Document:

kl09044_ex4-4.htm

    
      

    

    Exhibit
      4.4

     

    THIS
      WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT 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.

     

    NEPHROS,
      INC.

     

    Placement
      Agent Warrant for the Purchase of Shares of Common Stock

     

    No.:
      PA-
      __                                                                     Number
      of Shares:
      ___________

    Date
      of
      Issuance: _____ __, 2007

     

    FOR
      VALUE
      RECEIVED, the undersigned, NEPHROS, INC., a Delaware corporation (together
      with
      its successors and assigns, the “Company”), hereby certifies that
      _______________________________ or its registered assigns (the “Holder”)
      is entitled to subscribe for and purchase from the Company, subject to the
      provisions of this Warrant (this “Warrant” and, together with any other
      Placement Agent Warrants to purchase shares of Common Stock, collectively,
      the
“Warrants”), at any time on or prior to 5:00 P.M., New York City time, on
[_____ __], 2012 (the “Termination Date”),
      [________________] (___________) fully paid and non-assessable shares of the
      Common Stock, par value $.001 per share, of the Company (“Common Stock”),
      at an exercise price per share of Common Stock equal to $0.90 per share (the
      “Per Share Exercise Price”), as such price may be adjusted from time to
      time as shall result from the adjustments specified in this
      Warrant.

     

    1.           Exercise
      of Warrant.

     

    (a)           Exercise.  This
      Warrant may be exercised in whole or in part, at any time by its holder prior
      to
      the Termination Date by presentation and surrender of this Warrant, together
      with the duly executed notice of exercise form attached at the end hereof,
      at
      the address set forth in Subsection 8(c) hereof, together with payment to the
      Company of an amount of consideration therefor equal to the Per Share Exercise
      Price in effect on the date of such exercise multiplied by the number of shares
      of Common Stock issuable upon exercise of any Warrant or Warrants or otherwise
      issuable pursuant to any Warrant or Warrants then being exercised (the
“Warrant Shares”), payable by certified or official bank check or by wire
      transfer to an account designated by the Company. The delivery of the
      notice of exercise and payment of the Per Share Exercise Price are the only
      procedures required of the Holder to exercise this Warrant.  No
      additional legal opinion or other information or instructions shall be required
      of the Holder upon the exercise of this Warrant.

     

     

    
      
        
        

      

      
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    (b)           Cashless
      Exercise.  If, and only if, at the time of exercise pursuant to
      this Section 1 there is no effective registration statement registering, or
      no current prospectus available for, the sale of the Warrant Shares to the
      Holder or the resale of the Warrant Shares by the Holder and the VWAP (as
      defined below) is greater than the Per Share Exercise Price at the time of
      exercise, then this Warrant may also be exercised at such time and with respect
      to such exercise by means of a “cashless exercise” in which the Holder shall be
      entitled to receive a certificate for the number of Warrant Shares equal to
      the
      quotient obtained by dividing (i) the result of (x) the difference of (A) minus
      (B), multiplied by (y) (C), by (ii) (A), where: 

     

    
      	 	(A)
              = the VWAP (as defined below) on the Trading Day (as defined below)
              immediately preceding the date of such
              election; 

      	
               

            	
              (B)
                = the Per Share Exercise Price of this Warrant, as adjusted;
                and

            

    

    
      	
               

            	
              (C)
                = the number of Warrant Shares issuable upon exercise of this Warrant
                in
                accordance with the terms of this Warrant by means of a cash exercise
                rather than a cashless exercise.

            

    

    

    “VWAP”
      means, for any date, the price determined by the first of the following clauses
      that applies: (a) if the Common Stock is then listed or quoted for trading
      on the New York Stock Exchange, American Stock Exchange, Nasdaq Capital Market,
      Nasdaq Global Market, Nasdaq Global Select Market or the OTC Bulletin Board,
      or
      any successor to any of the foregoing (a “Trading Market”), the daily
      volume weighted average price of the Common Stock on the Trading Market on
      which
      the Common Stock is then listed or quoted for trading as reported by Bloomberg
      L.P. for such date if such date is a date on which the Trading Market on which
      the Common Stock is then listed or quoted for trading (a “Trading Day”)
      or the nearest preceding Trading Date (based on a Trading Day from 9:30 a.m.
      (New York City time) to 4:02 p.m. (New York City time); (b) if the Common
      Stock is not then listed or quoted for trading on a Trading Market and if prices
      for the Common Stock are then reported in the “Pink Sheets” published by Pink
      Sheets, LLC (or a similar organization or agency succeeding to its functions
      of
      reporting prices), the most recent bid price per share of the Common Stock
      so
      reported; or (c) in all other cases, the fair market value of a share of
      Common Stock as determined by an independent appraiser selected in good faith
      by
      the Holder and reasonably acceptable to the Company.

     

    (c)           Partial
      Exercise.  If this Warrant is exercised in part only, the Company
      shall, upon presentation of this Warrant upon such exercise, execute and deliver
      (along with the certificate for the Warrant Shares purchased) a new Warrant
      evidencing the rights of the Holder hereof to purchase the balance of the
      Warrant Shares purchasable hereunder upon the same terms and conditions as
      herein set forth.  Upon proper exercise of this Warrant, the Company
      promptly shall deliver certificates for the Warrant Shares to the
      Holder.

     

    2.           Stock
      Fully Paid; Reservation and Listing of Shares;
      Covenants.

     

    (a)           Authorization,
      Reservation of Shares; Etc.  The Company shall at all times
      reserve and keep available, out of its authorized and unissued shares of Common
      Stock, solely for the purpose of effecting the exercise of this Warrant, such
      number of shares of its Common Stock free of preemptive rights as shall
      be

     

     

     

    
      
        
        

      

      
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    sufficient
      to effect the exercise of this Warrant.  The Company shall use its
      commercially reasonable best efforts from time to time, in accordance with
      the
      laws of the State of Delaware, to increase the authorized number of shares
      of
      Common Stock if at any time the number of shares of Common Stock not outstanding
      shall not be sufficient to permit the exercise of this Warrant.  The
      Company covenants that all Warrant Shares so issuable and deliverable shall,
      upon issuance and the payment of the applicable Per Share Exercise Price in
      accordance with the terms hereof, be duly authorized and validly issued and
      fully paid and nonassessable. The Company will take all such action as may
      be
      necessary to assure that such shares of Common Stock may be issued as provided
      herein without violation of any applicable law or regulation, or of any
      requirements of any securities exchange or automated quotation system upon
      which
      the Common Stock may be listed.

    

    (b)           Payment
      of Taxes.  The Company shall pay any and all issue or other taxes
      (other than income taxes) that may be payable in respect of any issue or
      delivery of Warrant Shares on exercise of this Warrant.  The Company
      shall not, however, be required to pay any tax which may be payable in respect
      of any transfer involved in the issue or delivery of Warrant Shares (or other
      securities or assets) in a name other than that in which Warrant was registered,
      and no such issue or delivery shall be made unless and until the person
      requesting such issue has paid to the Company the amount of such tax or has
      established, to the satisfaction of the Company, that such tax has been
      paid.

     

    (c)           Loss,
      Theft, Destruction of Warrants.  Upon receipt of evidence
      satisfactory to the Company of the ownership of and the loss, theft, destruction
      or mutilation of this Warrant and, in the case of any such loss, theft or
      destruction, upon receipt of indemnity or security satisfactory to the Company
      (which may include a bond) or, in the case of any such mutilation, upon
      surrender and cancellation of such Warrant, the Company will make and deliver,
      in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant
      of
      like date, tenor and denomination.

    

    (d)           Delivery
      of Warrant Shares.

