in clauses (x) and (y) above shall not adversely affect
      the commercial reasonableness of any such sale of Collateral.  In
      addition to the foregoing, (A) upon written notice to the Company from the
      Secured Party after and during the continuance of an Event of Default, the
      Company shall cease any use of the Intellectual Property for any purpose
      described in such notice; (B) the Secured Party may, at any time and from
      time to time after and during the continuance of an Event of Default, upon
      10 days’ prior notice to the Company, license, whether general, special or
      otherwise, and whether on an exclusive or non-exclusive basis, any of the
      Intellectual Property, throughout the universe for such term or terms, on such
      conditions, and in such manner, as the Secured Party shall in its sole
      discretion determine; and (C) the Secured Party may, at any time, pursuant
      to the authority granted in Section 8 hereof (such authority being
      effective upon the occurrence and during the continuance of an Event of
      Default), execute and deliver on behalf of the Company, one or more instruments
      of assignment of the Intellectual Property (or any application or registration
      thereof), in form suitable for filing, recording or registration in any
      country.

     

    (e)  Benefits
      to Holders of 2007 Notes.  The rights of the Secured Party are for
      the ratable benefit of the holders of the 2007 Notes (including the Secured
      Party).  Any proceeds or other Collateral received or recovered by the
      Secured Party in its capacity as such shall, in the sole discretion of the
      Secured Party, either (i) be held (or sold, liquidated or otherwise converted
      into another form of proceeds or other Collateral that is held) by the Secured
      Party for the ratable benefit of the holders of the 2007 Notes, as collateral
      security for the Obligations (whether matured or unmatured), (ii) after and
      during the continuance of an Event of Default, be retained by the Secured Party
      to reimburse the Secured Party for its reasonable costs and expenses, including
      attorneys fees and disbursements, incurred in serving as the Secured Party,
      and/or (iii) after and during the continuance of an Event of Default, be
      distributed to the holders of the 2007 Notes on a pro rata basis based on the
      respective amounts then due and owing to the respective holders of the 2007
      Notes.  After and during the continuance of an Event of Default, the
      Secured Party shall distribute any cash Collateral then held by the Secured
      Party in accordance with clause (iii) of the proceeding sentence to the extent
      that such cash Collateral exceeds the costs or expenses described in clause
      (ii)
      of the preceding sentence that have already been incurred or are reasonably
      expected by the Secured Party to be incurred unless the Secured Party has
      determined, upon the advice of counsel, that it is not entitled to distribute
      such cash Collateral at such time, in which case the Secured Party shall make
      such distributions as soon as practicable after the Secured Party determines
      that it is entitled to distribute such cash Collateral.

     

    9.  Confidentiality.  Each
      Holder acknowledges and agrees that all information, written and oral,
      concerning the Company furnished from time to time to such Holder and identified
      as confidential has been and is provided on a confidential basis pursuant to
      a
      confidentiality agreement between such Holder and the Company.

     

    10.  Expenses.  The
      Company shall pay, in connection with the preparation, execution and delivery
      of
      this Agreement, the other 2007 Transaction Documents and the consummation of
      the
      transactions contemplated hereby and thereby, all reasonable fees and out of
      pocket expenses incurred by the Holders in connection with the Exchange up
      to an
      aggregate maximum amount of $10,000, whether or not the transactions
      contemplated by the 2007 Transaction Documents are consummated.

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    11.  Miscellaneous.

     

    (a)  This
      Agreement, including the exhibits hereto, sets forth the entire understanding
      of
      the parties with respect to each Holder’s Exchange of Old Notes for New Notes
      with the Company, supersedes all existing agreements among them concerning
      such
      subject matter, and, subject to paragraph (h) below, may be modified, and the
      provisions hereof may be waived, only by a written instrument duly executed
      by
      the party to be charged; provided, however, the obligations of the
      Company under Sections 5(b), (f), (h), (j), (k), (n) and (p) may be amended
      or
      waived following the Closing by the 2007 Notes Majority Holders; provided,
      further, that any amendment or waiver to any such Sections by the 2007 Notes
      Majority Holders must apply to the corresponding Sections of all of the
      subscription agreements entered into by the Company in connection with the
      Offering.

     

    (b)  Except
      as
      otherwise specifically provided herein, any notice or other communication
      required or permitted to be given hereunder shall be in writing and shall be
      mailed by certified mail, return receipt requested, or by Federal Express,
      Express Mail or similar guaranteed overnight delivery or courier service or
      delivered in person against receipt to the party to whom it is to be
      given,

     

    (i)
      if
      to the
      Company,

     

    Nephros,
      Inc.

    3960
      Broadway

    New
      York,
      New York  10032

    Attn:  President

     

    (ii)
      with
      a copy to,

    Kramer
      Levin Naftalis & Frankel LLP

    1177
      Avenue of the Americas

    New
      York,
      New York 10036

    Attention:  Thomas
      D. Balliett, Esq.

     

    (ii)
      if
      to a Holder, at the address set forth on the signature page hereof, with a
      copy
      to,

     

    Stroock
      & Stroock & Lavan LLP

    180
      Maiden Lane

    New
      York,
      New York 10038

    Attention:  Kristopher
      M. Hansen, Esq.

     

    or
      in
      either case, to such other address as the party shall have furnished in writing
      in accordance with the provisions of this Section 11(b).  Any
      notice given by means permitted by this Section 11(b) shall be deemed
      given at the time of receipt thereof at the address specified in this Section
      11(b).

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (c)  This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their successors and permitted assigns. The Company may not assign this
      Agreement or any rights or obligations hereunder without the prior written
      consent of each Holder or, after the Closing, the 2007 Majority
      Holders.  Each Holder may assign any or all of its rights under this
      Agreement to any person or entity to whom such Holder assigns or transfers
      any
      Subject Securities, provided that such transferee agrees in writing to be bound,
      with respect to the transferred Subject Securities, by the provisions of the
      2007 Transaction Documents  that apply to such Subject
      Securities.  In the event of any assignment pursuant to this Section
      11(c), the transferee shall be treated as a Holder to the same extent as if
      such
      transferee were the original party to this Agreement.  Notwithstanding
      anything in this Section 11(c) to the contrary, in the event of any assignment
      pursuant to this Section 11(c), Holders shall not be entitled to assign any
      rights under this Agreement to a purchaser of shares of Common Stock sold by
      such Holder pursuant to an effective registration statement or Rule
      144.

     

    (d)  The
      headings in this Agreement are solely for convenience of reference and shall
      be
      given no effect in the construction or interpretation of this
      Agreement.

     

    (e)  This
      Agreement may be executed in any number of counterparts, each of which shall
      be
      deemed an original, but all of which together shall constitute one and the
      same
      instrument.

     

    (f)  This
      Agreement shall be governed by and construed in accordance with the laws of
      the
      State of New York, without giving effect to principles governing conflicts
      of
      law that would defer to the substantive law of another
      jurisdiction.

     

    (g)  In
      the
      event that any provision of this Agreement shall be determined to be illegal
      or
      unenforceable, that provision will be limited or eliminated to the minimum
      extent necessary so that this Agreement shall otherwise remain in full force
      and
      effect and enforceable.

     

    (h)  This
      Agreement does not create, and shall not be construed as creating, any rights
      enforceable by any person not a party to this Agreement other than the Secured
      Party and each Indemnified Party. The Company and the Holders acknowledge that
      the Secured Party’s consent to serve in such capacity is based in part on the
      effectiveness of the provisions in Section 8 of this Agreement, and the Company
      and the Holders agree that the provisions of Section 8 of this Agreement may
      be
      enforced by, and may not be modified or waived, without the prior written
      consent of the Secured Party.

     

    (i)  Each
      party hereto consents and submits to the exclusive jurisdiction of any state
      court sitting in the County of New York or federal court sitting in the Southern
      District of the State of New York in connection with any dispute arising out
      of
      or relating to this Agreement, and agrees that all suits, actions and
      proceedings brought by such party hereunder shall be brought only in such
      jurisdictions.  Each party hereto waives any objection to the laying
      of venue in such courts and any claim that any such action has been brought
      in
      an inconvenient forum.  To the extent permitted by law, any judgment
      in respect of a dispute arising out of or relating to this Agreement may be
      enforced in any other jurisdiction within or outside the United States by suit
      on the judgment, a certified copy of such judgment being conclusive evidence
      of
      the fact and amount of such judgment.  Each party hereto agrees that
      personal service of process

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    may
      be
      effected by any of the means specified in Section 12(b), addressed to such
      party.  The foregoing shall not limit the rights of any party to serve
      process in any other manner permitted by law.