    

    (i)           Upon
      the exercise of this Warrant, the Company shall promptly (but in no event later
      than three Trading Days after the exercise date) issue or cause to be issued
      and
      cause to be delivered to or upon the written order of the Holder and in such
      name or names as the Holder may designate, a certificate for the Warrant Shares
      issuable upon such exercise, free of restrictive legends unless a registration
      statement covering the resale of the Warrant Shares and naming the Holder as
      a
      selling stockholder thereunder is not then effective and the Warrant Shares
      are
      not freely transferable without volume restrictions pursuant to Rule 144 under
      the Securities Act.  The Holder, or any Person so designated by
      the Holder to receive Warrant Shares, shall be deemed to have become holder
      of
      record of such Warrant Shares as of the exercise date. Notwithstanding any
      provision of this Warrant requiring the delivery of certificates, the Company
      shall, upon request of the Holder, use its commercially reasonable efforts
      to
      deliver Warrant Shares hereunder electronically through the Depository Trust
      Corporation or another established clearing corporation performing similar
      functions.  Any obligation to deliver certificates under this Warrant
      shall be deemed satisfied if Warrant Shares are delivered electronically in
      accordance with the preceding sentence.

    

    (ii)           If
      the Company fails to cause its transfer agent to transmit to the Holder a
      certificate or certificates representing the Warrant Shares pursuant to this
      Section 2(d)(ii) by the third Trading Day following the Warrant Share date
      of exercise, then the Holder shall have the right to rescind such
      exercise.

     

     

    
      
        
        

      

      
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    (iii)           In
      addition to any other rights available to a Holder, if the Company fails to
      deliver to the Holder a certificate representing Warrant Shares by the third
      Trading Day after exercise of this Warrant in full compliance with Section
      1,
      and if after such third Trading Day the Holder purchases (in an open market
      transaction) shares of Common Stock to deliver in satisfaction of a sale by
      the
      Holder of the Warrant Shares that the Holder anticipated receiving from the
      Company (a “Buy-In”) upon such exercise, then the Company shall, within
      three Trading Days after the Holder’s request and in the Holder’s discretion,
      either (x) pay cash to the Holder in an amount equal to the Holder’s total
      purchase price (including brokerage commissions, if any) for the shares of
      Common Stock so purchased (the “Buy-In Price”), at which point the
      Company’s obligation to deliver such certificate (and to issue such Warrant
      Shares) shall terminate, or (y) promptly honor its obligation to deliver to
      the
      Holder a certificate or certificates representing such Common Stock and pay
      cash
      to the Holder in an amount equal to the excess (if any) of the Buy-In Price
      over
      the product of (1) the number of shares of Common Stock purchased in the Buy-In,
      times (2) the closing price on the date of the exercise.  The Holders
      shall provide the Company written notice indicating the amounts payable to
      the
      Holder in respect of the Buy-In, together with applicable confirmations and
      other evidence reasonably requested by the Company.

    

    (iv)           Except
      as provided in clause (x) of Section 2(d)(iii), the Company’s obligations to
      issue and deliver Warrant Shares upon an exercise in accordance with Section
      1
      above are absolute and unconditional, irrespective of any action or inaction
      by
      the Holder to enforce the same, any waiver or consent with respect to any
      provision hereof, the recovery of any judgment against any person or entity
      or
      any action to enforce the same, or any setoff, counterclaim, recoupment,
      limitation or termination, or any breach or alleged breach by the Holder or
      any
      other person or entity of any obligation to the Company or any violation or
      alleged violation of law by the Holder or any other person or entity, and
      irrespective of any other circumstance which might otherwise limit such
      obligation of the Company to the Holder in connection with the issuance of
      Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any
      other remedies available to it hereunder, at law or in equity, including,
      without limitation, a decree of specific performance and/or injunctive relief
      with respect to the Company’s failure to timely deliver certificates
      representing shares of Common Stock upon exercise of the Warrant as required
      pursuant to the terms hereof.

    

    3.           Protection
      Against Dilution.

     

    (a)           In
      case the Company shall, at any time or from time to time hereafter (i) pay
      a
      dividend or make a distribution on its Common Stock in shares of Common Stock,
      (ii) subdivide its outstanding shares of Common Stock into a greater number
      of
      shares or (iii) combine its outstanding shares of Common Stock into a smaller
      number of shares (each of (i) through (iii), a “Change of Shares”), then
      (1) the number of shares of Common Stock for which this Warrant is exercisable
      immediately after the occurrence of any such event shall be adjusted to equal
      the number of shares of Common Stock which a record holder of the same number
      of
      shares of Common Stock for which this Warrant is exercisable immediately prior
      to the occurrence of such event would own or be entitled to receive after the
      happening of such event, and (2) the Per Share Exercise Price in effect
      immediately prior to the occurrence of such event shall be adjusted to equal
      (A)
      the Per Share Exercise Price in effect immediately prior to the occurrence
      of
      such

     

     

     

    
      
        
        

      

      
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    event
      multiplied by (B) the number of shares of Common Stock for which this Warrant
      is
      exercisable immediately prior to the adjustment divided by (C) the number of
      shares of Common Stock for which this Warrant is exercisable immediately after
      such adjustment.  An adjustment made pursuant to this Subsection 3(a)
      shall become effective immediately after the record date in the case of a
      dividend or distribution and shall become effective immediately after the
      effective date in the case of a subdivision, combination or
      reclassification.

     

    (b)           If
      the Company, at any time while this Warrant is outstanding, distributes to
      holders of Common Stock (i) evidences of its indebtedness, (ii) any security
      (other than a distribution of Common Stock covered by paragraph (a) above or
      a
      security issued in a capital reorganization or reclassification, consolidation
      or merger covered by paragraph (c) below), (iii) rights, warrants or options
      to
      subscribe for or purchase any security, or (iv) any other asset (in each case,
      “Distributed Property”), then in each such case (1) the Per Share
      Exercise Price in effect immediately prior to the record date fixed for
      determination of stockholders entitled to receive such Distributed Property
      shall be adjusted (effective on such record date) to equal the product of such
      Per Share Exercise Price times a fraction of which the denominator shall be
      the
      VWAP for the Trading Day immediately prior to (but not including) such record
      date and of which the numerator shall be the difference between such VWAP minus
      the then fair market value of the Distributed Property distributed in respect
      of
      one outstanding share of Common Stock, as determined by the Board of Directors
      of the Company in good faith, and (2) the number of shares of Common Stock
      for
      which this Warrant is exercisable immediately prior to such record date shall
      be
      adjusted to equal (A) the number of shares of Common Stock for which this
      Warrant is exercisable immediately prior to such record date multiplied by
      (B)
      the Per Share Exercise Price in effect immediately prior to such record date
      divided by (C) the Per Share Exercise Price in effect immediately after such
      record date.

     

    (c)           In
      the event of any capital reorganization or reclassification, or any
      consolidation or merger to which the Company is a party (other than a merger
      or
      consolidation in which the Company is the continuing corporation and in which
      no
      securities, cash or other property is distributed to holders of Common Stock),
      or in case of any sale or conveyance to another entity of the property of the
      Company as an entirety or substantially as an entirety, or in the case of any
      statutory exchange of securities with another corporation (including any
      exchange effected in connection with a merger of a third corporation into the
      Company), the Holder of this Warrant shall have the right thereafter to receive
      on the exercise of this Warrant the kind and amount of securities, cash or
      other
      property which the Holder would have owned or have been entitled to receive
      immediately after such reorganization, reclassification, consolidation, merger,
      statutory exchange, sale or conveyance had this Warrant been exercised
      immediately prior to the effective date of such reorganization,
      reclassification, consolidation, merger, statutory exchange, sale or conveyance
      and in any such case, if necessary, appropriate adjustment shall be made in
      the
      application of the provisions set forth in this Section 3 with respect to the
      rights and interests thereafter of the Holder of this Warrant to the end that
      the provisions set forth in this Section 3 shall thereafter correspondingly
      be
      made applicable, as nearly as may reasonably be, in relation to any shares
      of
      stock or other securities or property thereafter deliverable on the exercise
      of
      this Warrant.  A sale of all or substantially all of the assets of the
      Company for a consideration consisting primarily of securities shall be deemed
      a
      consolidation or merger for the foregoing purposes.

     

     

    
      
        
        

      

      
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    (d)           Anti-Dilution
      Adjustments.

     

    (i)           (A)    Except
      as
      otherwise provided in Subparagraph 3(d)(iii)(B), or for Changes of Shares in
      the
      event the Company shall, at any time or from time to time after the date hereof,
      sell or issue any shares of Common Stock for a consideration per share less
      than
      the Conversion Price in effect on the date of such sale or issuance (any such
      sale or issuance, a “Dilutive Issuance”), then, and thereafter upon each
      further Dilutive Issuance, the Per Share Exercise Price in effect immediately
      prior to such Dilutive Issuance shall be changed to a price equal to the
      consideration per share received by the Company in respect of the shares issued
      in such Dilutive Issuance (rounded to the nearest tenth of a cent) (determined
      as provided in Clause 3(d)(ii)(D) below).  Such adjustment shall be
      made successively whenever such an issuance is made.

     

    (B)           Upon
      any adjustment of the Per Share Exercise Price as provided in this Subparagraph
      3(d), the number of shares of Common Stock for which this Warrant is exercisable
      immediately after the occurrence of any such event shall be adjusted to equal
      (1) the number of shares of Common Stock for which this Warrant was exercisable
      immediately prior to the adjustment multiplied by (2) the Per Share Exercise
      Price in effect immediately prior to the occurrence of such event divided by
      (3)
      the Per Share Exercise Price in effect immediately after the occurrence of
      such
      event.

     

    (ii)           For
      purposes of Paragraph 3(d)(i), the following Subparagraphs (A) to (E) shall
      also
      be applicable:

     

    (A)           No
      adjustment in the Per Share Exercise Price shall be required unless such
      adjustment would require a decrease of at least $0.001 per share of Common
      Stock; provided, however, that any adjustments which by reason of
      this Subsection 3(d)(ii)(A) are not required to be made shall be carried forward
      and shall be made at the time of and together with adjustments so carried
      forward, shall require a decrease of at least $0.001 per share of Common Stock
      in the Per Share Exercise Price hereunder.

     

    (B)           In
      case of the sale or other issuance by the Company (including as a component
      of a
      unit) of any rights or warrants to subscribe for or purchase, or any options
      for
      the purchase of, Common Stock or any securities convertible into or exchangeable
      for Common Stock (such securities convertible, exercisable or exchangeable
      into
      Common Stock being herein called “Convertible Securities”), whether or
      not such rights, warrants or options, or the right to convert or exchange such
      Convertible Securities, are immediately exercisable, if the consideration per
      share for which Common Stock is issuable upon the exercise, conversion or
      exchange of such Convertible Securities (determined by dividing (x) the minimum
      aggregate consideration, as set forth in the instrument relating thereto without
      regard to any antidilution or similar provisions contained therein for a
      subsequent adjustment of such amount, payable to the Company upon the exercise
      of such Convertible Securities, plus the consideration received by the Company
      for the issuance or sale of such Convertible Securities, by (y) the total
      maximum number, as set forth in the instrument relating thereto without regard
      to any antidilution or similar provisions contained therein for a
      subsequent

     

     

     

    
      
        
        

      

      
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    adjustment
      of such amount, of shares of Common Stock issuable upon the exercise, conversion
      or exchange of such Convertible Securities) is less than the Per Share Exercise
      Price as of the date of the issuance or sale of such Convertible Securities,
      then such total maximum number of shares of Common Stock issuable upon the
      exercise, conversion or exchange of such Convertible Securities (as of the
      date
      of the issuance or sale of such rights, warrants or options) shall be deemed
      to
      be “Common Stock” for purposes of Paragraph 3(d)(i) and shall be deemed to have
      been sold for an amount equal to such consideration per share and shall cause
      an
      adjustment to be made in accordance with Paragraph 3(d)(i).

     

    (C)           In
      case the rights of conversion, exchange or exercise of any of the securities
      referred to in Subparagraph (B) of this Paragraph 3(d)(ii) or any other
      securities of the Company convertible, exchangeable or exercisable for shares
      of
      Common Stock are modified for any reason other than an event that would require
      adjustment to prevent dilution under another paragraph in this Section 3, so
      that the consideration per share received by the Company after such modification
      is less than the Per Share Exercise Price as of the date prior to such
      modification, then such securities, to the extent not theretofore exercised,
      converted or exchanged, shall be deemed to have expired or terminated
      immediately prior to the date of such modification and the Company shall be
      deemed, for purposes of calculating any adjustments pursuant to this Subsection
      3(d), to have issued such new securities upon such new terms on the date of
      modification.  Such adjustment shall become effective as of the date
      upon which such modification shall take effect.

     

    (D)           In
      case of the sale of any shares of Common Stock, any Convertible Securities,
      any
      rights or warrants to subscribe for or purchase, or any options for the purchase
      of, Common Stock or Convertible Securities, the consideration received by the
      Company therefor shall be deemed to be the gross sales price therefor without
      deducting therefrom any expense paid or incurred by the Company or any
      underwriting discounts or commissions or concessions paid or allowed by the
      Company in connection therewith.  In the event that any securities
      shall be issued in connection with any other securities of the Company, together
      comprising one integral transaction in which no specific consideration is
      allocated among the securities, then each of such securities shall be deemed
      to
      have been issued for such consideration as the Board of Directors of the Company
      determines in good faith.  In case of the sale of any shares of Common
      Stock, any Convertible Securities, any rights or warrants to subscribe for
      or
      purchase, or any options for the purchase of, Common Stock or Convertible
      Securities for any non-cash consideration, then the non-cash component of the
      consideration for such securities shall be deemed to be such amount as the
      Board
      of Directors of the Company determines in good faith.

     

    (iii)           Notwithstanding
      any other provision hereof, no adjustment to the Per Share Exercise Price will
      be made:

     

    (A)           upon
      the issuance or exercise of any options or other awards granted pursuant to
      a
      stock incentive plan or similar plan of the Company

     

     

     

    
      
        
        

      

      
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    in
      effect
      on the date hereof (but without giving effect to any amendment thereto after
      the
      date hereof) or approved by the Warrant Majority (as defined in Section 8
      hereto) or otherwise issued as compensation or inducement to employment or
      engagement in the ordinary course of business; or

     

    (B)           upon
      exercise or conversion of any Convertible Securities that are outstanding as
      of
      the date hereof, or upon the issuance, conversion or exercise of any Warrants
      or
      Class D Warrants (as hereafter defined); or

     

    (C)           upon
      the issuance, exercise or conversion of Common Stock, Convertible Securities
      or
      options, warrants or other rights to acquire Common Stock or Convertible
      Securities in connection with any of the following: (v) settlement of any actual
      or threatened litigation or other claims; (w) customer or vendor alliances;
      (x)
      joint ventures or manufacturing, marketing or distribution alliances; (y)
      equipment leasing transactions or borrowing transactions with institutional
      lenders; and (z) acquisitions, joint ventures or other strategic transactions;
      provided, that in each such case the Board of Directors has determined in good
      faith that such transaction is not primarily a capital raising transaction;
      or

     

    (D)           upon
      the issuance or sale of Common Stock or other securities upon exercise,
      conversion or exchange of any Convertible Securities, whether or not such
      Convertible Securities were outstanding on the date hereof or are hereafter
      issued or sold; provided, that any adjustment was either made or not required
      to
      be made upon the issuance or sale of such Convertible Securities or any
      modification of the terms thereof were so made; or

     

    (E)           if
      the Company shall take a record of the holders of its Common Stock for the
      purpose of entitling them to receive a dividend or distribution or subscription
      or purchase rights and shall, thereafter and before the distribution to
      stockholders thereof, legally abandon its plan to pay or deliver such dividend,
      distribution, subscription or purchase rights, and any such adjustment
      previously made in respect thereof shall be rescinded and annulled.

     

    Notwithstanding
      anything to the contrary in this Paragraph 3(d)(iii), Subparagraph 3(d)(ii)(C)
      shall apply to any modification of the rights of conversion, exchange or
      exercise of any of the securities referred to in Subparagraphs (B) and (D)
      of
      this Paragraph 3(d)(iii).

     

    (v)           As
      used in this Subsection 3(c), the term “Common Stock” shall mean and include the
      Company’s Common Stock authorized on the date hereof and shall also include any
      capital stock of any class of the Company thereafter authorized which shall
      not
      be limited to a fixed sum or percentage in respect of the rights of the holders
      thereof to participate in dividends and in the distribution of assets upon
      the
      voluntary liquidation, dissolution or winding up of the Company, and the number
      of “shares” thereof for purposes hereof shall be based on the ratio by which
      such new securities participate equally with the Common Stock.