     

    (j)  In
      the
      event of any litigation or other proceeding concerning this Agreement or the
      transactions contemplated hereby, including any such litigation or proceeding
      with respect to the enforcement of this Agreement against any defaulting party,
      the prevailing party in such litigation or proceeding shall be entitled to
      reimbursement from the party opposing such prevailing party for all attorneys’
fees and costs incurred by such prevailing party in such litigation or
      proceeding

     

    [THE
      REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, this Agreement was duly executed on the date first written
      above.

     

     

    
      	
                                                          NEPHROS,
                INC.

               

            
	
                                                          By:
                /s/ Norman J.
                Barta          
                

                                                             Name:
                Norman
                J. Barta

                                                             Title:  
                President and Chief Executive
                Officer

            

    

     

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
 

    
      	
                                                          HOLDER:  Southpaw
                Credit Opportunity Master Fund LP

                                                          By:  Southpaw
                GP LLC

            
	
                                                         

                                                          By:
                /s/ Kevin
                Wyman             
                

                                                             Name:
                Kevin
                Wyman

                                                             Title:Managing
                Member

            

    

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
      	
                                                          HOLDER:  3V
                Capital Master Fund Ltd.

                                                          By:  3V
                Capital Management LLC

               

            
	
                                                          By:
                /s/ Scott A. Stagg

                                                             Name:
                Scott
                A. Stagg

                                                             Title:  Managing
                Member

            

    

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
      	
                                                          HOLDER:  Distressed/High
                Yield Trading Opportunities, Ltd.

                                                          By:
                Eliteperformance Fund, Ltd.

               

            
	
                                                          By:
                /s/ Scott A. Stagg

                                                             Name:
                Scott
                A. Stagg

                                                            
                Title:  Portfolio Manager

            

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    
      	
                                                          HOLDER:  Kudu
                Partners, LP

               

            
	
                                                          By:
                /s/ Brian P. Lupien

                                                             Name:
                Brian
                P. Lupien

                                                             Title:
                Treasurer

            

    

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
      	
                                                          HOLDER:  LJHS
                Company

               

            
	
                                                          By:
                /s/ Jack A. McLeod

                                                             Name:
                Jack A.
                McLeod

                                                             Title:  
                Agent

            

    

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

     

    
      	
              Holder
                of Old Note

            	 	
              Amount
                of Old Note

              (including
                accrued interest)

            	 
	 	 	 	 	 
	
              Southpaw
                Credit Opportunity Master Fund LP

            	 	$	
              2,157,651.10

            	 
	
              3V
                Capital Master Fund Ltd.

            	 	$	
              1,618,238.32

            	 
	
              Distressed/High
                Yield Trading Opportunities, Ltd.

            	 	$	
              1,618,238.32

            	 
	
              Kudu
                Partners

            	 	$	
              107,865.13

            	 
	
              LJHS
                Company

            	 	$	
              107,865.13

            	 

    

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      B

     

    (Form
      of
      New Notes)

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      C

     

    
      	
              Holder
                of New Note

            	 	
              Amount
                of New Note

            	 
	 	 	 	 	 
	
              Southpaw
                Credit Opportunity Master Fund LP

            	 	$	
              2,038,461.54

            	 
	
              3V
                Capital Master Fund Ltd.

            	 	$	
              1,528,846.15

            	 
	
              Distressed/High
                Yield Trading Opportunities, Ltd.

            	 	$	
              1,528,846.15

            	 
	
              Kudu
                Partners

            	 	$	
              101,923.08

            	 
	
              LJHS
                Company

            	 	$	
              107,923.08

            	 

    

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      D

     

    (Form
      of
      Subscription Agreement)

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      E

     

    (Form
      of
      Registration Rights Agreement)

     

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      F

     

    (Form
      of
      Investor Rights Agreement)

     

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      G

     

    ACCREDITED
      INVESTOR STATUS

     

    The
      Holder represents that it is an Accredited Investor on the basis that it is
      (check all that apply):

     

    _____(i)  A
      bank as defined in Section 3(a)(2) of the Act, or a savings and loan association
      or other institution as defined in Section 3(a)(5)(A) of the Act, whether acting
      in its individual or fiduciary capacity; a broker dealer registered pursuant
      to
      Section 15 of the Securities Exchange Act of 1934; an insurance company as
      defined in Section 2(13) of the Act; an investment company registered under
      the
      Investment Company Act of 1940 (the “Investment Company Act”) or a
      business development company as defined in Section 2(a)(48) of the Investment
      Company Act; a Small Business Investment Company licensed by the U.S. Small
      Business Administration under Section 301(c) or (d) of the Small Business
      Investment Act of 1958; a plan established and maintained by a state, its
      political subdivisions or any agency or instrumentality of a state or its
      political subdivisions for the benefit of its employees, if such plan has total
      assets in excess of $5,000,000; an employee benefit plan within the meaning
      of
      the Employee Retirement Income Security Act of 1974 (“ERISA”), if the
      investment decision is made by a plan fiduciary, as defined in Section 3(21)
      of
      ERISA, which is either a bank, savings and loan association, insurance company,
      or registered investment advisor, or if the employee benefit plan has total
      assets in excess of $5,000,000 or, if a self-directed plan, with investment
      decisions made solely by persons that are accredited investors.

     

    _____(ii)  A
      private business development company as defined in Section 202(a)(22) of the
      Investment Advisers Act of 1940.

     

    _____(iii)  An
      organization described in Section 501(c)(3) of the Internal Revenue Code,
      corporation, Massachusetts or similar business trust, or partnership, not formed
      for the specific purpose of acquiring the securities offered, with total assets
      in excess of $5,000,000.

     

    _____(iv)  A
      director or executive officer of the Company.

     

    _____(v)  A
      natural person whose individual net worth, or joint net worth with that person’s
      spouse, at the time of his or her purchase exceeds $1,000,000.

     

    _____(vi)  A
      natural person who had an individual income in excess of $200,000 in each of
      the
      two most recent years or joint income with that person’s spouse in excess of
      $300,000 in each of those years and has a reasonable expectation of reaching
      the
      same income level in the current year.

     

    _____(vii)  A
      trust, with total assets in excess of $5,000,000, not formed for the specific
      purpose of acquiring the securities offered, whose purchase is directed by
      a
      sophisticated person as described in Rule 506(b)(2)(ii) (i.e., a person who
      has
      such knowledge and experience in financial and business matters that he is
      capable of evaluating the merits and risks of the prospective
      investment).

     

    _____(viii)  An
      entity in which all of the equity owners are accredited
      investors.  (If this alternative is checked, each
      Holder  must identify each equity owner and provide statements signed
      by each demonstrating how each is qualified as an accredited
      investor.  Further, each Holder  represents that it has made
      such investigation as is reasonably necessary in order to verify the accuracy
      of
      this alternative.)kl09044_ex10-3.htm

    
      

    

    Exhibit
      10.3

     

    REGISTRATION
      RIGHTS AGREEMENT

     

    This
      REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of
      September 19, 2007, among NEPHROS, INC., a Delaware corporation (the “Company”),
      and holders of securities of the Company listed as Investors on Schedule
      1 attached hereto (collectively, the “Holders”).

     

    WHEREAS, the
      Holders are the beneficial owners of certain securities issued by the Company;
      and

     

    WHEREAS,
      the Company and the Holders deem it to be in their respective best interests
      to
      set forth the rights of the Holders in connection with Registrable Securities
      (as defined below).

     

    NOW,
      THEREFORE, in consideration of the premises and mutual covenants and obligations
      hereinafter set forth, the Company and the Holders, intending legally to be
      bound, hereby agree as follows. 

     

    Section
      1. Definitions.  As
      used in this Agreement, the following terms shall have the following
      meanings:

     

    “Affiliate”
      of any person means any other person who either directly or indirectly is in
      control of, is controlled by, or is under common control with such
      person.

     

    “Automatic
      Conversion Date” shall mean the twenty-first (21st) day after
      the
      Company sends or gives its stockholders a definitive Schedule 14C information
      statement.

     

    “Business
      Day” shall mean any Monday, Tuesday, Wednesday, Thursday or Friday that is not a
      day on which banking institutions in The City of New York are authorized by
      law,
      regulation or executive order to close.

     

    “Class
      D
      Warrants” shall mean the Class D Warrants for the purchase of shares of Common
      Stock of the Company.