     

     

    
      
        
        

      

      
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    (d)           All
      calculations under this Section 3 shall be made to the nearest tenth of a cent
      or to the nearest 1/100th of a share, as the case may be.  Anything in
      this Section 3 to the contrary notwithstanding, the Company shall be entitled
      to
      make such reductions in the Per Share Exercise Price, in addition to those
      required by this Section 3, as it in its discretion shall deem to be advisable
      in order that any stock dividend, subdivision of shares or distribution of
      rights to purchase stock or securities convertible or exchangeable for stock
      hereafter made by the Company to its stockholders shall not be
      taxable.

     

    (e)           If,
      as a result of an adjustment made pursuant to this Section 3, the Holder of
      any
      Warrant thereafter surrendered for exercise shall become entitled to receive
      shares of two or more classes of capital stock or shares of Common Stock and
      other capital stock of the Company, the Board of Directors shall determine
      in
      good faith the allocation of the adjusted Per Share Exercise Price between
      or
      among shares or such classes of capital stock or shares of Common Stock and
      other capital stock.

     

    4.           Prior
      Notice of Certain Events.  In case:

     

    (i)  
                the Company shall declare
      any dividend (or any other distribution);

     

    (ii)  
               the Company shall
      authorize the granting to the holders of Common Stock of rights or warrants
      to
      subscribe for or purchase any shares of stock of any class or of any other
      rights or warrants;

     

    (iii)           of
      any reclassification of Common Stock (other than a subdivision or combination
      of
      the outstanding Common Stock, or a change in par value, or from par value to
      no
      par value, or from no par value to par value);

     

    (iv)           of
      any consolidation or merger to which the Company is a party and for which
      approval of any stockholders of the Company shall be required, or of the sale
      or
      transfer of all or substantially all of the assets of the Company or of any
      compulsory share exchange whereby the Common Stock is converted into other
      securities, cash or other property; or

     

    (v)           any
      (x) liquidation, dissolution or winding up of the Company, whether voluntary
      or
      involuntary, (y) a sale or other disposition of all or substantially all of
      the assets of the Company or (z) any consolidation, merger, combination,
      reorganization or other transaction in which the Company is not the surviving
      entity or shares of Common Stock constituting in excess of 50% of the voting
      power of the Company are exchanged for or changed into stock or securities
      of
      another entity, cash and/or any other property;

     

    then
      the
      Company shall cause to be mailed to the Holder, at its last address as it shall
      appear upon the warrant registration records of the Company or its transfer
      agent, at least ten days prior to the applicable date hereinafter specified,
      a
      notice stating (x) the date on which a record (if any) is to be taken for the
      purpose of such dividend. distribution or granting of rights or warrants or,
      if
      a record is not to be taken, the date as of which the holders of Common Stock
      of
      record to be entitled to such dividend, distribution, rights or warrants are
      to
      be determined and a description of the cash, securities or other property to
      be
      received by such holders upon such dividend, distribution or granting of rights
      or warrants or (y) the date on which such reclassification, consolidation,
      merger, sale, transfer, share exchange or Liquidation Event is expected to
      become

     

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

     

    effective,
      the date as of which it is expected that holders of Common Stock of record
      shall
      be entitled to exchange their shares of Common Stock for securities or other
      property deliverable upon such exchange or Liquidation Event and the
      consideration, including securities or other property, to be received by such
      holders upon such exchange; provided, however, that no failure to mail such
      notice or any defect therein or in the mailing thereof shall affect the validity
      of the corporate action required to be specified in such notice.

     

    5.           Notice
      of Adjustments.  Whenever the Per Share Exercise Price is
      adjusted as provided in Section 3 and upon any modification of the rights of
      a
      Holder of Warrants in accordance with Section 3, the Chief Financial Officer,
      or
      equivalent officer, of the Company shall promptly prepare a certificate setting
      forth the Per Share Exercise Price and the number of Warrant Shares after such
      adjustment or the effect of such modification, a brief statement of the facts
      requiring such adjustment or modification and the manner of computing the same
      and cause copies of such certificate to be mailed to the Holder.

     

    6.           Fractional Shares.  No
      fractional shares or scrip representing fractional Warrant Shares shall be
      issued upon conversion of this Warrant.  If more than one certificate
      evidencing Warrants shall be surrendered for conversion at one time by the
      same
      Holder, the number of full shares issuable upon conversion thereof shall be
      computed on the basis of the aggregate number of shares of Common Stock that
      may
      be purchased pursuant to the Warrants so surrendered.  Instead of any
      fractional Warrant Shares which would otherwise be issuable upon exercise of
      this Warrant (or of such aggregate number of Warrants), the Company may elect,
      in its sole discretion, independently for each Holder, whether such number
      of
      Warrant Shares will be rounded to the nearest whole share (with a .5 of a share
      rounded upward) or whether such Holder will be given cash, in lieu of any
      fractional share, in an amount equal to the same fraction of the fair market
      value per share of Common Stock at such time, as determined by the Board of
      Directors of the Company in good faith as of the close of business on the day
      of
      exercise.

     

    7.           Securities
      Laws Matters.

     

    (a)           The
      Holder represents, by accepting this Warrant, that it understands that this
      Warrant and any securities obtainable upon exercise of this Warrant have not
      been registered for sale under Federal or state securities laws and are being
      offered and sold to the Holder pursuant to one or more exemptions from the
      registration requirements of such securities laws.  The Holder further
      represents that it is an “accredited investor” within the meaning of Regulation
      D under the Securities Act.  In the absence of an effective
      registration of such securities or an exemption therefrom, any certificates
      for
      such securities shall bear a legend similar to the legend set forth in Section
      7(c) hereof.  The Holder understands that it must bear the economic
      risk of its investment in this Warrant and any securities obtainable upon
      exercise of this Warrant for an indefinite period of time, as this Warrant
      and
      such securities have not been registered under Federal or state securities
      laws
      and therefore cannot be sold unless subsequently registered under such laws,
      unless as exemption from such registration is available.

     

    (b)           The
      Holder, by his acceptance of this Warrant, represents to the Company that it
      is
      acquiring this Warrant and will acquire any securities obtainable upon exercise
      of this Warrant for its own account for investment and not with a view to,
      or
      for sale in connection with, any distribution thereof in violation of the
      Securities Act.  The Holder agrees that this Warrant and

     

     

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

     

    any
      such
      securities will not be sold or otherwise transferred unless (i) a registration
      statement with respect to such transfer is effective under the Securities Act
      and any applicable state securities laws or (ii) such sale or transfer is made
      pursuant to one or more exemptions from the Securities Act.

     

    (c)           All
      certificates representing Warrant Shares issued upon exercise hereof shall
      be
      stamped or imprinted with a legend in substantially the following
      form:

     

    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.

     

    8.           Miscellaneous

     

    (a)           This
      Warrant may be amended only by mutual written agreement of the Company and
      the
      Holder or, if such amendment shall apply to all outstanding Class D Warrants
      issued by the Company of even date herewith (“Class D Warrants”), with
      the written consent of the Company and the registered holders of Class D
      Warrants to purchase a majority of the shares of Common Stock or other
      securities or property issuable upon exercise of all outstanding Class D
      Warrants (the “Warrant Majority”); provided, however, without the consent
      of the Holder of this Warrant, no such amendment may be approved that would
      have
      the effect of (i) increasing the Per Share Exercise Price of this Warrant,
      (ii)
      decreasing the number of shares of Common Stock for which this Warrant is
      exercisable, (iii) accelerating the Termination Date; or (iv) except as
      permitted by the following proviso, waive any adjustment under Section 3 of
      this
      Agreement; provided, further, that the Warrant Majority may waive the
      application of any adjustment under Subsection 3(d) of this Agreement, however,
      that (x) such waiver must be given in writing prior to the date such adjustment
      would otherwise become effective, and (y) for purposes of determining a Warrant
      Majority for such purpose any holder of Class D Warrants (and any Class D
      Warrants held by such holders) participating in the transaction that would
      otherwise give rise to such adjustment shall be excluded from such
      determination.  Furthermore, the Company may take any action herein
      prohibited or omit to take any action herein required to be performed by it,
      and
      any breach of any covenant, agreement, warranty or representation may be waived,
      if the Company has obtained the written consent or waiver of the
      Holder.  Any amendments approved in compliance with this Section 8
      shall bind the Holder’s successors and assigns.

     

    (b)           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.

     

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

     

    (c)           Notice.  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.

    

    
      	
               

            	
              (iii)

            	
              if
                to the Holder, at the address set forth on the Company’s
                records,

            

    

     

    or
      in
      either case, to such other address as the party shall have furnished in writing
      in accordance with the provisions of this Section 8(c).  Any notice
      given by means permitted by this Section 8(c) shall be deemed given at the
      time of receipt thereof at the address specified in this Section
      8(c).

     

    (d)           Interpretation.  If
      any term or provision of this Warrant shall be held invalid, illegal or
      unenforceable, the validity of all other terms and provisions hereof shall
      in no
      way be affected thereby.

     

    (e)           Successors
      and Assigns.  Subject to the restrictions on transfer contained in
      Section 7 of this Agreement, this Warrant shall be binding upon the Company
      and
      its successors and assigns and shall inure to the benefit of the Holder and
      its
      successors and registered assigns.

     

    (f)           Assignment
      by the Company.  Neither this Warrant nor any of the rights,
      interests or obligations hereunder may be assigned, by operation of law or
      otherwise, in whole or in part, by the Company without the prior written consent
      of the Holder.

     

    (g)           Saturdays,
      Sundays, Holidays.  If any date that may at any time be specified
      in this Warrant as a date for the taking of any action under this Warrant shall
      fall on Saturday, Sunday or on a day which in New York shall be a legal holiday,
      then the date for the making of that payment shall be the next subsequent day
      which is not a Saturday, Sunday or legal holiday.

     

    (h)           Jurisdiction;
      Forum.  Any dispute arising out of or relating to this Warrant
      shall be resolved, and all suits, actions and proceedings brought by the Company
      or Holder hereunder shall be brought only in, any state court sitting in the
      County of New York or federal court sitting in the Southern District of the
      State of New York.  The Company waives, and upon

     

     

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

     

    delivery
      of a Notice of Election the Holder 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 Warrant 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.

     

    (i)           Attorneys’
      Fees.  In the event of any litigation or other proceeding
      concerning this Warrant or the transactions contemplated hereby, including
      any
      such litigation or proceeding with respect to the enforcement of this Warrant
      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.

     

     

    9.           Registration
      Rights.  The Company pursuant to that
      certain Registration Rights Agreement dated September ___, 2007 by and among
      the
      Company and the persons listed on Schedule I thereto (the “Registration
      Rights Agreement”) has agreed to file one or more Resale Registration
      Statements as such term is defined in the Registration Rights
      Agreement.  The Warrant Shares shall be registered on one or more of
      such Resale Registration Statements and the Resale Registration Statement or
      Statements in which the Warrant Shares shall be included shall be determined
      in
      accordance with Section 3(b) of the Registration Rights Agreement (treating
      the
      Warrant Shares as “Registrable Securities” and as “shares of Common Stock
      issuable upon exercise of the Class D Warrants” and treating the holders of
      Warrants as “holders of the Class D Warrants”).  The registration
      rights with respect to the Warrant Shares issuable upon the exercise of this
      Warrant by any subsequent Holder may only be assigned in accordance with the
      terms and provisions of the Registrations Rights Agreement.  The
      Holder, by acceptance of this Warrant, represents, warrants and covenants to
      the
      Company as follows:

     

    (a)           As
      a condition to the inclusion of its Warrant Shares in any Resale Registration
      Statement, Holder shall furnish to the Company such information regarding Holder
      and the distribution proposed by Holder as the Company may request in writing
      or
      as shall be required in connection with any registration, qualification or
      compliance referred to in the Registration Rights Agreement.

    

    (b)           Holder
      hereby covenants with the Company (i) not to make any sale of the Warrant
      Shares pursuant to a Resale Registration Statement without effectively causing
      the prospectus delivery requirements under the Securities Act to be satisfied,
      and (ii) if such Warrant Shares 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 Holder first offers to sell any such Warrant
      Shares.

    

    (c)           Holder
      acknowledges and agrees that the Warrant Shares sold pursuant to a Resale
      Registration Statement described in the Registration Rights Agreement are not
      transferable on the books of the Company unless the stock certificate submitted
      to the Company’s transfer agent evidencing such Warrant Shares is accompanied,
      if requested by the transfer agent, by a certificate reasonably satisfactory
      to
      the transfer agent to the effect that

     

     

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

     

    (i) the
      Warrant Shares have been sold in accordance with such Resale Registration
      Statement and (ii) the requirement of delivering a current Prospectus has
      been satisfied.

    

    (d)           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.

     

    (e)           Holder
      shall suspend, upon request of the Company, any disposition of Warrant Shares
      pursuant to the Resale Registration Statement and Prospectus contemplated by
      the
      Registration Rights Agreement 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.

     

    (f)           Holder
      agrees to provide the indemnification set forth in Section 5(c) of the
      Registration Rights Agreement to the same extent as if Holder was a “Holder” as
      defined in the Registration Rights Agreement and the Warrant Shares were
“Registrable Securities” as defined in the Registration Rights
      Agreement.

     

    For
      purposes of Sections 9(a) through (f) only, any capitalized terms not otherwise
      defined in this Warrant shall have the respective meanings set forth in the
      Registration Rights Agreement.

     

    10.           Headings.  The
      headings of the Sections of this Warrant are for convenience of reference only
      and shall not, for any purpose, be deemed a part of this Warrant.

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

     

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    

    IN
      WITNESS WHEREOF, the Company has executed this Warrant as of the day and year
      first above written.

     

                NEPHROS,
      INC.

     

                By: _________________________________________                                                                          

                      
      Name:

                      
      Title:

    

    

    

    Accepted:

    

    

    

    [Name
      of
      Holder]

    

    

    

    

    By: _______________________________________                                                                          

          
      Name:

         
       Title:

     

    
 

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    NOTICE
      OF EXERCISE-CASH PAYMENT

     

    

     

    The
      undersigned, ____________________________, pursuant to the provisions of the
      foregoing Warrant, hereby elects to exercise the within Warrant to the extent
      of
      purchasing _____________________ shares of Common Stock of Nephros, Inc.
      thereunder and hereby makes payment of $_______________ by certified or official
      bank check in payment of the exercise price therefor.  The undersigned
      hereby confirms the representations, warranties and covenants made by it in
      the
      Warrant.

     

    

     

    Dated:_______________                                         Signature:_____________________________

     

                                                           Address:______________________________

    

     

    

     

    NOTICE
      OF EXERCISE-CASHLESS EXERCISE

     

    

     

    

     

    The
      undersigned, ____________________________, pursuant to the provisions of the
      foregoing Warrant, hereby elects to exercise the within Warrant as it relates
      to
      _____________________ shares of Common Stock of Nephros, Inc. by means of a
      cashless exercise pursuant to Section 1(d) of the Warrant.  As a
      result of such exercise, and based on a VWAP of $_______ per share, the
      undersigned is entitled to receive _____________ shares of Common
      Stock.  The undersigned hereby confirms the representations,
      warranties and covenants made by it in the Warrant.

     

    

     

    Dated:_______________                                        Signature:_____________________________

     

                                                             
      Address:______________________________

    

     

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    ASSIGNMENT

     

    FOR
      VALUE
      RECEIVED _______________________________________ hereby sells, assigns and
      transfers unto _____________________________________ the foregoing Warrant
      and
      all rights evidenced thereby, and does irrevocably constitute and appoint
      _____________________________, attorney, to transfer said Warrant on the books
      of Nephros, Inc.

     

    Dated:_______________                                        Signature:_____________________________

     

                                                           Address:______________________________

    

    

    

    

    PARTIAL
      ASSIGNMENT

     

    FOR
      VALUE
      RECEIVED __________________________ hereby assigns and transfers unto
      _________________________ the right to purchase __________ shares of the Common
      Stock, $0.001 par value per share, of Nephros, Inc. covered by the foregoing
      Warrant, and a proportionate part of said Warrant and the rights evidenced
      thereby, and does irrevocably constitute and appoint __________________________,
      attorney, to transfer that part of said Warrant on the books of Nephros,
      Inc.