     

    “Common
      Stock” shall mean the common stock, par value $0.001 per share, of the
      Company.

     

    “Conversion
      Amount” shall mean the principal amount of the Note and all accrued but unpaid
      interest thereon as of the Automatic Conversion Date.

     

    “Effectiveness
      Date” shall mean, with respect to the Initial Resale Registration Statement, the
      one hundred eightieth (180th) day following
      the
      Filing Date; provided that, if the Effectiveness Date falls
      on a Saturday, Sunday or any other day which shall be a legal holiday or a
      day
      on which the SEC is authorized or required by law or other government actions
      to
      close, the Effectiveness Date shall be the following Business Day.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    “Effectiveness
      Period” shall have the meaning set forth in Section 3(a).

     

    “Exchange
      Act” shall mean the Securities Exchange Act of 1934, as amended (or any similar
      successor federal statute), and the rules and regulations thereunder, as the
      same are in effect from time to time.

     

    “Exchanged
      Notes” shall mean 10% Secured Convertible Notes due 2008 convertible into shares
      of Common Stock.

     

    “Filing
      Date” shall mean, subject to Section 3(b) hereof, the sixtieth (60th) day after
      the
      date the Company files a definitive Schedule 14C information statement with
      the
      SEC; provided that, if the Filing Date falls on a Saturday,
      Sunday or any other day which shall be a legal holiday or a day on which the
      SEC
      is authorized or required by law or other government actions to close, the
      Filing Date shall be the following Business Day.

     

    “Holder”
      shall have the meaning assigned to such term in the preamble
      hereof.

     

    “Initial
      Resale Registration Statement” shall mean the Registration Statement referred to
      in Section 3(a).

     

    “Losses”
      shall have the meaning set forth in Section 5(a).

     

    “Notes”
      shall mean the Exchanged Notes and the Purchased Notes.

     

    “Person”
      shall mean an individual, partnership, corporation, limited liability company,
      joint venture, trust or unincorporated organization, a government or agency
      or
      political subdivision thereof or any other entity.

     

    “Placement
      Agent Warrants” shall mean, collectively, each Placement Agent Warrant for the
      Purchase of Shares of Common Stock issued by the Company of even date with
      the
      Class D Warrants.

     

    “Prospectus”
      shall mean the prospectus included in any Registration Statement, as amended
      or
      supplemented by a prospectus supplement with respect to the terms of the
      offering of any portion of the Registrable Securities covered by such
      Registration Statement and by all other amendments and supplements to the
      prospectus, including post-effective amendments and all material incorporated
      by
      reference in such prospectus.

     

    “Purchased
      Notes” shall mean the 10% Secured Convertible Notes due 2008 convertible into
      shares of the Company’s Common Stock and Class D Warrants.

     

    “Registrable
      Securities” shall mean (i) shares of Common Stock issuable upon conversion of
      the Notes or exercise of Class D Warrants, and (ii) any other securities issued
      as a result of, or in connection with, any stock dividend, stock split or
      reverse stock split, combination, recapitalization, reclassification, merger
      or
      consolidation, exchange or distribution in respect of the Common Stock referred
      to above.

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    “Registration
      Statement” shall mean any registration statement which covers any of the
      Registrable Securities pursuant to the provisions of this Agreement, including
      the Prospectus included therein, all amendments and supplements to such
      Registration Statement, including post-effective amendments, all exhibits and
      all material incorporated by reference in such Registration
      Statement.

     

    “Resale
      Registration Statement” shall have the meaning set forth in Section 3(b)
      hereof.

     

    “Restricted
      Securities” shall have the meaning set forth in Section 2 hereof.

     

    “Rule
      144” shall mean Rule 144 promulgated under the Securities Act, as amended from
      time to time, or any similar successor rule thereto that may be promulgated
      by
      the SEC.

     

    “Rule
      415” shall mean Rule 415 promulgated under the Securities Act, as amended from
      time to time, or any similar successor rule thereto that may be promulgated
      by
      the SEC.

     

    “SEC”
      shall mean the Securities and Exchange Commission, or any other federal agency
      at the time administering the Securities Act.

     

    “Securities
      Act” shall mean the Securities Act of 1933, as amended (or any similar successor
      federal statute), and the rules and regulations thereunder, as the same are
      in
      effect from time to time.

     

    “Underwritten
      Offering” shall mean a registered offering in which securities of the Company
      are sold to an underwriter for reoffering to the public.

     

    Section
      2. Securities
      Subject to this Agreement.  The securities entitled to
      the benefits of this Agreement are the Registrable Securities but, with respect
      to any particular Registrable Security, only so long as such security continues
      to be a Restricted Security.  A Registrable Security that has ceased
      to be a Restricted Security cannot thereafter become a Restricted
      Security.  As used herein, a Restricted Security shall cease to be a
      Restricted Security, and will no longer be a Registrable Security hereunder,
      when:  (i) it has been registered under the Securities Act, the
      registration statement in connection therewith has been declared effective
      and
      it has been disposed of pursuant to such effective registration statement;
      (ii)
      it is eligible to be sold or distributed pursuant to Rule 144 within any
      consecutive three month period (including, without limitation, pursuant to
      Rule
      144(k)) without volume limitations; or (iii) it shall have ceased to be
      outstanding.

     

    Section
      3. Required
      Resale Registration

     

    (a)  On
      or
      prior to the Filing Date, the Company shall prepare and file with the SEC an
      initial “resale” Registration Statement (once declared effective by the SEC, the
“Initial Resale Registration Statement”) providing for the resale of (i) all
      Registrable Securities, and (ii) the other securities set forth in
Schedule 3(a) hereto (the “Other Registrable Securities”; provided, such
      securities shall cease to be Other Registrable Securities if the warrants
      pursuant to

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    which
      such securities may be purchased expire without being exercised) for an offering
      to be made on a continuous basis pursuant to Rule 415.  The Initial
      Resale Registration Statement shall be on Form SB-2 (except if the Company
      is
      not then eligible to register for resale the Registrable Securities on Form
      SB-2, in which case such registration shall be on another appropriate form
      in
      accordance herewith and with the Securities Act and the rules promulgated
      thereunder).  Such Initial Resale Registration Statement shall cover,
      to the extent allowable under the Securities Act and the rules promulgated
      thereunder (including Rule 416), such indeterminate number of additional shares
      of Common Stock resulting from stock splits, stock dividends or similar
      transactions with respect to the Registrable Securities.  The Company
      shall use its commercially reasonable best efforts to cause the Initial Resale
      Registration Statement to be declared effective under the Securities Act as
      promptly as possible after the filing thereof, but in any event prior to the
      Effectiveness Date, and to keep such Initial Resale Registration Statement
      continuously effective under the Securities Act until all of the Registrable
      Securities have ceased to be Restricted Securities (the “Effectiveness
      Period”).  The Company shall immediately notify the Holders via
      facsimile or electronic mail of the effectiveness of the Initial Resale
      Registration Statement on the same trading day that the Company telephonically
      confirms effectiveness with the SEC, which date shall be the date effectiveness
      of the Initial Resale Registration Statement is granted by the SEC.

     

    (b)  Notwithstanding
      anything to the contrary set forth in this Section 3, in the event it is
      determined that the Company is unable to register all of the Registrable
      Securities and Other Registrable Securities in the Initial Resale Registration
      Statement in order to comply with applicable securities rules and regulations,
      including, without limitation, Rule 415, then the Company shall register in
      the
      Initial Resale Registration Statement such number of Registrable Securities
      and
      Other Registrable Securities determined on a pro rata basis
      among the Holders thereof and the holders of Other Registrable
      Securities.  The Company will use its commercially reasonable best
      efforts to register the remaining Registrable Securities and Other Registrable
      Securities as soon as reasonably practicable on additional “resale” Registration
      Statement(s) (each, an “Additional Resale Registration Statement” and together
      with the Initial Resale Registration Statement, the “Resale Registration
      Statement”) after such registration is permitted, in each case in accordance
      with applicable securities rules and regulations and including such number
      of
      Registrable Securities and Other Registrable Securities determined on a
pro rata basis among the Holders of the Registrable
      Securities and the holders of the Other Registrable Securities, until all
      Registrable Securities and Other Registrable Securities have been
      registered.  The number of Registrable Securities to be included in
      any Resale Registration Statement shall be equal to the total number of
      securities that may be included in such Resale Registration Statement multiplied
      by a fraction, the numerator of which is the total number of Registrable
      Securities and the denominator of which is the sum of the total number of
      Registrable Securities and the number of Other Registrable Securities, in each
      case as of the filing of such Resale Registration Statement.  The
      actual Registrable Securities to be included in any Resale Registration
      Statement shall be determined in the following order: (i) first, the shares
      of
      Common Stock issuable upon conversion of the Notes shall be registered on a
      pro rata basis among the holders of the Notes, and (ii)
      second, the shares of Common Stock issuable upon exercise of the Class D
      Warrants shall be registered on a pro rata basis among the
      holders of the Class D Warrants.  The actual Other Registrable
      Securities to be included in any Resale Registration Statement shall
      be allocated among the holders of the Other Registrable Securities on a
pro rata basis.  For purposes of this Section 3(b),
“Filing Date” means with respect to each