     

    Dated:_______________                                        Signature:___________________________

     

                                                           Address:____________________________

     

    

     

     

     

     

    17kl09044_ex10-1.htm

    
      

    

     

    Exhibit
      10.1

     

     

    Name
      of
      Subscriber:                                                                                                

     

    NEPHROS,
      INC.

     

    SUBSCRIPTION
      AGREEMENT

     

    Nephros,
      Inc.

    3960
      Broadway

    New
      York,
      New York  10032

     

    Ladies
      and Gentlemen:

     

    1.  Subscription.  (a)  The
      undersigned, intending to be legally bound, hereby irrevocably subscribes to
      purchase from Nephros, Inc., a Delaware corporation (the “Company”), the
      principal amount of Series A 10% Secured Convertible Notes due 2008 (the
“Notes”), of the Company, set forth on the signature page hereof (the
“Subscription Amount”), for a purchase price equal to the Subscription
      Amount.  The Company, intending to be legally bound, hereby accepts
      the foregoing subscription and agrees to sell and issue to the undersigned
      a
      Note having a principal amount equal to the Subscription Amount for a purchase
      price equal to the Subscription Amount.  This subscription is made in
      accordance with and subject to the terms and conditions described in this
      Subscription Agreement (this “Agreement”).  The terms of the
      Notes shall be substantially as set forth in the form of Series A 10% Secured
      Convertible Note due 2008 attached hereto as Exhibit A (the “Form of
      Note”).

     

    (b)  The
      Notes
      that are the subject of this Agreement are part of an offering by the Company
      (the “Offering”) of up to fifteen million dollars ($15,000,000) aggregate
      principal amount of Notes (the “Maximum Amount”) convertible into shares
      of the Company’s common stock, par value $0.001 per share (the “Common
      Stock”), at a per share conversion price (subject to adjustment as set forth
      in the Form of Note) of $0.706, and Class D warrants for the purchase of shares
      of Common Stock (the “Warrants”), in the form attached hereto as
Exhibit B (the “Form of Warrant”).  The Company is
      offering 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”).  The undersigned and each person purchasing Notes in the
      Offering (collectively, the “Purchasers”) shall enter into a registration
      rights agreement among the Company and the Holders (as defined therein), in
      substantially the form attached hereto as Exhibit C (the “Registration
      Rights Agreement”).

     

    2.  Closing.

     

    (a)  Subject
      to the satisfaction of the conditions and upon the terms set forth in this
      Agreement, the first closing of the transactions contemplated by this Agreement
      (the

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “First
      Closing”) shall occur at any time on or prior to the Expiration Date with
      the execution and delivery of this Agreement by the parties
      hereto.  The First Closing shall be conducted at the offices of Kramer
      Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, New
      York or such other location as the parties shall mutually agree.

     

    (b)  Following
      the First Closing, the Company may continue to sell Notes up to the Maximum
      Amount and may conduct closings from time to time for additional Notes sold
      (each an “Additional Closing”, and the First Closing and each Additional
      Closing shall be considered a “Closing”).  A final closing will
      be held promptly on the earlier to occur of (i) the Expiration Date and (ii)
      acceptance of subscriptions for sale of the Maximum Amount.

     

    (c)  The
      undersigned acknowledges that, concurrently with the consummation of the First
      Closing, the Company will exchange its 6% Secured Convertible Notes due 2012
      (“Old Notes”) with the holders thereof 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”
and together with the Notes, the “2007 Notes”).  The terms of
      the New Notes shall be substantially as set forth in the form of Series B 10%
      Secured Convertible Note due 2008 attached as an exhibit to the Exchange
      Agreement (as defined below) (the “Form of New Note”).  The New
      Notes will be convertible into shares of the Company’s Common Stock at a per
      share conversion price (subject to adjustment as set forth in the Form of New
      Note) of $0.706 per share and are not included in the Maximum
      Amount.

     

    (d)  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 the undersigned 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
      undersigned 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 undersigned at or prior to the Closing;

     

    (iii)  at
      the First 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 the undersigned of the items set forth
      in Section 2(g) of this Agreement; and

     

    (v)  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 Transaction
      Documents (as defined below) or the Exchange Agreement.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (e)  The
      obligations of the undersigned 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(f) of this Agreement;

     

    (iv)  the
      Company and the holders of the Old
      Notes shall have duly executed and delivered the Exchange Agreement in the
      form
      attached hereto as Exhibit D (the “Exchange Agreement”) and the
      Investor Rights Agreement in the form attached hereto as Exhibit E (the
“Investor Rights Agreement”), and the transactions contemplated by the
      Exchange Agreement shall be consummated simultaneous with the First
      Closing;

     

    (v)  the
      holders of a majority of the
      outstanding Common Stock as of the First Closing shall have executed and
      delivered to the Company written consents, in a form reasonably acceptable
      to
      the undersigned (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
      First 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 First 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 First Closing;

     

    (vii)  at
      the First 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 Transaction
      Documents (as defined below) or the Exchange Agreement.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (f)  At
      the
      Closing, the Company shall deliver or cause to be delivered to the undersigned
      the following (to the extent not previously delivered):

     

    (i)  an
      executed acceptance of subscription
      relating to this Agreement;

     

    (ii)  a
      Note in the principal amount of the
      Subscription Amount, registered in the name of the undersigned;

     

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

     

    (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(e)
      have been satisfied;

     

    (v)  copies
      of the duly executed Exchange
      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 Registration Rights
      Agreement.

     

    (g)  At
      the
      Closing, the undersigned 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 F to this Agreement and the Investor Rights Agreement duly
      executed by the undersigned;

     

    (ii)  immediately
      available funds in the
      amount of the Subscription Amount, delivered by wire transfer to the following
      account:

     

    
      	Bank:	Bank
              of America 
	
              ABA
                No.:

            	
              026009593

            
	
              Account
                Name:

            	
              Nephros,
                Inc.

            
	
              Account
                No.:

            	
              94293
                70902

            
	
              Apply
                To:

            	
              Nephros,
                Inc.

            
	
              Attention:

            	
              Client
                Manager

            
	 	 

    

     

    (iii)  an
      executed copy of the signature page,
      or counterpart signature page, to the Registration Rights Agreement;
      and

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

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

     

    3.  Representations
      and Warranties of the Company.  The Company represents and
      warrants to the undersigned as follows, in each case as of the date hereof
      and
      in all material respects as of the date of any Closing, except, where the
      following representations and warranties are made or deemed to be made after
      the
      First Closing, for any changes resulting solely from any Closing that has
      previously been consummated or the consummation of the transactions contemplated
      by the Exchange Agreement:

     

     

    (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 Transaction Document (as defined below) or the Exchange
      Agreement, (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 Transaction Document (as defined below) or the Exchange
      Agreement (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 and sell the Notes
      subscribed for hereunder, the shares of Common Stock and Warrants issuable
      upon
      conversion thereof, and the shares of Common Stock issuable upon exercise of
      the
      Warrants (collectively, the “Subject Securities”).  Subject to
      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 Notes, the Warrants, the Registration Rights
      Agreement and the Investor Rights Agreement (collectively, the “Transaction
      Documents”), the Exchange Agreement and the New Notes.  The
      Transaction Documents and Exchange Agreement 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 2007
      Notes and the Common Stock issuable upon exercise of the Warrants, when issued
      in compliance with the provisions of the 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 undersigned.  The 2007
      Notes are duly authorized, and when issued pursuant to the Transaction Documents
      and the Exchange Agreement, will be validly issued.  The Warrants are
      duly authorized, and when issued, pursuant to the 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 Transaction Documents or the Exchange Agreement 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 Transaction Documents
      and Exchange Agreement, other than (i) the filing with the Securities and
      Exchange Commission (the “Commission”) of the registration statement or
      registration statements pursuant to the 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 the Certificate of
      Amendment.