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    Additional
      Resale Registration Statement filed pursuant hereto, the later of (i) sixty
      (60)
      days following the sale of substantially all of the Registrable Securities
      included in the Initial Resale Registration Statement or any Additional Resale
      Registration Statement and (ii) six (6) months following the effective date
      of
      the Initial Resale Registration Statement or any Additional Resale Registration
      Statement, as applicable, or such earlier date as permitted by the
      SEC.  The Company shall immediately notify the Holders via facsimile
      or electronic mail of the effectiveness of any Additional Resale Registration
      Statement on the same trading day that the Company telephonically confirms
      effectiveness with the SEC, which date shall be the date effectiveness of any
      such Additional Resale Registration Statement is granted by the
      SEC.

     

    (c)  The
      Company and the Holders agree that the Holders will suffer damages if the
      Initial Resale Registration Statement is not declared effective by the SEC
      on or
      prior to the Effectiveness Date.  The Company and the Holders further
      agree that it would not be feasible to ascertain the extent of such damages
      with
      precision.  Accordingly, if the Initial Resale Registration Statement
      is not declared effective by the SEC on or prior to the Effectiveness Date
      and
      to the extent that the Holders owning a majority of the outstanding Registrable
      Securities have not waived the application of this Section 3(c), for each thirty
      (30) day period after the Effectiveness Date or portion thereof during which
      the
      Initial Resale Registration Statement has not been declared effective, the
      Company shall pay an amount as liquidated damages to each Holder, payable in
      cash, equal to (i) one percent (1.0%) of the amount of such Holder’s Conversion
      Amount for each of the first ten (10) 30-day periods after the Effectiveness
      Date and two percent (2%) of the amount of such Holder’s Conversion Amount for
      each 30-day period thereafter, until the Initial Resale Registration Statement
      is declared effective by the SEC.  Liquidated damages payable by the
      Company pursuant to this Section 3(c) shall be payable on the first (1st) Business
      Day of
      each thirty (30) day period following the Effectiveness Date.  If the
      Company fails to pay any liquidated damages pursuant to this Section 3(c) in
      full within ten (10) business days after the date payable, the Company will
      pay
      interest thereon at a rate of fifteen percent (15%) per annum (or such lesser
      maximum amount that is permitted to be paid by applicable law) to the Holder,
      accruing daily from the date such liquidated damages are due until such amounts,
      plus all such interest thereon, are paid in full.  In the event the
      Initial Resale Registration Statement is not declared effective by the SEC
      on or
      prior to the Effectiveness Date, the Holders’ sole remedy shall be receipt of
      the liquidated damages payable pursuant to this Section 3(c); provided,
      nothing in this Section 3(c) shall limit the Holders’ right to specific
      performance of the Company’s obligations under this Agreement.  For
      the avoidance of doubt: (x) if the Initial Resale Registration Statement is
      declared effective on or before the Effectiveness Date, no liquidated damages
      will be payable for any Holder’s Conversion Amount that corresponds to
      Registrable Securities not permitted to be included in the Initial Resale
      Registration Statement by applicable securities rules and regulations, and
      (y)
      otherwise, after the Initial Resale Registration Statement is declared effective
      by the SEC no further liquidated damages will be payable for any Holder’s
      Conversion Amount that corresponds to Registrable Securities not permitted
      to be
      included in the Initial Resale Registration Statement by applicable securities
      rules and regulations.

     

    (d)  As
      a
      condition to the inclusion of its Registrable Securities in any Resale
      Registration Statement, each Holder shall furnish to the Company such
      information regarding such Holder and the distribution proposed by such Holder
      as the Company may request in

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    writing
      or as shall be required in connection with any registration, qualification
      or
      compliance referred to in this Agreement.

     

    (e)  In
      connection with the Company’s registration obligations hereunder, the Company
      shall:

     

    (A)  Prepare
      and file with the SEC such amendments, including post-effective amendments,
      to
      the Resale Registration Statement and the Prospectus used in connection
      therewith as may be necessary to keep such Resale Registration Statement
      continuously effective as to the applicable Registrable Securities for the
      Effectiveness Period; (ii) cause the related Prospectus to be amended or
      supplemented by any required Prospectus supplement (subject to the terms of
      this
      Agreement), and as so supplemented or amended to be filed pursuant to Rule
      424
      of the Securities Act; (iii) respond as promptly as reasonably possible to
      any
      comments received from the SEC with respect to such Resale Registration
      Statement or any amendment thereto; and (iv) comply in all material respects
      with the provisions of the Securities Act and the Exchange Act with respect
      to
      the disposition of all Registrable Securities covered by such Resale
      Registration Statement during the applicable period in accordance (subject
      to
      the terms of this Agreement) with the intended methods of disposition by the
      Holders thereof set forth in the Resale Registration Statement as so amended
      or
      in such Prospectus as so supplemented.

     

    (B)           Notify
      the Holders of Registrable Securities to be sold (which notice shall, pursuant
      to clauses (ii) through (v) hereof, be accompanied by an instruction to suspend
      the use of the Prospectus until the requisite changes have been made) as
      promptly as reasonably possible and (if requested by any such Holder) confirm
      such notice in writing no later than one trading day following the day (i)(X)
      when a Prospectus or any Prospectus supplement or post-effective amendment
      to
      the Resale Registration Statement is filed; and (Y) with respect to the Resale
      Registration Statement or any post-effective amendment, when the same has become
      effective; (ii) of any request by the SEC or any other Federal or state
      governmental authority for amendments or supplements to the Resale Registration
      Statement or Prospectus or for additional information; (iii) of the issuance
      by
      the SEC or any other federal or state governmental authority of any stop order
      suspending the effectiveness of the Resale Registration Statement covering
      any
      or all of the Registrable Securities or the initiation of any proceedings for
      that purpose; (iv) of the receipt by the Company of any notification with
      respect to the suspension of the qualification or exemption from qualification
      of any of the Registrable Securities for sale in any jurisdiction, or the
      initiation or threatening of any proceeding for such purpose; and (v) of the
      occurrence of any event or passage of time that makes the financial statements
      included in the Resale Registration Statement ineligible for inclusion therein
      or any statement made in the Resale Registration Statement or Prospectus or
      any
      document incorporated or deemed to be incorporated therein by reference untrue
      in any material respect or that requires any revisions to the Resale
      Registration Statement, Prospectus or other documents so that, in the case
      of
      the Resale Registration Statement or the Prospectus, as the case may be, it
      will
      not contain any untrue statement of a material fact or omit to state any
      material fact required to be stated therein or necessary to make the statements
      therein, in light of the circumstances under which they were made,
      not

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    misleading;
      provided that any and all of such information provided pursuant to clause
      (v) above shall remain confidential to each Holder until such information
      otherwise becomes public, unless disclosure by a Holder is required by law;
      provided, further, notwithstanding each Holder’s agreement to keep
      such information confidential, the Holders make no acknowledgement that any
      such
      information is material, non-public information.

     

    (C)           Use
      its commercially reasonable best efforts to avoid the issuance of, or, if
      issued, obtain the withdrawal of (i) any order suspending the effectiveness
      of
      the Resale Registration Statement, or (ii) any suspension of the qualification
      (or exemption from qualification) of any of the Registrable Securities for
      sale
      in any jurisdiction, at the earliest practicable moment.

     

    (D)           Furnish
      to each Holder, upon written request of such Holder, without charge, at least
      one conformed copy of the Resale Registration Statement and each amendment
      thereto, including financial statements and schedules, all documents
      incorporated or deemed to be incorporated therein by reference to the extent
      requested by such Holder, and all exhibits to the extent requested by such
      Holder (including those previously furnished or incorporated by
      reference).

     

    (E)           Promptly
      deliver to each Holder, upon written request of such Holder, without charge,
      as
      many copies of the Prospectus or Prospectuses (including each form of
      prospectus) and each amendment or supplement thereto as such Holders may
      reasonably request in connection with resales by the Holder of Registrable
      Securities.  Subject to the terms of this Agreement, the Company
      hereby consents to the use of such Prospectus and each amendment or supplement
      thereto by each of the selling Holders in connection with the offering and
      sale
      of the Registrable Securities covered by such Prospectus and any amendment
      or
      supplement thereto, except after the giving of any notice pursuant to Section
      3(e)(B).

     

    (F)           Prior
      to any resale of Registrable Securities by a Holder, use its commercially
      reasonable efforts to register or qualify or cooperate with the selling Holders
      in connection with the registration or qualification (or exemption from the
      registration or qualification) of such Registrable Securities for the resale
      by
      the Holder under the securities or Blue Sky laws of such jurisdictions within
      the United States as any Holder reasonably requests in writing, to keep each
      registration or qualification (or exemption therefrom) effective during the
      Effectiveness Period and to do any and all other acts or things reasonably
      necessary to enable the disposition in such jurisdictions of the Registrable
      Securities covered by each Resale Registration Statement; provided that the
      Company shall not be required to qualify generally to do business in any
      jurisdiction where it is not then so qualified or subject the Company to any
      material tax in any such jurisdiction where it is not then so subject or file
      a
      general consent to service of process in any such jurisdiction.

     

    (G)           If
      requested by the Holders, use its commercially reasonable best efforts to cause
      its transfer agent to prepare and deliver certificates representing Registrable
      Securities to a transferee pursuant to the Resale Registration Statement
      within

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    three
      (3)
      trading days of delivery to the transfer agent of certificates bearing
      restrictive legends, which certificates shall be free, to the extent permitted
      by the Subscription Agreement, of all restrictive legends, and to enable such
      Registrable Securities to be in such denominations and registered in such names
      as any such Holders may request.

     

    (H)           Upon
      the occurrence of any event contemplated by Section 3(e)(B), as promptly as
      reasonably possible under the circumstances taking into account the Company’s
      good faith assessment of any adverse consequences to the Company and its
      shareholders of the premature disclosure of such event, prepare a supplement
      or
      amendment, including a post-effective amendment, to the Resale Registration
      Statement or a supplement to the related Prospectus or any document incorporated
      or deemed to be incorporated therein by reference, and file any other required
      document so that, as thereafter delivered, neither the Resale Registration
      Statement nor such Prospectus will contain an untrue statement of a material
      fact or omit to state a material fact required to be stated therein or necessary
      to make the statements therein, in light of the circumstances under which they
      were made, not misleading.  If the Company notifies the Holders in
      accordance with clauses (ii) through (v) of Section 3(e)(B) above to suspend
      the
      use of any Prospectus until the requisite changes to such Prospectus have been
      made, then the Holders shall suspend use of such Prospectus.  The
      Company will use its commercially reasonable best efforts to ensure that the
      use
      of the Prospectus may be resumed as promptly as is practicable.  The
      Company shall be entitled to exercise its right under this Section 3(e)(H)
      to
      suspend the availability of the Resale Registration Statement and Prospectus
      for
      a period not to exceed 90 days (which need not be consecutive days) in any
      365-day period.

     

    (I)           Comply
      in all material respects with all applicable rules and regulations of the SEC
      and the American Stock Exchange (or any successor entity or any other national
      securities exchange or automated quotation system on which the Common Stock
      is
      then listed or quoted).

     

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

     

    (K)           Unless
      waived by Holders owning a majority of the outstanding Registrable Securities,
      include in such Resale Registration Statement, amendment thereto, or prospectus
      or prospectus supplement all material non-public information made available
      by
      the Company to any Holder prior to the filing thereof, except for material
      non-public information made available to a Holder to whom knowledge of a member
      of the Board of Directors of the Company is attributable.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (f)  Holder
      hereby covenants with the Company (i) not to make any sale of the
      Registrable Securities pursuant to a Resale Registration Statement without
      effectively causing the prospectus delivery requirements under the Securities
      Act to be satisfied, and (ii) if such Registrable Securities are to be sold
      by any method or in any transaction other than on a national securities exchange
      or in the over-the-counter market, in privately negotiated transactions, or
      in a
      combination of such methods, to notify the Company at least 5 Business Days
      prior to the date on which the Holder first offers to sell any such Registrable
      Securities.

     

    (g)  Holder
      acknowledges and agrees that the Registrable Securities sold pursuant to the
      Registration Statement described in this Agreement are not transferable on
      the
      books of the Company unless the stock certificate submitted to the Company’s
      transfer agent evidencing such Registrable Securities is accompanied, if
      requested by the transfer agent, by a certificate reasonably satisfactory to
      the
      transfer agent to the effect that (i) the Registrable Securities have been
      sold in accordance with such Resale Registration Statement and (ii) the
      requirement of delivering a current Prospectus has been satisfied.

     

    (h)  Holder
      shall not take any action with respect to any distribution deemed to be made
      pursuant to such Resale Registration Statement, which would constitute a
      violation of Regulation M under the Exchange Act, or any other applicable rule,
      regulation or law.

     

    Section
      4.  Registration
      Expenses.  All expenses incident to the Company’s
      performance of or compliance with this Agreement will be borne by the Company,
      regardless of whether a Resale Registration Statement becomes effective,
      including, without limitation: (i) all registration and filing fees;
      (ii) all reasonable fees and expenses of compliance with federal securities
      and state blue sky or securities laws; (iii) all reasonable expenses of printing
      (including printing Prospectuses), messenger and delivery services and
      telephone; (iv) all reasonable fees and disbursements of counsel for the
      Company; (v) all applications and filing fees in connection with listing the
      Registrable Securities on a national securities exchange or automated quotation
      system pursuant to the requirements hereof; (vi) Securities Act liability
      insurance, if the Company so desires such insurance and (vii) all reasonable
      fees and disbursements of independent certified public accountants of the
      Company (including the expenses of any special audit and comfort letters
      required by or incident to such performance).  Notwithstanding
      anything in this Section 4 to the contrary, the Company shall not be
      required to pay any underwriting discounts, commissions or transfer taxes,
      if
      any, relating to the sale or disposition of any Holder’s Restricted
      Securities.

     

    The
      Company will, in any event, bear its internal expenses (including, without
      limitation, all salaries and expenses of its officers and employees performing
      legal or accounting duties), the expenses of any annual audit and the fees
      and
      expenses of any person, including special experts, retained by the
      Company.

     

    Section
      5.  Indemnification.

     

    (a)  Indemnification
      by the Company. To the fullest extent permitted by law, the Company shall,
      notwithstanding any termination of this Agreement, indemnify and hold harmless
      each Holder of the Registrable Securities (including, its officers, directors,
      members, partners, agents, brokers, investment advisors and employees of each
      of
      them) and each person

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    controlling
      such Holder within the meaning of Section 15 of the Securities Act (including
      the officers, directors, members, partners, agent and employees of each such
      controlling person), with respect to which any registration has been effected
      pursuant to this Agreement, against all claims, losses, damages, liabilities,
      judgments, fines, penalties, charges, costs (including, without limitation,
      reasonable attorneys’ fees and disbursements) and expenses (collectively,
“Losses”), as incurred, including any Losses incurred in settlement of any
      litigation, commenced or threatened (subject to Subsection 5(c) below), arising
      out of or based on any untrue or alleged untrue statement of a material fact
      contained in any Resale Registration Statement, Prospectus or offering circular,
      or any amendment or supplement thereof, incident to any such registration,
      or
      based on any omission or alleged omission to state therein a material fact
      required to be stated therein or necessary to make the statements therein not
      misleading, in light of the circumstances in which they were made;
provided, that the Company shall not be liable in any such case to the
      extent that any untrue or alleged untrue statement or omission or alleged
      omission is made in reliance upon and in conformity with information furnished
      to the Company by or on behalf of any Holder and stated to be specifically
      for
      use in preparation of such Resale Registration Statement, Prospectus or offering
      circular; provided, further, that the Company shall not be liable
      in any such case where the Losses arise out of, or are related to, the failure
      of any Holder to comply with the covenants and agreements contained in this
      Agreement.  The Company will also indemnify underwriters participating
      in the distribution, their officers, directors, employees, partners and agents,
      and each Person who controls such underwriters (within the meaning of the
      Securities Act), to the same extent as provided above with respect to the
      indemnification of the Holders of Registrable Securities, if so
      requested.  The Company shall notify the Holders promptly of the
      institution, threat or assertion of any legal proceeding arising from or in
      connection with the transactions contemplated by this Agreement of which the
      Company is aware.