     

    (d)  Except
      as
      disclosed on Schedule 3(d), the execution, delivery and performance of the
      Transaction Documents and the Exchange Agreement 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 undersigned, (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 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 Purchasers and the holders of the Old Notes) 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 Transaction Documents or Exchange Agreement
      based on any agreement, arrangement or understanding with or known to the
      Company.  The Purchasers 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 (including the Liens securing the Old Notes, which Liens shall
      be
      released at the First Closing) 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 First 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 for sale
      only to the Purchasers and certain other “accredited investors” within the
      meaning of Rule 501 under the Securities Act.  Assuming the accuracy
      of the undersigned’s representations and warranties set forth in Section 4
      (and corresponding representations made by other Purchasers), no registration
      under the Securities Act is required for the offer and sale of the Subject
      Securities by the Company to the Purchasers as contemplated by the
      Offering.  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 Offering 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 and sale 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 First 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 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 Purchasers
      as
      a result of the Purchasers and the Company fulfilling their obligations or
      exercising their rights under the Transaction Documents and the Exchange
      Agreement, including without limitation as a result of the Company’s issuance of
      the Subject Securities and the Purchasers’ ownership of the Subject
      Securities.

     

    (w)  All
      disclosure furnished by or on behalf of the Company in writing to the Purchasers
      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 First Closing, after giving
      effect to the receipt by the Company of not less than ten million dollars
      ($10,000,000) from the Purchasers at the First Closing, and assuming
      (counterfactually) that all of the 2007 Notes issued at the First 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 First 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 First Closing, no Indebtedness or other claim against the Company
      is senior to the 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 Purchasers is acting solely
      in
      the capacity of an arm’s length purchaser with respect to the

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    Transaction
      Documents and the transactions contemplated thereby.  The Company
      further acknowledges that no Purchaser is acting as a financial advisor or
      fiduciary of the Company (or in any similar capacity) with respect to the
      Transaction Documents and the transactions contemplated thereby and any advice
      given by any Purchaser or any of their respective representatives or agents
      in
      connection with the Transaction Documents and the transactions contemplated
      thereby is merely incidental to the Purchasers’ purchase of the Subject
      Securities.  The Company further represents to each Purchaser that the
      Company’s decision to enter into this Agreement and the other Transaction
      Documents has been based solely on the independent evaluation 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
      accepting the subscription and entering into this Agreement, the Company is
      not
      relying on any representations and warranties of the undersigned 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
      and the purchase of the Notes, the conversion of the Notes and the exercise
      of
      the Warrants.

     

    (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 Subscriber.  The undersigned
      hereby represents and warrants to, and agrees with, the Company as
      follows:

     

    (a)  The
      undersigned 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, the undersigned 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 the undersigned’s home address; at least
      twenty-one (21) years of age; and legally competent to execute the Transaction
      Documents.  If an entity, the undersigned 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
      and
      the individual signing on behalf of the undersigned is duly authorized to
      execute the Transaction Documents.

     

    (c)  When
      executed and delivered by the undersigned, each of the Transaction Documents
      to
      which the undersigned is party will constitute the legal, valid and binding
      obligation of the undersigned, enforceable against the undersigned 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 Transaction Documents by the
      undersigned 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 the undersigned’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 the undersigned 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 the undersigned or its assets or
      properties.  If the undersigned is not a natural person, the
      execution, delivery and performance by the undersigned of the Transaction
      Documents have been duly authorized by all necessary corporate or other action
      on behalf of the undersigned 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 the
      undersigned.

     

    (e)  The
      undersigned has received from the Company, or has been directed to, all
      materials which have been requested by the undersigned and the Nephros SEC
      Filings.  The undersigned has had a reasonable opportunity to ask
      questions of the Company and its representatives, and the Company has answered
      to the satisfaction of the undersigned all inquiries that the undersigned or
      the
      undersigned’s representatives have put to it.

     

    (f)  The
      undersigned or the undersigned’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.  The undersigned can afford to bear such
      risks, including, without limitation, the risk of losing its entire
      investment.

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (g)  The
      undersigned acknowledges that no liquid market for the Notes and Warrants
      presently exists and none may develop in the future and that the undersigned
      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)  The
      undersigned 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 the
      undersigned in this Agreement.

     

    (i)  The
      undersigned will acquire the Subject Securities for the undersigned’s own
      account (or, if such individual is married, for the joint account of the
      undersigned and the undersigned’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
      subscribing for Notes, the undersigned is not relying on any representations
      and
      warranties of the Company other than those in this Agreement.

     

    (k)  The
      undersigned acknowledges that the representations, warranties and agreements
      made by the undersigned herein shall survive the execution and delivery of
      this
      Agreement and the purchase of the Notes, the conversion of the Notes and the
      exercise of the Warrants.

     

    (l)  Except
      as
      set forth on the signature page hereto, the undersigned 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)  The
      undersigned is not subscribing for 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 of a subscription by a person other than a
      representative of the Company with whom the undersigned had a pre-existing
      relationship.

     

    (n)  The
      undersigned is not with respect to the undersigned’s subscription 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 the
      undersigned nor any Person who owns an interest in the undersigned
      (collectively, a “Purchaser 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 the undersigned, the funds used to pay to the Company the
      purchase price for the Subject Securities were derived: (i) from transactions
      that do not violate United States law or, to the extent such funds originate
      outside the United States, do not violate the laws of the jurisdiction in which
      they originated; and (ii) from permissible sources under United States law
      and
      to the extent such funds originate outside the United States, under the laws
      of
      the jurisdiction in which they originated.

     

    (p)  To
      the
      actual knowledge of the undersigned, neither the undersigned nor any Purchaser
      Party, nor any Person providing funds to the undersigned: (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.

     

    (q)  The
      undersigned 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 the undersigned 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.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (r)  The
      undersigned represents and warrants that, since July 15, 2007, the undersigned
      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 after the First Closing, 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)  As
      long
      as any Purchaser 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 Purchaser owns Subject Securities, if the Company is not required
      to
      file reports pursuant to the Exchange Act, it will prepare and furnish to the
      Purchasers and make publicly available in accordance with Rule 144(c) such
      information as is required for the Purchasers 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.

     

    (d)  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.

     

    (e)  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 the undersigned shall issue any press release
      or otherwise make any public statement concerning the transactions contemplated
      by the Transaction Documents and Exchange Agreement without the prior consent
      of
      the Company, with respect to any press release of the undersigned, or without
      the prior consent of the undersigned, 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.

     

    (f)  No
      claim
      will be made or enforced by the Company or, with the consent of the Company,
      any
      other person or entity, that any Purchaser 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 Purchaser
      could be deemed to trigger the provisions of any such plan or arrangement,
      by
      virtue of receiving Subject Securities under the Transaction Documents or under
      any other agreement between the Company and the Purchasers.

     

    (g)  Except
      as
      set forth on Schedule 5(g), 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.

     

    (h)  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 Transaction Documents in such amount as
      may
      be required to fulfill its obligations in full under the 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.

     

    (i)  From
      the
      date hereof until 90 days after the date on which a registration statement
      is
      declared effective pursuant to the 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(i) 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 Purchasers for
      the
      resale of Common Stock.  This Section 5(i) shall not apply to any
“Exempt Issuance” as such term is defined in the Warrant.

     

    (j)  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(j).

     

    (i)  The
      Company shall deliver to each
      Purchaser and holder of New Notes (collectively, the “2007 Holders”) 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(j)(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(j)(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(j)(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(j)(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(j)(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(j)(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(j) 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(j). 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(j)(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(j) 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)) no longer hold: (x) prior to the conversion of the
      Notes, Notes representing at least 25% of the aggregate principal amount of
      all
      Notes issued in the Offering, and (y) after the conversion of the 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 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 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).

     

    (k)  The
      Company acknowledges and agrees that the undersigned 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, the undersigned 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 the undersigned’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.

     

    (l)  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(e) to be satisfied) and to cooperate with the undersigned in
      connection with the foregoing.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (m)  From
      the
      date hereof until such time as no Purchaser 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
      First
      Closing covering each such person serving as an officer or director of the
      Company immediately prior to the First Closing to the extent that such coverage
      is in place as of the First 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 First Closing shall
      not
      have occurred prior to September 21, 2007 the directors and officers liability
      coverage may be reduced to $7,000,000.

     

    (n)  Except
      with respect to the material terms and conditions of the transactions
      contemplated by the Transaction Documents and the Exchange 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 Purchaser or
      its
      agents or counsel with any information that the Company believes constitutes
      material non-public information, unless prior thereto such Purchaser 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 Purchaser
      shall be relying on the foregoing representations in effecting transactions
      in
      securities of the Company.  This Section 5(n) shall not apply to any
      information provided, or limit the ability of the Company to provide any
      information, to any Purchaser to whom knowledge of a member of the Board of
      Directors of the Company is attributable.