     

    (b)  Indemnification
      by Holders of Registrable Securities.  In connection with any
      Resale Registration Statement in which a Holder of Registrable Securities is
      participating, each such Holder will furnish to the Company in writing such
      information and affidavits as the Company reasonably requests for use in
      connection with any such Resale Registration Statement or Prospectus. Each
      Holder will severally and not jointly, if Registrable Securities held by such
      Holder are included in the securities as to which such registration is being
      effected, indemnify the Company, each of its directors and officers, each
      underwriter of an underwritten offering of the Registrable Securities in which
      such Holder participates, each other Holder whose Securities are included in
      such Resale Registration Statement and each person who controls the Company
      within the meaning of Section 15 of the Securities Act (collectively, “Holder
      Indemnitees”), against all Losses, as incurred, including any Losses incurred in
      settlement of any litigation, commenced or threatened (subject to Subsection
      5(c) below), arising out of, or based on, any untrue or alleged untrue statement
      of a material fact contained in any Resale Registration Statement, Prospectus
      or
      offering circular, or any amendment or supplement thereof, incident to any
      such
      registration, or based on any omission or alleged omission to state therein
      a
      material fact required to be stated therein or necessary to make the statements
      therein not misleading, in light of the circumstances in which they were made,
      in each case to the extent, but only to the extent, that such untrue or alleged
      untrue statement or omission or alleged omission is made in reliance upon and
      in
      conformity with written information and/or affidavits furnished to the Company
      by or on behalf of such Holder; provided, that the indemnity shall not
      apply to the extent that such Losses result from the fact that a current copy
      of
      the Prospectus was not made

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    available
      to the Holders and such current copy of the Prospectus would have cured the
      defect giving rise to such Losses.  In no event shall the liability of
      any selling Holder hereunder be greater in amount than the dollar amount of
      the
      net proceeds received by such Holder upon the sale of the Registrable Securities
      covered by such Resale Registration Statement giving rise to such
      indemnification obligation.  The Holder Indemnitees shall be entitled
      to receive indemnities from underwriters participating in the distribution,
      to
      the same extent as provided above, with respect to information furnished in
      writing by such underwriters specifically for inclusion in any Registration
      Statement, Prospectus or offering circular.

     

    (c)  Conduct
      of Indemnification Proceedings.  Any Person entitled to
      indemnification hereunder will (i) give prompt notice to the indemnifying party
      of any claim with respect to which it seeks indemnification and (ii) permit
      such
      indemnifying party to assume the defense of such claim with counsel of such
      indemnifying party’s choice; provided, however, that any Person
      entitled to indemnification hereunder shall have the right to employ separate
      counsel and to participate in the defense of such claim, but the fees and
      expenses of such counsel shall be at the expense of such indemnified party
      unless (A) the indemnifying party shall have failed to assume the defense of
      such claim and employ counsel reasonably satisfactory to the indemnified party
      in a timely manner or (B) a written opinion of counsel reasonably acceptable
      to
      the indemnifying party, asserts that a conflict of interest exists between
      such
      person and the indemnifying party with respect to such claims (in which case,
      if
      the indemnified Person notifies the indemnifying party in writing that such
      Person elects to employ separate counsel at the expense of the indemnifying
      party, the indemnifying party shall not have the right to assume the defense
      of
      such claim on behalf of such Person).  The indemnifying party will not
      be subject to any liability for any settlement made without its
      consent.  No indemnified party will be required to consent to entry of
      any judgment or enter into any settlement unless (x) such judgment or settlement
      includes as an unconditional term thereof the giving by the claimant or
      plaintiff to such indemnified party of a release from all liability in respect
      of such claim or litigation, and (y) the only consequence to the indemnified
      party under such judgment or settlement is the creation of an obligation to
      pay
      money damages, all of which are being satisfied by the indemnifying
      party.  An indemnifying party who is not entitled to, or elects not
      to, assume the defense of the claim will not be obligated to pay the fees and
      expenses of more than one counsel for all parties indemnified by such
      indemnifying party with respect to such claim.

     

    (d)  Contribution.  If
      for any reason the indemnification provided for in Subsection 5(a) or Subsection
      5(b) is unavailable to an indemnified party or insufficient to hold it harmless
      as contemplated by Subsection 5(a) and Subsection 5(b), then the indemnifying
      party shall contribute to the amount paid or payable by the indemnified party
      as
      a result of such Losses in such proportion as is appropriate to reflect not
      only
      the relative benefits received by the indemnifying party and the indemnified
      party, but also the relative fault of the indemnifying party and the indemnified
      party, as well as any other relevant equitable considerations.  No
      Person guilty of fraudulent misrepresentation (within the meaning of Section
      11(f) of the Securities Act) shall be entitled to contribution from any Person
      who was not guilty of such fraudulent
      misrepresentations.  Notwithstanding the provisions of this Section
      5(d), no Holder shall be required to contribute, in the aggregate,
      any  amount in excess of the amount by which the proceeds actually
      received by such Holder from the sale of the Registrable Securities subject
      to
      the proceeding exceeds the amount of any damages that such Holder has otherwise
      been

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    required
      to pay by reason of such untrue or alleged untrue statement or omission or
      alleged omission, except in the case of fraud by such Holder.

     

    Section
      6.  Participation
      in Underwritten Registrations.

     

    (a)  One
      or
      more Holders may elect to retain an underwriter to conduct an Underwritten
      Offering of all or a portion of the Registrable Securities held by such
      Holders.  In the event any Holders elect to conduct an Underwritten
      Offering, each other Holder shall be entitled to participate in such
      Underwritten Offering subject to Subsection 6(b) below.

     

    (b)  No
      Person
      may participate in any Underwritten Offering hereunder unless such Person (i)
      agrees to sell such Person’s Registrable Securities on the basis provided in any
      underwriting arrangements approved by the Holders of a majority of the
      Registrable Securities included in such Underwritten Offering and (ii) completes
      and executes all questionnaires, powers of attorney, indemnities, underwriting
      agreements and other documents required under the terms of such underwriting
      arrangements.  Nothing in this Section 6 shall be construed to create
      any additional rights regarding the registration of Registrable Securities
      in
      any Person otherwise than as set forth herein.

     

    (c)  Nothing
      in this Section 6 (i) shall obligate the Company to pay any underwriting
      discounts or commissions in connection with any underwritten offering of
      Registrable Securities, or (ii) entitle the Holders to select the underwriter
      of
      any underwritten primary offering of securities by the Company.

     

    Section
      7.  Rule
      144. The Company agrees with each Holder, for so long as any
      Restricted Securities remain outstanding and during any period in which the
      Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to
      make available, upon request of such Holder in connection with any sale thereof
      and any prospective purchaser of such Restricted Securities designated by the
      Holder, the information required by Rule 144A(d)(4) under the Securities Act
      in
      order to permit resales of such Restricted Securities pursuant to Rule 144A,
      and
      (ii) is subject to Section 13 or 15(d) of the Exchange Act, to use
      reasonable efforts to make all filings required thereby in a timely manner
      in
      order to permit resales of such Restricted Securities pursuant to Rule
      144.

     

    Section
      8.  Legend.  Each
      Holder consents to the placing of the following legend on all certificates
      representing shares of Registrable Securities and on any certificate issued
      at
      any time in exchange or substitution for any certificate bearing such legend,
      for so long as the securities represented thereby are Registrable
      Securities:

     

    THIS
      CERTIFICATE IS ISSUED SUBJECT TO THE PROVISIONS OF A REGISTRATION RIGHTS
      AGREEMENT, AND ANY TRANSFEREE OF THIS CERTIFICATE OR OF THE SHARES REPRESENTED
      BY IT SHALL BE BOUND BY THE PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH IS
      ON
      FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS, INC.

     

    Section
      9.  Delay
      Periods; Suspension of Sales.  Each Holder shall suspend,
      upon request of the Company, any disposition of Registrable Securities pursuant
      to the Resale

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

     

    Registration
      Statement and Prospectus contemplated herein during (i) any period not to exceed
      two 30-day periods within any one 12-month period the Company requires in
      connection with a primary underwritten offering of equity securities and (ii)
      any period, not to exceed one 45-day period per circumstance or development,
      when the Company determines in good faith that offers and sales pursuant thereto
      should not be made by reason of the presence of material undisclosed
      circumstances or developments with respect to which the disclosure that would
      be
      required in such a prospectus is premature, would have an adverse effect on
      the
      Company or is otherwise inadvisable; provided, however, the
      aggregate number of days that such suspensions may apply during any 365-day
      period is 90 days.  In the event of a delay period or suspension, the
      Company will use its commercially reasonable best efforts to ensure that the
      use
      of the Prospectus may be resumed as promptly as is
      practicable.  Nothing in this Section 9 shall operate to extend the
      Effectiveness Date.

     

    Section
      10.  Miscellaneous.

     

    (a)  Amendments
      and Waivers.  The provisions of this Agreement may not be amended,
      modified or supplemented, and waivers or consents to or departures from the
      provisions hereof may not be given, without the written consent of the Company
      and the Holders of a majority of the outstanding Registrable Securities;
provided, however, that no such amendment, modification,
      supplement, waiver, consent or departure shall distinguish between Holders
      or
      groups of Holders unless any Holder adversely affected thereby shall have
      consented thereto in writing.

     

    (b)  Notices.  Except
      where expressly stated otherwise herein, all notices and other communications
      provided for or permitted hereunder shall be made in writing by hand-delivery,
      first-class mail (registered, return receipt requested), or air courier
      guaranteeing overnight delivery:

     

        (i)    if
      to any
      Holder, at the address for such Holder set forth on the records of the Company;
      and

     

        (ii)    if
      to the
      Company,

     

    Nephros,
      Inc.

    3960
      Broadway

    New
      York,
      New York  10032

    Attention:
      President

    

    With
      a
      copy to:

     

    Kramer
      Levin Naftalis & Frankel LLP

    1177
      Avenue of the Americas

    New
      York,
      New York 10036

    Attention:  Thomas
      D. Balliett, Esq.

    

    All
      such
      notices and communications shall be deemed to have been duly given: at the
      time
      delivered by hand, if personally delivered; five Business Days after being
      deposited in

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    the
      mail,
      postage prepaid, if mailed; and on the next Business Day, if timely delivered
      to
      an air courier guaranteeing overnight delivery.

     

    The
      address or person or entity to whose attention any notice or communication
      shall
      be given may be changed by notice to the other parties in accordance with the
      provisions of this Section 10(b).

     

    (c)  Successors
      and Assigns; Third Party Beneficiaries.  This Agreement
      shall inure to the benefit of and be binding upon the successors and assigns
      of
      each of the parties and shall inure to the benefit of each Holder, and it is
      not
      the intention of the parties to confer upon any other person or entity any
      rights or remedies, except the rights, remedies, obligations and liabilities
      of
      Section 5 herein shall be conferred upon National Securities Corporation,
      Dinosaur Securities, LLC, and registered persons of such entities that own
      Placement Agent Warrants to the same extent as if they were Holders hereunder
      and their shares issuable upon exercise of Placement Agent Warrants and included
      in any Resale Registration Statement were Registrable Securities.  The
      Company may not assign its rights or obligations hereunder without the prior
      written consent of the Holders of a majority of the outstanding Registrable
      Securities.  Each Holder may assign its respective rights hereunder to
      any Person.  If any transferee of a Holder shall acquire Registrable
      Securities in any manner, whether by operation of law or otherwise, such
      Registrable Securities shall be held subject to all of the terms of this
      Agreement, and by taking and holding such Registrable Securities such person
      shall be conclusively deemed to have agreed to be bound by and to perform all
      of
      the terms and provisions of this Agreement, including the restrictions on resale
      set forth in this Agreement and such person shall be entitled to receive the
      benefits hereof.

     

    (d)  Counterparts.  This
      Agreement may be executed in any number of counterparts and by the parties
      hereto in separate counterparts, each of which when so executed shall be deemed
      to be an original and all of which taken together shall constitute one and
      the
      same agreement.

     

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

     

    (f)  Governing
      Law.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
      ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
      PRINCIPLES OF THE CONFLICT OF LAWS THEREOF.

     

    (g)  Severability.  In
      the event that any one or more of the provisions contained herein, or the
      application thereof in any circumstance, is held invalid, illegal or
      unenforceable, the validity, legality and enforceability of any such provision
      in every other respect and of the remaining provisions contained herein shall
      not be affected or impaired thereby.

     

    (h)  Jurisdiction;
      Forum.  Each party hereto consents and submits to the exclusive
      jurisdiction of any state court sitting in the County of New York or federal
      court sitting in the Southern District of the State of New York in connection
      with any dispute arising out of or relating to this Agreement, and agrees that
      all suits, actions and proceedings brought by such

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    party
      hereunder shall be brought only in such jurisdictions.  Each party
      hereto waives any objection to the laying of venue in such courts and any claim
      that any such action has been brought in an inconvenient forum.  To
      the extent permitted by law, any judgment in respect of a dispute arising out
      of
      or relating to this Agreement may be enforced in any other jurisdiction within
      or outside the United States by suit on the judgment, a certified copy of such
      judgment being conclusive evidence of the fact and amount of such
      judgment.  Each party hereto agrees that personal service of process
      may be effected by any of the means specified in Section 10(b), addressed to
      such party.  The foregoing shall not limit the rights of any party to
      serve process in any other manner permitted by law.

     

    (i)  Entire
      Agreement.  This Agreement is intended by the parties as a final
      expression of their agreement and intended to be a complete and exclusive
      statement of the agreement and understanding of the parties hereto with respect
      to registration rights granted with respect to Registrable
      Securities.  There are no restrictions, promises, warranties or
      undertakings, other than those set forth or referred to herein with respect
      to
      the registration rights granted with respect to the Registrable
      Securities.  This Agreement supersedes all prior agreements and
      understandings between the parties with respect to such subject
      matter.

     

    (j)  Independent
      Nature of Holders’ Obligations and Rights.  The obligations of
      each Holder hereunder are several and not joint with the obligations of any
      other Holder hereunder, and no Holder shall be responsible in any way for the
      performance of the obligations of any other Holder hereunder.  Nothing
      contained herein or in any other agreement or document delivered at any closing,
      and no action taken by any Holder pursuant hereto or thereto, shall be deemed
      to
      constitute the Holders as a partnership, an association, a joint venture or
      any
      other kind of entity, or create a presumption that the Holders are in any way
      acting in concert with respect to such obligations or the transactions
      contemplated by this Agreement.  Each Holder shall be entitled to
      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.

     

    (k)  Attorneys’
      Fees.  In the event of any litigation or other proceeding
      concerning this Agreement or the transactions contemplated hereby, including
      any
      such litigation or proceeding with respect to the enforcement of this Agreement
      against any defaulting party, the prevailing party in such litigation or
      proceeding shall be entitled to reimbursement from the party opposing such
      prevailing party for all attorneys’ fees and costs incurred by such prevailing
      party in such litigation or proceeding.

     

    (l)  Inclusion
      of Placement Agent Shares.  The parties hereto agree that the
      shares of Common Stock issuable pursuant to the Placement Agent Warrants may
      be
      included in the Resale Registration Statements.  For purposes of
      making allocations pursuant to Section 3(b), such shares shall be treated as
      “Registrable Securities” and as “shares of Common Stock issuable upon exercise
      of the Class D Warrants” and the holders of such warrants shall be treated as
“holders of the Class D Warrants”.

     

    [SIGNATURE
      PAGE FOLLOWS IMMEDIATELY]

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

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

     

                                                    NEPHROS,
      INC.