     

    (o)  From
      the
      date hereof until such time as no Purchaser 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.

     

    (p)  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, the undersigned 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) the
      undersigned 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) the undersigned 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 the undersigned 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 Note
      or Warrant 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(p) and the undersigned has complied
      with this Section 5(p), it will, no later than three trading days following
      the
      delivery by the undersigned 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 the undersigned 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(p).  Certificates for shares of Common Stock subject to
      legend removal hereunder shall, at the direction of the undersigned, be
      transmitted by the transfer agent of the Company to the undersigned by crediting
      the account of the undersigned’s prime broker with the Depository Trust Company
      System.

     

    (q)  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.

     

    (r)  Prior
      to
      the Automatic Conversion Date (as defined in the Form of 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 this Agreement and
      all exhibits hereto without the prior consent of the 2007 Notes Majority Holders
      (as defined in section 7(b) hereof).

     

    6.  Covenants
      of the Undersigned.

     

    (a)  The
      undersigned agrees that no sale, assignment or transfer of any of the Subject
      Securities acquired by the undersigned 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 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, the
      undersigned agrees that following the removal of the restrictive legend from
      certificates representing Common Stock, the undersigned 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)  The
      undersigned agrees to the imprinting, so long as is required by
      Section 6(a), 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)  The
      undersigned hereby agrees that from the date hereof and continuing until the
      Cessation Date, the undersigned 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 the undersigned’s position
      in any equity security of the Company, provided, however, that it shall not
      be a
      violation of this Section 6(c), if the undersigned places a sell order for
      shares of Common Stock underlying the Notes or Warrants at or following the
      time
      of conversion or exercise of such Notes or Warrants and all conditions to
      exercise of such Warrants have been satisfied, relies on the Company to deliver
      such Common Stock in accordance with the Form of

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    Note
      or
      Warrants as the case may be, and completes the sale of such Common Stock before
      the Company delivers the Common Stock to the undersigned.

     

    (d)  Upon
      the
      terms and subject to the conditions hereof, the undersigned 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) and (ii) of Section 2(d) to be satisfied
      and
      to execute and deliver at the First Closing the Registration Rights Agreement
      and Investor Rights Agreement) and to cooperate with the Company in connection
      with the foregoing.

     

    (e)  After
      the
      Closing, upon the request of the Company the undersigned shall provide to the
      Company such additional information and documentation concerning the
      undersigned’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 the undersigned and each officer,
      director, partner, employee, agent and controlling person of the undersigned
      (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 Transaction Document, or (ii) a claim against the
      undersigned by a third party based on the transactions contemplated by the
      Transaction Documents (other than a claim based on a breach by the undersigned
      of any representation, warranty or covenant of the undersigned in the
      Transaction Documents to which it is a party).  No knowledge by the
      undersigned 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 the undersigned 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
      clause (i) of Section 7(a) shall not exceed, in the aggregate, the Subscription
      Amount plus the Indemnified Parties’ reasonable out-of-pocket expenses incurred
      in connection with (i) the 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 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 the
      indemnification rights provided in this Section 7 shall be the exclusive
      remedy of the parties hereto 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 grants and pledges to
      Lambda (the “Secured Party”) a continuing security interest in the
      Collateral (as defined in the Form of 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 shall 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 Note) (the “Security Interest Termination
      Date”).

     

    (b)  Designation
      of Secured Party as Agent.  The undersigned hereby irrevocably
      designates the Secured Party to act as Secured Party on the undersigned’s
      behalf.  The undersigned 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.  The
      undersigned, on behalf of itself and future holders of the Subject Securities
      issued to the undersigned, 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 the undersigned’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 the
      undersigned 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 the undersigned
      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 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 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 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.  The
      undersigned acknowledges and agrees that all information, written and oral,
      concerning the Company furnished from time to time to the undersigned and
      identified as confidential has been and is provided on a confidential basis
      pursuant to a confidentiality agreement between the undersigned and the
      Company.

     

    10.  Expenses.  The
      Company shall pay, in connection with the preparation, execution and delivery
      of
      this Agreement, the other Transaction Documents and the consummation of the
      transactions contemplated hereby and thereby, all reasonable fees and out of
      pocket expenses incurred by Lambda in connection with the Offering up to an
      aggregate maximum amount of $75,000, whether or not the transactions
      contemplated by the Transaction Documents are consummated.

     

    11.  Miscellaneous.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    (a)  This
      Agreement, including the exhibits hereto, sets forth the entire understanding
      of
      the parties with respect to the undersigned’s purchase of Notes from 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), (e), (g), (i), (j), (m) and (o) may be amended or
      waived following the First Closing by the 2007 Notes Majority Holders;
provided, further, that any amendment or waiver to any of 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 and the corresponding Sections of the Exchange
      Agreement.

     

    (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 the undersigned, at the address set forth on the signature page
      hereof,

     

    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 the undersigned or, after the Closing, the Majority
      Holders.  The undersigned may assign any or all of its rights under
      this Agreement to any person or entity to whom the undersigned 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 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 the “undersigned” and a
“Purchaser” 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), the
      undersigned shall not be entitled to assign any rights under this Agreement
      to a
      purchaser of shares of Common Stock sold by the undersigned 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 undersigned
      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 undersigned 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.

     

    [Signature
      page follows immediately]

     

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    SIGNATURE
      PAGE

     

    

      IN
        WITNESS WHEREOF, the parties hereto have executed this Agreement as of
        the day and year this subscription has been accepted by the Company as set
        forth
        below.

       

    

     

     

    Aggregate
      principal amount of Notes subscribed from (and purchase
      price):                          
Print
      Name of
      Subsicriber:

    $____________________                                         ________________________________                                         

    
       

                                                      _________________________________

      

                                                                Social
        Security Number
        or
other
        Taxpayer ID
        Number

    

    
                                                                By:
        ______________________________

                                                          
        (Signature of Subscriber
        or Authorized Signatory)   

                                                                          
Name:
        _____________________________

                                                                          
Title:
        __________________________

    

    
       

                                                               Address:
        ___________________________

    

    
                                                            

                                                                           
        ___________________________

       

                                                                      Telephone:__________________________

                                                               

                                              Fax:___________________________________

    

     

     

    If
      the
      Notes will
      be
      held as
      joint
      tenants, tenants
      in common, or
      community property,
      please complete
      the following:

     

                                    _________________________________

                                    Print
      name of spouse
      or other co-subscriber

     

                                    _________________________________

                                    Signature
      of spouse
      or other co-subscriber

     

                                    _________________________________

                         Social
      Security Number or other Taxpayer ID Number

     

                                    _________________________________

                                    Print
      manner in which
      shares will be held

     

    If
      the
      Notes have been purchased through a broker or other intermediary, please
      identify such entity:

     

    [Please
      complete Signature Page for each subscriber.]

     

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    ACCEPTANCE
      OF SUBSCRIPTION

     

                _____________________________

                Name
      of
      Subscriber

     

    ACCEPTED
      BY:

     

    NEPHROS,
      INC.

     

    By:
      ____________________________

    Name:  Norman
      J. Barta

    Title:
      President and Chief Executive Officer

     

    Date:
      _______________________, 2007

     

    Accepted
      for $ __________________________ principal amount of
      Notes

     

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
 

    EXHIBIT
      A

    (Form
      of
      Note)

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
 

    

    EXHIBIT
      B

    (Form
      of
      Warrant)

     

     

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
 

    

    EXHIBIT
      C

    (Form
      of
      Registration Rights Agreement)

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
      D

    (Form
      of
      Exchange Agreement)

     

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
      E

    (Form
      of
      Investor Rights Agreement)

     

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
      F

     

    ACCREDITED
      INVESTOR STATUS

     

    The
      subscriber 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, the undersigned must
      identify each equity owner and provide statements signed by each demonstrating
      how each is qualified as an accredited investor.  Further, the
      undersigned represents that it has made such investigation as is reasonably
      necessary in order to verify the accuracy of this alternative.)

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