     

     

                                   
      By: /s/ Norman J. Barta

                                    Name:
      Norman J. Barta

                                    Title:
      President and Chief Executive Officer

     

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

                                                        INITIAL
      HOLDER:  Southpaw Credit Opportunity Master Fund
      LP

                                                        By:
      Southpaw GP
      LLC

     

    

                                                        By:
/s/
      Kevin
      Wyman                                      

                                                           Name:
      Kevin
      Wyman

                                                           Title:
      Managing
      Member

     

     

                                                        Address
      for
      Notices:

                                                        c/o
      Southpaw Asset
      Management LP

     

                                                         4
      Greenwich Office Park      
                                                                                          

                                                        (Street
      Address)

    

                                                        Greenwich,    
              
CT                   06831       

                                     
      (City)          
(State/Country)   (Zip Code)

    

    

                                                        Attention:
Bob
      Thompson                            

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

                                                        INITIAL
      HOLDER:  Lambda Investors LLC

    

                                                        By:
/s/
      Arthur
      Amron                             

                                                           Name:
      Arthur
      Amron

                                                           Title:
      Vice
      President

     

                                                        Address
      for
      Notices:

                                                        c/o
      Wexford Capital
      LLC

     

                                                        411
      West Putnam
      Avenue                    
                                                                

                                                        (Street
      Address)

    

                                                        Greenwich,   
           CT           06830    
                                                                

                                                          (City)        (State/Country)  (Zip
      Code)

    

                                                        Attention:
Arthur
      Amron                       

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

                                                            INITIAL
      HOLDER:  GPC 76, LLC

                                                            By:
      Southpaw Asset
      Management LP

     

    

                                                            By:
/s/
      Kevin
      Wyman                             
         

                                                               Name:
      Kevin
      Wyman

                                                               Title:
      Investment
      Manager

     

     

                                                            Address
      for
      Notices:

                                                            c/o
      Southpaw Asset
      Management LP

     

                                                            4
      Greenwich Office
      Park                                 

                                       
      (Street Address)

    

    

                                                            Greenwich,         
       
CT                 
  06831        

                                       
      (City)       
  (State/Country)     (Zip Code)

    

    

                                                            Attention:
Bob
      Thompson                          

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

                                                    INITIAL
      HOLDER: 3V
      Capital Master Fund Ltd.

                                                    By:  3V
      Capital Management LLC

    

                                                    By:
/s/
      Scott A.
      Stagg                                   
                                                                

                                                       Name:
      Scott A.
      Stagg

                                                       Title:
      Managing
      Member

     

                                                    Address
      for
      Notices:

     

                                                    3
      Greenwich Office
      Park                              
                                                                

                                                    (Street
      Address)

    

                                                    Greenwich,      
      CT                
  06831          
                                                                

                                                    (City)        (State/Country)  (Zip
      Code)

    

                                                    Attention:
Mark
      Focht                             
   

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

                                                    INITIAL
      HOLDER:
      Distressed/High Yield Trading Opportunities, Ltd.

                                                    By:  Eliteperformance
      Fund, Ltd.

    
 

    
                                                      By:
/s/
        Scott A.
        Stagg                                   
                                                                

                                                         Name:
        Scott A.
        Stagg

                                                         Title:
        Portfolio
        Manager

       

                                                      Address
        for
        Notices:

       

                                                      3
        Greenwich Office
        Park                              
                                                                

                                                      (Street
        Address)

      

                                                      Greenwich,      
        CT                
  06831          
                                                                

                                                      (City)        (State/Country)  (Zip
        Code)

      

                                                      Attention:
Mark
        Focht                             
   

      

    

     

     

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

                                                    INITIAL
      HOLDER:  Lewis P. Schneider

     

    

                                                    By:
/s/
      Lewis P.
      Schneider              
           

                                                       Name:
      Lewis P.
      Schneider

                                                              
Title:

     

                                                          
Address
      for
      Notices:

     

                                                    10
      Dunmore
      Road                       
                
       
                                  
                                                                

                                                    (Street
      Address)

    

                                                    New
      City,          NY         
     
 10956           
       

                                                    (City)        (State/Country)  (Zip
      Code)

    

                                                           
      Attention: Lewis P.
      Schneider                  
             

    

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

                                                    INITIAL
      HOLDER:  Kudu Partners, LP

     

    

                                                    By:
/s/
      Brian P.
      Lupien                           

                                                       Name:
      Brian P.
      Lupien

                                                       Title:
      Treasurer

     

                                                    Address
      for
      Notices:

     

                                   
      1900 Country Road
      124                        
                                                                

                                                    (Street
      Address)

    

    

                                                    Hesperus,       
       CO                 
 81326      

                                                    (City)       (State/Country)   (Zip
      Code)

    

    

                                                    Attention:
Bill
      Lupien                            

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

                                                            INITIAL
      HOLDER:  LJHS Company

     

    

                                                            By:
/s/
      Jack A.
      McLeod                        
    

                                                               Name:
      Jack A.
      McLeod

                                                               Title:
      Agent

     

                                                            Address
      for
      Notices:

     

                                                            50
      No. Sierra St.,
      Palladio Apt. 1313        

                                                            (Street
      Address)

    

                                                            Reno,            
      NV            
89501-1340      
                                                                

                                                            (City)   (State/Country)  (Zip
      Code)       

    

                                                            Attention:
Jack
      McLeod                         

    

     

     

    

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

    

     

                                                        INITIAL
      HOLDER:  Enso Global Equities Partnership LP

     

     

                                                        By:
/s/
      Joshua A.
      Fink                       
     

                                      
      Name: Joshua A. Fink

                                                           Title:  Director
      of GP

     

                                                        Address
      for
      Notices:

     

                                                        540
      Madison
      Avenue, 18th
      Floor          

                                                        (Street
      Address)

    

                                                        New
      York,    New York      
   10022        

                                                         
      (City)      (State/Country)  (Zip
      Code)

    

                                                        Attention:
Salina
      Love                           

     

     

     

    
 

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    SCHEDULE
      1

    

    
      	
              Investor

            	
              Registrable
                Securities

            
	 	 
	
              Lambda
                Investors
                Inc.

            	
              Common
                Stock issuable upon exercise of $10,000,000 aggregate principal amount
                of
                Series A 10% Secured Convertible Notes due 2008 and Common Stock
                issuable
                upon exercise of Class D Warrants to purchase Common
                Stock

            
	 	 
	
              Enso
                Global Equities Partnership LP

            	
              Common
                Stock issuable upon exercise of $2,400,000 aggregate principal amount
                of
                Series A 10% Secured Convertible Notes due 2008 and Common Stock
                issuable
                upon exercise of Class D Warrants to purchase Common
                Stock

            
	 	 
	
              GPC
                76, LLC

            	
              Common
                Stock issuable upon exercise of $176,500 aggregate principal amount
                of
                Series A 10% Secured Convertible Notes due 2008 and Common Stock
                issuable
                upon exercise of Class D Warrants to purchase Common
                Stock

            
	 	 
	
              Lewis
                P. Schneider

            	
              Common
                Stock issuable upon exercise of $100,000 aggregate principal amount
                of
                Series A 10% Secured Convertible Notes due 2008 and Common Stock
                issuable
                upon exercise of Class D Warrants to purchase Common
                Stock

            
	 	 
	
              Southpaw
                Credit Opportunity Master Fund L.P.

            	
              Common
                Stock issuable upon exercise of $2,038,461.54 aggregate principal
                amount
                of Series B 10% Secured Convertible Notes due 2008

            
	 	 
	
              3V
                Capital Master Fund Ltd.

            	
              Common
                Stock issuable upon exercise of $1,528,846.15 aggregate principal
                amount
                of Series B 10% Secured Convertible Notes due 2008

            
	 	 
	
              Distressed/High
                Yield Trading Opportunities Ltd.

            	
              Common
                Stock issuable upon exercise of $1,528,846.15 aggregate principal
                amount
                of Series B 10% Secured Convertible Notes due 2008

            
	 	 
	
              Kudu
                Partners

            	
              Common
                Stock issuable upon exercise of $101,923.08 aggregate principal amount
                of
                Series B 10% Secured Convertible Notes due 2008

            
	 	 
	
              LJHS
                Company

            	
              Common
                Stock issuable upon exercise of $101,923.08 aggregate principal amount
                of
                Series B 10% Secured Convertible Notes due
                2008

            

    

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    SCHEDULE
      3(a)

    

    Other
      Registrable Securities

    

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

     

    Form
      of
      Counterpart Signature Page

     

    IN
      WITNESS WHEREOF, the undersigned has caused this counterpart to the
      Registration Rights Agreement among Nephros, Inc. and the Holders (as defined
      therein), dated as of ______ __, 2007, as amended from time to time, to be
      duly
      executed and delivered as of _______ __, ____.

     

                [__________________],
      as an additional Holder

    

    

    

                By: ________________________________________                                                             

                Name:

                Title:

     

                Notice
      Address:

     

                                            ____________________________

     

                                            ____________________________

     

                                            ____________________________

                Attention:                                      

                Tel:(___)
      ___-___

                Fax:(___)
      ___-___

    

     

    Accepted
      and agreed to as of the

    __
      day of
      _________, ____:

     

    NEPHROS,
      INC.

     

    By:                                                      

    Name:

    Title:

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